SHOE STATION GROUP INC 10-K

ITEM 8. FINANCIAL STATEMENTS The information required by this item follows Deloitte & Touche LLP’s audit opinion, which begins on the following page. 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Shoe Carnival, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shoe Carnival, Inc. 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, 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). Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 42 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 Indianapolis, Indiana March 26, 2021 We have served as the Company's auditor since 1988. 43 Shoe Carnival, Inc. Consolidated Balance Sheets (In thousands, except share data) January 30, 2021 February 1, 2020 Assets Current Assets: Cash and cash equivalents $ 106,532 $ 61,899 Accounts receivable 7,096 2,724 Merchandise inventories 233,266 259,495 Other 8,411 5,529 Total Current Assets 355,305 329,647 Property and equipment – net 62,325 67,781 Deferred income taxes 5,635 7,833 Other noncurrent assets 13,843 8,106 Operating lease right-of-use assets 205,639 215,007 Total Assets $ 642,747 $ 628,374 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable $ 57,717 $ 60,665 Accrued and other liabilities 24,390 18,695 Current portion of operating lease liabilities 48,794 43,146 Total Current Liabilities 130,901 122,506 Long-term portion of operating lease liabilities 182,622 194,108 Deferred compensation 16,008 13,345 Other 3,040 1,052 Total Liabilities 332,571 331,011 Shareholders’ Equity: Common stock, $ .01 par value, 50,000,000 shares authorized, 20,524,601 and 20,524,601 shares issued, respectively 205 205 Additional paid-in capital 78,878 79,914 Retained earnings 406,655 395,761 Treasury stock, at cost, 6,419,736 and 6,516,875 shares, respectively ( 175,562 ) ( 178,517 ) Total Shareholders’ Equity 310,176 297,363 Total Liabilities and Shareholders’ Equity $ 642,747 $ 628,374 See notes to consolidated financial statements. 44 Shoe Carnival, Inc. Consolidated Statements of Income (In thousands, except per share data) January 30, 2021 February 1, 2020 February 2, 2019 Net sales $ 976,765 $ 1,036,551 $ 1,029,650 Cost of sales (including buying, distribution and occupancy costs) 696,783 724,682 720,658 Gross profit 279,982 311,869 308,992 Selling, general and administrative expenses 258,117 257,660 259,232 Operating income 21,865 54,209 49,760 Interest income ( 97 ) ( 730 ) ( 747 ) Interest expense 412 191 150 Income before income taxes 21,550 54,748 50,357 Income tax expense 5,559 11,834 12,222 Net income $ 15,991 $ 42,914 $ 38,135 Net income per share: Basic $ 1.14 $ 2.97 $ 2.51 Diluted $ 1.12 $ 2.92 $ 2.45 Weighted average shares: Basic 14,066 14,427 15,111 Diluted 14,248 14,686 15,499 See notes to consolidated financial statements. 45 Shoe Carnival, Inc. Consolidated Statements of Shareholders’ Equity (In thousands) Common Stock Issued Treasury Amount Additional Paid-In Capital Retained Earnings Treasury Stock Total Balance at February 3, 2018 20,529 ( 3,582 ) $ 205 $ 65,458 $ 326,738 $ ( 85,099 ) $ 307,302 Adoption of Accounting Standards Codification 606 620 620 Dividends ($ 0.315 per share) ( 5,050 ) ( 5,050 ) Employee stock purchase plan purchases 7 8 169 177 Restricted stock awards ( 39 ) 543 ( 543 ) 0 Shares surrendered by employees to pay taxes on restricted stock ( 13 ) ( 327 ) ( 327 ) Purchase of common stock for Treasury ( 1,527 ) ( 46,046 ) ( 46,046 ) Stock-based compensation expense 9,622 9,622 Net income 38,135 38,135 Balance at February 2, 2019 20,529 ( 5,154 ) $ 205 $ 75,631 $ 360,443 $ ( 131,846 ) $ 304,433 Adoption of Accounting Standards Codification 842 ( 2,649 ) ( 2,649 ) Dividends ($ 0.335 per share) ( 4,947 ) ( 4,947 ) Employee stock purchase plan purchases 6 7 175 182 Restricted stock awards ( 4 ) 72 ( 1,982 ) 1,982 0 Shares surrendered by employees to pay taxes on restricted stock ( 324 ) ( 11,060 ) ( 11,060 ) Purchase of common stock for Treasury ( 1,117 ) ( 37,768 ) ( 37,768 ) Stock-based compensation expense 6,258 6,258 Net income 42,914 42,914 Balance at February 1, 2020 20,525 ( 6,517 ) $ 205 $ 79,914 $ 395,761 $ ( 178,517 ) $ 297,363 Dividends ($ 0.355 per share) ( 5,097 ) ( 5,097 ) Employee stock purchase plan purchases 8 ( 29 ) 224 195 Restricted stock awards 161 ( 4,467 ) 4,467 0 Shares surrendered by employees to pay taxes on restricted stock ( 72 ) ( 1,736 ) ( 1,736 ) Stock-based compensation expense 3,460 3,460 Net income 15,991 15,991 Balance at January 30, 2021 20,525 ( 6,420 ) $ 205 $ 78,878 $ 406,655 $ ( 175,562 ) $ 310,176 See notes to consolidated financial statements. 46 Shoe Carnival, Inc. Consolidated Statements of Cash Flows (In thousands) January 30, 2021 February 1, 2020 February 2, 2019 Cash Flows From Operating Activities Net income $ 15,991 $ 42,914 $ 38,135 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,114 16,950 21,843 Stock-based compensation 3,883 6,486 10,162 Loss/(gain) on retirement and impairment of assets, net 2,807 1,503 ( 1,264 ) Deferred income taxes 2,198 2,619 ( 1,440 ) Non-cash operating lease expense 42,008 42,322 0 Lease incentives 0 0 634 Other 2,035 1,236 ( 8,650 ) Changes in operating assets and liabilities: Accounts receivable ( 4,372 ) ( 1,505 ) 3,905 Merchandise inventories 26,229 ( 1,956 ) 2,961 Operating lease liabilities ( 38,477 ) ( 45,933 ) 0 Accounts payable and accrued liabilities 2,510 9,468 12,688 Other ( 7,531 ) ( 7,158 ) ( 4,833 ) Net cash provided by operating activities 63,395 66,946 74,141 Cash Flows From Investing Activities Purchases of property and equipment ( 12,396 ) ( 18,501 ) ( 7,413 ) Other proceeds 303 750 2,998 Net cash used in investing activities ( 12,093 ) ( 17,751 ) ( 4,415 ) Cash Flows From Financing Activities Borrowings under line of credit 24,903 20,000 0 Payments on line of credit ( 24,903 ) ( 20,000 ) 0 Proceeds from issuance of stock 195 182 177 Dividends paid ( 5,128 ) ( 5,671 ) ( 4,763 ) Purchase of common stock for treasury 0 ( 37,768 ) ( 46,046 ) Shares surrendered by employees to pay taxes on restricted stock ( 1,736 ) ( 11,060 ) ( 327 ) Net cash used in financing activities ( 6,669 ) ( 54,317 ) ( 50,959 ) Net increase (decrease) in cash and cash equivalents 44,633 ( 5,122 ) 18,767 Cash and cash equivalents at beginning of year 61,899 67,021 48,254 Cash and cash equivalents at end of year $ 106,532 $ 61,899 $ 67,021 Supplemental disclosures of cash flow information: Cash paid during year for interest $ 392 $ 192 $ 150 Cash paid during year for income taxes $ 3,144 $ 9,805 $ 13,419 Capital expenditures incurred but not yet paid $ 1,440 $ 1,377 $ 130 Dividends declared but not yet paid $ 133 $ 165 $ 888 See notes to consolidated financial statements. 47 Shoe Carnival, Inc. Notes to Consolidated Financial Statements Note 1 – Organization and Description of Business Our consolidated financial statements include the accounts of Shoe Carnival, Inc. and its wholly-owned subsidiaries SCHC, Inc. and Shoe Carnival Ventures, LLC, and SCLC, Inc., a wholly-owned subsidiary of SCHC, Inc. (collectively referred to as “we”, “our”, “us” or the “Company”). All intercompany accounts and transactions have been eliminated. Our primary activity is the sale of footwear and related products through our retail stores in 35 states within the continental United States and in Puerto Rico. We also offer online shopping on our mobile app and our e-commerce site at www.shoecarnival.com. Note 2 – Summary of Significant Accounting Policies Fiscal Year 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 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. 48 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. The U.S. 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 The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the financial statement reporting date in addition to the reported amounts of certain revenues and expenses for the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances and actual results could differ from those estimates. Cash and Cash Equivalents 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 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 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. To date, we have experienced no loss or lack of access to either invested cash or cash held in our bank accounts. Fair Value Measurements Certain assets are valued and disclosed at fair value. Financial assets include cash and cash equivalents. Nonfinancial assets consist of long-lived assets that are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). 49 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued 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. Level 2 – Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; • inputs that are derived principally from or corroborated by observable market; and • data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs. Merchandise Inventories and Cost of Sales Merchandise inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. For determining net realizable value, we estimate the future demand and related sale price of merchandise contained in inventory as of the balance sheet date. 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 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. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Material changes in the factors previously noted could have a significant impact on the actual net realizable value of our inventory and our reported operating results. 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 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. Leases 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. 50 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued 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. Revenue Recognition Substantially all of our revenue is for a single performance obligation and is recognized when control passes to customers. We consider control to have transferred when we have a present right to payment, the customer has title to the product, physical possession of the product has been transferred to the customer and the risks and rewards of the product that we retain are minimal. The redemption of loyalty points under our Shoe Perks loyalty rewards program and redemptions of gift cards are accounted for as separate performance obligations. 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 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. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures that materially increase values, improve capacities or extend useful lives are capitalized. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in operations. Cloud Computing Arrangements that are Service Contracts We account for the costs to implement hosted cloud computing arrangements that are considered to be service contracts in current and noncurrent other assets. We capitalize these costs based on the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We amortize the costs over the related service contract period for the hosted arrangement. 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. 51 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Long-Lived Asset Impairment Testing We periodically evaluate our long-lived assets if events or circumstances indicate the carrying value may not be recoverable. The carrying value of long-lived assets is considered impaired when the carrying value of the assets exceeds the expected future cash flows to be derived from their use. Assets are grouped, and the evaluation is performed, at the lowest level for which there are identifiable cash flows, which is generally at a store level. Store level asset groupings typically include property and equipment and operating lease 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 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, 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. Changes in sales and operating income assumptions or unfavorable changes in external factors can significantly impact the estimated future cash flows. An increase or decrease in the projected cash flow can significantly decrease or increase the fair value of these assets, which may have an effect on the impairment recorded. 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. Insurance Reserves We self-insure a significant portion of our workers’ compensation, general liability and employee health care costs and also maintain insurance in each area of risk to protect us from individual and aggregate losses over specified dollar values. Self-insurance reserves include estimates of claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. 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. 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. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. Consideration Received From a Vendor Consideration is primarily received from merchandise vendors and includes co-operative advertising/promotion, margin assistance, damage allowances and rebates earned for a specific level of purchases over a defined period. Consideration principally takes the form of credits that we can apply against trade amounts owed. Consideration is recorded as a reduction of the price paid for the vendor’s products and recorded as a reduction of our cost of sales unless the consideration represents a reimbursement of a specific, incremental, identifiable cost; in such a scenario, it is recorded as an offset to the same financial statement line item. Consideration received after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. 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 52 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 Print, television, radio, outdoor media, digital media and internal production costs are expensed when incurred. External production costs are expensed in the period the advertisement first takes place. Advertising expenses included in selling, general and administrative expenses were $ 42.1 million, $ 40.0 million and $ 41.2 million in fiscal years 2020, 2019 and 2018, respectively. Store Opening and Start-up Costs Non-capital expenditures, such as payroll, supplies and rent incurred prior to the opening of a new store, are charged to expense in the period they are incurred. Advertising related to new stores is expensed pursuant to the aforementioned advertising policy. Stock-Based Compensation 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 expenses. We account for forfeitures as they occur in calculating stock-based compensation expense for the period. For performance-based stock awards, we estimate the probability of vesting based on the likelihood that the awards will meet their performance goals. Segment Information We are a family footwear retailer that offers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with emphasis on national name brands. We operate our business as one reportable segment based on the similar nature of products sold; merchandising, distribution, and marketing processes involved; target customers; and economic characteristics of our stores and e-commerce platform. Due to our multi-channel retailer strategy, we view e-commerce sales as an extension of our physical stores. Income Taxes We compute income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those tax benefits are uncertain. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest expense and penalties, if any, related to uncertain tax positions in income tax expense. 53 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Net Income Per Share The following table sets forth the computation of basic and diluted net income per share as shown on the face of the accompanying consolidated statements of income: Fiscal Year Ended January 30, 2021 February 1, 2020 February 2, 2019 (In thousands, except per share data) Basic Net Income per Share: Net Income Shares Per Share Amount Net Income Shares Per Share Amount Net Income Shares Per Share Amount Net income $ 15,991 $ 42,914 $ 38,135 Conversion of share-based compensation arrangements 0 ( 63 ) ( 152 ) Net income available for basic common shares and basic net income per share $ 15,991 14,066 $ 1.14 $ 42,851 14,427 $ 2.97 $ 37,983 15,111 $ 2.51 Diluted Net Income per Share: Net income $ 15,991 $ 42,914 $ 38,135 Conversion of share-based compensation arrangements 0 182 ( 62 ) 259 ( 148 ) 388 Net income available for diluted common shares and diluted net income per share $ 15,991 14,248 $ 1.12 $ 42,852 14,686 $ 2.92 $ 37,987 15,499 $ 2.45 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 January 30, 2021 and February 1, 2020: Fair Value Measurements (In thousands) Level 1 Level 2 Level 3 Total As of January 30, 2021: Cash equivalents – money market account $ 97,519 $ 0 $ 0 $ 97,519 As of February 1, 2020: Cash equivalents – money market account $ 48,080 $ 0 $ 0 $ 48,080 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. 54 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Note 4 – Revenue Disaggregation of Revenue by Product Category Revenue is disaggregated by product category below. Net sales and percentage of net sales for the fiscal years 2020, 2019 and 2018 are as follows: (In thousands) January 30, 2021 February 1, 2020 February 2, 2019 Non-Athletics: Women's $ 213,095 22 % $ 255,773 25 % $ 250,320 24 % Men's 132,057 14 149,075 14 144,628 14 Children's 54,706 5 54,707 5 51,963 5 Total 399,858 41 459,555 44 446,911 43 Athletics: Women's 180,664 18 175,298 17 179,411 18 Men's 214,010 22 210,157 20 215,796 21 Children's 125,728 13 139,625 14 138,686 14 Total 520,402 53 525,080 51 533,893 53 Accessories 48,282 5 48,402 5 45,100 4 Other 8,223 1 3,514 0 3,746 0 Total $ 976,765 100 % $ 1,036,551 100 % $ 1,029,650 100 % Accounting Policy and Performance Obligations 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 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. Sales are recorded net of such incentives and returns and allowances. If an incentive involves free merchandise, that merchandise is recorded as a zero sale and the cost is included in cost of sales. Gift card revenue is recognized at the time of redemption. When a customer makes a purchase as part of our rewards program, we allocate the transaction price between the goods purchased and the loyalty reward points and recognize the loyalty revenue based on estimated customer redemptions. Transaction Price and Payment Terms The transaction price is the amount of consideration we expect to receive from our customers and is reduced by any stated promotional discounts at the time of purchase. The transaction price may be variable due to terms that permit customers to exchange or return products for a refund. The implicit contract with the customer reflected in the transaction receipt states the final terms of the sale, including the description, quantity, and price of each product purchased. The customer agrees to a stated price in the contract that does not vary over the term of the contract and may include revenue to offset shipping costs. Taxes imposed by governmental authorities such as sales taxes are excluded from net sales. 55 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued 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 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. For Shoes 2U transactions, customers may order the product at the point of sale. For these transactions, customers pay in advance and unearned revenue is recorded as a contract liability. We recognize the related revenue when control has been transferred to the customer (i.e., when the product is picked up by the customer or shipped to the customer). Unearned revenue related to Shoes 2U was not material to our consolidated financial statements at January 30, 2021 and February 1, 2020. Returns and Refunds We have established an allowance based upon historical experience in order to estimate return and refund transactions. This allowance is recorded as a reduction in sales with a corresponding refund liability recorded in accrued and other liabilities. The estimated cost of merchandise inventory is recorded as a reduction to cost of sales and an increase in merchandise inventories. 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 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 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 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 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. The portion allocated to the points program is recorded as a contract liability for rewards that are expected to be redeemed. We then recognize revenue based on an estimate of when customers redeem rewards, which incorporates an estimate of points expected to expire using historical rates. 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. 56 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Note 5 – Property and Equipment and Hosted Cloud Computing Arrangements The following is a summary of property and equipment: (In thousands) January 30, 2021 February 1, 2020 Land $ 1,564 $ 1,564 Buildings 6,783 6,636 Furniture, fixtures and equipment 156,202 153,198 Leasehold improvements 107,405 105,611 Total 271,954 267,009 Less accumulated depreciation and amortization ( 209,629 ) ( 199,228 ) Property and equipment – net $ 62,325 $ 67,781 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. 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 Accrued and other liabilities consisted of the following: (In thousands) January 30, 2021 February 1, 2020 Employee compensation and benefits $ 9,582 $ 7,687 Self-insurance reserves 3,405 2,698 Sales and use tax 3,172 2,317 Gift cards 1,680 1,538 Other 6,551 4,455 Total accrued and other liabilities $ 24,390 $ 18,695 57 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued 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 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) 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. 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. 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 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. In addition, we do not have any sublease arrangements with any related party or third party. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. 58 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued 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. 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) 2020 2019 Operating lease cost $ 53,418 $ 54,681 Variable lease cost CAM, property taxes and insurance 19,805 20,010 Percentage rent and other variable lease costs 2,008 1,637 Total $ 75,231 $ 76,328 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) 2020 2019 Cash paid for amounts included in the measurement of operating lease liabilities $ 38,477 $ 45,933 ROU assets obtained in exchange for operating lease liabilities $ 36,290 $ 31,474 As of As of January 30, 2021 February 1, 2020 Weighted-average remaining lease term for operating leases (in years) 6.1 6.1 Weighted-average discount rate for operating leases 5.2 % 5.5 % 59 Shoe Carnival, Inc. 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 our operating lease liabilities as of January 30, 2021: (In thousands) Operating Leases 2021 $ 59,376 2022 53,214 2023 46,899 2024 33,555 2025 22,517 Thereafter to 2034 65,922 Total undiscounted lease payments 281,483 Less: Imputed interest 50,067 Total operating lease liabilities 231,416 Less: Current portion of operating lease liabilities 48,794 Long-term portion of operating lease liabilities $ 182,622 Note 9 – Income Taxes The provision for income taxes consisted of: (In thousands) 2020 2019 2018 Current: Federal $ 2,233 $ 6,799 $ 11,468 State 887 2,175 1,693 Puerto Rico 241 241 700 Total current 3,361 9,215 13,861 Deferred: Federal 2,122 2,749 ( 894 ) State ( 294 ) 3 ( 745 ) Puerto Rico 133 246 643 Total deferred 1,961 2,998 ( 996 ) Valuation allowance 237 ( 379 ) ( 643 ) Total provision $ 5,559 $ 11,834 $ 12,222 Reconciliation between the statutory federal income tax rate and the effective income tax rate is as follows: Fiscal years 2020 2019 2018 U.S. Federal statutory tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax benefit 2.4 3.2 3.0 Puerto Rico 1.7 0.5 4.2 Valuation allowance 0 ( 0.7 ) ( 1.3 ) Tax effect of foreign losses 0 0.4 ( 2.7 ) Excess tax benefit on stock-based compensation 0.4 ( 3.6 ) 0.0 Other 0.3 0.8 0.1 Effective income tax rate 25.8 % 21.6 % 24.3 % 60 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. The sources of these differences and the tax effect of each are as follows: (In thousands) January 30, 2021 February 1, 2020 Deferred tax assets: Lease obligations $ 56,287 $ 57,891 Accrued compensation 4,957 4,844 Inventory 32 938 Other 1,886 1,282 Total deferred tax assets 63,162 64,955 Valuation allowance ( 431 ) ( 194 ) Total deferred tax assets – net of valuation allowance 62,731 64,761 Deferred tax liabilities: Lease right-of-use assets 50,609 51,367 Property and equipment 5,064 4,711 Other 1,423 850 Total deferred tax liabilities 57,096 56,928 Long-term deferred income taxes, net $ 5,635 $ 7,833 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 Retirement Savings Plans Our Board of Directors-approved Shoe Carnival Retirement Savings Plan (the “Domestic Savings Plan”) is open to all employees working in the continental United States 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. 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 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. This plan is similar to our Domestic Savings Plan, whereby an employee may contribute up to 20 % of his or her annual earnings, with a matching Company contribution up to the first 4 % at a rate of 50 %. Contributions charged to expense associated with these plans were $ 851,000 , $ 818,000 and $ 754,000 in fiscal years 2020, 2019 and 2018, respectively. 61 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued Stock Purchase Plan 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, 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: (In thousands) 2020 2019 2018 Stock-based compensation expense before the recognized income tax benefit (1) $ 34 $ 32 $ 31 Income tax benefit $ 9 $ 7 $ 8 (1) Amounts are representative of the 15 % discount employees are provided for purchases under the Stock Purchase Plan. Deferred Compensation Plan We have a non-qualified deferred compensation plan for certain key employees who, due to Internal Revenue Service guidelines, cannot take full advantage of the employer-sponsored 401(k) plan. Participants in the plan may elect on an annual basis to defer, on a pre-tax basis, portions of their current compensation until retirement, or earlier if so elected. We voluntarily match a portion of the employees’ contributions, which is subject to vesting requirements. The compensation deferred under this plan is credited with earnings or losses measured by the rate of return on investments elected by plan participants. The plan is currently unfunded. 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 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. 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. 62 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; (c) one-third of the award vests after two years and two-thirds of the award vests after three 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 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: Number of Shares Weighted- Average Grant Date Fair Value Restricted stock units and performance stock units at February 1, 2020 263,135 $ 29.44 Granted 159,189 14.96 Vested ( 164,099 ) 26.80 Forfeited ( 1,717 ) 31.94 Restricted stock units and performance stock units at January 30, 2021 256,508 $ 22.13 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: Number of Shares Weighted- Average Grant Date Fair Value Restricted stock at February 1, 2020 67,435 $ 24.23 Granted 12,045 24.91 Vested ( 64,664 ) 24.33 Forfeited ( 14,816 ) 24.37 Restricted stock at January 30, 2021 0 $ 0.00 63 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. 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) 2020 2019 2018 Stock-based compensation expense before the recognized income tax benefit $ 3,426 $ 6,226 $ 9,591 Income tax benefit $ 884 $ 1,346 $ 2,328 The $ 9.6 million of expense recognized in fiscal 2018 included a $ 2.2 million cumulative catch-up of expense recorded in the third quarter of fiscal 2018. 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. 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. Cash-Settled Stock Appreciation Rights 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 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. During the second quarter of fiscal 2018, all remaining SARs related to this grant were exercised. The following table summarizes SARs activity: Number of Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Outstanding at February 1, 2020 43,200 $ 34.95 Granted 43,000 13.79 Forfeited ( 5,600 ) 28.15 Exercised ( 36,400 ) 34.95 Outstanding at January 30, 2021 44,200 $ 15.23 2.1 64 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 January 30, 2021, was $ 10.00 . The fair value was estimated using a trinomial lattice model with the following assumptions: January 30, 2021 February 1, 2020 Risk free interest rate yield curve 0.07%-0.45 % 1.30%-1.56 % Expected dividend yield 0.8 % 0.9 % Expected volatility 63.11 % 48.63 % Maximum life 2.1 Years 2.2 Years Exercise multiple 1.29 1.29 Maximum payout $ 10.00 $ 10.00 Employee exit rate 2.2% - 9.0 % 2.2% - 9.0 % The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the end of the reporting period. The expected dividend yield was based on our quarterly cash dividends, with the assumption that quarterly dividends would continue at that rate. Expected volatility was based on the historical volatility of our common stock. The exercise multiple and employee exit rate were based on historical option data. The following table summarizes information regarding stock-based compensation recognized for SARs: (In thousands) 2020 2019 2018 Stock-based compensation before the recognized income tax effect $ 423 $ 228 $ 540 Income tax effect $ 109 $ 49 $ 131 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. 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, 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 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 177 footwear vendors. In fiscal 2020, two branded suppliers, Nike, Inc. and Skechers USA, Inc., collectively accounted for approximately 43 % of our net sales. Nike, Inc. accounted for 65 Shoe Carnival, Inc. Notes to Consolidated Financial Statements - continued approximately 33 % and Skechers USA, Inc. accounted for approximately 10 % of our net sales, respectively . A loss of any of our key suppliers in certain product categories could have a material adverse effect on our business. As is common in the industry, we do not have any long-term contracts with suppliers. Note 14 – Litigation Matters 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: (1) probable – the future event or events are likely to occur, (2) remote – the chance of the future event or events is slight and (3) reasonably possible – the chance of the future event or events occurring is more than remote but less than likely. The guidance also contains certain requirements with respect to how we accrue for and disclose information concerning our loss contingencies. We accrue for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a loss has been incurred. No accrual or disclosure is required for losses that are remote. From time to time, we are involved in certain legal proceedings in the ordinary course of conducting our business. 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. The quarterly cash dividend of $ 0.14 per share will be paid on April 19, 2021 to shareholders of record as of the close of business on April 5, 2021 . 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. 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.