SHOE STATION GROUP INC 10-Q

ITEM 1. FINANCIAL STATEMENTS SHOE CARNIVAL, INC. CONDENSED CONSOLID ATED BALANCE SHEETS Unaudited (In thousands, except share data) May 3, 2025 February 1, 2025 May 4, 2024 Assets Current Assets: Cash and cash equivalents $ 78,476 $ 108,680 $ 56,919 Marketable securities 14,477 14,432 12,555 Accounts receivable 8,745 9,018 5,868 Merchandise inventories 428,424 385,605 411,619 Other 18,509 18,409 17,992 Total Current Assets 548,631 536,144 504,953 Property and equipment – net 178,424 172,806 172,182 Operating lease right-of-use assets 341,815 343,547 345,881 Intangible assets 40,956 40,968 41,001 Goodwill 18,018 18,018 15,223 Other noncurrent assets 12,314 12,650 13,342 Total Assets $ 1,140,158 $ 1,124,133 $ 1,092,582 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable $ 66,592 $ 52,030 $ 71,234 Accrued and other liabilities 24,699 25,382 21,938 Current portion of operating lease liabilities 58,355 53,013 56,025 Total Current Liabilities 149,646 130,425 149,197 Long-term portion of operating lease liabilities 306,987 314,974 313,302 Deferred income taxes 19,624 18,879 15,999 Deferred compensation 9,539 10,011 12,157 Other 781 848 4,123 Total Liabilities 486,577 475,137 494,778 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 87,921 90,371 84,576 Retained earnings 778,517 773,353 728,175 Treasury stock, at cost, 13,713,457 shares, 13,874,787 shares and 13,890,868 shares, respectively ( 213,267 ) ( 215,138 ) ( 215,357 ) Total Shareholders’ Equity 653,581 648,996 597,804 Total Liabilities and Shareholders’ Equity $ 1,140,158 $ 1,124,133 $ 1,092,582 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 May 3, 2025 Thirteen Weeks Ended May 4, 2024 Net sales $ 277,715 $ 300,365 Cost of sales (including buying, distribution and occupancy costs) 181,938 193,565 Gross profit 95,777 106,800 Selling, general and administrative expenses 83,812 84,293 Operating income 11,965 22,507 Interest income ( 1,103 ) ( 803 ) Interest expense 78 136 Income before income taxes 12,990 23,174 Income tax expense 3,647 5,888 Net income $ 9,343 $ 17,286 Net income per share: Basic $ 0.34 $ 0.64 Diluted $ 0.34 $ 0.63 Weighted average shares: Basic 27,233 27,142 Diluted 27,476 27,408 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 February 1, 2025 41,049 ( 13,875 ) $ 410 $ 90,371 $ 773,353 $ ( 215,138 ) $ 648,996 Dividends declared ($ 0.150 per share) ( 4,179 ) ( 4,179 ) Employee stock purchase plan purchases 3 8 40 48 Stock-based compensation awards 258 ( 4,004 ) 4,004 0 Shares surrendered by employees to pay taxes on stock-based compensation awards ( 99 ) ( 2,173 ) ( 2,173 ) Stock-based compensation expense 1,546 1,546 Net income 9,343 9,343 Balance at May 3, 2025 41,049 ( 13,713 ) $ 410 $ 87,921 $ 778,517 $ ( 213,267 ) $ 653,581 Balance at February 3, 2024 41,049 ( 13,919 ) $ 410 $ 83,738 $ 714,647 $ ( 215,406 ) $ 583,389 Dividends declared ($ 0.135 per share) ( 3,758 ) ( 3,758 ) Employee stock purchase plan purchases 1 19 20 39 Stock-based compensation awards 46 ( 717 ) 717 0 Shares surrendered by employees to pay taxes on stock-based compensation awards ( 19 ) ( 688 ) ( 688 ) Stock-based compensation expense 1,536 1,536 Net income 17,286 17,286 Balance at May 4, 2024 41,049 ( 13,891 ) $ 410 $ 84,576 $ 728,175 $ ( 215,357 ) $ 597,804 See notes to Condensed Consolidated Financial Statements. 5 SHOE CARNIVAL, INC. CONDENSED CONSOLIDAT ED STATEMENTS OF CASH FLOWS Unaudited (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Cash Flows From Operating Activities Net income $ 9,343 $ 17,286 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 8,335 7,385 Stock-based compensation 1,546 1,757 Loss on retirement and impairment of assets, net 596 117 Deferred income taxes 745 326 Non-cash operating lease expense 15,876 14,926 Other 317 277 Changes in operating assets and liabilities: Accounts receivable 272 ( 904 ) Merchandise inventories ( 42,819 ) ( 23,387 ) Operating leases ( 16,789 ) ( 14,916 ) Accounts payable and accrued liabilities 12,256 7,886 Other 685 6,306 Net cash (used in) provided by operating activities ( 9,637 ) 17,059 Cash Flows From Investing Activities Purchases of property and equipment ( 13,346 ) ( 10,192 ) Investments in marketable securities ( 678 ) ( 17 ) Acquisition, net of cash acquired 0 ( 44,577 ) Net cash used in investing activities ( 14,024 ) ( 54,786 ) Cash Flows From Financing Activities Proceeds from issuance of stock 48 39 Dividends paid ( 4,418 ) ( 3,705 ) Shares surrendered by employees to pay taxes on stock-based compensation awards ( 2,173 ) ( 688 ) Net cash used in financing activities ( 6,543 ) ( 4,354 ) Net decrease in cash and cash equivalents ( 30,204 ) ( 42,081 ) Cash and cash equivalents at beginning of period 108,680 99,000 Cash and cash equivalents at end of period $ 78,476 $ 56,919 Supplemental disclosures of cash flow information: Capital expenditures incurred but not yet paid $ 1,856 $ 813 Dividends declared but not yet paid $ 388 $ 332 Contingent consideration related to business acquisition $ 0 $ 3,600 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 sellers of footwear for the family, 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 sales channel. We offer customers a broad assortment of primarily branded dress and casual shoes, sandals, boots and athletic footwear and accessories for men, women and children with an emphasis on national name brands through our Shoe Carnival, Shoe Station and Rogan’s store fronts. 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 Rogan Shoes, Incorporated (“Rogan’s”), 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 February 1, 2025 . Note 2 - Acquisition of Rogan Shoes On February 13, 2 024, we acquired all of the stock of Rogan Shoes, Incorporated, a privately-held 53-year-old work and family footwear company incorporated in Wisconsin, for a purchase price of $ 44.8 million, net of $ 2.2 million of cash acquired, which was paid with cash on hand . This included $ 378,000 of purchase accounting adjustments which were paid in fourth quarter 2024. Additional consideration of up to $ 5.0 million may be paid by the Company subject to the achievement of three-year growth targets. At the time of the acquisition, Rogan’s operated 28 store locations in Wisconsin, Minnesota and Illinois. The Rogan’s acquisition advanced our strategy to be the nation’s leading family footwear retailer. It immediately positioned us as the market leader in Wisconsin, and it established a store base in Minnesota, creating additional expansion opportunities. Rogan’s results were included in our consolidated financial statements since the acquisition date. Net Sales from our Rogan’s operations were $ 19.0 million in the thirteen weeks ended May 3, 2025 and $ 19.6 million from February 13, 2024 through May 4, 2024. For the thirteen weeks ended May 4, 2024, acquisition-related costs of $ 321,000 were expensed as incurred and were included in Selling, General and Administrative Expenses (“SG&A”), compared to no acquisition-related costs included in SG&A in first quarter 2025. The following table summarizes the purchase price and the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed. We measured these fair values using Level 3 inputs. The excess purchase price over the fair value of net assets acquired was allocated to Goodwill. 7 (In thousands) Purchase price: Cash consideration, net of cash acquired $ 44,762 Fair value of contingent consideration 3,600 Total purchase price $ 48,362 Fair value of identifiable assets and liabilities: Accounts receivable $ 2,365 Merchandise inventories 42,340 Other assets 2,000 Operating lease right-of-use assets 16,891 Identifiable intangible assets: Trade name 7,500 Customer relationships 900 Goodwill 5,994 Total assets $ 77,990 Accounts payable 6,308 Operating lease liabilities 19,843 Deferred income taxes 974 Accrued and other liabilities 2,503 Total liabilities $ 29,628 Total fair value allocation of purchase price $ 48,362 Our fair value estimate of the Merchandise Inventories for Rogan’s was determined using the Comparative Sales and Replacement Cost methods. Our fair value estimate related to the identified intangible asset of Rogan’s trade name was determined using the Relief from Royalty method, and the significant assumptions used for the valuation include the royalty rate, estimated projected revenues, long-term growth rate and the discount rate. Our fair value estimates related to Rogan’s customer relationships were determined using the Multi-Period Excess Earnings method, and the significant assumptions used for the valuation include projected cash flows, the discount rate and customer attrition rate. Our fair value estimate of the contingent consideration for the Rogan’s acquisition was determined using a Monte Carlo simulation and other methods that account for the probabilities of various outcomes and was recorded in Other long-term liabilities. Significant assumptions used for the valuation include the discount rate, projected cash flows and calculated volatility. It will be remeasured on a recurring basis at fair value. Identifiable intangible assets include Rogan’s trade name and customer relationships. We assigned an indefinite life to Rogan’s trade name; therefore, Goodwill and Rogan’s trade name will be charged to expense only if impaired. Impairment reviews will be conducted at least annually and involve a comparison of fair value to the carrying amount. If fair value is less than the carrying amount, an impairment loss would be recognized in SG&A. Customer relationships are subject to amortization and will be amortized over a period of 20 years. Goodwill and the acquisition-related Intangible Assets are not deductible for tax purposes. 8 Note 3 - 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 May 3, 2025 May 4, 2024 (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 $ 9,343 27,233 $ 0.34 $ 17,286 27,142 $ 0.64 Diluted Net Income per Share: Net income $ 9,343 $ 17,286 Conversion of stock-based compensation arrangements 0 243 0 266 Net income available for diluted common shares and diluted net income per share $ 9,343 27,476 $ 0.34 $ 17,286 27,408 $ 0.63 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. During the thirteen weeks ended May 3, 2025 , approximately 10,000 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. No unvested stock-based awards that will be settled in shares were excluded from the computation of Diluted Net Income per Share for the thirteen weeks ended May 4, 2024 . Note 4 - Recently Issued Accounting Pronouncements In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The guidance requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in the ASU should be applied on a prospective basis, but retrospective application is permitted. We are continuing to evaluate the impact of this new guidance but believe the adoption will not have a material impact on our consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The guidance requires new financial statement disclosures in tabular format, disaggregating information about prescribed categories underlying any relevant income statement expense caption. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments in the ASU should be applied on a prospective basis, but retrospective application is permitted. The adoption will not have a material impact on our consolidated financial statements. 9 Note 5 - Fair Value Measurements Financial Instruments The following table presents financial instruments that are measured at fair value on a recurring basis at May 3, 2025, February 1, 2025 and May 4, 2024: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Total As of May 3, 2025 Cash equivalents - money market mutual funds $ 68,330 $ 0 $ 0 $ 68,330 Marketable securities - mutual funds that fund deferred compensation 14,477 0 0 14,477 Total $ 82,807 $ 0 $ 0 $ 82,807 As of February 1, 2025 Cash equivalents - money market mutual funds $ 95,963 $ 0 $ 0 $ 95,963 Marketable securities - mutual funds that fund deferred compensation 14,432 14,432 Total $ 110,395 $ 0 $ 0 $ 110,395 As of May 4, 2024 Cash equivalents - money market mutual funds $ 40,588 $ 0 $ 0 $ 40,588 Marketable securities - mutual funds that fund deferred compensation 12,555 12,555 Total $ 53,143 $ 0 $ 0 $ 53,143 We invest in publicly traded mutual funds with readily determinable fair values. These Marketable Securities are designed to mitigate volatility in our Consolidated Statements of Income associated with our non-qualified deferred compensation plan. As of May 3, 2025, these Marketable Securities were principally invested in equity-based mutual funds, consistent with the allocation in our deferred compensation plan. To the extent there is a variation in invested funds compared to the total non-qualified deferred compensation plan liability, such fund variance is managed through 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. Changes in these Marketable Securities and deferred compensation plan liabilities are charged to Selling, General and Administrative Expenses. Deferred Compensation Plan Liabilities and Related Marketable Securities The following tables present the balances and activity of the Company’s deferred compensation plan liabilities and related Marketable Securities: (In thousands) May 3, 2025 February 1, 2025 May 4, 2024 Deferred compensation plan current liabilities $ 4,266 $ 4,259 $ 183 Deferred compensation plan long-term liabilities 9,539 10,011 12,157 Total deferred compensation plan liabilities $ 13,805 $ 14,270 $ 12,340 Marketable securities - mutual funds that fund deferred compensation $ 14,477 $ 14,432 $ 12,555 (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Deferred compensation liabilities Employer contributions, net $ 114 $ 81 Investment (losses) earnings ( 436 ) 323 Marketable Securities Mark-to-market losses (gains) (1) 605 ( 308 ) Net deferred compensation expense $ 283 $ 96 (1) Included in the mark-to-market activity related to equity securities still held at quarter-end, we recognized an unrealiz ed loss of $ 94,000 and an unrealized gain of $ 292,000 for the thirteen weeks ended May 3, 2025 and May 4, 2024, respectively. 10 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 and Operating Lease Right-of-Use Assets, net of 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 weeks ended May 3, 2025 or the thirteen weeks ended May 4, 2024. Note 6 - Stock-Based Compensation Stock-based compensation includes share-settled awards issued pursuant to the Shoe Carnival, Inc. Amended and Restated 2017 Equity Incentive 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 May 3, 2025 and May 4, 2024, stock-based compensation expense was comprised of the following: (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Share-settled equity awards $ 1,537 $ 1,529 Stock appreciation rights 0 221 Employee Stock Purchase Plan 9 7 Total stock-based compensation expense $ 1,546 $ 1,757 Income tax effect at statutory rates $ ( 376 ) $ ( 427 ) Additional income tax expense (benefit) on vesting of share-settled awards $ 455 $ ( 109 ) As of May 3, 2025 , approximately $ 14.6 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 February 1, 2025 695,259 $ 29.71 Granted 416,031 21.64 Vested ( 258,225 ) 28.83 Forfeited ( 59,113 ) 29.47 Outstanding at May 3, 2025 793,952 $ 25.79 The total fair value at grant date of restricted stock units and performance stock units that vested during the thirteen weeks ended May 3, 2025 and May 4, 2024 was $ 7.4 million and $ 1.4 million, respectively. The weighted-average grant date fair value of restricted stock units and performance stock units granted during the thirteen weeks ended May 4, 2024 was $ 31.99 . 11 Note 7 – Revenue Disaggregation of Net Sales by Product Category Net Sales and percentage of Net Sales, disaggregated by product category, for the thirteen weeks ended May 3, 2025 and May 4, 2024 were as follows: (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Non-Athletics: Women’s $ 67,138 24 % $ 77,529 26 % Men’s 49,122 18 49,193 16 Children’s 19,119 7 21,395 7 Total 135,379 49 148,117 49 Athletics: Women’s 47,697 17 50,183 17 Men’s 50,101 18 52,149 17 Children’s 29,932 11 33,565 12 Total 127,730 46 135,897 46 Accessories 13,357 5 15,012 5 Other 1,249 0 1,339 0 Total $ 277,715 100 % $ 300,365 100 % 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 sales channel 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. 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 12 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 May 3, 2025, February 1, 2025 or May 4, 2024. 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 Inventories is reco rded as a reduction to Cost of Sales and an increase in Merchandise Inventories. Approximately $ 1.1 million of refund liabilities and $ 726,000 of right of return assets associated with estimated product returns were recorded in Accrued and Other Liabilities and Merchandise Inventories, respectively, as of May 3, 2025 and February 1, 2025. Approximately $ 962,000 of refund liabilities and $ 618,000 of right of return assets associated with estimated product returns were recorded in Accrued and Other Liabilities and Merchandise Inventories, respectively, at May 4, 2024. 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 May 3, 2025, February 1, 2025 and May 4, 2024 , approximately $ 2.0 million, $ 2.3 million and $ 2.7 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 weeks ended May 3, 2025 and May 4, 2024 , approximately $ 920,000 and $ 761,000 , respectively, of loyalty rewards were recognized in Net Sales. At May 3, 2025, February 1, 2025 and May 4, 2024 , approximately $ 630,000 , $ 564,000 and $ 501,000 , 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. Note 8 – Segment Reporting Shoe Carnival, Inc. has a single operating and reportable segment that sells footwear and related merchandise for the family across our retail banners and sales channels. With respect to our omnichannel strategy, our e-commerce sales channel is integrated with our Shoe Carnival, Shoe Station and Rogan’s physical store locations across 35 states and Puerto Rico and is fundamentally inseparable in how we serve our target customers. Our chief operating decision maker (“CODM”) is our President and Chief Executive Officer . The CODM assesses performance and decides how to allocate resources based on Net Income that also is reported on the income statement as our consolidated Net Income. The CODM uses Net Income to evaluate performance in deciding whether to reinvest profits, facilitate acquisitions or return funds to shareholders through dividends or share repurchases. Net Income is used to monitor budget versus actual results and in competitive analysis by benchmarking to our peers and competitors. The benchmarking analysis and the monitoring of budgeted versus actual results are used in assessing our performance and in establishing management’s compensation. We have concluded that, on the basis of the principles in FASB ASU 2023-07, Segment Reporting (Topic 280), the expenses below require disclosure under the significant expense principle. The CODM does not review assets in evaluating results. Therefore, such 13 information is not provided. Operating financial results of our segment for the thirteen weeks ended May 3, 2025 and May 4, 2024 were as follows: (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Net sales $ 277,715 $ 300,365 Less: Merchandise & delivery costs (1) 158,845 171,535 Store occupancy costs 23,093 22,030 Store expenses (2) 39,486 40,485 E-commerce expenses (3) 4,357 4,771 Advertising 11,100 11,925 Store depreciation and other selling expenses (4) 10,645 9,547 General and administrative expenses (5) 18,224 17,565 Interest income ( 1,103 ) ( 803 ) Interest expense 78 136 Income tax expense 3,647 5,888 Net income $ 9,343 $ 17,286 (1) Merchandise & delivery costs include the cost of merchandise and other buying and distribution costs. (2) Store expenses include selling expenses generally controlled operationally at the store level, such as store level payroll. (3) E-commerce expenses include primarily website maintenance costs and other selling expenses. (4) Other selling expenses include store-related health care, other insurance, licensing/tax costs and Property and Equipment write-offs. (5) General and administrative expenses include departmental and corporate expenses, including incentive and share-based compensation and merger and integration expenses. Note 9 – Leases We lease all of our physical stores, our Evansville, Indiana distribution center, which has a current lease term expiring in 2034 , our Fort Mill, South Carolina corporate headquarters and other warehousing space. We also enter into leases of equipment and other assets. Substantially all of our leases are operating leases; however, as a result of the acquisition of Rogan’s, we also acquired certain assets subject to finance leases. The finance lease assets and related current liabilities and noncurrent liabilities were recorded in Other Noncurrent Assets, Accrued and Other Liabilities and Other long-term liabilities, respectively. 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 or any sublease arrangements with any related party or third party as of May 3, 2025, February 1, 2025 or May 4, 2024. Lease costs, including other related occupancy costs, reported in our Condensed Consolidated Statements of Income were as follows for the thirteen weeks ended May 3, 2025 and May 4, 2024: (In thousands) Thirteen Weeks Ended May 3, 2025 Thirteen Weeks Ended May 4, 2024 Operating lease cost $ 17,891 $ 17,175 Variable lease cost Occupancy costs 5,885 5,760 Percentage rent and other variable lease costs 272 ( 35 ) Finance lease cost Amortization of leased assets 8 7 Interest on lease liabilities 3 3 Total $ 24,059 $ 22,910 14