SHOE CARNIVAL INC (SHOE)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations (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 2024 and Fiscal 2023 and year-over-year comparisons between Fiscal 2024 and Fiscal 2023. A discussion of Fiscal 2022 and year-over-year comparisons between Fiscal 2023 and Fiscal 2022 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 our fiscal year ended February 3, 2024, filed with the SEC on March 22, 2024. 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.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation’s largest omnichannel sellers of footwear for the family. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe Station. We furthered our acquisition strategy by acquiring all of the stock of Rogan Shoes, Incorporated (“Rogan’s”) in February 2024, which added 28 physical stores (25 in Wisconsin, 2 in Minnesota, and 1 in Illinois) to our portfolio, positioned us as the market leader in Wisconsin and established a store base in Minnesota, creating additional expansion opportunities.

Our goal is to be the leading family footwear retailer in the United States. Our product assortment, whether shopping in a physical store or through our e-commerce sales channel, is primarily branded footwear and includes dress and casual 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, through our e-commerce sales channel, customers can purchase the same assortment of merchandise in all categories of footwear with expanded options in certain instances.

Our stores under the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe 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.

The Shoe Station banner and retail locations serve a broader base of footwear customers. The Shoe Station concept targets a more affluent footwear customer, and its product assortment includes higher end athletics and non-athletics shoes and more accessories. Shoe Station has a strong track record of capitalizing on emerging footwear fashion trends and introducing new brands.

Recent Acquisition

On February 13, 2024, we acquired all of the stock of Rogan's, a privately-held 53-year-old work and family footwear company incorporated in Wisconsin, for an adjusted purchase price of $44.8 million, net of $2.2 million of cash acquired, which was paid with cash on hand. Additional consideration of up to $5.0 million may be paid by the Company subject to the achievement of three-year growth targets. Net sales from our Rogan’s operations were $80.3 million in Fiscal 2024. More information about this acquisition can be found in Note 3 - “Acquisition of Rogan Shoes” in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Comparable Stores Net Sales

Comparable stores Net Sales is a key performance indicator for us. Comparable stores Net Sales include stores that have been open for 13 full months after such stores’ grand opening or acquisition prior to the beginning of the period, including those stores that have been relocated, remodeled or rebannered. Therefore, stores recently opened, acquired or permanently closed are not included in comparable stores Net Sales. We generally include e-commerce sales in our comparable stores Net Sales as a result of our omnichannel retailer strategy. Due to our omnichannel retailer

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strategy, we view e-commerce sales as an extension of our physical stores. E-commerce sales channels associated with a physical store acquisition will not be included in comparable stores Net Sales until the initial physical stores are included. The 21 original Shoe Station stores acquired and the www.shoestation.com e-commerce site that went live in early February 2023 were included in comparable stores Net Sales calculations beginning in first quarter 2023. All of Rogan’s sales are excluded from our comparable stores Net Sales.

Our fiscal year is a 52/53 week year ending on the Saturday closest to January 31. Fiscal 2023 consisted of the 53 weeks ended February 3, 2024, while Fiscal 2024 consisted of the 52 weeks ended February 1, 2025. The 53rd week in Fiscal 2023 caused a one-week shift in our fiscal calendar. To minimize the effect of this fiscal calendar shift on comparable stores Net Sales, our reported annual comparable stores Net Sales results for Fiscal 2024 compare the 52-week period ended February 1, 2025 to the 52-week period ended February 3, 2024. As such, changes in comparable stores Net Sales are not consistent with changes in Net Sales reported for the fiscal period.

Stores and Rebanner Strategy

We ended Fiscal 2024 with 430 stores, comprised of 360 Shoe Carnival stores, 42 Shoe Station stores and 28 Rogan's stores. During Fiscal 2024 we opened four new Shoe Station stores and permanently closed two Shoe Carnival stores. The 430 stores operated at the end of Fiscal 2024 was an all-time year end high for us.

We have been evaluating customer analytics and market data and developing strategies to expand Shoe Station since we acquired the chain in December 2021. We believe that a national expansion opportunity exists in markets where the customer and/or market characteristics align better with the Shoe Station concept, rather than our Shoe Carnival concept. A 10-store in-market test was completed during Fiscal 2024, where we closed underperforming Shoe Carnival stores and opened new Shoe Station stores in those markets. The customer response and business results exceeded our success criteria on an aggregated basis, with sales and profit contribution over 10% higher at the new Shoe Station stores versus Shoe Carnival stores. In March 2025, we announced a new long-term strategy to rapidly scale up Shoe Station into a national footwear and accessories leader. The first investment phase will rebanner 175 stores to the Shoe Station banner over the next 24 months. Once this phase is complete, we expect to operate 218 Shoe Station stores, representing 51% of our present store fleet.

During Fiscal 2025, we expect to rebanner between 50 to 75 Shoe Carnival stores to Shoe Station stores. Total capital expenditures are expected to be in a range of $45 million to $60 million in Fiscal 2025 to support the rebanner strategy, compared to $33.2 million, $56.3 million and $77.3 million spent in Fiscal 2024, Fiscal 2023 and Fiscal 2022, respectively. As the rebanner strategy is implemented, it is expected to decrease our Operating Income by between $20 to $25 million in Fiscal 2025 due to store closing costs, amortization of new store construction costs, a four-to-six-week store closure period through each store’s grand opening and customer acquisition costs, with such costs recovered over a two-to-three-year period following a store’s grand opening. More information about the rebanner strategy can be found in PART 1, ITEM 1, “Business—Our Stores—Rebanner Strategy” of this Annual Report on Form 10-K.

Executive Summary

During Fiscal 2024, our Net Sales of $1.2 billion were up $27.0 million, or 2.3%, compared to Fiscal 2023. Fiscal 2023 contained a 53rd week of Net Sales totaling approximately $15 million, as described above. In Fiscal 2024, Net Sales otherwise increased approximately $42 million, or 3.7%. This increase resulted from continued growth from the Shoe Station banner’s 5.7% Net Sales increase and $80.3 million in Net Sales attributed to Rogan’s. We also grew Net Sales during peak shopping periods throughout the year. These areas of growth were partially offset by a 3.9% comparable stores Net Sales decline, driven primarily by Shoe Carnival declines during non-event periods.

Long-term Gross Profit margin expansion has been a key driver of our profit transformation, led by our targeted promotional plans, buying strategies and growth of our customer loyalty program, Shoe Perks. During Fiscal 2024, our Gross Profit margin was above 35% for the fourth consecutive year. Gross profit margin in Fiscal 2024 decreased 20 basis points compared to Fiscal 2023, primarily due to higher buying, distribution and occupancy costs (“BDO”) from operating more stores, partially offset by a 10 basis point increase in merchandise margins.

In Fiscal 2024, our Selling, General, and Administrative Expenses (“SG&A”) were higher than Fiscal 2023 by $9.8 million, primarily due to incremental costs associated with Rogan’s. As market conditions softened in the third and

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fourth quarters of Fiscal 2024 during non-event periods, we lowered selling costs at our comparable stores. These lower selling expenses reflected optimized advertising spend, driven by our digital-first marketing strategy. While Rogan’s costs were an additional expense in Fiscal 2024 compared to Fiscal 2023, those cost increases were mitigated by synergies captured during Fiscal 2024 from our accelerated integration of Rogan’s.

Fiscal 2024 Operating Income totaled $91.2 million, a decrease of 2.5% versus Fiscal 2023, primarily due to the extra week of sales in Fiscal 2023 and non-event period declines at Shoe Carnival stores, partially offset by Net Sales growth, principally from our Shoe Station and Rogan’s stores. Primarily as a result of accelerated synergy capture, Rogan’s exceeded our initial $10 million Operating Income target for Fiscal 2024 by more than 20%.

Fiscal 2024 Net Income was $73.8 million, or $2.68 per diluted share, compared to Fiscal 2023 Net Income of $73.3 million, or $2.68 per diluted share. The slight increase in Net Income reflected pandemic-related tax credits of $3.0 million associated with our acquisition of Rogan’s, included in Interest and Other Income, partially offset by lower Operating Income and a higher effective tax rate.

Capital Management and Inventories

Fiscal 2024 marked the 20th consecutive fiscal year end where we ended the fiscal year with no debt. In each of the last four years, we have funded our operations and growth investments, including our acquisitions of Shoe Station and Rogan’s, without drawing on our credit facility. We ended Fiscal 2024 with $123.1 million of Cash, Cash Equivalents and Marketable Securities. Cash flows from operations in Fiscal 2024 totaled $102.6 million. In Fiscal 2024, we paid $44.8 million for Rogan’s with cash on hand.

Merchandise Inventories totaled $385.6 million at the end of Fiscal 2024, an increase of $39.2 million compared to the end of Fiscal 2023, primarily reflecting Rogan’s acquired inventory. Merchandise Inventories supporting the Shoe Carnival and Shoe Station stores were slightly down on a unit basis at the end of Fiscal 2024 compared to the end of Fiscal 2023, but additional inventory purchases were made near Fiscal 2024 year end to support rebannering additional stores and, to a lesser extent, as a hedge against potential supply chain disruption from tariffs and port worker strikes.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of Net Sales for the following fiscal years:

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Fiscal 2024 Compared to Fiscal 2023

Net Sales

Net Sales were $1.2 billion in Fiscal 2024 and increased 2.3%, or $27.0 million, compared to Fiscal 2023. The increase was primarily due to continued growth from the Shoe Station banner’s 5.7% Net Sales increase and the acquisition of Rogan's in February 2024, which added Net Sales of $80.3 million. Increases were partially offset by the extra week in the prior year, which reduced Net Sales approximately $15 million, and a 3.9% decrease in comparable stores Net Sales, primarily due to a mid-single digit decline from our Shoe Carnival bannered stores. The comparable stores Net Sales decline resulted primarily from an approximate 5% decrease in traffic in our physical stores resulting in an approximate 6% decrease in units sold. E-commerce sales were approximately 10% of merchandise sales in both Fiscal 2024 and Fiscal 2023.

Gross Profit

Gross Profit was $428.8 million in Fiscal 2024, an increase of $7.4 million compared to Fiscal 2023, primarily due to the $27.0 million increase in Net Sales. Gross profit margin in Fiscal 2024 was 35.6% compared to 35.8% in Fiscal 2023. This slight decrease was driven by stable merchandise margins that were up 10 basis points in Fiscal 2024 compared to Fiscal 2023 but were more than offset by BDO as a percentage of Net Sales that deleveraged 30 basis points on increased occupancy costs from operating more stores.

Selling, General and Administrative Expenses

SG&A increased $9.8 million in Fiscal 2024 to $337.6 million compared to $327.9 million in Fiscal 2023. The increase was primarily due to incremental costs associated with Rogan's in Fiscal 2024, partially offset by lower selling costs at Shoe Carnival and Shoe Station stores, which reflected optimized advertising spend driven by our digital-first marketing strategy. While Rogan’s costs were an additional expense in Fiscal 2024 compared to Fiscal 2023, those cost increases were mitigated by synergies captured during Fiscal 2024 from our accelerated integration of Rogan’s. As a percentage of Net Sales, SG&A were 28.0% in Fiscal 2024, compared to 27.8% in Fiscal 2023.

Interest and Other Income and Interest Expense

Changes in our Interest and Other Income and our Interest Expense increased our Income Before Income Taxes by $3.7 million in Fiscal 2024 compared to Fiscal 2023. This increase was primarily due to pandemic-related tax credits of $3.0 million associated with our acquisition of Rogan's in February 2024 and also higher interest earned on invested cash balances.

Income Taxes

The effective income tax rate for Fiscal 2024 was 24.3% compared to 23.7% for Fiscal 2023. The higher effective tax rate was due to the decrease in tax benefits from share-settled equity awards in Fiscal 2024 and a state deferred tax benefit included in Fiscal 2023 that did not recur in Fiscal 2024, partially offset by impacts associated with our acquisition of Rogan’s.

Liquidity and Capital Resources

Our primary sources of liquidity are $123.1 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of Fiscal 2024, cash generated from operations and availability under our $100 million Credit Agreement. 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 rebanners and 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 other capital projects, including investments in new systems. As part of our growth strategy, we have also pursued strategic acquisitions of other footwear retailers.

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Cash Flow - Operating Activities

Net cash generated from operating activities was $102.6 million in Fiscal 2024 compared to $122.8 million during Fiscal 2023. The decrease in operating cash flow was primarily driven by the timing of increased inventory purchases to support our rebanner strategy, new Shoe Station stores and, to a lesser extent, as a hedge against potential supply chain disruption from tariffs and port worker strikes, and the timing of prepaid contracts payments in Fiscal 2024 compared to Fiscal 2023.

Working capital increased on a year-over-year basis and totaled $405.7 million at February 1, 2025 compared to $353.5 million at February 3, 2024. The increase was primarily attributable to higher Merchandise Inventories and Accounts Receivable, primarily due to the acquisition of Rogan's, higher cash balances and lower Accounts Payable, partially offset by an increase in Accrued and Other Liabilities. Our current ratio was 4.1 as of February 1, 2025, compared to 3.8 as of February 3, 2024.

Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During Fiscal 2024 and Fiscal 2023, we expended $33.2 million and $56.3 million, respectively, for the purchases of property and equipment, primarily related to store remodels and rebanners and opening four new Shoe Station stores.

Our Rogan’s acquisition in first quarter 2024 resulted in the payment of cash consideration of $44.8 million, net of cash acquired in Fiscal 2024. Additional information regarding the Rogan’s acquisition, including information on the additional contingent consideration of up to $5.0 million, can be found in Note 3 — “Acquisition of Rogan Shoes” in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

We invest in publicly traded mutual funds designed to mitigate income statement volatility associated with our non-qualified deferred compensation plan. The balance of these Marketable Securities was $14.4 million at February 1, 2025, compared to $12.2 million at February 3, 2024. Additional information can be found in Note 4 — “Fair Value Measurements” in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Cash Flow - Financing Activities

Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our Credit Agreement. 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 Agreement.

During Fiscal 2024, net cash used in financing activities was $15.3 million compared to $20.5 million during Fiscal 2023. The decrease in net cash used in financing activities was primarily due to the repurchase of $5.4 million of shares in Fiscal 2023 under our Board of Directors’ authorized share repurchase program compared to none in Fiscal 2024 and the decrease in shares surrendered by employees to pay taxes on stock-based compensation awards, partially offset by increased dividend payments. During Fiscal 2024 and Fiscal 2023, we did not borrow or repay funds under our Credit Agreement. Letters of credit outstanding were $1.0 million at February 1, 2025, and our borrowing capacity was $99.0 million.

Our Credit Agreement requires us to maintain compliance with various financial covenants. See Note 10 – “Debt” in 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 Agreement and its covenants. We were in compliance with these covenants as of February 1, 2025.

Store Rebanners, Openings and Closings – Fiscal 2025

As previously discussed, we plan to rebanner between 50 to 75 Shoe Carnival stores into Shoe Station stores in Fiscal 2025 as the first part of the first investment phase. We plan to complete an additional 100 or more rebanners in Fiscal 2026 and early Fiscal 2027 as the second part of the first investment phase. Once this investment phase is complete,

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we expect to operate 218 Shoe Station stores, representing 51% of our present store fleet. Additional rebanners may follow.

Increasing market penetration by adding new stores is also a key component of our growth strategy. We expect limited store closures over the next several years. Future store growth may continue to be impacted by macroeconomic uncertainty, our ability to identify desirable locations and/or acquisition partners and increased focus on our store rebanner strategy.

Capital Expenditures – Fiscal 2025

Capital expenditures for Fiscal 2025 are expected to be between $45 million and $60 million, with approximately $35 million to $45 million to be used for new and rebannered stores and remodels and approximately $10 million to $15 million for upgrades to our Evansville distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to projects are subject to near-term changes depending on potential inflationary, supply chain 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, rebannered, 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

During Fiscal 2024, four quarterly cash dividends of $0.135 per share were approved and paid. In Fiscal 2023, we paid quarterly cash dividends of $0.10 per share in our first and second fiscal quarters and $0.12 per share in the third and fourth fiscal quarters. During Fiscal 2024 and Fiscal 2023, we returned $14.7 million and $12.2 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, subject to the restrictions in our Credit Agreement. See Note 10 – “Debt” in 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 Agreement and its restrictions.

Share Repurchase Program

On December 11, 2024, our Board of Directors authorized a share repurchase program for up to $50 million of our outstanding common stock, effective January 1, 2025 (the “2025 Share Repurchase Program”). The purchases may be made in the open market or through privately negotiated transactions from time to time through December 31, 2025 and in accordance with applicable laws, rules and regulations. The 2025 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, subject to the restrictions in our Credit Agreement. See Note 10 – “Debt” in 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 Agreement and its restrictions.

The 2025 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2023, became effective January 1, 2024 and expired in accordance with its terms on December 31, 2024. No shares were repurchased during Fiscal 2024 and shares totaling 230,696 were repurchased during Fiscal 2023 at a cost of $5.4 million.

Leases

Rent-related payments made in Fiscal 2024 totaled $97.2 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

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in future years and will increase in future years due to expected organic and acquired 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 occupancy related charges. See Note 11 – “Leases” in 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.

(Unaudited, in thousands, except per share amounts)

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.

2) The fourth quarter of Fiscal 2023 consisted of 14 weeks compared to 13 weeks in all other quarters presented.

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 CRM 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 that the store closings we effected in the last several fiscal years resulted in long-term improvements to our 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.

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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.

Store Openings, Closings and Impairment Charges – Impact on Fiscal 2024 and Fiscal 2023

In Fiscal 2024, we opened four new stores. The initial average inventory investment for the new stores in Fiscal 2024 was $1.2 million, capital expenditures were $1.3 million and lease incentives received from our landlords were $425,000. In Fiscal 2023, we opened five new stores. The initial average inventory investment for the new stores was $1.0 million, capital expenditures were $1.7 million and lease incentives received from our landlord were $480,000.

Pre-opening expenses for the four stores opened in Fiscal 2024 included in Cost of Sales and SG&A were approximately $786,000, or an average of $197,000 per store. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During Fiscal 2023, we expended $1.2 million, or an average of $237,000 per store, in pre-opening expenses for the five new stores.

Total store closing costs were $128,000 associated with the closing of two stores in Fiscal 2024 and $83,000 associated with the closing of two stores in Fiscal 2023. There were no non-cash impairment charges recognized in Fiscal 2024 and Fiscal 2023. In addition to non-cash impairment charges, store closing costs can include fixed asset write-offs, employee severance, lease termination fees, store tear-down and clean-up expenses and acceleration of expenses and deferred lease incentives.

In total, store opening and closing costs impacting SG&A were $616,000 in Fiscal 2024 and $891,000 in Fiscal 2023. Store opening and closing costs included in Cost of Sales were expenses of $298,000 in Fiscal 2024 and $376,000 in Fiscal 2023.

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 also review aging trends, which include the historical rate at which merchandise has sold below cost and the value and nature of merchandise currently held in inventory and priced below original cost. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Merchandise Inventories as of February 1, 2025 totaled $385.6 million, representing approximately 34% of total assets. Merchandise Inventories as of February 3, 2024 totaled $346.4 million, representing approximately 33% 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.

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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 SG&A. 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.

Valuation of Goodwill and Intangible Assets – Our indefinite-lived assets include Goodwill and non-amortizing Intangible Assets (trade names) resulting from the acquisitions of Shoe Station in Fiscal 2021 and Rogan's in Fiscal 2024. Goodwill represents the purchase price in excess of fair values assigned to the underlying identifiable net assets of the acquired business. Goodwill and indefinite-lived Intangible Assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. We perform our annual impairment testing as of the first day of the fourth fiscal quarter.

Goodwill is reviewed for impairment at our single reporting unit level. We have the option to either first perform a qualitative assessment to determine whether it is “more likely than not” that the reporting unit's fair value is less than its carrying value, or to proceed directly to the quantitative assessment, which requires a comparison of the reporting unit's fair value to its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, expense factors, overall financial performance, entity specific and reporting unit events, capital markets and pricing and breakeven multiples. If we determine that the fair value of our reporting unit is less than its carrying value, we recognize an impairment charge equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. In performing an impairment test for our Goodwill in Fiscal 2024, we completed the qualitative assessment on November 3, 2024. We determined that it was not “more likely than not” that the fair value of our reporting unit was less than the carrying value; therefore, no quantitative assessment was performed and no impairment was recorded.

With respect to the trade names, we tested their carrying amounts for impairment in Fiscal 2024 at the Shoe Station store set and Rogan’s store set levels using respective revenue growth and discount rate assumptions and assumed royalty rates. Significant changes in our estimates and assumptions could affect our fair value calculations. We performed these assessments on November 3, 2024 and our estimate of fair values exceeded the carrying amounts; therefore, no impairments were recorded.

Leases – We lease our retail stores, our Evansville distribution center and office space for our Southern office. We also enter into leases of equipment and other assets. Substantially 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”), 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 2024 and Fiscal 2023 was 4.7% and 4.2%, respectively.

For new leases, renewals or amendments and when we make material investments in leased properties pursuant to our emerging rebanner strategy or store modernization plan, 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 and

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modified 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, property and equipment, right-of-use assets, operating lease liabilities, goodwill and non-amortizing intangible assets. 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 our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and related impacts.

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Historical Financial and Operating 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 2020 – Fiscal 2023 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations (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 2023 and Fiscal 2022 and year-over-year comparisons between Fiscal 2023 and Fiscal 2022. A discussion of Fiscal 2021 and year-over-year comparisons between Fiscal 2022 and Fiscal 2021 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 our fiscal year ended January 28, 2023, filed with the SEC on March 24, 2023.

We have included certain comparisons in this MD&A between Fiscal 2023 and Fiscal 2019 to provide further context regarding our Fiscal 2023 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.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation’s largest omnichannel family footwear retailers. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe Station. Our objective is to be the omnichannel retailer-of-choice for on-trend branded footwear for the entire family. Our product assortment, whether shopping in a physical store or on our e-commerce platform, includes dress and casual 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 the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe 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.

The Shoe Station banner and retail locations provide a complementary retail platform for us to serve a broader base of family footwear customers in 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 our Shoe Station stores and the targeted, more affluent customer, these locations provide for a primary destination shopping experience.

We believe our distinctive shopping experiences give us various competitive advantages, including the building of a loyal, repeat customer base; the creation of word-of-mouth advertising; and enhanced sell-through of in-season goods.

Recent Acquisitions

On December 3, 2021, we acquired the physical stores and substantially all of the other assets and liabilities of Shoe Station, Inc. ("Shoe Station"), a privately-held, family-owned shoe retailer. The Shoe Station assets were acquired for approximately $70.4 million, funded with cash on hand. We continue to operate the original 21 locations acquired under the Shoe Station banner and have opened seven new Shoe Station bannered stores since the acquisition. Net Sales attributed to the Shoe Station banner were $104.5 million and $99.9 million in Fiscal 2023 and Fiscal 2022, respectively, and $16.6 million from the acquisition date through January 29, 2022. More information about this acquisition can be found in Note 3 - "Acquisition of Shoe Station" in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Subsequent to Fiscal 2023 year end, on February 13, 2024, we acquired all the stock of Rogan Shoes, Incorporated ("Rogan's"). More information about this acquisition can be found in Note 16 - “Subsequent Events” in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

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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. E-commerce platforms associated with a physical store acquisition will not be included in comparable store sales until the initial physical stores are included. The 21 original Shoe Station stores acquired and the www.shoestation.com e-commerce site that went live in early February 2023 were included in comparable store sales calculations beginning in the first quarter of Fiscal 2023.

The 53rd week in Fiscal 2023 caused a one-week shift in our fiscal calendar. To minimize the effect of this fiscal calendar shift on comparable store sales, our reported annual comparable store sales results for Fiscal 2023 compare the 52-week period ended January 27, 2024 to the 52-week period ended January 28, 2023. Net Sales in the 53rd week of Fiscal 2023 totaled $14.4 million.

Executive Summary

In Fiscal 2023, our results were impacted by continuing inflation, higher interest rates, and reduced tax refunds. These economic factors particularly impacted our Shoe Carnival banner and its lower income customers and more urban markets. Our Diluted Net Income per Share ("EPS") earned in Fiscal 2023 was $2.68 compared to $3.96 earned in Fiscal 2022.

The primary driver of the lower EPS in Fiscal 2023 compared to Fiscal 2022 was an $86.4 million, or 6.8%, decline in Net Sales, with our Shoe Carnival banner down 7.8%, offset by a 4.5% increase from our Shoe Station banner.

Within this more challenging economic environment, Fiscal 2023 was impacted by event-driven shopping during the peak back-to-school and holiday shopping periods and soft sales of seasonal merchandise and sales during non-peak periods compared to Fiscal 2022. During these peak shopping periods, our children’s categories outperformed every other category. Tax refunds in Fiscal 2023 were nearly 9% lower than Fiscal 2022, which significantly impacted our spring sales. Primarily because of these lower seasonal sales and sales during non-peak periods, traffic in our physical stores was down 9% in Fiscal 2023 compared to Fiscal 2022 and comparable sales were down 8.8%.

As a result of e-commerce growth, new stores and integration of our Shoe Perks loyalty program into our Shoe Station stores, we grew Net Sales under our Shoe Station banner in Fiscal 2023 compared to Fiscal 2022. Our Shoe Perks members grew 7.3% in Fiscal 2023 compared to Fiscal 2022 and comprised 34.4 million members at the end of Fiscal 2023. In Fiscal 2023 Operating Income margin for the Shoe Station banner was accretive to our overall Operating Income margin.

Long-term Profit Transformation

As part of our long-term growth strategy, we have invested significantly in customer relationship management (“CRM”) capabilities, e-commerce infrastructure, modernization of our store fleet, and acquisitions as key drivers of profitable growth. Since Fiscal 2019, our Diluted Net Income Per Share has increased 84%, Gross Profit margin expanded 570 basis points, and Net Sales grew 13%. With this increased profitability, we have increased our quarterly dividend. The recently approved dividend that will be paid in the first quarter of Fiscal 2024 of $0.135 per share has increased 238% from the quarterly dividend paid in early Fiscal 2019.

Merchandise Inventory

We made significant progress throughout Fiscal 2023 to reduce our Merchandise Inventories and optimize our inventory positions for an improved athletic assortment. At the end of Fiscal 2023, Merchandise Inventories were $43.9 million, or 11%, lower than at the end of Fiscal 2022. This reduction in inventory was a primary driver of our improved cash flow from operations in Fiscal 2023, which totaled $122.8 million, an increase of $72.3 million compared to Fiscal 2022. We expect additional reductions in inventory in Fiscal 2024, excluding the impact from the Rogan’s acquisition.

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Capital Management

Fiscal 2023 marked the 19th consecutive year we ended the fiscal year with no debt, and in each of the last three years, we have not drawn on our credit facility. We ended Fiscal 2023 with $111.2 million of Cash, Cash Equivalents and Marketable Securities and $99.3 million in borrowing capacity. On February 13, 2024, we utilized approximately $45 million of this liquidity to acquire Rogan’s with cash on hand.

Store Growth and Store Modernization

We ended Fiscal 2023 with 400 total stores, comprising 372 Shoe Carnival stores and 28 Shoe Station stores. During Fiscal 2023, we opened four Shoe Station stores and one Shoe Carnival Store and closed two Shoe Carnival stores. Including the recently acquired Rogan’s stores, we expect to operate 430 to 432 stores by the end of Fiscal 2024, representing net growth of 30 to 32 stores. We have a strategic growth roadmap in place to surpass 500 stores in 2028, inclusive of organic and acquired activity. After the Rogan's acquisition, we began operating an all-time high 429 stores.

During Fiscal 2023, we modernized 53 Shoe Carnival bannered stores. We continue to modernize our store fleet. As of February 3, 2024, 60% of our Shoe Carnival stores were modernized and we expect to modernize additional stores in Fiscal 2024. Total capital expenditures are expected to be in a range of $25 million to $35 million in Fiscal 2024 and lower than Fiscal 2023 and Fiscal 2022 as the store modernization program nears completion.

We also modernized and relaunched our www.shoecarnival.com website in late October 2023 and in February 2023 launched our www.shoestation.com website. Combined with our advanced CRM capabilities, these investments enhance our customers’ omnichannel interaction with us and support our ability to drive long-term, sustainable growth. The relaunched www.shoecarnival.com website incorporates improvements in search capability, use of predictive analytics and improved product imagery and speed of operation.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of Net Sales for the following fiscal years:

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Fiscal 2023 Compared to Fiscal 2022

Net Sales

Net Sales were $1.18 billion in Fiscal 2023 and decreased 6.8% compared to Fiscal 2022. The decrease was primarily due to an 8.8% comparable store sales decline, partially offset by the $14.4 million effect of the 53rd week in Fiscal 2023. The comparable store sales decline resulted from an approximate 9% decrease in traffic in our physical stores, with the most significant decreases in physical stores that serve a lower income demographic and more urban market. Net Sales through our e-commerce sales channel were also 7.7.% lower than in Fiscal 2022. We believe the lower physical store traffic and e-commerce sales in Fiscal 2023 were primarily due to persistent inflation, higher interest rates and a reduction in first quarter 2023 federal tax refunds compared to 2022. Net Sales attributable to new stores, mostly new Shoe Station stores, partially offset the decrease in comparable store sales. E-commerce sales were approximately 10% of merchandise sales in both Fiscal 2023 and Fiscal 2022.

Gross Profit

Gross Profit was $421.4 million in Fiscal 2023, a decrease of $46.8 million compared to Fiscal 2022. Gross profit margin in Fiscal 2023 was 35.8% compared to 37.1% in Fiscal 2022. Merchandise margin decreased 90 basis points, reflecting an increase in promotional intensity and shifting product mix. Buying, distribution and occupancy costs (“BDO”) were lower in Fiscal 2023 compared to Fiscal 2022; however, BDO decreased gross profit margin by 40 basis points due to the lower Net Sales in Fiscal 2023. The BDO costs were lower in Fiscal 2023 as freight and distribution costs declined versus Fiscal 2022 through active management, contract renegotiation and normalization, partially offset by our investments in store modernization and by rent associated with operating more stores.

Selling, General and Administrative Expenses ("SG&A")

SG&A increased $6.2 million in Fiscal 2023 to $327.9 million compared to $321.7 million in Fiscal 2022. The increase was primarily attributable to new and modernized store costs, including increased depreciation expense resulting from our investment in property and equipment related to our store portfolio modernization plan. As a percentage of Net Sales, SG&A was 27.8% in Fiscal 2023 compared to 25.5% in Fiscal 2022.

Fiscal 2023 SG&A included $0.8 million of transaction costs related to the Rogan's acquisition. Additional information regarding the Rogan’s acquisition can be found in Note 16 - “Subsequent Events” in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K.

Interest Income and Interest Expense

Changes in our interest income and expense increased our income before taxes by $2.0 million in Fiscal 2023 compared to Fiscal 2022. This increase was primarily due to higher interest earned on invested cash balances.

Income Taxes

The effective income tax rate for Fiscal 2023 was 23.7% compared to 25.2% for Fiscal 2022. The lower effective tax rate was reflective of a greater tax rate benefit from the vesting of equity based compensation and a nonrecurring benefit associated with state deferred taxes.

Liquidity and Capital Resources

Our primary sources of liquidity are $111.2 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of Fiscal 2023, cash generated from operations and availability under our $100 million Credit Agreement. Subsequent to Fiscal 2023 year end, we acquired Rogan's and paid cash totaling approximately $45 million on the closing date of the acquisition. 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, modernization/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 other capital projects, including investments in new systems. As part of our growth strategy, we may also pursue additional strategic acquisitions of other footwear retailers.

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Cash Flow - Operating Activities

Net cash generated from operating activities was $122.8 million in Fiscal 2023 compared to $50.4 million during Fiscal 2022. The increase in operating cash flow was primarily driven by reduced inventory purchases, partially offset by decreased Net Income in Fiscal 2023 compared to Fiscal 2022.

Working capital increased on a year-over-year basis and totaled $353.5 million at February 3, 2024 compared to $312.4 million at January 28, 2023. The increase was primarily attributable to higher cash and lower Accounts Payable balances, partially offset by lower Merchandise Inventories levels. Our current ratio was 3.8 as of February 3, 2024, compared to 3.0 as of January 28, 2023.

Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During Fiscal 2023 and Fiscal 2022, we expended $56.3 million and $77.3 million, respectively, for the purchases of property and equipment, primarily related to our store portfolio modernization plan.

Cash Flow - Financing Activities

Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our Credit Agreement. 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 Agreement.

During Fiscal 2023, net cash used in financing activities was $20.5 million compared to $42.5 million during Fiscal 2022. The decrease in net cash used in financing activities was primarily due to the repurchase of $5.4 million of shares in Fiscal 2023, compared to the repurchase of $30.5 million of shares in Fiscal 2022, associated with our Board of Directors’ authorized share repurchase program. During Fiscal 2023 and Fiscal 2022, we did not borrow or repay funds under our Credit Agreement. Letters of credit outstanding were $700,000 at February 3, 2024, and our borrowing capacity was $99.3 million.

Our Credit Agreement requires us to maintain compliance with various financial covenants. See Note 9 – “Debt” in 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 Agreement and its covenants. We were in compliance with these covenants as of February 3, 2024.

Store Openings and Closings – Fiscal 2024

Increasing market penetration by adding new stores is a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to operate approximately 30 new stores, inclusive of the 28 Rogan's stores acquired on February 13, 2024, in Fiscal 2024 and are targeting operating over 500 stores in 2028. We expect limited store closures over the next several years.

Capital Expenditures – Fiscal 2024

Capital expenditures for Fiscal 2024 are expected to be between $25 million and $35 million, with approximately $15 million to $20 million to be used for new stores and modernization and approximately $10 million to $15 million for upgrades to our Evansville distribution center and e-commerce platform, various other store improvements, continued investments in technology and normal asset replacement activities. The resources allocated to projects are subject to near-term changes depending on potential inflationary, supply chain 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.

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Dividends

During Fiscal 2023, we paid quarterly cash dividends of $0.10 per share in our first and second fiscal quarters and $0.12 per share in the third and fourth fiscal quarters. In Fiscal 2022 four quarterly dividends of $0.09 per share were approved and paid. During Fiscal 2023 and Fiscal 2022, we returned $12.2 million and $10.0 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, subject to the restrictions in our Credit Agreement. See Note 9 – “Debt” in 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 Agreement and its restrictions.

Share Repurchase Program

On December 14, 2023, our Board of Directors authorized a share repurchase program for up to $50 million of our outstanding common stock, effective January 1, 2024 (the “2024 Share Repurchase Program”). The purchases may be made in the open market or through privately negotiated transactions from time to time through December 31, 2024 and in accordance with applicable laws, rules and regulations. The 2024 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, subject to the restrictions in our Credit Agreement. See Note 9 – "Debt" in 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 Agreement and its restrictions.

The 2024 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2022, became effective January 1, 2023 and expired in accordance with its terms on December 31, 2023. Shares totaling 230,696 were repurchased during Fiscal 2023 at a cost of $5.4 million. Shares totaling 1,134,524 were repurchased during Fiscal 2022 at a cost of $30.5 million.

Leases

Rent-related payments made in Fiscal 2023 totaled $94.4 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 expected organic and acquired 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 occupancy related charges. See Note 10 – “Leases” in 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.

(Unaudited, in thousands, except per share amounts)

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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.

2) The fourth quarter of Fiscal 2023 consisted of 14 weeks compared to 13 weeks in all other quarters presented.

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 CRM 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 that the store closings we effected in the last several fiscal years resulted in long-term improvements to our 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.

Store Openings, Closings and Impairment Charges – Impact on Fiscal 2023 and Fiscal 2022

In Fiscal 2023, we opened five new stores. The initial average inventory investment for the new stores in Fiscal 2023 was $1.0 million, capital expenditures were $1.7 million and lease incentives received from our landlords were $480,000. In Fiscal 2022, we opened four new stores. The initial average inventory investment for the new stores was $1.4 million, capital expenditures were $1.6 million and lease incentives received from our landlord were $212,000.

Pre-opening expenses for the five stores opened in Fiscal 2023 included in Cost of Sales and SG&A expenses were approximately $1.2 million, or an average of $237,000 per store. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During Fiscal 2022, we expended approximately $1.3 million, or an average of $320,000 per store, in pre-opening expenses for the four new stores.

Total store closing costs were $83,000 associated with closing two stores in Fiscal 2023 and there were no store closing costs in Fiscal 2022. There were no non-cash impairment charges recognized in Fiscal 2023 and Fiscal 2022. In addition to non-cash impairment charges, store closing costs can include fixed asset write-offs, employee severance,

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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 $0.9 million in Fiscal 2023 and $1.0 million in Fiscal 2022. Store opening and closing costs included in Cost of Sales were expenses of $376,000 in Fiscal 2023 and $178,000 in Fiscal 2022.

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 also review aging trends, which include the historical rate at which merchandise has sold below cost and the value and nature of merchandise currently held in inventory and priced below original cost. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Merchandise Inventories as of February 3, 2024 totaled $346.4 million, representing approximately 33% of total assets. Merchandise Inventories as of January 28, 2023 totaled $390.4 million, representing approximately 39% 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 SG&A. 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.

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Valuation of Goodwill and Intangible Assets – Our indefinite-lived assets include Goodwill and non-amortizing Intangible Assets (trade name) resulting from the acquisition of Shoe Station in Fiscal 2021. Goodwill represents the purchase price in excess of fair values assigned to the underlying identifiable net assets of the acquired business. Goodwill and indefinite-lived Intangible Assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. We perform our annual impairment testing as of the first day of the fourth fiscal quarter.

In performing impairment tests for our Goodwill in Fiscal 2023, we opted to complete a quantitative assessment at the Shoe Station banner level as opposed to relying on a qualitative assessment as permitted in the guidance. This quantitative assessment required that the estimated fair value of a reporting unit’s net assets, including Goodwill, be calculated and compared to its carrying amount. If that estimated fair value is in excess of the carrying amount, no impairment is recognized. We performed this assessment on October 29, 2023. We estimated the fair value of the net assets tested using a discounted cash flow model and guideline transaction market approach. The income-based approach required significant judgment to estimate future cash flows, including revenue growth inclusive of long-term growth rate assumptions and the discount rate. The guideline transaction market approach included 20 majority stake acquisition transactions in the footwear and apparel retail industries over the last 12 years. With respect to the trade name, we also tested its carrying amount for impairment at the Shoe Station banner level using the same revenue growth and discount rate assumptions and an assumed royalty rate. Significant changes in our estimates and assumptions could affect our fair value calculations. Our estimate of fair value exceeded the carrying amounts and therefore resulted in no impairment.

Leases – We lease our retail stores, our Evansville distribution center and office space for our Southern office. We also enter into leases of equipment, copiers and billboards. 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”), 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 2023 and Fiscal 2022 was 4.2%.

For new leases, renewals or amendments and when we make material investments in leased properties pursuant to our store modernization plan, 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 and modified 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, property and equipment, right-of-use assets, operating lease liabilities, goodwill and non-amortizing intangible assets. Deferred tax assets and liabilities are measured using the tax rates enacted and expected to be in

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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 our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and related impacts.

Historical Financial and Operating 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 2019 – Fiscal 2022 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations (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 2022 and Fiscal 2021 and year-over-year comparisons between Fiscal 2022 and Fiscal 2021. A discussion of Fiscal 2020 and year-over-year comparisons between Fiscal 2021 and Fiscal 2020 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 our fiscal year ended January 29, 2022, filed with the United States SEC on March 25, 2022.

Given the significant impact of the COVID-19 pandemic on our Fiscal 2021 and Fiscal 2020 results, we have included certain comparisons in this MD&A between Fiscal 2022 and Fiscal 2019 to provide further context regarding our Fiscal 2022 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.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation’s largest omnichannel family footwear retailers. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe Station. Our objective is to be the omnichannel retailer-of-choice for on-trend branded 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 the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe 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.

The addition of the Shoe Station banner and retail locations has created a complementary retail platform for us to serve a broader base of family footwear customers in 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 our Shoe Station stores and the targeted, more affluent 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 Shoe Station

On December 3, 2021, we acquired the physical stores and substantially all of the other assets and liabilities of Shoe Station, Inc. ("Shoe Station"), a privately-held, family-owned shoe retailer. The Shoe Station assets were acquired for approximately $70.4 million, funded with cash on hand. We are continuing to operate the 21 locations acquired under the Shoe Station banner and have opened three new Shoe Station bannered stores since the acquisition. Shoe Station contributed Net Sales of $16.6 million during the period from the acquisition date through January 29, 2022 in Fiscal 2021 and $99.9 million in Fiscal 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 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 of Shoe Station” in our Notes to Consolidated Financial

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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. E-commerce platforms associated with a physical store acquisition will not be included in comparable store sales until the initial physical stores are included. Our method for calculating comparable store sales in Fiscal 2022 and Fiscal 2021, therefore, does not include any sales activity from Shoe Station. The 21 original Shoe Station stores acquired and the www.shoestation.com e-commerce site that went live in early February 2023 will be included in comparable store sales calculations beginning in the first quarter of the fiscal year ending February 3, 2024 (Fiscal 2023).

Executive Summary

In Fiscal 2022, we delivered operating income margins and overall profitability more than double those generated pre-pandemic. These Fiscal 2022 results demonstrate the sustainability of our business and set the new benchmark for us going forward. For Fiscal 2022, Diluted Net Income per Share was the second highest year in our history and was only surpassed by Fiscal 2021. Our Diluted Net Income per Share in Fiscal 2022 grew in each quarter compared to Fiscal 2019's pre-pandemic results with growth compared to Fiscal 2019 of 107%, 160%, 151%, and 558%, respectively. Our total Diluted Net Income per Share earned over the past two fiscal years of $9.38 ($3.96 in Fiscal 2022 and $5.42 in Fiscal 2021) exceeded the Diluted Net Income per Share earned over the preceding 13 years combined.

Net Sales in Fiscal 2022 were $1.26 billion and were the second highest of any fiscal year in our history, only exceeded by Fiscal 2021. In a challenging economic environment, our Fiscal 2022 Net Sales increased 21.8% and comparable store sales increased 13.9% compared to pre-pandemic results in Fiscal 2019. Our physical store comparable store sales increased 8.9% and e-commerce Net Sales increased 85.4% compared to Fiscal 2019. Our Fiscal 2022 results were positively impacted by sustained higher gross profit margin compared to pre-pandemic results, new growth provided from the Shoe Station acquisition and growth in our Shoe Perks loyalty member program. More detail on each of these factors follows:

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Gross profit margin in Fiscal 2022 was 37.1%, a 700 basis point increase compared to Fiscal 2019. This increase was due primarily to enhancements to our customer relationship management capabilities and promotional strategies, partially offset by increased distribution and freight costs, which reduced gross profit margin compared to Fiscal 2019 by 220 basis points.

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Less promotional intensity resulted in higher average selling prices in Fiscal 2022 compared to Fiscal 2019, and these higher prices were the primary driver for the comparable store sales increase.

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Shoe Station bannered stores contributed Net Sales of $99.9 million in Fiscal 2022 and $16.6 million in Fiscal 2021.

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The 32.1 million Shoe Perks members as of January 28, 2023 represented an increase in new customers of 34% compared to Fiscal 2019 year end and 13% compared to Fiscal 2021 year end. Our Shoe Perks loyalty program members now include Shoe Station customers, which added over 1.4 million customers in Fiscal 2022.

Compared to Fiscal 2021, Net Sales were down 5.1% and comparable store sales declined 11.1% on lower traffic and sales volume. This decrease was due primarily to fluctuations in our customer base's income as impacted by government stimulus in Fiscal 2021, inflation in Fiscal 2022 and continued COVID-19-related manufacturing delays, which decreased availability of athletic inventory and athletic sales in Fiscal 2022.

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Comparable store athletic sales were down 21.6% compared to Fiscal 2021 and were flat compared to Fiscal 2019. On a comparable store basis, non-athletic sales were flat compared to Fiscal 2021 and increased 29.5% compared to Fiscal 2019. Net Sales attributed to athletic sales were 42% in Fiscal 2022, compared to 50% in Fiscal 2021 and 51% in Fiscal 2019. Athletic sales began to show some improvement during the second half of Fiscal 2022, as athletic inventory availability began to improve.

We ended Fiscal 2022 with Merchandise Inventories of $390.4 million, an increase of $130.9 million over Fiscal 2019. Approximately 40% of the increase was inventory in Shoe Station stores acquired last year or opened this year and higher in-transit inventory. The remaining increase in inventory was supportive of the Net Sales increases compared to Fiscal 2019 and the expectation of increased sales in Fiscal 2023.

We had no borrowings outstanding under our credit agreement (the "Credit Agreement"), which was amended and restated during the first quarter of Fiscal 2022 and expires on March 23, 2027. We ended Fiscal 2022 with $63.0 million of Cash, Cash Equivalents and Marketable Securities.

We are currently in the process of modernizing our stores and plan to have over 60% of our stores modernized by the end of Fiscal 2023 and the full program complete in the Fiscal 2024 - Fiscal 2025 horizon. Through Fiscal 2022, 41% of the stores in our fleet have been remodeled.

We opened two Shoe Station stores in the fourth quarter of Fiscal 2022, ending Fiscal 2022 with 397 total stores, 373 Shoe Carnival stores and 24 Shoe Station stores. We are on track to operate 400 stores in the third quarter of Fiscal 2023.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of Net Sales for the following fiscal years:

Fiscal 2022 Compared to Fiscal 2021

Net Sales

Net Sales during Fiscal 2021 grew 36.2% compared to Fiscal 2020, with significant government stimulus distributions to our customer base in Fiscal 2021 and COVID-19 related temporary store closures occurring in the first half of Fiscal 2020. Net Sales decreased 5.1% in Fiscal 2022 versus this stimulus-elevated Fiscal 2021, but maintained growth of 21.8% versus pre-pandemic Fiscal 2019. The decrease in Net Sales between Fiscal 2022 and Fiscal 2021 was primarily the result of an 11.1% comparable store sales decline due largely to this fluctuation in spending by our customer base as impacted by government stimulus in Fiscal 2021 and inflation in Fiscal 2022 and continued COVID-19 related manufacturing delays, which decreased availability of athletic shoes in Fiscal 2022. Net Sales attributable to new stores, mostly the Shoe Station stores, partially offset the decrease in comparable store sales. E-commerce sales were approximately 10% of merchandise sales in Fiscal 2022, compared to 12% in Fiscal 2021.

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Gross Profit

Gross Profit was $468.2 million in Fiscal 2022, a decrease of $58.6 million compared to Fiscal 2021. Gross profit margin in Fiscal 2022 was 37.1% compared to 39.6% in Fiscal 2021. Buying, distribution and occupancy costs increased 1.9 percentage points and merchandise margin decreased 0.6 percentage points as a percentage of Net Sales compared to Fiscal 2021. These changes were primarily the result of the impact of inflation and supply chain disruption on distribution and freight costs, other merchandise cost increases and the de-leveraging of other buying, distribution and occupancy costs due to lower Net Sales in Fiscal 2022.

Selling, General and Administrative Expenses ("SG&A")

SG&A increased $2.6 million in Fiscal 2022 to $321.7 million compared to $319.1 million in Fiscal 2021. This increase was primarily attributable to our Shoe Station operations and increased depreciation expense resulting from our investment in property and equipment related to our store portfolio modernization plan. These increases were partially offset by lower incentive compensation and advertising expense. As a percentage of Net Sales, SG&A was 25.5% in Fiscal 2022 compared to 24.0% in Fiscal 2021.

Fiscal 2021 SG&A included $3.2 million of transaction costs and integration related charges related to the Shoe Station acquisition.

Interest Income and Interest Expense

Changes in our interest income and expense increased our income before taxes by $1.1 million in Fiscal 2022 compared to Fiscal 2021. This increase was primarily due to higher interest earned on invested cash balances and lower unused commitment fees under the Credit Agreement as compared to our prior credit agreement.

Income Taxes

The effective income tax rate for Fiscal 2022 was 25.2% compared to 25.3% for Fiscal 2021.

Liquidity and Capital Resources

Our primary sources of liquidity are $63.0 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of Fiscal 2022, cash generated from operations and availability under our $100 million Credit Agreement. While the effects of the COVID-19 pandemic and other economic uncertainty associated with inflation and constrained supply chains, among 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 other 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 $50.4 million in Fiscal 2022 compared to $147.9 million during Fiscal 2021. The change in operating cash flow was primarily driven by increased earnings in Fiscal 2021 and replenishing merchandise inventory levels in Fiscal 2022.

Working capital increased on a year-over-year basis and totaled $312.4 million at January 28, 2023 compared to $288.4 million at January 29, 2022. The increase was primarily attributable to higher merchandise inventory levels, partially offset by lower cash balances due to increased investment in property and equipment related to our store portfolio modernization plan and increased share repurchases. Our current ratio was 3.0 as of January 28, 2023, compared to 2.9 as of January 29, 2022.

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Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During Fiscal 2022 and Fiscal 2021, we expended $77.3 million and $31.4 million, respectively, for the purchases of property and equipment, primarily related to our store portfolio modernization plan.

During Fiscal 2021, we acquired the physical stores and substantially all of the assets and liabilities of Shoe Station and finalized the purchase price in Fiscal 2022, paying approximately $70.4 million. In Fiscal 2021 we also 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. The balance of these Marketable Securities, net of sales and mark to market activity, was $11.6 million at January 28, 2023, compared to $15.0 million at January 29, 2022. Additional information regarding the Shoe Station acquisition can be found in Note 3 -“Acquisition of Shoe 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.

Cash Flow - Financing Activities

Our cash outflows for financing activities are typically for cash dividend payments, share repurchases or payments on our Credit Agreement. 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 Agreement.

During Fiscal 2022, net cash used in financing activities was $42.5 million compared to $17.7 million during Fiscal 2021. The increase in net cash used in financing activities was primarily due to the repurchase of $30.5 million of shares in Fiscal 2022, compared to the repurchase of $7.1 million of shares in Fiscal 2021, associated with our Board of Directors’ authorized share repurchase program. During Fiscal 2022 and Fiscal 2021, we did not borrow or repay funds under our Credit Agreement. Letters of credit outstanding were $700,000 at January 28, 2023, and our borrowing capacity was $99.3 million.

Our Credit Agreement requires us to maintain compliance with various financial covenants. See Note 9 – “Debt” in 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 Agreement and its covenants. We were in compliance with these covenants as of January 28, 2023.

Store Openings and Closings – Fiscal 2023

Increasing market penetration by adding new stores is a key component of our growth strategy. Through a combination of both organic and acquired store growth, we aim to operate approximately 10 to 20 new stores in Fiscal 2023, with additional store growth acceleration in 2024 and beyond. We expect limited, if any, store closures over the next several years.

Capital Expenditures – Fiscal 2023

Capital expenditures for Fiscal 2023 are expected to be between $60 million and $70 million, with approximately $55 million to $60 million to be used for new stores and modernization 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 projects are subject to near-term changes depending on 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.

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Dividends

Four quarterly cash dividends of $0.09 per share were approved and paid during Fiscal 2022, and in Fiscal 2021 four quarterly dividends of $0.07 per share were approved and paid. During Fiscal 2022 and Fiscal 2021, we returned $10.0 million and $8.0 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, subject to the restrictions in our Credit Agreement. See Note 9 – “Debt” in 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 Agreement and its restrictions.

Share Repurchase Program

On December 14, 2022, our Board of Directors authorized a share repurchase program for up to $50 million of our outstanding common stock, effective January 1, 2023 (the “2023 Share Repurchase Program”). The purchases may be made in the open market or through privately negotiated transactions from time-to-time through December 31, 2023 and in accordance with applicable laws, rules and regulations. The 2023 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, subject to the restrictions in our Credit Agreement. See Note 9 – "Debt" in 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 Agreement and its restrictions.

The 2023 Share Repurchase Program replaced a $50 million share repurchase program that was authorized in December 2021, became effective January 1, 2022 and expired in accordance with its terms on December 31, 2022. Shares totaling 1,134,524 were repurchased during Fiscal 2022 at a cost of $30.5 million. Shares totaling 208,662 were repurchased during Fiscal 2021 at a cost of $7.1 million and no repurchases were made in Fiscal 2020. Share repurchase activity in Fiscal 2021 and Fiscal 2020 was impacted by the COVID-19 pandemic.

Leases

Rent-related payments made in Fiscal 2022 totaled $83.9 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 expected organic and acquired 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” in 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.

(Unaudited, in thousands, except per share amounts)

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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.

Over the last several years, we performed a store improvement plan. As part of the plan, which was completed in Fiscal 2021, we identified underperforming stores and worked to address these stores' performance through renegotiation of lease terms, relocation, or closure. We closed 45 stores from Fiscal 2018 through Fiscal 2021. While we continue to actively monitor the store portfolio, we do not expect any further significant closures over the next several years.

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 that the store closings we effected in the last several fiscal years resulted in long-term improvements to our 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.

Store Openings, Closings and Impairment Charges – Impact on Fiscal 2022 and Fiscal 2021

In Fiscal 2022, we opened four new stores. The initial average inventory investment for the new stores in Fiscal 2022 was $1.4 million, capital expenditures were $1.6 million and lease incentives received from our landlords were $212,000. In Fiscal 2021, we opened one new store. The initial inventory investment for the new store was $469,000, capital expenditures were $299,000 and lease incentives received from our landlord were $100,000.

Pre-opening expenses for the four stores opened in Fiscal 2022 included in Cost of Sales and SG&A expenses were approximately $1.3 million, or an average of $320,000 per store. Items classified as pre-opening expenses include rent, freight, advertising, salaries and supplies. During Fiscal 2021, we expended $77,000 in pre-opening expenses for the one new store.

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There were no store closing costs in Fiscal 2022 and total store closing costs were $1.9 million associated with closing 12 stores in Fiscal 2021. We recorded non-cash impairment charges on a majority of these stores and also recognized impairment charges on other underperforming stores in Fiscal 2021. There were no non-cash impairment charges recognized in Fiscal 2022, while non-cash impairment charges of $1.3 million were included in store closing costs in Fiscal 2021. In addition to non-cash impairment charges, store closing costs can include fixed asset write-offs, employee severance, lease termination fees, store tear-down and clean-up expenses and acceleration of expenses and deferred lease incentives.

In total, store opening and closing costs impacting SG&A expenses were $1.0 million in Fiscal 2022 and $1.9 million in Fiscal 2021. Store opening and closing costs included in Cost of Sales were expenses of $178,000 in Fiscal 2022 and $50,000 in Fiscal 2021.

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 also review aging trends, which include the historical rate at which merchandise has sold below cost and the value and nature of merchandise currently held in inventory and priced below original cost. We reduce the value of our inventory to its estimated net realizable value where cost exceeds the estimated future selling price. Merchandise Inventories as of January 28, 2023 totaled $390.4 million, representing approximately 39% of total assets. Merchandise Inventories as of January 29, 2022 totaled $285.2 million, representing approximately 35% 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 SG&A. 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.

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Valuation of Goodwill and Intangible Assets – Our indefinite-lived assets include Goodwill and non-amortizing Intangible Assets (trade name) resulting from the acquisition of Shoe Station in Fiscal 2021. Goodwill represents the purchase price in excess of fair values assigned to the underlying identifiable net assets of the acquired business. Goodwill and indefinite-lived Intangible Assets are reviewed annually for impairment unless circumstances dictate the need for more frequent assessment. We performed our annual impairment testing as of the first day of the fourth fiscal quarter, beginning in Fiscal 2022.

In performing impairment tests for our Goodwill in Fiscal 2022, we opted to complete a quantitative assessment at the Shoe Station banner level as opposed to relying on a qualitative assessment as permitted in the guidance. This quantitative assessment required that the estimated fair value of a reporting unit’s net assets, including Goodwill, be calculated and compared to its carrying amount. If that estimated fair value is in excess of the carrying amount, no impairment is recognized. We performed this assessment on October 30, 2022. We estimated the fair value of the net assets tested using a discounted cash flow model. This income-based approach required significant judgment to estimate future cash flows, including revenue growth inclusive of long-term growth rate assumptions and the discount rate. With respect to the trade name, we also tested its carrying amount for impairment at the Shoe Station banner level using the same revenue growth and discount rate assumptions and an assumed royalty rate. Significant changes in our estimates and assumptions could affect our fair value calculations. Our estimate of fair value exceeded the carrying amounts and therefore resulted in no impairment.

Leases – We lease our retail stores, our single distribution center and office space for our Southern office. We also enter into leases of equipment, copiers and billboards. 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 2022 and Fiscal 2021 was 4.2% and 5.2%, respectively.

As of the date of adoption of ASC 842, for new leases, renewals or amendments and when we make material investments in leased properties pursuant to our store modernization plan, 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 and modified 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, property and equipment, right-of-use assets, operating lease liabilities, goodwill and non-amortizing intangible assets. 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.

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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 our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and related impacts.

Historical Financial and Operating 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 2018 – Fiscal 2021 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations (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 ended January 30, 2021, filed with the United States Securities and Exchange Commission on March 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 to January 31. Unless otherwise stated, references to fiscal years 2021, 2020 and 2019 relate to the fiscal years ended January 29, 2022, January 30, 2021 and February 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. On December 3, 2021, we began operating under two banners: Shoe Carnival and Shoe 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 the Shoe Carnival banner combine competitive pricing with a high-energy in-store environment that encourages customer participation. Footwear in our Shoe 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 our Shoe 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 the Shoe 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 our Shoe 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 Shoe Station

On December 3, 2021, we acquired substantially all of the assets of Shoe 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 the Shoe Station banner. Shoe Station contributed net sales of $16.6 million during the period from the acquisition date through January 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

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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 of Shoe 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 from Shoe 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 on July 6, 2021 that was completed on July 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 effective March 19, 2020. Our e-commerce platform continued to operate, and our e-commerce sales increased significantly in fiscal 2020 as customers shifted purchases to our online channel. We began reopening our physical stores in accordance with applicable public health guidelines in late April 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 early June 2020, substantially all of our stores had reopened. We did not have any stores closed as of January 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 the Shoe 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:

•
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

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•
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:

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Net sales for fiscal 2021 of $1.33 billion were an all-time record, surpassing the previous record set in fiscal 2019 by 28.3%.

•
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.

•
We had no borrowings during fiscal 2021 and ended our fiscal year with $132.4 million of cash, cash equivalents and marketable securities.

•
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 of January 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.

•
We spent $31.4 million on capital expenditures during fiscal 2021, primarily focused on our store modernization efforts. Through January 29, 2022, we have completed 68 store modernizations.

Fiscal 2022 Plans

Following is a summary of certain strategic initiatives and goals for fiscal 2022:

•
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 acquired Shoe 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.

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Results of Operations

The following table sets forth our results of operations expressed as a percentage of net sales for the following fiscal years:

Fiscal 2021 Compared to Fiscal 2020

Net Sales

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 the Shoe 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 through May 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.

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Selling, General and Administrative Expenses ("SG&A")

SG&A increased $61.0 million to $319.1 million in fiscal 2021 compared to $258.1 million in fiscal 2020. As a percentage of net sales, SG&A was leveraged to 24.0% in fiscal 2021 compared to 26.5% in fiscal 2020 and 24.9% in fiscal 2019.

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 on March 23, 2022 to, among other things, extend the term until March 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 at January 29, 2022 compared to $224.4 million at January 30, 2021. The increase was primarily attributable to increased cash and marketable securities positions. Our current ratio was 2.9 as of January 29, 2022, compared to 2.7 as of January 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 of Shoe 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 the Shoe Station acquisition can be found in Note 3 -“Acquisition of Shoe 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.

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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 at January 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 of January 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.

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Share Repurchase Program

On December 16, 2021, our Board of Directors authorized a share repurchase program for up to $50 million of our outstanding common stock, effective January 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 through December 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 in December 2020, became effective January 1, 2021 and expired in accordance with its terms on December 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 of Shoe 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)

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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

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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 $1.9 million in fiscal 2021 and $4.1 million in fiscal 2020. Store opening and closing costs included in cost of sales was expense of $50,000 in fiscal 2021 and $500,000 in fiscal 2020.

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 of January 29, 2022 totaled $285.2 million, representing approximately 35% of total assets. Merchandise inventories as of January 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 acquired Shoe Station assets and liabilities during fiscal 2022.

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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 of Shoe 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.

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Historical Financial Data

The following historical financial data is included for the convenience of assessing trends in our financial condition and results of operations over the previous five fiscal years. A more detailed description of the fluctuations among fiscal 2017 – fiscal 2020 can be found in our Annual Reports on Form 10-K filed for those previous fiscal years.

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