The following discussion of our financial condition and results of operations (the "MD&A") 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 2021 and fiscal 2020 and year-over-year comparisons between fiscal 2021 and fiscal 2020. A discussion of fiscal 2019 and year-over-year comparisons between fiscal 2020 and fiscal 2019 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 endedJanuary 30, 2021 , filed with theUnited States Securities and Exchange Commission onMarch 26, 2021 . However, given the significant impact of the COVID-19 pandemic on our fiscal 2020 results, we have included certain comparisons in this MD&A between fiscal 2021 and fiscal 2019 to provide further context regarding our fiscal 2021 results of operations. 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 toJanuary 31 . Unless otherwise stated, references to fiscal years 2021, 2020 and 2019 relate to the fiscal years endedJanuary 29, 2022 ,January 30, 2021 andFebruary 1, 2020 . Fiscal years 2021, 2020, and 2019 all consisted of 52 weeks.
Overview of Our Business
Shoe Carnival, Inc. is one of the nation's largest family footwear retailers. OnDecember 3, 2021 , we began operating under two banners:Shoe Carnival andShoe Station . Our objective is to be the omnichannel retailer-of-choice for on-trend branded and private label footwear for the entire family. Our product assortment, whether shopping in a physical store or on our e-commerce platform, includes dress, casual, and work shoes, sandals, boots and a wide assortment of athletic shoes. Our typical physical store carries shoes in two general categories - athletics and non-athletics with subcategories for men's, women's, and children's, as well as a broad range of accessories. In addition to our physical stores, our e-commerce platform offers customers the same assortment of merchandise in all categories of footwear with expanded options in certain instances. Our stores under theShoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in ourShoe Carnival physical stores is organized by category and brand, creating strong brand statements within the aisles. These brand statements are underscored by branded signage on endcaps and in-line signage throughout the store. Our signage may highlight a vendor's product offerings or sales promotions, or may highlight seasonal or lifestyle statements by grouping similar footwear from multiple vendors. Approximately 160 of ourShoe Carnival stores have athletic shops that highlight leading athletic brands. We expect to continue growing our "athletic shop" in-store concept across our fleet in the years ahead. The addition of theShoe Station banner and retail locations creates a complementary retail platform to serve a broader family footwear customer base across both urban and suburban demographics.The Shoe Station concept targets a more affluent family footwear customer and has a strong track record of capitalizing on emerging footwear fashion trends and introducing new brands. Due to the larger average size of ourShoe Station stores and the targeted customer, these locations provide for a primary destination shopping experience. We believe our distinctive shopping experiences give us various competitive advantages, including increased multiple unit sales; the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods.
Acquisition of
OnDecember 3, 2021 , we acquired substantially all of the assets ofShoe Station , a privately-held, family-owned shoe retailer.The Shoe Station assets were acquired for$70.7 million , inclusive of customary adjustments which are not yet finalized, and funded with cash on hand. We are continuing to operate the 21 locations acquired under theShoe Station banner.Shoe Station contributed net sales of$16.6 million during the period from the acquisition date throughJanuary 29, 2022 . We incurred acquisition and integration-related charges of$4.3 million ($3.2 million after tax, or$0.11 on a diluted per share basis) during fiscal 2021. These charges were comprised of non-recurring expense related 28 -------------------------------------------------------------------------------- to the fair value adjustment to acquisition-date inventory of$1.1 million recorded in cost of goods sold and$3.2 million of transaction costs and integration-related charges recorded in selling, general, and administrative expenses. See Note 3 - "Acquisition ofShoe Station " in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for additional information on the acquisition.
Comparable Store Sales
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' acquisition or grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores recently opened, acquired or closed are not included in comparable store sales. We generally include e-commerce sales in our comparable store sales as a result of our omnichannel retailer strategy. Due to our omnichannel retailer strategy, we view e-commerce sales as an extension of our physical stores. Similar to our physical stores, e-commerce platforms that are acquired will not be included in comparable store sales for 13 months after the acquisition of the platform. Our method for calculating comparable store sales for fiscal 2021, therefore, does not include any sales activity fromShoe Station .
Stock Split
The shares outstanding and net income per share information throughout this MD&A has been adjusted retroactively for all periods presented as a result of a two-for-one stock split of the outstanding shares of our common stock held by shareholders of record onJuly 6, 2021 that was completed onJuly 19, 2021 . See Note 2 - "Summary of Significant Accounting Policies" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for additional information on the stock split.
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, distribution processes, and overall economic conditions and consumer spending for the foreseeable future. In response to the COVID-19 pandemic, all of our physical stores were temporarily closed effectiveMarch 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 with applicable public health guidelines in lateApril 2020 . Thus, substantially all of our physical stores were closed for approximately 50% of the first fiscal quarter of 2020. By the beginning of the second quarter of fiscal 2020, approximately 50% of our stores were reopened, and by earlyJune 2020 , substantially all of our stores had reopened. We did not have any stores closed as ofJanuary 29, 2022 or for extended periods during fiscal 2021 due to the pandemic.
Executive Summary
Fiscal 2021 was a record-breaking year for us. Results in fiscal 2021 were the highest in terms of net sales, gross profit, operating income and diluted net income per share in our history. For each of these financial metrics, the first three quarters of fiscal 2021 set consecutive all-time records and the fourth quarter of fiscal 2021 set a record for that specific quarter. The diluted net income per share of$5.42 earned in fiscal 2021, which included theShoe Station acquisition-related charges incurred during the fourth quarter of fiscal 2021, exceeded the diluted net income per share earned during the last six fiscal years combined.
Comparable store sales in fiscal 2021 increased 35.3% compared to fiscal 2020 and increased 28.3% compared to fiscal 2019.
We believe these record-breaking results were driven by the following:
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our inventory selection; • our more focused promotional strategy; • our customer base returning to a more normal lifestyle, including going back to work and in-person learning; and 29 --------------------------------------------------------------------------------
•
the economic impact of consumer-based government stimulus.
During fiscal 2021, physical store traffic increased 37.5% compared to fiscal 2020 and was slightly above traffic in fiscal 2019. The increased store traffic, combined with increased conversion rates, resulted in an increased number of converted customers, compared to both prior year periods. All of our major product categories had comparable store sale increases ranging from low to mid double digits compared to fiscal 2020 and fiscal 2019. These increases were driven by higher average per unit prices across all categories and, overall, more units sold.
Highlights for fiscal 2021 and a brief discussion of some key initiatives follow:
•
Net sales for fiscal 2021 of
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We achieved record annual gross profit of$526.8 million during fiscal 2021. Gross profit margin as a percent of sales increased 10.9 percentage points compared to fiscal 2020 to 39.6% and increased 9.5 percentage points compared to fiscal 2019.
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We had no borrowings during fiscal 2021 and ended our fiscal year with
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In fiscal 2021, we continued to increase membership in our Shoe Perks customer loyalty program. Membership in the program totaled 28.5 million customers as ofJanuary 29, 2022 . We believe our Shoe Perks program affords us opportunities to communicate, build relationships and engage with our most loyal shoppers, which we believe will result in long-term customer commitment to our brand.
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We spent$31.4 million on capital expenditures during fiscal 2021, primarily focused on our store modernization efforts. ThroughJanuary 29, 2022 , we have completed 68 store modernizations.
Fiscal 2022 Plans
Following is a summary of certain strategic initiatives and goals for fiscal 2022:
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Continue modernizing our stores through design enhancements, as we expect to have 100 more stores completed by the end of fiscal 2022 and to complete our modernization program by the end of fiscal 2024. • Leverage our Customer Relationship Management ("CRM") capabilities to increase personalized, segmented marketing, and continue with limited, to no, reliance on broad-based promotional activities, and enhance our vendor relationships. • Continue to grow the recently acquiredShoe Station banner and further integrate its supply chain. • Continue to manage the effect of COVID-19 on our operations and protect the health and safety of our customers, employees and vendor partners. • Continue to navigate and manage supply chain disruption and other macroeconomic uncertainties. • Maintain the growth and market share of our omnichannel platform. • Continue implementation of upgrades to merchandise planning and allocation systems and continue to increase the productivity of other recently implemented systems. 30 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our results of operations expressed as a percentage of net sales for the following fiscal years:
2021 2020
2019
Net sales 100.0 % 100.0 % 100.0 % Cost of sales (including buying, distribution, and occupancy costs) 60.4 71.3
69.9
Gross profit 39.6 28.7
30.1
Selling, general and administrative expenses 24.0 26.5 24.9 Operating income 15.6 2.2 5.2 Interest income (0.0 ) 0.0 (0.1 ) Interest expense 0.0 0.0 0.0 Income before income taxes 15.6 2.2 5.3 Income tax expense 4.0 0.6 1.2 Net income 11.6 % 1.6 % 4.1 %
Fiscal 2021 Compared to Fiscal 2020
Net sales were a record$1.33 billion during fiscal 2021 and increased 36.2% compared to fiscal 2020 and 28.3% compared to fiscal 2019. Comparable stores sales increased 35.3% compared to fiscal 2020. Sales generated from our comparable physical stores increased 45.8% in fiscal 2021 compared to fiscal 2020 and 20.1% compared to fiscal 2019. Sales generated from theShoe Carnival branded e-commerce platform decreased 10.3% compared to fiscal 2020 due to the return of in-store shopping. E-commerce sales in fiscal 2021 were 146.6% higher than sales in fiscal 2019. E-commerce sales were approximately 12% of merchandise sales in fiscal 2021, compared to 19% in fiscal 2020 and 6% in fiscal 2019. Net sales were positively impacted by continued demand for our merchandise as result of our merchandise selection, the continued easing of COVID-19 restrictions and customers returning to a more normal lifestyle, including going back to work and in-person learning, and the economic impact of consumer-based government stimulus. Net sales in fiscal 2021 were also favorably impacted by increased average transaction price and more units sold compared to fiscal 2020, with store traffic slightly above the pre-pandemic levels experienced in fiscal 2019. The increase in average transaction price was primarily driven by our more focused promotional activity. The temporary closure of our physical stores for approximately 50% of the first quarter of fiscal 2020 as a result of the COVID-19 pandemic, with some stores closed throughMay 2020 , decreased net sales in the prior year.
Gross Profit
Gross profit was a record$526.8 million during fiscal 2021, an increase of$246.8 million compared to fiscal 2020. Gross profit margin in fiscal 2021 increased to 39.6% compared to 28.7% in fiscal 2020 and 30.1% in fiscal 2019. Merchandise margin increased 8.8 percentage points compared to fiscal 2020 and 8.2 percentage points compared to fiscal 2019. Fewer margin-dilutive promotions and higher average selling prices drove a higher merchandise margin compared to both fiscal 2020 and 2019. We began eliminating broad-based use of the "buy one get one half off" promotional strategy during fiscal 2020 and completely eliminated its broad use during fiscal year 2021. A more standard product mix, with more non-athletic merchandise sold in fiscal 2021 compared to fiscal 2020, further increased margins compared to fiscal 2020. As a percentage of sales, our buying, distribution and occupancy costs decreased 2.2 percentage points compared to fiscal 2020 and 1.3 percentage points compared to fiscal 2019 primarily due to the leveraging effect of increased sales, despite higher supply chain and distribution costs. 31 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses ("SG&A")
SG&A increased
Compared to fiscal 2020, the increase in SG&A primarily correlated with our record performance, in terms of increased performance-based incentive compensation, general wages (inclusive of CARES Act payroll retention tax credits recognized in fiscal 2020) and variable costs, such as credit card fees. SG&A also increased due to increased investment in advertising, as well as market return volatility on our deferred compensation plan and higher stock-based compensation. Store level wages, incentives paid to store level employees, and annual performance-based compensation comprised nearly half of the increase compared to the prior year, with advertising being the majority of the remaining increase. Income Taxes The effective income tax rate for fiscal 2021 was 25.3% compared to 25.8% for fiscal 2020. The lower effective rate was primarily attributable to increased benefit from vested stock-based compensation awards.
Liquidity and Capital Resources
Our primary sources of liquidity are$132.4 million of cash, cash equivalents and marketable securities on hand at the end of fiscal 2021, cash generated from operations, plus availability under our$100 million credit facility, which was amended and restated onMarch 23, 2022 to, among other things, extend the term untilMarch 23, 2027 (the "New Credit Agreement"). While the effects of the COVID-19 pandemic and other macroeconomic uncertainty make 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 normally for working capital, which are principally inventory purchases, investments in our stores, such as new stores, remodels and relocations, distribution center initiatives, lease payments associated with our real estate leases, potential dividend payments, potential share repurchases under our share repurchase program, and the financing of capital projects, including investments in new systems. As part of our growth strategy, we may also pursue additional strategic acquisitions of other footwear retailers.
Cash Flow - Operating Activities
Net cash generated from operating activities was$147.9 million in fiscal 2021 compared to$63.4 million during fiscal 2020. The increase in operating cash flow was primarily driven by higher cash receipts on increased sales, partially offset by increased inventory purchases and payments for operating expenses and income taxes. Working capital increased on a year-over-year basis and totaled$288.4 million atJanuary 29, 2022 compared to$224.4 million atJanuary 30, 2021 . The increase was primarily attributable to increased cash and marketable securities positions. Our current ratio was 2.9 as ofJanuary 29, 2022 , compared to 2.7 as ofJanuary 30, 2021 .
Cash Flow - Investing Activities
Our cash outflows for investing activities are normally for capital expenditures. During fiscal 2021, we expended$31.4 million for the purchase of property and equipment, primarily related to our store portfolio modernization plan. During fiscal 2020, we expended$12.4 million for the purchase of property and equipment,$5.9 million of which was for new store construction and the remodeling and relocation of existing stores, and$3.1 million was for investments in our distribution center. During fiscal 2021, we acquired substantially all of the assets ofShoe Station for approximately$70.7 million and invested on a net basis approximately$17.2 million in publicly traded mutual funds designed to mitigate income statement volatility associated with our nonqualified deferred compensation plan. Additional information regarding theShoe Station acquisition can be found in Note 3 -"Acquisition ofShoe Station " and regarding the marketable securities can be found in Note 4 - "Fair Value of Financial Instruments" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K. 32 --------------------------------------------------------------------------------
Cash Flow - Financing Activities
Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or 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 stock-based compensation awards that are settled in shares. Our cash inflows from financing activities generally reflect stock issuances to employees under our Employee Stock Purchase Plan and borrowings under our credit facility. During fiscal 2021, net cash used in financing activities was$17.7 million compared to$6.7 million during fiscal 2020. The increase in net cash used in financing activities was primarily due to the repurchase of$7.1 million of shares in fiscal 2021 associated with our Board of Directors' authorized share repurchase program. In fiscal 2021 we also increased our dividend payments and more shares were withheld upon the vesting of stock-based compensation awards. During fiscal 2021, we did not borrow or repay funds under our credit facility. During fiscal 2020, we borrowed and repaid$24.9 million under our credit facility. Letters of credit outstanding were$700,000 atJanuary 29, 2022 , and our borrowing capacity was$99.3 million . Our credit facility requires us to maintain compliance with various financial covenants. See Note 9 - "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. We were in compliance with these covenants as ofJanuary 29, 2022 .
Store Openings and Closings - Fiscal 2022
Increasing market penetration by adding new stores is expected to reemerge as a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to add more than 10 new stores in fiscal 2022, over 20 new stores in fiscal 2023, and over 25 new stores annually by fiscal 2024. We expect limited, if any, store closures over the next several years.
Capital Expenditures - Fiscal 2022
Capital expenditures for fiscal 2022 are expected to be between$55 million and$65 million , with approximately$50 million to$55 million to be used for new stores, relocations and remodels and approximately$5 million to$10 million for upgrades to our distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to these projects are subject to near-term changes depending on the impacts associated with the COVID-19 pandemic, ongoing supply chain disruptions, and potential inflationary and other macroeconomic impacts. Furthermore, the actual amount of cash required for capital expenditures for store operations depends in part on the number of stores opened, relocated, and remodeled, and the amount of lease incentives, if any, received from landlords. The number of new store openings and relocations will be dependent upon, among other things, the availability of desirable locations, the negotiation of acceptable lease terms and general economic and business conditions affecting consumer spending.
Dividends
In fiscal 2021, four quarterly cash dividends of$0.07 per share were approved and paid. During fiscal 2020, the first quarter dividend was in the amount of$0.0425 per share and the dividends for the remaining three quarters were$0.0450 per share. During fiscal years 2021 and 2020, we returned$8.0 million and$5.1 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 in place at the end of fiscal 2021 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 . These restrictions have changed as a result of entering into the New Credit Agreement after our fiscal year end. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K. 33 --------------------------------------------------------------------------------
Share Repurchase Program
OnDecember 16, 2021 , our Board of Directors authorized a share repurchase program for up to$50 million of our outstanding common stock, effectiveJanuary 1, 2022 (the "2022 Share Repurchase Program"). The purchases may be made in the open market or through privately negotiated transactions from time-to-time throughDecember 31, 2022 and in accordance with applicable laws, rules and regulations. The 2022 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 and economic factors, including impacts caused by the COVID-19 pandemic. The 2022 Share Repurchase Program replaced a$50 million share repurchase program that was authorized inDecember 2020 , became effectiveJanuary 1, 2021 and expired in accordance with its terms onDecember 31, 2021 . Shares totaling 208,662 were repurchased during fiscal 2021 at a cost of$7.1 million . No repurchases were made in fiscal 2020, and share repurchases pursuant to previously Board-approved share repurchase programs that have now expired were approximately 2,234,000 shares at an aggregate cost of$37.8 million in fiscal 2019. Share repurchase activity in fiscal 2021 and fiscal 2020 was impacted by the COVID-19 pandemic. Our credit facility in place at the end of fiscal 2021 stipulates that distributions in the form of redemptions of Equity Interests (as defined in the credit agreement) could 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. These restrictions have changed a result of entering into the New Credit Agreement after our fiscal year end. See Note 9 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.
Leases
Rent-related payments made in fiscal 2021 totaled$82.2 million . As we are contractually obligated to make lease payments to landlords, estimated future payments to landlords and lease-related charges are expected to be significant in future years and will increase in future years due to the acquisition ofShoe Station and other expected store growth. These payments include estimates for fixed minimum and contingent rent, estimated reimbursements to landlords for common area maintenance, taxes and insurance and other lease related charges. See Note 10 - "Leases" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for further discussion of our lease obligations.
Impact of Store Count and Seasonality on Quarterly Results
Our quarterly results of operations have fluctuated and are expected to continue to fluctuate in the future, primarily as a result of seasonal variances and the timing of sales and costs associated with opening new stores and closing underperforming stores. In addition, fiscal 2020 quarterly results were significantly impacted by the COVID-19 pandemic. As illustrated in the chart below, our first quarter fiscal 2020 net sales and earnings significantly declined due to the temporary closure of our physical stores for approximately 50% of the quarter.
(Unaudited, In thousands, except per share amounts)
First Second Third Fourth Fiscal 2021 Quarter Quarter Quarter Quarter Net sales$ 328,457 $ 332,230 $ 356,336 $ 313,371 Gross profit 130,158 135,752 144,056 116,821 Operating income 57,603 59,714 62,424 27,913 Net income 43,242 44,212 46,836 20,591
Net income per share - Diluted 1
$ 0.72 34
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First Second Third Fourth Fiscal 2020 Quarter Quarter Quarter Quarter Net sales$ 147,495 $ 300,794 $ 274,579 $ 253,897 Gross profit 31,464 82,605 87,761 78,152 Operating income/(loss) (23,261 ) 14,398 20,163 10,565 Net income/(loss) (16,190 ) 10,060
14,678 7,443
Net income/(loss) per share - Diluted 1
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. Any unanticipated decrease in demand for our products or a supply chain disruption that reduces inventory availability during these peak shopping seasons could reduce our net sales and gross profit and negatively affect our profitability. 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 continue to 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 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, including uncertainty associated with the COVID-19 pandemic.
Store Openings, Closings and Impairment Charges - Impact on Fiscal 2021 and Fiscal 2020
In fiscal 2021, we opened one new store. The initial inventory investment for the new store in fiscal 2021 was$469,000 , capital expenditures were$299,000 and lease incentives received from our landlord were$100,000 . In fiscal 2020, we opened four new stores. The initial average inventory investment for the new stores was$578,000 , capital expenditures were$973,000 and lease incentives received from our landlord were$448,000 . Pre-opening expenses for the one store opened in fiscal 2021 included in cost of sales and SG&A expenses were approximately$77,000 . Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During fiscal 2020, we expended$590,000 in pre-opening expenses, or an average of$147,000 per store. Total store closing costs were$1.9 million in fiscal 2021 and$4.0 million in fiscal 2020. We closed 12 stores during fiscal 2021 and 13 stores during fiscal 2020. 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$1.3 million in fiscal 2021 and$3.1 million in fiscal 2020. In addition to 35 --------------------------------------------------------------------------------
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
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. 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. 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 ofJanuary 29, 2022 totaled$285.2 million , representing approximately 35% of total assets. Merchandise inventories as ofJanuary 30, 2021 totaled$233.3 million , representing approximately 36% 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. Accounting for Business Combinations - We account for acquisitions of other businesses by recording the net assets of the acquired businesses at fair value and making estimates and assumptions to determine the fair value of these acquired assets and liabilities. We will allocate the purchase price of the acquired business based, in part, upon internal estimates of cash flows and considering the report of a third-party valuation expert retained to assist us. Changes to the assumptions used to estimate the fair value could affect the recorded amounts of the assets acquired and the resultant goodwill. We expect there will be changes to the current valuation of the recently acquiredShoe Station assets and liabilities during fiscal 2022. 36 -------------------------------------------------------------------------------- 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 2021 and fiscal 2020 was 5.2%. 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. 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 basis. Our temporary timing differences relate primarily to inventory, depreciation, accrued expenses, right-of-use assets, operating lease liabilities and stock-based compensation. With the recent acquisition ofShoe Station , we expect the level of temporary timing differences to increase as a result of tax deductible goodwill and trade names. 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.
Recent Accounting Pronouncements
See Note 2 - "Summary of Significant Accounting Policies" in the accompanying notes included in PART II, ITEM 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements that may have an impact on our consolidated financial statements when adopted. 37 --------------------------------------------------------------------------------
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 2017 - fiscal 2020 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) 2021 2020 2019 2018 2017 Income Statement Data: Net sales$ 1,330,394 $ 976,765 $ 1,036,551 $ 1,029,650 $ 1,019,154 Gross profit$ 526,787 $ 279,982 $ 311,869 $ 308,992 $ 296,269 Operating income$ 207,654 $ 21,865 $ 54,209 $ 49,760 $ 37,701 Net income$ 154,881 $ 15,991 $ 42,914 $ 38,135 $ 18,933 Diluted net income per share$ 5.42 $ 0.56 $ 1.46
Dividends declared per share$ 0.280 $ 0.178 $ 0.168
Balance Sheet Data: Cash and cash equivalents$ 117,443 $ 106,532 $ 61,899 $ 67,021 $ 48,254 Total assets (2)$ 812,264 $ 642,747 $ 628,374 $ 417,999 $ 415,580 Long-term debt $ 0$ 0 $ 0
$ 0 $ 0
Total shareholders' equity
Selected Operating Data: Stores open at end of year 393 383 392 397 408 Comparable store sales (3)(4) 35.3 % -5.3 % 1.9 % 4.3 % 0.3 % Square footage of store space at year end (000's) 4,419 4,146 4,220 4,268 4,391 Average sales per store (000's) (3)(5)(7)$ 3,473 $ 2,503 $ 2,475 $ 2,473 $ 2,419 Average sales per square foot (3)(6)(7)$ 321 $ 237 $ 245 $ 236 $ 229 (1) Our fiscal year is a 52/53 week year ending on the Saturday closest toJanuary 31 . Unless otherwise stated, references to years 2021, 2020, 2019, 2018, and 2017 relate respectively to the fiscal years endedJanuary 29, 2022 ,January 30, 2021 ,February 1, 2020 ,February 2, 2019 , andFebruary 3, 2018 . 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 10 - "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 endedJanuary 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 endedJanuary 27, 2018 to the 52-week period endedJanuary 28, 2017 and average sales per store and average sales per square foot are calculated for the 52-week period endedJanuary 28, 2017 . Comparable store sales results for fiscal 2018 compare the 52-week period endedFebruary 2, 2019 to the 52-week period endedFebruary 3, 2018 . (4) Comparable store sales for the periods indicated include stores that have been open for 13 full months after such stores' acquisition or grand opening prior to the beginning of the period, including those stores that have been relocated or remodeled. Therefore, stores opened, acquired 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 omnichannel retailer strategy, we view e-commerce sales as an extension of our physical stores. (5) In fiscal years 2021, 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 omnichannel retailer strategy. Due to our omnichannel retailer strategy, we view e-commerce sales as an extension of our physical stores. (7) Average sales per store and average sales per square foot include onlyShoe Carnival banner stores. 38
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