Quarterly Report for Quarter Ending May 2, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information to assist the reader in better understanding and evaluating our financial condition and results of operations. We encourage you to read this in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included in PART I, ITEM 1 of this Quarterly Report, as well as our Annual Report on Form 10-K for the fiscal year ended January 31, 2026 as filed with the SEC. This section of this Quarterly Report generally discusses our results for first quarter 2026 and first quarter 2025 and year-over-year comparisons between first quarter 2026 and first quarter 2025.

Referred to herein, first quarter 2026 is the thirteen weeks ended May 2, 2026, first quarter 2025 is the thirteen weeks ended May 3, 2025 and Fiscal 2026 is the fiscal year ending January 30, 2027.

Overview of Our Business

Shoe Carnival, Inc. is one of the nation's largest omnichannel sellers of footwear for the family, and 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, work shoes, and a wide assortment of athletic shoes. We carry shoes in two general categories - athletics and non-athletics with subcategories for men's, women's and children's and we also carry certain 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. We operate under two banners: Shoe Carnival and Shoe Station. As of May 2, 2026, we operated 426 stores across 35 states and Puerto Rico, consisting of 145 Shoe Station locations and 281 Shoe Carnival locations.

On November 13, 2025, we announced that our Board unanimously approved changing our corporate name to Shoe Station Group, Inc., subject to shareholder approval at our Annual Meeting of Shareholders on June 10, 2026.

Shoe Carnival

Our Shoe Carnival retail concept has developed over our 47-year history and is differentiated from our competitors by our distinctive, fun and promotional marketing efforts. Shoe Carnival stores combine competitive pricing with a high-energy in-store environment that encourages customer participation. Unique features of our Shoe Carnival store experience include upbeat music, opportunities for customers to spin our spin-n-win wheel and a mic-person who runs in-store specials. These specials include contests, games and hot deals of the moment to encourage customers to take immediate advantage of our special, in-store pricing. Our Shoe Carnival bannered stores serve families with children through moderate-income brands and a value-oriented selection, with entry-level price points.

Shoe Station

The Shoe Station banner and retail locations, which includes stores co-branded as "Shoe Station at Rogan's" and business-to-business operations branded as "Rogan's Work", serve a broader base of footwear customers. Our Shoe Station concept targets a more affluent footwear customer than our Shoe Carnival banner and has a strong track record of capitalizing on emerging footwear fashion trends and introducing new brands that meet the needs of the target customer. Shoe Station serves this demographic through a differentiated assortment of premium brands and an enhanced in-store experience.

CEO Transition

Following the departure of Mark J. Worden from his position as our President and Chief Executive Officer and his resignation from our Board on February 24, 2026, our Board appointed Clifton E. Sifford to serve as our Interim President and Chief Executive Officer. Mr. Sifford continues to also serve as the Vice Chairman of our Board. Mr. Worden's departure was not due to any disagreement with the Company on any matter relating to its operations, policies or practices.

Mr. Worden's departure was treated as a termination without cause pursuant to his Amended and Restated Employment and Noncompetition Agreement, dated as of November 1, 2024. Payments to Mr. Worden included 168,184 shares of our common stock for the settlement of outstanding equity awards whose vesting accelerated upon his termination without cause and a cash payment of $4.8 million. Payments to Mr. Worden and other related costs incurred, net of accruals for incentive and stock-based compensation as of January 31, 2026, resulted in a charge of $5.3 million in first quarter 2026. The tax deductibility of the payments made to Mr. Worden was limited by the Internal Revenue Code and increased our income tax expense by approximately $1.6 million. The impact on our Diluted Net Loss per Share in first quarter 2026 was $0.20.

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. Our accounting policies that require more significant judgments include those with respect to Merchandise Inventories, valuation of long-lived assets, valuation of Goodwill and Intangible Assets, leases and income taxes. The accounting policies that require more significant judgment are discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2026, and there have been no material changes to those critical accounting policies.

Results of Operations Summary Information

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

Executive Summary for First Quarter Ended May 2, 2026

In first quarter 2026, we furthered our Fiscal 2026 goals by completing a review of our rebanner strategy and strategic direction, selling down inventory, and maintaining our capital discipline.

Our Strategic Direction

Following the CEO transition described above, we undertook a review of our previously announced rebanner program as well as our broader strategic direction. We completed our review during first quarter 2026 and determined that:

These decisions resulted in first quarter 2026 store level long-lived asset impairments, other Property and Equipment write-offs and other charges totaling approximately $8.3 million, or $0.23 per diluted share.

When combined with the CEO transition costs discussed above, these charges increased our Selling, General and Administrative Expenses ("SG&A") in first quarter 2026 by $13.6 million and increased our Net Loss and Diluted Net Loss per Share by $11.9 million and $0.43, respectively.

Inventory Reductions

Our Merchandise Inventories at the end of first quarter 2026 were $417.2 million, down $11.2 million, or 2.6%, compared to the end of first quarter 2025. We anticipate aggregate declines in Merchandise Inventories in a range of $50 to $65 million by the end of Fiscal 2026 compared to the end of Fiscal 2025 as we expect to sell the remaining opportunistic pre-tariff and in-demand product purchased in Fiscal 2025 and increase promotional activity to work through excess inventory not part of our ongoing assortment, including legacy Shoe Carnival inventory, that will no longer be required as a result of rebannering. The promotional activity necessary to sell this inventory is expected to reduce gross profit margins in Fiscal 2026 compared to the 36.6% gross profit margin achieved in Fiscal 2025. Our first quarter 2026 gross profit margin declined 120 basis points compared to first quarter 2025.

Capital Discipline and Return of Capital to Shareholders

The Fiscal 2025 year-end marked the 21st consecutive year where we ended a fiscal year with no debt, fully funding our operations, acquisitions and investments from operating cash flow and cash reserves. Through first quarter 2026, we also funded our operations without incurring any debt and grew our Cash, Cash Equivalents and Marketable Securities by $36.4 million, or 39.2%, compared to the end of first quarter 2025. At the end of first quarter 2026, we had $129.3 million of Cash, Cash Equivalents and Marketable Securities and $99.0 million of available borrowings under our existing credit facility to fund our growth objectives, including new store openings expected in Fiscal 2027 and strategic acquisitions of other footwear retailers. Cash Flow from Operations increased $32.7 million compared to first quarter 2025 while Capital Expenditures declined $2.9 million.

During first quarter 2026, we returned approximately $12.0 million to shareholders through dividends and share repurchases. The $5.0 million in dividend payments in first quarter 2026 were paid at an increased rate of $0.17 per share, up 13.3% compared to the first quarter 2025. This increase represented the 12th consecutive year we increased our quarterly dividend rate. The new Fiscal 2026 annualized rate represents a compounded annual growth rate of approximately 15.5% over the past 12 years. We have now paid a dividend for 56 consecutive quarters.

Approximately $7.0 million of shares were repurchased during first quarter 2026. As of May 2, 2026, $43 million remained available under our share repurchase authorization.

Operating Results

As impacted by the first quarter 2026 charges of $13.6 million ($11.9 million after tax or $0.43 per diluted share) discussed above involving CEO transition and related strategy review, our first quarter 2026 Net Loss was $(5.6) million, or $(0.21) per diluted share compared to Net Income of $9.3 million, or $0.34 per diluted share, reported in first quarter 2025. Our operating results in first quarter 2026 otherwise declined $0.11 compared to first quarter 2025 on lower Net Sales and lower gross profit margin.

Our Net Sales declined 2.5% in first quarter 2026 compared to first quarter 2025, primarily due to a 2.1% decline in comparable store Net Sales, driven by a decrease in units sold. For each respective banner:

Our Gross Profit margin of 33.3% in first quarter 2026 decreased 120 basis points from first quarter 2025. The decrease included a 140 basis point decrease in our merchandise margin, driven by the expected increase in promotional activity, higher merchandise cost, and higher e-commerce-related shipping costs. This more than offset 20 basis points gained from primarily lower buying, distribution and occupancy costs. As a result of our lower Net Sales and lower gross profit margin, our Gross Profit declined to $90.1 million in first quarter 2026 compared to $95.8 million in first quarter 2025.

Our SG&A increased in first quarter 2026 compared to first quarter 2025 by $12.3 million as a result of the $13.6 million charges related to CEO transition costs and review of our strategic direction, and otherwise decreased $1.3 million primarily from lower selling costs.

Results of Operations for First Quarter Ended May 2, 2026 Compared to First Quarter Ended May 3, 2025

Net Sales

Net Sales were $270.7 million during first quarter 2026, a decrease of $7.0 million, or 2.5%, compared to first quarter 2025. The decrease was primarily due to a 2.1% decline in our comparable store Net Sales, which included an approximate 6% decrease in units sold, partially offset by price increases. Our Shoe Carnival banner comparable store Net Sales declined 1.7%, and our Shoe Station banner comparable store Net Sales declined 2.9%. E-commerce sales were approximately 10% of merchandise sales in first quarter 2026, compared to 9% in first quarter 2025.

Gross Profit

Gross Profit was $90.1 million during first quarter 2026, a decrease of $5.7 million compared to first quarter 2025. Gross profit margin in first quarter 2026 was 33.3%, a decrease of 120 basis points, compared to 34.5% in first quarter 2025. The decrease in gross profit margin resulted from a 140 basis point decrease in merchandise margin driven by increased promotional activity, higher merchandise cost, and higher e-commerce-related shipping costs. This decrease was partially offset by 20 basis points from primarily lower buying, distribution and occupancy costs.

Selling, General and Administrative Expenses

SG&A increased $12.3 million in first quarter 2026 to $96.1 million compared to $83.8 million in first quarter 2025. The increase was due primarily to $13.6 million in charges recorded in first quarter 2026, offset by a decrease of $1.3 million primarily from lower selling costs. These charges included CEO transition costs totaling $5.3 million and the completion of a review of our strategic direction, which resulted in store level long-lived asset impairments, other Property and Equipment write-offs and other charges of approximately $8.3 million.

Income Taxes

Income tax expense in the first quarter of 2026 was $0.6 million and was impacted by nondeductible CEO severance payments that increased income tax expense by approximately $1.6 million. Our effective tax rate in the first quarter of 2026 was (11.2)% compared to 28.1% in the first quarter of 2025. Our provision for income taxes is based on the current estimate of our annual effective tax rate and is adjusted as necessary for quarterly events.

Liquidity and Capital Resources

Our primary sources of liquidity are $129.3 million of Cash, Cash Equivalents and Marketable Securities on hand at the end of first quarter 2026, 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 our working capital needs, which are principally inventory purchases, investments in our stores and distribution center, 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 and technology. As part of our growth strategy, we have also pursued, from time to time, strategic acquisitions of other footwear retailers.

Cash Flow - Operating Activities

Net cash generated from operating activities was $23.1 million in first quarter 2026 compared to net cash used in operating activities of $9.6 million in first quarter 2025. The increase in operating cash flow was primarily driven by decreased inventory purchases, partially offset by lower earnings.

Working capital increased on a year-over-year basis and totaled $429.0 million at May 2, 2026 compared to $399.0 million at May 3, 2025. The increase was primarily attributable to a higher cash balance coupled with lower payables and accrued liabilities, partially offset by lower Merchandise Inventories. Our current ratio was 4.0 as of May 2, 2026 compared to 3.7 as of May 3, 2025.

Cash Flow - Investing Activities

Our cash outflows for investing activities are normally for capital expenditures. During first quarters 2026 and 2025, we expended $10.4 million and $13.3 million, respectively, for the purchase of Property and Equipment, primarily related to our stores.

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 $13.2 million at May 2, 2026, compared to $13.6 million at January 31, 2026 and $14.5 million at May 3, 2025. Additional information can be found in Note 5 - "Fair Value Measurements" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report on Form 10-Q.

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 first quarter 2026, net cash used in financing activities was $14.2 million compared to $6.5 million during first quarter 2025. The increase in net cash used in financing activities was primarily due to shares repurchased under our Board of Directors' authorized share repurchase program, increased dividend payments, and an increase in shares surrendered by employees to pay taxes on stock-based compensation awards.

Credit Agreement

On March 23, 2022, we entered into a $100 million Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement is collateralized by our inventory, expires on March 23, 2027, and uses a Secured Overnight Financing Rate ("SOFR") as quoted by The Federal Reserve Bank of New York as the basis for financing charges. Material covenants associated with the Credit Agreement require that we maintain a minimum net worth of $250 million and a consolidated interest coverage ratio of not less than 3.0 to 1.0. We were in compliance with these covenants as of May 2, 2026.

The Credit Agreement contains certain restrictions. However, as long as our consolidated EBITDA is positive and there are either no or low borrowings outstanding, we expect these restrictions would have no impact on our ability to pay cash dividends, execute share repurchases or facilitate acquisitions from cash on hand. The Credit Agreement stipulates that cash dividends and share repurchases of $15 million or less per fiscal year can be made without restriction as long as there is no default or event of default before and immediately after such distributions. We are also permitted to make acquisitions and pay cash dividends or repurchase shares in excess of $15 million in a fiscal year provided that (a) no default or event of default exists before and immediately after the transaction and (b) on a proforma basis, the ratio of (i) the sum of (A) our consolidated funded indebtedness plus (B) three times our consolidated rental expense to (ii) the sum of (A) our consolidated EBITDA plus (B) our consolidated rental expense is less than 3.5 to 1.0. Among other restrictions, the Credit Agreement also limits our ability to incur additional secured or unsecured debt to $20 million.

The Credit Agreement bears interest, at our option, at (1) the agent bank's base rate plus 0.0% to 1.0% or (2) Adjusted Term SOFR plus 0.9% to 1.9%, depending on our achievement of certain performance criteria. A commitment fee is charged at 0.2% to 0.3% per annum, depending on our achievement of certain performance criteria, on the unused portion of the lenders' commitment. During first quarter 2026, we did not borrow or repay funds under the Credit Agreement. Letters of credit outstanding were $1.0 million at May 2, 2026 and our borrowing capacity was $99.0 million.

The terms "net worth", "consolidated interest coverage ratio", "consolidated funded indebtedness", "consolidated rental expense", "consolidated EBITDA", "base rate" and "Adjusted Term SOFR" are defined in the Credit Agreement.

See Note 10 - "Debt" in our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2026 for a further discussion of our Credit Agreement and its covenants.

Store Portfolio

We had 426 stores at the end of first quarter 2026. The strategic review of our store portfolio performed in first quarter 2026 confirmed a permanent two-banner operating model. We rebannered one Shoe Carnival store into a Shoe Station store in the first quarter 2026 and will rebanner 20 additional Shoe Carnival stores into Shoe Station stores in second quarter 2026. CRM analysis and store-level trade area analysis identified only a limited number of other stores for future conversion to Shoe Station. No additional rebanners are planned for the third and fourth quarters of 2026. No stores were opened or permanently closed in first quarter 2026.

In addition to increasing our scale through acquisitions, we believe our current store footprint provides fill-in opportunities within existing markets as well as growth in new markets within the United States. New store growth is expected to commence in Fiscal 2027 with three to five store openings planned and another eight to 10 store openings planned for Fiscal 2028, primarily under the Shoe Station banner in suburban trade areas within our existing 35-state footprint.

We expect to close 12 to 14 underperforming stores during Fiscal 2026 and six to 10 stores during Fiscal 2027.

Capital Expenditures

Capital expenditures for Fiscal 2026 are expected to be between $15 million and $20 million, inclusive of $6 million to $8 million related to rebanner activity. 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 and Share Repurchases

On March 3, 2026, the Board of Directors approved a 13.3% increase in our cash dividend paid to our shareholders in first quarter 2026. The quarterly cash dividend of $0.17 per share was paid on April 20, 2026 to shareholders of record as of the close of business on April 6, 2026. In first quarter 2025, the dividend paid was $0.15 per share. During first quarters 2026 and 2025, we returned $5.0 million and $4.4 million, respectively, to our shareholders through our quarterly cash 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.

On December 10, 2025, our Board of Directors authorized a share repurchase program for up to $50.0 million of our outstanding common stock, effective January 1, 2026 (the "2026 Share Repurchase Program"). The purchases may be made in the open market or through privately negotiated transactions from time to time through December 31, 2026 and in accordance with applicable laws, rules and regulations. The 2026 Share Repurchase Program may be amended, suspended, or discontinued at any time and does not commit us to repurchase shares of our common stock. Although we may use other sources of capital, we have funded, and intend to continue to fund, share repurchases 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.

During first quarter 2026, we repurchased 390,492 shares of common stock at a total cost of $7.0 million under the 2026 Share Repurchase Program. As of May 2, 2026, we had $43.0 million available for future repurchases. No share repurchases were made during first quarter 2025.

Our Credit Agreement permits the payment of dividends and repurchase of shares, subject to certain covenants and restrictions. See "Credit Agreement" above and Note 10 - "Debt" to our Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2026 for a further discussion of the Credit Agreement, its covenants and restrictions regarding dividends and share repurchases and other matters. The Credit Agreement's covenants and restrictions did not change during first quarter 2026.

Supreme Court Tariff Ruling

In February 2026, the United States Supreme Court issued a ruling striking down certain tariffs previously imposed by the United States executive branch under the International Emergency Economic Powers Act ("IEEPA"). The United States executive branch subsequently instituted additional tariffs under other laws. These actions have resulted in considerable uncertainty regarding the scope and duration of current and potential tariffs and the impact this uncertainty may have on us, including availability and timing of refunds of tariffs paid under IEEPA. We continue to monitor and evaluate tariff policy and assess the potential impact on our business, financial condition, and results of operations. At this time, we cannot reasonably estimate the total financial impact of these events; however, these actions, and any additional tariffs imposed, may materially affect our future results of operations and cash flows.

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.

Recent Accounting Pronouncements

See Note 4 - "Recently Issued Accounting Pronouncements" to our Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM 1 of this Quarterly Report for a description of recent accounting pronouncements that may have an impact on our condensed consolidated financial statements when adopted.