Shoe Carnival Inc. Reports Operating Results (10-Q)

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Dec 09, 2010
Shoe Carnival Inc. (SCVL, Financial) filed Quarterly Report for the period ended 2010-10-30.

Shoe Carnival Inc. has a market cap of $391.5 million; its shares were traded at around $29.69 with a P/E ratio of 15.7 and P/S ratio of 0.6. SCVL is in the portfolios of John Rogers of ARIEL CAPITAL MANAGEMENT LLC, Jim Simons of Renaissance Technologies LLC, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

Net sales increased $12.9 million to $204.4 million, a 6.7% increase over the prior year comparative period. Our comparable store sales increased 7.2%. Our sales gains were driven by an increase in the number of footwear units sold as the consumer responded favorably to our assortment of footwear for the back-to-school and early fall periods. Our gross profit margin increased to 30.1% from 29.8% in the third quarter of fiscal 2009. The merchandise margin decreased 0.2%; however, buying, distribution and occupancy costs decreased 0.5%, as a percentage of sales, due to the leverage associated with comparable store sales increases. Selling, general and administrative expenditures decreased 0.4%, as a percentage of sales, when compared to the third quarter of fiscal 2009. Net income for the third quarter increased to $9.1 million, or $0.70 per diluted share, compared to $7.5 million, or $0.59 per diluted share, for the third quarter last year. The $0.70 per diluted share represents the highest third quarter earnings in our history and the second highest quarterly earnings overall, trailing only the earnings per diluted share achieved in the first quarter of this fiscal year. We ended the quarter with $43.3 million in cash and cash equivalents and no interest bearing debt. Inventories at October 30, 2010, when compared to levels at the end of the third quarter of fiscal 2009, were up $24.2 million. Approximately half of this increase was attributable to an increase in inventory levels of toning product. At the end of the third quarter of fiscal 2009, this style of footwear was not yet available in all stores or in the variety of styles that you can find today. We believe toning will continue to generate comparable store sales gains and that we will be able to effectively manage our inventory levels in this product. Increases in inventory levels excluding toning were in-line with our non-toning sales trend. Results of Operations for the Third Quarter Ended October 30, 2010

Net sales increased $12.9 million to $204.4 million during the third quarter ended October 30, 2010, a 6.7% increase over the prior year's third quarter net sales of $191.5 million. This increase was primarily due to an increase of 7.2% in comparable store sales and a $3.7 million increase in sales generated by new stores opened since the second quarter of fiscal 2009. These increases were partially offset by a $4.2 million loss in sales from the 12 stores closed since the second quarter of fiscal 2009.

Net sales increased $47.7 million to $559.3 million during the nine months ended October 30, 2010, a 9.3% increase over net sales of $511.6 million for the first nine months of fiscal 2009. This increase was primarily due to a 9.4% gain in comparable store sales along with a $13.0 million increase in sales from new stores opened since the beginning of fiscal 2009. These increases were partially offset by an $11.4 million loss from the 14 stores that were closed since the beginning of fiscal 2009. Increased consumer demand for footwear, combined with our business model of providing a broad product assortment for the entire family at a compelling value, resulted in a significant year-over-year increase in the number of footwear units sold.

Selling, general and administrative expenses increased $8.1 million in the first nine months of fiscal 2010 to $132.1 million from $124.0 million in the prior year comparable period; however, our sales gain enabled us to leverage these costs as a percentage of sales by 0.7%. While we were able to significantly leverage our store operating expenses as a percentage of sales, we did incur an additional $3.3 million in expense as compared to the same period in the prior year. The increase in store selling expenses was primarily due to increases in wages, advertising and credit and debit card processing fees, partially offset by a decrease in depreciation. Incentive compensation increased $5.3 million when compared to the same period in the prior year due to our improved financial performance. Also, during the first quarter of fiscal 2010 we recorded a non-cash asset impairment of $1.1 million related to certain underperforming stores. The increases in selling, general and administrative expenses were partially offset by a $1.7 million decrease in our self-insured health care costs, as compared to the first nine months of fiscal 2009 when we experienced unusually high claim activity. The costs related to our self-insured health care programs are subject to a certain degree of volatility and can vary materially between reporting periods.

Working capital increased to $203.1 million at October 30, 2010 from $169.1 million at October 31, 2009. This $34.0 million increase resulted primarily from a $16.1 million increase in cash and cash equivalents in addition to a $24.2 million increase in inventories. These increases were partially offset by an $8.4 million increase in accounts payable and accrued and other liabilities. The current ratio at October 30, 2010 was 3.6 as compared to 3.5 at October 31, 2009. We had no outstanding interest bearing debt as of the end of either period.

Our current store prototype uses between 8,000 and 12,000 square feet depending upon, among other factors, the location of the store and the population base the store is expected to service. Capital expenditures for a new store in fiscal 2010 are expected to average approximately $360,000 with landlord incentives expected to average approximately $147,000. The average inventory investment in a new store is expected to range from $325,000 to $500,000 depending on the size and sales expectation of the store and the timing of the new store opening. Pre-opening expenses, such as advertising, salaries and supplies, are expected to average approximately $73,000 per store in fiscal 2010. Pre-opening costs, such as advertising, payroll and supplies, incurred prior to the opening of a new store are charged to expense in the period they are incurred. The total amount of pre-opening expense incurred will vary on a store-by-store basis depending on the specific market and the promotional activities involved.

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