What changed in this filing

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Item 1. Financial Statements

2023-09-01 compared with 2023-06-02 · 201 added, 116 removed, 402 unchanged (44% of the section changed)

3 unchanged sentences

(In thousands, except share data)

April 29, 2023

July 29, 2023

January 28, 2023

April 30, 2022

July 30, 2022

Current Assets:

31 unchanged sentences

(In thousands, except per share data)

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Cost of sales (including buying, distribution

13 unchanged sentences

(In thousands, except per share data)

Balance at April 29, 2023

Dividends declared ($ 0.10 per share)

Employee stock purchase plan purchases

Stock-based compensation awards

Stock-based compensation expense

Balance at July 29, 2023

Balance at April 30, 2022

Dividends declared ($ 0.09 per share)

Employee stock purchase plan purchases

Stock-based compensation awards

Shares surrendered by employees to pay taxes

on stock-based compensation awards

Stock-based compensation expense

Balance at July 30, 2022

Twenty-six Weeks Ended

(In thousands, except per share data)

Balance at January 28, 2023

5 unchanged sentences

Stock-based compensation expense

Balance at April 29, 2023

Balance at July 29, 2023

Balance at January 29, 2022

6 unchanged sentences

Stock-based compensation expense

Balance at April 30, 2022

Balance at July 30, 2022

See notes to Condensed Consolidated Financial Statements.

2 unchanged sentences

(In thousands)

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

Cash Flows From Operating Activities

57 unchanged sentences

Thirteen Weeks Ended

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

(In thousands, except per share data)

6 unchanged sentences

shares and diluted net income per share

Twenty-six Weeks Ended

July 29, 2023

July 30, 2022

(In thousands, except per share data)

Basic Net Income per Share:

Net income available for basic common shares

and basic net income per share

Diluted Net Income per Share:

Conversion of stock-based compensation

Net income available for diluted common

shares and diluted net income per share

The computation of Basic Net Income per Share is based on the weighted average number of common shares outstanding during the period.

The computation of Diluted Net Income per Share is based on the weighted average number of shares outstanding plus the dilutive incremental shares that would be outstanding assuming the vesting of stock-based compensation arrangements involving restricted stock, restricted stock units and performance stock units.

The computation of Diluted Net Income per Share for the thirteen weeks ended April 29, 2023 excluded approximately 1,000 unvested stock-based awards that will be settled in shares because the impact would have been anti-dilutive.

During the thirteen weeks ended April 30, 2022 , approximately 24,000 unvested stock-based awards that will be settled in shares were excluded from the computation of diluted net income per share because the impact would have been anti-dilutive.

The computation of Diluted Net Income per Share for the thirteen and twenty-six weeks ended July 29, 2023 excluded approximately 134,000 and 1,000 , respectively, of unvested stock-based awards that will be settled in shares because the impact would have been anti-dilutive.

During the thirteen and twenty-six weeks ended July 30, 2022 , approximately 318,000 and 31,000 , respectively, of unvested stock-based awards that will be settled in shares were excluded from the computation of Diluted Net Income per Share because the impact would have been anti-dilutive.

Note 3 - Fair Value Measurements

The following table presents financial instruments that are measured at fair value on a recurring basis at April 29, 2023, January 28, 2023 and April 30, 2022:

The following table presents financial instruments that are measured at fair value on a recurring basis at July 29, 2023, January 28, 2023 and July 30, 2022:

Fair Value Measurements

(In thousands)

As of April 29, 2023

As of July 29, 2023

Cash equivalents - money market mutual funds

5 unchanged sentences

deferred compensation

As of April 30, 2022

As of July 30, 2022

Cash equivalents - money market mutual funds

3 unchanged sentences

These Marketable Securities are designed to mitigate volatility in our Condensed Consolidated Statements of Income associated with our non-qualified deferred compensation plan.

As of April 29, 2023, these Marketable Securities were principally invested in equity-based mutual funds, consistent with the allocation in our deferred compensation plan.

As of April 29, 2023, the balance in our deferred compensation plan was $ 11.7 million, of which $ 1.9 million was in Accrued and Other Liabilities based on scheduled payments due within the next 12 months and the remaining balance was in Deferred Compensation, a long-term liability.

As of July 29, 2023, these Marketable Securities were principally invested in equity-based mutual funds, consistent with the allocation in our deferred compensation plan.

As of July 29, 2023, the balance in our deferred compensation plan was $ 12.2 million, of which $ 1.6 million was in Accrued and Other Liabilities based on scheduled payments due within the next 12 months and the remaining balance was in Deferred Compensation, a long-term liability.

To the extent there is a variation in invested funds compared to the total non-qualifi ed deferred compensation plan liability, such fund variance is invested in a stable value mutual fund.

We classify these Marketable Securities as current assets because we have the ability to convert the securities into cash at our discretion and these Marketable Securities are not held in a rabbi trust.

We have recognized cumulative unrealized losses of $ 2.6 million, $ 2.9 million and $ 2.6 million related to equity securities still held at April 29, 2023, January 28, 2023 and April 30, 2022, respectively.

For the thirteen weeks ended April 29, 2023 and April 30, 2022, we have recognized unrealized gains of $ 299,000 and unrealized losses of $ 535,000 related to equity securities still held at April 29, 2023 and April 30, 2022, respectively.

The fair values of Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, Accrued Expenses and Other Current Liabilities approximate their carrying values because of their short-term nature.

We have recognized cumulative unrealized losses of $ 1.8 million, $ 2.9 million and $ 2.5 million related to equity securities still held at July 29, 2023, January 28, 2023 and July 30, 2022, respectively.

For the thirteen and twenty-six weeks ended July 29, 2023, we have recognized unrealized gains of $ 761,000 and $ 1.1 million, respectively, related to equity securities still held at July 29, 2023.

For the thirteen and twenty-six weeks ended July 30, 2022, we have recognized unrealized gains of $ 34,000 and unrealized losses of $ 501,000 , respectively, related to equity securities still held at July 30, 2022.

The fair values of Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued and Other Liabilities approximate their carrying values because of their short-term nature.

Long-Lived Asset Impairment Testing

5 unchanged sentences

If the Operating Lease Right-of-Use Asset is impaired, we would amortize the remaining right-of-use asset on a straight-line basis over the remaining lease term.

During the thirteen weeks ended April 29, 2023 and April 30, 2022, no impairment charges were recorded.

No impairment charges were recorded during the thirteen and twenty-six weeks ended July 29, 2023 or the thirteen and twenty-six weeks ended July 30, 2022.

Note 4 - Stock-Based Compensation

Stock-based compensation includes share-settled awards issued pursuant to the Shoe Carnival, Inc.

2017 Equity Incentive Plan in the form of restricted stock units, performance stock units, and restricted and other stock awards.

On June 20, 2023, our shareholders approved the Shoe Carnival, Inc.

Amended and Restated 2017 Equity Incentive Plan (the “Amended 2017 Plan”), which amended and restated the Shoe Carnival, Inc.

2017 Equity Incentive Plan.

Among other changes approved by our shareholders, the Amended 2017 Plan increased the number of shares of our common stock that are available for issuance under the plan by 1.8 million additional shares.

As of July 29, 2023, 1,858,000 shares were available for issuance under the Amended 2017 Plan, assuming that all unmeasured but outstanding performance stock units vest at the maximum level of performance.

Stock-based compensation includes share-settled awards issued pursuant to the Amended 2017 Plan in the form of restricted stock units, performance stock units, and restricted and other stock awards.

Additionally, we recognize stock-based compensation expense for the discount on shares sold to employees through our Employee Stock Purchase Plan and for cash-settled stock appreciation rights.

For the thirteen weeks ended April 29, 2023 and April 30, 2022, stock-based compensation expense was comprised of the following:

For the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022, stock-based compensation expense was comprised of the following:

(In thousands)

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Share-settled equity awards

4 unchanged sentences

Additional income tax benefit on vesting of share-settled awards

As of April 29, 2023 , approximately $ 10.9 million of unrecognized compensation expense remained related to our share-settled equity awards.

As of July 29, 2023 , approximately $ 8.4 million of unrecognized compensation expense remained related to our share-settled equity awards.

The cost is expected to be recognized over a weighted average period of approximately 2.1 years.

4 unchanged sentences

Outstanding at January 28, 2023

Outstanding at April 29, 2023

The total fair value at grant date of restricted stock units and performance stock units that vested during the thirteen weeks ended April 29, 2023 and April 30, 2022 was $ 4.8 million and $ 3.1 million, respectively.

The weighted-average grant date fair value of restricted stock units and performance stock units granted during the thirteen weeks ended April 30, 2022 was $ 30.52 .

Outstanding at July 29, 2023

The total fair value at grant date of restricted stock units and performance stock units that vested during the twenty-six weeks ended July 29, 2023 and July 30, 2022 was $ 4.8 million and $ 3.2 million, respectively.

The weighted-average grant date fair value of restricted stock units and performance stock units granted during the twenty-six weeks ended July 30, 2022 was $ 30.32 .

The following table summarizes transactions for our restricted stock and other stock awards:

Average Grant

Date Fair Value

Outstanding at January 28, 2023

Outstanding at July 29, 2023

No restricted stock and other stock awards vested during the twenty-six weeks ended July 29, 2023 or July 30, 2022.

The weighted-average grant date fair value of restricted stock and other stock awards granted during the twenty-six weeks ended July 30, 2022 was $ 24.12 .

Note 5 –

1 unchanged sentence

Revenue is disaggregated by product category below.

Net Sales and percentage of Net Sales for the thirteen weeks ended April 29, 2023 and April 30, 2022 were as follows:

Net Sales and percentage of Net Sales for the thirteen and twenty-six weeks ended July 29, 2023 and July 30, 2022 were as follows:

(In thousands)

Thirteen Weeks

Ended April 29, 2023

Ended July 29, 2023

Thirteen Weeks

Ended April 30, 2022

Ended July 30, 2022

Non-Athletics:

3 unchanged sentences

Children’s

(In thousands)

Twenty-six Weeks

Ended July 29, 2023

Twenty-six Weeks

Ended July 30, 2022

Non-Athletics:

Women’s

Children’s

Women’s

Children’s

Accounting Policy and Performance Obligations

26 unchanged sentences

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 April 29, 2023, January 28, 2023 or April 30, 2022.

Unearned revenue related to Shoes 2U was not material to our consolidated financial statements at July 29, 2023, January 28, 2023 or July 30, 2022.

Returns and Refunds

2 unchanged sentences

The estimated cost of Merchandise Inventory is recorded as a reduction to Cost of Sales and an increase in Merchandise Inventories.

Approximately $ 866,000 of refund liabilities and $ 503,000 o f right of return assets associated with estimated product returns were recorded in Accrued and Other Liabilities as of April 29, 2023 and January 28, 2023.

Approximately $ 884,000 of refund liabilities and $ 516,000 of right of return assets associated with estimated product returns were recorded in Accrued and Other Liabilities at April 30, 2022.

Approximately $ 884,000 of refund liabilities and $ 516,000 of right of return assets associated with estimated product returns were recorded in Accrued and Other Liabilities and Merchandise Inventories, respectively, at July 30, 2022.

Contract Liabilities

2 unchanged sentences

We do not record breakage revenue when escheat liability to relevant jurisdictions exists.

At April 29, 2023, January 28, 2023 and April 30, 2022, approxima tely $ 2.0 million, $ 2.4 million and $ 2.0 million of contract liabilities associated with unredeemed gift cards were recorded in Accrued and Other Liabilities, respectively.

At July 29, 2023, January 28, 2023 and July 30, 2022, approxima tely $ 2.0 million, $ 2.4 million and $ 2.0 million of contract liabilities associated with unredeemed gift cards were recorded in Accrued and Other Liabilities, respectively.

We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions within two years.

6 unchanged sentences

We then recognize revenue based on an estimate of when customers redeem rewards, which incorporates an estimate of points expected to expire using historical rates.

During each of the thirteen weeks ended April 29, 2023 and April 30, 2022 , approximately $ 1.3 million of loyalty rewards were recognized in Net Sales.

At April 29, 2023, January 28, 2023 and April 30, 2022, approxi mately $ 884,000 , $ 844,000 and $ 849,000 of contract liabilities associated with loyalty rewards were recorded in Accrued and Other Liabilities, respectively.

During the thirteen and twenty-six weeks ended July 29, 2023 , approximately $ 1.4 million and $ 2.7 million, respectively, of loyalty rewards were recognized in Net Sales.

During the thirteen and twenty-six weeks ended July 30, 2022 , approximately $ 1.3 million and $ 2.6 million, respectively, of loyalty rewards were recognized in Net Sales.

At July 29, 2023, January 28, 2023 and July 30, 2022, approxi mately $ 950,000 , $ 844,000 and $ 889,000 , respectively, of contract liabilities associated with loyalty rewards were recorded in Accrued and Other Liabilities.

We expect the revenue associated with these liabilities to be recognized in proportion to the pattern of customer redemptions in less than one year.

3 unchanged sentences

All of our leases are operating leases.

Leases with terms of twelve months or less are immaterial and are expensed as incurred, and we did not have any leases with related parties as of April 29, 2023.

Lease costs, including related common area maintenance (“CAM”), property taxes and insurance, reported in our Condensed Consolidated Statements of Income were as follows for the thirteen weeks ended April 29, 2023 and April 30, 2022:

Leases with terms of twelve months or less are immaterial and are expensed as incurred, and we did not have any leases with related parties as of July 29, 2023.

(In thousands)

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Operating lease cost

43 unchanged sentences

We encourage you to read this in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included in PART I, ITEM 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 as filed with the SEC.

This section of this Quarterly Report on Form 10-Q generally discusses our results for first quarter 2023 and first quarter 2022 and year-over-year comparisons between first quarter 2023 and first quarter 2022.

Referred to herein, first quarter 2023 is the thirteen weeks ended April 29, 2023 and first quarter 2022 is the thirteen weeks ended April 30, 2022.

This section of this Quarterly Report on Form 10-Q generally discusses our results for second quarter 2023 and second quarter 2022 and year-over-year comparisons between second quarter 2023 and second quarter 2022, as well as year-to-date results for, and comparisons between, the two periods.

Referred to herein, second quarter 2023 is the thirteen weeks ended July 29, 2023 and second quarter 2022 is the thirteen weeks ended July 30, 2022.

Also referred to herein, year-to-date 2023 is the twenty-six weeks ended July 29, 2023 and year-to-date 2022 is the twenty-six weeks ended July 30, 2022.

Overview of Our Business

4 unchanged sentences

Our objective is to be the omnichannel retailer-of-choice for on-trend branded footwear for the entire family.

Our product assortment, whether shopping in a physical store or on our e-commerce platform, includes dress, casual, and work shoes, sandals, boots and a wide assortment of athletic shoes.

Our product assortment, whether shopping in a physical store or on our e-commerce platform, includes

dress, casual, and work shoes, sandals, boots and a wide assortment of athletic shoes.

Our typical physical store carries shoes in two general categories –

athletics and non-athletics with subcategories for men's, women's and children's, as well as a broad range of

athletics and non-athletics with subcategories for men's, women's and children's, as well as a broad range of accessories.

In addition to our physical stores, our e-commerce platform offers customers the same assortment of merchandise in all categories of footwear with expanded options in certain instances.

25 unchanged sentences

April 29, 2023

July 29, 2023

April 30, 2022

July 30, 2022

(1) Comparable store sales is a key performance indicator for us.

7 unchanged sentences

The following table sets forth our results of operations expressed as a percentage of Net Sales for the periods indicated:

April 29, 2023

April 30, 2022

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Cost of sales (including buying, distribution and

4 unchanged sentences

Income tax expense

Executive Summary for First Quarter Ended April 29, 2023

For first quarter 2023, diluted net income per share (“EPS”) was $0.60, compared to $0.95 of EPS in first quarter 2022.

The decrease in EPS was primarily driven by reduced Net Sales, which were down $36.3 million, or 11.4%.

Store traffic was down approximately 10% and e-commerce traffic was down approximately 13% compared to first quarter 2022.

We believe the reduced demand for footwear, and the decrease in volume sold by us, was primarily due to persistent inflation, a nearly 9% reduction in federal tax refunds compared to refunds in first quarter 2022 and unfavorable weather.

Sales of spring seasonal product were down approximately 23% compared to first quarter 2022.

Despite the reduction in top-line sales and bottom-line earnings, first quarter 2023 ranked as a top-three first quarter in our history, only surpassed by the first quarters of fiscal 2022 and fiscal 2021.

Our investments in customer relationship management (“CRM”) systems have continued to produce sustained higher gross profit margin, increased customer conversion and increased loyalty members compared to pre-CRM and pre-pandemic results in 2019.

The benefits of our CRM program were key factors to maintaining the following results with traffic down and consumer spending delayed by weather and stressed by inflation and lower tax refunds:

First quarter 2023 marked the ninth consecutive quarter gross profit margin exceeded 35%;

Loyalty customers grew over 12% compared to first quarter 2022 to 32.7 million customers;

Store conversion climbed to the highest level in seven consecutive quarters.

We also progressed our plan to lower Merchandise Inventories.

As of April 29, 2023, Merchandise Inventories were $44.5 million higher than as of April 30, 2022, down from $105.2 million higher at year end fiscal 2022 compared to year end fiscal 2021, just three months ago.

Our goal is that by year end fiscal 2023, Merchandise Inventories will be approximately $40 million lower than year end fiscal 2022.

We also began to rebalance Merchandise Inventories and expect to carry a broader assortment of footwear for the back-to-school shopping season with an improved selection of athletic inventory.

Last year, athletic footwear availability and related sales in the back-to-school time frame were significantly impacted by a constrained supply chain.

Year end fiscal 2022 marked the 18th consecutive year we ended the year with no debt, and through first quarter 2023, we also funded our operations without debt.

As of April 29, 2023, we had $44.1 million of Cash, Cash Equivalents and Marketable Securities and $99.3 million in borrowing capacity.

We ended first quarter 2023 with 397 total stores, 372 Shoe Carnival stores and 25 Shoe Station stores.

In first quarter 2023, we opened one Shoe Station store, went live with the Shoe Station e-commerce site, www.shoestation.com, and closed one Shoe Carnival store.

We expect to operate over 400 stores in third quarter 2023.

Results of Operations for First Quarter Ended April 29, 2023 Compared to First Quarter Ended April 30, 2022

Net Sales were $281.2 million during first quarter 2023 and decreased 11.4% compared to first quarter 2022, due to an 11.9% comparable store sales decline resulting from decreased traffic in our physical stores and our e-commerce sites.

We believe the lower traffic resulted from persistent inflation and a reduction in federal tax refunds compared to first quarter 2022.

Unfavorable weather also impacted Net Sales, with sales of spring seasonal product down approximately 23% in first quarter 2023 compared to first quarter 2022.

The decrease was partially offset by Net Sales attributable to new stores, mostly new Shoe Station stores.

E-commerce sales were approximately 8% of merchandise sales in first quarter 2023, compared to 11% in first quarter 2022.

Gross Profit was $98.5 million during first quarter 2023, a decrease of $14.3 million compared to first quarter 2022.

Gross profit margin in first quarter 2023 was 35.0% compared to 35.5% in first quarter 2022.

Merchandise margin decreased 30 basis points, reflecting an increase in promotional intensity in first quarter 2023 compared to first quarter 2022 on lower volumes sold.

Buying, distribution and occupancy (“BDO") costs were lower in the quarter compared to first quarter 2022;

however, BDO decreased gross profit margin by 20 basis points.

The BDO costs were lower in first quarter 2023 as freight and distribution costs declined versus 2022 through active management, contract renegotiation and normalization.

Executive Summary for Second Quarter Ended July 29, 2023

For second quarter 2023, Diluted Net Income per Share (“EPS”) was $0.71, compared to $1.04 of EPS in second quarter 2022.

The primary driver of the lower EPS in second quarter 2023 compared to second quarter 2022 was a $17.7 million, or 5.7%, decline in Net Sales.

The Net Sales decline was primarily due to store traffic declining approximately 7%, which resulted in a comparable store sales decline of 6.5% compared to second quarter 2022.

A 5.4% increase in our e-commerce Net Sales and Net Sales from new Shoe Station stores partially offset the decrease.

As a result of e-commerce growth and new stores, we grew Net Sales under our Shoe Station banner by low-single digits.

Net Sales under the Shoe Carnival banner declined mid-single digits primarily due to a store traffic decline principally from our lower income consumers and within our urban markets.

Second quarter 2023 ranked as the third best second quarter in our history in terms of EPS, only surpassed by the second quarters of fiscal 2022 and fiscal 2021.

Our investments in customer relationship management (“CRM”) systems and store modernization have continued to produce sustained higher gross profit margin, increased customer conversion and increased loyalty members compared to our pre-CRM and pre-modernization results in 2019.

The benefits of our CRM and store modernization programs were key factors to maintaining the following results with store traffic continuing to be impacted by inflation and higher interest rates:

Second quarter 2023 marked the tenth consecutive quarter that gross profit margin exceeded 35%;

Loyalty customers grew over 12% compared to second quarter 2022 to 33.3 million customers;

Store conversion was over 400 basis points higher compared to pre-CRM and pre-modernization results in 2019.

In second quarter 2023, we increased our strategic investments in branding, advertising and our in-store experience.

These investments resulted in increased Selling, General and Administrative Expenses and occupancy costs in Cost of Sales in second quarter 2023 compared to second quarter 2022.

Significant progress was made in the first half of 2023 to reduce our Merchandise Inventories and optimize our inventory positions for an improved athletic assortment of national named brands.

Second quarter 2023 ending inventory was $23.8 million higher than the prior year, compared to first quarter 2023 when ending inventory was $44.5 million higher than the prior year and to fiscal 2022 year end when inventory was $105.2 million higher than the prior year end.

We expect our Merchandise Inventories at the end of third quarter 2023 to be lower than the end of third quarter 2022 and to be approximately $40 million lower by year end 2023 compared to year end 2022.

Year end fiscal 2022 marked the 18th consecutive year we ended the year with no debt, and through second quarter 2023 we also funded our operations without debt.

As of July 29, 2023, we had $46.8 million of Cash, Cash Equivalents and Marketable Securities and $99.3 million in borrowing capacity.

We ended second quarter 2023 with 399 total stores, 373 Shoe Carnival stores and 26 Shoe Station stores.

In second quarter 2023, we opened one Shoe Carnival store and one Shoe Station store.

No stores were closed in second quarter 2023.

In August 2023, we opened another new store, achieving the 400 store level for the first time since 2018.

Over 50% of Shoe Carnival stores have been modernized.

Results of Operations for Second Quarter Ended July 29, 2023 Compared to Second Quarter Ended July 30, 2022

Net Sales were $294.6 million during second quarter 2023 and decreased 5.7% compared to second quarter 2022.

The decrease was due to a 6.5% comparable store sales decline resulting from an approximate 7% decrease in physical store traffic, which we believe was primarily due to persistent inflation and higher interest rates impacting our lower income consumers and our urban markets, partially offset by a 5.4% increase in e-commerce Net Sales and Net Sales from new Shoe Station stores.

E-commerce sales were favorably impacted by the February 2023 launch of shoestation.com and increased sales through shoecarnival.com.

E-commerce sales were approximately 9% of merchandise sales in both second quarter 2023 and second quarter 2022.

With an improved brand name assortment this year, sales of athletic merchandise in second quarter 2023 were flat compared to second quarter 2022 despite lower store traffic.

Gross Profit was $105.5 million during second quarter 2023, a decrease of $7.7 million compared to second quarter 2022.

Gross profit margin in second quarter 2023 was 35.8% compared to 36.2% in second quarter 2022.

Merchandise margin decreased 20 basis points.

Buying, distribution and occupancy (“BDO") costs were lower in the quarter compared to second quarter 2022;

however, BDO costs decreased gross profit margin by 20 basis points due to the lower Net Sales in second quarter 2023.

The BDO costs were lower in second quarter 2023 as freight and distribution costs declined versus 2022 through active management, contract renegotiation and normalization, partially offset by our investments in store modernization and by rent associated with operating more stores.

Selling, General and Administrative Expenses (“SG&A”)

SG&A were $77.6 million in first quarter 2023, near flat compared to $77.5 million in first quarter 2022, with higher depreciation and healthcare costs offset by reduced selling costs.

The higher depreciation resulted from our store modernization program.

As a percentage of Net Sales, SG&A were 27.6% in first quarter 2023 compared to 24.4% in first quarter 2022.

Interest Income and Interest Expense

Changes in our interest income and expense increased our income before taxes by $0.5 million in first quarter 2023 compared to first quarter 2022.

This increase was primarily due to higher interest earned on invested cash balances and lower unused commitment fees under our current credit agreement as compared to our prior credit agreement.

The effective income tax rate for first quarter 2023 was 22.6% compared to 23.8% for first quarter 2022.

SG&A increased $6.5 million in second quarter 2023 to $80.8 million compared to $74.3 million in second quarter 2022.

Approximately $6.2 million of the increase was evenly split between (1) advertising and brand initiatives, supporting new store growth and e-commerce growth and (2) sustaining our in-store experience, which included higher payroll expense and depreciation of newly modernized stores.

As a percentage of Net Sales, SG&A were 27.4% in second quarter 2023, consistent with first quarter 2023 when SG&A was 27.6% of Net Sales.

In second quarter 2022, SG&A was 23.8% of Net Sales.

The effective income tax rate for second quarter 2023 was 22.3% compared to 25.6% for second quarter 2022.

Our provision for income taxes is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events.

The lower quarterly effective tax rate was primarily due to one discrete item related to a higher stock-based compensation benefit, leveraged over lower pre-tax income.

The lower effective tax rate in second quarter 2023 compared to the prior year quarter was reflective of discrete adjustments recognized during the second quarter 2023.

For the full 2023 fiscal year, we expect our tax rate to be between 24% and 25% compared to the 25.2% effective tax rate recognized during the full 2022 fiscal year.

Results of Operations Year-to-Date Through July 29, 2023 Compared to Year-to-Date Through July 30, 2022

Net Sales were $575.8 million in year-to-date 2023 and decreased 8.6% compared to year-to-date 2022.

The decrease was due to a 9.3% comparable store sales decline resulting from an approximate 8% decrease in traffic in our physical stores and lower Net Sales through our e-commerce sales channel.

We believe the lower store traffic was primarily due to persistent inflation, higher interest rates and a reduction in first quarter 2023 federal tax refunds compared to 2022 impacting our lower income consumers and our urban markets.

The decrease was partially offset by Net Sales attributable to new stores, mostly new Shoe Station stores.

E-commerce sales were approximately 8% of merchandise sales in year-to-date 2023 compared to 10% in year-to-date 2022.

Gross Profit was $204.0 million during year-to-date 2023, a decrease of $22.0 million compared to year-to-date 2022.

Gross profit margin in year-to-date 2023 was 35.4% compared to 35.9% in year-to-date 2022.

Merchandise margin decreased 30 basis points, reflecting an increase in promotional intensity.

BDO costs were lower year-to-date compared to year-to-date 2022;

however, BDO decreased gross profit margin by 20 basis points due to the lower Net Sales in year-to-date 2023.

The BDO costs were lower in year-to-date 2023 as freight and distribution costs declined versus 2022 through active management, contract renegotiation and normalization, partially offset by our investments in store modernization and by rent associated with operating more stores.

Selling, General and Administrative Expenses

SG&A increased $6.6 million, or 4.3%, in year-to-date 2023 to $158.4 million compared to $151.8 million in year-to-date 2022.

The increase was nearly evenly split between (1) brand initiatives, supporting new store growth and the launch of shoestation.com and (2) sustaining our in-store experience, which included higher payroll expense and depreciation of newly modernized stores.

These increases were partially offset by lower advertising expense.

As a percentage of Net Sales, SG&A were 27.5% in year-to-date 2023 compared to 24.1% in year-to-date 2022.

Interest Income and Interest Expense

Changes in our interest income and expense increased our income before taxes by $764,000 in year-to-date 2023 compared to year-to-date 2022.

This increase was primarily due to higher interest earned on invested cash balances and lower unused commitment fees under our current credit agreement as compared to our prior credit agreement.

The effective income tax rate for year-to-date 2023 was 22.4% compared to 24.8% for year-to-date 2022.

The lower effective tax rate in year-to-date 2023 compared to the prior year-to-date was reflective of discrete adjustments recognized during second quarter 2023.

Liquidity and Capital Resources

Our primary sources of liquidity are $44.1 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of the first quarter 2023, cash generated from operations and availability under our $100 million credit agreement.

Our primary sources of liquidity are $46.8 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of the second quarter 2023, cash generated from operations and availability under our $100 million credit agreement.

We believe our resources will be sufficient to fund our cash needs, as they arise, for at least the next 12 months.

Our primary uses of cash are normally for working capital, which are principally inventory purchases, investments in our stores, such as new stores, remodels and relocations, distribution center initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program and the financing of capital projects, including investments in new systems.

Our primary uses of cash are normally for working capital, which are principally inventory purchases, investments in our stores, such as new stores, modernization/remodels and relocations, distribution center initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program and the financing of capital projects, including investments in new systems.

As part of our growth strategy, we may also pursue strategic acquisitions of other footwear retailers.

Cash Flow - Operating Activities

Net cash generated from operating activities was $2.1 million in first quarter 2023 compared to $17.7 million during first quarter 2022.

The change in operating cash flow was primarily driven by decreased Net Sales in first quarter 2023.

Working capital increased on a year-over-year basis and totaled $318.3 million at April 29, 2023 compared to $271.8 million at April 30, 2022.

The increase was primarily attributable to lower Accounts Payable and higher Merchandise Inventory levels, partially offset by lower cash balances due to investment in Property and Equipment related to our store portfolio modernization plan.

Our current ratio was 3.4 as of April 29, 2023 compared to 2.4 as of April 30, 2022.

Net cash generated from operating activities was $22.4 million in year-to-date 2023 compared to $8.9 million during year-to-date 2022.

The change in operating cash flow was primarily driven by inventory reductions, partially offset by decreased Net Sales in year-to-date 2023.

Working capital increased on a year-over-year basis and totaled $330.6 million at July 29, 2023 compared to $287.7 million at July 30, 2022.

The increase was primarily attributable to lower Accounts Payable and higher Merchandise Inventories levels, partially offset by lower cash balances due to investment in Property and Equipment related to our store modernization program.

Our current ratio was 3.1 as of July 29, 2023 compared to 2.5 as of July 30, 2022.

Cash Flow –

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Our cash outflows for investing activities are normally for capital expenditures.

During the first quarters of 2023 and 2022, we expended $15.0 million and $26.9 million, respectively, for the purchase of Property and Equipment, primarily related to our store portfolio modernization plan.

During year-to-date 2023 and 2022, we expended $30.7 million and $50.2 million, respectively, for the purchase of Property and Equipment, primarily related to our store modernization program.

We invest in publicly traded mutual funds designed to mitigate income statement volatility associated with our nonqualified deferred compensation plan.

The balance of these Marketable Securities was $11.5 million at April 29, 2023, compared to $11.6 million at January 28, 2023 and $11.0 million at April 30, 2022.

The balance of these Marketable Securities was $12.2 million at July 29, 2023, compared to $11.6 million at January 28, 2023 and $11.0 million at July 30, 2022.

Additional information can be found in Note 3 —

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Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit agreement.

During first quarter 2023, net cash used in financing activities was $5.8 million compared to $25.1 million during first quarter 2022.

The decrease in net cash used in financing activities was primarily due to the repurchase of $20.5 million of shares in first quarter 2022 under our Board of Directors’

During year-to-date 2023, net cash used in financing activities was $8.5 million compared to $27.6 million during year-to-date 2022.

The decrease in net cash used in financing activities was primarily due to the repurchase of $20.5 million of shares in year-to-date 2022 under our Board of Directors’

authorized share repurchase program.

No share repurchases were made in first quarter 2023.

No share repurchases were made in year-to-date 2023.

Capital Expenditures

Capital expenditures for Fiscal 2023, including actual expenditures in first quarter 2023, are expected to be between $60 million and $70 million, with approximately $55 million to $60 million to be used for new stores and modernization and approximately $5 million to $10 million for upgrades to our distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities.

Capital expenditures for fiscal 2023, including actual expenditures in year-to-date 2023, are expected to be between $55 million and $65 million, with approximately $45 million to $50 million to be used for new stores and modernization and approximately $10 million to $15 million for upgrades to our distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities.

The resources allocated to projects are subject to near-term changes depending on ongoing supply chain disruptions and potential inflationary and other macroeconomic impacts.

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Store Portfolio

We opened one Shoe Station branded store and closed one Shoe Carnival branded store in first quarter 2023.

We opened two Shoe Station branded stores, opened one Shoe Carnival branded store and closed one Shoe Carnival branded store in year-to-date 2023.

Increasing market penetration by adding new stores is a key component of our growth strategy.

We are on track to operate over 400 stores in third quarter 2023 and are targeting operating over 500 stores in 2028.

We opened our 400 th store in August 2023 and are targeting operating over 500 stores in 2028.

This increased scale will be accomplished through a combination of both organic and acquired store growth.

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Material covenants associated with the Credit Agreement require that we maintain a minimum net worth of $250 million and a consolidated interest coverage ratio of not less than 3.0 to 1.0.

We were in compliance with these covenants as of April 29, 2023.

We were in compliance with these covenants as of July 29, 2023.

The Credit Agreement contains certain restrictions.

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We are also permitted to make acquisitions and pay cash dividends or repurchase shares in excess of $15 million in a fiscal year provided that (a) no default or event of default exists before and immediately after the transaction and (b) on a proforma basis, the ratio of (i) the sum of (A) our consolidated funded indebtedness plus (B) three times our consolidated rental expense to (ii) the sum of (A) our consolidated EBITDA plus (B) our consolidated rental expense is less than 3.5 to 1.0.

Among other restrictions, the New Credit Agreement also limits our ability to incur additional secured or unsecured debt to $20 million.

Among other restrictions, the Credit Agreement also limits our ability to incur additional secured or unsecured debt to $20 million.

The Credit Agreement bears interest, at our option, at (1) the agent bank’s base rate plus 0.0% to 1.0% or (2) Adjusted Term SOFR plus 0.9% to 1.9%, depending on our achievement of certain performance criteria.

A commitment fee is charged at 0.2% to 0.3% per annum, depending on our achievement of certain performance criteria, on the unused portion of the lenders’

During first quarter 2023, we did not borrow or repay funds under the Credit Agreement.

Letters of credit outstanding were $700,000 at April 29, 2023 and our borrowing capacity was $99.3 million.

During year-to-date 2023, we did not borrow or repay funds under the Credit Agreement.

Letters of credit outstanding were $700,000 at July 29, 2023 and our borrowing capacity was $99.3 million.

The terms “net worth”, “consolidated interest coverage ratio”, “consolidated funded indebtedness”, “consolidated rental expense”, “consolidated EBITDA”, “base rate”

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are defined in the Credit Agreement.

On March 14, 2023, the Board of Directors approved the payment of a first quarter 2023 cash dividend to our shareholders.

The quarterly cash dividend of $0.10 per share was paid on April 17, 2023 to shareholders of record as of the close of business on April 3, 2023.

In first quarter 2022, the dividend paid was $0.09 per share.

During the first quarters of 2023 and 2022, we returned $2.9 million and $2.6 million, respectively, to our shareholders through our quarterly cash dividends.

On June 20, 2023, the Board of Directors approved the payment of a second quarter 2023 cash dividend to our shareholders.

The quarterly cash dividend of $0.10 per share was paid on July 19, 2023 to shareholders of record as of the close of business on July 5, 2023.

In second quarter 2022, the dividend paid was $0.09 per share.

During year-to-date 2023 and 2022, we returned $5.7 million and $5.1 million, respectively, to our shareholders through our quarterly cash dividends.

The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors, subject to restrictions as outlined above in the “Credit Agreement”

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No share repurchases have been made to date in fiscal 2023.

During first quarter 2022, we repurchased 682,886 shares of common stock at a total cost of $20.5 million.

During year-to-date 2022, we repurchased 682,886 shares of common stock at a total cost of $20.5 million.

We have three distinct peak selling periods:

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We do not use interest rate derivative instruments to manage exposure to changes in market interest rates.

We had no borrowings outstanding during first quarter 2023.

We had no borrowings outstanding during second quarter 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements