Threats and vulnerability: A case study of Shoe Carnival, Inc.
Shoe carnival overview
Shoe Carnival Inc. is a publicly traded company that offers a range of footwear products for all categories of customers, men, women, children and sportswear. It also offers casual wear products and other assorted products such as handbags. Its headquarters are situated in Evansville, Indiana and it runs over 300 stores across several states mostly concentrated in South, Midwest, and Southeastern states of the U.S. David Russell, who had sold shoes for over 20 years in the traditional way, founded Shoe Carnival after feeling convicted that that was what he wanted to do. In the year 1978, and with is personal savings and some capital from his in-laws, he opened his first store that he called "Shoe Biz." His main idea was to create a shoe store made shoe-shopping fun. The major difference with Russell's stores was the self-service where customers were free to try out different shoes on their own and select the ones they preferred. He also availed a Jukebox that played favorite music at the time. The store manager also used this system to carry out sales promotions by making necessary advertisements (FundingUniverse.com, 2012).
This strategy bore fruits and Russell was able to open a second store in Evansville that he christened "Shoe Shower" which comprises the chain of stores within Shoe Carnival Inc. A third store came soon afterward in Owensboro, Kentucky in the 1980s. Russell employed a system of giving special offers, which in turn generated a lot of press coverage for the stores. For example, a customer was once rewarded $25,000 in one of the stores in Evansville, and as expected, this caused a lot of public interest. This strategy translated to more sales for the stores. Early statistics reveal that Shoe Carnival was generating a whooping $8 million in annual sales by 1984. Due to this great success, many players in the industry wanted to be part of this success. Therefore, in 1986, Russell sold a controlling of Shoe Carnival to a competitor, Fisher-Camunto Corporation based in Stamford, Connecticut. However, he remained the CEO and was in charge of the company's operations. The main interest of Fisher-Camunto was to expand the proven strategies employed by Russell to other areas other than Evansville. Therefore, in the months of October and November of 1986, they realized this dream by commissioning three Shoe Carnival stores in Indianapolis. The success of these new stores paved way for rapid growth that saw the creation of 15 stores across Midwest markets in the U.S. In a period of less than two years (FundingUniverse.com, 2012).
J. Wayne Weaver, who was at the time the CEO of Nine West company, aptly recognized this great growth potential. He managed to purchase Shoe Carnival from Fisher-Camunto for $17 million in 1989. As was the case in the Fisher-Camunto buy-out, Russell retained his position as CEO and Weaver became the chairperson. The expansion of Shoe Carnival continued at breathtaking speed and by the end of 1989, Shoe Carnival was boasting of over 30 stores spread across nine states in the U.S. This success can be attributed the management team at Shoe Carnival which comprised mostly of friends and other personnel from competitors. This team stayed in touch with the day-to-day operations of Shoe Carnival and closely interacted with their customers (FundingUniverse.com, 2012).
By mid-1993, Shoe Carnival was running 41 stores concentrated mostly in the Midwest. However, in the same year (1993), Shoe Carnival decided to go public in order to raise capital. The Initial Public Offer (IPO) managed to raise $28 million and left 7% ownership to Weaver and Russell. After this IPO, revenue from sales doubled hitting the $157 million mark. By 1994, Shoe Carnival was regarded as a powerhouse in the family footwear fraternity (FundingUniverse.com, 2012). The figure below gives a representation of the major categories of footwear that brought in most of Shoe Carnival sales.
Fig. Percentages of various categories of products sold by Shoe Carnival in 1994
Shoe Carnival continued with its strategy of sales promotion to attract and retain customers. One such strategy included giving customers and opportunity to spin a wheel, which was divided with several possible rewards such as discounts and free prizes. The deal given to the customer depended on where the wheel landed, and this was the deal offered to the customers at the store at that particular time. However, Russell suffered poor health in 1996 and was forced to resign. Mark L. Lemond took over as CEO who had been serving as the Chief Financial Officer at Shoe Carnival. Under Lomond's leadership, Shoe Carnival closed unprofitable outlets and embarked on an aggressive upgrading venture, which included diversification of the brand name products available in the stores. This strategy worked as well and Shoe Carnival continued in its profit-making path. This was evidenced by the $519.7 million in revenues in 2002 (FundingUniverse.com, 2012). More recently, Shoe Carnival as embraced Information Technology and e-commerce by creating a website designed to allow customers to purchase products online. This has enabled it to make $762.5 million in sales for the financial year 2011 (Reuters, 2012).
Shoe Carnival's vulnerability to financial threats
Effects of recession
There are a number of financial threats associated with any company such as Shoe Carnival. These threats include, for example, recession. Recession is the negative growth experienced by any economy. In the case of Shoe Carnival, a recession may be a threat to its financial stability in a number of ways. Firstly, recession creates a situation referred to as credit crunch. This refers to unwillingness by banks and other financial institutions to lend money to businesses since they might be experiencing liquidity problems (Lowth, Prowle, Zhang, 2010). This situation puts Shoe Carnival in a compromising situation in case of a situation that may require the need of urgent capital.
Globalization comes with it a contagious feature about recession. In other words, globalization as created an interdependence of the various global economies. Although this has a positive effect because business can access wider markets, it implies that in case of one of the economies is affected by recession, other economies as affected as well (Lowth, Prowle, Zhang, 2010). For example, the recent recession experienced in Europe was felt globally in Asia, Africa, and the Americas as well. For large companies such as Shoe Carnival, although it does not have outlets outside the U.S., the ripples of a global recession would affect its sales and reduce profits as a result of customers having pressure on their expenditure.
During a recession, it is common for governments to take steps to reduce its effects. These measures may involve increasing corporate taxation, a situation that will definitely eat into Shoe Carnival's profits. Another strategy that may be implemented is increasing of individual taxation such as VAT. This in turn causes an increase in the prices of product being sold by Shoe Carnival, for this case. An increase in prices of goods has the effect of reducing demand for that particular product. A decline in procurement in the public sector is also a common trend during recessions. This implies that less monetary funds are utilized by the public offers to spend. This affects sales negatively since most consumers will follow a stricter budget than they would normally have followed. For Shoe Carnival, this would reflect by a decline in sales and therefore, subsequent profits (Lowth, Prowle, Zhang, 2010).
Higher interest rates
Most households rely on borrowed money to sustain themselves. These include mortgages and other personal loans taken to purchase some asset or the other. Another fundamental debt that many consumers incur is the credit card debt. However, an increase in interest rate, even by a paltry 0.5% translates to approximately $194-$229 more annually for the average family. If the interest rate increases by 1%, this amount stands at $387-$449 annually. These amounts tend to increase the stress levels in the family's budgeting needs. This additional burden translates to a decrease in expenditure (Weller & Chaurushiya, 2004). The majority of Shoe Carnival customers fall into these category of consumers. A drop in their spending capability will have adverse consequences on the overall sales volume.
Although global competition is attributed to improving standards and innovation, it also increases imports of various products that may also be manufactured locally. This coupled with trade barriers being eliminated may cause a market flooded with imported goods and therefore a split in the market share (Laboureconomic's weblog, 2012). For example, if Bata Inc. products are imported into the U.S. with little or no trade barriers, a substantial market share enjoyed by Shoe Carnival may be lost. Moreover, these global competitors may have cheaper production costs in their economies as compared to the U.S. And therefore capable of lowering their prices leading to unfair competition.
Shoe Carnival's financial trends
In the fiscal year 2011, Shoe Carnival experienced fluctuating customer demand in comparison with the previous year. There was a…