Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and notes to those statements included in PART II, ITEM 8 of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-over-year comparisons between fiscal 2020 and fiscal 2019. A discussion of fiscal 2018 and year-over-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Annual Report on Form 10-K can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the United States Securities and Exchange Commission on March 31, 2020. At the end of this section of this Annual Report on Form 10-K, we have included historical data for the past five fiscal years to facilitate trend analysis of key data reported in our consolidated financial statements and other select operating data.
Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to fiscal years 2020, 2019 and 2018 relate to the fiscal years ended January 30, 2021, February 1, 2020 and February 2, 2019, respectively. Fiscal years 2020, 2019 and 2018 all consisted of 52 weeks.
Overview of Our Business
Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers, providing customers the convenience of shopping at any of our store locations, our mobile app or online at www.shoecarnival.com. Our stores combine competitive pricing with a promotional, high-energy in-store environment that encourages customer participation and injects fun and excitement into every shopping experience. We believe our distinctive shopping experience gives us various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods. A similar customer experience is reflected in our e-commerce platform through special promotions and limited time sales.
Our objective is to be the destination retailer-of-choice for value-priced, on-trend branded and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. Our average store carries shoes in four general categories – women’s, men’s, children’s and athletics, as well as a broad range of accessories such as socks, belts, shoe care items, handbags, hats, sport bags, backpacks and wallets. Footwear is organized by category and brand, creating strong brand statements within the aisles. These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store. Our signage may highlight a vendor’s product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors. Our e-commerce platform offers customers a large assortment of products in all categories of footwear with an increased depth of sizes and colors that may not be available in all stores.
Comparable store sales is a key performance indicator for us. Comparable store sales include stores that have been open for 13 full months after such stores’ grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores recently opened or closed are not included in comparable store sales. We include e-commerce sales in our comparable store sales as a result of our multi-channel retailer strategy. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.
Information regarding the COVID-19 Coronavirus Pandemic (“COVID-19”)
We continue to closely monitor and manage the impact of the COVID-19 pandemic, and the safety and well-being of our customers, employees and business partners remains a top priority. The COVID-19 pandemic has significantly impacted, and is expected to continue to impact, our operations, supply chains, and overall economic conditions and consumer spending for the foreseeable future. As guidance and mandates from governments and health officials continue to evolve, closures of some or all our stores may reoccur, and sales, including e-commerce sales, may be reduced.
In response to the COVID-19 pandemic, all of our physical stores were temporarily closed effective March 19, 2020. Our e-commerce platform continued to operate, and our e-commerce sales increased significantly in fiscal 2020 as customers shifted purchases to our online channel. We began reopening our physical stores in accordance
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with applicable public health guidelines in late April 2020 . B y the beginning of our second fiscal quarter, approximately 50 % of our stores were reopened , and b y early June, substantially all of our stores had reopened . As stores reopened, we experienced increases in conversion and total average transaction despite reduced traffic due to the COVID-19 pandemic . In addition, changes in customer shopping habits due to the pandemic and government stimulus impacted our peak shopping periods throughout fiscal 2020. We do not have any stores closed due to the pandemic as of January 30, 2021.
We have undertaken a number of actions to mitigate the financial impact of the COVID-19 pandemic, preserve capital and keep our customers and employees safe. These actions include:
•
Implementing new health and safety procedures at our stores, corporate headquarters and distribution center. Materials, such as thermometers, cleaning supplies, social distancing signage, and personal protective equipment have been distributed to our facilities.
•
Enhancing our liquidity by exercising the full accordion feature under our existing credit facility to increase our borrowing capacity from $50 million to $100 million and eliminating a covenant through the first quarter of fiscal year 2021 that may have limited our access to the increased borrowing capacity. The facility is now collateralized by our inventory.
•
Voluntarily suspending repurchases under our share repurchase program.
•
Continuing to pay employees while our stores were closed and recording tax credits in selling, general and administrative (“SG&A”) expenses that offset wage expense. This credit was associated with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and represents an employee retention tax credit to support wages paid to employees while such employees were not working.
•
Reaching agreements with certain landlords to defer approximately $3.1 million of April, May and June lease payments with the deferrals substantially repaid over the remainder of fiscal 2020. We continued to recognize lease expense on a straight-line basis.
•
Temporarily lowering the base salaries of our named executive officers and the annual cash retainer fee of the Board of Directors while a majority of our physical stores were closed.
•
Temporarily reducing inventory receipts and inventory on hand and extending payment terms with many of our business partners.
•
Reducing or deferring non-essential corporate spending and capital projects and implementing hiring freezes.
•
Postponing marketing activities for physical stores and evaluating promotional activities.
Executive Summary
Our sales patterns throughout fiscal 2020 were significantly impacted by the COVID-19 pandemic. In the first quarter of fiscal 2020, we sustained unprecedented comparable store sales declines and losses due to the temporary closure of our physical stores. Throughout the remainder of fiscal 2020, we experienced considerable sales growth compared to fiscal 2019. Fiscal 2020 annual highlights included:
•
Record second quarter net sales despite a COVID-related shift in back-to-school shopping, as the timing of back-to-school start dates were delayed in the markets we serve.
•
Record third quarter gross profit, net income and diluted net income per share.
•
Record fourth quarter net sales, net income and diluted net income per share, partially attributable to government stimulus late in 2020.
During fiscal 2020, comparable store sales decreased 42.3% in the first quarter, followed by comparable store sales increases of 12.6% in the second quarter, 0.9% in the third quarter and 6.4% in the fourth quarter. Throughout fiscal 2020, sales through our e-commerce platform increased approximately 175% compared to fiscal 2019. In addition, in fiscal 2020, we experienced high demand for athletics and leisure product and reduced demand for adult dress product. We believe this reflects a more casual and active lifestyle in response to the COVID-19 pandemic.
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The following tables illustrate the quarterly impact of our temporary store closures through June 2020 due to the COVID-19 pandemic:
(In thousands, except per share amounts)
Fiscal 2020
First
Quarter
Second through
Fourth Quarters
Full Fiscal Year
Net sales
$
147,495
$
829,270
$
976,765
Gross profit
31,464
248,518
279,982
Operating (loss)/income
(23,261)
45,126
21,865
Net (loss)/income
(16,190)
32,181
15,991
Net (loss)/income per share – Diluted 1
(1.16)
2.26
1.12
Fiscal 2019
First
Quarter
Second through
Fourth Quarters
Full Fiscal Year
Net sales
$
253,810
$
782,741
$
1,036,551
Gross profit
75,140
236,729
311,869
Operating income
15,608
38,601
54,209
Net income
13,873
2
29,041
42,914
2
Net income per share – Diluted 1
0.91
2
1.98
2.92
2
1)
Per share amounts are computed independently for each quarter. For per share amounts, the sum of the quarters does not equal the total year due to the impact of changes in weighted shares outstanding and differing applications of earnings as prescribed by accounting guidance.
2)
Included in fiscal 2019 earnings is the first quarter impact of a tax benefit associated with the vesting of equity-based compensation of approximately $1.9 million, or $0.13 per diluted share.
Highlights of our performance in fiscal 2020 compared to the prior year are as follows:
•
Fiscal 2020 net sales decreased $59.8 million to $976.8 million. This included a $106.3 million decrease in first quarter net sales followed by an increase in sales over the remainder of the fiscal year. Net sales in the first quarter of fiscal 2020 declined primarily due to the temporary closure of our physical stores for approximately 50% of the quarter. Fiscal 2020 comparable store sales decreased 5.3% due to a 42.3% decrease in comparable store sales in the first quarter followed by a 6.9% cumulative increase over the remaining three fiscal quarters.
•
E-commerce sales increased approximately 175% compared to fiscal 2019 and represented approximately 19% of merchandise sales in fiscal 2020 compared to 6% of merchandise sales in fiscal 2019.
•
Net income for fiscal 2020 was $16.0 million, or $1.12 per diluted share, compared to net income of $42.9 million, or $2.92 per diluted share, in fiscal 2019. Net income and diluted net income per share decreased primarily due to the temporary physical store closures in the first quarter of fiscal 2020. We did, however, experience earnings growth in the second half of fiscal 2020 primarily due to shifts in back-to-school shopping, government stimulus, and our ability to replenish high demand product during peak shopping periods.
•
Gross profit in fiscal 2020 was $280.0 million, a $31.9 million decrease compared to fiscal 2019. As a percentage of net sales, gross profit decreased 1.4% to 28.7%. The decrease was primarily attributable to an increase in shipping costs associated with higher e-commerce sales and the deleveraging effect of certain fixed costs against a lower sales base.
•
As of January 30, 2021, we had no debt outstanding and $106.5 million of cash and cash equivalents.
•
In fiscal 2020, we continued to increase membership in our Shoe Perks customer loyalty program, approaching 10% growth compared to fiscal 2019. This brought total membership in the program to over 26 million customers as of January 30, 2021. We believe our Shoe Perks program affords us opportunities to
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communicate, build relationships and engage with our most loyal shoppers, which we believe will result in long-term customer commitment to our brand .
•
In fiscal 2020, we launched a new order management system to support our growing multi-channel business. In the second quarter of fiscal 2020, we implemented new warehouse and transportation management platforms that provide enhanced productivity, flexibility and optimized operations for our supply chain. These upgrades reflect our goals of implementing best practices and systems to meet the complex demands of multi-channel fulfillment, building the capacity needed to fulfill increased activity from our multi-channel business and positioning ourselves for long-term growth.
•
In fiscal 2020, we commenced implementation of a new, third-party merchandise planning system. This cloud-based platform is a multi-year project that includes a complete range of critical financial planning functions that will enhance the efficiency and effectiveness of our merchandise buying process.
•
We closed 13 stores during fiscal 2020 and opened four stores. We ended fiscal 2020 with 383 stores.
Fiscal 2021
In fiscal 2021 we will continue to lay the foundation for growth through investments in our e-commerce platform, investments in our customer relationship capabilities and investments in our store experience. We believe these enhancements will reinforce our customer-centric focus and strengthen our unique Shoe Carnival brand. Over the next fiscal year, we remain committed to providing customers with a preferred shopping experience and broad product assortment which is core to our long-term strategy. Following is a summary of certain strategic initiatives and goals for fiscal 2021:
•
Continue to manage the effect of COVID-19 on our operations and protect the health and safety of our customers, associates and vendor partners.
•
Maintain the growth and market share of our multi-channel platform.
•
Navigate and manage the growing import disruption that has begun to impact our supply chain.
•
Leverage our recent leadership changes and leadership experience to drive shareholder value.
•
Start modernizing our stores through design enhancements with the goal of modernizing two-thirds of our stores in the next three to five years.
•
Leverage our CRM capabilities to increase personalized, segmented marketing, decrease broad-based promotional intensity, and enhance our vendor relationships.
•
Implement the financial planning phase of our new merchandise planning system and continue to increase the productivity of other recently implemented systems.
Critical Accounting Policies
We use judgment in reporting our financial results. This judgment involves estimates based in part on our historical experience and incorporates the impact of the current general economic climate and company-specific circumstances. However, because future events and economic conditions are inherently uncertain, our actual results could differ materially from these estimates. The accounting policies that require more significant judgment are included below. Furthermore, as the COVID-19 pandemic has had a significant impact on our financial performance in fiscal 2020, we evaluated this impact on the related accounting estimates and assumptions described in these critical polices and throughout our consolidated financial statements.
Merchandise Inventories – Our merchandise inventories are stated at the lower of cost or net realizable value as of the balance sheet date and consist primarily of dress, casual and athletic footwear for women, men and children. The cost of our merchandise is determined using the first-in, first-out valuation method (“FIFO”). For determining net realizable value, we estimate the future demand and related sale price of merchandise in our inventory. The stated value of merchandise inventories contained on our consolidated balance sheets also includes freight, certain capitalized overhead costs and reserves.
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Factors considered when we review our inventory to properly state it at lower of cost or net realizable value include recent sale prices, historical loss rates, the length of time merchandise has been held in inventory, quantities of the various styles held in inventory, seasonality of the merchandise, expected consideration to be received from our vendors and current and expected future sales trends. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Merchandise inventories as of January 30, 2021 , totaled $233.3 million , representing approximately 36% of total assets. Merchandise inventories as of February 1, 2020 , totaled $259.5 million , representing approximately 41% of total assets . Given the significance of inventories to our consolidated financial statements, the determination of net realizable value is a critical accounting estimate. Material changes in the factors noted above could have a significant impact on the actual net realizable value of our inventory and our reported operating results.
Valuation of Long-Lived Assets – Long-lived assets, such as property and equipment subject to depreciation and right-of-use assets arising from our leased properties, are evaluated for impairment on a periodic basis if events or circumstances indicate the carrying value may not be recoverable. This evaluation includes performing an analysis of the estimated undiscounted future cash flows of the long-lived assets. Assets are grouped and the evaluation performed at the lowest level for which there are identifiable cash flows, which is generally at a store level.
If the estimated 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 the estimated fair value and the carrying value. 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 assumptions and estimates used in the evaluation of impairment, including current and future economic trends for stores, are subject to a high degree of judgment. 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 actual operating results or market conditions differ from those anticipated, the carrying value of certain of our assets may prove unrecoverable and we may incur additional impairment charges in the future.
Leases – 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 accordance with Accounting Standards Codification Topic No. 842 – Leases (“ASC 842”), which we adopted in fiscal 2019, on the lease commencement date we recognize a right-of-use 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. The weighted average discount rate utilized in fiscal 2020 was 5.2% and was 5.5% in fiscal 2019.
As of the date of adoption of ASC 842 and 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 right-of-use assets. The amount of amortized rent expense would vary if different estimates and assumptions were used.
Our real estate leases typically include options to extend the lease or to terminate the lease at our sole discretion. 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-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 the lease term, we include options that are reasonably certain to be exercised.
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Income Taxes – As part of the process of preparing our consolidated financial statements, we are required to estimate our current and future income taxes for each tax jurisdiction in which we operate. Significant judgment is required in determining our annual tax expense and evaluating our tax positions. As a part of this process, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bas i s. Our temporary timing differences relate primarily to inventory, depreciation, a ccrued expenses, right-of-use assets, operating lease liabilities and stock-based compensation. Deferred tax assets and liabilities are measured using the tax rates enacted and expected to be in effect in the years when those temporary differences are expected to reverse. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain.
We are also required to make many subjective assumptions and judgments regarding our income tax exposures when accounting for uncertain tax positions associated with our income tax filings. We must presume that taxing authorities will examine all uncertain tax positions and that they have full knowledge of all relevant information. However, interpretations of guidance surrounding income tax laws and regulations are often complex, ambiguous and frequently change over time, and a number of years may elapse before a particular issue is resolved. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in our consolidated financial statements. Although we believe we have no uncertain tax positions, tax authorities could assess tax liabilities in open tax periods not presently foreseen.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the following fiscal years:
2020
2019
2018
Net sales
100.0
%
100.0
%
100.0
%
Cost of sales (including buying, distribution, and
occupancy costs)
71.3
69.9
70.0
Gross profit
28.7
30.1
30.0
Selling, general and administrative expenses
26.5
24.9
25.2
Operating income
2.2
5.2
4.8
Interest income
0.0
(0.1
)
(0.1
)
Interest expense
0.0
0.0
0.0
Income before income taxes
2.2
5.3
4.9
Income tax expense
0.6
1.2
1.2
Net income
1.6
%
4.1
%
3.7
%
We offer our customers sales incentives, including coupons, discounts, and free merchandise. Sales are recorded net of such incentives and returns and allowances. If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in cost of sales.
Fiscal 2020 Compared to Fiscal 2019
Net Sales
Net sales decreased $59.8 million to $976.8 million in fiscal 2020, a 5.8% decrease from net sales of $1.037 billion in fiscal 2019. Of this decrease in net sales, approximately $106.3 million occurred in the first quarter of fiscal 2020. During the first quarter of fiscal 2020, our physical stores were temporarily closed for approximately 50% of the quarter due to the COVID-19 pandemic. Fiscal 2020 comparable store sales decreased 5.3% primarily due to a 42.3% decrease in comparable store sales in the first quarter. Comparable store sales increased 6.9% over the remainder of the fiscal year. We experienced increases in conversion but experienced lower traffic throughout fiscal 2020 in our physical stores, which led to lower physical store sales. The decrease in physical store sales was partially offset by an increase in e-commerce sales of approximately 175% as customers shifted to online shopping amid government mandated stay-at-home orders and ongoing health concerns.
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Gross Profit
Gross profit decreased $31.9 million to $280.0 million in fiscal 2020 primarily due to lower sales. Our gross profit margin decreased 1.4% to 28.7% in fiscal 2020. Our merchandise margin decreased 0.6% primarily due to increased shipping costs associated with higher e-commerce sales. The decrease in merchandise margin was partially offset by being less promotional throughout fiscal 2020. Buying, distribution and occupancy costs, as a percentage of sales, increased 0.8% compared to fiscal 2019 primarily due to increased distribution costs resulting from recent investments in our distribution center, and the deleveraging effect of lower sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $258.1 million in fiscal 2020, an increase of $0.5 million compared to fiscal 2019. The primary factors attributable to the increase were e-commerce fulfillment, impairment charges on long-lived assets and store opening and closing costs (see “Impact of Store Count and Seasonality on Quarterly Results” below for more detail) and advertising expense. The overall increase in SG&A expense was partially offset by lower store wages as a result of employee payroll retention tax credits related to the CARES Act, reductions in stock-based compensation expense and lower depreciation and amortization expense.
Interest Income and Interest Expense
Throughout fiscal 2020, we experienced a net $0.9 million decrease in our income before income taxes compared to fiscal 2019 due to decreased interest income and an increase in interest expense. The primary reason for the decrease was lower interest earned on our cash and cash equivalents and increased commitment fees associated with our larger credit facility.
Income Taxes
The effective income tax rate for fiscal 2020 was 25.8% compared to 21.6% for fiscal 2019. The primary reason for the change in our effective tax rate was a $1.9 million tax benefit related to the vesting of stock-based compensation recognized in the first quarter of fiscal 2019 and the timing of other tax adjustments.
Liquidity and Capital Resources
Our primary sources of liquidity are $106.5 million of cash and cash equivalents on hand as of fiscal 2020 year end, cash generated from operations and availability under our $100 million credit facility. During fiscal 2020, we amended our credit facility to increase its capacity to $100 million from $50 million and waive a covenant through the first quarter of 2021 in order to access the additional borrowing capacity if needed. As part of these amendments, the facility is now collateralized by our inventory. See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.
While the continued economic uncertainty and future effects on customer behavior caused by the COVID-19 pandemic makes our operating cash flow less predictable, we believe our resources will be sufficient to fund our cash needs, as they arise, for at least the next 12 months. Our primary uses of cash are for working capital, which are principally inventory purchases, store initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program, the financing of capital projects, including investments in new systems, and various other commitments and obligations.
Cash Flow - Operating Activities
Our net cash provided by operating activities was $63.4 million and $66.9 million in fiscal years 2020 and 2019, respectively. These amounts reflect our income from operations adjusted for non-cash items and working capital and other changes. The $3.5 million decrease in operating cash flow was primarily due to reduced earnings as a result of the pandemic, partially offset by lower inventory near year end. The current ratio was 2.7 at both January 30, 2021 and February 1, 2020.
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Cash Flow - Investing Activities
Our cash outflows for investing activities were primarily for capital expenditures. During fiscal 2020, we expended $12.4 million for the purchase of property and equipment, $5.9 million of which was for the construction of four new stores and the remodeling and relocation of existing stores, and $3.1 million was for investments in our distribution center. During fiscal 2019, we expended $18.5 million for the purchase of property and equipment, $7.1 million of which was for the purchase of our corporate headquarters and $3.3 million was for the construction of one new store and the remodeling and relocation of existing stores.
Cash Flow - Financing Activities
Our cash outflows for financing activities were primarily for cash dividend payments, share repurchases and payments on our credit facility. Shares of our common stock can be either acquired as part of a publicly announced repurchase program or withheld by us in connection with employee payroll tax withholding upon the vesting of equity awards. Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit facility.
During fiscal 2020, net cash used in financing activities was $6.7 million compared to $54.3 million during fiscal 2019. The decrease in net cash used in financing activities was primarily due to reduced stock buybacks under our share repurchase program and fewer shares withheld upon the vesting of equity awards. During fiscal 2020, we borrowed and repaid $24.9 million under our credit facility. During fiscal 2019, we borrowed and repaid $20.0 million under our credit facility.
At January 30, 2021, there were no borrowings outstanding under our credit facility and letters of credit outstanding were $1.2 million. As of January 30, 2021, $98.8 million was available to us for additional borrowings under the credit facility. Our credit facility requires us to maintain compliance with various financial covenants, the most restrictive of which are disclosed in Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K. We were in compliance with these covenants at January 30, 2021.
Store Openings and Closings – Fiscal 2021
Increasing market penetration by opening new stores has historically been a key component of our growth strategy, and we continue to focus on generating positive long-term financial performance for our store portfolio. In fiscal 2021, we expect to open a limited number of new stores within our existing geographic footprint, and we expect to close approximately nine stores.
Capital Expenditures – Fiscal 2021
Capital expenditures are expected to be $23 million to $25 million in fiscal 2021 and lease incentives from landlords are expected to be approximately $2 million. Of our total capital expenditures, approximately $16 million are expected to be used for new store construction and relocations, with the majority expected to be used for store remodels. Moreover, approximately $2 million are expected to be used for the ongoing upgrade of our distribution center. The remaining capital expenditures are expected to be incurred for various other store improvements, enhancements to our e-commerce platform, continued investments in technology and normal asset replacement activities. The resources allocated to these projects are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, the number of stores relocated, the amount of lease incentives, if any, received from landlords and the number of stores remodeled. The number of new store openings and relocations will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending.
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Dividends
In fiscal 2020, four quarterly cash dividends were approved and paid. The first quarter dividend was in the amount of $0.085 per share and the dividends paid for the remaining three quarters were increased to $0.090 per share. During fiscal 2019, the first quarter dividend was in the amount of $0.080 per share and the dividends for the remaining three quarters were $0.085 per share. During fiscal years 2020 and 2019, we returned $5.1 million and $5.7 million, respectively, in cash to our shareholders through our quarterly dividends.
The declaration and payment of any future dividends are at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. Our credit facility permits the payment of cash dividends as long as no default or event of default exists under the credit agreement both immediately before and immediately after giving effect to the cash dividends, and the aggregate amount of cash dividends for a fiscal year do not exceed $10 million. See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.
Share Repurchase Program
On December 15, 2020, our Board of Directors authorized a share repurchase program for up to $50 million of our 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. The actual number and value of the shares to be purchased will depend on the performance of our stock price and other market conditions.
The 2021 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2019, became effective January 1, 2020 and expired in accordance with its terms on December 31, 2020. Share repurchases pursuant to previous Board-approved share 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. We plan to resume the repurchase of shares under the 2021 Share Repurchase Program in fiscal 2021 under the assumption that general economic conditions will stabilize and the pandemic will have significantly less impact on our performance and operations.
Our credit facility stipulates that 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 . See Note 7 – “Debt” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a further discussion of our credit facility and its covenants.
Leases
Rent-related payments made in fiscal 2020 totaled $76.1 million. As we are contractually obligated to make lease payments to landlords, estimated future payments to landlords and lease-related charges are expected to be significant in future years and consistent with the total amount paid in fiscal 2020. These payments include estimates for fixed minimum and contingent rent, estimated reimbursements to landlords for common area maintenance, taxes and insurance and other lease related charges. See Note 8 – “Leases” to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for further discussion of our lease obligations.
Impact of Store Count and Seasonality on Quarterly Results
Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future, primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores and closing
37
underperforming stores. As discussed in the Executive Summary, our fiscal 2020 quarterly results were significantly impacted by the COVID-19 pandemic. As illustrated in the chart below, our f irst quarter fiscal 2020 net sales and earnings significantly declined due to the temporary closure of our physical stores for ap proximately 50% of the quarter.
(Unaudited, In thousands, except per share amounts)
Fiscal 2020
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net sales
$
147,495
$
300,794
$
274,579
$
253,897
Gross profit
31,464
82,605
87,761
78,152
Operating (loss)/income
(23,261
)
14,398
20,163
10,565
Net (loss)/income
(16,190
)
10,060
14,678
7,443
Net (loss)/income per share – Diluted 1
$
(1.16
)
$
0.71
$
1.03
$
0.52
Fiscal 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net sales
$
253,810
$
268,221
$
274,645
$
239,875
Gross profit
75,140
82,095
84,734
69,900
Operating income
15,608
15,674
18,150
4,777
Net income
13,873
11,832
13,726
3,483
Net income per share – Diluted 1
$
0.91
$
0.80
$
0.94
$
0.24
1) Per share amounts are computed independently for each of the quarters presented. For per share amounts, 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 as prescribed by accounting guidance.
Seasonality
We have three distinct peak selling periods: Easter, back-to-school and Christmas. Our operating results depend significantly upon the sales generated during these periods. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other periods of the year. We experienced reduced sales during the fiscal 2020 Easter season as a result of the COVID-19 pandemic. We canceled any seasonal merchandise that had a short selling window and moved seasonal merchandise with longer selling periods to later shipping dates, as applicable. The back-to-school shopping period in fiscal 2020 started later and lasted longer than previous years in many of our markets. In addition, approximately 10% of school districts in the markets where we operate did not return to in-person learning, which decreased our sales in those markets. Our holiday shopping season was also impacted by the effects of COVID-19 on customer shopping habits and discretionary income associated with government stimulus provided in late fiscal 2020. Any unanticipated decrease in demand for our products during these peak shopping seasons in future periods could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit and negatively affect our profitability.
Store Count
We continually analyze our store portfolio and the potential for new stores based on our view of internal and external opportunities and challenges in the marketplace. As part of our long-term growth strategy, we expect to pursue opportunities for store growth across large and mid-size markets as we leverage customer data from our customer relationship management program and more attractive real estate options become available.
When we identify a store that produces or may potentially produce, low or negative contribution, we either renegotiate lease terms, relocate or close the store. In instances when underperformance indicates the carrying value of a store’s assets may not be recoverable, we impair the store. Although store closings could reduce our overall net sales volume, we believe this strategy will realize long-term improvement in operating income and diluted net income per share. Depending upon the results of lease negotiations with certain landlords of underperforming stores, we may increase or decrease the number of store closures in future periods.
Non-capital expenditures, such as advertising and payroll incurred prior to the opening of a new store, are charged to expense as incurred. The timing and actual amount of expense recorded in closing an individual store can vary
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significantly depending, in part, on the period in which management commits to a closing plan, the remaining basis in the fixed assets to be disposed of at closing and the amount of any lease buyout. Therefore, our results of operations may be adversely affected in any quarter in which we incur pre-opening expenses related to the opening of new stores or incur store closing costs related to the closure of existing stores.
Our future store strategies may continue to be impacted by the current economic uncertainty associated with the COVID-19 pandemic.
Store Openings, Closings and Impairment Charges – Impact on Fiscal 2020 and Fiscal 2019
In fiscal 2020, we opened four new stores. The average initial inventory investment for new stores in fiscal 2020 was $578,000, capital expenditures were $973,000 and lease incentives received from our landlord were $448,000. In fiscal 2019, we opened one new store. The initial inventory investment for the new store was $683,000, capital expenditures were $236,000 and lease incentives received from our landlord were $120,000.
Pre-opening expenses for the stores opened in fiscal 2020 included in cost of sales and SG&A expenses were approximately $590,000, or an average of $147,000 per store. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During fiscal 2019, we opened one new store and expended $59,000 in pre-opening expenses.
Total store closing costs were $4.0 million in fiscal 2020 and $1.3 million in fiscal 2019. We closed 13 stores during fiscal 2020 and six stores during fiscal 2019. We recorded non-cash impairment charges on a majority of these stores and also recognized impairment charges on other underperforming stores during these years. Included in store closing costs were non-cash impairment charges of $3.1 million in fiscal 2020 and $1.2 million in fiscal 2019. In addition to non-cash impairment charges, store closing costs can include fixed asset write-offs, employee severance, lease termination fees, store tear-down and clean-up expenses, and acceleration of expenses and deferred lease incentives.
In total, store opening and closing costs impacting SG&A expenses were $4.1 million in fiscal 2020 and $1.7 million in fiscal 2019. Store opening and closing costs included in cost of sales was expense of $0.5 million in fiscal 2020 and a benefit of $0.3 million in fiscal 2019.
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Historical Financial Data
The following historical financial data is included for the convenience of assessing trends in our financial condition and results of operations over the previous five fiscal years. A more detailed description of the fluctuations among fiscal 2016 – fiscal 2019 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.
(In thousands, except per share and operating data)
Fiscal years (1)
2020
2019
2018
2017
2016
Income Statement Data:
Net sales
$
976,765
$
1,036,551
$
1,029,650
$
1,019,154
$
1,001,102
Gross profit
279,982
311,869
308,992
296,269
289,235
Operating income
21,865
54,209
49,760
37,701
37,912
Net income
15,991
42,914
38,135
18,933
23,517
Diluted net income per share
1.12
2.92
2.45
1.15
1.28
Dividends Declared Per Share:
$
0.355
$
0.335
$
0.315
$
0.295
$
0.275
Balance Sheet Data:
Cash and cash equivalents
$
106,532
$
61,899
$
67,021
$
48,254
$
62,944
Total assets (2)
642,747
628,374
417,999
415,580
458,478
Long-term debt
0
0
0
0
0
Total shareholders’ equity
310,176
297,363
304,433
307,302
318,882
Selected Operating Data:
Stores open at end of year
383
392
397
408
415
Comparable store sales (3)(4)
-5.3
%
1.9
%
4.3
%
0.3
%
0.5
%
Square footage of store space at year
end (000’s)
4,146
4,220
4,268
4,391
4,526
Average sales per store (000’s) (3) (5)
$
2,503
$
2,635
$
2,610
$
2,419
$
2,367
Average sales per square foot (3) (6)
$
237
$
245
$
236
$
229
$
224
(1) Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Unless otherwise stated, references to years 2020, 2019, 2018, 2017, and 2016 relate respectively to the fiscal years ended January 30, 2021, February 1, 2020, February 2, 2019, February 3, 2018, and January 28, 2017. Fiscal year 2017 consisted of 53 weeks and the other fiscal years consisted of 52 weeks.
(2) In fiscal 2019, we adopted Accounting Standards Codification No. 842 on a modified retrospective basis, which requires us to recognize leased assets and obligations on our balance sheet. See Note 8 – “Leases” contained in the Notes to Consolidated Financial Statements included in PART II, ITEM 8 of this Annual Report on Form 10-K for further discussion.
(3) Data for fiscal 2017 has been adjusted to a comparable 52-week period ended January 27, 2018. The 53rd week in fiscal 2017 caused a one-week shift in our fiscal calendar. To minimize the effect of this fiscal calendar shift on comparable store sales, average sales per store and average sales per square foot, our reported annual comparable store sales results for fiscal 2017 compare the 52-week period ended January 27, 2018 to the 52-week period ended January 28, 2017 and average sales per store and average sales per square foot are calculated for the 52-week period ended January 28, 2017. Comparable store sales results for fiscal 2018 compare the 52-week period ended February 2, 2019 to the 52-week period ended February 3, 2018.
(4) Comparable store sales for the periods indicated include stores that have been open for 13 full months after such stores’ grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores opened or closed during the periods indicated are not included in comparable store sales. We include e-commerce sales in our comparable store sales. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.
(5) In fiscal years 2020, 2019, and 2018, average sales per store includes e-commerce sales that are in close proximity to a physical store.
(6) Average sales per square foot includes net e-commerce sales. We include e-commerce sales in our average sales per square foot as a result of our multi-channel retailer strategy. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores.
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