Financial analysis and vulnerabilities of Shoe Carnival, Inc.

Financial Analysis

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

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.

Global competition

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 steady decline in athletic footwear, which has been the major performer for the company. This, according to the annual report, has negatively impacted on sales especially in the fiscal year 2011. The weather, which was relatively warm throughout the year, resulted in a low demand for fall footwear such as gumboots. The management was therefore involved in promotional activities in order to mitigate this effect.

These challenges, however, did not prevent Shoe Carnival from making profits. Comparative statistics show a small dip in profits of 0.2% to 5.5% (as percentages of sales) for the year 2011. Generally, net sales increased by 3.2% whereas store sales increased 0.7%. However, the profit margin experienced from 30% to 29.5% (Shoe Carnival, Inc. 2012). The following information is captured in the table below:

Table 1: Shoe Carnival, Inc., Consolidated Balance Sheets (in thousands of $U.S.)

January 28,

2012

January 29,

2011

Assets

Current Assets:

Cash and cash equivalents

Accounts receivable

Merchandize inventories

Deferred income tax benefits

Other

Total Current Assets

Property and equipment -- net

Other

Total Assets

70,602

2,621

237,655

2,496

2,887

316,261

69,232

1,069

386,562

60,193

1,550

212,929

4,275

2,407

281,354

62,391

1,400

345,145

Liabilities and Stakeholders' Equity

Current Liabilities:

Accounts payable

Accrued and other liabilities

Total Current Liabilities

Deferred lease incentives

Accrued rent

Deferred income taxes

Deferred compensation

Other

Total Liabilities

61,238

14,522

75,760

12,964

6,029

1,930

6,054

102,878

55,219

15,457

70,676

8,211

5,082

4,907

1,257

90,802

Shareholders' Equity:

Common stock, $.01 par value, 50,000

Shares authorized, 13,652 and 13,655 shares

Issued at January 28, 2012 and January 29, 2011

Additional paid-in capital

Retained earnings

Treasury stock, at cost, 261 and 456 shares at January 28, 2012 and January 29, 2011

Total shareholders' equity

Total Liabilities and Shareholders' Equity

67,642

222,235

(6,330)

283,684

386,562

68,833

195,853

(10,480)

254,343

345,145

Retrieved from Shoe Carnival Annual report 2011

Future financial trends indicate a strong sales volume due to the continued increase of sales despite major challenges faced in athletic footwear sales. However, Shoe Carnival management needs to target new markets to ensure continuity of profitability. In this regard, it should focus on going global in order to access the global market. This will boost sales considering the online shopping strategy that has been developed recently in the company's strategic plan. The online shopping experience will enhance globalization being a 24/7/365 open-shop platform of doing business (see www.shoecarnival.com) (Shoe Carnival, Inc. 2012).