UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the fiscal year ended: January 29, 2005 |
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or |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from ____________________ to ____________________ |
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Commission File Number: 0-21360 |
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Shoe Carnival, Inc. |
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(Exact name of registrant as specified in its charter) |
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Indiana |
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35-1736614 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification Number) |
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8233 Baumgart Road |
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47725 |
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(Address of principal executive offices) |
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(Zip code) |
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(812) 867-6471 |
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(Registrant’s telephone number, including area code) |
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NONE |
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(Securities registered pursuant to Section 12(b) of the Act) |
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COMMON STOCK, $.01 PAR VALUE |
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(Securities registered pursuant to Section 12(g) of the Act) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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x Yes |
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Indicate by check mark if disclosure of delinquent filers pursuant of Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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x Yes |
o No |
The aggregate market value of the voting stock held by non-affiliates of the registrant based on the last sale price for such stock at July 30, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $102,810,957 (assuming solely for the purposes of this calculation that all Directors and executive officers of the registrant are “affiliates”).
Number of Shares of Common Stock, $.01 par value, outstanding at April 8, 2005 were 12,976,589.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Definitive Proxy Statement for the Annual Meeting of Shareholders of the Registrant to be held on June 14, 2005 is incorporated by reference into PART III hereof.
TABLE OF CONTENTS
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Item 1. |
1 |
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Item 2. |
10 |
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Item 3. |
11 |
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Item 4. |
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Item 5. |
13 |
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Item 6. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
43 |
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Item 9B. |
43 |
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Item 10. |
44 |
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Item 11. |
44 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
44 |
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Item 14. |
44 |
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Item 15. |
45 |
Shoe Carnival, Inc.
Evansville, Indiana
Annual Report to Securities and Exchange Commission
January 29, 2005
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BUSINESS |
Forward-Looking Statements
This Annual Report contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: general economic conditions in the areas of the United States in which our stores are located; changes in the overall retail environment and more specifically in the apparel and footwear retail sectors; the potential impact of national and international security concerns on the retail environment; changes in our relationships with key suppliers; the impact of competition and pricing; changes in weather patterns, consumer buying trends and our ability to identify and respond to emerging fashion trends; risks associated with the seasonality of the retail industry; the availability of desirable store locations at acceptable lease terms and our ability to open new stores in a timely and profitable manner; higher than anticipated costs associated with the closing of underperforming stores; the inability of manufacturers to deliver products in a timely manner; changes in the political and economic environments in the People’s Republic of China, a major manufacturer of footwear; and the continued favorable trade relations between the United States and China and other countries which are the major manufacturers of footwear. See “BUSINESS - Risk Factors”
General
Shoe Carnival, Inc. is one of the nation’s largest family footwear retailers. We offer customers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with emphasis on national and regional name brands. We differentiate ourselves from our competitors by our distinctive, highly promotional in-store marketing effort and large stores that average 11,600 square feet, generate an average of approximately $2.4 million in annual sales and house an average inventory of approximately 29,600 pairs of shoes per location. As of January 29, 2005, we operated 255 stores in 24 states in the Midwest, South and Southeast regions of the United States.
We make available free of charge through the Investor Relations portion of our Internet website at www.shoecarnival.com our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Our annual report on Form 10-K as filed with the Securities and Exchange Commission is available without charge to shareholders, investment professionals and securities analysts upon written request. Requests should be directed to Investor Relations at the corporate address.
We are an Indiana corporation that was initially formed in Delaware in 1993 and reincorporated in Indiana in 1996.
Business Strategy
Our goal is to continue to grow our net sales and earnings by strengthening our position as the logical destination store for our customers’ footwear needs. Key elements of our business strategy are as follows:
We offer a distinctive shopping experience. Our stores combine competitive pricing with a highly promotional, in-store marketing effort that encourages customer participation and creates a fun and exciting shopping experience. We promote a high-energy retail environment by decorating with bright lights and bold colors, and by featuring a stage and barker as the focal point in each store. With a microphone, this barker, or “mic-person”, advertises current specials, organizes contests and games, and assists and educates customers with the features and location of merchandise. Our mic-person offers limited-duration promotions throughout the day, encouraging the customers to take immediate advantage of our value pricing. We believe this highly promotional atmosphere results in 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.
1
We offer a broad merchandise assortment. Our objective is to be the destination store-of-choice for a wide range of consumers seeking moderately priced, current season name brand and private label footwear. Our product assortment includes dress and casual shoes, sandals, boots and a wide assortment of athletic shoes for the entire family. The average store carries approximately 29,600 pairs of shoes in four general categories - men’s, women’s, children’s and athletics. In addition to footwear, our stores carry selected accessory items complementary to the sale of footwear. We place significant emphasis on visual merchandising and the promotion of nationally recognized name brands. We communicate the importance of these brands through creative signage and other visual aids on the fixtures throughout the stores.
We believe that by offering a wide selection of both athletic and non-athletic footwear, we are able to reduce our exposure to shifts in fashion preferences between those categories. Our ability to identify and react to fashion changes is a key factor in our sales and earnings performance.
We offer value to our customers. Our marketing effort targets middle income, value-conscious consumers seeking name brand footwear for all age groups. We believe that by offering a wide selection of popular styles of name brand merchandise at competitive prices, we generate broad customer appeal. Additionally, the time-conscious customer appreciates the convenience of one-stop shopping for the entire family. We also believe our highly promotional in-store shopping environment contributes to a reputation of value pricing throughout the store.
We maintain an efficient store level cost structure. Our cost-efficient store operations and real estate strategy enable us to price products competitively and earn attractive store level returns. Low labor costs are achieved by housing merchandise directly on the selling floor in an open-stock format, enabling customers who choose to serve themselves. This reduces the staffing required to assist customers and reduces store level labor costs as a percentage of sales. We prefer to locate stores predominantly in strip shopping centers in order to take advantage of lower occupancy costs and maximize our exposure to value-oriented shoppers.
We rely heavily on information technology. We have invested significant resources in information technology. Our proprietary inventory management and point-of-sale systems provide corporate management, buyers and store managers with the timely information necessary to monitor and control all phases of operations. Our store managers are able to monitor sales and gross profit margins on a real-time basis throughout the day. Reacting to sales trends, our mic-people use this information to choose from among a number of product promotions supplied by our centralized merchandising staff. Our data warehouse enables the buying staff to analyze sales, margin and inventory levels by store, by day, down to the size of shoe if necessary. Using this information, our merchandise managers meet regularly with vendors to compare their product sales, gross margins and return on inventory investment against previously stated objectives. We believe timely access to key business data has enabled us in the past to drive annual comparable store sales increases, manage our markdown activity and improve inventory turnover.
Growth Strategy
Key elements of our growth strategy are as follows:
We will to continue to grow our store base. Aside from comparable store sales increases, the majority of our sales and earnings growth is expected to be generated by the opening of new stores. In 2005, we expect to open between 8 and 10 stores, net of store closings. These new stores will be located in large and small markets within our existing geographic areas. Our intention is to fill in certain under-penetrated larger markets with additional stores, thereby increasing the performance of the overall market. We also intend to enter smaller markets that we can fully penetrate with one or two stores. We generally can advertise more effectively in these markets, which helps to create immediate brand awareness. We have, and will continue to adjust our annual store growth rate based on our view of internal and external opportunities and challenges. In 2006, we expect to continue to have moderate store growth by opening between 10 and 20 stores, net of closings. Beyond 2006, if the retail environment has improved and sufficient real estate sites are available, we expect to accelerate net new store openings to between 25 and 35 stores per year.
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We typically enter larger markets (populations greater than 400,000) by opening two or more stores at approximately the same time. In smaller markets that can only support a single store, we generally will seek locations in reasonably close proximity to other existing markets. This strategy supports more efficient management and reduces distribution costs. We believe the advantages of clustering stores in existing markets will lead to cost efficiencies and overall incremental sales gains that should more than offset any adverse effect on sales of existing stores.
One of our major goals is to improve our operating margins. We are focused on improving our operating margins by increasing our gross margin and leveraging general and administrative expenses against a higher sales base. A primary opportunity to increase our gross margin is to increase women’s non-athletic sales as a percentage of our total business. Women’s product has historically achieved the highest gross margin. To achieve this goal, we have improved the fashion content of our women’s merchandise assortment, particularly in the dress and seasonal categories. Secondly, to highlight our women’s merchandise, we introduced a new store design in 2003 that prominently displays women’s footwear immediately upon entering the store. At the end of 2004, approximately 80 of our existing stores had the new design. Over the next four years, we intend to remodel virtually all remaining stores with the latest store design.
Merchandising
Our merchandising strategy is designed to provide a large selection of moderately priced footwear for the entire family. Our stores carry an average of approximately 29,600 pairs of shoes featuring a broad assortment of current-season name brand footwear, supplemented with private label merchandise and select name brand closeouts. Our stores also carry complementary accessories such as handbags, wallets, shoe care items and socks. The mix of merchandise and the brands offered in a particular store are based upon the demographics of each market, among other factors.
Our mic-person offers limited-duration promotions throughout the day, encouraging customers to take immediate advantage of value pricing. We emphasize name brand merchandise to customers with creative signage and by prominently displaying selected brands on end caps, focal walls and within the aisles. These displays may highlight a product offering of a single vendor or may make a seasonal or lifestyle statement by highlighting similar footwear from multiple vendors. These visual merchandise techniques make it easier for customers to shop and focus attention on key name brands. Expenses for signage and visual displays highlighting a particular brand typically will be partially or fully reimbursed by the vendor.
The table below sets forth our percentage of sales by product category for fiscal years 2004, 2003 and 2002.
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2004 |
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2003 |
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2002 |
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Women’s |
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23 |
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24 |
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25 |
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Men’s |
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15 |
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15 |
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16 |
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Children’s (1) |
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17 |
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16 |
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16 |
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Athletics (2) |
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41 |
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41 |
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39 |
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Accessories and Miscellaneous Items |
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4 |
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4 |
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4 |
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100 |
% |
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100 |
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100 |
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(1) Children’s includes children’s athletic shoes. |
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(2) Includes men’s and women’s sizes only. |
Women’s, men’s and children’s non-athletic footwear categories are further divided into dress, casual, sport, sandals and boots. Athletic shoes are classified by functionality, such as running, basketball or fitness shoes. In 2004, athletic styles, including children’s sizes, represented slightly more than half of our footwear sales.
Pricing
Our pricing strategy is designed to emphasize value. By combining current season name brand product with promotional pricing, we feel that we create a better value for customers. Initial pricing decisions are guided by gross profit margin targets, which vary by merchandise category and depend on whether the item is name brand or private label merchandise. Markdowns are centrally managed by the buying staff and communicated to the stores through information systems as needed.
In-store signage is used extensively to highlight sales promotions and to advertise promotional pricing to meet or beat competitors’ sale prices.
3
Advertising and Promotion
In-store promotions are a key element in our marketing effort. By utilizing both planned and impromptu contests and games, store managers create an environment that encourages customer interaction with store personnel. For example, with a spin of the Spin-N-Win™ Wheel, a customer is enticed to purchase a second pair of shoes by winning an on-the-spot discount. Promotions of this type exemplify our emphasis on fun and excitement in order to enhance our customers’ total shopping experience.
We use various forms of media advertising to communicate the exceptional values offered on specific shoes or entire product categories. Approximately 55% of our total advertising budget was directed to television and radio in 2004. Print media (including newspaper ads, inserts and direct mail) and outdoor advertising account for the balance of the budget. A special effort is made to utilize the cooperative advertising dollars offered by vendors whenever possible. Major promotions during grand openings and peak selling periods allow customers to win prizes such as electronics, gift cards, merchandise or cash.
We strive to make each store opening a major retail event. Grand openings feature contests, cash and prize giveaways, and live musical performances. We believe our grand openings help to establish the high-energy, promotional atmosphere that develops a loyal, repeat customer base and generates word-of-mouth advertising.
Store Location and Design
The number of stores opened and closed for fiscal years 2004, 2003 and 2002 were as follows:
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2004 |
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2003 |
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2002 |
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Stores open at beginning of year |
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237 |
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207 |
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182 |
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Opened during year |
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22 |
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37 |
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25 |
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Closed during year |
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4 |
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7 |
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0 |
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Stores open at end of year |
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255 |
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237 |
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207 |
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At January 29, 2005, we had 255 stores located in 24 states, primarily in the Midwest, South and Southeast regions of the United States. Although three stores are located in enclosed malls, we prefer strip shopping center locations where occupancy costs are typically lower and we enjoy greater operating freedom to implement our non-traditional retail methods. We feel that our target customers enjoy the convenience offered by strip shopping centers as opposed to enclosed malls.
All of our stores are leased rather than owned. We believe the flexibility afforded by leasing allows us to avoid the inherent risks of owning real estate, particularly with respect to under-performing stores. Before entering a new market, we perform a market, demographic and competition analysis to evaluate the suitability of the potential market. Potential store site selection criteria include, among other factors, market demographics, traffic counts, the tenant mix of a potential strip shopping center, visibility within the center and from major thoroughfares, overall retail activity of the area and proposed lease terms. The time required to open a store after signing a lease depends primarily upon the landlord’s ability to deliver the premises. After we accept the premises from the landlord, we can generally open a store within 45 days.
Critical to the success of opening new stores in larger markets or geographic areas is our ability to cluster stores. Clustering involves the operation of multiple locations in a particular metropolitan area or in several smaller markets located in reasonable proximity to one another. The clustering of stores creates cost efficiencies by enabling us to leverage store expenses with respect to advertising, distribution and management costs.
As of January 29, 2005, our stores averaged approximately 11,600 square feet, ranging in size from 6,500 to 26,500 square feet. Our current store prototype utilizes between 8,000 and 12,000 square feet, depending upon, among other factors, the location of the store and the population base the store is expected to service. The sales area of most stores is approximately 85% of the gross store size.
Our stores are designed and fixtured to reflect the high energy level of our retail concept. Stores are typically equipped with a sound system, microphone and entertainment devices such as the Spin-N-Win™ Wheel. With an open stock format, merchandise is displayed by category, with athletic footwear located in the center of the store to provide a transition between women’s and men’s footwear.
4
Updated Store Design. The store design and logo utilized by 70% of our stores was introduced in 1996. This design conveys a carnival-like atmosphere through the use of distinctive signs, flashing colored lights, large mirrors and bold colors. While we believe the existing design will continue to be successful into the future, a new store design was developed and rolled out in all stores opened and remodeled in 2003 and after. The new design incorporates the excitement and energy that makes Shoe Carnival distinctive, but features a contemporary look and feel by utilizing a more muted color scheme, larger-than-life sized graphics, better visual displays and an improved wayfinding system. In addition, the Shoe Carnival logo was redesigned to reflect the store’s new color scheme and contemporary look.
The new design highlights our women’s non-athletic merchandise by relocating from an interior position to the front window line. We also showcase our latest women’s styles on displays which can be seen by customers as they enter the store. At the end of 2004, approximately 80 of our stores had the new design. Over the next four years, we intend to remodel virtually all remaining stores to the latest store design. Prominently displaying the women’s merchandise is one way in which we expect to achieve our goal of raising the percent of sales of women’s merchandise from 23% in 2004 to between 28% and 30% over the next five years.
Store Operations
Management of store operations is the responsibility of our Executive Vice President - Store Operations, who is assisted by divisional senior vice presidents, regional managers and the individual store general managers. There are two divisions designated as the North and South Divisions. Each divisional senior vice president is responsible for approximately twelve regions, but is ultimately expected to manage up to fifteen regions. Each regional manager is responsible for the operation of between six and seventeen stores and is required to visit each store periodically, concentrating more heavily on under-performing stores. Regional managers meet with their respective divisional senior vice president and other members of senior management on a periodic basis to discuss strategies, merchandise, advertising, financial performance and personnel requirements.
Each store has a general manager and up to three assistant managers, depending on sales volume. General managers and most assistant managers are paid a salary, while all other store employees are paid on an hourly basis. We provide an incentive compensation plan for regional and general managers based primarily upon the attainment of sales, expense control and profitability goals.
Administrative functions are centrally controlled from corporate headquarters. These functions include accounting, purchasing, store maintenance, information systems, advertising, human resources, distribution and pricing. Regional and general managers are expected and encouraged to provide feedback to all corporate departments to improve efficiencies. Regional and general managers are charged with making certain merchandising decisions necessary to maximize sales and profits primarily through merchandise placement, signage and timely clearance of slower selling items.
Distribution
We operate a single 200,000 square foot distribution facility in Evansville, Indiana. The distribution center processes virtually all merchandise prior to shipping to the stores. At a minimum, this includes count verification, price and bar code labeling of each unit (when not performed by the manufacturer), redistribution of an order into size assortments and allocation of shipments to individual stores. Once a distribution order form is received from the buying staff, the remainder of the distribution process, including packing, allocating, storing and shipping is essentially paperless. Merchandise is shipped to each store from one to two times per week, depending on store volume, proximity to other stores and proximity to the distribution center. The majority of shipments are handled by a dedicated carrier, with occasional use of common carriers.
In 2004, we completed a forward-looking logistics study evaluating the need for additional distribution center capacity as we grow. Based on our current store growth plans, the results of the study identified the need to have additional distribution capacity available by the end of 2006. We intend to replace our existing 200,000 square foot distribution center with a new 400,000 square foot facility. The construction is anticipated to begin in the spring of 2006. Preliminary cost estimates for land, building and equipment are expected to range from $23 million to $25 million.
5
Buying Operations
Maintaining fresh, fashionable merchandise is critical to our success. Our buyers stay in touch with evolving trends by shopping fashion-leading markets, attending national trade shows, gathering vendor input and monitoring the current styles shown in leading fashion and lifestyle magazines. Management of the purchasing function is the responsibility of our Executive Vice President - General Merchandise Manager. Regional managers are expected to provide input to our merchandising staff regarding market specific fashion trends.
We purchase merchandise from over 160 footwear vendors. In 2004, three suppliers, Nike USA, Inc., Reebok International Ltd., and Skechers USA, Inc. each accounted for more than 10% of net sales and together accounted for approximately 36% of net sales. 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.
Information Systems
We have devoted significant resources to expand our sophisticated information technology systems. Our network connects our corporate office to every store, providing up-to-date sales and inventory information as required. Each store has an independent point-of-sale controller, with two to 12 point-of-sale terminals per store. To provide maximum flexibility and maintain data integrity, our information systems are based upon relational database technology. Our distribution facility utilizes a spread spectrum radio frequency network to assure accurate, real-time information throughout the distribution operation. Each member of the buying and distribution staff has on-line access to up-to-date sales and inventory information broken down by store, style, color, size and width. Additional data analysis can be quickly provided on demand by using either a fourth generation language programming tool or personal computer tools that access our database.
A state of the art point-of-sales system uses bar code technology to capture sales, gross margin and inventory information. The system provides, in addition to other features, full price management (including price look-up), promotion tracking capabilities (in support of the spontaneous nature of the in-store price promotions), real-time sales and gross margin analysis by product category at the store level and customer tracking.
Competition
The retail footwear business is highly competitive. We believe the principal competitive factors in our industry are merchandise selection, price, fashion, quality, location, store environment and service. We compete primarily with department stores, shoe stores, sporting goods stores and mass merchandisers.
We compete with most department stores and traditional shoe stores by offering lower prices. We compete with off-price retailers, mass merchandisers and discount stores by offering a wider and deeper selection of merchandise.
Many of our competitors are significantly larger and have substantially greater financial and other resources. However, we believe that our distinctive retail format, in combination with our wide merchandise selection, competitive prices and low operating costs, have in the past enabled us to compete effectively.
Employees
At January 29, 2005, we had approximately 3,770 employees, of which approximately 2,130 were employed on a part-time or seasonal basis. The number of employees fluctuates during the year primarily due to seasonality. None of our employees are represented by a labor union.
We attribute a large portion of our success in various areas of cost control to our inclusion of virtually all management level employees in incentive compensation plans. We contribute all or a portion of the cost of medical, disability and life insurance coverage for those employees who are eligible to participate in company-sponsored plans. Additionally, we sponsor a 401(k) retirement plan which is open to all employees who have met the minimum age and workhour requirements. All employees are eligible to receive discounts on purchases from our stores. We consider our relationship with our employees to be satisfactory.
6
Trademarks
We own the following federally registered trademarks and servicemarks: Shoe Carnival®, The Carnival®, Nuff Said®, Donna Lawrence®, Oak Meadow®, Victoria Spenser®, Via Nova®, Fresh Stuff®, Innocence®, Trade Dress®, Carnival Lites® and Color Block Design®. We believe these marks are valuable and, accordingly, intend to maintain the marks and the related registrations. We are not aware of any pending claims of infringement or other challenges to our right to use these marks.
Risk Factors
You should carefully consider the following risk factors and all other information contained in this annual report before making an investment decision with respect to our common stock. Investing in our common stock involves a high degree of risk. If any of the following risks actually occurs, we may not be able to conduct our business as currently planned and our financial condition and operating results could be seriously harmed. See “BUSINESS - Forward-Looking Statements.”
We may not be able to successfully execute our growth strategy, which could have a material adverse effect on our business, financial condition and results of operations. We intend to open new stores as a part of our growth strategy. We may not be able to open all of the new stores contemplated by our growth strategy and the new stores that we open may not be as profitable as existing stores.
The complexity of our operations and management responsibilities will increase as we grow. Our growth strategy requires that we continue to expand and improve our operating and financial systems and to expand, train and manage our employee base. In addition, as we open new stores, we may be unable to hire a sufficient number of qualified store personnel or successfully integrate the new stores into our business.
The success of our growth strategy will depend on a number of other factors, many of which are out of our control, including, among other things:
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our ability to locate suitable store sites and negotiate store leases on favorable terms; |
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the acceptance of the Shoe Carnival concept in new markets; |
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the availability of financing for capital expenditures and working capital requirements; |
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our ability to provide adequate distribution to support growth; |
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particularly in new markets, our ability to open a sufficient number of new stores to provide the critical mass needed for efficient advertising and effective name recognition; |
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our ability to improve costs and timing associated with opening new stores; and |
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the impact of new stores on sales or profitability of existing stores in the same market. |
Due to the risks involved, we may be unable to open new stores at the rates expected. If we fail to successfully implement our growth strategy, it could have a material adverse effect on our business, financial condition or results of operations.
We may not be able to achieve comparable store sales gains in the future, which could cause a decline in the trading price of our common stock. A variety of factors affect our comparable store sales results, including:
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economic conditions; |
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the retail sales environment; |
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the results of our merchandising strategies; |
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the impact of relatively new stores and new markets; and |
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the success of our marketing and promotional programs. |
7
Declines or fluctuations in our comparable store sales could cause the trading price of our common stock to decline.
We depend on our key suppliers for merchandise and advertising support and the loss of key suppliers could adversely affect our business. Our business depends upon our ability to purchase fashionable, name brand and other merchandise at competitive prices from our suppliers. In 2004, three branded suppliers, Nike USA, Inc., Reebok International Ltd. and Skechers USA, Inc., each accounted for more than 10% of our net sales and together accounted for approximately 36% of net sales. Name brand suppliers also provide us with cooperative advertising and visual merchandising funds. A loss of any of our key suppliers in certain product categories could have a material adverse effect on our business. Although our relations with key suppliers are currently satisfactory and we have adequate sources of name brand and other merchandise at competitive prices, we cannot assure you that we will be able to acquire such merchandise at comparable prices or on comparable terms in the future. As is common in the industry, we do not have any long-term contracts with our suppliers.
An increase in the cost or a disruption in the flow of our imported goods may decrease our sales and profits. We rely on imported goods to sell in our stores. Substantially all of the footwear product we sell is manufactured overseas, including the merchandise we import directly from overseas manufacturers and agents and the merchandise we purchase from domestic vendors. The primary footwear manufacturers are located in China, Brazil and East Asia. A disruption in the flow of imported merchandise or an increase in the cost of those goods may decrease our sales and profits.
If imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Products from alternative sources may be of lesser quality and more expensive than those we currently import. Other risks associated with our use of imported goods include: disruptions in the flow of imported goods because of factors such as electricity or raw material shortages, work stoppages, strikes and political unrest; problems with oceanic shipping, including shipping container shortages; economic crises and international disputes; increases in the cost of purchasing or shipping foreign merchandise resulting from the failure to maintain normal trade relations with source countries; import duties, import quotas and other trade sanctions; and increases in shipping rates imposed by the trans-Pacific shipping cartel.
Our failure to identify fashion trends could result in lower sales, higher markdowns and lower gross profits. Our success depends upon our ability to anticipate and react to the fashion tastes of our customers and provide merchandise that satisfies customer demand. Our failure to anticipate, identify or react appropriately to changes in consumer fashion preferences may result in lower sales, higher markdowns to reduce excess inventories and lower gross profits. Conversely, if we fail to anticipate or react to consumer demand for our products, we may experience inventory shortages, which would result in lost sales and could negatively impact our customer goodwill, our brand image and our profitability. Moreover, our business relies on continuous changes in fashion preferences. Stagnating consumer preferences could also result in lower sales and would require us to take higher markdowns to reduce excess inventories.
Our failure to retain our existing senior management team and to continue to attract qualified personnel could adversely affect our business. Our success depends to a large extent on the continued service of our executive management team. Departures by executive officers could have a negative impact on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. Furthermore, our strategy requires us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified managerial and merchandising personnel. Competition for these types of personnel is intense, and we cannot assure you that we will be successful in attracting, assimilating and retaining the personnel required to grow and operate our business profitably.
We face significant competition in our markets and we may be unable to compete favorably. The retail footwear industry is highly competitive. We compete primarily with department stores, shoe stores, sporting goods stores and mass merchandisers. Many of our competitors have greater financial resources than we do. Economic pressures on or bankruptcies of vendors could result in increased pricing pressures. This competition could adversely affect our results of operations and financial condition in the future. Our stores compete, among other things, on the basis of convenience of location and store layout, product mix and selection, customer convenience and price.
We will require significant funds to implement our growth strategy and meet our other liquidity needs. We cannot assure you that we will be able to generate sufficient cash flow from operations or obtain sufficient borrowings under our existing credit agreement to finance our growth strategy and meet our other liquidity needs. In 2005, capital expenditures, including assets acquired through leasing arrangements but net of lease incentives, are expected to range from $12 million to $14 million. Our actual costs may be greater than anticipated. We also require working capital to support inventory for our existing stores. Failure to generate or raise sufficient funds may require us to modify, delay or abandon some of our future growth or expenditure plans. Also, our results would be adversely affected if interest rates materially increase from present levels.
8
Declines in general economic conditions and fluctuations in consumer confidence and spending could lead to reduced consumer demand for our products. General economic conditions and consumer confidence and spending can decline as a result of numerous factors outside of our control such as rising oil prices, terrorist attacks, acts of war and natural disasters. While the precise effects of these events on our industry and business are difficult to determine, they could lead to reduced consumer demand for our products and it is possible that they may have an adverse effect on our operating and financial performance.
We would be adversely affected if our distribution or IT operations were disrupted. We operate a single, 200,000 square foot distribution center in Evansville, Indiana. Virtually all merchandise received by our stores, with the exception of a small amount of goods shipped directly to the stores, is shipped through our distribution center. Our corporate computer network is essential to our distribution process. If our distribution center is shut down for any reason, such as a national disaster, power outage or terrorist attack, or if our information technology systems do not operate effectively, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores. We maintain insurance to protect us from the costs relating to matters such as a shutdown, but we cannot assure you that our insurance will be sufficient, or that the insurance proceeds will be timely paid to us, in the event of a shutdown.
Failure to maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and have a material adverse effect on our stock price. We must continue to document, test and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports by management regarding the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to management’s assessment and the effectiveness of the internal control. We have, and expect that we will continue to, expend significant management time and resources documenting and testing our internal control over financial reporting. While management’s evaluation as of January 29, 2005 resulted in the conclusion that our internal control over financial reporting was effective as of that date, we cannot predict the outcome of testing in future periods. If we conclude in future periods that our internal control over financial reporting is not effective, it could result in lost investor confidence in the accuracy, reliability and completeness of our financial reports. Any such events could have a material adverse effect on our stock price.
We are controlled by our principal shareholder. J. Wayne Weaver, our Chairman of the Board of Directors and principal shareholder, his spouse and his adult children together own approximately 47% of our outstanding common stock. Accordingly, Mr. Weaver is able to exert substantial influence over our management and operations. In addition, his interests may differ from or be opposed to the interests of our other shareholders, and his control may have the effect of delaying or preventing a change in control that may be favored by other shareholders.
Our stock price may be volatile and could decline substantially. The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including:
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operating results failing to meet the expectations of securities analysts or investors in any quarter; |
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downward revisions in securities analysts’ estimates; |
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material announcements by us or our competitors; and |
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the other risk factors cited in this annual report. |
In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of management attention and resources, thus harming our business.
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Our quarterly operating results will fluctuate due to seasonality and other factors. Our quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate in the future. Our quarterly results of operations are affected by a variety of factors, including:
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fashion trends; |
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calendar shifts of holiday or seasonal periods; |
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the effectiveness of our inventory management; |
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weather conditions; |
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timing of opening of new stores; |
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changes in general economic conditions and consumer spending patterns; and |
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actions of competitors or co-tenants. |
We have three distinct peak selling periods: Easter, back-to-school and Christmas. To prepare for our peak shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively impact our profitability. Our operating results depend significantly upon the sales generated during these periods. If our future quarterly results fail to meet the expectations of research analysts, then the market price of our common stock could decline substantially.
Provisions of our organizational documents and Indiana law might deter acquisition bids for us. Our Restated Articles of Incorporation and Indiana corporate laws contain provisions that may discourage other persons from attempting to acquire control of us, including, without limitation, a Board of Directors that has staggered terms for its members, supermajority voting provisions, restrictions on the ability of shareholders to call a special meeting of shareholders and procedural requirements in connection with shareholder proposals or director nominations. The Board of Directors has the authority to issue preferred stock in one or more series without the approval of the holders of the common stock. In certain circumstances, the fact that corporate devices are in place which inhibit or discourage takeover attempts could reduce the market value of the common stock.
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PROPERTIES |
We lease all existing stores and intend to lease all future stores. All leases for existing stores provide for fixed minimum rentals and most provide for contingent rental payments based upon various specified percentages of sales above minimum levels. Certain leases also contain escalation clauses for increases in minimum rentals, operating costs and taxes.
The following table identifies the number of stores in each state as of January 29, 2005:
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State |
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# |
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Alabama |
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8 |
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Arkansas |
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7 |
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Colorado |
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6 |
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Florida |
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19 |
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Georgia |
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12 |
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Iowa |
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4 |
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Illinois |
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23 |
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Indiana |
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20 |
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Kansas |
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3 |
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Kentucky |
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12 |
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Louisiana |
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9 |
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Maryland |
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1 |
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Michigan |
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8 |
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Missouri |
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18 |
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Mississippi |
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6 |
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North Carolina |
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14 |
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Ohio |
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15 |
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Oklahoma |
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6 |
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South Carolina |
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11 |
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Tennessee |
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13 |
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Texas |
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25 |
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Virginia |
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8 |
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Wisconsin |
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4 |
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West Virginia |
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3 |
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Total Stores |
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255 |
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We own our headquarters and distribution center, which are located at 8233 Baumgart Road, Evansville, Indiana. For additional information with respect to our properties, see ITEM 1 “BUSINESS -- Store Location and Design” and “Distribution”.
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LEGAL PROCEEDINGS |
We are involved in various legal proceedings incidental to the conduct of our business. While the outcome of any legal proceeding is always uncertain, we do not currently expect that any such proceedings will have a material adverse effect on our financial position or results of operations.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
We did not submit any matters to a vote of security holders during the fourth quarter of the 2004 fiscal year.
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Executive Officers
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Name |
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Age |
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Position |
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J. Wayne Weaver |
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70 |
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Chairman of the Board and Director |
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Mark L. Lemond |
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50 |
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President, Chief Executive Officer and Director |
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Timothy T. Baker |
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48 |
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Executive Vice President - Store Operations |
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W. Kerry Jackson |
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