UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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: January 30, 2021
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 | 35-1736614 | ||
(State or other jurisdiction of | (IRS Employer Identification Number) | ||
incorporation or organization) | |||
7500 East Columbia Street | |||
Evansville, IN | 47715 | ||
(Address of principal executive offices) | (Zip code) | ||
|
| ||
(812) 867-4034 | |||
(Registrant’s telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, | SCVL | The Nasdaq Stock Market LLC | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] | Yes | [ X] | No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
[ ] | Yes | [X] | No |
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.
[X] | Yes | [ ] | No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X ] | Yes | [ ] | No | ||
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
[ ] | Large accelerated filer | [X] | Accelerated filer | [ ] | Non-accelerated filer | [ ] | Smaller reporting company | [ ] | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 July 29, 201731, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $208,058,714$250,858,087 (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 March 23, 201822, 2021 was 16,471,994.
14,105,551.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Definitive Proxy Statement for the 2021 Annual Meeting of Shareholders of the Registrant to be held on June 14, 2018 is10, 2021 are incorporated by reference into PART III hereof.
TABLE OF CONTENTS
PART I
Item 1. | 4 | |
Item 1A. | 16 | |
Item 1B. | 26 | |
Item 2. | 26 | |
Item 3. | 27 | |
Item 4. | 27 |
TABLE OF CONTENTSPART II
Item 15. | 71 | |
Item 16. | 74 | |
75 |
Shoe Carnival, Inc.
Evansville, Indiana
Annual Report to Securities and Exchange CommissionFebruary 3, 2018
For the Fiscal Year Ended January 30, 2021
PART I
Cautionary Statement Regarding Forward-Looking Information
This annual reportAnnual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: the duration and spread of the COVID-19 outbreak, mitigating efforts deployed by government agencies and the public at large, and the overall impact from such outbreak on the operations of our stores, economic conditions, financial market volatility, consumer spending and our supply chain and distribution processes;general economic conditions in the areas of the continental United States in which our stores are located and the impact of the ongoing economic crisis and hurricane recoveryuncertainty in Puerto Rico on sales at, and cash flows of, our stores located in Puerto Rico; the effects and duration of economic downturns and unemployment rates; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; our ability to generate increased sales at our stores; our ability to successfully navigate the increasing use of on-lineonline retailers for fashion purchases and the impact on traffic and transactions in our physical stores; the success of the open-air shopping centers where our stores are located and its impact on our ability to attract customers to our stores; our ability to attract customers to our e-commerce websiteplatform and to successfully grow our e-commercemulti-channel sales; the potential impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers; our ability to control costs and meet our labor needs in a rising wage environment; changes in the political and economic environments in, the status of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear; the impact of competition and pricing; our ability to successfully manage and execute our marketing initiatives and maintain positive brand perception and recognition; our ability to successfully manage our current real estate portfolio and leasing obligations; changes in weather, including patterns impacted by climate change; changes in consumer buying trends and our ability to identify and respond to emerging fashion trends; the impact of disruptions in our distribution or information technology operations; the effectiveness of our inventory management; the impact of natural disasters, other public health crises, political crises, civil unrest, and other catastrophic events on our stores and our suppliers, as well as on consumer confidence and purchasing in general; risks associated with the seasonality of the retail industry; the impact of unauthorized disclosure or misuse of personal and confidential information about our customers, vendors and employees, including as a result of a cyber-securitycybersecurity breach; our ability to manage our third-party vendor relationships; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to open new stores in a timely and profitable manner, including our entry into major new markets, and the availability of sufficient funds to implement our business plans; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; changesan increase in the political and economic environmentscost, or a disruption in the statusflow, of trade relations with, and the impact of changes in trade policies and tariffs impacting, China and other countries which are the major manufacturers of footwear;imported goods; the impact of regulatory changes in the United States, including minimum wage laws and regulations, and the countries where our manufacturers are located; the resolution of litigation or regulatory proceedings in which we are or may become involved; our ability to meet our labor needs while controlling costs;continued volatility and disruption in the impact of the U.S. Tax Cutscapital and Jobs Act of 2017; andcredit markets; future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of risk factors impacting us, see ITEM 1A. RISK FACTORS of this report.Annual Report on Form 10-K.
Our Company
Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing the convenience of shopping at any of our store locations, our mobile app or online. We offer customers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with an emphasis on national and regional name brands. We differentiate our retail concept from our competitors’competitors by our distinctive, fun and promotional marketing efforts. On average, our physical stores are 11,000approximately 10,800 square feet generate approximately $2.4 million in annual sales and carry inventory of approximately 27,80025,200 pairs of shoes per location. Including e-commerce sales in close proximity to a physical store, our physical stores each generated an average of $2.5 million in annual sales in fiscal 2020. As of February 3, 2018,January 30, 2021, we operated 408383 stores in 35 states and Puerto Rico and offered online shopping at www.shoecarnival.com.
We are an Indiana corporation that was initially formed in Delaware in 1993 and reincorporated in Indiana in 1996. References to “Shoe Carnival,” “we,” “us,” “our” and the “Company” in this Annual Report on Form 10-K refer to Shoe Carnival, Inc. and its subsidiaries.
Key Competitive Strengths
We believe our financial success is due to a number of key competitive strengths that make Shoe Carnival a destination of choice for today’s retail consumer.
Distinctive shopping experience
Our stores combine competitive pricing with a promotional, high-energy in-store marketing effortenvironment that encourages customer participation and injects fun and surpriseexcitement into every shopping experience. We promoteUnique features of our store experience include upbeat music, opportunities for our customer to spin our iconic spin-n-win wheel, and a high-energy retail environment by decorating with exciting graphics and bold colors, and by featuring a stage and mic-person as the focal point inwho runs specials for customers shopping at our stores. With a microphone, this mic-person announces currentThese specials supplied by our centralized merchandising staff, organizesinclude contests and games and hot deals of the moment to encourage customers to take immediate advantage of our promotional pricing. Our staff is dedicated to customer service and assists and educates customers with the features and location of merchandise. Our mic-person offers limited-duration promotions throughout the day, encouraging customers to take immediate advantage of our value pricing.merchandise, as well as finding sizes, styles and colors. We believe this fun and promotional atmosphere results inour distinctive shopping experience gives us various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods. A similar customer experience is reflected in our e-commerce siteplatform through special promotions and limited time sales, along with relevant product stories featured on our home page.sales.
Broad merchandise assortment
Our objective is to be the destination retailer-of-choice for a wide range of consumers seeking value-priced, current season name brandon-trend branded and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. Our average store carries approximately 27,800 pairs of shoes in four general categories – women’s, men’s, children’s and athletics, – which areas well as a broad range of accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks, water bottles and wallets. Footwear is organized within the store by category and brand, thus fashioningcreating strong brand statements within the aisles. We engage our customersThese brand statements are underscored by presenting creatively branded merchandise statementssignage on endcaps and in-line signage upon entering our stores. Key brands are further emphasized by prominent displays on end caps, focal walls, and withinthroughout the aisles. These displaysstore. Our signage may highlight a vendor’s product offering of a single vendor, highlightofferings or sales promotions, advertise promotional pricing to meet or beat competitors’ sale prices or may make ahighlight seasonal or lifestyle statementstatements by highlightinggrouping similar footwear from multiple vendors. These visual merchandising techniques make it easier for customersOver 100 of our physical stores have strongly branded Nike shops that highlight Nike products within the stores, and we expect to shop and focus attention on key name brands.add more Nike shops to our physical stores through 2023. Our e-commerce siteplatform offers customers an opportunity to choose from a large selectionassortment of products in all of the same categories of footwear with aan increased depth of sizes and colors that may not be available in some of our smaller stores, and introduces our concept to consumers who are new to Shoe Carnival, in both existing and new markets. Customers who enroll in our loyalty program (“Shoe Perks”) or register on our website receive periodic personalized e-mail communication from us. These communications afford us additional opportunities to highlight our broad product assortment and promotions.all stores.
Value pricing for our customers
Our marketing effort targetscustomer is primarily a moderate income, value conscious consumersvalue-conscious consumer seeking name brand footwear foracross all age groups.ages. We believe that by offering a wide selection of popular styles of name brand and private label merchandise at competitive prices, we generate broad customer appeal. Additionally, the time conscioustime-conscious customer appreciates the convenience of one-stop shopping for the entire family, whether it isthis occurs at any of our store locations, or online at shoecarnival.com. We also believe
www.shoecarnival.com or through our mobile app. Our fun and promotional shopping environment contributesadds to a reputation of value pricing.our value-priced reputation.
Efficient store level cost structure
Our cost-efficient store operations and real estate strategy enable us to price products competitively. We achieve low labor costs by housing merchandise directly on the selling floor in an open stock format, allowing customers to serve themselves, if they choose. This reduces the staffing required to assist customers and reduces store level labor costs
as a percentage of sales. We locate stores predominantly in open-air shopping centers in order to take advantage of lower occupancy costs and maximize our exposure to value-orientedvalue-conscious shoppers. We continue to invest in our existing store locations and expect to remodel and refresh many of our physical stores over the next three fiscal years.
Heavy reliance on information technology
We have invested significant resources in information technology. Our proprietary inventory management and advanced point-of-sale (“POS”) systems provide corporate management, buyers and store managers with the timely information necessary to monitor and control all phases of operations. The POS provides, in addition to other features, full price management (including price look-up), promotion tracking capabilities (in support of the spontaneous nature of the in-store price promotions), real-time sales and gross margincost of sales by product category at the store level and customer tracking. Using the POS, store managers are able to monitor sales and gross profit marginscost of sales on a real-time basis throughout the day. Reacting to sales trends, our mic-people use the POS to choose from among a number of product promotions supplied by our centralized merchandising staff.
Our centralized network connects our corporate office to our distribution center and retail stores via a wide area network, providing up-to-date sales and inventory information as required. Our data warehouse enables our merchandising and store operations staff to analyze sales, margin and inventory levels by location, by day, down to the size of shoe. Using this information, our merchandise managers meet regularly with vendors to compare their product sales grossand margins and return on inventory investment against previously stated objectives. We believe timely access to key business data has enabled us in the past to drive annualour comparable store sales, increases, manage our markdown activity and improve inventory turnover.
In fiscal 2020, we implemented new Traffic, Warehouse and Order Management Systems (“TMS”, “WMS”, “OMS”, respectively). We believe these cloud-based, software-as-a-service arrangements will enable us to meet the complex demands of multi-channel fulfillment, enhance our supply chain, position us for long-term growth and ultimately enhance customer satisfaction and convenience in an increasingly competitive environment.
Growth Strategy
Store portfolio
Disciplined Approach to Capital Management
We aim to realize positive long-term financial performance forremain focused on funding our store portfolio. Inoperations without leverage. We ended fiscal 2017, we opened 19 new stores2020 with no debt and closed 26 stores. The majority$106.5 million of our new store locations served to fill in existing markets withcash and cash equivalents. Over the goal of increasing the performance of the overall market. For fiscal 2018, we expect to open approximately three stores. These store locations will serve existing markets within our current geographic footprint.
As of February 3, 2018, we operated 408 stores located across 35 states and Puerto Rico. Our stores averaged approximately 11,000 square feet, ranging in size from 26,000 to 4,000 square feet. New store sizes typically depend upon location and population base, and our stores are predominantly located in open-air shopping centers. Our traditional store prototype utilizes between 7,000 and 10,000 square feet of leased area. During the past severallast five years, we beganhave had no debt outstanding and a cash and cash equivalents balance of at least $48 million at the end of each fiscal year. We believe this approach increases our ability to roll out scalable store prototypes that reflectmake impactful long-term decisions and enhances our stakeholder relationships. Over the diverse population densities oflast five fiscal years we have returned approximately $181.6 million to our markets. These scalable prototypes utilize a wide range of leased space based on sales potentialshareholders through share repurchases and opportunistic space availability. In all of our stores, the sales area is approximately 85% of the gross store footprint.dividends.
Growth Strategy
| Historical Store Count | |||||
| Fiscal Years | 2017 | 2016 | 2015 | 2014 | 2013 |
| Stores open at the beginning of the year | 415 | 405 | 400 | 376 | 351 |
| New store openings | 19 | 19 | 20 | 31 | 32 |
| Store closings | (26) | (9) | (15) | (7) | (7) |
| Stores open at the end of the year | 408 | 415 | 405 | 400 | 376 |
| Stores relocated | 3 | 3 | 2 | 3 | 9 |
| Percentage of store base remodeled | 3% | 4% | 7% | 7% | 9% |
Store portfolio
Increasing market penetration by opening new stores has historically been a key component of our growth strategy. Whilestrategy, and we will have limitedcontinue to focus on generating positive long-term financial performance for our store portfolio. We opened four new store openingsstores in fiscal 2018, going forward we2020 and expect to open a limited number of new stores in existing markets in fiscal 2021. We believe our strong unleveraged financial position will provide a solid platformcurrent store footprint provides for additional growth. Criticalgrowth nationwide as well as fill-in opportunities within existing markets. We expect to pursue opportunities for store growth across large and mid-size markets as we leverage customer data from our customer relationship management (“CRM”) program and more attractive real estate options become available. Furthermore, our future store growth may continue to be impacted by the economic uncertainty
associated with the COVID-19 pandemic. Our CRM program is more fully described below under “Multi-Channel Strategy – Customer Relationship Management.”
Our ability to cluster stores has been critical to the success of opening new stores in larger markets or geographic areas has been our ability to cluster stores.areas. In large markets (populations greater than 400,000), clustering involves opening two or more stores at approximately the same time. In smaller markets that can only support a single store, clustering involves seeking locations in reasonably close proximity to other existing markets. This strategy creates cost efficiencies by enabling us to leverage store expenses with respect to advertising, distribution and management costs. We believe 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.
We continuously analyze our portfolio of stores, with a concentration on underperforming stores, to meet our long-term goal of increasing shareholder value through increasing operating income. Our objective is to identify and address underperforming stores that produce low or negative contribution and either renegotiate lease terms, relocate or close those stores. Based on this analysis, we closed 13 stores in fiscal 2020 and expect to close nine stores in fiscal 2021. Even though store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share.
As of January 30, 2021, we operated 383 stores located across 35 states and Puerto Rico. Our stores averaged approximately 10,800 square feet, ranging in size from 4,000 to 26,000 square feet. New store sizes typically depend upon location and population base, and our stores are predominantly located in open-air shopping centers. Our traditional store prototype typically utilizes between 8,000 and 12,000 square feet of leased area. We also utilize scalable store prototypes that reflect the diverse population densities of our markets. These prototypes utilize a wide range of leased space based on sales potential and opportunistic space availability. The sales area is approximately 85% of the typical gross store footprint.
|
| Historical Store Count |
| |||||||||||||||||
Fiscal Years |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||||
Stores open at the beginning of the year |
|
| 392 |
|
|
| 397 |
|
|
| 408 |
|
|
| 415 |
|
|
| 405 |
|
New store openings |
|
| 4 |
|
|
| 1 |
|
|
| 3 |
|
|
| 19 |
|
|
| 19 |
|
Store closings |
|
| (13 | ) |
|
| (6 | ) |
|
| (14 | ) |
|
| (26 | ) |
|
| (9 | ) |
Stores open at the end of the year |
|
| 383 |
|
|
| 392 |
|
|
| 397 |
|
|
| 408 |
|
|
| 415 |
|
Stores relocated |
|
| 0 |
|
|
| 4 |
|
|
| 1 |
|
|
| 3 |
|
|
| 3 |
|
Percentage of store base remodeled |
| <1% |
|
|
| 3 | % |
|
| 1 | % |
|
| 3 | % |
|
| 4 | % | |
The following table identifies the number of our stores in each state and Puerto Rico as of January 30, 2021:
State/Territory |
|
|
|
| State/Territory |
|
|
|
Alabama |
| 10 |
|
| New Jersey |
| 2 |
|
Arkansas |
| 10 |
|
| New York |
| 3 |
|
Arizona |
| 3 |
|
| North Carolina |
| 18 |
|
Colorado |
| 4 |
|
| North Dakota |
| 3 |
|
Delaware |
| 1 |
|
| Ohio |
| 20 |
|
Florida |
| 30 |
|
| Oklahoma |
| 7 |
|
Georgia |
| 16 |
|
| Pennsylvania |
| 12 |
|
Idaho |
| 4 |
|
| Puerto Rico |
| 5 |
|
Iowa |
| 11 |
|
| South Carolina |
| 10 |
|
Illinois |
| 31 |
|
| South Dakota |
| 2 |
|
Indiana |
| 28 |
|
| Tennessee |
| 18 |
|
Kansas |
| 5 |
|
| Texas |
| 47 |
|
Kentucky |
| 12 |
|
| Utah |
| 2 |
|
Louisiana |
| 8 |
|
| Virginia |
| 7 |
|
Michigan |
| 14 |
|
| Wisconsin |
| 3 |
|
Missouri |
| 22 |
|
| West Virginia |
| 5 |
|
Mississippi |
| 6 |
|
| Wyoming |
| 1 |
|
Montana |
| 1 |
|
| Total Stores |
| 383 |
|
Nebraska |
| 2 |
|
|
|
|
|
|
We lease all store locations, as we believe the flexibility afforded by leasing allows us to avoid the inherent risks of owning real estate, particularly with respect to underperforming stores. Before entering a new market, we perform 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, tenant mix, 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 property owner’s ability to deliver the premises. After we accept the premises from the property owner, we can generally open a turnkey store within 60 days and open an ‘as-is’“as-is” store in up to 115 days. A turnkey store is generally available for immediate use from the landlord, as the landlord performs nearly all aspects of construction and delivers the store in a condition ready for fixtures. There are typically minimal tenant improvement allowances negotiated with landlords for turnkey stores. An “as-is” store typically requires more significant capital investment by us, as the landlord performs minimal construction and delivers the space “as-is” while representing that the location is free of hazardous materials. There are typically significant tenant improvement allowances negotiated with landlords for “as-is” stores.
We believe that a continued, disciplined approachTo do our part in helping to new store openings is very important asprevent the rapid spread of COVID-19 and to align with the evolving guidance from federal, state and local governments and health officials, we leveragetemporarily closed all of our multi-channel strategy and pursue opportunities for brick-and-mortar stores across large, midthe United States and smaller markets. OverPuerto Rico effective March 19, 2020. We began reopening stores in accordance with applicable public health guidelines in late April 2020. By the past several years,beginning of our second fiscal quarter, approximately 50% of our stores were reopened, and by early June, substantially all of our stores had reopened. Our e-commerce platform has been fully operational during the pandemic, with e-commerce orders generally fulfilled by our store locations. As of January 30, 2021, we do not have analyzedany stores closed due to the COVID-19 pandemic.However, we continue to closely monitor the impact of the COVID-19 pandemic on all facets of our entire portfoliobusiness and will take the necessary steps to ensure the health and safety of stores, with a concentration on underperforming stores,our associates and customers. This could include future, temporary store closures or modifications to meet our long-termnormal store operating processes.
Multi-Channel Strategy
Our goal of increasing shareholder value through increasing operating income. Our objective is to identify and address underperforming stores that produce low or negative contribution and either renegotiate lease terms, relocate or close the store. Based on this analysis, we closed 26 stores in fiscal 2017 and we currently expect to close 25 to 30 stores in fiscal 2018. Even though this could reduce our overall net sales volume, we believe this strategy would realize long-term improvement in operating income and diluted earnings per share. As discussed above, in fiscal 2018, we anticipate opening approximately three new stores. We remain committed to long-term strategic store growth; however, with the changing landscape in brick-and-mortar stores, we believe more attractive real estate opportunities will become available in the marketplace if we remain diligent in our approach.
Multi-Channel Strategy
We are committed to establishing Shoe Carnival asbe a world class multi-channel retailer. The foundation of our multi-channel strategy is connecting customers with our wide assortment of store inventory through multiple channels, while maintaining a personalized, seamless customer service experience. Our customer’s shopping journey bridges multiple devices and touchpoints. We believe over time the majority of our customers will utilize multipleare committed to providing an incomparable customer experience across all channels to purchase our product offerings based on their needs at the time, as described below. Our e-commerce business continues to grow and we continue to make enhancements to capitalize on our increasing website traffic and optimize conversion rates. We believe that our ongoing multi-channel initiatives represent the cornerstone for our long-term growth and are in-linealigned with rapidly
changing consumer behavior. These initiatives are an integral part of expanding our multi-channel footprint and creating opportunities to connect with our customers in new ways.
Ship From StoreCustomer Relationship Management
Our “shipCRM program continues to provide valuable customer insights to our business, resulting in more efficient and effective marketing outreach. CRM provides our marketing, merchandising, analytics and real estate teams with a holistic view of our customer’s shopping behaviors and forms the foundation of our digital marketing efforts and our Shoe Perks loyalty program (“Shoe Perks”). Our view into customer data allows us to more effectively communicate with our customers on a segmented basis through all owned and paid media channels and tailor the merchandise mix down to a store level. Through transaction data, we gain useful insights into our customers’ shopping habits, including where, when and how they shop our stores and navigate our online presence. Additionally, our CRM program allows us to gain a deeper understanding of the brands and categories that our high-value customers consistently purchase so that we can continue to deliver strong performance at a geographic and store level.
Our CRM program allows us to drive customer retention by delivering each customer more individualized shopping opportunities and experiences and aids in gaining a better understanding of our existing customer base as well as identifying new customers. We expect segmentation and activation of our high-value customers through data analysis and targeting the broader market of ‘look-a-like’ customers to play a key role in our growth.
Customers who enroll in Shoe Perks or register on our website receive personalized e-mail communications from store”us. These communications afford us additional opportunities to highlight our broad product assortment and promotions. Shoe Perks provides customers with a heightened shopping experience, which includes exclusive offers and rewards that are earned by making purchases either in-store or online and through participating in other point earning opportunities that facilitate engagement with our brand.
We remain highly focused on expanding our Shoe Perks enrollment. In fiscal 2020, we added 2.3 million new members, which brought total Shoe Perks membership to 26.3 million members at the end of fiscal 2020, an approximate 10% increase over fiscal 2019. Purchases from Shoe Perks members were approximately 67% of our comparable net sales. We believe our Shoe Perks program affords us tremendous opportunity to communicate, build relationships, and engage with our most loyal shoppers and increase our customer touch points, which we believe will result in long-term sales gains. Our most loyal customers, those who qualify for our “Gold” tier, receive additional rewards and incentives. The Gold tier represents approximately 10% of our members, and the average transaction value for these customers was approximately 40% higher than non-Gold tier Shoe Perks members in fiscal 2020.
E-commerce Platform
Our e-commerce platform is an extension of our physical stores and is designed to improve the customer journey by providing a more relevant and personalized shopping experience. Our e-commerce platform played a critical role in fiscal 2020 due to the challenges associated with the COVID-19 pandemic. In fiscal 2020, our customers embraced our e-commerce platform as demand for online shopping surged, and we exceeded our e-commerce sales expectations. During fiscal 2020, we also added a new online payment platform, which we believe helped to generate a record increase in multi-channel sales. This payment solution allows customers to enjoy flexible payment options for their purchases, such as separating purchases into multiple, interest free payments. E-commerce sales represented approximately 19% of our merchandise sales in fiscal 2020 and 6% of our merchandise sales in fiscal 2019.
Ship-From-Store
Our Ship-From-Store program is a core element of our multi-channel strategy. This program allows stores to fulfill online orders and has been implemented on a chain widechain-wide basis (with limited exceptions). By fulfilling e-commerce orders from our store level inventory, we are able to minimize out-of-stocks, offer our customers an expanded online assortment and leverage store level inventory and overhead. Additionally, during peak sales periods, e-commerceE-commerce orders for certain key items and promotional product are also fulfilled from our distribution center in Evansville, Indiana.
Shoes 2UVendor Drop-Ship Program
A growing partWe maintain a vendor drop-ship program with select business partners. This program offers our customers an expanded online assortment of styles and colors that we do not carry in-store. While our customers benefit from expanded item assortment, the functionality of this program is seamless, and our customers’ online experience is not impacted by the vendor drop-ship fulfillment option. We benefit from this program by not having to make a capital investment in the expanded inventory assortment, which is carried and fulfilled by our business partners participating in this program.
Buy Online, Pick Up In Store
Another key element of our multi-channel strategy is our “buy online, pick up in store” program. Not only can our customers choose to pick up their e-commerce orders in-store, but they can now shop their favorite or nearby stores online and only see the product that is available in any given store. This program provides the convenience of local pickup for our customers with the added benefit of driving traffic back to our stores.
Shoes 2U program. This
Our Shoes 2U program enables us to ship product from any store to a customer’s home or store of their choice if they are unable to find the size, color or style of a shoe in the
store in which they are shopping. This creates an endless aisle experience for our customers in which our chain-wide inventory is accessible to any store customer.
Buy Online Pick Up In Store, Buy Online Ship To StoreOrder Management System
Another key element of our multi-channel strategy is our buy online, pick up in store and buy online, ship to store services. These features provide the convenience of local pickup for our customers with the added benefit of driving traffic back to our stores.
Mobile App
Given our desire to connect with customers anywhere and anytime, an important component of our multi-channel strategy is our mobile app. Our mobile app was upgraded in fiscal 2017 and offers e-commerce functionality directly from the app. Product offerings on the app correspond to our online assortment and customers have the ability to scan UPC codes to find sizes that may not be available in our stores. These products and our entire online assortment can be conveniently purchased directly from our app.
E-commerce and Mobile Platform
In fiscal 2017,2020 we relaunchedlaunched a cloud-based OMS, which will enhance the operational efficiency of our direct-to-consumer programs. Combined with our new WMS, our new OMS allows us to optimize the allocation of e-commerce and mobile storefronts on aShoes 2U orders and further leverage our distribution center. Moreover, with our new platform, designed to improveOMS, we have seamless orchestration of orders across the customer journey and allow us to provide a more relevant and personalized shopping experience for our customers. This system is cloud-based and enables us to operate a single platform for more effective e-commerce and mobile management. The platform is open and extensible, and provides the scalability required for complex multi-channel integration and complex retail operations. This new technology will enable us to keep pace with the rapidly changing retail environment and respond to new opportunities.
Customer Relationship Management (“CRM”)
During fiscal 2017 we engaged a strategic partner that specializes in creating holistic CRM strategies for large and mid-sized retail organizations. Our CRM initiative is intended to focus our entire organization on a more customer-centric model. We believe using CRM strategies will help drive customer retention through segmentation and other analysis and will aid us in gaining a better understanding of our existing customer baseCompany as well as identifying new loyal customers.enhanced visibility of available inventory and insight into customer transactions.
Merchandise
Critical to our success is maintaining fresh, fashionable merchandise at moderate prices. Our buyers stay in touch with evolving fashion trends and adjust growth strategies based on these trends. This is accomplished by subscribing to an industry leading trend service, shopping fashion-leading markets, attending national trade shows, gathering vendor input and monitoring the current styles shown in leading fashion and lifestyle magazines.
Our buyers and planners have years of experience and in-depth knowledge of our customers and the markets in which we operate. This helps us select our assortment and quantities in order to manage and allocate inventories at the store level. The mix of merchandise and the brands offered in a particular store reflect the demographics of each market, climate and seasonality, among other factors. Management encourages store operations personnel to provide input to our merchandising staff regarding market specific fashion trends. Our e-commerce siteplatform offers customers an opportunity to choose from a large selection of products in all of the same categories of footwear and introduces our concept to consumers who are new to Shoe Carnival, in both existing and new markets. Due
In fiscal 2020, we commenced implementation of a new merchandise planning system that will provide a unified strategic planning and budgeting process that is supported by various solutions, including strategic and assortment planning, store allocation and replenishment and in-season management. This cloud-based platform is a multi-year project. We believe this collaborative platform will unify our buy plans, optimize inventory levels, help achieve more sales at higher margins and allow us to our multi-channel retailer strategy, we view our e-commerce sales as an extension of our physical stores.
set goals for multiple channels and formats common in today’s competitive environment.
Our stores and e-commerce siteplatform offer a broad assortment of current-season, name brand footwear, supplemented with private label merchandise. Our stores carry complementary accessories such as socks, belts, shoe care items, handbags, sport bags, backpacks, jewelry, scarvesmerchandise and wallets, while our e-commerce site offers certain handbags, sport bags and backpacks.accessories. We purchase merchandise from approximately 160177 footwear vendors. Management of the purchasing function is the responsibility of our Executive Vice President – Chief Merchandising Officer. Our buyers maintain ongoing communication with our vendors and provide feedback to our vendors on sales, profitability and
current demand for their products. We adjust future purchasing decisions based upon the results of this analysis. In fiscal 2017,2020, two branded suppliers, Nike, Inc. and Skechers USA, Inc.,
collectively accounted for approximately 46%43% of our net sales. Nike, Inc. accounted for approximately 35%33% and Skechers USA, Inc. accounted for approximately 11%10% of our net sales, respectively. Name brand suppliers also provide us with cooperative advertising and visual merchandising funds. A loss of any of our key suppliers in certain product categories or our inability to obtain name brand or other merchandise from suppliers at competitive prices could have a material adverse effect on our business. As is common in the industry, we do not have any long-termlong‑term contracts with our suppliers.
Initial pricing levels are typically established in accordance with the manufacturer’s suggested retail pricing structure. Subsequent to this initial pricing, our buying staff manages our markdown cadence based on product-specific sell-through rates to achieve liquidation of inventory within the natural lifecycle of the product. We emphasize our value proposition to customers by combining current season name brand productproducts with promotional pricing. Ourmarketing promotions. These promotions include both advertised limited time sale offerings in addition to in-store and online timed specials.
The table below sets forth our percentage of merchandise sales by product category.
| Fiscal Years | 2017 | 2016 | 2015 | 2014 | 2013 |
| 2020 |
|
| 2019 |
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| 2018 |
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| 2017 |
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| 2016 |
| ||||||||||||||||||||
| Non-Athletics: |
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|
| ||||||||||||||||||||
| Women’s | 24 | % | 26 | % | 27 | % | 27 | % | 27 | % | ||||||||||||||||||||||||||||||
| Men’s | 14 | 14 | 14 | 14 | 15 | |||||||||||||||||||||||||||||||||||
| Children’s | 5 | 5 | 5 | 5 | 5 | |||||||||||||||||||||||||||||||||||
Women's |
|
| 22 | % |
|
| 25 | % |
|
| 24 | % |
|
| 24 | % |
|
| 26 | % | ||||||||||||||||||||
Men's |
|
| 14 |
|
|
| 14 |
|
|
| 14 |
|
|
| 14 |
|
|
| 14 |
| ||||||||||||||||||||
Children's |
|
| 5 |
|
|
| 5 |
|
|
| 5 |
|
|
| 5 |
|
|
| 5 |
| ||||||||||||||||||||
| Total | 43 | 45 | 46 | 46 | 47 |
|
| 41 |
|
|
| 44 |
|
|
| 43 |
|
|
| 43 |
|
|
| 45 |
| |||||||||||||||
| Athletics: |
|
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|
|
|
|
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|
|
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|
|
|
|
| ||||||||||||||||||||
| Women’s | 17 | 16 | 16 | 16 | 16 | |||||||||||||||||||||||||||||||||||
| Men’s | 22 | 22 | 22 | 21 | 21 | |||||||||||||||||||||||||||||||||||
| Children’s | 14 | 13 | 12 | 13 | 12 | |||||||||||||||||||||||||||||||||||
Women's |
|
| 19 |
|
|
| 17 |
|
|
| 18 |
|
|
| 17 |
|
|
| 16 |
| ||||||||||||||||||||
Men's |
|
| 22 |
|
|
| 20 |
|
|
| 21 |
|
|
| 22 |
|
|
| 22 |
| ||||||||||||||||||||
Children's |
|
| 13 |
|
|
| 14 |
|
|
| 14 |
|
|
| 14 |
|
|
| 13 |
| ||||||||||||||||||||
| Total | 53 | 51 | 50 | 50 | 49 |
|
| 54 |
|
|
| 51 |
|
|
| 53 |
|
|
| 53 |
|
|
| 51 |
| |||||||||||||||
| Accessories | 4 | 4 | 4 | 4 | 4 |
|
| 5 |
|
|
| 5 |
|
|
| 4 |
|
|
| 4 |
|
|
| 4 |
| |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % | ||||||||||
Women’s, men’s and children’s non-athletic footwear categories are further divided into dress, casual, sport, sandals and boots. We classify athletic shoes by functionality, such as running, basketball or fitness shoes.
Building Brand Awareness
Our goal is to communicate a consistent brand image across all aspects of our operations.operations and throughout our marketing mix of paid, owned and earned channels. We utilize a blend of advertising mediums and marketing methods to communicate who we are and the values we offer. Special emphasis is made to highlight brands, as well as specific styles of product, using lifestyle and visual graphics are used extensively in our storesproduct imagery to emphasizeshowcase the lifestyle aspect of the styles we carry.product. The use of socialdigital media has become an increasingly important mediumcontinues to grow in importance in our digital marketing efforts,mix, particularly as we leverage data that comes directly from our customers as part of our CRM solution, allowing us to directly communicate with as well as advertise to, our core customers. ForIn fiscal 2017, approximately 51%2020, we invested more heavily in targeted digital advertising to drive customers to our e-commerce platform. We believe this was an effective way to counter the pandemic and the related shifts in back-to-school shopping. Approximately 70% of our total advertising budget in fiscal 2020 was directed to television, radio and digital media. PrintTelevision, radio, print media (including inserts, direct mail and newspaper advertising) and outdoor advertising accounted for the balance. We make a special effort to utilize the cooperative advertising dollars and collateral offered by vendors whenever possible. We utilize television advertising to deliver a balanced mix of both branding and seasonal product messaging across the year beginning with the Easter selling season. Moreover, it enables us to provide a message of offering value-priced, current season footwear.
In addition to a dynamic, lively and fun shopping experience, we offer our customers our Shoe Perks rewards program. This loyalty program provides customers with a heightened shopping experience, which includes exclusive offers and personalized messaging. Rewards are earned by making purchases either in-store or online and through participating in other point earning opportunities that facilitate engagement with our brand.
We remain highly focused on expanding Shoe Perks enrollment. In fiscal 2017, we added 5.8 million new members, and purchases from Shoe Perks members increased to approximately 70%balance of our net sales. We believe our Shoe Perks program affords us tremendous opportunity to communicate, build relationships, and engage with our most loyal
shoppers and increase our customer touch points, which we believe will result in long-term sales gains. In fiscal 2018, we plan to enhance the Shoe Perks program to better reward our high-valued customers and incentivize all of our members in order to encourage brand loyalty.
total advertising budget.
We strive to make each store opening a major retail event. Major promotions during grand openings and peak selling periods feature contests and prize giveaways. We believe our grand openings help establish thea high-energy, promotional atmosphere that develops a loyal, repeat customer base and generates word-of-mouthword of mouth advertising.
Distribution
Distribution
We operate a single 410,000 square foot distribution center located in Evansville, Indiana. Our facility is leased from a third party and can support the processing and distribution needs of a minimum offor up to 460 stores.stores based on our current configuration. We have the right to expand the facility by 200,000 square feet, which would provide us processing capacity to support approximately 650 stores. We lease the facility from a third party, which expires in 2034.
Our distribution center is equipped with state-of-the-art processing and product movement equipment. The facility utilizes cross docking/store replenishment and redistribution methods to fill store product requirements. These methods may include count verification, price and bar code labeling of each unit (when not performed by the manufacturer), redistribution of an order into size assortments (when not performed by the manufacturer) and allocation of shipments to individual stores. Throughout packing, allocating, storing and shipping, our distribution process is essentially paperless. Merchandise is typically shipped to each store location once per week. For stores within the continental United States, a dedicated carrier, with occasional use of common carriers, handles the majority of shipments. Our shipments to Puerto Rico are loaded for containerized overseas shipment, with final delivery by a third partythird-party provider.
During fiscal 2020 we implemented a new WMS in order to optimize our supply chain and drive warehouse efficiency. This new platform was integrated with our existing systems and affords us the flexibility to keep pace with changing customer buying habits.
Competition
The retail footwear business is highly competitive. We believe the principal competitive factors in our industry are merchandise selection, price, fashion, quality, location, shopping environment and service. We compete with department stores, shoe stores, sporting goods stores, onlinee-commerce retailers and mass merchandisers. Our specific competitors vary from market to market. We compete with most department stores and traditional shoe stores by offering competitive prices. We compete with off-price retailers, mass merchandisers and discount stores by offering a wider and deeper selection of merchandise. Many of our competitors are significantly larger and have substantially greater resources than we do. However, we believe that our distinctive retail format, in combination with our wide merchandise selection, competitive prices and low operating costs, enables us to compete effectively.
Store Operations
Management of store operations is the responsibility of our Executive Vice President - StoreChief Retail Operations Officer, who is assisted by divisional managers, regional directors,vice presidents, district managers and the individual store general managers. Generally, each store has a general manager and up to three store managers, depending on sales volume. Store operations personnel make certain merchandising decisions necessary to maximize sales and profits primarily through merchandise placement, signage and timely clearance of slower selling items. Administrative functions are centralized at theour corporate headquarters. These functions include accounting, purchasing,strategic sourcing, store maintenance, information systems, advertising,marketing, human resources, distribution and pricing. Management oversight for e-commerce is also located at our corporate headquarters.
Culture and Human Capital Management
Employees
We have intentionally built an employee-centric, customer-focused organization designed to compete at the highest levels in the retail industry. Our commitment to, and investment in, a strong performance culture is paramount to our long-term sustainability and success. Forbes Magazine recently recognized the quality of our employee-centric culture by naming us one of America’s Best Midsize Employers for 2019.
Our employee-centric culture aided us during the COVID-19 pandemic. As non-essential retailers were required to close to the public, many of our competitors decided to furlough a significant number of employees. We, however, took a different route, finding innovative ways to keep our associates in full employment. This strategy positively impacted our associates, their families, and the communities we serve. In addition, this decision enabled us to rapidly reopen our stores in a safe manner as soon as we were permitted to do so.
Workforce Diversity and Inclusion
We serve a diverse customer base and seek diversity in and among our workforce in all areas, from our stores to our distribution center and our corporate office. We believe that the diversity of our workforce and management is a tremendous asset. We are firmly committed to providing equal opportunities in all aspects of employment and believe that all individuals should be treated with respect and dignity. Diversity is an important element in our
ongoing annual mandatory training for all employees and managers. We do not tolerate harassment or unlawful discrimination of any kind.
We have clear policies encouraging strong relationships and protecting open lines of communication with management at every level. This, coupled with our non-retaliation policy, encourages employees to raise issues and seek immediate redress of those issues if they should arise.
We understand the value of diversity at all levels, whether of gender, race, ethnicity, background or experience. As of January 30, 2021, our overall workforce identified as 66% female and 34% male. Our broad-based leadership team, including those who manage and lead our stores and those who lead our company, identified as 59% female and 41% male as of our fiscal 2020 year end. With respect to ethnicity, our broad-based leadership team identified as 61% Caucasian and 39% non-Caucasian as of January 30, 2021. The diversity of our broad-based leadership team trends with the diversity of our customer base, which based on recent data from our Shoe Perks customer loyalty program, approximates three-quarters Caucasian and one-quarter African American, Hispanic, or Asian and is more female than male.
In our corporate leadership roles (senior director-level employees through our named executive officers), the portion identifying as female has significantly increased over the last three years from 5% to 26%. Our human resources, marketing, and supply chain departments as well as portions of our merchandising and technology departments are led by females.
At February 3, 2018,the Board level, we are also focused on increasing our diversity. Currently 20% of our non-employee Board members is female. We are currently refreshing our Board and assessing long-term succession as well as the diversity of the Board’s collective skill set. In fiscal 2019, a board member rolled off the Board as his term expired, creating space for new candidates who will enhance our diversity. Our short-term goal is to achieve 40% diversity in our non-employee Board members by the end of fiscal 2021.
Retention
We believe our employee-centric culture not only supports higher levels of execution and performance, but also has led to increased retention of key talent. We take great pride in our store-level training programs that provide the foundation for long-term careers and our ability to promote from within. Currently, all of the general managers who operate our stores and 85% of our district managers who oversee those general managers were trained, developed, and promoted from within. As of January 30, 2021, of our 26 district managers, 81% have been employed by Shoe Carnival for more than 20 years. The average tenure of the general managers who operate our 383 stores was 13 years as of fiscal 2020 year end.
Individuals who comprise our leadership team, which includes our named executive officers, vice presidents and senior director-level employees, have been employed by Shoe Carnival for an average of 18 years.
Employee Benefits
Among the many ways we seek to serve our employees, we offer a complete range of benefits. These include competitive wages and incentives, including stock appreciation rights for mid-level managers; an employee stock purchase plan with a 15% discount off the fair value of our common stock; employer-subsidized medical plans with dental and vision benefits; qualified and unqualified defined contribution plans with employer matching contributions; and merchandise discounts, among other benefits.
Training and Code of Business Conduct and Ethics
We are dedicated to strengthening our culture and execution through ongoing training for all associates. We are uniquely focused on training within our store-level, customer-facing operations. Employees must obtain necessary certifications in order to be responsible for the keys to a store and eventually to become a general manager. Our broad-based training program also engages and educates our employees on the following key topics:
• | Non-discrimination and anti-harassment, including the value of diversity and awareness of unconscious bias in all aspects of the employment relationship; |
• | Cybersecurity awareness and responsibility; |
• | Supply chain security; and |
• | Business code of conduct. |
More information regarding our approach to conducting business responsibly, including our guidelines on discrimination and harassment, can be found in our Code of Business Conduct and Ethics (“Code of Ethics”). Our Code of Ethics applies to all of our Board members, officers and employees, including our principal executive officer, our principal financial officer, and our principal accounting officer. The Code of Ethics is posted on our website at investors.shoecarnival.com/governance/ governance-documents. We intend to disclose any amendments to the Code of Ethics by posting such amendments on our website. In addition, any waivers of the Code of Ethics for our Board members or executive officers will be disclosed in a Current Report on Form 8-K.
Safety of our Employees and Security of our Data
We strive to provide our associates with a safe and healthy work environment. Our Safety Committee works across the Company and with leadership at all levels and regularly reports to management. We evaluate conditions and incidents on an ongoing basis, developing lessons learned and documenting actions taken to safeguard our personnel. We measure OSHA recordable incidents to gauge the success of our safety protocol. During calendar year 2020, we recorded 49 OSHA recordable incidents, an approximate 25% reduction in incidents compared to just two years ago.
Our strategies to address the ever-expanding complexities of protecting customer and employee data and executing our business strategies in an increasingly digital world continue to advance. Our Security Committee monitors and tests compliance with our protocols, provides regular updates to employees and management, and conducts annual training.
Number of Employees
At January 30, 2021, we had approximately 4,700 employees, of which approximately 2,600 were employed on a part-time basis. The number of employees fluctuates during the year primarily due to seasonality. NoNone of our employees are represented by a labor union.
We attribute a large portion of our success in various areas of cost control to our inclusion of virtually all management level employees in incentive compensation plans. We contribute 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. Additionally, we sponsor retirement plans that are open to all employees who have met the minimum age and work hour requirements. All employees are eligible to receive discounts on purchases from our stores. We consider our relationship with our employees to be satisfactory.
Seasonality
Our 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 and closing underperforming stores. Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores or incur closing costs related to the closure of existing stores. Non-capital expenditures, such as advertising and payroll, incurred prior to the opening of a new store are charged to expense as incurred. The timing and actual amount of expense recorded in closing a store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout.
Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores or incur closing costs related to the closure of existing stores.
We have three distinct peak selling periods: Easter, back-to-school and Christmas. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other partsperiods of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively affect our profitability. Our operating results depend significantly upon the sales generated during these periods.
Trademarks
Trademarks
We own the following federally registered trademarks and service marks: Shoe Carnival® and associated trade dress and related logos, The Carnival®, Donna Lawrence®, Innocence®, Y-NOT?®, UNR8ED®, Solanz®, Cabrizi®, Shoe Perks®, SC Work Wear®, When You Want To 2®, Jump Back In®, A Surprise In Store®, Shoes 2U®, Laces for Learning® and Princess Lacey’s Laces®. We believe these marks are valuable and, accordingly, we intend to maintain the marks and the related registrations. We are not aware of any pending claims of infringement or other challenges to our right to use these marks.
Environmental
Environmental
We seek to minimize our impact on the environment and reduce our carbon footprint by actively implementing environmentally-friendly processes throughout our business, including energy efficiency initiatives, waste minimization, and the use of recycled materials within our supply chain. Our most significant areas of focus are fuel and packaging material used to deliver merchandise to our distribution center and stores; the HVAC and lighting systems in our stores, distribution center, and corporate office; and recycling methods.
Compliance with current federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had a material effect upon our capital expenditures, earnings or competitive position. We believe the nature of our operations have little, if any, environmental impact. We therefore anticipate no material capital expenditures for environmental control facilities for our current fiscal year or for the near future.
Available Information
We make available free of charge through the investor relations portion of our website at www.shoecarnival.com our annual reportsAnnual Reports on Form 10-K, our quarterly reportsQuarterly Reports on Form 10-Q, our current reportsCurrent 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 (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We have included our website address throughout this filing as textual references only. The information contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.
This Annual Report on Form 10-K filed with the Securities and Exchange Commission, including the financial statements and schedules thereto, without the accompanying exhibits, is available without charge to shareholders, investment professionals and securities analysts upon written request. Requests should be directed to Investor Relations at our corporate address. A list of exhibits is included in this Annual Report on Form 10-K, and exhibits are available from us upon payment to us of the cost of furnishing them.
Information about our Executive Officers
The following table sets forth certain information with respect to our executive officers as of the date of filing this Annual Report on Form 10-K, March 26, 2021:
Executive Officers
Name | Age | Position | ||
J. Wayne Weaver | 86 | Chairman of the Board and Director | ||
Clifton E. Sifford | 67 | Vice Chairman, Chief Executive Officer and Director | ||
Mark J. Worden | 47 | President and Chief Customer Officer | ||
W. Kerry Jackson | 59 | Senior Executive Vice President - Chief | ||
Carl N. Scibetta | 62 | Senior Executive Vice President - Chief Merchandising Officer | ||
Timothy T. Baker | 64 | Executive Vice President - Chief Retail Operations Officer | ||
Patrick C. Edwards | 49 | Vice President, Chief Accounting Officer, Corporate Controller and Assistant Secretary |
Mr. Weaver is Shoe Carnival’s largest shareholder and has served as Chairman of the Board 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 50 years of experience in the footwear industry. Mr. Weaver is a former Director of Nine West Group, Inc. Mr. Weaver served as Chairman and Chief Executive Officer of
Jacksonville Jaguars, LTD, a professional football franchise, until January 2012. Mr. Weaver previously served two terms as a Director of Stein Mart, Inc., a publicly traded chain of off-price retail stores, from June 2014 until March 2016 and from November 2000 until April 2008.
Mr. Sifford has been employed as PresidentVice Chairman since September 2019 and has served as Chief Executive Officer and has served as a Director since October 2012. Mr. Sifford also served as President from October 2012 to September 2019. Mr. Sifford served as Chief Merchandising Officer from October 2012 to March 2016. From June 2001 to October 2012, Mr. Sifford served as Executive Vice President – General Merchandise Manager and from April 1997 to June 2001, Mr. Sifford served as Senior Vice President – General Merchandise Manager. Prior to joining us, Mr. Sifford served as merchandise managerMerchandise Manager – shoesShoes for Belk, Inc.
Mr. Worden has been employed as President and Chief Customer Officer since September 2019. From September 2018 to September 2019, Mr. Worden served as Executive Vice President – Chief Strategy and Marketing Officer. Prior to joining us, Mr. Worden led the Northern European region for S. C. Johnson & Son, Inc. (“SC Johnson”), a manufacturer of household cleaning supplies and products, and was responsible for revenue and share growth objectives across six countries from May 2014 to July 2018. Prior to that, Mr. Worden served as Assistant to the Chairman and Chief Executive Officer of SC Johnson from May 2012 to May 2014 and as a Senior Marketing Director from 2009 to 2012. Mr. Worden also served as a Senior Brand Manager at Kimberly-Clark Corporation and held multiple marketing roles across their flagship brands during his tenure there from 2003 through 2009.
Mr. Jackson has been employed as Senior Executive Vice President, Chief Financial and Administrative Officer and Treasurer since September 2019. From October 2012 to September 2019, Mr. Jackson served as Senior Executive Vice President – Chief Operating and Financial Officer and Treasurer since October 2012.Treasurer. From August 2004 to October 2012, Mr. Jackson served as Executive Vice President – Chief Financial Officer and Treasurer. From June 2001 to August 2004, Mr. Jackson served as Senior Vice President – Chief Financial Officer and Treasurer. 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 us. Prior to joining us in 1988, Mr. Jackson was associated with a public accounting firm. He is a Certified Public Accountant.
Mr. BakerScibetta has been employed 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 one of our regional managers. From 1983 to June 1989, Mr. Baker held various retail management positions with Payless ShoeSource.
Mr. Scibetta has been employed as Executive Vice President – Chief Merchandising Officer since March, 2016.2021. From March 2016 to March 2021, Mr. Scibetta serviced as Executive Vice President – Chief Merchandising Officer. From December 2012 to March 2016, Mr. Scibetta served as General Merchandise Manager. Prior to joining us, Mr. Scibetta served as Vice President, Divisional Merchandise Manager– Footwear for Belk, Inc. since 2008. From 2004 to 2007, Mr. Scibetta served as Vice President, Divisional Merchandise Manager – Footwear for Parisian Department Stores. From 1998 to 2000, Mr. Scibetta served as Vice President, Divisional Merchandise Manager for Shoe Corporation of America. Mr. Scibetta began his retail career with Wohl Shoe Company in 1980.
Mr. Baker has been employed as Executive Vice President – Chief Retail Operations Officer since September 2019. From June 2001 to September 2019, Mr. Baker served as Executive Vice President – Store Operations. 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 one of our regional managers. From 1983 to June 1989, Mr. Baker held various retail management positions with Payless ShoeSource.
Mr. Edwards has been employed as Vice President, Chief Accounting Officer, Corporate Controller and Assistant Secretary since March 2021. From October 2019 to March 2021, Mr. Edwards served as our Vice President and Corporate Controller and as our Assistant Secretary since December 2019. Prior to joining us, Mr. Edwards was Vice President of Accounting for CenterPoint Energy, Inc. (“CenterPoint”) from February 2019 to August 2019 following its acquisition of Evansville, Indiana-based Vectren Corporation (“Vectren”). For Vectren, Mr. Edwards held various leadership roles in the accounting, audit and finance functions from February 2001 through February 2019, including Vice President and Treasurer from April 2017 to February 2019 and Vice President of Corporate Audit from August 2013 to April 2017. Prior to joining Vectren, Mr. Edwards worked in public accounting. Mr. Edwards is a Certified Public Accountant.
Our executive officers serve at the discretion of the Board of Directors. There is no family relationship between any of our Directors or executive officers.
Chief Executive Officer Succession
In March 2021, our Board unanimously elected Mr. Worden as our next President and Chief Executive Officer, effective September 30, 2021. Mr. Worden will succeed Mr. Sifford, who will step down as our Chief Executive Officer effective September 30, 2021, but will continue to serve in the role of Vice Chairman of the Board of Directors and, in such role, will continue as an employee.
Chief Retail Operations Officer Succession
Effective April 2021, Marc A. Chilton will succeed Mr. Baker as our Executive Vice President – Chief Retail Operations Officer. Mr. Baker is stepping away after 32 years as our operations leader. Mr. Chilton, age 51, served as our Senior Vice President – Store Operations and Administration from March 2019 until February 2020, after which he has served as Senior Vice President – Store Administration and Development. Mr. Chilton started with us in 1994 as a store manager and has served in roles of increasing responsibility in store management and operations since that time, including serving as the Vice President of our Northern Division, with approximately one-third of our stores reporting to him, from April 2012 until March 2019.
Carefully consider the following risk factors and all other information contained in this annual reportAnnual Report on Form 10-K before making an investment decision with respect to our common stock. Investing in our common stock involves a high degree of risk. If any of the following risks actually occur, we may not be able to conduct our business as currently planned and our financial condition and operating results could be materially and adversely affected. See PART I “Cautionary Statement Regarding Forward-Looking Information” at the beginning of this Annual Report on Form 10-K. Our risk factors are categorized as follows: Operational and Strategic Risks, Compliance and Litigation Risks, Human Capital Risks, Financial and Liquidity Risks and Risks Related to the Ownership of our Common Stock.
Operational and Strategic Risks
The COVID-19 pandemic has adversely impacted, and may continue to adversely impact, our business and our results of operations.
Our operations and the markets in which we operate, procure merchandise and raise capital are continuing to experience significant disruption and financial market volatility associated with the outbreak of a novel strain of coronavirus (“COVID-19”). The World Health Organization has declared COVID‑19 a pandemic. The U.S. Government, as well as state and local governments, have taken unprecedented measures to control the spread of COVID-19 and to provide stimulus as a mitigating measure to deteriorating economic conditions and increasing unemployment. Many businesses, schools, and other institutions have closed, or adjusted operations, to further the practice of “social distancing” as a method to slow the outbreak. Our business and results of operations were significantly impacted by the temporary closure of our physical stores effective March 19, 2020. Beginning in late April 2020, we began reopening stores in accordance with applicable health guidelines, and by the end of the second quarter of fiscal 2020, all of our stores were reopened. Both before the closure and since reopening, we have experienced reduced foot traffic in our physical stores, while traffic through our e-commerce platform has increased. As guidance and mandates from governments and public health officials continue to evolve, closures to some, or all, of our store and other operations may reoccur. In addition, our stock price and the stock prices of our peer companies have been volatile.
The extent of the impact of the COVID‑19 pandemic on our operational and financial performance will depend on future developments, including, but not limited to:
• | the duration and spread of the outbreak in the areas in which we operate and whether there are additional periods of increases or spikes in the number of such cases in future periods; |
• | mitigating efforts deployed by government agencies and the public at large; |
• | the development, pace of distribution, and effectiveness of vaccines and therapeutic treatments; and |
• | the general perception of those mitigating efforts where we operate, procure merchandise and raise capital. |
Economic conditions
Should the COVID-19 pandemic lead to further temporary closures of our physical stores; financial market volatility; adverse changes in economic conditions; adverse changes in consumer spending; increased operational risks; and/or disruptions to our supply chain and unemployment ratesdistribution processes, our costs may adversely affectincrease, our sales and gross profit may decline and our stock price may decrease, any of which could negatively impact our results of operations, cash flows, and financial condition.
Since our physical stores have reopened to our customers, our customers and store employees are exposed to certain safety risks. While we have taken measures to control these risks, the unpredictable nature of COVID-19 may result in unexpected outcomes. For example, if the established protocols cease to be effective, or are not followed, the health and safety of our employees and customers could be at risk. A future outbreak in our stores, distribution center, or corporate headquarters could result in temporary or sustained workforce shortages or store or facility closures. Inadequate response by us, perceived or otherwise, could impact our costs, our reputation, and/or our ability to recruit a qualified workforce.
An increase in the cost, or a disruption in the flow, of imported goods may decrease our sales and profits. We rely on imported goods to sell in our stores. Substantially all of our footwear product is manufactured overseas, including the merchandise we import directly from overseas manufacturers and the merchandise we purchase from domestic vendors. Our primary footwear manufacturers are located in China. Currently, most retailers, including us, are experiencing some form of disruption in their supply chains involving goods imported from Asian countries. To date, such disruption has not been material to us, however, should the disruption continue for an extended period, and there is a possibility this disruption may continue throughout fiscal 2021, it may eventually increase the cost of the goods we purchase and decrease our sales and profits.
If imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Products from alternative sources may be of lesser quality and more expensive than those we currently import. Other risks associated with our use of imported goods include:
• | disruptions in the flow of imported goods because of factors such as electricity or raw material shortages, work stoppages, strikes, political unrest, pandemics and natural disasters; |
• | tariffs, import duties, import quotas, anti-dumping duties, and other trade sanctions; |
• | modifications to international trade policy and/or existing trade agreements and other changes affecting United States trade relations with other countries; |
• | problems with oceanic shipping, including shipping container shortages and piracy; |
• | port congestion at arrival ports causing delays; |
• | additional oceanic shipping costs to reach non-congested ports; |
• | inland transit costs and delays resulting from port congestion; |
• | economic crises and international disputes; |
• | currency exchange rate fluctuations; |
• | increases in the cost of purchasing or shipping foreign merchandise resulting from the failure to maintain normal trade relations with source countries; |
• | increases in shipping rates imposed by the trans-Pacific shipping cartel; and |
• | compliance with the laws and regulations, and changes to such laws and regulations, in the United States and the countries where our manufacturers are located, including but not limited to requirements relating to shipping security, product safety testing, environmental requirements and anti-corruption laws. |
Adverse impacts on consumer spending and may significantly harm our business.The success of our business depends to a significant extent upon the level of consumer spending. A number of factors may affect the level of consumer spending on merchandise that we offer, including, among other things:
The merchandise we sell generally consists of discretionary items. Adverse economic conditions and unemployment rates, and any related decrease in consumer confidence and spending may result in reduced consumer demand for discretionary items. We face significant competition in our markets, and we may be unable to compete favorably.The retail footwear industry is highly competitive with few barriers to entry. We compete primarily with department stores, shoe stores, sporting goods stores,
Our failure to identify fashion trends could result in lower sales, higher markdowns and lower gross profits.Our success depends upon our ability to anticipate and react to the fashion tastes of our customers and provide merchandise that satisfies consumer demand. Our failure to anticipate, identify or react appropriately to changes in consumer fashion preferences may result in lower sales, higher markdowns to reduce excess inventories and lower gross profits. Conversely, if we fail to anticipate or react to consumer demand for our products, we may experience inventory shortages, which would result in lost sales and could negatively affect our customer goodwill, our brand image and our profitability. Moreover, our business relies on continuous changes in fashion preferences. Stagnating consumer preferences could also result in lower sales and would require us to take higher markdowns to reduce excess inventories. Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business. Our success and growth are partially dependent on generating customer traffic in order to gain sales momentum in our physical stores and drive traffic to our e-commerce platform. Successful marketing efforts require the ability to reach customers through their desired mode of communication, utilizing various media outlets. Media placement decisions are generally made months in advance of the scheduled release date. Our inability to accurately predict our customers’ preferences, to utilize their desired mode of communication, or to ensure availability of advertised products could adversely affect our business and results of operations. In addition, our competitors may spend more on marketing or use different marketing approaches, which could provide them with a competitive advantage. Our failure to effectively manage our real estate portfolio may negatively impact our results of operations.Effective management of our real estate portfolio is critical to our multi-channel strategy. All of our stores are subject to leases and are primarily located in open-air shopping centers. The effective evaluation of the range of considerations that may influence the success of our long-term real estate strategy is essential. Such considerations include, but are not limited to:
If we fail to effectively evaluate these factors or negotiate appropriate terms or if unforeseen changes arise, the consequences could include, for example:
These consequences could have a material adverse effect on our profitability, cash flows and liquidity. The financial impact of exiting a leased location can vary greatly depending on, among other factors, the terms of the lease, the condition of the local real estate market, demand for the specific property and our relationship with the landlord, and influencing these factors is difficult. In addition to rent, we could still be responsible for the maintenance, taxes, insurance and common area maintenance (“CAM”) charges for vacant properties until the lease commitment expires or is terminated. We locate our stores primarily in open-air shopping centers where we believe our customers and potential customers shop. The success of an individual store can depend on favorable placement within a given open-air shopping center and the volume of traffic generated by the other destination retailers and the anchor stores in the open-air shopping centers where our stores are located. We cannot control the development of alternative shopping destinations near our existing stores or the availability or cost of real estate within existing or new shopping destinations. If one or more of the destination retailers or anchor stores located in the open-air shopping centers where our stores are located close or leave, or if there is significant deterioration of the surrounding areas in which our stores are located, our business may be adversely affected.In addition, if our store locations fail to attract sufficient customer traffic or we are unable to locate replacement locations on terms acceptable to us, our business could suffer. Various risks associated with our e-commerce platform may adversely affect our business and results of operations.E-commerce has been a rapidly growing sales channel and an increasing source of competition in the retail industry. We sell shoes and related accessories through our website at www.shoecarnival.com and mobile app. We fulfill substantially all e-commerce orders from our store locations and from our distribution center. The percentage of our sales through our e-commerce platform grew substantially in fiscal 2020 and may continue to grow. If we are unable to maintain recent market share gains in our e-commerce sales or continue to grow our e-commerce sales, our sales, comparable store sales and gross profit may decline, and our stock price may decrease, any of which could negatively impact our results of operations, cash flows, and financial condition. Our e-commerce operations are subject to numerous other risks that could have an impact on our results of operations, including:
Any significant interruptions in the operations of our third-party providers, over which we have no control, could have a material adverse effect on our e-commerce business. Any breach involving our customer information could materially harm our reputation or result in liability including, but not limited to, fines, penalties and costs of litigation, any of which could have a material adverse effect on our operating results, financial condition and cash flows. A failure to increase sales at our existing stores may adversely affect our stock price and affect our results of operations.A number of factors have historically affected, and will continue to affect, our comparable store sales results,
Our comparable store sales results have fluctuated in the past, and we believe such fluctuations may continue. The unpredictability of our comparable store sales may cause our revenue and results of operations to vary from quarter to quarter, and an unanticipated decline in revenues or operating income may cause our stock price to fluctuate significantly. Members in our Shoe Perks customer loyalty program account for a significant portion of our sales, and any material decline in sales from our Shoe Perks members could have an adverse impact on our results of operations.We believe our Shoe Perks rewards program provides our customers with a heightened shopping experience, which includes exclusive offers and personalized messaging. Rewards are earned by making purchases We may not be able to successfully execute our growth strategy, which could have a material adverse effect on our business, financial condition and results of operations. We intend to continue to invest in our multi-channel initiatives, which requires substantial investment in technology. Our growth strategy requires that we continue to expand and improve our operating and financial systems and expand, train and manage our employee base. In addition, as we create more opportunities to connect with our customers through our multi-channel initiatives and as we adjust the number of our physical stores, we may be unable to hire a sufficient number of qualified personnel or successfully integrate the multi-channel initiatives or new stores into our business. If we fail to successfully implement our growth strategy, our business, financial condition or results of operations could be materially adversely effected. The success of our growth strategy will depend on a number of other factors, many of which are out of our control, including, among other things:
We Natural disasters, other public health crises, political crises and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend and could impact our supply chain and access to customers.Our facilities, including our distribution center, our corporate headquarters and our retail stores, and the facilities of our third-party vendors and service providers could suffer if affected by:
Disasters occurring at our distribution center, our corporate headquarters, our retail stores, or the infrastructure of a key third-party vendor or service provider also could result in us being unable to deliver merchandise to our stores or directly to customers for a prolonged period and could impact our reputation and our customers’ perception of our brand. In the event of a severe disruption resulting from such events, we have contingency plans and employ crisis management to respond and recover operations. Despite these measures, if such an occurrence were to occur, our results of operations and financial condition could be materially adversely affected. We could be adversely affected if our information technology systems fail to operate effectively, are disrupted or are compromised.We rely on our existing information technology systems in operating and monitoring enhance or replace The reliability and capacity of our information technology systems, and in particular our distribution technology operations, are critical to our continued operations. We currently operate a single Despite our precautionary efforts, our information technology systems are vulnerable from time to time to damage or interruption from, among other things, natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, If our distribution center is shut down for any reason, if our information technology systems do not operate effectively, or if we are the target of attacks or security breaches, we may suffer the loss of critical data, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores, our ability to operate our e-commerce
We outsource certain business processes to third-party vendors and have certain business relationships that subject us to risks, including disruptions
Failure of Failure to maintain positive brand perception and recognition could have a negative impact on our business.Maintaining a good reputation is critical to our business.
Emerging technologies may create disruption to the retail industry.New and emerging technology may enable new
Our quarterly operating results We have three distinct peak selling periods: Easter, back-to-school and Christmas. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other negatively affect our profitability. Our operating results depend significantly upon the sales generated during these periods, and our quarterly results may be impacted by calendar shifts of holiday or seasonal periods. We also increase our inventory levels to offer styles particularly suited for the relevant season, such as sandals in the early summer season and boots during the winter season. If the weather conditions for a particular season vary significantly from those typical for such season, such as an unusually cold early summer or an unusually warm winter, consumer demand for the seasonally appropriate merchandise that we have available in our stores could be adversely affected and negatively impact net sales and margins. Lower demand for seasonally appropriate merchandise may leave us with an excess inventory of our seasonally appropriate products, forcing us to sell these products at significantly discounted prices and adversely affecting our net sales margins and operating cash flow. Conversely, if weather conditions permit us to sell our seasonal product early in the season, this may reduce inventory levels needed to meet our customers’ needs later in that same season. Consequently, our results of operations are highly dependent on somewhat predictable weather conditions and our ability to react to changes in weather conditions. Other factors that may affect our quarterly results of operations include:
If our future quarterly results fail to meet the expectations of research analysts, then the market price of our common stock could decline substantially. We are exposed to physical and financial risks related to the uncertainty of climate change.A changing climate creates uncertainty and could result in broad changes, both physical and financial in nature, to our retail, distribution, and corporate locations. These impacts could include, but are not limited to:
Such changes could impact us in a number of ways including limiting available real estate; changing the demographics of our customer base and employees; increasing the likelihood of capital expenditures to replace damaged infrastructure; and increasing the cost of insurance. Compliance and Litigation Risks Failure to protect the integrity and security of individually identifiable data of our customers and employees could expose us to litigation and damage our reputation.We receive and maintain certain personal, sensitive and confidential information about our customers, vendors and employees. The collection and use of this information are regulated and are subject to certain contractual restrictions in third-party contracts. Non-compliance with these regulations and contractual restrictions may subject us to fines, penalties, restrictions and expulsion from credit card acceptance programs and civil liability. Although we have implemented processes to collect and protect the integrity and security of this personal information, there can be no assurance that this information will not be obtained by unauthorized persons, or collected or used inappropriately, including as a result of cybersecurity breaches, acts of vandalism, computer viruses, credit card fraud or phishing. Advanced cybersecurity threats are persistent and continue to evolve, making them increasingly difficult to identify and prevent. If our employees or external business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons, or collected or used inappropriately, our reputation, as well as our operations and financial results, could be negatively affected and litigation or regulatory action against us or the imposition of costs, fines or other penalties could also occur. As privacy and information security laws and regulations change, we may We may not have adequate insurance coverage for all potential liabilities.Natural risks, as well as other hazards associated with our operations, can result in personal injury, severe damage or destruction to our owned assets, leasehold improvements and inventory, suspension of our operations, and cybersecurity breaches. Our insurance covers costs relating to specified, limited matters, such as events involving casualty losses and property losses due to fire and windstorms, as well as securities litigation and certain cybersecurity incidents, but does not cover other events such as acts of war or terrorist attacks. We maintain an amount of insurance protection we We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources.We are a defendant from time to time in lawsuits and regulatory actions relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and will require us to devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business. Human Capital Risks Our failure to manage key executive succession and retention
Financial and Liquidity Risks We will require significant funds to implement our business strategy and meet our other liquidity needs. We may not facility to fund operational needs. If we borrow funds under our credit facility and interest rates materially increase from present levels, our financial results could be Continued financial market volatility could have an adverse effect on the
If our Failure to maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and have a material adverse effect on our stock price. We must continue to document, test and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports by management regarding the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to the effectiveness of our internal control over financial reporting. We have expended, and expect that we will continue to expend, significant management time and resources documenting and testing our internal control over financial reporting. If we conclude in future periods that our internal control over financial reporting is not effective, it could result in lost investor confidence in the accuracy, reliability and completeness of our financial reports. Any such events could have a material adverse effect on our stock price. Risks Relating to the Ownership of Our Common Stock Perception of the overall retail industry and other macroeconomic conditions may impact our stock price and operations.The retail industry continues to evolve and undergo structural change. This evolution and structural change has resulted in the bankruptcy and/or reorganization of various footwear specific and other publicly traded retailers. Despite our best efforts to differentiate our business model and processes, our stock price has fluctuated as a result of perceptions of the overall retail environment and investor confidence in the retail sector. The volatility in our stock price could be exacerbated by macroeconomic conditions that affect the market generally or our industry in particular and could have the effect of diverting management’s attention and could materially harm our business. We cannot provide any assurance that perception of the retail industry overall and other macroeconomic conditions will not continue to impact our stock price or our ability to engage business partners on terms acceptable to us. Our stock price may be volatile and could decline substantially. The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including:
The price of our common stock may decline and the value of any investment in our common stock may be reduced regardless of our performance. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management attention and resources, thus harming our business. We cannot guarantee that we will continue to make dividend payments or that we will continue to repurchase stock pursuant to our stock repurchase program.Our Board of Directors determines if it is in our best interest to pay a dividend to our shareholders and the amount of any dividend and declares all dividend payments. In the future, our results of operations and financial condition may not allow for a dividend to be declared or the Board of Directors may decide not to continue to declare dividends. In addition, our current share repurchase program authorizes the purchase of up to $50 million of our common stock through December 31, 2021. However, we are not obligated to make any purchases under the share repurchase program and the program may be amended, suspended or discontinued at any time. We are controlled by our principal Provisions of our organizational documents and Indiana law might deter acquisition bids for us. Our Restated Articles of Incorporation, our By-Laws and Indiana corporate laws contain provisions that may discourage other persons from attempting to acquire control of us, including, without limitation, a Board of Directors that has staggered terms for its members, supermajority voting provisions, restrictions on the ability of shareholders to call a special meeting of shareholders and procedural requirements in connection with shareholder proposals or director nominations. The Board of Directors has the authority to issue preferred stock in one or more series without the approval of the holders of our common stock. Further, Indiana corporate law contains business combination provisions that, in general, prohibit for five years any business combination with a beneficial owner of 10% or more of our common stock unless the holder’s acquisition of the stock was approved in advance by our Board of Directors. Indiana corporate law also contains control share acquisition provisions that limit the ability of certain shareholders to vote their shares unless their control share acquisition is approved. In certain circumstances, the fact that corporate devices are in place that inhibit or discourage takeover attempts could reduce the market value of our common stock. ITEM 1B.Unresolved staff comments None. As of January 30, 2021, we operated 383 stores in 35 states and Puerto Rico. We lease all
In February 2006, we entered into an operating lease with an independent third party to lease our 410,000 square foot distribution center located in Evansville, Indiana. The lease In independent third party. For additional information with respect to our properties, see ITEM 1. BUSINESS – “Growth Strategy” and “Distribution” as well as PART II, ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Annual Report on Form 10-K.
From time to time, we are involved in certain legal proceedings in the ordinary course of conducting our business. While the outcome of any legal proceeding is uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our financial position or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders Our common stock
Cash Dividends During fiscal 2020, we paid quarterly cash dividends of $0.085 per share in our first fiscal quarter and $0.090 per share in the second, third and fourth fiscal quarters. The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit agreement permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year On March 5, 2021. Issuer Purchases of Equity Securities We did not repurchase any shares of our common stock under our Board-approved share repurchase program during the fourth quarter of fiscal 2020. For a discussion of our share repurchase program, see “Share Repurchase Program” in PART II, ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – “Liquidity and Capital Resources” of this Annual Report on Form 10-K.
Throughout fiscal
ITEM 6.SELECTED FINANCIAL DATA Part II, Item 6 is no longer required as we have adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included in PART II, ITEM 8 of this Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to fiscal years 2020, 2019 and 2018 relate to the fiscal years ended January 30, 2021, February 1, 2020 and February 2, 2019, respectively. Fiscal years 2020, 2019 and 2018 all consisted of 52 weeks. Overview of Our Business Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing customers the convenience of shopping at any of our store locations, our mobile app or online at sales. Our objective is to be the destination retailer-of-choice for Comparable store sales is a key performance indicator for us. Comparable store sales include stores that have been open for 13 full months after such stores’ grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores recently opened or closed are not included in comparable store sales. We include e-commerce sales in our comparable store sales as a result of our Information regarding the COVID-19 Coronavirus Pandemic (“COVID-19”) We continue to closely monitor and manage the impact of the COVID-19 pandemic, and the safety and well-being of our customers, employees and business partners remains a top priority. The COVID-19 pandemic has significantly impacted, and is expected to continue to impact, our operations, supply chains, and overall economic conditions and consumer spending for the foreseeable future. As guidance and mandates from governments and health officials continue to evolve, closures of some or all our stores may reoccur, and In response to the COVID-19 pandemic, all of our with applicable public health guidelines in late April 2020. By the beginning of our second fiscal quarter, approximately 50% of our stores were reopened, and
Executive Summary
During fiscal 2020, comparable store sales decreased 42.3% in the first quarter, followed by comparable store sales increases of 12.6% in the second quarter, 0.9% in the third quarter and 6.4% in the fourth quarter. Throughout fiscal 2020, sales through our e-commerce platform increased The following tables illustrate the quarterly impact of our temporary store closures through June 2020 due to
(In thousands, except per share amounts)
Highlights of our performance in fiscal
Fiscal 2021 In fiscal
Critical Accounting Policies
Merchandise Inventories – Our merchandise inventories are stated at the lower of cost or net realizable value as of the balance sheet date and consist primarily of dress, casual and athletic footwear for women, men and children. The cost of our merchandise is determined using the first-in, first-out valuation method
Valuation of Long-Lived Assets – Long-lived assets, such as property and equipment subject to depreciation and right-of-use assets arising from our leased properties, are evaluated for impairment on a periodic basis if events or circumstances indicate the carrying value may not be recoverable. This evaluation includes performing an analysis of the estimated undiscounted future cash flows of the long-lived assets. Assets are grouped and the evaluation performed at the lowest level for which there are identifiable cash flows, which is generally at a store level. If the estimated future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between the estimated fair value and the carrying value. We estimate the fair value of our long-lived assets using
In accordance with Accounting Standards Codification Topic No. 842 – Leases (“ASC 842”), which we adopted in fiscal 2019, on the lease commencement date we recognize a right-of-use asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term. The weighted average discount rate utilized in fiscal 2020 was 5.2% and was 5.5% in fiscal 2019. As of the date of adoption of ASC 842 and for new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms. These estimates and assumptions can impact: (1) lease classification and the related accounting treatment; (2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense; (3) the term over which leasehold improvements for each store are amortized; and (4) the values and lives of adjustments to initial right-of-use assets. The amount of amortized rent expense would vary if different estimates and assumptions were used. Our real estate leases typically include options to extend the lease or to terminate the lease at our sole discretion. Options to extend real estate leases typically include one or more options to renew, with renewal terms that typically extend the lease term for five years or more. Many of our Income Taxes – As part of the process of preparing our consolidated financial statements, we are required to estimate our current and future income taxes for each tax jurisdiction in which we operate. Significant judgment is required in determining our annual tax expense and evaluating our tax positions. As a part of this process, 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 basis. Our temporary timing differences relate primarily to inventory, depreciation, accrued expenses, We are also required to make many subjective assumptions and judgments regarding our income tax exposures when accounting for uncertain tax positions associated with our income tax filings. We must presume that taxing authorities will examine all uncertain tax positions and that they have full knowledge of all relevant information. However, interpretations of guidance surrounding income tax laws and regulations are often complex, ambiguous and frequently change over time, and a number of years may elapse before a particular issue is resolved. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in our consolidated financial statements. Although we believe we have
Results of Operations The following table sets forth our results of operations expressed as a percentage of net sales for the following fiscal years:
Net Sales Net sales 175% as customers shifted to online shopping amid government mandated stay-at-home orders and ongoing health concerns. Gross Profit Gross profit Selling, General and Administrative Expenses Selling, general and administrative expenses
Interest Income and Interest Expense Throughout fiscal 2020, we experienced a net $0.9 million decrease in our income before income taxes compared to fiscal 2019 due to
Income Taxes The effective income tax rate for fiscal Liquidity and Capital Resources
Our primary sources of liquidity are $106.5 million of cash and cash equivalents on hand as of fiscal 2020 year end, cash generated from operations and availability under our $100 million credit facility. While the continued economic uncertainty and future effects on customer behavior caused by the COVID-19 pandemic makes our operating cash flow less predictable, we believe Cash Flow - Operating Activities Our net cash provided by operating activities was Cash Flow - Investing Activities Our cash outflows for investing activities were primarily for capital expenditures. During fiscal Cash Flow - Financing Activities Our cash outflows for financing activities were primarily for cash dividend payments, share repurchases and payments on our credit facility. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of During fiscal At January 30, 2021, there were no borrowings outstanding under our credit facility and letters of credit outstanding were $1.2 million. As of January 30, 2021, $98.8 million was available to Store Openings and Closings – Fiscal
In fiscal
Capital Expenditures – Fiscal 2021 Capital expenditures are expected to be
spending. Dividends In fiscal
The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit Share Repurchase Program On December The Due to uncertainty related to the COVID-19 pandemic, no share repurchases were made in fiscal 2020. We plan to resume the repurchase of shares under the
Our credit facility
agreement. See Leases
Impact of Store Count and Seasonality Our 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 and closing underperforming stores. As discussed in the Executive Summary, our fiscal 2020 quarterly results were significantly impacted by the COVID-19 pandemic. As illustrated in the chart below, our first quarter fiscal 2020 net sales and earnings significantly declined due to the temporary closure of our physical stores for approximately 50% of the quarter. (Unaudited, In thousands, except per share amounts)
1)Per share amounts are computed independently for each of the quarters presented. For per share amounts, the sum of the quarters may not equal the total year due to the impact of changes in weighted shares outstanding and differing applications of earnings as prescribed by accounting guidance. Seasonality We have three distinct peak selling periods: Easter, back-to-school and Christmas. Our operating results depend significantly upon the sales generated during these periods. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other periods of the year. We experienced reduced sales during the fiscal 2020 Easter season as a result of the COVID-19 pandemic. We canceled any seasonal merchandise that had a short selling window and moved seasonal merchandise with longer selling periods to later shipping dates, as applicable. The back-to-school shopping period in fiscal 2020 started later and lasted longer than previous years in many of our markets. In addition, approximately 10% of school districts in the markets where we operate did not return to in-person learning, which decreased our sales in those markets. Our holiday shopping season was also impacted by the effects of COVID-19 on customer shopping habits and discretionary income associated with government stimulus provided in late fiscal 2020. Any unanticipated decrease in demand for our products during these peak shopping seasons in future periods could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit and negatively affect our profitability. Store Count We continually analyze our store portfolio and the potential for new stores based on our view of internal and external opportunities and challenges in the marketplace. As part of our long-term growth strategy, we expect to pursue opportunities for store growth across large and mid-size markets as we leverage customer data from our customer relationship management program and more attractive real estate options become available. When we identify a store that produces or may potentially produce, low or negative contribution, we either renegotiate lease terms, relocate or close the store. In instances when underperformance indicates the carrying value of a store’s assets may not be recoverable, we impair the store. Although store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share. Depending upon the results of lease negotiations with certain landlords of underperforming stores, we may increase or decrease the number of store closures in future periods. Non-capital expenditures, such as advertising and payroll incurred prior to the opening of a new store, are charged to expense as incurred. The timing and actual amount of expense recorded in closing an individual store can vary significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the Our future store strategies may continue to be impacted by the current economic uncertainty associated with the COVID-19 pandemic. Store Openings, Closings and Impairment Charges – Impact on Fiscal 2020 and Fiscal 2019 In fiscal 2020, we opened four new stores. The average initial inventory investment for new stores in fiscal 2020 was $578,000, capital expenditures were $973,000 and lease incentives received from our landlord were $448,000. In fiscal 2019, we opened one new store. The initial inventory investment for the new store was $683,000, capital expenditures were $236,000 and lease incentives received from our landlord were $120,000. Pre-opening expenses for the stores opened in fiscal 2020 included in cost of sales and SG&A expenses were approximately $590,000, or an average of $147,000 per store. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During fiscal 2019, we opened one new store and expended $59,000 in pre-opening expenses. Total store closing costs were $4.0 million in fiscal 2020 and $1.3 million in fiscal 2019. We closed 13 stores during fiscal 2020 and six stores during fiscal 2019. We recorded non-cash impairment charges on a majority of these stores and also recognized impairment charges on other underperforming
In total, store opening and closing costs impacting SG&A expenses were $4.1 million in fiscal 2020 and $1.7 million in fiscal 2019. Store opening and closing costs included in cost of sales was expense of $0.5 million in fiscal 2020 and a
Historical Financial Data The following historical financial data is included for the convenience of assessing trends in our financial condition and results of operations over the previous five fiscal years. A more detailed description of the fluctuations among fiscal 2016 – fiscal 2019 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk in that the interest payable on our credit facility is based on variable interest rates and therefore is affected by changes in market rates. We do not use interest rate derivative instruments to manage exposure to changes in market interest rates. For fiscal 2020, the weighted average borrowings outstanding were approximately $256,000. A 1% change in the weighted average interest rate charged under the credit facility would have ITEM 8. FINANCIAL STATEMENTS The information required by this item the following page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shoe Carnival, Inc. and subsidiaries (the We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No. 842, Leases (ASC 842). Basis for Opinion These financial statements are the responsibility of the We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Merchandise Inventories — Refer to Note 2 to the financial statements Critical Audit Matter Description Merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Factors considered in determining if inventory is properly stated at the lower of cost or net realizable value include, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of various styles held in inventory, seasonality of merchandise, expected consideration to be received from vendors and current and expected future sales trends. The Company reduces the value of inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Given the significant judgments made by management to estimate the net realizable value of inventory, such as expected consideration to be received from vendors and current and expected future sales trends, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the significant judgments made by management to determine net realizable value of inventory included the following procedures, among others:
/s/ Indianapolis, Indiana
We have served as the Shoe Carnival, Inc. Consolidated Balance Sheets (In thousands, except share data)
See notes to consolidated financial statements. Shoe Carnival, Inc. Consolidated Statements of Income (In thousands, except per share data)
See notes to consolidated financial statements. Shoe Carnival, Inc. Consolidated Statements of Shareholders’ Equity (In thousands)
See notes to consolidated financial statements. Shoe Carnival, Inc. Consolidated Statements of Cash Flows (In thousands)
See notes to consolidated financial statements. Shoe Carnival, Inc. Notes to Consolidated Financial Statements Note 1 – Organization and Description of Business Our consolidated financial statements include the accounts of Shoe Carnival, Inc. and its wholly-owned subsidiaries SCHC, Inc. and Shoe Carnival Ventures, LLC, and SCLC, Inc., a wholly-owned subsidiary of SCHC, Inc. (collectively referred to as “we”, “our”, “us” or the “Company”). All intercompany accounts and transactions have been eliminated. Our primary activity is the sale of footwear and related products through our retail stores in 35 states within the continental United States and in Puerto Rico. We also offer online shopping on our mobile app and our e-commerce site at www.shoecarnival.com. Note 2 – Summary of Significant Accounting Policies Fiscal Year Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to years Basis of Presentation In the first quarter of fiscal 2018, we adopted new revenue guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 606 – Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective transition approach. At adoption, we recorded a net increase in retained earnings of $620,000 as a cumulative effect of the adoption based on our evaluation of incomplete contracts involving our e-commerce transactions and our gift card program as of the adoption date. We elected the practical expedient to treat shipping and handling activities associated with freight charges that occur after control of the product transfers to the customer as fulfillment activities. These costs are expensed as incurred and included in cost of sales in our consolidated statements of income. We also elected the practical expedient for sales tax collected, which allows us to exclude from our transaction price any amounts collected from customers for sales tax and other similar taxes. There were no changes to our comparative reporting of shipping and handling costs included in cost of sales or accounting for sales tax as a result of the adoption of ASC 606. The adoption of this guidance in fiscal 2018 did not have a material impact on our consolidated balance sheets, consolidated statements of income or our consolidated statements of cash flows. In the first quarter of fiscal 2019, we adopted new lease accounting guidance under ASC Topic No. 842 – Leases (“ASC 842”). We adopted ASC 842 using the effective date as the date of initial application; therefore, the comparative period of fiscal 2018 on our consolidated statement of income has not been adjusted and is reported under the previous lease guidance. The adoption of this guidance in fiscal 2019 had a material impact on our consolidated balance sheets but did not have a material impact on our consolidated statements of income or our consolidated statements of cash flows. At adoption, initial recognition of operating lease liabilities totaled $251.7 million as of February 3, Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.
48 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Risk and Uncertainties Associated with the COVID-19 Pandemic Our operations have been significantly disrupted by the outbreak of a novel strain of coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The U.S. Government, as well as the vast majority of states and local municipalities, have taken unprecedented measures to control the spread of COVID-19 and to provide stimulus as a mitigating measure to deteriorating economic conditions and increasing unemployment. The COVID-19 pandemic began significantly impacting our operations, sales and costs beginning in the first quarter of fiscal 2020. Impacts included the temporary closure of our physical stores effective March 19, 2020, reduced foot traffic and sales, deteriorating economic conditions for our customer base, and some disruption to our global supply chain. We began reopening physical stores in accordance with applicable public health guidelines in late April 2020. By the beginning of the second quarter of fiscal 2020, approximately 50% of our stores were reopened, and by early June, substantially all of our stores had reopened. Our e-commerce platform has been fully operational during the pandemic, with e-commerce orders generally fulfilled by our store locations. As of January 30, 2021, we do not have any stores closed due to the pandemic. As the COVID-19 pandemic continues to impact the retail sector, we remain focused on protecting the health and safety of our customers and associates and continue to work with our vendors to mitigate any potential ongoing disruption. Furthermore, as the pandemic has had a significant impact on our financial performance in fiscal 2020, we evaluated this impact on the related accounting estimates and assumptions used in the preparation of our consolidated financial statements, including, but not limited to, assumptions and estimates related to impairments of long-lived assets, leases, inventory valuation, self-insurance reserves and income taxes. The COVID-19 pandemic will likely continue to impact our financial condition and results of operations for the foreseeable future. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the financial statement reporting date in addition to the reported amounts of certain revenues and expenses for the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances and actual results could differ from those estimates. Cash and Cash Equivalents We had cash and cash equivalents of We consider all short-term investments with an original maturity date of three months or less to be cash equivalents. As of January Fair Value Certain assets are valued and disclosed at fair value. Financial
measurements).
49 Shoe Carnival, Inc. Notes to Consolidated Financial Statements
The three levels of the fair value hierarchy are described as follows: Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. Level 2 – Inputs to the valuation methodology include:
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs. Merchandise Inventories and Cost of Sales Merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out
Cost of sales includes the cost of merchandise sold, buying, distribution, and occupancy costs, inbound freight expense, provision for inventory obsolescence, inventory shrink and credits and allowances from merchandise vendors. Cost of sales related to our e-commerce orders include Leases We evaluate whether a contract is an operating or finance lease at its inception. All of our leases are classified as operating leases as of January 30, 2021. Leases with terms of twelve months or less were not significant and we have elected to expense them as incurred.
On the lease commencement date, we recognize a ROU asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term. As the rate implicit in our leases is not readily determinable, we utilize an incremental borrowing rate for the initial measurement of ROU assets and liabilities, which is determined through the development of a synthetic credit rating. For leases existing before the adoption of ASC 842, we used an incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of ASC 842, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date. 50 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Operating lease liabilities are increased by interest and reduced by payments each period, and ROU assets are amortized over the lease term. Interest on operating lease liabilities and the amortization of ROU assets results in straight-line rent expense over the lease term. We record variable lease expense associated with contingent rent, reduced rent due to co-tenancy violations, and other variable non-lease components when incurred. In addition to fixed minimum rental payments set forth in our leases, the measurement of ROU assets and liabilities can also include prepaid rent, landlord incentives (such as construction and tenant improvement allowances), fixed payments related to lease components (such as rent escalation payments scheduled at the lease commencement date), fixed payments related to non-lease components (such as taxes, insurance, and common area maintenance (“CAM”)) and initial direct costs incurred in conjunction with securing a lease. The measurement of ROU assets and liabilities excludes amounts related to variable payments related to lease components (such as contingent rent payments based on performance), variable payments related to non-lease components (such as real estate taxes, insurance and CAM) and non-store related leases with an initial term of 12 months or less. For new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms. These estimates and assumptions can impact: (1) lease classification and the related accounting treatment; (2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense; (3) the term over which leasehold improvements for each store are amortized; and (4) the values and lives of adjustments to initial ROU assets. The amount of amortized rent expense would vary if different estimates and assumptions were used. See Note 8 – “Leases” for additional discussion of our lease policies as well as additional disclosures related to our leases. Revenue Recognition Substantially all of our revenue is for a single performance obligation and is recognized when control passes to customers. We consider control to have transferred when we have a present right to payment, the customer has title to the product, physical possession of the product has been transferred to the customer and the risks and rewards of the product that we retain are minimal. The redemption of loyalty points under our Shoe Perks loyalty rewards program and redemptions of gift cards are accounted for as separate performance obligations. See Note 4 – “Revenue” for additional discussion of our revenue recognition policies as well as additional disclosures on revenue from contracts with customers. Property and Property and equipment is stated at Cloud Computing Arrangements that are Service Contracts We account for the costs to implement hosted cloud computing arrangements that are considered to be service contracts in current and noncurrent other assets. We capitalize these costs based on the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We amortize the costs over the related service contract period for the hosted arrangement. For fiscal 2020 and fiscal 2019, the amortization of the implementation costs and the related service contract fees are included in selling, general and administrative expenses. 51 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Long-Lived Asset Impairment Testing We periodically evaluate our long-lived assets if events or circumstances indicate the carrying value may not be recoverable. The carrying value of long-lived assets is considered impaired when the carrying value of the assets exceeds the expected future cash flows to be derived from their use. Assets are grouped, and the evaluation is performed, at the lowest level for which there are identifiable cash flows, which is generally at a store level. Store level asset groupings typically include property and equipment and operating lease ROU assets. If the estimated, undiscounted future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between estimated fair value and carrying value. Assets subject to impairment are adjusted to estimated fair value and, if applicable, an impairment loss is recorded in selling, general and administrative expenses. If the operating lease ROU asset is impaired, we would amortize the remaining ROU asset on a straight-line basis over the remaining lease term. We estimate the fair value of our long-lived assets using store specific cash flow assumptions discounted by a rate commensurate with the risk involved with such assets while incorporating marketplace assumptions. Our estimates are derived from an income-based approach considering the cash flows expected over the remaining lease term for each location. These projections are primarily based on management’s estimates of store-level sales, exercise of future lease renewal options and the store’s contribution to cash flows and, by their nature, include judgments about how current initiatives will impact future performance. We estimate the fair value of operating ROU assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term. External factors, such as the local environment in which the store resides, including store traffic and competition, are evaluated in terms of their effect on sales trends. Changes in sales and operating income assumptions Insurance Reserves We self-insure a significant portion of our workers’ compensation, general liability and employee health care costs and also maintain insurance in each area of risk
Consideration Received From a Vendor
Consideration is recorded as a reduction of the price paid for the vendor’s products and recorded as a reduction of our cost of sales unless the consideration represents a reimbursement of a specific, incremental, identifiable cost; in such a scenario, it is recorded as an offset to the same financial statement line item. Consideration received after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. For consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale. Should the 52 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued consideration received exceeds the incremental
Advertising Costs Print, television, radio, outdoor media, digital media and internal production costs are expensed when incurred. External production costs are expensed in the period the advertisement first takes place. Advertising expenses included in selling, general and administrative expenses were $42.1 million, $40.0 million and $41.2 million in fiscal years 2020, 2019 and 2018, respectively. Store Opening and Start-up Costs Non-capital expenditures, such as
Stock-Based Compensation We recognize compensation expense for stock-based awards expenses. We account for forfeitures as they occur in calculating stock-based compensation expense for the period. For performance-based stock awards, we estimate the probability of vesting based on the likelihood that the awards will meet their performance goals. Segment Information We Income Taxes We compute income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. We
53
Shoe Carnival, Inc. Notes to Consolidated Financial Statements
Net Income Per Share The following table sets forth the computation of basic and diluted
Note 3 – Fair Value
The following table presents
The fair values of cash
Shoe Carnival, Inc. Notes to Note 4 – Revenue Disaggregation of Revenue by Product Category Revenue is disaggregated by product category below. Net sales and percentage of net sales for the fiscal years 2020, 2019 and 2018 are as follows:
Accounting Policy and Performance Obligations We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our physical stores or shopping online through our e-commerce platform. As part of our multi-channel strategy, we For our physical stores, we satisfy our performance obligation and control is transferred at the point of sale when the customer takes possession of the products. This also includes the “buy online, pick up in store” scenario described above and includes sales made via our Shoes 2U program when customers choose to pick up their We offer our customers sales incentives including Transaction Price and Payment Terms The transaction price is the amount of consideration we expect to receive from our customers and is reduced by any stated promotional discounts at the time of purchase. The transaction price may be variable due to terms that permit customers to exchange or return products for a refund. The implicit contract with the customer reflected in the transaction receipt states the final terms of 55 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Our physical stores accept various forms of payment from customers at the point of sale. These include cash, checks, credit/debit cards and gift cards. Our e-commerce platform accepts credit/debit cards, PayPal, Apple Pay, Klarna and gift cards as forms of payment. Payments made for products are generally collected when control passes to the customer, either at the point of sale or at the time the customer order is shipped. For Shoes 2U transactions, customers may order the product at the point of sale. For these transactions, customers pay in advance and unearned revenue is recorded as a contract liability. We recognize the related revenue when control has been transferred to the customer (i.e., when the product is picked up by the customer or shipped to the customer). Unearned revenue related to Shoes 2U was not material to our consolidated financial statements at January 30, 2021 and February 1, 2020. Returns and Refunds We have established an allowance based upon historical experience in order to estimate return and refund transactions. This allowance is recorded as a reduction in sales with a corresponding refund liability recorded in accrued and Contract Liabilities When a gift card is issued, the issuance is recorded as an increase to contract liabilities at the time of issuance and a decrease to contract liabilities when a customer redeems a gift card. Estimated breakage is determined based on historical breakage percentages and recognized as revenue based on expected gift card usage. We do not record breakage revenue when escheat liability to relevant jurisdictions exists. At January 30, 2021 and February 1, 2020, approximately $1.7 million and $1.5 million of contract liabilities associated with unredeemed gift cards were recorded in our consolidated balance sheets, respectively. We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions within two years. Breakage revenue associated with our gift cards recognized in net sales was $132,000, $143,000 and $179,000 during fiscal years 2020, 2019 and 2018, respectively. Our Shoe Perks rewards program allows customers to accrue points and provides customers with the opportunity to earn rewards. Points under Shoe Perks can When a Shoe Perks customer makes a purchase, we allocate the 56 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued
Note The following is a summary of property and equipment:
In fiscal 2020 and fiscal 2019, we recorded impairment charges of $3.1 million and $1.2 million on long-lived assets held and used, respectively. There were no impairments of long-lived assets recorded during fiscal 2018. Impairment charges are included in selling, general and administrative expenses in our consolidated statements of income. In fiscal 2019, we engaged third-party providers to Note Accrued and other liabilities consisted of the following:
Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued
Note 7 – Debt On On July 20, 2020, we entered into a fourth amendment (the “Fourth Amendment”) to our Credit Agreement. Pursuant to the Fourth Amendment, we (1) eliminated the covenant involving the ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense for (3) established increased reporting requirements to the lenders through January 31, 2021. The Credit Agreement, as amended, contains covenants which stipulate: (1) Total Shareholders’ Equity (as defined in the Credit Agreement) will not fall below $250.0 million at the end of each fiscal quarter; (2) the ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense will not exceed compliance with these covenants at January 30, 2021. The credit facility bears interest, at our option, at (1) the agent bank’s prime rate as defined in the Credit Agreement plus 1.0%, with the prime rate defined as the greater of (a) the Federal Fund rate plus 0.50% or (b) the interest rate announced from time to time by the agent bank as its “prime rate” or (2) LIBOR plus
NaN borrowings were outstanding under the Credit Agreement as of January 30, 2021 and February 1, 2020. The maximum borrowings outstanding during fiscal 2020 and 2019 were $8.7 million and $20.0 million, respectively. As of January 30, 2021, there were $1.2 million in letters of credit outstanding and $98.8 million available to us for borrowing under the Credit Agreement. Note We lease all of our 58 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Our real estate leases typically include options to extend the Our leases typically provide for fixed minimum rental payments, and
Lease-related costs reported in our consolidated statements of income were as follows:
During fiscal 2020, we deferred lease payments of approximately $3.1 million during April, May, and June pursuant to arrangements reached with various landlords. These deferrals were substantially repaid over the remainder of fiscal 2020. We accounted for these arrangements as if they were part of the enforceable rights and obligations of the existing contracts, not as lease modifications. Rent continued to be recognized on a straight line basis for contracts with these deferrals. We adopted new lease accounting guidance in the first quarter of fiscal 2019, as discussed in Note 2 – “Summary of Significant Accounting Policies.” Under the prior lease guidance, lease expense was $61.2 million in fiscal 2018 and included fixed, variable, contingent rent and CAM, but excluded taxes and insurance. Other information related to leases, including supplemental cash flow information, consists of:
59 Shoe Carnival, Inc. Notes to Consolidated Financial Statements
The following table reconciles the
Note The provision for income taxes consisted of:
Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:
60
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:
As of
Note Retirement Savings Plans
Contributions charged to expense associated with these plans were 61 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued
Stock Purchase Plan
The following table summarizes information regarding stock-based compensation expense recognized for the Stock Purchase Plan:
Deferred Compensation Plan
Note Compensation Plan Summaries
Stock-based compensation includes restricted stock
62 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Our service-based restricted stock
Under the 2017 Plan,
Restricted Stock
Units and Performance Stock Units The following table summarizes transactions for our restricted stock
The
Restricted Stock Awards The following table summarizes transactions for our restricted stock awards pursuant to our stock-based compensation plans:
63 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued
The total fair value at grant date of all restricted stock
The following table summarizes information regarding stock-based compensation expense recognized for
The
As of Cash-Settled Stock Appreciation Rights
During the first quarter of fiscal 2015, SARs first three anniversaries of the date of the grant. During the second quarter of fiscal 2018, all remaining SARs related to this grant were exercised. The following table summarizes SARs activity:
64 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued
The fair value of these liability awards
The weighted-average fair value of outstanding, non-vested SAR awards as of January 30, 2021, was $10.00. The fair value was estimated using a trinomial lattice model with the following assumptions:
The
The following table summarizes information regarding stock-based compensation recognized for SARs:
As of Note 12 – Share Repurchase Program On December 15, 2020, our Board of Directors authorized a share repurchase program for up to $50 million of outstanding common stock, effective January 1, 2021 (the “2021 Share Repurchase Program”). The purchases may be made in the The 2021 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2019 and became effective January 1, 2020 and expired in accordance with its terms on December 31, 2020. Share repurchases pursuant to previous Board-approved repurchase programs were approximately 1,117,000 shares at an aggregate cost of $37.8 million in fiscal 2019 and approximately 1,527,000 shares at an aggregate cost of $46.0 million in fiscal 2018. Due to uncertainty related to the COVID-19 pandemic, no share repurchases were made in fiscal 2020. Note We purchase merchandise from 65 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued approximately Note The accounting standard related to loss contingencies provides guidance
From time to time, we are involved in certain legal proceedings in the ordinary course of conducting our business. While the outcome of any legal proceeding is uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our consolidated balance sheets, statements of income, or cash flows.
Note
– Dividend Declaration On March 5, 2021. The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s
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