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Item 8. Financial Statements and Supplementary Data

2021-03-26 compared with 2020-03-31 · 269 added, 300 removed, 472 unchanged (55% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears beginning on page 40.

FINANCIAL STATEMENTS

The information required by this item follows Deloitte & Touche LLP’s audit opinion, which begins on the following page.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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We have audited the accompanying consolidated balance sheets of Shoe Carnival, Inc.

and subsidiaries (the "Company") as of February 1, 2020 and February 2, 2019, the related consolidated statements of income, shareholders’ equity, and cash flows, for each of the three years in the period ended February 1, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

and subsidiaries (the "Company") as of January 30, 2021 and February 1, 2020, the related consolidated statements of income, shareholders’ equity, and cash flows, for each of the three years in the period ended January 30, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, effective February 3, 2019, the Company adopted Accounting Standards Codification Topic No.

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No.

842, Leases (ASC 842).

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Merchandise Inventories — Refer to Note 2 to the financial statements

Critical Audit Matter Description

Merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.

Factors considered in determining if inventory is properly stated at the lower of cost or net realizable value include, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of

various styles held in inventory, seasonality of merchandise, expected consideration to be received from vendors and current and expected future sales trends.

The Company reduces the value of inventory to its estimated net realizable value where cost exceeds the estimated future selling price.

Given the significant judgments made by management to estimate the net realizable value of inventory, such as expected consideration to be received from vendors and current and expected future sales trends, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the significant judgments made by management to determine net realizable value of inventory included the following procedures, among others:

We tested the effectiveness of the Company’s internal control over the valuation of inventory, including the review and determination of the anticipated net realizable value of merchandise inventories compared to the cost value of inventory on-hand.

We tested the recorded inventory reserve by developing an expectation based on the prior year inventory reserve balance relative to the merchandise inventory balance at the prior year balance sheet date and compared it to the actual reserve recorded in the current year.

We evaluated the reasonableness of management’s determination of the net realizable value of inventory by:

Testing the accuracy of source data used in the calculation, including inventory on hand, aging of inventory, historical losses by product category, sales prices and consideration received from vendors.

Evaluating terms and supporting documentation for consideration expected to be received from vendors.

Recalculating the projected loss for inventory on hand based on the source data used in the calculation.

Making inquiries of management, including merchandise buyers, regarding current and expected future sales trends, and evaluating external communications by analysts.

Evaluating management’s ability to accurately forecast future sales trends by comparing actual results to management’s historical forecasts.

We evaluated management’s ability to accurately project inventory losses by comparing actual results to management’s historical estimates.

/s/ Deloitte & Touche LLP

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Long-term portion of operating lease liabilities

Deferred lease incentives

Deferred compensation

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(In thousands)

Balance at January 28, 2017

Balance at February 3, 2018

Adoption of Accounting Standards

Stock option exercises

Codification 606

Dividends ($ 0.315 per share)

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Balance at February 1, 2020

Adoption of Accounting Standards

Codification 842

Dividends ($ 0.355 per share)

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taxes on restricted stock

Purchase of common stock for Treasury

Stock-based compensation expense

Balance at February 1, 2020

Balance at January 30, 2021

See notes to consolidated financial statements.

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Net cash used in investing activities

Cash Flow From Financing Activities

Cash Flows From Financing Activities

Borrowings under line of credit

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Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

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Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31.

Unless otherwise stated, references to years 2019, 2018 and 2017 relate to the fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018, respectively.

Fiscal year 2017 consisted of 53 weeks and the other fiscal years consisted of 52 weeks.

Unless otherwise stated, references to years 2020, 2019 and 2018 relate to the fiscal years ended January 30, 2021, February 1, 2020 and February 2, 2019, respectively.

Basis of Presentation

In the first quarter of fiscal 2018, we a dopted new revenue guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No.

606 – Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective transition approach.

At adoption, w e recorded a net increase in retained earnings of $ 620,000 as a cumulative effect of the adoption based on our evaluation of incomplete contracts involving our e-commerce transactions and our gift card program as of the adoption date.

We elected the practical expedient to treat shipping and handling activities associated with freight charges that occur after control of the product transfers to the customer as fulfillment activities.

These costs are expensed as incurred and included in cost of sales in our consolidated statements of income.

We also elected the practical expedient for sales tax collected, which allows us to exclude from our transaction price any amounts collected from customers for sales tax and other similar taxes.

There were no changes to our comparative reporting of shipping and handling costs included in cost of sales or accounting for sales tax as a result of the adoption of ASC 606.

The adoption of this guidance in fiscal 2018 did not have a material impact on our consolidated balance sheets, consolidated statements of income or our consolidated statements of cash flows.

In the first quarter of fiscal 2019, we adopted new lease accounting guidance under ASC Topic No.

842 – Leases (“ASC 842”).

We adopted ASC 842 using the effective date as the date of initial application;

therefore, the comparative period of fiscal 2018 on our consolidated statement of income has not been adjusted and is reported under the previous lease guidance.

The adoption of this guidance in fiscal 2019 had a material impact on our consolidated balance sheets but did not have a material impact on our consolidated statements of income or our consolidated statements of cash flows.

At adoption, initial recognition of operating lease liabilities totaled $ 251.7 million as of February 3, 2019.

We recorded corresponding Right-of-Use (“ROU”) assets based on the operating lease liabilities, reduced by net accrued rent, unamortized deferred lease incentives and prepaid rent totaling $ 25.8 million.

Moreover, as of the adoption date, we recorded $ 2.6 million of lease-related capitalized costs to beginning retained earnings, net of tax, that did not meet the definition of initial direct costs in accordance with the new guidance .

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Risk and Uncertainties Associated with the COVID-19 Pandemic

Our operations have been significantly disrupted by the outbreak of a novel strain of coronavirus (“COVID-19”).

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

Government, as well as the vast majority of states and local municipalities, have taken unprecedented measures to control the spread of COVID-19 and to provide stimulus as a mitigating measure to deteriorating economic conditions and increasing unemployment.

The COVID-19 pandemic began significantly impacting our operations, sales and costs beginning in the first quarter of fiscal 2020.

Impacts included the temporary closure of our physical stores effective March 19, 2020, reduced foot traffic and sales, deteriorating economic conditions for our customer base, and some disruption to our global supply chain.

We began reopening physical stores in accordance with applicable public health guidelines in late April 2020.

By the beginning of the second quarter of fiscal 2020, approximately 50 % of our stores were reopened, and by early June , substantially all of our stores had reopened.

Our e-commerce platform has been fully operational during the pandemic, with e-commerce orders generally fulfilled by our store locations.

As of January 30, 2021, we do not have any stores closed due to the pandemic.

As the COVID-19 pandemic continues to impact the retail sector, we remain focused on protecting the health and safety of our customers and associates and continue to work with our vendors to mitigate any potential ongoing disruption.

Furthermore, as the pandemic has had a significant impact on our financial performance in fiscal 2020, we evaluated this impact on the related accounting estimates and assumptions used in the preparation of our consolidated financial statements, including, but not limited to, assumptions and estimates related to impairments of long-lived assets, leases, inventory valuation, self-insurance reserves and income taxes.

The COVID-19 pandemic will likely continue to impact our financial condition and results of operations for the foreseeable future.

Use of Estimates in the Preparation of Consolidated Financial Statements

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Cash and Cash Equivalents

We had cash and cash equivalents of $61.9 million at February 1, 2020 and $67.0 million at February 2, 2019.

Credit and debit card receivables and receivables due from a third party totaling $10.0 million and $8.2 million were included in cash equivalents at February 1, 2020 and February 2, 2019, respectively.

We had cash and cash equivalents of $ 106.5 million at January 30, 2021 and $ 61.9 million at February 1, 2020.

Credit and debit card receivables and receivables due from a third party totaling $ 5.3 million and $ 10.0 million were included in cash equivalents at January 30, 2021 and February 1, 2020, respectively.

Credit and debit card receivables generally settle within three days ;

receivables due from a third party generally settle within 15 days.

receivables due from third parties generally settle within five business days.

We consider all short-term investments with an original maturity date of three months or less to be cash equivalents.

As of February 1, 2020 and February 2, 2019, all invested cash was held in money market mutual funds.

As of January 30, 2021 and February 1, 2020, all invested cash was held in money market mutual funds.

While investments are not considered by management to be at significant risk, they could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.

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Notes to Consolidated Financial Statements - continued

The three levels of the fair value hierarchy are described as foll ows:

The three levels of the fair value hierarchy are described as follows:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

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The stated value of merchandise inventories contained on our consolidated balance sheets also includes freight, certain capitalized overhead costs and reserves.

Factors considered in determining if our inventory is properly stated at the lower of cost or net realizable value includes, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of various styles held in inventory, seasonality of merchandise, expected consideration to be received from our vendors and current and expected future sales trends.

Factors considered in determining if our inventory is properly stated at the lower of cost or net realizable value include, among others, recent sale prices, the length of time merchandise has been held in inventory, quantities of various styles held in inventory, seasonality of merchandise, expected consideration to be received from our vendors and current and expected future sales trends.

We also review aging trends, which include the historical rate at which merchandise has sold below cost and the value and nature of merchandise currently held in inventory and priced below original cost.

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Cost of sales includes the cost of merchandise sold, buying, distribution, and occupancy costs, inbound freight expense, provision for inventory obsolescence, inventory shrink and credits and allowances from merchandise vendors.

Cost of sales related to our e-commerce orders include charges paid to a third-party service provider in addition to the freight expense for delivering merchandise to our customer.

We lease our retail stores and our single distribution center, which has a current lease term of 15 years, expiring in 2034.

We also enter into leases of equipment, copiers and billboards.

Prior to the purchase of our corporate headquarters in fiscal 2019, it was also leased.

All of our leases are operating leases.

Therefore, how operating leases are recognized throughout the financial statements in accordance with applicable accounting guidance can have a significant impact on our financial condition and results of operations and related disclosures.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which replaced most existing lease accounting guidance.

This guidance requires an entity to recognize leased assets (“right-of-use” assets or “ROU” assets) and obligations created by those leased assets on the balance sheet at their present values and to disclose key information about the entity's leasing arrangements.

This new guidance was codified as Accounting Standards Codification Topic No.

842 – Leases (“ASC 842”) .

ASC 842 became effective for us on February 3, 2019.

We adopted ASC 842 using the effective date as the date of initial application;

therefore, the comparative periods as of February 1, 2019 and for the years ended in fiscal 2018 and fiscal 2017 have not been adjusted and continue to be reported under the previous lease guidance as described in ASC 840.

ASC 840 did not require recognition of ROU assets and related lease liabilities associated with operating leases.

Therefore, the adoption of this guidance had a material impact on our consolidated balance sheet but did not have a material impact on our consolidated statements of income or our consolidated statements of cash flow.

Cost of sales related to our e-commerce orders include freight expense for delivering merchandise to our customers.

In fiscal 2018 and fiscal 2019, cost of sales also include fees paid to a third-party service provider.

We evaluate whether a contract is an operating or finance lease at its inception.

All of our leases are classified as operating leases as of January 30, 2021.

Leases with terms of twelve months or less were not significant and we have elected to expense them as incurred.

On the lease commencement date, we recognize a ROU asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.

As the rate implicit in our leases is not readily determinable, we utilize an incremental borrowing rate for the initial measurement of ROU assets and liabilities, which is determined through the development of a synthetic credit rating.

For leases existing before the adoption of ASC 842, we used an incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption.

For leases commencing on or after the adoption of ASC 842, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Under the new guidance, companies may elect certain optional practical expedients.

We elected the practical expedient that permits us not to recognize ROU assets and related liabilities that arise from short-term leases (i.e.

leases with terms of twelve months or less).

W e elected the practical expedient that permits us to account for lease and non-lease components as a single lease component for new and m odified leases, effective upon adoption of the new guidance.

We did not elect the transition practical expedient that permit companies to use hindsight when determining lease ter m and impairment of ROU assets.

We also did not elect the transition package of practical expedients that is permitted by the guidance;

therefore, we were required to reassess previous accounting conclusions regarding whether existing arrangements are , or contain , leases, the classification of existing leases and the treatment of initial direct costs.

At adoption, initial recognition of operating lease liabilities totaled $251.7 million as of February 3, 2019.

We recorded corresponding operating lease ROU assets based on the operating lease liabilities, reduced by net accrued rent, unamortized deferred lease incentives and prepaid rent totaling $25.8 million.

Moreover, as of the adoption date, we recorded $2.6 million of lease-related capitalized costs to beginning retained earnings, net of tax, that did not meet the definition of initial direct costs in accordance with the new guidance.

Operating lease liabilities are increased by interest and reduced by payments each period, and ROU assets are amortized over the lease term.

Interest on operating lease liabilities and the amortization of ROU assets results in straight-line rent expense over the lease term.

We record variable lease expense associated with contingent rent, reduced rent due to co-tenancy violations, and other variable non-lease components when incurred.

In addition to fixed minimum rental payments set forth in our leases, the measurement of ROU assets and liabilities can also include prepaid rent, landlord incentives (such as construction and tenant improvement allowances), fixed payments related to lease components (such as rent escalation payments scheduled at the lease commencement date), fixed payments related to non-lease components (such as taxes, insurance, and common area maintenance (“CAM”)) and initial direct costs incurred in conjunction with securing a lease.

The measurement of ROU assets and liabilities excludes amounts related to variable payments related to lease components (such as contingent rent payments based on performance), variable payments related to non-lease components (such as real estate taxes, insurance and CAM) and non-store related leases with an initial term of 12 months or less.

For new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms.

These estimates and assumptions can impact:

(1) lease classification and the related accounting treatment;

(2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense;

(3) the term over which leasehold improvements for each store are amortized;

and (4) the values and lives of adjustments to initial ROU assets.

The amount of amortized rent expense would vary if different estimates and assumptions were used.

See Note 8 – “Leases” for additional discussion of our lease policies as well as additional disclosures related to our leases.

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The redemption of loyalty points under our Shoe Perks loyalty rewards program and redemptions of gift cards are accounted for as separate performance obligations.

We adopted and applied the new revenue guidance in Accounting Standards Codification Topic No.

606 – Revenue from Contracts with Customers (“ASC 606”) as of February 4, 2018 using the modified retrospective transition approach.

Based on this approach, the consolidated financial statements for fiscal 2017 were not restated and are reported under the prior revenue guidance.

At adoption, we elected the practical expedient to treat shipping and handling activities associated with freight charges that occur after control of the product transfers to the customer as fulfillment activities.

These costs are expensed as incurred and included in cost of sales in our consolidated statements of income.

We also elected the practical expedient for sales tax collected, which allows us to exclude from our transaction price any amounts collected from customers for sales tax and other similar taxes.

There were no changes to our comparative reporting of shipping and handling costs included in cost of sales or accounting for sales tax as a result of the adoption of ASC 606.

See Note 4 – “Revenue” for additional discussion of our revenue recognition policies as well as additional disclosures on revenue from contracts with customers.

Property and Equipment- Net

Property and equipment is stated at cost.

Depreciation and amortization of property, equipment and leasehold improvements are taken on the straight-line method over the shorter of the estimated useful lives of the assets or the applicable lease terms.

Property and equipment is stated at cost and is depreciated or amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the applicable lease terms.

Lives used in computing depreciation and amortization range from two to twenty-five years.

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We amortize the costs over the related service contract period for the hosted arrangement.

For fiscal 2019, the amortization of the implementation costs and the related service contract fees are included in selling, general and administrative expenses.

For fiscal 2020 and fiscal 2019, the amortization of the implementation costs and the related service contract fees are included in selling, general and administrative expenses.

Shoe Carnival, Inc.

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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.

Store level asset groupings typically include property and equipment and operating lease ROU assets.

If the estimated, undiscounted future cash flows for a store are determined to be less than the carrying value of the store’s assets, an impairment loss is recorded for the difference between estimated fair value and carrying value.

Assets subject to impairment are adjusted to estimated fair value and, if applicable, an impairment loss is recorded in selling, general and administrative expenses.

If the operating lease 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.

If the operating lease ROU asset is impaired, we would amortize the remaining ROU asset on a straight-line basis over the remaining lease term.

We estimate the fair value of our long-lived assets using store specific cash flow assumptions discounted by a rate commensurate with the risk involved with such assets while incorporating marketplace assumptions.

Our estimates are derived from an income-based approach considering the cash flows expected over the remaining lease term for each location.

These projections are primarily based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance.

We estimate the fair value of operating right-of-use assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term.

These projections are primarily based on management’s estimates of store-level sales, exercise of future lease renewal options and the store’s contribution to cash flows and, by their nature, include judgments about how current initiatives will impact future performance.

We estimate the fair value of operating ROU assets using the market value of rents applicable to the leased asset, discounted using the remaining lease term.

External factors, such as the local environment in which the store resides, including store traffic and competition, are evaluated in terms of their effect on sales trends.

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These estimates take into consideration a number of factors, including historical claims experience, severity factors, statistical trends and, in certain instances, valuation assistance provided by independent third parties.

As of February 1, 2020 and February 2, 2019, our self-insurance reserves totaled $2.7 million and $3.4 million, respectively.

We record self-insurance expense as a component of selling, general and administrative expenses in our consolidated statements of income.

We record self-insurance expense as a component of Accrued and other liabilities in our consolidated balance sheets and in selling, general and administrative expenses in our consolidated statements of income.

While we believe that the recorded amounts are adequate, there can be no assurance that changes to management’s estimates will not occur due to limitations inherent in the estimating process.

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For consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale.

Should the consideration received be related to something other than the vendor’s product and such consideration received exceeds the incremental costs incurred, then the excess consideration is recorded as a reduction to the cost of on-hand inventory and allocated to cost of sales in future periods utilizing an average inventory turn rate.

Should the consideration received be related to something other than the vendor’s product and such

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

consideration received exceeds the incremental costs incurred, then the excess consideration is recorded as a reduction to the cost of on-hand inventory and allocated to cost of sales in future periods utilizing an average inventory turn rate.

Advertising Costs

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Stock-Based Compensation

We recognize compensation expense for stock-based awards based on a fair value based method.

Stock-based awards may include stock units, restricted stock, stock appreciation rights, stock options and other stock-based awards under our stock-based compensation plans.

We recognize compensation expense for stock-based awards using a fair value based method.

Stock-based awards may include stock units, restricted stock, stock appreciation rights and other stock-based awards under our stock-based compensation plans.

Additionally, we recognize stock-based compensation expense for the discount on shares sold to employees through our employee stock purchase plan.

This discount represents the difference between the market price and the employee purchase price.

Stock-based compensation expense is included in selling, general and administrative expense.

Stock-based compensation expense is included in selling, general and administrative expenses.

We account for forfeitures as they occur in calculating stock-based compensation expense for the period.

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We recognize interest expense and penalties, if any, related to uncertain tax positions in income tax expense.

On December 22, 2017, the U.S.

government enacted the U.S.

Tax Cuts and Jobs Act (the “Tax Act”), which made significant changes to the Internal Revenue Code of 1986, as amended, including, but not limited to, reducing the U.S.

corporate statutory tax rate from 35% to 21%, and eliminating or limiting deduction of several expenses which were previously deductible.

In connection with the Tax Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act.

SAB 118 provided a measurement period of one year from the Tax Act’s enactment date for companies to complete their accounting under the income tax guidance.

For our initial analysis of the impact of the Tax Act, we recorded additional income tax expense of $4.4 million in fiscal 2017, which was related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future.

We also calculated our fiscal 2017 income tax expense using a blended rate of 33.7%, which is based on the applicable tax rates before and after the Tax Act and the number of days in the fiscal year that the respective tax rates were in effect.

We determined that these provisions were the only provisions of the Tax Act that impacted fiscal 2017 results.

In fiscal 2018 we filed our fiscal 2017 federal income tax return and completed our assessment of the final impact of the Tax Act and recorded an income tax benefit of $0.1 million.

Shoe Carnival, Inc.

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Fiscal Year Ended

February 1, 2020

January 30, 2021

February 1, 2020

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Basic Net Income per Share:

Amount allocated to participating

Conversion of share-based

compensation arrangements

Net income available for basic

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Diluted Net Income per Share:

Amount allocated to participating

Adjustment for dilutive potential

common shares

Conversion of share-based

compensation arrangements

Net income available for diluted

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net income per share

Our basic and diluted net income per share are computed using the two-class method.

The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses.

Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities.

Per share amounts are computed by dividing net income available to common shareholders by the weighted average shares outstanding during each period.

No options to purchase shares of common stock were excluded in the computation of diluted shares for the periods presented.

The computation of basic net income per share of common stock 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 restricted stock awards, restricted stock units and performance stock units.

A small portion of these awards that were outstanding at the beginning of fiscal 2020, and vested during fiscal 2020, had a non-forfeitable right to dividends.

The computation of diluted net income per share excluded approximately 2,000 unvested share-settled awards for fiscal 2020 because the impact would be anti-dilutive.

For the other periods presented, all unvested share-settled equity awards were dilutive.

Note 3 – Fair Value of Financial Instruments

The following table presents financial instruments that are measured at fair value on a recurring basis at February 1, 2020 and February 2, 2019:

The following table presents financial instruments that are measured at fair value on a recurring basis at January 30, 2021 and February 1, 2020:

Fair Value Measurements

(In thousands)

As of February 1, 2020:

Cash equivalents – money market mutual funds

As of January 30, 2021:

Cash equivalents – money market account

As of February 1, 2020:

Cash equivalents – money market mutual funds

The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Cash equivalents – money market account

The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Shoe Carnival, Inc.

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Accounting Policy and Performance Obligations

We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our brick-and-mortar stores or shopping online through our e-commerce and mobile platforms.

As part of our multi-channel 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.

We operate as a multi-channel, family footwear retailer and provide the convenience of shopping at our physical stores or shopping online through our e-commerce platform.

As part of our multi-channel strategy, we 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 brick-and-mortar 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 Shoes 2U when customers choose to pick up their goods in-store.

For sales made through our e-commerce site or mobile app in which the customer chooses home delivery, we transfer control and recognize revenue when the product is shipped from our stores or distribution center.

This also includes Shoes 2U when the customer chooses home delivery.

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.

We offer our customers sales incentives including coupons, discounts, and free merchandise.

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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 within a limited period of time.

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.

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Notes to Consolidated Financial Statements - continued

Our brick-and-mortar stores accept various forms o f payment from customers at the point of sale.

Our physical stores accept various forms of payment from customers at the point of sale.

These include cash, checks, credit/debit cards and gift cards.

Our e-commerce and mobile platforms accept credit/debit cards, PayPal, Apple Pay and gift cards as forms of payment.

Our e-commerce platform accepts credit/debit cards, PayPal, Apple Pay, Klarna and gift cards as forms of payment.

Payments made for products are generally collected when control passes to the customer, either at the point of sale or at the time the customer order is shipped.

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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 re lated to Shoes 2U was not material to our consolidated financial statements at February 1, 2020 and February 2, 2019 .

Unearned revenue related to Shoes 2U was not material to our consolidated financial statements at January 30, 2021 and February 1, 2020.

Returns and Refunds

Brick-and-mortar and online customers can exchange or return products for a refund within a limited period of time.

We have established a returns allowance based upon historical experience in order to estimate these transactions.

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.

At February 1, 2020, approximately $718,000 of refund liabilities and $500,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheet.

At February 2, 2019, approximately $600,000 of refund liabilities and $410,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheet.

At January 30, 2021, approximately $ 740,000 of refund liabilities and $ 495,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheets.

At February 1, 2020, approximately $ 718,000 of refund liabilities and $ 500,000 of right of return assets associated with estimated product returns were recorded in our consolidated balance sheets.

Contract Liabilities

We sell gift cards in our brick-and-mortar stores and through our e-commerce and mobile platforms.

Gift card purchases are recorded as an increase to contract liabilities at the time of purchase and a decrease to contract liabilities when a customer redeems a gift card.

When a gift card is issued, the issuance is recorded as an increase to contract liabilities at the time of issuance and a decrease to contract liabilities when a customer redeems a gift card.

Estimated breakage is determined based on historical breakage percentages and recognized as revenue based on expected gift card usage.

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

At February 1, 2020 and February 2, 2019, approximately $1.5 million and $1.6 million of contract liabilities associated with unredeemed gift cards were recorded in our consolidated balance sheets, respectively.

At January 30, 2021 and February 1, 2020, approximately $ 1.7 million and $ 1.5 million of contract liabilities associated with unredeemed gift cards were recorded in our consolidated balance sheets, respectively.

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

Breakage revenue associated with our gift cards of $143,000 and $179,000 was recognized in net sales during fiscal 2019 and fiscal 2018, respectively.

Breakage revenue associated with our gift cards recognized in net sales was $ 132,000 , $ 143,000 and $ 179,000 during fiscal years 2020, 2019 and 2018, respectively.

Our Shoe Perks rewards program allows customers to accrue points and provides customers with the opportunity to earn rewards.

Points under Shoe Perks are earned primarily by making purchases either in-store or through our online platform.

Once a certain threshold of accumulated points is reached, the customer earns a reward certificate, which is redeemable at any of our stores or online.

Points under Shoe Perks can be earned by making purchases through any of our multi-channel 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.

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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 fiscal 2019 and 2018, approximately $2.4 million and $1.5 million, respectively, of loyalty rewards were recognized in net sales.

At February 1, 2020 and February 2, 2019, approximately $679,000 and $245,000 of contract liabilities associated with loyalty rewards were recorded in our consolidated balance sheets, respectively.

Loyalty awards recognized in net sales were $ 4.4 million, $ 2.4 million and $1.5 million during fiscal years 2020, 2019 and 2018, respectively.

At January 30, 2021 and February 1, 2020, approximately $ 755,000 and $ 679,000 of contract liabilities associated with loyalty rewards were recorded in our consolidated balance sheets, respectively.

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

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Property and equipment – net

In fiscal 2019, we recorded an impairment charge of $1.2 million on long-lived assets held and used, which was included in selling, general and administrative expenses for the period.

Subsequent to this impairment, these long-lived assets had no remaining unamortized basis.

Total depreciation expense associated with property and equipment was $ 14.8 million in fiscal 2020, $ 16.8 million in fiscal 2019 and $ 21.8 million in fiscal 2018.

In fiscal 2020 and fiscal 2019, we recorded impairment charges of $ 3.1 million and $ 1.2 million on long-lived assets held and used, respectively.

There were no impairments of long-lived assets recorded during fiscal 2018.

In fiscal 2017, we recorded an impairment charge of $5.1 million on long-lived assets held and used, which was included in selling, general and administrative expenses for the period.

Subsequent to this impairment, these long-lived assets had a remaining unamortized basis of $4.7 million.

We have engaged several third party providers of cloud computing arrangements that are service contracts to host our Customer Relationship Management (“CRM”) platform and our transportation, warehouse and e-commerce order management systems.

Total gross capitalized costs as of February 1, 2020 and February 2, 2019 were $8.1 million and $1.2 million, respectively, for these arrangements.

Accumulated amortization totaled $122,000 at February 1, 2020 and was $0 at February 2, 2019.

Total amortization expense was $122,000 during fiscal year 2019.

As of February 1, 2020, $713,000 is classified in Other current assets and $7.3 million is classified as Other noncurrent assets in our consolidated balance sheet, net of accumulated amortization.

Impairment charges are included in selling, general and administrative expenses in our consolidated statements of income.

In fiscal 2019, we engaged third-party providers to host our customer relationship management (“CRM”) platform, merchandise financial planning platform and our transportation, warehouse and order management systems.

These platforms are cloud computing arrangements that are software-as-a-service (“SaaS”) contracts.

Net capitalized costs related to cloud computing arrangements as of January 30, 2021 and February 1, 2020 were $ 14.2 million and $ 8.0 million, respectively.

Total amortization expense related to these arrangements was $ 1.3 million during fiscal year 2020 and $ 122,000 during fiscal year 2019.

No amortization expense was recorded in fiscal 2018.

As of January 30, 2021, approximately $ 3.0 million of net capitalized costs related to cloud computing arrangements were classified in other current assets and $ 11.2 million were classified as other noncurrent assets in our consolidated balance sheets.

As of February 1, 2020, approximately $ 713,000 of net capitalized costs related to cloud computing arrangements was classified in other current assets and $ 7.3 million was classified as other noncurrent assets in our consolidated balance sheets.

Note 6 – Accrued and Other Liabilities

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Total accrued and other liabilities

Note 7 – Debt

On March 27, 2017 we entered into a second amendment of our current unsecured credit agreement (the “Credit Agreement”) to extend the expiration date by five years and renegotiate certain terms and conditions.

The Credit Agreement, as amended, continues to provide for up to $50.0 million in cash advances and commercial and standby letters of credit with borrowing limits based on eligible inventory, which amount may be increased from time to time by up to an additional $50 million, if certain conditions are met.

These conditions include consent from the current lenders if additional capacity is sought from those lenders.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

T he Credit Agreement contain s covenants which stipulate:

Note 7 – Debt

On April 16, 2020, we entered into a third amendment (the “Third Amendment”) of our existing credit agreement (the “Credit Agreement”).

Pursuant to the Third Amendment, we (1) exercised the full $ 50 million accordion feature, which increased the revolving commitment under the Credit Agreement from $ 50 million to $ 100 million, and increased the swing line sublimit from $ 10 million to $ 15 million;

(2) granted a security interest in our inventory to the lenders;

and (3) increased the maximum ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense from 2.5 to 1.0 to 3.0 to 1.0.

In addition, the Third Amendment, among other things, increased certain LIBOR margins applicable to borrowings under the Credit Agreement, increased the commitment fee charged on the unused portion of the lenders’ commitment and made customary updates to certain representations, covenants and other terms contained in the Credit Agreement.

On July 20, 2020, we entered into a fourth amendment (the “Fourth Amendment”) to our Credit Agreement.

Pursuant to the Fourth Amendment, we (1) eliminated the covenant involving the ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense for the fiscal quarters ending on or about July 31, 2020;

October 31, 2020;

and January 31, 2021;

(2) amended the definition of LIBOR to establish a minimum LIBOR rate of 0.75% per annum;

and (3) established increased reporting requirements to the lenders through January 31, 2021.

The Credit Agreement, as amended, contains covenants which stipulate:

(1) Total Shareholders’ Equity (as defined in the Credit Agreement) will not fall below $250.0 million at the end of each fiscal quarter;

(2) the ratio of funded debt plus three times rent to EBITDA (as defined in the Credit Agreement) plus rent will not exceed 2.5 to 1.0;

(2) the ratio of funded debt plus three times rent expense to EBITDA (as defined in the Credit Agreement) plus rent expense will not exceed 3.0 to 1.0, except for the fiscal quarters ending on or about July 31, 2020;

October 31, 2020;

and January 31, 2021;

(3) the aggregate amount of cash dividends for a fiscal year will not exceed $10.0 million;

and (4) d istributions in the form of redemptions of Equity Interests (as defined in the Credit Agreement) can be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the Credit Agreement .

and (4) distributions in the form of redemptions of Equity Interests (as defined in the Credit Agreement) can be made solely with cash on hand so long as before and immediately after such distributions there are no revolving loans outstanding under the Credit Agreement.

Should a default condition be reported, the lenders may preclude additional borrowings and call all loans and accrued interest at their discretion.

No borrowings were outstanding as of February 1, 2020 and February 2, 2019.

As of February 1, 2020 , there were $ 1.2 million in letters of credit outstanding a nd $ 48.8 million available to us for borrowing under the Credit Agreement.

We were in compliance with these covenants at January 30, 2021.

The credit facility bears interest, at our option, at (1) the agent bank’s prime rate as defined in the Credit Agreement plus 1.0%, with the prime rate defined as the greater of (a) the Federal Fund rate plus 0.50% or (b) the interest rate announced from time to time by the agent bank as its “prime rate” or (2) LIBOR plus 1.50% to 2.50%, depending on our achievement of certain performance criteria.

A commitment fee is charged at 0.20% to 0.35% per annum, depending on our achievement of certain performance criteria, on the unused portion of the bank group’s commitment.

If the stated LIBOR rate is less than 0.75%, the LIBOR rate for purposes of calculating the interest rate under the credit facility shall be 0.75%.

A commitment fee is charged at 0.30 % to 0.40 % per annum, depending on our achievement of certain performance criteria, on the unused portion of the lenders’ commitment.

The Credit Agreement expires on March 27, 2022 .

No borrowings were outstanding under the Credit Agreement as of January 30, 2021 and February 1, 2020.

The maximum borrowings outstanding during fiscal 2020 and 2019 were $ 8.7 million and $ 20.0 million, respectively.

As of January 30, 2021, there were $ 1.2 million in letters of credit outstanding and $ 98.8 million available to us for borrowing under the Credit Agreement.

Note 8 – Leases

Accounting Policy for Leases

We evaluate whether a contract is a lease at its inception, and if it is a lease, the type of lease.

All of our leases are classified as operating leases as of February 1, 2020.

Leases with terms of twelve months or less are immaterial and are expensed as incurred.

We lease all of our physical stores and our single distribution center, which has a current lease term expiring in 2034 .

We also enter into leases of equipment, copiers and billboards.

Prior to the purchase of our corporate headquarters in fiscal 2019, it was also leased.

We do not have any leases with related parties.

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Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In accordance with ASC 842, on the lease commencement date we recognize an ROU asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.

For leases existing before the adoption of ASC 842, we used an incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption.

For leases commencing on or after the adoption of ASC 842, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.

Our leases typically provide for fixed minimum rental payments, and certain leases provide for contingent rental payments based upon various specified percentages of sales above minimum levels.

In addition to rental payments, we are required to pay certain non-lease components, such as real estate taxes, insurance and common area maintenance (“CAM”), on most of our real estate leases.

Such non-lease components are typically variable in nature.

Certain real estate leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.

In addition to fixed minimum rental payments set forth in our leases, the measurement of ROU assets and liabilities can also include prepaid rent, landlord incentives (such as construction and tenant improvement allowances), fixed payments related to lease components (such as rent escalation payments scheduled at the lease commencement date), fixed payments related to non-lease components (such as taxes, insurance, and CAM) and initial direct costs incurred in conjunction with securing a lease.

Shoe Carnival, Inc.

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Options to extend real estate leases typically include one or more options to renew, with renewal terms that typically extend the lease term for five years or more.

Many of our leases also contain “co-ten ancy” provisions, including the required presence and continued operation of certain anchor tenants in the adjoining retail space.

If a co-tenancy violation occurs , we have the right to a reduction of rent for a defined period after which we have the opti on to terminate the lease if the violation is not cured .

Many of our leases also contain “co-tenancy” provisions, including the required presence and continued operation of certain anchor tenants in the adjoining retail space.

If a co-tenancy violation occurs, we have the right to a reduction of rent for a defined period after which we have the option to terminate the lease if the violation is not cured.

In addition to co-tenancy provisions, certain leases contain “go-dark” provisions that allow us to cease operations while continuing to pay rent through the end of the lease term.

When determining t he leas e term, we include option s that are reasonably certain to be exercised.

Operating lease liabilities are increased by interest and reduced by payments each period, and ROU assets are amortized over the lease term.

Interest on operating lease liabilities and the amortization of ROU assets results in straight-line rent expense over the lease term.

We record variable lease expense associated with contingent rent, reduced rent due to co-tenancy violations, and other variable non-lease components when incurred.

For new leases, renewals or amendments, we make certain estimates and assumptions regarding property values, market rents, property lives, discount rates and probable terms.

These estimates and assumptions can impact:

(1) lease classification and the related accounting treatment;

(2) rent holidays, escalations or deferred lease incentives, which are taken into consideration when calculating straight-line expense;

(3) the term over which leasehold improvements for each store are amortized;

and (4) the values and lives of adjustments to initial ROU assets.

The amount of amortized rent expense would vary if different estimates and assumptions were used.

Lease-related costs reported in our consolidated statements of income post adoption of ASC 842 were as follows:

When determining the lease term, we include options that are reasonably certain to be exercised.

Our leases typically provide for fixed minimum rental payments, and certain leases provide for contingent rental payments based upon various specified percentages of sales above minimum levels.

In addition to rental payments, we are required to pay certain non-lease components, such as real estate taxes, insurance and common area maintenance (“CAM”), on most of our real estate leases.

Such non-lease components are typically variable in nature.

Certain real estate leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.

Lease-related costs reported in our consolidated statements of income were as follows:

(In thousands)

Operating lease cost

Variable lease costs

Variable lease cost

CAM, property taxes and insurance

Percentage rent and other variable lease costs

Other information related to leases post adoption of ASC 842, including supplemental cash flow information, consists of:

During fiscal 2020, we deferred lease payments of approximately $ 3.1 million during April, May, and June pursuant to arrangements reached with various landlords.

These deferrals were substantially repaid over the remainder of fiscal 2020.

We accounted for these arrangements as if they were part of the enforceable rights and obligations of the existing contracts, not as lease modifications.

Rent continued to be recognized on a straight line basis for contracts with these deferrals.

We adopted new lease accounting guidance in the first quarter of fiscal 2019, as discussed in Note 2 – “Summary of Significant Accounting Policies.” Under the prior lease guidance, lease expense was $ 61.2 million in fiscal 2018 and included fixed, variable, contingent rent and CAM, but excluded taxes and insurance.

Other information related to leases, including supplemental cash flow information, consists of:

(In thousands)

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ROU assets obtained in exchange for operating lease liabilities

January 30, 2021

February 1, 2020

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Notes to Consolidated Financial Statements - continued

The following table reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the operating lease liabilities recognized pursuant to ASC 842 on the consolidated balance sheet as of February 1, 2020:

The following table reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to our operating lease liabilities as of January 30, 2021:

(In thousands)

Operating Leases

Thereafter to 2034

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Long-term portion of operating lease liabilities

Prior to our adoption of ASC 842, we accounted for our leases using Accounting Standards Codification Topic No.

840 – Leases .

Our future minimum lease payments for operating leases as of February 2, 2019 as calculated in accordance with this legacy guidance was:

$60.8 million in 2019;

$51.9 million in 2020;

$50.7 million in 2021;

$41.5 million in 2022;

$34.0 million in 2023 and $56.4 million thereafter (through 2031) for a total of $295.3 million.

Lease expense as calculated in accordance with this legacy guidance was $61.2 million in fiscal 2018 and $66.9 million in fiscal 2017.

Lease expense in those years included fixed rent, variable and contingent rent, and CAM, but excluded taxes and insurance.

Note 9 – Income Taxes

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Total provision

We realized an excess tax benefit of $1.9 million in fiscal year 2019, tax benefit of $26,100 in fiscal year 2018 and tax expense of $17,800 in fiscal year 2017 as a result of the vesting of awards granted pursuant to our stock-based compensation plans described in Note 11.

These amounts were recorded in tax expense in fiscal 2019 and fiscal 2018 and shareholder’s equity in fiscal 2017.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Rec onciliation between the statutory federal income tax rate and the effective income tax rate is as follows:

Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows:

Federal statutory tax rate

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Tax effect of foreign losses

Remeasurement of deferred tax assets and liabilities

due to the Tax Act

Excess tax benefit on stock-based compensation

Effective income tax rate

We recorded $263,000, $310,000 and $223,000 in federal employment-related tax credits in fiscal 2019, 2018 and 2017, respectively.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Deferred income taxes are the result of temporary differences in the recognition of revenue and expense for tax and financial reporting purposes.

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Long-term deferred income taxes, net

At the end of fiscal 2019, we estimated foreign net operating loss carry forwards of $350,000, which expire between fiscal 2024 and fiscal 2027.

At February 1, 2020, we had a valuation allowance of $194,000 against these net operating losses that would be realizable only upon the generation of future taxable income in the jurisdiction in which the losses were incurred.

At February 1, 2020 and February 2, 2019 there were no unrecognized tax liabilities or related accrued penalties or interest in other liabilities on the consolidated balance sheets.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

We have tax credit carryforwards associated with our Puerto Rico operations totaling $ 431,000 at January 30, 2021 and $ 194,000 at February 1, 2020.

These credits expire at various times over the next ten years .

We have taken a full valuation allowance against these credits given they are not expected to be utilized due to the current differential between U.S.

and Puerto Rico tax rates.

As of January 30, 2021 and February 1, 2020, there were no unrecognized tax liabilities or related accrued penalties or interest in other liabilities on the consolidated balance sheets.

Note 10 – Employee Benefit Plans

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The primary savings mechanism under the Domestic Savings Plan is a 401(k) plan under which an employee may contribute up to 20 % of annual earnings with a matching Company contribution up to the first 4 % at a rate of 50 %.

Our contributions to the participants’ accounts become fully vested when the participant reaches their third anniversary of employment with us.

Our contributions to the participants’ accounts become fully vested when participants reach their third anniversary of employment with us.

Our Board of Directors-approved Shoe Carnival Puerto Rico Savings Plan (the “Puerto Rico Savings Plan”) is open to all employees working in Puerto Rico who have been employed for at least one year , are at least 21 years of age and who work at least 1,000 hours in a defined year.

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Contributions charged to expense associated with these plans were $ 851,000 , $ 818,000 and $ 754,000 in fiscal years 2020, 2019 and 2018, respectively.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Stock Purchase Plan

On May 11, 1995, our shareholders approved the Shoe Carnival, Inc.

Employee Stock Purchase Plan (the “Stock Purchase Plan”) as adopted by our Board of Directors on February 9, 1995.

In 1995, our Board of Directors and shareholders approved the Shoe Carnival, Inc.

Employee Stock Purchase Plan (the “Stock Purchase Plan”).

The Stock Purchase Plan reserves 450,000 shares of our common stock (subject to adjustment for any subsequent stock splits, stock dividends and certain other changes in our common stock) for issuance and sale to any employee who has been employed for more than a year at the beginning of the calendar year, and who is not a 10 % owner of our common stock, at 85 % of the then fair market value up to a maximum of $ 5,000 in any calendar year.

Under the Stock Purchase Plan, 7,000, 7,000 and 10,000 shares of common stock were purchased by participants in the plan and proceeds to us for the sale of those shares were approximately $182,000, $177,000 and $205,000 for fiscal years 2019, 2018 and 2017, respectively.

At February 1, 2020, there were 70,000 shares of unissued common stock reserved for future purchase under the Stock Purchase Plan.

Under the Stock Purchase Plan, 8,000 , 7,000 and 7,000 shares of common stock were purchased by plan participants and proceeds to us for the sale of those shares were approximately $ 195,000 , $ 182,000 and $ 177,000 for fiscal years 2020, 2019 and 2018, respectively.

At January 30, 2021, there were 62,000 shares of unissued common stock reserved for future purchase under the Stock Purchase Plan.

The following table summarizes information regarding stock-based compensation expense recognized for the Stock Purchase Plan:

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The plan is currently unfunded.

Compensation expense for our match and earnings on the deferred amounts was $2.0 million for fiscal 2019, $154,000 for fiscal 2018 and $1.8 million for fiscal 2017.

The total deferred compensation liability at February 1, 2020 and February 2, 2019 was $13.9 million and $12.1 million, respectively.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Compensation expense for our match and earnings on the deferred amounts was $ 2.0 million for both fiscal 2020 and fiscal 2019 and $ 154,000 for fiscal 2018.

The total deferred compensation liability at January 30, 2021 and February 1, 2020 was $ 16.4 million and $ 13.9 million, respectively, of which $ 393,000 and $ 525,000 was classified as accrued and other liabilities at January 30, 2021 and February 1, 2020, respectively.

Note 11 – Stock-Based Compensation

Compensation Plan Summaries

At our 2017 annual meeting of shareholders, our shareholders approved a new equity incentive plan, the Shoe Carnival, Inc.

2017 Equity Incentive Plan (the “2017 Plan”), which replaced our 2000 Stock Option and Incentive Plan, as amended (the “2000 Plan”).

Under the 2017 Plan, we may issue stock units, restricted stock, stock appreciation rights, stock options and other stock-based awards to eligible participants.

According to the terms of the 2017 Plan, no further awards may be made under the 2000 Plan.

A maximum of 1,000,000 shares of our common stock are available for issuance and sale under the 2017 Plan.

In addition, any shares of our common stock subject to an award granted under the 2017 Plan, or to an award granted under the 2000 Plan that was outstanding on the date our shareholders approved the 2017 Plan, that expires, is cancelled or forfeited, or is settled for cash will, to the extent of such cancellation, forfeiture, expiration or cash settlement, automatically become available for future awards under the 2017 Plan.

As of February 1, 2020, there were approximately 650,000 shares of our common stock available for future issuances under our 2017 Plan.

Stock-based compensation includes restricted stock units and performance stock units, restricted stock awards, cash-settled stock appreciation rights (“SARs”), and stock options.

During fiscal 2017, all remaining stock options were exercised.

Under our shareholder-approved Shoe Carnival, Inc.

2017 Equity Incentive Plan (the “2017 Plan”), we may issue stock units, restricted stock, stock appreciation rights, stock options and other stock-based awards to eligible participants.

According to the terms of the 2017 Plan, no further awards may be made from any previously approved equity plans.

The 2017 Plan initially reserved 1,000,000 shares of our common stock for issuance and sale.

As of January 30, 2021, there were approximately 519,000 shares of our common stock available for future issuances under the 2017 Plan.

Stock-based compensation includes restricted stock units and performance stock units, restricted stock awards, and cash-settled stock appreciation rights (“SARs”).

We have not issued stock options since 2008 and all were exercised prior to fiscal 2018.

Equity awards issued to employees are classified as either performance-based or service-based.

Performance-based awards are granted such that they vest upon the achievement of specified levels of diluted net income per share during a specified performance period.

Should the diluted net income per share criteria not be met within the stated period, any shares still restricted are forfeited.

Currently, performance-based equity awards are granted such that vesting depends on whether diluted net income per share meets an established threshold, target, or maximum level of performance.

Diluted net income per share below the threshold level of performance will result in complete forfeiture of the award.

Service-based restricted stock units and restricted stock awards typically are granted under one of four vesting periods:

(a) one-third of the shares would vest on each of the first three anniversaries subsequent to the date of the grant;

(b) the full award would vest at the end of a 5-year service period subsequent to the date of grant;

or (d) for our Directors, all restricted stock awards are issued to vest on January 2 nd of the year following the year of the grant.

Awards that contain both performance and service-based conditions require that the performance target be met during the required service period.

Under the 2017 Plan, all dividends paid with respect to shares subject to the non-vested portion of a restricted stock award are subject to the same restrictions and risk of forfeiture as the shares of restricted stock to which such dividends relate.

Recipients of restricted stock units and performance stock units will be entitled to receive dividend equivalents, based on dividends actually declared and paid, on the restricted stock units and performance stock units, and such dividend equivalents will be subject to the same restrictions and risk of forfeiture as the restricted stock units and performance stock units.

For awards granted under the 2000 Plan, all shares of non-vested service-based restricted stock provide non-forfeitable rights to all dividends declared by the Company, and dividends on non-vested performance-based restricted stock are subject to deferral until such times as the shares vest and are released.

Our outstanding performance-based equity awards were granted such that vesting depended on whether diluted net income per share met an established threshold, target, or maximum level of performance.

Diluted net income per share below the threshold level of performance would have resulted in complete forfeiture of the award.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Our service-based restricted stock units and restricted stock awards vest under different scenarios based on the year they were granted, as determined and approved by our Board of Directors.

Typical vesting scenarios are as follows:

(a) one-third of the award vests on each of the first three anniversaries subsequent to the date of the grant ;

(b) one-half of the award vests after one year and one-half vests after two years;

(d) the full award vests at the end of a 2 -year service period subsequent to the date of grant;

or (e) for our non-employee Board members, all restricted stock awards are issued to vest on January 2 nd of the year following the year of the grant.

Awards that contain both performance and service-based conditions require that the performance target be met during the required service period.

Under the 2017 Plan, recipients of restricted stock units and performance stock units are entitled to receive dividend equivalents, based on dividends actually declared and paid, on the restricted stock units and performance stock units, and such dividend equivalents are subject to the same restrictions and risk of forfeiture as the restricted stock units and performance stock units.

Dividends paid with respect to shares subject to the non-vested portion of a restricted stock award are subject to the same restrictions and risk of forfeiture as the shares of restricted stock to which such dividends relate.

Plan-Specific Activity and End-of-Period Balance Summaries

Share-Settled Equity Awards

Restricted Stock Units and Performance Stock Units

The following table summarizes transactions for our restricted stock units and performance stock units pursuant to our stock-based compensation plans:

Restricted stock units and performance stock units at February 1, 2020

The total fair value at grant date of restricted stock units and performance stock units that vested during fiscal 2019 and 2018 was $2.4 million and $26,000, respectively.

No units vested in fiscal 2017.

Restricted stock units and performance stock units at January 30, 2021

The total fair value at grant date of restricted stock units and performance stock units that vested during fiscal 2020, 2019 and 2018 was $ 4.4 million, $ 2.4 million and $ 26,000 , respectively.

The weighted-average grant date fair value of restricted stock units and performance stock units granted during fiscal 2019 and fiscal 2018 was $ 31.29 and $ 25.05 , respectively.

Restricted Stock Awards

The following table summarizes transactions for our restricted stock awards pursuant to our stock-based compensation plans:

Restricted stock at February 1, 2020

Restricted stock at January 30, 2021

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

The total fair value at grant date of all restricted stock that vested during fiscal 2020, 2019 and 2018 was $ 1.6 million, $ 17.4 million and $ 1.3 million, respectively.

The weighted-average grant date fair value of all restricted stock granted during fiscal 2019 and fiscal 2018 was $ 26.58 and $ 32.74 , respectively.

The following table summarizes information regarding stock-based compensation expense recognized for all share-settled equity awards (restricted stock awards, restricted stock units and performance stock units):

Stock-based Compensation Expense

The following table summarizes information regarding stock-based compensation expense recognized for all share-settled equity awards (restricted stock units, performance stock units and restricted stock awards):

(In thousands)

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This cumulative catch-up expense was related to performance-based restricted stock awards, which management had previously determined were not probable to vest prior to their expiration, but given our financial performance in fiscal 2018, in the third quarter of fiscal 2018, such awards were deemed by management as probable to vest.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

As of February 1, 2020 , there was approximately $ 3.0 million of unrecognized compensation expense remaining related to both our restricted stock units and performance stock u nits and performance-based and service-based restricted stock awards.

As of January 30, 2021, there was approximately $ 1.9 million of unrecognized compensation expense remaining related to our share-settled equity awards.

The cost is expected to be recognized over a weighted average period of approximately 1.2 years.

This incorporates our current assumptions with respect to the estimated requisite service period required to achieve the designated performance conditions for performance-based stock awards.

Cash-Settled Stock Appreciation Rights

Our cash-settled SARs were granted during the first quarter of fiscal 2019 to certain non-executive employees and will vest and become fully exercisable on March 31, 2020.

Any unexercised SARs will expire on March 31, 2022.

Each SAR entitles the holder, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a maximum amount of gain defined.

The SARs granted during the first quarter of fiscal 2019 were issued with a defined maximum gain of $10.00 over the exercise price of $34.95.

During the first quarter of fiscal 2015, SARs were granted to certain non-executive employees, such that one-third of the shares underlying the SARs vested and became fully exercisable on each of the first three anniversaries of the date of the grant and were assigned a five-year term from the date of grant, after which any unexercised SARs would expire.

Each SAR entitled the holder, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a defined maximum gain of $10.00 over the exercise price of $24.26.

During the second quarter of fiscal 2018, all remaining SARs granted during the first quarter of fiscal 2015 were exercised.

Cash-settled SARs are granted to certain non-executive employees.

Each SAR entitles holders, upon exercise of their vested shares, to receive cash in an amount equal to the closing price of our stock on the date of exercise less the exercise price, with a maximum amount of gain defined.

The SARs granted during the first quarter of fiscal 2020 will vest and become fully exercisable on March 31, 2021 and any unexercised SARs will expire on March 31, 2023.

SARs granted during the first quarter of fiscal 2019 vested and became fully exercisable on March 31, 2020 and any unexercised SARs will expire on March 31, 2022.

The SARs issued have a defined maximum gain of $ 10.00 over the exercise price of $ 13.79 for awards granted in fiscal 2020 and over the exercise price of $ 34.95 for awards granted in fiscal 2019.

During the second quarter of fiscal 2018, all remaining SARs related to this grant were exercised.

The following table summarizes SARs activity:

Outstanding at February 1, 2020

The fair value of these liability awards will be remeasured, using a trinomial lattice model at each reporting period until the date of settlement.

Outstanding at January 30, 2021

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

The fair value of these liability awards is remeasured, using a trinomial lattice model at each reporting period until the date of settlement.

Increases or decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards.

The weighted-average fair value of outstanding, non-vested SAR awards as of February 1, 2020, was $6.37.

The weighted-average fair value of outstanding, non-vested SAR awards as of January 30, 2021, was $ 10.00 .

The fair value was estimated using a trinomial lattice model with the following assumptions:

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The exercise multiple and employee exit rate were based on historical option data.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

The following table summarizes information regardin g stock-based compensation recognized for SARs:

The following table summarizes information regarding stock-based compensation recognized for SARs:

(In thousands)

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Income tax effect

As of February 1, 2020, approximately $47,000 in unrecognized compensation expense remained related to non-vested SARs.

As of January 30, 2021, approximately $ 65,000 in unrecognized compensation expense remained related to non-vested SARs.

This expense is expected to be recognized over a period of approximately 0.2 years.

Stock Options

No stock options have been granted since fiscal 2008.

During fiscal 2017, all remaining stock options were exercised.

The total intrinsic value (defined as the difference between the market value at exercise and the grant price of stock options exercised) of stock options exercised in fiscal 2017 was $127,000 and total cash received was $54,000.

Note 12 – Share Repurchase Plan

On December 12, 2019, our Board of Directors authorized a new share repurchase program for up to $50 million of outstanding common stock, effective January 1, 2020.

Note 12 – Share Repurchase Program

On December 15, 2020, our Board of Directors authorized a share repurchase program for up to $ 50 million of outstanding common stock, effective January 1, 2021 (the “2021 Share Repurchase Program”).

The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2021 and in accordance with applicable laws, rules and regulations.

The 2021 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, the share repurchase program from cash on hand, and any shares acquired will be available for stock-based compensation awards and other corporate purposes.

We have funded, and intend to continue to fund, our share repurchase program 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 conditions.

As of February 1, 2020, we had purchased approximately 184,000 shares at an aggregate cost of $6.9 million under the new share repurchase program, and we had $43.1 million available for future repurchases.

The new share repurchase program replaced a $50 million share repurchase program that was authorized in December 2018 and expired in accordance with its terms on December 31, 2019.

At its expiration, we had purchased approximately 933,000 shares at an aggregate cost of $30.9 million under that repurchase program.

Other Board-approved share repurchase programs existed in fiscal 2018 and fiscal 2017.

Share repurchases and amounts paid in those fiscal years were approximately 1,529,000 shares at an aggregate cost of $46.0 million in fiscal 2018 and approximately 1,259,000 shares at an aggregate cost of $29.8 million in fiscal 2017.

As of January 30, 2021, no repurchases had been made under the 2021 Share Repurchase Program, and we had $ 50 million available for future repurchases.

The 2021 Share Repurchase Program replaced a $ 50 million share repurchase program that was authorized in December 2019 and became effective January 1, 2020 and expired in accordance with its terms on December 31, 2020 .

Share repurchases pursuant to previous Board-approved repurchase programs were approximately 1,117,000 shares at an aggregate cost of $ 37.8 million in fiscal 2019 and approximately 1,527,000 shares at an aggregate cost of $ 46.0 million in fiscal 2018.

Due to uncertainty related to the COVID-19 pandemic, no share repurchases were made in fiscal 2020.

Note 13 – Business Risk

We purchase merchandise from approximately 160 footwear vendors.

We purchase merchandise from 177 footwear vendors.

In fiscal 2020, two branded suppliers, Nike, Inc.

and Skechers USA, Inc., collectively accounted for approximately 43 % of our net sales.

accounted for approximately 30% and Skechers USA, Inc.

accounted for

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

approximately 33 % and Skechers USA, Inc.

accounted for approximately 10 % of our net sales, respectively .

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Note 14 – Litigation Matters

The accounting standard related to loss contingencies provides guidance regarding to our disclosure and recognition of loss contingencies, including pending claims, lawsuits, disputes with third parties, investigations and other actions that are incidental to the operation of our business.

The accounting standard related to loss contingencies provides guidance regarding our disclosure and recognition of loss contingencies, including pending claims, lawsuits, disputes with third parties, investigations and other actions that are incidental to the operation of our business.

The guidance utilizes the following defined terms to describe the likelihood of a future loss:

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No accrual or disclosure is required for losses that are remote.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

From time to time, we are involved in certain legal proceedings in the ordinary course of conducting our business.

While the outc ome of any legal proceeding is uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our consolidated balance sheets, statements of income, or cash flows.

Note 15 – Quarterly Results (Unaudited)

Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year.

All fiscal quarters in 2019 and 2018 include results for 13 weeks.

(In thousands, except per share data)

Operating income

Net income per share – Basic (1)

Net income per share – Diluted (1)

Operating income

Net income per share – Basic (1)

Net income per share – Diluted (1)

Per share amounts are computed independently for each of the quarters presented.

The sum of the quarters may not equal the total year due to the impact of changes in weighted shares outstanding and differing applications of earnings under the two-class method.

Note 16 – New Accounting Pronouncements

In August 2018, the FASB issued guidance that adds, removes, and modifies the disclosure requirements related to fair value measurements.

This accounting update is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted.

We are evaluating the impact of this new guidance and believe the adoption will not have a material impact on our consolidated financial statements.

Shoe Carnival, Inc.

Notes to Consolidated Financial Statements - continued

Note 17 – Subsequent Events

Dividend Approval

While the outcome of any legal proceeding is uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our consolidated balance sheets, statements of income, or cash flows.

Note 15 – Subsequent Events – Dividend Declaration

On March 18, 2021 , the Board of Directors approved the payment of a cash dividend to our shareholders in the first quarter of fiscal 2021.

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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.

COVID-19 Pandemic

Our operations are currently experiencing significant disruption associated with an outbreak of a novel strain of coronavirus (“COVID-19”).

The World Health Organization has declared COVID‑19 a pandemic.

Government has taken unprecedented measures to control the virus’ spread and to provide stimulus as an offsetting measure to quickly deteriorating economic conditions and increasing unemployment.

Our operations have been significantly impacted by the temporary closure of our brick-and-mortar stores effective March 19, 2020 to April 2, 2020 and reduced foot traffic and sales prior to such time.

Our website and mobile app are continuing to take e-commerce orders, which are generally being fulfilled at our store locations.

As guidance and mandates from governments and health officials continue to evolve, closures to some, or all, of our operations will need to extend beyond the announced closure period.

W e expect this matter will negatively impact our results of operations, cash flows, and financial condition;

however, such impacts cannot be reasonably estimated at this time.

SHOE CARNIVAL, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

Reserve for sales returns and allowances

Year ended February 3, 2018

Year ended February 2, 2019

Year ended February 1, 2020

As a result of the implementation of ASC 606 on February 4, 2018, the accounting treatment for the reserve for sales returns and allowances was changed from a net to a gross basis.

Under the previous revenue guidance, we recorded a net returns reserve.

Under the new guidance, we record estimated sales returns at the gross sales price with a corresponding adjustment to inventory for the estimated cost of the product.

The difference between the balance at the end of the fiscal year ended February 3, 2018 and the beginning of the fiscal year ended February 2, 2019 reflects this change in accounting policy.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data