SHOE STATION GROUP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS SHOE CARNIVAL, INC. CONDENSED CONSOLID ATED BALANCE SHEETS Unaudited (In thousands, except share data) July 29, 2023 January 28, 2023 July 30, 2022 Assets Current Assets: Cash and cash equivalents $ 34,562 $ 51,372 $ 51,620 Marketable securities 12,218 11,601 10,994 Accounts receivable 3,961 3,052 10,677 Merchandise inventories 409,342 390,390 385,510 Other 25,281 13,308 18,131 Total Current Assets 485,364 469,723 476,932 Property and equipment – net 159,186 141,435 124,789 Operating lease right-of-use assets 339,598 318,612 254,537 Intangible assets 32,600 32,600 32,600 Goodwill 12,023 12,023 10,786 Other noncurrent assets 14,433 15,388 14,871 Total Assets $ 1,043,204 $ 989,781 $ 914,515 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable $ 77,429 $ 78,850 $ 113,826 Accrued and other liabilities 19,999 20,281 22,893 Current portion of operating lease liabilities 57,335 58,154 52,523 Total Current Liabilities 154,763 157,285 189,242 Long-term portion of operating lease liabilities 307,326 285,074 226,115 Deferred income taxes 14,631 11,844 4,436 Deferred compensation 10,596 9,840 10,779 Other 369 170 311 Total Liabilities 487,685 464,213 430,883 Shareholders’ Equity: Common stock, $ 0.01 par value, 50,000,000 shares authorized and 41,049,190 shares issued in each period, respectively 410 410 410 Additional paid-in capital 81,151 83,423 80,760 Retained earnings 683,875 653,450 604,192 Treasury stock, at cost, 13,689,493 shares, 13,883,902 shares and 13,435,296 shares, respectively ( 209,917 ) ( 211,715 ) ( 201,730 ) Total Shareholders’ Equity 555,519 525,568 483,632 Total Liabilities and Shareholders’ Equity $ 1,043,204 $ 989,781 $ 914,515 See notes to Condensed Consolidated Financial Statements. 3 SHOE CARNIVAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (In thousands, except per share data) Thirteen Weeks Ended July 29, 2023 Thirteen Weeks Ended July 30, 2022 Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Net sales $ 294,615 $ 312,268 $ 575,799 $ 629,795 Cost of sales (including buying, distribution and occupancy costs) 189,150 199,138 371,817 403,802 Gross profit 105,465 113,130 203,982 225,993 Selling, general and administrative expenses 80,803 74,341 158,381 151,820 Operating income 24,662 38,789 45,601 74,173 Interest income ( 433 ) ( 138 ) ( 911 ) ( 170 ) Interest expense 71 65 137 160 Income before income taxes 25,024 38,862 46,375 74,183 Income tax expense 5,583 9,953 10,408 18,377 Net income $ 19,441 $ 28,909 $ 35,967 $ 55,806 Net income per share: Basic $ 0.71 $ 1.05 $ 1.32 $ 2.01 Diluted $ 0.71 $ 1.04 $ 1.31 $ 1.99 Weighted average shares: Basic 27,336 27,590 27,280 27,784 Diluted 27,410 27,812 27,449 28,061 See notes to Condensed Consolidated Financial Statements. 4 SHOE CARNIVAL, INC. CONDENSED CONSOLIDATED STATE MENTS OF SHAREHOLDERS’ EQUITY Unaudited Thirteen Weeks Ended Common Stock Additional Paid-In Retained Treasury (In thousands, except per share data) Issued Treasury Amount Capital Earnings Stock Total Balance at April 29, 2023 41,049 ( 13,714 ) $ 410 $ 80,361 $ 667,196 $ ( 210,287 ) $ 537,680 Dividends declared ($ 0.10 per share) ( 2,762 ) ( 2,762 ) Employee stock purchase plan purchases 2 12 41 53 Stock-based compensation awards 23 ( 329 ) 329 0 Stock-based compensation expense 1,107 1,107 Net income 19,441 19,441 Balance at July 29, 2023 41,049 ( 13,689 ) $ 410 $ 81,151 $ 683,875 $ ( 209,917 ) $ 555,519 Balance at April 30, 2022 41,049 ( 13,462 ) $ 410 $ 79,595 $ 577,823 $ ( 202,114 ) $ 455,714 Dividends declared ($ 0.09 per share) ( 2,540 ) ( 2,540 ) Employee stock purchase plan purchases 3 9 39 48 Stock-based compensation awards 26 ( 383 ) 383 0 Shares surrendered by employees to pay taxes on stock-based compensation awards ( 2 ) ( 38 ) ( 38 ) Stock-based compensation expense 1,539 1,539 Net income 28,909 28,909 Balance at July 30, 2022 41,049 ( 13,435 ) $ 410 $ 80,760 $ 604,192 $ ( 201,730 ) $ 483,632 Twenty-six Weeks Ended Common Stock Additional Paid-In Retained Treasury (In thousands, except per share data) Issued Treasury Amount Capital Earnings Stock Total Balance at January 28, 2023 41,049 ( 13,884 ) $ 410 $ 83,423 $ 653,450 $ ( 211,715 ) $ 525,568 Dividends declared ($ 0.20 per share) ( 5,542 ) ( 5,542 ) Employee stock purchase plan purchases 5 29 81 110 Stock-based compensation awards 305 ( 4,644 ) 4,644 0 Shares surrendered by employees to pay taxes on stock-based compensation awards ( 115 ) ( 2,927 ) ( 2,927 ) Stock-based compensation expense 2,343 2,343 Net income 35,967 35,967 Balance at July 29, 2023 41,049 ( 13,689 ) $ 410 $ 81,151 $ 683,875 $ ( 209,917 ) $ 555,519 Balance at January 29, 2022 41,049 ( 12,883 ) $ 410 $ 80,681 $ 553,487 $ ( 182,045 ) $ 452,533 Dividends declared ($ 0.18 per share) ( 5,101 ) ( 5,101 ) Employee stock purchase plan purchases 5 27 66 93 Stock-based compensation awards 196 ( 2,850 ) 2,850 0 Shares surrendered by employees to pay taxes on stock-based compensation awards ( 70 ) ( 2,086 ) ( 2,086 ) Purchase of common stock for treasury ( 683 ) ( 20,515 ) ( 20,515 ) Stock-based compensation expense 2,902 2,902 Net income 55,806 55,806 Balance at July 30, 2022 41,049 ( 13,435 ) $ 410 $ 80,760 $ 604,192 $ ( 201,730 ) $ 483,632 See notes to Condensed Consolidated Financial Statements. 5 SHOE CARNIVAL, INC. CONDENSED CONSOLIDAT ED STATEMENTS OF CASH FLOWS Unaudited (In thousands) Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Cash Flows From Operating Activities Net income $ 35,967 $ 55,806 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,822 10,416 Stock-based compensation 2,326 2,741 Loss on retirement and impairment of assets, net 59 83 Deferred income taxes 2,787 7,135 Non-cash operating lease expense 27,627 23,497 Other 251 384 Changes in operating assets and liabilities: Accounts receivable ( 909 ) 3,481 Merchandise inventories ( 18,952 ) ( 100,305 ) Operating leases ( 27,181 ) ( 24,794 ) Accounts payable and accrued liabilities ( 927 ) 40,514 Other ( 12,518 ) ( 10,040 ) Net cash provided by operating activities 22,352 8,918 Cash Flows From Investing Activities Purchases of property and equipment ( 30,629 ) ( 50,198 ) Investments in marketable securities ( 41 ) ( 11 ) Sales of marketable securities 0 3,040 Net cash used in investing activities ( 30,670 ) ( 47,169 ) Cash Flows From Financing Activities Proceeds from issuance of stock 110 93 Dividends paid ( 5,675 ) ( 5,064 ) Purchase of common stock for treasury 0 ( 20,515 ) Shares surrendered by employees to pay taxes on stock-based compensation awards ( 2,927 ) ( 2,086 ) Net cash used in financing activities ( 8,492 ) ( 27,572 ) Net decrease in cash and cash equivalents ( 16,810 ) ( 65,823 ) Cash and cash equivalents at beginning of period 51,372 117,443 Cash and cash equivalents at end of period $ 34,562 $ 51,620 Supplemental disclosures of cash flow information: Cash paid during period for interest $ 138 $ 164 Cash paid during period for income taxes $ 12,732 $ 13,955 Capital expenditures incurred but not yet paid $ 2,730 $ 1,899 Dividends declared but not yet paid $ 183 $ 222 See notes to Condensed Consolidated Financial Statements. 6 SHOE CARNIVAL, INC. NOTES TO CONDENSED CONSOLID ATED FINANCIAL STATEMENTS Unaudited Note 1 – Basis of Presentation Shoe Carnival, Inc. is one of the nation’s largest omnichannel family footwear retailers, selling footwear and related products through our retail stores located in 35 states within the continental United States and in Puerto Rico, as well as through our e-commerce platform. We offer customers a broad assortment of dress, casual, and work shoes, sandals, boots and athletic footwear and accessories for men, women and children with an emphasis on national name brands through our Shoe Carnival and Shoe Station store banners. We are an Indiana corporation that was initially formed in Delaware in 1993 and reincorporated in Indiana in 1996. References to “we,” “us,” “our” and the “Company” in this Quarterly Report on Form 10-Q refer to Shoe Carnival, Inc. and its subsidiaries. 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. All intercompany accounts and transactions have been eliminated. In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements and notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and contain all normal recurring adjustments necessary to fairly present our financial position and the results of our operations and our cash flows for the periods presented. Certain information and disclosures normally included in the notes to Condensed Consolidated Financial Statements have been condensed or omitted as permitted by the rules and regulations of the SEC although we believe that the disclosures are adequate to make the information presented not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 . Note 2 - Net Income Per Share The following table sets forth the computation of Basic and Diluted Net Income per Share as shown on the face of the accompanying Condensed Consolidated Statements of Income: Thirteen Weeks Ended July 29, 2023 July 30, 2022 (In thousands, except per share data) Basic Net Income per Share: Net Income Shares Per Share Amount Net Income Shares Per Share Amount Net income available for basic common shares and basic net income per share $ 19,441 27,336 $ 0.71 $ 28,909 27,590 $ 1.05 Diluted Net Income per Share: Net income $ 19,441 $ 28,909 Conversion of stock-based compensation arrangements 0 74 0 222 Net income available for diluted common shares and diluted net income per share $ 19,441 27,410 $ 0.71 $ 28,909 27,812 $ 1.04 Twenty-six Weeks Ended July 29, 2023 July 30, 2022 (In thousands, except per share data) Basic Net Income per Share: Net Income Shares Per Share Amount Net Income Shares Per Share Amount Net income available for basic common shares and basic net income per share $ 35,967 27,280 $ 1.32 $ 55,806 27,784 $ 2.01 Diluted Net Income per Share: Net income $ 35,967 $ 55,806 Conversion of stock-based compensation arrangements 0 169 0 277 Net income available for diluted common shares and diluted net income per share $ 35,967 27,449 $ 1.31 $ 55,806 28,061 $ 1.99 7 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 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 July 29, 2023, January 28, 2023 and July 30, 2022: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Total As of July 29, 2023 Cash equivalents - money market mutual funds $ 22,445 $ 0 $ 0 $ 22,445 Marketable securities - mutual funds that fund deferred compensation 12,218 0 0 12,218 Total $ 34,663 $ 0 $ 0 $ 34,663 As of January 28, 2023 Cash equivalents - money market mutual funds $ 45,265 $ 0 $ 0 $ 45,265 Marketable securities - mutual funds that fund deferred compensation 11,601 11,601 Total $ 56,866 $ 0 $ 0 $ 56,866 As of July 30, 2022 Cash equivalents - money market mutual funds $ 41,401 $ 0 $ 0 $ 41,401 Marketable securities - mutual funds that fund deferred compensation 10,994 10,994 Total $ 52,395 $ 0 $ 0 $ 52,395 W e invest in publicly traded mutual funds with readily determinable fair values. 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 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 $ 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 We periodically evaluate our long-lived assets for impairment if events or circumstances indicate that 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, Operating Lease Right-of-Use Assets, and the current and long-term portions of operating lease liabilities. 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 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. 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. 8 Note 4 - Stock-Based Compensation 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 and twenty-six weeks ended July 29, 2023 and July 30, 2022, stock-based compensation expense was comprised of the following: (In thousands) Thirteen Weeks Ended July 29, 2023 Thirteen Weeks Ended July 30, 2022 Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Share-settled equity awards $ 1,098 $ 1,530 $ 2,324 $ 2,885 Stock appreciation rights 10 ( 38 ) ( 17 ) ( 161 ) Employee stock purchase plan 9 9 19 17 Total stock-based compensation expense $ 1,117 $ 1,501 $ 2,326 $ 2,741 Income tax effect at statutory rates $ ( 249 ) $ ( 385 ) $ ( 522 ) $ ( 678 ) Additional income tax benefit on vesting of share-settled awards $ 5 $ ( 26 ) $ ( 616 ) $ ( 521 ) 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. Share-Settled Equity Awards The following table summarizes transactions for our restricted stock units and performance stock units: Number of Shares Weighted- Average Grant Date Fair Value Outstanding at January 28, 2023 560,323 $ 23.27 Granted 370,653 24.98 Vested ( 282,927 ) 16.83 Forfeited ( 36,526 ) 30.09 Outstanding at July 29, 2023 611,523 $ 26.87 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: Number of Shares Weighted- Average Grant Date Fair Value Outstanding at January 28, 2023 0 $ 0.00 Granted 21,462 21.90 Vested 0 0.00 Forfeited 0 0.00 Outstanding at July 29, 2023 21,462 $ 21.90 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 . 9 Note 5 – Revenue Disaggregation of Revenue by Product Category Revenue is disaggregated by product category below. 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 July 29, 2023 Thirteen Weeks Ended July 30, 2022 Non-Athletics: Women’s $ 82,747 28 % $ 94,013 30 % Men’s 51,650 17 55,102 18 Children’s 22,318 8 22,822 7 Total 156,715 53 171,937 55 Athletics: Women’s 40,598 14 40,511 13 Men’s 49,096 17 50,776 17 Children’s 32,013 11 30,977 10 Total 121,707 42 122,264 40 Accessories 14,881 5 16,664 5 Other 1,312 0 1,403 0 Total $ 294,615 100 % $ 312,268 100 % (In thousands) Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Non-Athletics: Women’s $ 160,505 28 % $ 182,569 29 % Men’s 95,096 16 104,254 17 Children’s 43,846 8 44,231 7 Total 299,447 52 331,054 53 Athletics: Women’s 83,386 15 91,545 14 Men’s 97,132 17 103,802 16 Children’s 64,042 11 67,705 11 Total 244,560 43 263,052 41 Accessories 29,429 5 32,414 5 Other 2,363 0 3,275 1 Total $ 575,799 100 % $ 629,795 100 % Accounting Policy and Performance Obligations We operate as an omnichannel, 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 omnichannel strategy, we offer Shoes 2U, a program that enables us to ship product to a customer’s home or selected store if the product is not in stock at a particular store. We also offer “buy online, pick up in store” services for our customers. “Buy online, pick up in store” provides the convenience of local pickup for our customers. 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 goods at a physical store. For sales made through our e-commerce platform in which the customer chooses home delivery, we transfer control and recognize revenue when the product is shipped. This also includes sales made via our Shoes 2U program when the customer chooses home delivery. 10 We offer our customers sales incentives including coupons, discounts and free merchandise. Sales are recorded net of such incentives and returns and allowances. If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in Cost of Sales. Gift card revenue is recognized at the time of redemption. When a customer makes a purchase as part of our rewards program, we allocate the transaction price between the goods purchased and the loyalty reward points and recognize the loyalty revenue based on estimated customer redemptions. 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 the sale, including the description, quantity, and price of each product purchased. The customer agrees to a stated price in the contract that does not vary over the term of the contract and may include revenue to offset shipping costs. Taxes imposed by governmental authorities such as sales taxes are excluded from Net Sales. We accept various forms of payment from customers at the point of sale typical for an omnichannel retailer. 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 July 29, 2023, January 28, 2023 or July 30, 2022. 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 Other Liabilities. 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 and Merchandise Inventories, respectively, as of July 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 and Merchandise Inventories, respectively, at July 30, 2022. Contract Liabilities The issuance of a gift card is recorded as an increase to contract liabilities 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 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. Breakage revenue associated with our gift cards recognized in Net Sales was no t material to any of the periods presented. Our Shoe Perks rewards program allows customers to accrue points and provides customers with the opportunity to earn rewards. Points under Shoe Perks are earned primarily by making purchases through any of our omnichannel points of sale. Once a certain threshold of accumulated points is reached, the customer earns a reward certificate, which is redeemable through any of our sales channels. When a Shoe Perks customer makes a purchase, we allocate the transaction price between the goods purchased and the loyalty reward points earned based on the relative standalone selling price. The portion allocated to the points program is recorded as a contract liability for rewards that are expected to be redeemed. 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 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. 11 Note 6 – Leases We lease all of our physical stores, our single distribution center, which has a current lease term expiring in 2034 , and office space for our Southern office. We also enter into leases of equipment, copiers and billboards. 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 July 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 and twenty-six weeks ended July 29, 2023 and July 30, 2022: (In thousands) Thirteen Weeks Ended July 29, 2023 Thirteen Weeks Ended July 30, 2022 Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Operating lease cost $ 15,952 $ 14,943 $ 31,824 $ 29,642 Variable lease cost CAM, property taxes and insurance 5,370 4,667 10,722 9,429 Percentage rent and other variable lease costs 381 301 624 494 Total $ 21,703 $ 19,911 $ 43,170 $ 39,565 12 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors That May Affect Future Results This Quarterly Report on Form 10-Q 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: our ability to control costs and meet our labor needs in a rising wage, inflationary, and/or supply chain constrained environment; our ability to maintain current promotional intensity levels; the effects and duration of economic downturns and unemployment rates; our ability to achieve expected operating results, synergies, and other benefits from the Shoe Station acquisition within expected time frames, or at all; the potential impact of national and international security concerns, including those caused by war and terrorism, on the retail environment; general economic conditions in the areas of the continental United States and Puerto Rico where our stores are located; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; our ability to generate increased sales; our ability to successfully navigate the increasing use of online retailers for fashion purchases and the impact on traffic and transactions in our physical stores; the success of the open-air shopping centers where many of 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 platform and to successfully grow our omnichannel sales; the effectiveness of our inventory management, including our ability to manage key merchandise vendor relationships and direct-to-consumer initiatives; changes in our relationships with other key suppliers; 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 impact of natural disasters, public health and political crises, civil unrest, and other catastrophic events on our operations and the operations of our suppliers, as well as on consumer confidence and purchasing in general; the duration and spread of a public health crisis, such as COVID-19, and the mitigating efforts deployed, including the effects of government stimulus on consumer spending; 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 cybersecurity breach; our ability to successfully execute our business strategy, including the availability of desirable store locations at acceptable lease terms, our ability to identify, consummate or effectively integrate future acquisitions, our ability to implement and adapt to new technology and systems, 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; an increase in the cost, or a disruption in the flow, of 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; continued volatility and disruption in the capital and credit markets; future stock repurchases under our stock repurchase program and future dividend payments. For a more detailed discussion of risk factors impacting us, see the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023. General Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information to assist the reader in better understanding and evaluating our financial condition and results of operations. 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 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 Shoe Carnival, Inc. is one of the nation’s largest omnichannel family footwear retailers. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe Station. 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 13 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 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. Our stores under the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe Carnival physical stores is organized by category and brand, creating strong brand statements within the aisles. These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store. Our signage may highlight a vendor’s product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors. The Shoe Station banner and retail locations are a complementary retail platform for us to serve a broader base of family footwear customers in both urban and suburban demographics. The Shoe Station concept targets a more affluent family footwear customer and has a strong track record of capitalizing on emerging footwear fashion trends and introducing new brands. Due to the larger average size of our Shoe Station stores and the targeted, more affluent customer, these locations provide for a primary destination shopping experience. See Note 3 — “Acquisition of Shoe Station” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, for further discussion. We believe our distinctive shopping experiences give 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. Critical Accounting Policies We use judgment in reporting our financial results. This judgment involves estimates based in part on our historical experience and incorporates the impact of the current general economic climate and company-specific circumstances. However, because future events and economic conditions are inherently uncertain, our actual results could differ materially from these estimates. Our accounting policies that require more significant judgments include those with respect to Merchandise Inventories, valuation of long-lived assets, valuation of Goodwill and Intangible Assets, leases and income taxes. The accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, and there have been no material changes to those critical accounting policies. Results of Operations Summary Information Number of Stores Store Square Footage Beginning End of Net End Comparable Quarter Ended Of Period Opened Closed Period Change of Period Store Sales (1) April 29, 2023 397 1 1 397 5,000 4,510,000 (11.9 )% July 29, 2023 397 2 0 399 32,000 4,542,000 (6.5 )% Year-to-date 397 3 1 399 37,000 4,542,000 (9.3 )% April 30, 2022 393 2 0 395 31,000 4,450,000 (10.6 )% July 30, 2022 395 0 0 395 0 4,450,000 (13.8 )% Year-to-date 393 2 0 395 31,000 4,450,000 (12.2 )% (1) 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 or acquisition prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores recently opened, acquired or closed are not included in comparable store sales. We generally include e-commerce sales in our comparable store sales as a result of our omnichannel retailer strategy. Due to our omnichannel retailer strategy, we view e-commerce sales as an extension of our physical stores. E-commerce platforms associated with a physical store acquisition will not be included in comparable store sales until the initial physical stores are included. The 21 original Shoe Station stores acquired and the www.shoestation.com e-commerce site that went live in early February 2023 are included in comparable store sales calculations beginning in first quarter 2023. 14 The following table sets forth our results of operations expressed as a percentage of Net Sales for the periods indicated: Thirteen Weeks Ended July 29, 2023 Thirteen Weeks Ended July 30, 2022 Twenty-six Weeks Ended July 29, 2023 Twenty-six Weeks Ended July 30, 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (including buying, distribution and occupancy costs) 64.2 63.8 64.6 64.1 Gross profit 35.8 36.2 35.4 35.9 Selling, general and administrative expenses 27.4 23.8 27.5 24.1 Operating income 8.4 12.4 7.9 11.8 Interest income, net (0.1 ) 0.0 (0.2 ) 0.0 Income tax expense 1.9 3.1 1.8 2.9 Net income 6.6 % 9.3 % 6.3 % 8.9 % 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; and • 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. 15 Results of Operations for Second Quarter Ended July 29, 2023 Compared to Second Quarter Ended July 30, 2022 Net Sales 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 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 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. Income Taxes 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 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 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 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. 16 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. Income Taxes 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 $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, 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 $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 – Investing Activities Our cash outflows for investing activities are normally for capital expenditures. 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 $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 — “Fair Value Measurements” to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q. Cash Flow – Financing Activities Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our credit agreement. 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 stock-based compensation awards that are settled in shares. Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit agreement. 17 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 year-to-date 2023. Capital Expenditures 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. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, relocated, and remodeled, and the amount of lease incentives, if any, received from landlords. The number of new store openings and relocations will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending. Store Portfolio 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 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. We believe our current store footprint provides for growth in new markets within the United States as well as fill-in opportunities within existing markets. In the near term, we expect to pursue fill-in opportunities for store growth across large and mid-size markets as we continue to leverage customer data from our CRM program. We believe more attractive real estate options will be available with the addition of the Shoe Station retail concept to our portfolio and aim to grow the Shoe Station banner to over 100 stores over the same time period. However, our future store growth may continue to be impacted by macroeconomic uncertainty and our ability to identify desirable locations and/or acquisition partners. Credit Agreement On March 23, 2022, we entered into a $100 million Amended and Restated Credit Agreement (the “Credit Agreement”), which replaced our prior credit agreement. The Credit Agreement is collateralized by our inventory, expires on March 23, 2027, and uses a Secured Overnight Financing Rate ("SOFR") as quoted by The Federal Reserve Bank of New York as the basis for financing charges. 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 July 29, 2023. The Credit Agreement contains certain restrictions. However, as long as our consolidated EBITDA is positive and there are either no or low borrowings outstanding, we expect these restrictions would have no impact on our ability to pay cash dividends, execute share repurchases or facilitate acquisitions from cash on hand. The Credit Agreement stipulates that cash dividends and share repurchases of $15 million or less per fiscal year can be made without restriction as long as there is no default or event of default before and immediately after such distributions. 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 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’ commitment. 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” and “Adjusted Term SOFR” are defined in the Credit Agreement. 18 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” discussion. See Note 9 — “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 for a further discussion of the Credit Agreement. Share Repurchase Program On December 14, 2022, our Board of Directors authorized a share repurchase program for up to $50.0 million of our outstanding common stock, effective January 1, 2023 (the “2023 Share Repurchase Program”). The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2023 and in accordance with applicable laws, rules and regulations. The 2023 Share Repurchase Program may be amended, suspended or discontinued at any time and does not commit us to repurchase shares of our common stock. We have funded, and intend to continue to fund, share repurchases from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes. The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market and economic factors and are subject to restrictions as outlined above in the “Credit Agreement” discussion. See Note 9 — “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 for a further discussion of the Credit Agreement. No share repurchases have been made to date in fiscal 2023. During year-to-date 2022, we repurchased 682,886 shares of common stock at a total cost of $20.5 million. 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. Any unanticipated decrease in demand for our products or a supply chain disruption that reduces inventory availability during these peak shopping seasons could reduce our Net Sales and Gross Profit and negatively affect our profitability. ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk in that the interest payable under the Credit Agreement 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. We had no borrowings outstanding during second quarter 2023.