UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549





Form 10-K




(Mark One)[X]
            Annual report pursuant to Section 13 or
      15(d) of the Securities Exchange Act of 1934For the fiscal year ended:January 30,
      2010or[   ]
            Transition report pursuant to Section 13
      or 15(d) of the Securities Exchange Act of 1934For the transition period from__________________________
      to__________________________




Commission File Number:
            0-21360  Shoe Carnival,
      Inc.(Exact name of registrant as
      specified in its charter)  Indiana
            
            35-1736614(State or other jurisdiction
      of
            
            (IRS Employer Identification
      Number)incorporation or
      organization)7500 East Columbia
    StreetEvansville, IN
            
            47715(Address of principal executive
      offices)
            
            (Zip code)(812)867-6471(Registrant’s telephone number,
      including area code)Securities registered pursuant to
      Section 12(b) of the Act:Common Stock, $.01 par
      value
            
            The NASDAQ Stock Market
    LLC(Title of Each Class)
            
            (Name of Each Exchange on Which
      Registered)Securities registered pursuant to Section 12(g) of the Act:
      None


Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities
Act.                           
[  ]
Yes                    [X]
No




Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange
Act.                           
[  ]
Yes                    [X]
No




Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. [X]
Yes                    [ 
] No




Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files).                           
[  ]
Yes                    [ 
] No




Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]




Indicate by check mark whether the
      registrant is a large accelerated filer, an accelerated filer, a
      non-accelerated filer or a smaller reporting company. See definition of
      "large accelerated filer", "accelerated filer" and "smaller reporting
      company" in Rule 12b-2 of the Exchange Act.[ 
      ]Large accelerated filer
            [X]Accelerated filer
            [  ]Non-accelerated filer
            [  ]Smaller reporting
    company




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).                           
[  ]
Yes                    [X]
No




The aggregate market
value of the voting stock held by non-affiliates of the registrant based on the
last sale price for such stock at August 1, 2009 (the last business day of the
registrant’s most recently completed second fiscal quarter) was approximately
$229,134,000 (assuming solely for the purposes of this calculation that all
Directors and executive officers of the registrant are "affiliates").




Number of Shares of
Common Stock, $.01 par value, outstanding at April 12, 2010 was
13,172,758.




DOCUMENTS INCORPORATED
BY REFERENCE


Certain
information contained in the Definitive Proxy Statement for the Annual Meeting
of Shareholders of the Registrant to be held on June 16, 2010 is incorporated by
reference into PART III hereof.




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TABLE OF CONTENTS




PART IItem 1.
            
            Business
            
            2Item 1A.
            
            Risk Factors
            
            8Item 1B.
            
            Unresolved Staff Comments
            
            13Item 2.
            
            Properties
            
            13Item 3.
            
            Legal Proceedings
            
            14Item 4.
            
            (Removed and Reserved)
            
            14PART IIItem 5.
            
            Market for the Registrant’s Common
      Equity, Related Stockholder Matters and IssuerPurchases of Equity
      Securities
            
            15Item 6.
            
            Selected Financial Data
            
            17Item 7.
            
            Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            
            18Item 7A.
            
            Quantitative and Qualitative Disclosures
      About Market Risk
            
            26Item 8.
            
            Financial Statements and Supplementary
      Data
            
            26Item 9.
            
            Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
            
            49Item 9A.
            
            Controls and Procedures
            
            49Item 9B.
            
            Other Information
            
            52PART IIIItem 10.
            
            Directors, Executive Officers and
      Corporate Governance
            
            53Item 11.
            
            Executive Compensation
            
            53Item 12.
            
            Security Ownership of Certain Beneficial
      Owners and Management and RelatedStockholder Matters
            
            53Item 13.
            
            Certain Relationships and Related
      Transactions, and Director Independence
            
            53Item 14.
            
            Principal Accountant Fees and
      Services
            
            53PART IVItem 15.
            
            Exhibits and Financial Statement
      Schedules
            
            54


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Shoe Carnival, Inc.Evansville,
Indiana




Annual Report to
Securities and Exchange CommissionJanuary 30, 2010




PART I




ITEM 1. BUSINESS




Forward-Looking Statements




This annual report
contains forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve a number of risks and
uncertainties. A number of factors could cause our actual results, performance,
achievements or industry results to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. These factors include, but are not limited to:
general economic conditions in the areas of the United States in which our
stores are located; the effects and duration of the current economic downturn
and unemployment rates; changes in the overall retail environment and more
specifically in the apparel and footwear retail sectors; our ability to generate
increased sales at our stores; the potential impact of national and
international security concerns on the retail environment; changes in our
relationships with key suppliers; the impact of competition and pricing; changes
in weather patterns, consumer buying trends and our ability to identify and
respond to emerging fashion trends; the impact of disruptions in our
distribution or information technology operations; the effectiveness of our
inventory management; the impact of hurricanes or other natural disasters on our
stores, as well as on consumer confidence and purchasing in general; risks
associated with the seasonality of the retail industry; our ability to
successfully execute our growth strategy, including the availability of
desirable store locations at acceptable lease terms, our ability to open new
stores in a timely and profitable manner and the availability of sufficient
funds to implement our growth plans; higher than anticipated costs associated
with the closing of underperforming stores; the inability of manufacturers to
deliver products in a timely manner; changes in the political and economic
environments in the People’s Republic of China, Brazil, Spain and East Asia,
where the primary manufacturers of footwear are located; the impact of
regulatory changes in the United States and the countries where our
manufacturers are located; and the continued favorable trade relations between
the United States and China and the other countries which are the major
manufacturers of footwear. See ITEM 1A. RISK FACTORS of this
report.




General




Shoe Carnival, Inc.
is one of the nation’s largest family footwear retailers. We offer customers a
broad assortment of moderately priced dress, casual and athletic footwear for
men, women and children with emphasis on national and regional name brands. We
differentiate our retail concept from our competitors' by our distinctive,
highly promotional in-store marketing effort and large stores that average
10,900 square feet, generate an average of approximately $2.2 million in annual
sales and carry an average inventory of approximately 26,000 pairs of shoes per
location. As of January 30, 2010, we operated 311 stores in 30 states primarily
in the Midwest, South and Southeast regions of the United States.




We make available
free of charge through the Investor Relations portion of our website at
www.shoecarnival.com our annual reports on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission. We have included our website address throughout this filing
as textual references only. The information contained on our website is not
incorporated into this Form 10-K.




Our annual report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge to
shareholders, investment professionals and securities analysts upon written
request. Requests should be directed to Investor Relations at our corporate
address.




2




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We are an Indiana
corporation that was initially formed in Delaware in 1993 and reincorporated in
Indiana in 1996. References to "we," "us," "our" and the "Company" in this
Annual Report on Form 10-K refer to Shoe Carnival, Inc. and its
subsidiaries.




Business Strategy




Our goal is to
continue to grow our net sales and earnings by strengthening our position as the
logical destination store for our customers’ footwear needs. Key elements of our
business strategy are as follows.




We offer a distinctive shopping experience . Our stores combine competitive pricing with
a highly promotional, in-store marketing effort that encourages customer
participation and creates a fun and exciting shopping experience. We promote a
high-energy retail environment by decorating with exciting graphics and bold
colors, and by featuring a stage and barker as the focal point in each store.
With a microphone, this barker, or "mic-person", announces current specials,
organizes contests and games, and assists and educates customers with the
features and location of merchandise. Our mic-person offers limited-duration
promotions throughout the day, encouraging the customers to take immediate
advantage of our value pricing. We believe this highly promotional atmosphere
results in various competitive advantages, including increased multiple unit
sales; the building of a loyal, repeat customer base; the creation of
word-of-mouth advertising; and enhanced sell through of in-season goods.




We offer a broad merchandise assortment. Our objective is to be the destination
store-of-choice for a wide range of consumers seeking moderately priced, current
season name brand and private label footwear. Our product assortment includes
dress and casual shoes, sandals, boots and a wide assortment of athletic shoes
for the entire family. The average store carries approximately 26,000 pairs of
shoes in four general categories - men’s, women’s, children’s and athletics. In
addition to footwear, our stores carry selected accessory items complementary to
the sale of footwear. We emphasize name brand merchandise to customers with
creative signage and by prominently displaying selected brands on end caps,
focal walls and within the aisles. These displays may highlight a product
offering of a single vendor, highlight sales promotions, advertise promotional
pricing to meet or beat competitors’ sale prices or may make a seasonal or
lifestyle statement by highlighting similar footwear from multiple vendors.
These visual merchandising techniques make it easier for customers to shop and
focus attention on key name brands. Expenses for signage and visual displays
highlighting a particular brand will often be partially or fully reimbursed by
the vendor.




We believe that by
offering a wide selection of both athletic and non-athletic footwear, we are
able to reduce our exposure to shifts in fashion preferences between those
categories. Our ability to identify and react to fashion changes is a key factor
in our sales and earnings performance.




We offer value to our customers. Our marketing effort targets moderate income,
value conscious consumers seeking name brand footwear for all age groups. We
believe that by offering a wide selection of popular styles of name brand
merchandise at competitive prices, we generate broad customer appeal.
Additionally, the time conscious customer appreciates the convenience of one
stop shopping for the entire family. We also believe our highly promotional
in-store shopping environment contributes to a reputation of value pricing
throughout the store.




We maintain an efficient store level cost
structure. Our cost
efficient store operations and real estate strategy enable us to price products
competitively. Low labor costs are achieved by housing merchandise directly on
the selling floor in an open stock format, enabling customers to serve
themselves, if they choose. This reduces the staffing required to assist
customers and reduces store level labor costs as a percentage of sales. We
prefer to locate stores predominantly in strip shopping centers in order to take
advantage of lower occupancy costs and maximize our exposure to value oriented
shoppers.




We rely heavily on information technology. We have invested significant resources in
information technology. Our proprietary inventory management and
state-of-the-art point-of-sale ("POS") systems provide corporate management,
buyers and store managers with the timely information necessary to monitor and
control all phases of operations. The POS provides, in addition to other
features, full price management (including price look-up), promotion tracking
capabilities (in support of the spontaneous nature of the in-store price
promotions), real-time sales and gross margin analysis by product category at
the store level and customer tracking. Using the POS, store managers are able to
monitor sales and gross profit margins on a real-time basis throughout the day.
Reacting to sales trends, our mic-people use POS reports to choose from among a
number of product promotions supplied by our centralized merchandising
staff.




3




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Our network connects
our corporate office to our distribution center and retail stores via a wide
area network, providing up-to-date sales and inventory information as required.
Our data warehouse enables the merchandising staff to analyze sales, margin and
inventory levels by store, by day, down to the size of shoe. Using this
information, our merchandise managers meet regularly with vendors to compare
their product sales, gross margins and return on inventory investment against
previously stated objectives. We believe timely access to key business data has
enabled us in the past to drive annual comparable store sales increases, manage
our markdown activity and improve inventory turnover.




Growth Strategy and Store
Location




In reaction to the
current economic environment, we have slowed our store growth during the past
two years and will continue this slower growth until we see a sustained
improvement in consumer spending and commercial real estate development. In
fiscal 2010, we expect to open 10 to 15 stores and close 10 to 13 stores. These
new stores will primarily be located in existing geographic areas. Our intention
is to fill in certain under-penetrated markets with additional stores, thereby
increasing the performance of the overall market. We also intend to enter new
smaller markets that we can fully penetrate with one or two stores. We generally
can advertise more effectively in these markets, which helps to create immediate
brand awareness. Historically, we have adjusted and will continue to adjust, our
annual store growth rate based on our view of internal and external
opportunities and challenges. In fiscal years beyond 2010, we intend to increase
our annual store growth rate to between 10% to 12% subject to the availability
of sufficient real estate and a sustained recovery of the U.S.
economy.




Critical to the
success of opening new stores in larger markets or geographic areas is our
ability to cluster stores. In larger markets (populations greater than 400,000),
clustering involves opening two or more stores at approximately the same time,
and in smaller markets that can only support a single store, clustering involves
seeking locations in reasonably close proximity to other existing markets. This
strategy creates cost efficiencies by enabling us to leverage store expenses
with respect to advertising, distribution and management costs. We believe the
advantages of clustering stores in existing markets will lead to cost
efficiencies and overall incremental sales gains that should more than offset
any adverse effect on sales of existing stores.




The number of stores
opened and closed was as follows:




Fiscal years
            
            2009
            
            2008
            
            2007Stores open at beginning of
    year
            
            304
            
            291
            
            271Opened during year
            
            16
            
            24
            
            25Closed during year
            
            9
            
            11
            
            5Stores open at end of year
            
            311
            
            304
            
            291


On January 30, 2010,
we had 311 stores located in 30 states, primarily in the Midwest, South and
Southeast regions of the United States. We prefer strip shopping center
locations where occupancy costs are typically lower and we enjoy greater
operating freedom to implement our non-traditional retail methods. We feel that
our target customers enjoy the convenience offered by strip shopping centers as
opposed to enclosed malls. Our stores averaged approximately 10,900 square feet,
ranging in size from 6,000 to 26,500 square feet. Our current store prototype
utilizes between 8,000 and 12,000 square feet, depending upon, among other
factors, the location of the store and the population base the store is expected
to service. The sales area of most stores is approximately 86% of the gross
store size.




All of our stores are
leased rather than owned. We believe the flexibility afforded by leasing allows
us to avoid the inherent risks of owning real estate, particularly with respect
to under-performing stores. Before entering a new market, we perform a market,
demographic and competition analysis to evaluate the suitability of the
potential market. Potential store site selection criteria include, among other
factors, market demographics, traffic counts, the tenant mix of a potential
strip shopping center, visibility within the center and from major
thoroughfares, overall retail activity of the area and proposed lease terms. The
time required to open a store after signing a lease depends primarily upon the
landlord’s ability to deliver the premises. After we accept the premises from
the landlord in turnkey condition, we can generally open a store within 60
days.




4




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Merchandising and Pricing




Our merchandising
strategy is designed to provide a large selection of moderately priced footwear
for the entire family. Our stores carry an average of approximately 26,000 pairs
of shoes featuring a broad assortment of current-season name brand footwear,
supplemented with private label merchandise and select name brand closeouts. Our
stores also carry complementary accessories such as handbags, shoe care items
and socks. The mix of merchandise and the brands offered in a particular store
are based upon the demographics of each market, among other factors.




Our pricing strategy
is designed to emphasize value. By combining current season name brand product
with promotional pricing, we feel that we create a better value for customers.
Initial pricing decisions are guided by gross profit margin targets, which vary
by merchandise category and depend on whether the item is name brand or private
label merchandise. Markdowns are centrally managed by the buying staff and
communicated to the stores through information systems as needed.




The table below sets
forth our percentage of sales by product category:




Fiscal years
            
            2009
            
            2008
            
            2007Women’s
            
            26
            %
            
            26
            %
            
            27
            %Men’s
            
            15
            
            
            15
            
            
            15Children’s (1)
            
            17
            
            
            17
            
            
            17Athletics (2)
            
            38
            
            
            38
            
            
            37Accessories and Miscellaneous
      Items
            
            4
            
            
            4
            
            
            4100
            %
            
            100
            %
            
            100
            %


(1)
            
            Children’s
      includes children’s athletic shoes.(2)
            
            Includes men’s
      and women’s sizes only.




Women’s, men’s and
children’s non-athletic footwear categories are further divided into dress,
casual, sport, sandals and boots. Athletic shoes are classified by
functionality, such as running, basketball or fitness shoes. In fiscal 2009,
athletic styles, including children’s sizes, represented approximately half of
our footwear sales.




One of our major
goals is to improve our operating margins. We are focused on improving our
operating margins by increasing our gross margin and to a lesser extent
leveraging general and administrative expenses against a higher sales
base.




Advertising and Promotion




We use various forms
of media advertising to communicate the exceptional values offered on specific
shoes or entire product categories. Approximately 55% of our total advertising
budget was directed to television, radio and digital media in fiscal 2009. Print
media (including inserts, direct mail and newspaper ads) and outdoor advertising
accounted for the balance of the budget. A special effort is made to utilize the
cooperative advertising dollars offered by vendors whenever
possible.




In-store promotions
are a key element in our marketing effort. By utilizing both planned and
impromptu contests and games, store managers create an environment that
encourages customer interaction with store personnel. For example, a customer is
enticed to purchase additional merchandise by winning an on-the-spot discount.
Promotions of this type exemplify our emphasis on fun and excitement in order to
enhance our customers’ total shopping experience.




5




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We strive to make
each store opening a major retail event. Major promotions during grand openings
and peak selling periods feature contests and prize giveaways. We believe our
grand openings help to establish the high-energy, promotional atmosphere that
develops a loyal, repeat customer base and generates word-of-mouth advertising.




Distribution




We utilize a single
distribution center located in Evansville, Indiana. This facility is leased from
a third party and can support the processing and distribution needs of a minimum
of 460 stores to facilitate future growth. We negotiated in our lease the right
to expand into a designated expansion area as long as we provide 120 days
written notice to the property owner. Expansion under this option would provide
us the processing capacity to support a total of approximately 650
stores.




The distribution
center is equipped with state-of-the-art processing and product movement
equipment. The facility utilizes cross docking/store replenishment and
redistribution methods to fill store product requirements. These methods may
include count verification, price and bar code labeling of each unit (when not
performed by the manufacturer), redistribution of an order into size assortments
(when not performed by the manufacturer) and allocation of shipments to
individual stores. Throughout packing, allocating, storing and shipping, our
distribution process is essentially paperless. Merchandise is typically shipped
to each store one time per week. The majority of shipments are handled by a
dedicated carrier, with occasional use of common carriers.




Buying Operations




Maintaining fresh,
fashionable merchandise is critical to our success. Our buyers stay in touch
with evolving trends by shopping fashion-leading markets, attending national
trade shows, gathering vendor input and monitoring the current styles shown in
leading fashion and lifestyle magazines. Management of the purchasing function
is the responsibility of our Executive Vice President - General Merchandise
Manager. Store operations personnel are expected to provide input to our
merchandising staff regarding market specific fashion trends.




We purchase
merchandise from over 150 footwear vendors. In fiscal 2009, two suppliers, Nike
USA, Inc. and Skechers USA, Inc., each accounted for over 10% of our net sales
and together accounted for over 36% of our net sales. A loss of any of our key
suppliers in certain product categories could have a material adverse effect on
our business. As is common in the industry, we do not have any long-term
contracts with suppliers.




Competition




The retail footwear
business is highly competitive. We believe the principal competitive factors in
our industry are merchandise selection, price, fashion, quality, location, store
environment and service. We compete primarily with department stores, shoe
stores, sporting goods stores and mass merchandisers.




We compete with most
department stores and traditional shoe stores by offering lower prices. We
compete with off-price retailers, mass merchandisers and discount stores by
offering a wider and deeper selection of merchandise.




Many of our
competitors are significantly larger and have substantially greater financial
and other resources. However, we believe that our distinctive retail format, in
combination with our wide merchandise selection, competitive prices and low
operating costs, have in the past enabled us to compete effectively.




Store Operations




Management of store
operations is the responsibility of our Executive Vice President - Store
Operations, who is assisted by divisional managers, regional managers and the
individual store general managers. In general, each store has a general manager
and up to three assistant managers, depending on sales volume. Store operations
personnel are charged with making certain merchandising decisions necessary to
maximize sales and profits primarily through merchandise placement, signage and
timely clearance of slower selling items. Administrative functions are centrally
controlled from the corporate headquarters. These functions include accounting,
purchasing, store maintenance, information systems, advertising, human
resources, distribution and pricing.




6




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Employees




At January 30, 2010,
we had approximately 4,300 employees, of which approximately 2,500 were employed
on a part-time basis. The number of employees fluctuates during the year
primarily due to seasonality. None of our employees are represented by a labor
union.




We attribute a large
portion of our success in various areas of cost control to our inclusion of
virtually all management level employees in incentive compensation plans. We
contribute all or a portion of the cost of medical, disability and life
insurance coverage for those employees who are eligible to participate in
Company-sponsored plans. Additionally, we sponsor a 401(k) retirement plan that
is open to all employees who have met the minimum age and work hour
requirements. All employees are eligible to receive discounts on purchases from
our stores. We consider our relationship with our employees to be satisfactory.




Seasonality




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. Non-capital expenditures, such as
advertising and payroll, incurred prior to the opening of a new store are
charged to expense as incurred. 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.




We have three
distinct peak selling periods: Easter, back-to-school and Christmas.




Trademarks




We own the following
federally registered trademarks and service marks: Shoe Carnival® and associated trade
dress and related logos, The Carnival®, Donna Lawrence®, Oak Meadow®, Victoria Spenser®, Via Nova®, Innocence®, Carnival Lites®, Y-NOT?®, UNR8ED®, Solanz®, and 93 Octane®. We believe these
marks are valuable and, accordingly, we intend to maintain the marks and the
related registrations. We are not aware of any pending claims of infringement or
other challenges to our right to use these marks.




Environmental




Compliance with
federal, state and local provisions regulating the discharge of material into
the environment or otherwise relating to the protection of the environment has
not had a material effect upon our capital expenditures, earnings or competitive
position. We believe the nature of our operations have little, if any,
environmental impact. We therefore anticipate no material capital expenditures
for environmental control facilities for our current fiscal year or for the
foreseeable future.




Executive Officers




Name
            
            
            Age
            
            PositionJ. Wayne Weaver
            
            75
            
            Chairman of the Board and
    DirectorMark L. Lemond
            
            55
            
            President, Chief Executive Officer and
      DirectorTimothy T. Baker
            
            53
            
            Executive Vice President - Store
      OperationsW. Kerry Jackson
            
            48
            
            Executive Vice President - Chief
      Financial Officer and TreasurerClifton E. Sifford
            
            56
            
            Executive Vice President - General
      Merchandise ManagerKathy A. Yearwood
            
            43
            
            Vice President -
  Controller


Mr. Weaver is Shoe Carnival’s largest shareholder and
has served as Chairman of the Board since March 1988. From 1978 until February
2, 1993, Mr. Weaver had served as president and chief executive officer of Nine
West Group Inc., a designer, developer and marketer of women’s footwear. He has
over 40 years of experience in the footwear industry. Mr. Weaver is a former
director of Nine West Group, Inc. Mr. Weaver serves as chairman and chief
executive officer of Jacksonville Jaguars, LTD and is a member of LC Footwear,
LLC.




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Mr. Lemond has been employed as President and Chief
Executive Officer since September 1996. From March 1988 to September 1996, Mr.
Lemond served as Executive Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary. On February 3, 1994, Mr. Lemond was promoted to the
position of Chief Operating Officer. Mr. Lemond has served as a Director since
March 1988. Prior to March 1988, he served in similar officer capacities with
Russell’s Shoe Biz, Inc. Prior to joining Russell’s Shoe Biz, Inc. in 1987, Mr.
Lemond was a partner with a public accounting firm. He is a Certified Public
Accountant.




Mr. Baker has been employed as Executive Vice President
- Store Operations since June 2001. From March 1994 to June 2001, Mr. Baker
served as Senior Vice President - Store Operations. From May 1992 to March 1994,
Mr. Baker served as Vice President - Store Operations. Prior to that time, he
served as one of our regional managers. From 1983 to June 1989, Mr. Baker held
various retail management positions with Payless ShoeSource.




Mr. Jackson has been employed as Executive Vice President
- Chief Financial Officer and Treasurer since August 2004. From June 2001 to
August 2004, Mr. Jackson served as Senior Vice President – Chief Financial
Officer and Treasurer. From September 1996 to June 2001, Mr. Jackson served as
Vice President – Chief Financial Officer and Treasurer. From January 1993 to
September 1996, Mr. Jackson served as Vice President - Controller and Chief
Accounting Officer. Prior to January 1993, Mr. Jackson held various accounting
positions with us. Prior to joining us in 1988, Mr. Jackson was associated with
a public accounting firm. He is a Certified Public Accountant.




Mr. Sifford has been employed as Executive Vice President
- General Merchandise Manager since June 2001. From April 13, 1997 to June 2001,
Mr. Sifford served as Senior Vice President - General Merchandise Manager. Prior
to joining us, Mr. Sifford served as merchandise manager-shoes for Belk Store
Services, Inc.




Ms. Yearwood was designated our principal accounting
officer in March 2010 and has served as our Vice President - Controller since
March 2005. Prior to that, Ms. Yearwood served as our corporate Controller since
joining us in December 2002. Before joining us, Ms. Yearwood served in various
financial positions for Brill Media Company, LP.




Our executive
officers serve at the discretion of the Board of Directors. There is no family
relationship between any of our Directors or executive officers.




(Pursuant to General
Instruction G (3) of Form 10-K, the foregoing information is included as an
unnumbered Item in PART I of this annual report in lieu of being included in our
Proxy Statement for our 2010 Annual Meeting of Shareholders.)




ITEM 1A. RISK FACTORS




Carefully consider
the following risk factors and all other information contained in this annual
report before making an investment decision with respect to our common stock.
Investing in our common stock involves a high degree of risk. If any of the
following risks actually occur, we may not be able to conduct our business as
currently planned and our financial condition and operating results could be
seriously harmed. See ITEM 1. BUSINESS - "Forward-Looking Statements" of this
report.




The current economic conditions and unemployment rates may adversely
affect consumer spending and may significantly harm our business. The success of our
business depends to a significant extent upon the level of consumer spending. A
number of factors may affect the level of consumer spending on merchandise that
we offer, including, among other things:


- general economic, industry and
  weather conditions;
- unemployment
  trends;
- energy costs, which affect
  gasoline and home heating prices;

8




---



- the level of consumer debt;
- consumer credit availability;
- real estate values and foreclosure
  rates;
- consumer confidence in future
  economic conditions;
- interest rates;
- tax rates and policies; and
- war, terrorism, other hostilities
  and security concerns.

The merchandise we
sell generally consists of discretionary items. Continued adverse economic
conditions and unemployment rates, and any related decrease in consumer
confidence and spending may result in reduced consumer demand for discretionary
items. Any decrease in consumer demand could reduce traffic in our stores, limit
the prices we can charge for our products and force us to take inventory
markdowns, which could have a material adverse effect on our business, results
of operations and financial condition. Reduced demand may also require increased
selling and promotional expenses. Reduced demand and increased competition could
increase the need to close underperforming stores, which could result in higher
than anticipated closing costs.




We face significant competition in our markets and we may be unable to
compete favorably. The retail footwear industry is highly competitive. We compete primarily
with department stores, shoe stores, sporting goods stores and mass
merchandisers. Many of our competitors are significantly larger and have
substantially greater financial and other resources than we do. Economic
pressures on or bankruptcies of our competition could result in increased
pricing pressures. This competition could adversely affect our results of
operations and financial condition in the future.




Our failure to identify fashion trends could result in lower sales,
higher markdowns and lower gross profits. Our success depends upon our ability to
anticipate and react to the fashion tastes of our customers and provide
merchandise that satisfies customer demand. Our failure to anticipate, identify
or react appropriately to changes in consumer fashion preferences may result in
lower sales, higher markdowns to reduce excess inventories and lower gross
profits. Conversely, if we fail to anticipate or react to consumer demand for
our products, we may experience inventory shortages, which would result in lost
sales and could negatively impact our customer goodwill, our brand image and our
profitability. Moreover, our business relies on continuous changes in fashion
preferences. Stagnating consumer preferences could also result in lower sales
and would require us to take higher markdowns to reduce excess inventories.




A failure to increase sales at our existing stores may adversely affect
our stock price and impact our results of operations. A number of factors have historically
affected, and will continue to affect, our comparable store sales results,
including:


- competition;
- timing of holidays including sales
  tax holidays;
- general regional and national
  economic conditions;
- inclement weather;
- consumer trends, such as less
  disposable income due to the impact of higher gasoline prices;
- fashion trends;
- changes in our merchandise
  mix;

9




---



- our ability to distribute
  merchandise efficiently to our stores;
- timing and type of, and customer
  response to, sales events, promotional activities or other advertising;
- the effectiveness of our inventory
  management;
- new merchandise introductions; and
- our ability to execute our
  business strategy effectively.

Our comparable store
sales results have fluctuated in the past, and we believe such fluctuations may
continue. The unpredictability of our comparable store sales may cause our
revenue and results of operations to vary from quarter to quarter, and an
unanticipated decline in revenues or operating income may cause our stock price
to fluctuate significantly.




We depend on our key suppliers for merchandise and advertising support
and the loss of key suppliers could adversely affect our
business. Our
business depends upon our ability to purchase fashionable, name brand and other
merchandise at competitive prices from our suppliers. In fiscal 2009, two
branded suppliers, Nike USA, Inc. and Skechers USA, Inc., collectively accounted
for over 36% of our net sales. Name brand suppliers also provide us with
cooperative advertising and visual merchandising funds. A loss of any of our key
suppliers in certain product categories or our inability to obtain name brand or
other merchandise from suppliers at competitive prices could have a material
adverse effect on our business. As is common in the industry, we do not have any
long-term contracts with our suppliers.




An increase in the cost or a disruption in the flow of our imported goods
may decrease our sales and profits. We rely on imported goods to sell in our
stores. Substantially all of the footwear product we sell is manufactured
overseas, including the merchandise we import directly from overseas
manufacturers and agents and the merchandise we purchase from domestic vendors.
The primary footwear manufacturers are located in China, Brazil, Spain and East
Asia. A disruption in the flow of imported merchandise or an increase in the
cost of those goods may decrease our sales and profits. In addition, we do not
control our vendors or their labor and business practices. The violation of
labor or other laws by one of our vendors could have an adverse affect on our
business.




If imported
merchandise becomes more expensive or unavailable, the transition to alternative
sources may not occur in time to meet our demands. Products from alternative
sources may be of lesser quality and more expensive than those we currently
import. Other risks associated with our use of imported goods include:
disruptions in the flow of imported goods because of factors such as electricity
or raw material shortages, work stoppages, strikes and political unrest;
problems with oceanic shipping, including shipping container shortages; economic
crises and international disputes; currency exchange rate fluctuations;
increases in the cost of purchasing or shipping foreign merchandise resulting
from the failure to maintain normal trade relations with source countries;
import duties, import quotas and other trade sanctions; increases in shipping
rates imposed by the trans-Pacific shipping cartel; and the impact of regulatory
changes in the United States and the countries where our manufacturers are
located, including but not limited to new requirements relating to product
safety and testing and new environmental requirements.




We may not be able to successfully execute our growth strategy, which
could have a material adverse effect on our business, financial condition and
results of operations. We intend to open new stores as a part of our growth strategy. We may not
be able to open all of the new stores contemplated by our growth strategy and
the new stores that we open may not be as profitable as existing stores.




The complexity of our
operations and management responsibilities will increase as we grow. Our growth
strategy requires that we continue to expand and improve our operating and
financial systems and to expand, train and manage our employee base. In
addition, as we open new stores, we may be unable to hire a sufficient number of
qualified store personnel or successfully integrate the new stores into our
business.




10




---



The success of our
growth strategy will depend on a number of other factors, many of which are out
of our control, including, among other things:


- our ability to locate suitable
  store sites and negotiate store leases (for new stores and renewals) on
  favorable terms;
- the acceptance of the Shoe
  Carnival concept in new markets;
- our ability to provide adequate
  distribution to support growth;
- our ability to source sufficient
  levels of inventory to meet the needs of new stores;
- particularly in new markets, our
  ability to open a sufficient number of new stores to provide the critical mass
  needed for efficient advertising and effective name recognition;
- the availability of financing for
  capital expenditures and working capital requirements;
- our ability to improve costs and
  timing associated with opening new stores; and
- the impact of new stores on sales
  or profitability of existing stores in the same market.

Due to the risks
involved, we may be unable to open new stores at the rates expected. If we fail
to successfully implement our growth strategy, it could have a material adverse
effect on our business, financial condition or results of operations.




We would be adversely affected if our distribution or information
technology operations were disrupted. We currently operate a single, 410,000 square
foot distribution center in Evansville, Indiana. Virtually all merchandise
received by our stores, with the exception of a small amount of goods shipped
directly to the stores, is and will be shipped through our distribution center.
Our corporate computer network is essential to our distribution process. If our
distribution center is shut down for any reason, such as a natural disaster,
power outage or terrorist attack, or if our information technology systems do
not operate effectively, or if we are the target of attacks or breaches, we
could incur significantly higher costs and longer lead times associated with
distributing our products to our stores. Our insurance only covers costs
relating to specified, limited matters such as a shutdown due to fire and
windstorms, but does not cover other events such as acts of war or terrorist
attacks. Even in the event of a shutdown due to covered matters, we cannot
assure you that our insurance will be sufficient, or that the insurance proceeds
will be paid to us in a timely fashion. Shutdowns or information technology
disruptions could have an adverse effect on our operating and financial
performance.




In addition, our
stores process debit and credit card transactions. We believe we have
established appropriate controls to protect our customers' personal confidential
information gathered when a debit or credit card is utilized. However, in the
event that such confidential information is misused or obtained by an
unauthorized third party, we could be subject to negative publicity that could
harm our business, as well as have a material adverse effect on our financial
conditions or results of operations.




We will require significant funds to implement our growth strategy and
meet our other liquidity needs. We cannot assure you that we will continue to
generate sufficient cash flow from operations or obtain sufficient borrowings
under our existing credit agreement to finance our growth strategy and meet our
other liquidity needs. In fiscal 2010, capital expenditures are expected to
range from $13 million to $15 million. Our actual costs may be greater than
anticipated. We also require working capital to support inventory for our
existing stores. Failure to generate or raise sufficient funds may require us to
modify, delay or abandon some of our future growth or expenditure plans. In
addition, our results could be adversely affected if we borrow funds and
interest rates materially increase from present levels.




Our failure to retain our existing senior management team and to continue
to attract qualified personnel could adversely affect our
business. Our
success depends to a large extent on the continued service of our executive
management team. Departures by executive officers could have a negative impact
on our business, as we may not be able to find suitable management personnel to
replace departing executives on a timely basis. Furthermore, our strategy
requires us to continue to train, motivate and manage our employees and to
attract, motivate and retain additional qualified managerial and merchandising
personnel. Competition for these types of personnel is intense, and we cannot
assure you that we will be successful in attracting, assimilating and retaining
the personnel required to grow and operate our business profitably.




11




---



Failure to maintain effective internal control over financial reporting
could result in a loss of investor confidence in our financial reports and have
a material adverse effect on our stock price. We must continue to document, test and
evaluate our internal control over financial reporting in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
annual reports by management regarding the effectiveness of our internal control
over financial reporting and a report by our independent registered public
accounting firm attesting to the effectiveness of our internal control over
financial reporting. We have expended, and expect that we will continue to
expend, significant management time and resources documenting and testing our
internal control over financial reporting. If we conclude in future periods that
our internal control over financial reporting is not effective, it could result
in lost investor confidence in the accuracy, reliability and completeness of our
financial reports. Any such events could have a material adverse effect on our
stock price.




Our quarterly operating results will fluctuate due to seasonality and
other factors. Our
quarterly results of operations have fluctuated in the past and can be expected
to continue to fluctuate in the future. Our quarterly results of operations are
affected by a variety of factors, including:


- fashion trends;
- calendar shifts of holiday or
  seasonal periods;
- the effectiveness of our inventory
  management;
- weather conditions;
- timing of opening of new stores;
- changes in general economic
  conditions and consumer spending patterns; and
- actions of competitors or
  co-tenants.

We have three
distinct peak selling periods: Easter, back-to-school and Christmas. To prepare
for our peak shopping seasons, we must order and keep in stock significantly
more merchandise than we would carry during other parts of the year. Any
unanticipated decrease in demand for our products during these peak shopping
seasons could require us to sell excess inventory at a substantial markdown,
which could reduce our net sales and gross margins and negatively impact our
profitability. Our operating results depend significantly upon the sales
generated during these periods. If our future quarterly results fail to meet the
expectations of research analysts, then the market price of our common stock
could decline substantially.




Our stock price may be volatile and could decline
substantially. The
stock market has, from time to time, experienced extreme price and volume
fluctuations. Many factors may cause the market price for our common stock to
decline, including:


- operating results failing to meet the expectations of securities analysts
  or investors in any quarter;
- downward revisions in securities analysts’ estimates;
- material announcements by us or our competitors; and
- the other risk factors cited in this annual report.

In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we become
involved in a securities class action litigation in the future, it could result
in substantial costs and diversion of management attention and resources, thus
harming our business.




We are controlled by our principal shareholder. J. Wayne Weaver,
our Chairman of the Board of Directors and principal shareholder, his spouse and
an adult child together own approximately 27.1% of our outstanding common stock.
Accordingly, Mr. Weaver is able to exert substantial influence over our
management and operations. In addition, his interests may differ from or be
opposed to the interests of our other shareholders, and his control may have the
effect of delaying or preventing a change in control that may be favored by
other shareholders.




12




---



Provisions of our organizational documents and Indiana law might deter
acquisition bids for us. Our Restated Articles of Incorporation and Indiana corporate laws contain
provisions that may discourage other persons from attempting to acquire control
of us, including, without limitation, a Board of Directors that has staggered
terms for its members, supermajority voting provisions, restrictions on the
ability of shareholders to call a special meeting of shareholders and procedural
requirements in connection with shareholder proposals or director nominations.
The Board of Directors has the authority to issue preferred stock in one or more
series without the approval of the holders of our common stock. Further, Indiana
corporate law contains business combination provisions that, in general,
prohibit for five years any business combination with a beneficial owner of more
than 10% or more of our common stock unless the holder’s acquisition of the
stock was approved in advance by our Board of Directors. Indiana corporate law
also contains control share acquisition provisions that limit the ability of
certain shareholders to vote their shares unless their control share acquisition
is approved. In certain circumstances, the fact that corporate devices are in
place that inhibit or discourage takeover attempts could reduce the market value
of our common stock.




ITEM 1B. UNRESOLVED STAFF COMMENTS




None.




ITEM 2. PROPERTIES




We lease all existing
stores and intend to lease all future stores. All leases for existing stores
provide for fixed minimum rentals and most provide for contingent rental
payments based upon various specified percentages of sales above minimum levels.
Certain leases also contain escalation clauses for increases in minimum rentals,
operating costs and taxes.




The following table
identifies the number of our stores in each state as of January 30, 2010:




State
            #
            
            State
            #Alabama
            10
            
            Mississippi
            6Arkansas
            8
            
            North Carolina
            17Arizona
            2
            
            North Dakota
            1Colorado
            4
            
            Nebraska
            1Florida
            24
            
            Ohio
            17Georgia
            12
            
            Oklahoma
            7Idaho
            4
            
            Pennsylvania
            3Iowa
            6
            
            South Carolina
            11Illinois
            27
            
            South Dakota
            2Indiana
            20
            
            Tennessee
            18Kansas
            3
            
            Texas
            38Kentucky
            12
            
            Utah
            5Louisiana
            12
            
            Virginia
            10Michigan
            5
            
            Wisconsin
            2Missouri
            20
            
            West Virginia
            4Total Stores
            311


In February 2006, we
entered into an operating lease with an independent third-party to lease our
410,000 square foot distribution center located in Evansville, Indiana. The
lease has an initial term of 15 years, commencing on December 1, 2006. We have
the right to extend the initial lease term for up to three additional periods of
five years each.




In June 2006, we
entered into an operating lease with an independent third-party to lease our
corporate headquarters for an initial term of 15 years, commencing on June 1,
2007. We have the right to extend the initial lease term for up to three
additional periods of five years each.




For additional
information with respect to our properties, see ITEM 1. BUSINESS – "Growth
Strategy and Store Location" and "Distribution" as well as PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS – "Executive Summary" of this report.




13




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ITEM 3. LEGAL PROCEEDINGS




On or about April 22,
2008, an arbitration claim was filed by SDI Industries, Inc. ("SDI") against us
with the American Arbitration Association Western Case Management Center in Los
Angeles, California, captioned SDI Industries, Inc. (Claimant and Counter-Respondent) v. Shoe Carnival,
Inc. (Respondent and Counterclaimant), in which SDI sought payment of $1.2 million
of unpaid retainage, $700,000 for services not yet billed, plus additional
interest and legal fees. The retainage was withheld from progress billings for
work performed on our distribution center and was recorded in accrued and other
liabilities and fixed assets in our consolidated financial statements. We filed
a Counterclaim and Response in this matter, denying SDI's claim, and seeking
monetary damages of more than $3.0 million. We asserted that SDI breached our
contract with SDI ("Contract") due to its failure to deliver our distribution
center's material handling system pursuant to the specifications of the
Contract.




On May 30, 2009, the
parties entered into a settlement of the above matter. Under the terms of the
settlement, SDI agreed to forego collection of the $1.2 million in unpaid
retainage and to pay us $1.2 million towards the remediation of the distribution
center's material handling system. The $1.2 million will be paid in installments
over seven years and is evidenced by a promissory note secured by a standby
letter of credit, renewable annually, in an amount not less than $200,000 and by
a security interest in SDI's accounts receivable. In addition, both parties
agreed to the dismissal of all pending claims under arbitration. The installment
due on the promissory note within the next 12 months has been recorded in
Accounts receivable in our consolidated financial statements. The remaining
balance of the promissory note is recorded in Other as a non-current asset. SDI
remitted the first scheduled payment prior to the due date of July 1,
2009.




We are involved in
various other legal proceedings incidental to the conduct of our business. While
the outcome of any legal proceeding is always uncertain, we do not currently
expect that any such proceedings will have a material adverse effect on our
financial position or results of operations.




ITEM 4. [REMOVED AND RESERVED]




14




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PART II




ITEM 5.
            
            MARKET FOR THE REGISTRANT’S COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES


Market Information and Holders




Our common stock has
been quoted on The NASDAQ Stock Market, LLC under the trading symbol "SCVL"
since March 16, 1993.




The quarterly high
and low trading prices were as follows:




Fiscal year 2009
            
            High
            
            LowFirst Quarter
            
            $
            12.25
            
            $
            6.05Second Quarter
            
            
            14.18
            
            
            9.25Third Quarter
            
            
            17.38
            
            
            11.63Fourth Quarter
            
            
            21.14
            
            
            14.69Fiscal year 2008First Quarter
            
            $
            15.15
            
            $
            11.52Second Quarter
            
            
            16.25
            
            
            11.48Third Quarter
            
            
            18.45
            
            
            10.20Fourth Quarter
            
            
            14.65
            
            
            6.75


As of April 8, 2010
there were approximately 218 holders of record of our common stock.




No unregistered
equity securities were sold by us during fiscal 2009.




Dividends




We have not paid, and
do not currently intend to pay, cash dividends on our common stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements, our general financial
condition and general business conditions. Our credit agreement allows the
payment of dividends as long as the dividends distributed do not exceed 30% of
our consolidated net income for the preceding fiscal year.




Issuer Purchases of Equity
Securities




Throughout fiscal
2009 we issued treasury shares to employees for the exercise of stock options
and the issuance of restricted stock awards. We also repurchased 19,241 shares
of common stock as a result of our withholding shares or allowing our employees
to deliver shares to us to cover the income taxes resulting from the vesting of
certain restricted stock awards. It is our intention to continue these practices
as they relate to the issuance of treasury shares.




15




---



In fiscal 2006, our
Board of Directors authorized a $50.0 million share repurchase program, which
was to terminate upon the earlier of the repurchase of the maximum amount or
December 31, 2008. On October 8, 2008, the Board of Directors extended the date
of termination one year to December 31, 2009. As of December 31, 2009,
approximately 1.2 million shares had been repurchased at an aggregate cost of
$28.1 million. The amount that was available upon the expiration of the
repurchase authorization at December 31, 2009 was $21.9 million. The following
table summarizes repurchase activity during the fourth quarter of fiscal 2009:




ApproximateDollar Value ofTotal Number Of
            
            Shares thatShares Purchased
            
            May Yet BeTotal Number of
            
            Average
            
            as Part of Publicly
            
            PurchasedShares
            
            Price Paid
            
            Announced
            
            Under thePeriod
            
            Purchased (1)
            
            per
      Share
            
            Programs
            
            Programs
      (2)November 1, 2009 toNovember 28, 2009
            
            0
            
            $
            0.00
            
            0
            
            $
            21,852,000November 29, 2009 toJanuary 2, 2010
            
            0
            
            $
            0.00
            
            0
            
            $
            0January 3, 2010 toJanuary 30, 2010
            
            19,241
            
            $
            20.47
            
            0
            
            $
            019,241
            
            
            
            
            0


(1)
            
            Total
      number of shares purchased represents shares delivered to or withheld by
      us in connection with employee payroll tax withholding upon the vesting of
      certain restricted stock awards.(2)
            
            The
      $50.0 million share repurchase program authorized by our Board of
      Directors in fiscal 2006 expired on December 31,
2009.




Securities Authorized for Issuance Under
Equity Compensation Plans




The information
required by this Item concerning securities authorized for issuance under our
equity plans has been incorporated by reference into PART III, ITEM 12 of this
report.




16




---



ITEM 6. SELECTED FINANCIAL DATA




The following
selected financial data should be read in conjunction with our consolidated
financial statements and notes to those statements included in PART II, ITEM 8
of this report.




(In thousands, except
per share and operating data)




Fiscal years (1)
            
            2009
            
            2008
            
            2007
            
            2006
            
            2005Income Statement Data:Net Sales
            
            $
            682,422
            
            
            $
            647,572
            
            
            $
            658,680
            
            
            $
            681,662
            
            
            $
            655,638Cost of sales (including
    buying,distribution and occupancycosts)
            
            
            488,816
            
            
            
            473,244
            
            
            
            472,831
            
            
            
            482,888
            
            
            
            465,942Gross Profit
            
            
            193,606
            
            
            
            174,328
            
            
            
            185,849
            
            
            
            198,774
            
            
            
            189,696Selling, general andadministrative expenses
            
            
            168,476
            
            
            
            165,953
            
            
            
            166,717
            
            
            
            161,144
            
            
            
            158,860Operating income
            
            
            25,130
            
            
            
            8,375
            
            
            
            19,132
            
            
            
            37,630
            
            
            
            30,836Interest income
            
            
            (39
            )
            
            
            (148
            )
            
            
            (690
            )
            
            
            (1,235
            )
            
            
            (170
            )Interest expense
            
            
            174
            
            
            
            153
            
            
            
            264
            
            
            
            152
            
            
            
            524Income before income taxes
            
            
            24,995
            
            
            
            8,370
            
            
            
            19,558
            
            
            
            38,713
            
            
            
            30,482Income tax expense
            
            
            9,829
            
            
            
            3,051
            
            
            
            6,751
            
            
            
            14,949
            
            
            
            11,692Net income
            
            $
            15,166
            
            
            $
            5,319
            
            
            $
            12,807
            
            
            $
            23,764
            
            
            $
            18,790Net income per share:Basic
            
            $
            1.21
            
            
            $
            0.43
            
            
            $
            0.99
            
            
            $
            1.78
            
            
            $
            1.43Diluted
            
            $
            1.20
            
            
            $
            0.43
            
            
            $
            0.97
            
            
            $
            1.73
            
            
            $
            1.40Average shares outstandingBasic
            
            
            12,513
            
            
            
            12,406
            
            
            
            12,922
            
            
            
            13,373
            
            
            
            13,128Diluted
            
            
            12,660
            
            
            
            12,492
            
            
            
            13,158
            
            
            
            13,744
            
            
            
            13,457Selected Operating Data (2):Stores open at end of year
            
            
            311
            
            
            
            304
            
            
            
            291
            
            
            
            271
            
            
            
            263Square footage of store spaceat
      year end (000’s)
            
            
            3,372
            
            
            
            3,335
            
            
            
            3,238
            
            
            
            3,062
            
            
            
            3,012Average sales per store (000’s)
            
            $
            2,219
            
            
            $
            2,206
            
            
            $
            2,364
            
            
            $
            2,544
            
            
            $
            2,524Average sales per square foot
            
            $
            204
            
            
            $
            198
            
            
            $
            209
            
            
            $
            223
            
            
            $
            219Comparable store sales
      (3)
            
            
            3.5
            %
            
            
            (4.6
            )%
            
            
            (5.2
            )%
            
            
            1.5
            %
            
            
            6.9
            %Balance Sheet Data:Cash and cash equivalents
            
            $
            44,168
            
            
            $
            24,817
            
            
            $
            9,177
            
            
            $
            34,839
            
            
            $
            20,304Total assets
            
            $
            311,641
            
            
            $
            293,074
            
            
            $
            291,616
            
            
            $
            311,162
            
            
            $
            274,833Long-term debt
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            $
            0Total
      shareholders’ equity
            
            $
            221,829
            
            
            $
            204,636
            
            
            $
            196,612
            
            
            $
            209,949
            
            
            $
            181,155


(1)
            
            Our
      fiscal year is a 52/53 week year ending on the Saturday closest to January
      31. Unless otherwise stated, references to years 2009, 2008, 2007, 2006,
      and 2005 relate respectively to the fiscal years ended January 30, 2010,
      January 31, 2009, February 2, 2008, February 3, 2007, and January 28,
      2006. Fiscal year 2006 consisted of 53 weeks and the other fiscal years
      consisted of 52 weeks.(2)
            
            Selected Operating Data has been adjusted to a comparable 52 week
      basis for fiscal 2006.(3)
            
            Comparable store sales for the periods indicated include stores
      that have been open for 13 full months prior to the beginning of the
      period, including those stores that have been relocated or remodeled.
      Therefore, stores opened or closed during the periods indicated are not
      included in comparable store sales.




17




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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 should be read
together with our consolidated financial statements and notes to those
statements included in PART II, ITEM 8 of this report.




Overview of Our Business




Shoe Carnival, Inc.
is one of the nation’s largest family footwear retailers. As of January 30,
2010, we operated 311 stores in 30 states primarily in the Midwest, South and
Southeast regions of the United States. We offer a distinctive shopping
experience, a broad merchandise assortment and value to our customers while
maintaining an efficient store level cost structure.




Our stores combine
competitive pricing with a highly promotional, in-store marketing effort that
encourages customer participation and creates a fun and exciting shopping
experience. We believe this highly promotional atmosphere results in various
competitive advantages, including increased multiple unit sales; the building of
a loyal, repeat customer base; the creation of word-of-mouth advertising; and
enhanced sell through of in-season goods. Our objective is to be the destination
store-of-choice for a wide range of consumers seeking moderately priced, current
season name brand and private label footwear. Our product assortment includes
dress and casual shoes, sandals, boots and a wide assortment of athletic shoes
for the entire family. We believe that by offering a wide selection of both
athletic and non-athletic footwear, we are able to reduce our exposure to shifts
in fashion preferences between those categories.




Our marketing effort
targets moderate income, value-conscious consumers seeking name brand footwear
for all age groups. We believe that by offering a wide selection of popular
styles of name brand merchandise at competitive prices, we generate broad
customer appeal. Our cost-efficient store operations and real estate strategy
enable us to price products competitively. Low labor costs are achieved by
housing merchandise directly on the selling floor in an open-stock format,
enabling customers to serve themselves, if they choose. This reduces the
staffing required to assist customers and reduces store level labor costs as a
percentage of sales. We locate stores predominantly in strip shopping centers in
order to take advantage of lower occupancy costs and maximize our exposure to
value-oriented shoppers.




Our fiscal year is a
52/53 week year ending on the Saturday closest to January 31. Unless otherwise
stated, references to years 2009, 2008 and 2007 relate respectively to the
fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008.




Executive Summary




Fiscal 2009




During fiscal 2009,
we achieved earnings per diluted share of $1.20, a 179% increase over the $0.43
earned in fiscal 2008. This increase resulted from a combination of top-line
sales growth, strong gross profit improvement and our ability to maintain tight
control over operating expenses. In addition:


- Net sales increased $34.8 million
  to $682.4 million, a 5.4% increase over the prior year.
- During the first six months of
  fiscal 2009, our comparable store sales declined 3.3%. However, customer
  traffic began to increase significantly in August (the beginning of the back
  to school selling season), and we saw sustained increases through the
  remainder of the year, which drove a 9.5% comparable store sales gain for the
  six-month period. For the full year, our comparable store sales increased
  3.5%. This sales gain was largely driven by an increase in the average selling
  price of our footwear. We were able to raise our average price through an
  increase in the sale of higher priced footwear, such as boots and athletics,
  and by operating in a less promotional selling environment during the second
  half of fiscal 2009 compared to the prior year period.

18




---



- Our gross profit margin increased
  to 28.4% from 26.9% in fiscal 2008. Well-controlled inventories and strong
  fashion trends resulted in a merchandise margin increase of 0.8%. Buying,
  distribution and occupancy costs decreased 0.7%, as a percentage of sales, due
  to the leveraging effect of higher sales and a $932,000 decrease in expenses.
  Our expense savings were primarily related to cost reduction initiatives
  within our supply chain, which resulted in a 15% reduction in distribution
  logistics expense.
- Selling, general and
  administrative expenditures were well controlled, increasing only $2.5
  million, or 1.5%, during fiscal 2009. These costs decreased 0.9% as a
  percentage of sales year-over-year.
- We opened 16 stores and closed
  nine stores during fiscal 2009, ending the year with 311
  stores.
- By slowing our store growth and
  tightly controlling all other capital expenditures, our total capital
  expenditures decreased $8.4 million, as compared to the prior
  year.
- We generated $18.1 million of cash
  from operating activities (net of purchases of property and equipment) and
  ended the fiscal year with $44.2 million in cash and cash equivalents and no
  interest bearing debt.

Fiscal 2010




In fiscal 2010, we
expect the positive sales trend we saw in the second half of fiscal 2009 to
continue, particularly in the first half of the year where the sales comparisons
are easier. However, we will continue to be cautious with our inventories,
selling, general and administrative expenses and capital expenditures. In
addition:


- Our per-store inventories are
  expected to increase in the mid-single digit percentage range in the first
  half of fiscal 2010 and low single digits in the second half of the year as
  compared to the prior year.
- Selling, general and
  administrative expenses are expected to rise moderately, primarily due to
  increases in employee compensation, including incentive compensation tied to
  financial performance, and advertising.
- Capital expenditures are expected
  to increase $3 to $5 million primarily due to our decision to return to a more
  normalized plan of remodeling our stores. We completed a minimal amount of
  remodeling during fiscal 2009.
- We anticipate opening 10 to 15
  stores and closing 10 to 13 stores. We will accelerate our store growth when
  we see a sustained improvement in consumer spending and commercial real estate
  development.

By controlling the
growth in our expense structure, inventories and capital expenditures in fiscal
2010, we anticipate having positive free cash flow for the year. This would be
our seventh consecutive year of positive free cash flow.




Critical Accounting Policies




It is necessary for
us to include certain judgments in our reported financial results. These
judgments involve estimates that are inherently uncertain and actual results
could differ materially from these estimates. The accounting policies that
require the more significant judgments are:




Merchandise Inventories - Merchandise inventories are stated at the
lower of cost or market using the first-in, first-out (FIFO) method. In
determining market value, we estimate the future sales price of items of
merchandise contained in the inventory as of the balance sheet date. Factors
considered in this determination include, among others, current and recently
recorded sales prices, the length of time product has been held in inventory and
quantities of various product styles contained in inventory. The ultimate amount
realized from the sale of certain product could differ materially from our
estimates. We also estimate a shrinkage reserve for the period between the last
physical count and the balance sheet date. The estimate for the shrinkage
reserve can be affected by changes in merchandise mix and changes in actual
shrinkage trends.




Valuation of Long-Lived
Assets - We review
long-lived assets whenever events or circumstances indicate the carrying value
of an asset may not be recoverable and annually when no such event has occurred.
We evaluate the ongoing value of assets associated with retail stores that have
been open longer than two years. When events such as these occur, the assets
subject to impairment are adjusted to estimated fair value and, if applicable,
an impairment loss is recorded in selling, general and administrative expenses.
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 and if actual results or market conditions differ from those
anticipated, additional losses may be recorded.




19




---



Income Taxes - We calculate income taxes and account for
uncertain tax positions in accordance with current authoritative guidance.
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. Deferred tax assets and
liabilities are measured using the estimated tax rates in effect in the years
when those temporary differences are expected to reverse. We are also required
to make many subjective assumptions and judgments regarding our income tax
exposures. Interpretations of and guidance surrounding income tax laws and
regulations are often complex, ambiguous and change over time. As such, changes
in our subjective assumptions and judgments can materially affect amounts
recognized in the consolidated financial statements.




Insurance Reserves - We use a combination of self-insurance and
third-party insurance for workers' compensation, employee medical and general
liability insurance. These plans have stop-loss provisions that protect us from
individual and aggregate losses over specified dollar values. When estimating
our self-insured liabilities, we consider a number of factors, including
historical claims experience, severity factors, statistical trends and, in
certain instances, valuation assistance provided by independent third-parties.
We will continue to evaluate our self-insured liabilities and the underlying
assumptions on a quarterly basis and make adjustments as needed. The ultimate
cost of these claims may be greater than or less than the established accruals.
While we believe that the recorded amounts are adequate, there can be no
assurance that changes to management's estimates will not occur due to
limitations inherent in the estimating process. In the event we determine an
accrual should be increased or reduced, we will record such adjustments in the
period in which such determination is made.




Results of Operations




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




2009
            
            2008
            
            2007Net Sales
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost of sales (including buying, distribution, andoccupancy costs)
            
            71.6
            
            
            73.1
            
            
            71.8Gross profit
            
            28.4
            
            
            26.9
            
            
            28.2Selling, general andadministrative
    expenses
            
            24.7
            
            
            25.6
            
            
            25.3Operating income
            
            3.7
            
            
            1.3
            
            
            2.9Interest income
            
            (0.0
            )
            
            (0.0
            )
            
            (0.1
            )Interest expense
            
            0.0
            
            
            0.0
            
            
            0.1Income before income taxes
            
            3.7
            
            
            1.3
            
            
            2.9Income tax expense
            
            1.5
            
            
            0.5
            
            
            1.0Net income
            
            2.2
            %
            
            0.8
            %
            
            1.9
            %


In the regular course
of business, we offer our customers sales incentives including coupons,
discounts, and free merchandise. Sales are recorded net of such incentives and
returns and allowances. If an incentive involves free merchandise, that
merchandise is recorded as a zero sale and the cost is included in cost of
sales. Comparable store sales for the periods indicated below include stores
that have been open for 13 full months prior to the beginning of the period,
including those stores that have been relocated or remodeled. Therefore, stores
opened or closed during the periods indicated are not included in comparable
store sales.




20




---



2009 Compared to 2008




Net Sales




Net sales increased
$34.8 million to $682.4 million in fiscal 2009, a 5.4% increase from net sales
of $647.6 million in fiscal 2008. Comparable store sales increased 3.5%, or
approximately $20.8 million, compared to the prior fiscal year. The 16 stores
opened in fiscal 2009 along with the effect of a full year's worth of sales from
the 24 stores opened in fiscal 2008 contributed an additional $32.2 million in
sales. These sales increases were partially offset by the $18.1 million of sales
lost from the 20 stores which were closed during the last two
years.




Gross Profit




Gross profit
increased $19.3 million to $193.6 million in fiscal 2009, an 11.1% increase from
gross profit of $174.3 million in fiscal 2008. The gross profit margin for
fiscal 2009 increased to 28.4% from 26.9% in fiscal 2008. As a percentage of
sales, the merchandise margin increased 0.8% compared to the prior year, and
buying, distribution and occupancy costs decreased 0.7%. Through tight control
of inventories, we were able to reduce the level of promotional selling on a
year-over-year basis. This, along with strong sales of boots and athletic
footwear, positively affected our merchandise margin. The leverage on our
buying, distribution and occupancy costs was the result of the sales increase
combined with a $932,000 decrease in expenses primarily due to cost saving
initiatives in distribution logistics. While additional occupancy costs were
incurred for the operation of our new stores, these increases were largely
offset by rent reductions on certain comparable stores, the elimination of rent
from the 20 stores closed during the past two years and lower store closing
costs.




Selling, General and
Administrative Expenses




Selling, general and
administrative expenses increased $2.5 million to $168.5 million in fiscal 2009
from $166.0 million in fiscal 2008; however, our sales gain enabled us to
leverage these costs by 0.9%, as a percentage of sales. Incentive compensation
increased $3.5 million on a year-over-year basis due to our improved financial
performance. Expenses related to employee benefits increased $1.6 million. This
increase was associated with our non-qualified deferred compensation plan, which
experienced an increase in value as a result of the rebound from the fiscal 2008
broad-based decline in the stock market. Health care costs increased $1.1
million in fiscal 2009 as compared to the prior year. These increases were
partially offset by a decrease of $2.2 million in non-cash asset impairments and
disposal charges associated with store closings, along with other operational
cost savings.




Pre-opening costs
included in selling, general and administrative expenses were $850,000, or 0.1%
of sales, compared to $1.0 million, or 0.2% of sales, in fiscal 2008. We opened
16 stores in fiscal 2009 as compared to 24 stores in fiscal 2008. Pre-opening
costs, such as advertising, payroll and supplies, incurred prior to the opening
of a new store are charged to expense in the period they are incurred. The total
amount of pre-opening expense incurred will vary by store depending on the
specific market and the promotional activities involved. Our average pre-opening
costs per store increased by $12,000 to $53,000 in fiscal 2009, primarily as a
result of an increase in advertising.




The portion of store
closing costs included in selling, general and administrative expenses for
fiscal 2009 was $750,000, or 0.1% as a percentage of sales. These costs related
to the closing of nine stores in fiscal 2009 and the impairment of assets and
acceleration of expenses associated with management's determination to close
certain underperforming stores in future periods. In fiscal 2008, we incurred
$3.3 million, or 0.5% as a percentage of sales, in costs related to the closing
of 11 stores and the impairment of assets and acceleration of expenses
associated with management's determination to close certain underperforming
stores in future periods. We have identified 13 stores to close in fiscal 2010,
five in fiscal 2011, and one in fiscal 2012. However, the potential exists that
further negotiations with our landlords could reverse our decision to close
certain stores. We will continue to evaluate underperforming stores, which may
result in additional closings for current or future periods. The timing and
actual amount of expense recorded in closing a 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.




21




---



Interest Income and
Expense, Net




Net interest expense
increased to $135,000 in fiscal 2009 from $5,000 in fiscal 2008 primarily as a
result of a reduction in interest income. As returns available on short-term
investments fell to record lows, we held our excess funds for the first seven
months of fiscal 2009 in non-interest bearing deposit accounts to offset bank
service fees, which are included in selling, general and administrative
expenses.




Income Taxes




The effective income
tax rate was 39.3% for fiscal 2009 and 36.5% in fiscal 2008. The increase in
rate between the two periods was primarily due to the federal tax rate falling
below 35% in fiscal 2008 as a result of lower projected income before
tax.




2008 Compared to 2007




Net Sales




Net sales decreased
$11.1 million to $647.6 million in fiscal 2008, a 1.7% decrease from net sales
of $658.7 million in fiscal 2007. Comparable store sales decreased 4.6%, or
approximately $28.4 million, compared to the prior fiscal year. This decrease in
net sales was partially offset by a $17.3 million increase in sales generated by
the 24 stores opened in fiscal 2008 and the effect of a full year's worth of
sales for the 25 stores opened in fiscal 2007, net of the sales loss from the 16
stores which were closed during the last two years.




Gross Profit




Gross profit
decreased $11.5 million to $174.3 million in fiscal 2008, a 6.2% decrease from
gross profit of $185.8 million in fiscal 2007. The gross profit margin for
fiscal 2008 decreased to 26.9% from 28.2% in fiscal 2007. As a percentage of
sales, the merchandise margin decreased 0.8% compared to the prior year, while
buying, distribution and occupancy costs increased 0.5%. As was seen across the
retail sector, heavy promotions throughout the year were necessary to keep
inventory turning at an acceptable level and consequently negatively impacted
margins. We experienced a 0.6% increase in occupancy costs, as a percentage of
sales, primarily as a result of the lower comparable store sales, an increase in
costs due to the additional stores we operated throughout the year and
additional store closing costs. This increase, as a percentage of sales, was
partially offset by a 0.2% decline in distribution costs. Our distribution
costs, both as a percentage of sales and in dollars, declined as a result of the
increased costs associated with the conversion to our new distribution center
during the first quarter of the prior year, a reduction in volume for fiscal
2008 and increased efficiencies.




Selling, General and
Administrative Expenses




Selling, general and
administrative expenses decreased $764,000 to $166.0 million in fiscal 2008 from
$166.7 million in fiscal 2007. As a percentage of sales, selling, general and
administrative expenses increased to 25.6% during fiscal 2008 from 25.3% in
fiscal 2007. The savings in dollars was primarily the result of a $6.2 million
reduction in advertising costs from our decision to decrease advertising during
non-peak periods along with a $1.2 million decrease in the expense for employee
incentives and benefits. These decreases were partially offset by $6.0 million
of additional costs incurred from the operation and support of the net new
stores opened since the beginning of fiscal 2007.




Pre-opening costs
included in selling, general and administrative expenses were $1.0 million, or
0.2% of sales, in both fiscal 2008 and in fiscal 2007. We opened 24 stores in
fiscal 2008 as compared to 25 stores in fiscal 2007. Pre-opening costs, such as
advertising, payroll and supplies, incurred prior to the opening of a new store
are charged to expense in the period they are incurred. The total amount of
pre-opening expense incurred will vary by store depending on the specific market
and the promotional activities involved. Our average pre-opening costs per store
were $41,000 in fiscal 2008 as compared to $40,000 in fiscal 2007.




22




---



The portion of store
closing costs included in selling, general and administrative expenses for
fiscal 2008 was $3.3 million, or 0.5% as a percentage of sales. These costs
related to the closing of 11 stores in fiscal 2008 and the impairment and
acceleration of expenses associated with management's determination to close
certain underperforming stores at future dates. In fiscal 2007, we incurred $1.9
million, or 0.3% as a percentage of sales, in costs related to the closing of
five stores in fiscal 2007 and the impairment and acceleration of expenses
associated with management's determination to close certain underperforming
stores at future dates. The timing and actual amount of expense recorded in
closing a 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.




Interest Income and
Expense




Interest income
decreased to $148,000 in fiscal 2008 from $690,000 in fiscal 2007. The decrease
was primarily attributable to a decrease in the rate available on investments.
Interest expense decreased to $153,000 in fiscal 2008 from $264,000 in fiscal
2007.




Income Taxes




The effective income
tax rate was 36.5% for fiscal 2008 and 34.5% in fiscal 2007. The effective
income tax rate for both years differed from the statutory rate due primarily to
state and local income taxes, net of the federal tax benefit and tax credits. In
the first quarter of fiscal 2007, we recorded $980,000 of state tax credits
related to the investment in our new distribution center, which was the primary
factor in reducing our effective tax rate in fiscal 2007.




Liquidity and Capital
Resources




Our sources and uses
of cash are summarized as follows:




(In thousands)
            
            2009
            
            2008
            
            2007Net income plus depreciation and
      amortization
            
            $
            30,148
            
            
            $
            22,164
            
            
            $
            28,613Deferred income taxes
            
            
            (1,042
            )
            
            
            780
            
            
            
            (387
            )Lease incentives
            
            
            2,211
            
            
            
            2,038
            
            
            
            663Changes in operating assets and liabilities
            
            
            (4,635
            )
            
            
            6,480
            
            
            
            (11,378
            )Other operating activities
            
            
            1,215
            
            
            
            616
            
            
            
            2,368Net cash provided by operating activities
            
            
            27,897
            
            
            
            32,078
            
            
            
            19,879Net cash used in investing
      activities
            
            
            (9,685
            )
            
            
            (18,201
            )
            
            
            (18,041
            )Net cash provided by (used in) financing activities
            
            
            1,139
            
            
            
            1,763
            
            
            
            (27,500
            )Net increase
      (decrease) in cash and cash equivalents
            
            $
            19,351
            
            
            $
            15,640
            
            
            $
            (25,662
            )


Our primary sources
of funds are cash flows from operations and borrowings under our revolving
credit facility. For fiscal 2009, net cash provided by operating activities was
$27.9 million compared to net cash provided by operating activities of $32.1
million for fiscal 2008. These amounts reflect the income from operations
adjusted for non-cash items and working capital changes.




Working capital
increased to $176.5 million at January 30, 2010 from $150.5 million at January
31, 2009. This was primarily attributable to a $19.4 million increase in cash
and cash equivalents and an $8.0 million increase in merchandise inventories,
partially offset by a $1.8 million decrease in Other current assets. The current
ratio at January 30, 2010 was 3.5 and for January 31, 2009 was 3.1. We had no
outstanding interest bearing debt at January 30, 2010 or January 31,
2009.




Capital expenditures
were $9.8 million in fiscal 2009, $18.2 million in fiscal 2008 and $18.4 million
in fiscal 2007. No capital lease obligations were incurred during this
three-year period. Of the fiscal 2009 capital expenditures, approximately $5.3
million was used for new stores, $1.4 million was used for remodels and
relocations and $1.3 million was used to replace the software controlling the
material handling equipment in our distribution center. The remaining capital
expenditures for fiscal 2009 were used for continued investments in technology
and normal asset replacement activities. Lease incentives received from
landlords were $2.2 million, $2.0 million and $663,000 for fiscal years 2009,
2008 and 2007, respectively. Approximately $500,000 of the lease incentives
received from landlords in fiscal 2009 represented monies that were negotiated
for fiscal 2010 new stores and remodeling activities.




23




---



Capital expenditures
are expected to be $13 million to $15 million in fiscal 2010. We intend to open
approximately 10 to 15 stores at an expected total cost of $3.2 million to $4.8
million and to expend up to $4.8 million on remodeling activities. Lease
incentives to be received from landlords are expected to be approximately $1.3
million. As part of our long-term strategy to grow our store base and increase
our distribution capabilities, we are in the process of redesigning certain
elements of the material handling system in our distribution center.
Accordingly, we anticipate expending $1.5 million on these elements during
fiscal 2010. The remaining capital expenditures are expected to be incurred for
various other store improvements, along with continued investments in technology
and normal asset replacement activities. The actual amount of cash required for
capital expenditures for store operations depends in part on the number of new
stores opened, the amount of lease incentives, if any, received from landlords
and the number of stores remodeled. The opening of new stores will be dependent
upon, among other things, the availability of desirable locations, and the
negotiation of acceptable lease terms and general economic and business
conditions affecting consumer spending in areas we target for expansion.




Our current store
prototype uses between 8,000 and 12,000 square feet depending upon, among other
factors, the location of the store and the population base the store is expected
to service. Capital expenditures for a new store in fiscal 2010 are expected to
average approximately $323,000 with landlord incentives averaging $32,700. The
average inventory investment in a new store is expected to range from $325,000
to $500,000 depending on the size and sales expectation of the store and the
timing of the new store opening. Pre-opening expenses, such as advertising,
salaries and supplies, are expected to average approximately $96,000 per store
in fiscal 2010. This represents a $43,000 increase over our average fiscal 2009
expenditure. The majority of the increase is attributable to our plan to
significantly expand our advertising for new stores. On a per-store basis, for
the 16 stores opened during fiscal 2009, the initial inventory investment
averaged $484,000, capital expenditures averaged $360,000 and lease incentives
received from landlords averaged $108,000.




Significant
contractual obligations as of January 30, 2010 and the fiscal years in which
payments are due include:




(In thousands)
            
            Payments
      Due By Fiscal Year2011 &
            
            2013 &
            
            2015 andContractual Obligations
            
            Total
            
            2010
            
            2012
            
            2014
            
            afterLetters of credit
            
            $
            10,110
            
            $
            10,110
            
            $
            0
            
            $
            0
            
            $
            0Operating leases
            
            
            239,261
            
            
            44,028
            
            
            74,248
            
            
            52,357
            
            
            68,628Purchase commitments
            
            
            208,170
            
            
            208,170
            
            
            0
            
            
            0
            
            
            0Unrecognized tax positions
            
            
            1,357
            
            
            65
            
            
            0
            
            
            0
            
            
            1,292Deferred compensation
            
            
            3,548
            
            
            81
            
            
            48
            
            
            101
            
            
            3,318Total contractual
      obligations
            
            $
            462,446
            
            $
            262,454
            
            $
            74,296
            
            $
            52,458
            
            $
            73,238


We entered into a new
unsecured credit agreement effective January 20, 2010 which provides for up to
$50.0 million in cash advances and commercial and standby letters of credit with
borrowing limits based on eligible inventory. It contains covenants which
stipulate: (1) Total Shareholders' Equity, adjusted for the effect of any share
repurchases, will not fall below that of the prior fiscal year-end; (2) the
ratio of funded debt plus rent to EBITDA plus rent will not exceed 2.5 to 1.0;
and (3) cash dividends for a fiscal year will not exceed 30% of consolidated net
income for the immediately preceding fiscal year. We were in compliance with
these covenants as of January 30, 2010. Should a default condition be reported,
the lenders may preclude additional borrowings and call all loans and accrued
interest at their discretion. There were no borrowings outstanding or letters of
credit outstanding under the new unsecured credit agreement at January 30, 2010.
Estimated interest payments on our line of credit are not included in the above
table as our line of credit provides for frequent borrowing and/or repayment
activities which does not lend itself to reliable forecasting for disclosure
purposes. As of January 30, 2010, $50.0 million was available to us for
additional borrowings under the credit facility.




24




---



Our prior unsecured
credit agreement, which also provided for cash advances and the issuance of
letters of credit, was set to mature on April 30, 2010. We did not incur early
termination or prepayment penalties in connection with the replacement of this
credit facility. Approximately $10.1 million of commercial letters of credit and
a standby letter of credit issued under this credit facility remained
outstanding at January 30, 2010. The standby letter of credit was replaced
during March 2010 under our new unsecured credit agreement with a similar
instrument. We will maintain cash and cash equivalents of a sufficient nature
with the agent bank until such time all letters of credit have expired. We
anticipate all remaining commercial letters of credit issued under our prior
unsecured credit agreement will be satisfied prior to the end of the first
quarter of fiscal 2010.




For purposes of our
contractual obligations table above, we have assumed that we will make all
payments scheduled or reasonably estimated to be made under those obligations
that have a determinable expiration date. We have disregarded the possibility
that such obligations may be prematurely terminated or extended, whether
automatically by the terms of the obligation or by agreement between us and the
counterparty, due to the speculative nature of premature termination or
extension. Except for operating leases, the balances included in the "2015 and
after" column of the contractual obligations table includes amounts where we are
not able to reasonably estimate the timing of the potential future
payments.




We anticipate that
our existing cash and cash flow from operations, supplemented by borrowings
under our revolving credit line, will be sufficient to fund our planned store
expansion along with other capital expenditures and other operating cash
requirements for at least the next 12 months.




See Note 5 –
"Long-Term Debt", Note 6 – "Leases", Note 7 – "Income Taxes" and Note 8 –
"Employee Benefit Plans" to our Notes to Consolidated Financial Statements
contained in PART II, ITEM 8 of this report for a further discussion of our
contractual obligations.




Off-Balance Sheet Arrangements




We did not assign any
store operating leases to separate third parties during fiscal 2009. We remain
liable on three assignments of operating leases covering former store locations.
We believe that the likelihood of material liability being triggered under these
leases is remote, and no liability has been accrued for these contingent lease
obligations in our consolidated financial statements as of January 30, 2010. See
Note 6 – "Leases" to our Notes to Consolidated Financial Statements contained in
PART II, ITEM 8 of this report for further discussion.




Except for the
assignment of certain store operating leases and operating leases entered into
in the normal course of business, we have not entered into any off-balance sheet
arrangements during fiscal 2009 or fiscal 2008, nor did we have any off-balance
sheet arrangements outstanding at January 30, 2010 or January 31, 2009.




Seasonality




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. Non-capital expenditures, such as
advertising and payroll, incurred prior to the opening of a new store are
charged to expense as incurred. 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.




We have three
distinct peak selling periods: Easter, back-to-school and
Christmas.




New Accounting Pronouncements




Recent accounting
pronouncements applicable to our operations are contained in Note 2 – "Summary
of Significant Accounting Policies," contained in the Notes to Consolidated
Financial Statements included in PART II, ITEM 8 of this report.




25




---



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We are exposed to
market risk in that the interest payable on our credit facility is based on
variable interest rates and therefore is affected by changes in market rates. We
do not use interest rate derivative instruments to manage exposure to changes in
market interest rates. We had no borrowings under our credit facility during
fiscal 2009. A 1% change in the weighted average interest rate charged under the
credit facility would have resulted in interest expense fluctuating by less than
one thousand dollars in fiscal 2008.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The information
required by this item appears beginning on page 28.




26




---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM




To the Board of
Directors and Shareholders of Shoe Carnival, Inc. Evansville, Indiana




We have audited the
accompanying consolidated balance sheets of Shoe Carnival, Inc. and subsidiaries
(the "Company") as of January 30, 2010 and January 31, 2009, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended January 30, 2010, January 31, 2009, and February 2, 2008. Our audits
also included the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.




We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of Shoe Carnival, Inc. and subsidiaries as of January 30,
2010 and January 31, 2009, and the results of their operations and their cash
flows for the years ended January 30, 2010, January 31, 2009, and February 2,
2008, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.




We have also audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company's internal control over financial reporting
as of January 30, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated April 15, 2010
expressed an unqualified opinion on the Company's internal control over
financial reporting.




/s/ Deloitte &
Touche LLPIndianapolis, Indiana




April 15, 2010




27




---



Shoe Carnival, Inc. Consolidated Balance Sheets (In thousands, except per share
data)




January 30,
            
            January 31,2010
            
            2009AssetsCurrent Assets:Cash and cash equivalents
            
            $
            44,168
            
            
            $
            24,817Accounts receivable
            
            
            746
            
            
            
            1,607Merchandise inventories
            
            
            197,452
            
            
            
            189,494Deferred income tax
      benefit
            
            
            3,255
            
            
            
            2,305Other
            
            
            2,480
            
            
            
            4,234Total Current Assets
            
            
            248,101
            
            
            
            222,457Property and equipment – net
            
            
            62,162
            
            
            
            70,217Other
            
            
            1,378
            
            
            
            400Total
    Assets
            
            $
            311,641
            
            
            $
            293,074Liabilities and Shareholders’
      EquityCurrent Liabilities:Accounts payable
            
            $
            57,235
            
            
            $
            60,320Accrued and other
      liabilities
            
            
            14,353
            
            
            
            11,600Total Current Liabilities
            
            
            71,588
            
            
            
            71,920Deferred lease incentives
            
            
            6,501
            
            
            
            5,844Accrued rent
            
            
            5,115
            
            
            
            5,331Deferred income taxes
            
            
            1,052
            
            
            
            1,144Deferred compensation
            
            
            3,548
            
            
            
            2,678Other
            
            
            2,008
            
            
            
            1,521Total Liabilities
            
            
            89,812
            
            
            
            88,438Shareholders’ Equity:Common stock, $.01 par value,
      50,000 shares authorized,13,655 and 13,664 shares issued at January 30, 2010and January 31, 2009
            
            
            137
            
            
            
            137Additional paid-in capital
            
            
            66,851
            
            
            
            67,686Retained earnings
            
            
            169,032
            
            
            
            153,866Treasury stock, at cost, 622 and 745 shares at January 30, 2010and January 31, 2009
            
            
            (14,191
            )
            
            
            (17,053
            )Total Shareholders’ Equity
            
            
            221,829
            
            
            
            204,636Total Liabilities
      and Shareholders’ Equity
            
            $
            311,641
            
            
            $
            293,074


See notes to
consolidated financial statements.




28




---



Shoe Carnival, Inc. Consolidated Statements of Income (In thousands, except per share
data)




January 30,
            
            January 31,
            
            February 2,2010
            
            2009
            
            2008Net sales
            
            $
            682,422
            
            
            $
            647,572
            
            
            $
            658,680Cost of sales (including buying,distribution and occupancy costs)
            
            
            488,816
            
            
            
            473,244
            
            
            
            472,831Gross profit
            
            
            193,606
            
            
            
            174,328
            
            
            
            185,849Selling, general and administrative expenses
            
            
            168,476
            
            
            
            165,953
            
            
            
            166,717Operating income
            
            
            25,130
            
            
            
            8,375
            
            
            
            19,132Interest income
            
            
            (39
            )
            
            
            (148
            )
            
            
            (690
            )Interest expense
            
            
            174
            
            
            
            153
            
            
            
            264Income before income taxes
            
            
            24,995
            
            
            
            8,370
            
            
            
            19,558Income tax expense
            
            
            9,829
            
            
            
            3,051
            
            
            
            6,751Net
    income
            
            $
            15,166
            
            
            $
            5,319
            
            
            $
            12,807Net income per share:Basic
            
            $
            1.21
            
            
            $
            0.43
            
            
            $
            0.99Diluted
            
            $
            1.20
            
            
            $
            0.43
            
            
            $
            0.97Average shares outstanding:Basic
            
            
            12,513
            
            
            
            12,406
            
            
            
            12,922Diluted
            
            
            12,660
            
            
            
            12,492
            
            
            
            13,158


See notes to
consolidated financial statements.




29




---



Shoe Carnival, Inc. Consolidated Statements of Shareholders’ Equity (In thousands)




AdditionalCommon
      Stock
            
            Paid-In
            
            Retained
            
            TreasuryIssued
            
            Treasury
            
            Amount
            
            Capital
            
            Earnings
            
            Stock
            
            TotalBalance atFebruary 3, 2007
            
            13,561
            
            
            0
            
            
            $
            136
            
            $
            73,959
            
            
            $
            135,854
            
            
            $
            0
            
            
            $
            209,949Stock option exercises
            
            24
            
            
            15
            
            
            
            
            
            
            116
            
            
            
            
            
            
            
            413
            
            
            
            529Stock-based compensationincome tax benefit
            
            
            
            
            
            
            
            
            
            
            
            404
            
            
            
            
            
            
            
            
            
            
            
            404Employee stock purchaseplan purchases
            
            2
            
            
            7
            
            
            
            
            
            
            (11
            )
            
            
            
            
            
            
            182
            
            
            
            171Restricted stock awards
            
            83
            
            
            11
            
            
            
            1
            
            
            (310
            )
            
            
            
            
            
            
            309
            
            
            
            0Common stockrepurchased
            
            
            
            
            (1,238
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (28,499
            )
            
            
            (28,499
            )Stock-based compensationexpense
            
            
            
            
            
            
            
            
            
            
            
            1,365
            
            
            
            
            
            
            
            
            
            
            
            1,365Cumulative effect ofadoption of ASC 740
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (114
            )
            
            
            
            
            
            
            (114
            )Net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,807
            
            
            
            
            
            
            
            12,807Balance atFebruary 2, 2008
            
            13,670
            
            
            (1,205
            )
            
            
            137
            
            
            75,523
            
            
            
            148,547
            
            
            
            (27,595
            )
            
            
            196,612Stock option exercises
            
            
            
            
            124
            
            
            
            
            
            
            (1,462
            )
            
            
            
            
            
            
            2,837
            
            
            
            1,375Stock-based compensationincome tax benefit
            
            
            
            
            
            
            
            
            
            
            
            214
            
            
            
            
            
            
            
            
            
            
            
            214Employee stock purchaseplan purchases
            
            
            
            
            16
            
            
            
            
            
            
            (191
            )
            
            
            
            
            
            
            356
            
            
            
            165Restricted stock awards
            
            (6
            )
            
            320
            
            
            
            
            
            
            (7,350
            )
            
            
            
            
            
            
            7,350
            
            
            
            0Common stockrepurchased
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1
            )
            
            
            (1
            )Stock-based compensationexpense
            
            
            
            
            
            
            
            
            
            
            
            952
            
            
            
            
            
            
            
            
            
            
            
            952Net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,319
            
            
            
            
            
            
            
            5,319Balance atJanuary 31, 2009
            
            13,664
            
            
            (745
            )
            
            
            137
            
            
            67,686
            
            
            
            153,866
            
            
            
            (17,053
            )
            
            
            204,636Stock option exercises
            
            
            
            
            125
            
            
            
            
            
            
            (1,853
            )
            
            
            
            
            
            
            2,851
            
            
            
            998Stock-based compensationincome tax benefit
            
            
            
            
            
            
            
            
            
            
            
            376
            
            
            
            
            
            
            
            
            
            
            
            376Employee stock purchaseplan purchases
            
            
            
            
            13
            
            
            
            
            
            
            (157
            )
            
            
            
            
            
            
            307
            
            
            
            150Restricted stock awards
            
            (9
            )
            
            4
            
            
            
            
            
            
            (98
            )
            
            
            
            
            
            
            98
            
            
            
            0Common stockrepurchased
            
            
            
            
            (19
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (394
            )
            
            
            (394
            )Stock-based compensationexpense
            
            
            
            
            
            
            
            
            
            
            
            897
            
            
            
            
            
            
            
            
            
            
            
            897Net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,166
            
            
            
            
            
            
            
            15,166Balance atJanuary 30, 2010
            
            13,655
            
            
            (622
            )
            
            $
            137
            
            $
            66,851
            
            
            $
            169,032
            
            
            $
            (14,191
            )
            
            $
            221,829


See notes to
consolidated financial statements.




30




---



Shoe Carnival, Inc. Consolidated Statements of Cash Flows (In thousands)




January 30,
            
            January 31,
            
            February 2,2010
            
            2009
            
            2008Cash Flows From Operating
      ActivitiesNet income
            
            $
            15,166
            
            
            $
            5,319
            
            
            $
            12,807Adjustments to reconcile net income to netcash provided by operating activities:Depreciation and amortization
            
            
            14,982
            
            
            
            16,845
            
            
            
            15,806Stock-based compensation
            
            
            1,648
            
            
            
            977
            
            
            
            1,365Loss on retirement and impairment of assets
            
            
            228
            
            
            
            2,454
            
            
            
            1,814Deferred income taxes
            
            
            (1,042
            )
            
            
            780
            
            
            
            (387
            )Lease incentives
            
            
            2,211
            
            
            
            2,038
            
            
            
            663Other
            
            
            (661
            )
            
            
            (2,815
            )
            
            
            (811
            )Changes in operating assets and liabilities:Accounts receivable
            
            
            961
            
            
            
            (1,196
            )
            
            
            537Merchandise inventories
            
            
            (7,958
            )
            
            
            11,287
            
            
            
            (4,119
            )Accounts payable and accrued liabilities
            
            
            40
            
            
            
            (6,195
            )
            
            
            (2,541
            )Other
            
            
            2,322
            
            
            
            2,584
            
            
            
            (5,255
            )Net cash provided by operating
      activities
            
            
            27,897
            
            
            
            32,078
            
            
            
            19,879Cash Flows From Investing
      ActivitiesPurchases of property and
      equipment
            
            
            (9,794
            )
            
            
            (18,204
            )
            
            
            (18,434
            )Proceeds from sale of property and equipment
            
            
            9
            
            
            
            3
            
            
            
            387Proceeds from note
      receivable
            
            
            100
            
            
            
            0
            
            
            
            0Other
            
            
            0
            
            
            
            0
            
            
            
            6Net cash used in investing activities
            
            
            (9,685
            )
            
            
            (18,201
            )
            
            
            (18,041
            )Cash Flow From Financing
      ActivitiesBorrowings under line of
      credit
            
            
            0
            
            
            
            6,625
            
            
            
            72,220Payments on line of credit
            
            
            0
            
            
            
            (6,625
            )
            
            
            (72,220
            )Proceeds from issuance of
      stock
            
            
            1,148
            
            
            
            1,540
            
            
            
            700Excess tax benefits from stock-based compensation
            
            
            385
            
            
            
            224
            
            
            
            299Common stock
    repurchased
            
            
            (394
            )
            
            
            (1
            )
            
            
            (28,499
            )Net cash provided by (used in) financing
      activities
            
            
            1,139
            
            
            
            1,763
            
            
            
            (27,500
            )Net increase (decrease) in cash and cash equivalents
            
            
            19,351
            
            
            
            15,640
            
            
            
            (25,662
            )Cash and cash equivalents at beginning
      of year
            
            
            24,817
            
            
            
            9,177
            
            
            
            34,839Cash and Cash
      Equivalents at End of Year
            
            $
            44,168
            
            
            $
            24,817
            
            
            $
            9,177Supplemental disclosures of cash flow
      information:Cash paid during year for
      interest
            
            $
            181
            
            
            $
            151
            
            
            $
            264Cash paid during year for income taxes
            
            $
            7,216
            
            
            $
            3,022
            
            
            $
            7,662Capital expenditures incurred
      but not yet paid
            
            $
            264
            
            
            $
            1,695
            
            
            $
            2,066Supplemental disclosures of non-cash
      operating and investingactivities:Forgiveness of accounts
      payable from litigation settlement (1)
            
            $
            1,160
            
            
            $
            0
            
            
            $
            0Recording of note receivable from litigation settlement (1)
            
            $
            1,200
            
            
            $
            0
            
            
            $
            0


(1)
            
            See
      Note 11 – Litigation Matters for details of the settlement. Cumulative
      settlement served to reduce the value of originally acquired
    assets.


See notes to
consolidated financial statements.




31




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements




Note 1 – Organization and Description of
Business




Our consolidated
financial statements include the accounts of Shoe Carnival, Inc. and its
wholly-owned subsidiaries SCHC, Inc. and Shoe Carnival Ventures, LLC, and SCLC,
Inc., a wholly-owned subsidiary of SCHC, Inc. (collectively referred to as "we",
"our" or "us"). All significant intercompany accounts and transactions have been
eliminated. Our primary activity is the sale of footwear and related products
through retail stores operated by us primarily in the Midwest, South and
Southeast regions of the United States.




Note 2 – Summary of Significant Accounting
Policies




Fiscal Year




Our fiscal year is a
52/53 week year ending on the Saturday closest to January 31. Unless otherwise
stated, references to years 2009, 2008, and 2007 relate respectively to the
fiscal years ended January 30, 2010, January 31, 2009, and February 2,
2008.




Use of Estimates in the Preparation of
Consolidated Financial Statements




The preparation of
our consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities as of the
financial statement reporting date in addition to the reported amounts of
certain revenues and expenses for the reporting period. The assumptions used by
management in future estimates could change significantly due to changes in
circumstances and actual results could differ from those estimates.




Cash and Cash Equivalents




We had cash and cash
equivalents of $44.2 million at January 30, 2010 and $24.8 million at January
31, 2009. Additionally, credit and debit card receivables (which generally
settle within three days) totaling $4.0 million and $3.9 million were included
in cash equivalents at January 30, 2010 and January 31, 2009,
respectively.




We consider all
certificates of deposit and other short-term investments with an original
maturity date of three months or less to be cash equivalents. As of January 30,
2010, all invested cash was held in a bank commercial paper account with a
maximum maturity of 30 days. While these investments are not considered by
management to be at significant risk, they could be impacted if the underlying
financial institutions fail or are subject to other adverse conditions in the
financial markets. To date, we have experienced no loss or lack of access to
either invested cash or cash held in our bank operating accounts.




At January 30, 2010
approximately $10.1 million of cash remained on deposit with a former banking
agent in support of commercial and standby letters of credit that were issued in
our normal course of business. We anticipate all commercial and standby letters
of credit with this former banking agent to be satisfied prior to the end of the
first quarter of fiscal 2010. No cash deposit arrangement was in place at
January 31, 2009. See Note 5 – "Long-Term Debt" for further
discussion.




Fair Value of Financial
Instruments




Our financial assets
as of January 30, 2010 and January 31, 2009 included cash and cash equivalents.
The carrying value of cash and cash equivalents approximates fair value due to
its short-term nature. We did not have any financial liabilities measured at
fair value for these periods. Non-financial assets included on our consolidated
balance sheet as of January 30, 2010 included long-lived assets that are
measured at fair value after taking into account impairment charges. We did not
have any non-financial liabilities measured at fair value for this period. See
Note 3 – "Fair Value Measurements" for further discussion.




32




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Merchandise Inventories and Cost of
Sales




Merchandise
inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method. In determining market value, we estimate the future
sales price of items of merchandise contained in the inventory as of the balance
sheet date. Factors considered in this determination include, among others,
current and recently recorded sales prices, the length of time product has been
held in inventory and quantities of various product styles contained in
inventory. The ultimate amount realized from the sale of certain product could
differ materially from our estimates.




Cost of sales
includes the cost of merchandise sold, buying, distribution, and occupancy
costs, inbound freight expense, provision for inventory obsolescence, inventory
shrink and credits and allowances from merchandise vendors.




Property and Equipment-Net




Property and
equipment is stated at cost. Depreciation and amortization of property,
equipment and leasehold improvements are taken on the straight-line method over
the shorter of the estimated useful lives of the assets or the applicable lease
terms. Lives used in computing depreciation and amortization range from two to
twenty years. Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures, which materially increase values, improve capacities or
extend useful lives are capitalized. Upon sale or retirement, the costs and
related accumulated depreciation or amortization are eliminated from the
respective accounts and any resulting gain or loss is included in
operations.




Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that full recoverability is questionable. Factors used in the evaluation
include, but are not limited to, our plans for future operations, recent
operating results and projected cash flows. Based upon this review, we recorded
non-cash impairment charges of $90,000, $2.1 million and $1.5 million in fiscal
years 2009, 2008 and 2007, respectively.




Insurance Reserves




We use a combination
of self-insurance and third-party insurance for workers' compensation, employee
medical and general liability insurance. These plans have stop-loss provisions
that protect us from individual and aggregate losses over specified dollar
values. When estimating our self-insured liabilities, we consider a number of
factors, including historical claims experience, severity factors, statistical
trends and in certain instances valuation assistance provided by independent
third-parties. We evaluate our self-insured liabilities and the underlying
assumptions on a quarterly basis and make adjustments as needed. The ultimate
cost of these claims may be greater than or less than the established accruals.
While we believe the recorded amounts are adequate, there can be no assurance
that changes to management's estimates will not occur due to limitations
inherent in the estimating process. In the event we determine an accrual should
be increased or reduced, we will record such adjustments in the period in which
such determination is made.




Deferred Lease Incentives




All cash incentives
received from landlords are recorded as deferred income and amortized over the
life of the lease on a straight-line basis as a reduction of rental
expense.




Accrued Rent




We are party to
various lease agreements which require scheduled rent increases over the initial
lease term. Rent expense for such leases is recognized on a straight-line basis
over the initial lease term beginning the earlier of the start date of the lease
or when we take possession of the property. The difference between rent based
upon scheduled monthly payments and rent expense recognized on a straight-line
basis is recorded as accrued rent.




33




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Revenue Recognition




Revenue from sales of
our merchandise is recognized at the time of sale, net of sales tax. In the
regular course of business, we offer our customers sales incentives including
coupons, discounts, and free merchandise. Sales are recorded net of such
incentives and returns and allowances. If an incentive involves free
merchandise, that merchandise is recorded as a zero sale and the cost is
included in cost of sales. Gift card revenue is recognized at the time of
redemption.




Cash Consideration Received From a
Vendor




Cash consideration is
primarily received from merchandise vendors. Cash consideration is either
recorded as a reduction of the price paid for the vendor’s products and recorded
as a reduction of our cost of sales or if the cash consideration represents a
reimbursement of a specific, incremental and identifiable cost then it is
recorded as an offset to the same financial statement line item.




Cash consideration
received from our vendors includes co-operative advertising/promotion, margin
assistance, damage allowances and rebates earned for a specific level of
purchases over a defined time period. Cash consideration principally takes the
form of credits that we can apply against trade amounts owed.




Cash consideration
received after the related merchandise has been sold is recorded as an offset to
cost of sales in the period negotiations are finalized. For cash consideration
received on merchandise still in inventory, the allowance is recorded as a
reduction to the cost of on-hand inventory and recorded as a reduction of our
cost of sales at the time of sale. Allowances received from vendors representing
a reimbursement of specific, incremental and identifiable costs are offset to
the same financial statement line item. Should the allowances received exceed
the incremental cost then the excess consideration is recorded as a reduction to
the cost of on-hand inventory and allocated to cost of sales in future periods
utilizing an average inventory turn rate.




Store Opening and Start-up
Costs




Non-capital
expenditures, such as advertising, payroll and supplies, incurred prior to the
opening of a new store are charged to expense in the period they are incurred.
Start-up costs associated with the new distribution center were incurred in the
first quarter of fiscal 2007 and charged to expense.




Advertising Costs




Print, television,
radio, outdoor and digital media costs are generally expensed when incurred.
Internal production costs are expensed when incurred and external production
costs are expensed in the period the advertisement first takes place.
Advertising expenses included in selling, general and administrative expenses
were $29.1 million, $28.7 million and $34.9 million in fiscal years 2009, 2008
and 2007, respectively.




Segments of an Enterprise and Related
Information




We have identified
each retail store as individual operating segments, which have been aggregated
into one reportable business segment that offers the same principal product and
service throughout the Midwest, South and Southeast regions of the United
States.




Income Taxes




We compute income
taxes using the asset and liability method, under which deferred income taxes
are provided for the temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities. We account for uncertain tax
positions in accordance with current authoritative guidance and report a
liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. We recognize interest expense and
penalties, if any, related to uncertain tax positions in income tax
expense.




34




---



Shoe Carnival, Inc.


Notes to Consolidated Financial Statements -
continued




Net Income Per Share




The computation of
basic earnings per share of common stock is based on the weighted average number
of common shares outstanding during the year. The computation of diluted
earnings per share of common stock is based on the weighted average number of
shares outstanding plus the incremental shares that would be outstanding
assuming the exercise of dilutive stock options and the vesting of restricted
stock. The number of incremental shares is calculated by applying the treasury
stock method. The following table presents a reconciliation of our basic and
diluted weighted average common shares outstanding in accordance with current
authoritative guidance:




(In thousands)
            
            2009
            
            2008
            
            2007Basic shares
            
            12,513
            
            12,406
            
            12,922Dilutive effect of stock-based awards
            
            147
            
            86
            
            236Diluted shares
            
            12,660
            
            12,492
            
            13,158


Options to purchase
224,700 shares of common stock for fiscal 2009 and options to purchase 223,600
shares of common stock in fiscal 2008 were not included in the computation of
diluted shares because the options’ exercise prices were greater than the
average market price of our common stock for the periods. For fiscal 2007, there
were no anti-dilutive shares.




Stock-Based Compensation




We recognize
compensation expense for stock-based awards based on the fair value of the
awards. Stock-based awards include stock option grants, stock appreciation
rights, restricted stock grants and certain transactions under our stock-based
compensation plans. Additionally, we recognize stock-based compensation expense
for the discount on shares sold to employees through our employee stock purchase
plan. This discount represents the difference between the grant date fair value
and the employee purchase price. Stock-based compensation expense is included in
selling, general and administrative expense.




We apply an estimated
forfeiture rate in calculating the stock-based compensation expense for the
period. Forfeiture estimates are adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from previous
estimates.




New Accounting
Pronouncements




In June 2009, the
Financial Accounting Standards Board ("FASB") issued the Accounting Standards
Codification ("ASC") effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The ASC is an aggregation of
previously issued authoritative generally accepted accounting principles in one
comprehensive set of guidance organized by subject area. In accordance with the
ASC, references to previously issued accounting standards have been replaced by
ASC references. Subsequent revisions will be incorporated into the ASC through
Accounting Standards Updates. Our adoption of the ASC during the third quarter
of fiscal 2009 did not have a material impact on our consolidated financial
position, results of operations or cash flows.




In September 2006,
the FASB issued guidance which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions are effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
deferred the implementation for certain non-financial assets and liabilities for
fiscal years beginning after November 15, 2008. We adopted the provisions for
financial assets and liabilities on February 3, 2008 and adopted the provisions
for non-financial assets and liabilities on February 1, 2009. This adoption did
not have a material impact on our consolidated financial position, results of
operations or cash flows. See Note 3 – "Fair Value Measurements."




35




---



Shoe Carnival, Inc.


Notes to Consolidated Financial Statements -
continued




In April 2008, the
FASB issued guidance regarding the determination of the useful life of
intangible assets. The guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. This allows an entity to use its own historical
experience in renewing or extending similar arrangements, adjusted for specified
entity-specific factors, in developing assumptions about renewal or extension
used to determine the useful life of a recognized intangible asset. Additional
disclosures are required to enable financial statement users to assess the
extent to which the expected future cash flows associated with the asset are
affected by the entity’s intent and/or ability to renew or extend the
arrangement. The guidance for determining the useful life of a recognized
intangible asset is to be applied prospectively to intangible assets acquired
after the effective date. The disclosure requirements are to be applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. We adopted the provisions on February 1, 2009. This adoption did
not have a material impact on our consolidated financial position, results of
operations or cash flows.




In April 2009, the
FASB issued guidance indicating that when determining the fair value of an asset
or liability that is not a Level 1 fair value measurement, an entity should
assess whether the volume and level of activity for the asset or liability
significantly decreased when compared with normal market conditions. If the
entity concludes that there has been a significant decrease in the volume and
level of activity, a quoted price (e.g., observed transaction) may not be
determinative of fair value and may require a significant adjustment. The
adoption during the second quarter of fiscal 2009 did not have a material impact
on our consolidated financial position, results of operations or cash
flows.




In April 2009, the
FASB issued guidance modifying the requirements for recognizing
other-than-temporarily impaired debt securities and changing the existing
impairment model for such securities. It also modifies the presentation of
other-than-temporary impairment losses and increases the frequency of and
expands already required disclosures about other-than-temporary impairment for
debt and equity securities. This adoption during the second quarter of fiscal
2009 did not have a material impact on our consolidated financial position,
results of operations or cash flows.




Reclassifications




We determined that
certain deposits and pre-paid expenses totaling $378,000 as of January 30, 2010
would not be utilized within the next 12 months and should be classified as
long-term. Therefore, we have presented these amounts as Other in the long-term
section of our Consolidated Balance Sheets along with other long-term assets.
Similar assets in the amount of $400,000 as of January 31, 2009 that had
previously been classified as Other within Current Assets have been reclassified
as long-term in the accompanying comparative Consolidated Balance
Sheets.




Note 3 – Fair Value
Measurements




As of February 1,
2009, we had adopted the provisions of current FASB guidance for both our
financial and non-financial assets and liabilities. Although the adoption had no
impact on our financial position or results of operations, it does result in
additional disclosures regarding fair value measurements.




Guidance is provided
for using fair value to measure assets and liabilities and only applies when
other standards require or permit the fair value measurement of assets and
liabilities. It does not expand the use of fair value measurements. A fair value
hierarchy was established, which prioritizes the inputs used in measuring fair
value into three broad levels.


- Level 1 – Quoted prices in active
  markets that are unadjusted and accessible at the measurement date for
  identical, unrestricted assets or liabilities;
- Level 2 – Quoted prices for
  identical assets and liabilities in markets that are not active, quoted prices
  for similar assets and liabilities in active markets or financial instruments
  for which significant inputs are observable, either directly or indirectly;
  and

36




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued


- Level 3 – Prices or valuations
  that require inputs that are both significant to the fair value measurement
  and unobservable.

Our financial assets
as of January 30, 2010 and January 31, 2009 included cash and cash equivalents.
We did not have any financial liabilities measured at fair value for these
periods. The carrying value of cash and cash equivalents approximates fair value
due to its short-term nature and is considered a Level 1 fair value
measurement.




The following table
summarizes our cash and cash equivalents that are measured at fair value on a
recurring basis:




Quoted Prices
            
            Significantin Active Markets
            
            Other
            
            Significantfor
            
            Observable
            
            UnobservableIdentical Assets
            
            Inputs
            
            Inputs(In thousands)
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)
            
            Total Fair
    ValueAs of January 30, 2010Cash and short-term
      investments (1)
            $
            40,148
            
            $
            0
            
            $
            0
            
            $
            40,148Credit and debit card receivables (2)
            
            4,020
            
            
            0
            
            
            0
            
            
            4,020$
            44,168
            
            $
            0
            
            $
            0
            
            $
            44,168As of January 31, 2009Cash and short-term
      investments (1)
            $
            20,920
            
            $
            0
            
            $
            0
            
            $
            20,920Credit and debit card receivables (2)
            
            3,897
            
            
            0
            
            
            0
            
            
            3,897$
            24,817
            
            $
            0
            
            $
            0
            
            $
            24,817


(1)
            
            Cash
      and short-term investments represent cash deposits and short-term
      investments held with financial institutions. Short-term investments
      consist of commercial paper and money market funds. To date, we have
      experienced no loss or lack of access to either invested cash or cash held
      in our bank accounts.(2)
            
            Our
      credit and debit card receivables are highly liquid financial assets that
      typically settle in less than three days.





Our non-financial
assets as of January 30, 2010 included certain long-lived assets that have been
measured at fair value after taking into account impairment charges. We did not
have any non-financial liabilities measured at fair value for this period. In
accordance with the current authoritative guidance on accounting, long-lived
assets with a carrying amount of $1.4 million were written down to their fair
value of $1.3 million, resulting in an impairment charge of $90,000, which was
included in earnings for the period.




The following table
summarizes our long-lived assets on which impairment charges were
recorded:




Quoted Prices
            
            Significantin Active Markets
            
            Other
            
            Significantfor
            
            Observable
            
            UnobservableIdentical Assets
            
            Inputs
            
            Inputs(In thousands)
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)
            
            Total Fair
      ValueFor the period ended January 30,
      2010Long-lived assets
            $
            0
            
            $
            0
            
            $
            90
            
            $
            90


37




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Note 4 – Property and
Equipment-Net




The following is a
summary of property and equipment:




January 30,
            
            January 31,(In thousands)
            2010
            
            2009Furniture, fixtures and
    equipment
            $
            104,539
            
            
            $
            105,913Leasehold improvements
            
            60,657
            
            
            
            60,319Total
            
            165,196
            
            
            
            166,232Less accumulated depreciation and amortization
            
            (103,034
            )
            
            
            (96,015
            )Property and equipment – net
            $
            62,162
            
            
            $
            70,217


Note 5 – Long-Term Debt




We entered into a new
unsecured credit agreement (the "Credit Agreement") effective January 20, 2010
which provides for up to $50.0 million in cash advances and commercial and
standby letters of credit with borrowing limits based on eligible
inventory.




The Credit Agreement
contains covenants which stipulate: (1) Total Shareholders' Equity, adjusted for
the effect of any share repurchases, will not fall below that of the prior
fiscal year-end; (2) the ratio of funded debt plus rent to EBITDA plus rent will
not exceed 2.5 to 1.0; and (3) cash dividends for a fiscal year will not exceed
30% of consolidated net income for the immediately preceding fiscal year. We
were in compliance with these covenants as of January 30, 2010. Should a default
condition be reported, the lenders may preclude additional borrowings and call
all loans and accrued interest at their discretion. As of January 30, 2010,
there were no cash advances or letters of credit outstanding under the Credit
Agreement and the full $50.0 million revolving credit line was available to us
for borrowings.




The credit facility
bears interest, at our option, at (1) the agent bank’s prime rate as defined in
the Credit Agreement plus 1% with the prime rate defined as the lesser of (a)
the Federal Fund rate plus 0.50% or (b) the interest rate announced from time to
time by the agent bank as its “prime rate” on commercial loans or (2) LIBOR plus
2.25% to 3.75%, depending on our achievement of certain performance criteria. A
commitment fee is charged at 0.40% to 0.55% per annum, depending on our
achievement of certain performance criteria, on the unused portion of the bank
group’s commitment. The Credit Agreement expires April 30, 2013.




Our prior unsecured
credit agreement, which also provided for cash advances and the issuance of
letters of credit, was set to mature on April 30, 2010. We did not incur early
termination or prepayment penalties in connection with the replacement of this
credit facility. Approximately $10.1 million of commercial letters of credit and
a standby letter of credit issued under this credit facility remained
outstanding at January 30, 2010 and cash approximating this amount remained on
deposit with the agent bank in support of these obligations. The standby letter
of credit was replaced under our new Credit Agreement during March 2010. We will
maintain cash and cash equivalents of a sufficient nature with the agent bank
until such time all remaining letters of credit have expired. We anticipate all
letters of credit issued under our prior unsecured credit agreement will be
satisfied prior to the end of the first quarter of fiscal 2010.




Note 6 – Leases




We lease all of our
retail locations and certain equipment under operating leases expiring at
various dates through fiscal 2022. Various lease agreements require scheduled
rent increases over the initial lease term. Rent expense for such leases is
recognized on a straight-line basis over the initial lease term beginning the
earlier of the start date of the lease or when we take possession of the
property. The difference between rent based upon scheduled monthly payments and
rent expense recognized on a straight-line basis is recorded as accrued rent.
All cash incentives received from landlords are recorded as deferred income and
amortized over the life of the lease on a straight-line basis as a reduction of
rental expense.




38




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Certain leases
provide for contingent rents that are not measurable at inception. These
contingent rents are primarily based on a percentage of sales that are in excess
of a predetermined level. These amounts are excluded from minimum rent and are
included in the determination of total rent expense when it is probable that the
expense has been incurred and the amount is reasonably estimable. Certain leases
also contain escalation clauses for increases in operating costs and
taxes.




We did not assign any
store operating leases during fiscal 2009. We remain liable on three assignments
of operating leases covering former store locations which were assigned to third
parties in prior years. The assignments require us to make payments under the
lease agreements in certain events of default. The maximum potential amount of
future payments (undiscounted) that we could be required to make under all
assignments was approximately $1.6 million at January 30, 2010. One assignment
remains in effect until the lease expires in fiscal 2011. Two of the assignments
remain in effect until the leases expire in fiscal year 2013. We believe that
the likelihood of material liability being triggered under these leases is
remote, and no liability has been accrued for these contingent lease obligations
in our consolidated financial statements as of January 30, 2010.




In February 2006, we
sold our combined distribution center and corporate headquarters for $7.2
million and recorded a loss of approximately $55,000 including legal fees and
associated selling costs. We entered into a lease to continue operations in this
combined facility, the initial term of which expired on January 31, 2007. The
lease provided an option that allowed us to continue our occupancy until January
31, 2008. We exercised this option during fiscal 2006 and leased the combined
facility on a month-to-month basis. In March and June 2007, we relinquished our
rights to the distribution center and corporate headquarters,
respectively.




In February 2006, we
entered into an operating lease with an independent third-party to lease our new
distribution center. The lease has an initial term of 15 years, commencing on
December 1, 2006. We have the right to extend the initial lease term for up to
three additional, successive periods of five years each.




In June 2006, we
entered into an operating lease with an independent third-party to lease our new
corporate headquarters for an initial term of 15 years, commencing on June 1,
2007. We have the right to extend the initial lease term for up to three
additional, successive periods of five years each.




Rental expense for
our operating leases consisted of:




(In thousands)
            
            2009
            
            2008
            
            2007Rentals for real property
            
            $
            47,292
            
            $
            46,628
            
            $
            43,800Contingent rent
            
            
            52
            
            
            50
            
            
            22Equipment rentals
            
            
            334
            
            
            393
            
            
            452Total
            
            $
            47,678
            
            $
            47,071
            
            $
            44,274


39




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Future minimum lease
payments at January 30, 2010 are as follows:




Operating(In thousands)
            Leases2010
            $
            44,0282011
            
            39,2932012
            
            34,9552013
            
            29,8832014
            
            22,474Thereafter to 2022
            
            68,628Total
            $
            239,261


Note 7 – Income Taxes




The provision for
income taxes consisted of:




(In thousands)
            2009
            
            2008
            
            2007Current:Federal
            $
            9,188
            
            
            $
            1,825
            
            $
            6,992State
            
            1,683
            
            
            
            446
            
            
            146Total current
            
            10,871
            
            
            
            2,271
            
            
            7,138Deferred:Federal
            
            (1,134
            )
            
            
            758
            
            
            (147
            )State
            
            92
            
            
            
            22
            
            
            (240
            )Total deferred
            
            (1,042
            )
            
            
            780
            
            
            (387
            )Total provision
            $
            9,829
            
            
            $
            3,051
            
            $
            6,751


We realized a tax
benefit of $376,000, $214,000, and $404,000 in fiscal years 2009, 2008, and
2007, respectively, as a result of the exercise of stock options and the vesting
of restricted stock, which is recorded in shareholders’ equity.




Reconciliation
between the statutory federal income tax rate and the effective income tax rate
is as follows:




Fiscal years
            
            2009
            
            2008
            
            2007U.S. Federal statutory tax
rate
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %State and local income taxes, net of federal taxbenefit
            
            7.1
            
            
            5.6
            
            
            (0.5
            )Other
            
            (2.8
            )
            
            (4.1
            )
            
            0.0Effective income tax rate
            
            39.3
            %
            
            36.5
            %
            
            34.5
            %


In fiscal 2009, we
recorded $304,000 in federal employment related tax credits. In fiscal 2008, we
recorded $414,000 and $35,000 in federal and state employment related tax
credits, respectively. In fiscal 2007, we recorded $980,000 in state tax credits
related to the investment in our new distribution center. Each of these credits
reduced our effective tax rate in the respective year.




40




---



Shoe Carnival, Inc.


Notes to Consolidated Financial Statements -
continued




Deferred income taxes
are the result of temporary differences in the recognition of revenue and
expense for tax and financial reporting purposes. The sources of these
differences and the tax effect of each are as follows:




January 30,
            
            January 31,(In thousands)
            2010
            
            2009Deferred tax assets:Accrued rent
            $
            1,941
            
            
            $
            2,053Accrued compensation
            
            1,996
            
            
            
            1,462Accrued employee
      benefits
            
            1,734
            
            
            
            1,273Inventory
            
            686
            
            
            
            616Self-insurance
    reserves
            
            600
            
            
            
            464Lease incentives
            
            1,371
            
            
            
            651Unrecognized tax
      benefits
            
            597
            
            
            
            487State bonus depreciation add-back
            
            200
            
            
            
            193Other
            
            306
            
            
            
            439Total deferred tax assets
            
            9,431
            
            
            
            7,638Deferred tax liabilities:Depreciation
            
            6,557
            
            
            
            5,635Capitalized costs
            
            671
            
            
            
            842Total deferred tax
      liabilities
            
            7,228
            
            
            
            6,477Net deferred tax asset
            
            2,203
            
            
            
            1,161Less current deferred income tax benefit
            
            (3,255
            )
            
            
            (2,305
            )Long-term deferred income
taxes
            $
            (1,052
            )
            
            $
            (1,144
            )


As of January 30,
2010, we had no available state tax credits that could be carried
forward.




Our unrecognized tax
liabilities, as discussed below, relate to tax years encompassing our fiscal
years 1999 through 2009, the tax years which remain subject to examination by
major tax jurisdictions as of January 30, 2010. A reconciliation of the
beginning and ending amount for our unrecognized tax positions, which exclude
interest and penalties, is as follows:




(In thousands)
            2009
            
            2008
            
            2007Beginning balance
            $
            1,135
            
            
            $
            1,029
            
            
            $
            567Increases – tax positions in
      prior period
            
            150
            
            
            
            0
            
            
            
            301Decreases – tax positions in prior period
            
            0
            
            
            
            (20
            )
            
            
            0Gross increases – current
      period tax positions
            
            179
            
            
            
            126
            
            
            
            161Decreases related to settlements with taxingauthorities
            
            (107
            )
            
            
            0
            
            
            
            0Ending balance
            $
            1,357
            
            
            $
            1,135
            
            
            $
            1,029


We have recorded $1.9
million in unrecognized tax liabilities as of January 30, 2010, of which $1.7
million is included in Other liabilities on the Consolidated Balance Sheets.
This liability is comprised of $1.4 million related to unrecognized tax
positions, $392,000 related to accrued interest and $112,000 related to accrued
penalties. Our policy is to record interest and penalty expense related to
income taxes as a component of income tax expense in the Consolidated Statements
of Income. If our uncertain tax positions become recognizable, the amount would
reduce our effective tax rate.




41




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




During the next
twelve months we expect to effectively settle an uncertain tax position which
could reduce our current portion of unrecognized tax liability by $65,000,
excluding penalties and interest.




Note 8 – Employee Benefit
Plans




Retirement Savings Plan




On February 24, 1994,
our Board of Directors approved the Shoe Carnival Retirement Savings Plan (the
"Retirement Plan"). The Retirement Plan is open to all employees who have been
employed for one year, are at least 21 years of age and who work at least 1,000
hours in a defined year. The primary savings mechanism under the Retirement Plan
is a 401(k) plan under which an employee may contribute up to 20% of earnings
with us matching the first 4% at a rate of 50%.




Our contributions to
the participants’ accounts become fully vested when the participant reaches
their third anniversary of employment with us. Contributions charged to expense
were $445,000, $450,000 and $447,000 in fiscal years 2009, 2008 and 2007,
respectively.




Stock Purchase Plan




On May 11, 1995, our
shareholders approved the Shoe Carnival, Inc. Employee Stock Purchase Plan (the
"Stock Purchase Plan") as adopted by our Board of Directors on February 9, 1995.
The Stock Purchase Plan reserves 300,000 shares of our common stock (subject to
adjustment for any subsequent stock splits, stock dividends and certain other
changes in the common stock) for issuance and sale to any employee who has been
employed for more than a year at the beginning of the calendar year, and who is
not a 10% owner of our stock, at 85% of the then fair market value up to a
maximum of $5,000 in any calendar year. Under the plan, 13,400, 15,600, and
9,200 shares of common stock were purchased by participants in the plan and
proceeds to us for the sale of those shares were approximately $150,000,
$165,000 and $171,000 for fiscal years 2009, 2008 and 2007, respectively. At
January 30, 2010, 114,702 shares of unissued common stock were reserved for
future purchase under the Stock Purchase Plan.




The following table
summarizes information regarding stock-based compensation expense recognized for
the employee stock purchase plan:




(In thousands)
            
            2009
            
            2008
            
            2007 (1)Stock-based compensation expense
      beforethe
      recognized income tax benefit (2)
            
            $
            26
            
            $
            29
            
            $
            30Income tax benefit
            
            $
            10
            
            $
            11
            
            $
            12


(1)
            
            Income tax
      benefit was calculated using an adjusted effective tax rate. The adjusted
      rate removes the tax effect of a reduction in state income taxes from
      state incentives related to the investment in our new distribution
      center.(2)
            
            Amounts are
      representative of the 15% discount employees are provided for purchases
      under the employee stock purchase
plan.





42




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Deferred Compensation Plan




In fiscal 2000, we
established a non-qualified deferred compensation plan for certain key employees
who, due to Internal Revenue Service guidelines, cannot take full advantage of
the employer sponsored 401(k) plan. Participants in the plan elect on an annual
basis to defer, on a pre-tax basis, portions of their current compensation until
retirement, or earlier if so elected. While not required to, we can match a
portion of the employees’ contributions, which would be subject to vesting
requirements. The compensation deferred under this plan is credited with
earnings or losses measured by the mirrored rate of return on investments
elected by plan participants. The plan is currently unfunded. Compensation
expense for our match and earnings on the deferred amounts was $621,000 for
fiscal 2009 and $269,000 for fiscal 2007. Due to the broad-based decline in the
stock market, the plan recorded a loss of $1.1 million in fiscal 2008 which
resulted in net compensation income of $977,000. Total deferred compensation
liability at January 30, 2010 and January 31, 2009 was $3.5 million and $2.7
million, respectively.




Note 9 – Stock Based
Compensation




Compensation Plan
Summaries




We have three
stock-based compensation plans: the 1993 Stock Option and Incentive Plan (the
"1993 Plan"), the Outside Directors Stock Option Plan (the "Directors Plan") and
the 2000 Stock Option and Incentive Plan (the "2000 Plan").




The 1993 Plan was
approved by our Board of Directors and shareholders effective January 15, 1993,
and amended at the 1997 annual meeting of shareholders. The 1993 Plan reserved
1,500,000 shares of common stock for stock option grants (subject to adjustment
for subsequent stock splits, stock dividends and certain other changes in the
common stock). On January 14, 2003, the 1993 Plan expired. Previously issued
stock options can be exercised for up to 10 years from their date of grant. At
January 30, 2010, all outstanding stock options granted under the 1993 Plan were
fully vested.




The Directors Plan
was approved by our Board of Directors on March 4, 1999. The plan reserves for
issuance 25,000 shares of common stock (subject to adjustment for stock splits,
stock dividends and certain other changes to the common stock). No grants have
been made under this plan since fiscal 2006, and it is currently the intention
of the Board of Directors not to grant stock options under this plan in the
future. At January 30, 2010, 11,000 shares of unissued common stock were
reserved for possible future grants under the Directors Plan. At January 30,
2010, all outstanding stock options granted under the Directors Plan were fully
vested.




The 2000 Plan was
approved by our Board of Directors and shareholders effective June 8, 2000. The
2000 Plan initially reserved 1,000,000 shares of common stock for stock option
and restricted stock grants, but on June 11, 2004, the 2000 Plan was amended to
increase the number of shares reserved for issuance to 1,500,000 (subject to
adjustment for subsequent stock splits, stock dividends and certain other
changes in the common stock). On June 14, 2005, the 2000 Plan was further
amended to include our non-employee Directors as individuals eligible to receive
awards; to stipulate that the exercise price of all options granted may not be
less than the fair market value of our common stock on the date the option is
granted; and to delete the provision permitting loans to participants. On June
12, 2008, the 2000 Plan was amended to increase the number of shares reserved
for issuance to 2,000,000, and to extend the term of the 2000 Plan until the
later of ten years from the date of adoption of the 2000 Plan by our
shareholders or the approval of any amendment of the 2000 Plan by our
shareholders. On October 8, 2008, the 2000 Plan was further amended to modify
the change in control provisions and to provide that upon a change in control
(as defined in the 2000 Plan), any shares of restricted stock will become fully
vested in the participants. At January 30, 2010, 545,300 shares of unissued
common stock were reserved for future grants under the 2000 Plan.




Stock options
currently outstanding under the 2000 Plan typically were granted such that
one-third of the shares underlying the stock options granted would vest and
become fully exercisable on each of the first three anniversaries of the date of
the grant and were assigned a 10-year term from the date of grant. Restricted
stock awards issued to employees under the 2000 Plan either vest upon the
achievement of specified levels of annual earnings per diluted share during a
six-year period starting from the grant date or were granted such that one-third
of the shares would vest on each of the first three anniversaries subsequent to
the date of the grant. For the performance-based awards, should the annual
earnings per diluted share criteria not be met within the six-year period from
the grant date, any shares still restricted will be forfeited. All restricted
stock awards issued to date to non-employee Directors vested on January 2 of the
year following the year of the grant.




43




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




Plan Specific Activity and End of Period
Balance Summaries




Stock Options




The following table
summarizes the stock option transactions pursuant to the stock-based
compensation plans:




Weighted-Average
            
            AggregateWeighted-
            
            Remaining
            
            IntrinsicNumber of
            
            Average
            
            Contractual
            
            Value (inShares
            
            Exercise
      Price
            
            Term (Years)
            
            thousands)Outstanding at January 31,
2009
            
            526,168
            
            
            $
            12.77Granted
            
            0
            
            
            
            0.00Forfeited or expired
            
            (8,000
            )
            
            
            11.91Exercised
            
            (124,536
            )
            
            
            8.02Outstanding at January 30,
2010
            
            393,632
            
            
            $
            14.29
            
            3.26
            
            $
            1,566Options outstanding at January 30, 2010,net of estimated
      forfeitures
            
            392,362
            
            
            $
            14.30
            
            3.25
            
            $
            1,559Exercisable at January 30,
2010
            
            370,297
            
            
            $
            14.37
            
            2.96
            
            $
            1,444


The total fair value
at grant date of previously non-vested stock options that vested during fiscal
2009 and fiscal 2008 were $87,000 and $52,000, respectively.




No stock options were
granted during fiscal 2009. The weighted-average fair value of options granted
was $6.44 during fiscal 2008 and $4.90 during fiscal 2007. The fair value of
options granted were estimated at grant date using a Black-Scholes
option-pricing model with the following weighted-average
assumptions:




Fiscal years
            
            2008
            
            2007Risk free interest rate
            
            3.0
            %
            
            2.8
            %Expected dividend yield
            
            0.0
            %
            
            0.0
            %Expected volatility
            
            45.93
            %
            
            43.91
            %Expected term
            
            5 Years
            
            
            5 Years


The risk free
interest rate was based on the U.S. Treasury yield curve in effect at the time
of the grant. We had not paid and did not anticipate paying cash dividends;
therefore, the expected dividend yield was assumed to be zero. Expected
volatility was based on the historical volatility of our stock. The expected
term of the options was based on our historical option exercise data taking into
consideration the exercise and forfeiture patterns of the class of option
holders during the option’s life.




44




---



Shoe Carnival, Inc.


Notes to Consolidated Financial Statements -
continued




The following table
summarizes information regarding options exercised:




(In thousands)
            2009
            
            2008
            
            2007Total intrinsic value (1)
            $
            1,290
            
            $
            640
            
            $
            578Total cash received
            $
            998
            
            $
            1,375
            
            $
            529Associated excess income tax
      benefitsrecorded
            $
            385
            
            $
            224
            
            $
            203


(1)
            
            Defined as the difference between the market value at exercise and
      the grant price of stock options
exercised.





The following table
summarizes information regarding outstanding and exercisable options at January
30, 2010:




Options
      Outstanding
            
            OptionsExercisableNumber
            
            Weighted
            
            Weighted
            
            Number
            
            WeightedRange of
            
            of Options
            
            Average
            
            Average
            
            of Options
            
            AverageExercise
      Price
            
            Outstanding
            
            Remaining
    Life
            
            Exercise
      Price
            
            Exercisable
            
            Exercise
      Price$
            4.38
            
            –
            
            5.75
            
            12,267
            
            0.74
            
            $
            4.77
            
            12,267
            
            $
            4.77$
            8.56
            
            –
            
            12.67
            
            183,745
            
            3.73
            
            $
            12.33
            
            172,077
            
            $
            12.38$
            13.86
            
            –
            
            16.30
            
            40,000
            
            6.14
            
            $
            15.10
            
            28,333
            
            $
            15.29$
            
            
            17.12
            
            
            
            157,620
            
            2.18
            
            $
            17.12
            
            157,620
            
            $
            17.12


The following table
summarizes information regarding stock-based compensation expense recognized for
non-vested options:




(In thousands)
            
            2009
            
            2008
            
            2007 (1)Stock-based compensation expense
      beforethe
      recognized income tax benefit
            
            $
            84
            
            $
            71
            
            $
            67Income tax benefit
            
            $
            33
            
            $
            26
            
            $
            26


(1)
            
            Income
      tax benefit was calculated using an adjusted effective tax rate. The
      adjusted rate removes the tax effect of a reduction in state income taxes
      from state incentives related to the investment in our new distribution
      center.





As of January 30,
2010, there was approximately $85,000 of unrecognized compensation expense, net
of estimated forfeitures, remaining related to non-vested stock options. This
expense is expected to be recognized over a weighted-average period of
approximately 1.3 years.




Restricted Stock Awards




The following table
summarizes the restricted share transactions pursuant to the 2000
Plan:




Weighted-Number of
            
            Average GrantShares
            
            Date Fair
      ValueNon-vested at January 31, 2009
            
            434,234
            
            
            $
            15.97Granted
            
            4,284
            
            
            
            12.26Vested
            
            (70,684
            )
            
            
            10.81Forfeited
            
            (1,500
            )
            
            
            21.64Non-vested at January 30, 2010
            
            366,334
            
            
            $
            16.89


45




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




The total fair value
at grant date of previously non-vested stock awards that vested during fiscal
2009, 2008, and 2007 was $764,000, $64,000, and $871,000, respectively. The
weighted-average grant date fair value of stock awards granted during fiscal
2008 and fiscal 2007 were $11.38 and $29.24, respectively.




The following table
summarizes information regarding stock-based compensation expense recognized for
restricted stock awards:




(In thousands)
            
            2009
            
            2008
            
            2007 (1)Stock-based compensation expense
      beforethe
      recognized income tax benefit
            
            $
            787
            
            $
            852
            
            $
            1,268Income tax benefit
            
            $
            309
            
            $
            311
            
            $
            492


(1)
            
            Income
      tax benefit was calculated using an adjusted effective tax rate. The
      adjusted rate removes the tax effect of a reduction in state income taxes
      from state incentives related to the investment in our new distribution
      center.





The $787,000 of
expense recognized in fiscal 2009 was comprised of compensation expense of $1.4
million offset by income of $653,000. The income was attributable to the first
quarter reversal of the cumulative prior period expense for performance-based
awards which now have been deemed by management as not probable of
vesting.




As of January 30,
2010, there was approximately $2.6 million of unrecognized compensation expense
remaining related to both the performance-based and service-based non-vested
stock awards. The cost is expected to be recognized over a weighted average
period of approximately 2.5 years. This incorporates the current assumptions of
the estimated requisite service period required to achieve the designated
performance conditions for performance-based stock awards.




Cash-Settled Stock Appreciation Rights
(SARs)




Cash-settled stock
appreciation rights (SARs) were granted to certain non-executive employees in
fiscal 2008 such that one-third of the shares underlying the SARs granted would
vest and become fully exercisable on each of the first three anniversaries of
the date of the grant and were assigned a five-year term from the date of grant.
Each SAR entitles the holder, upon exercise, to receive cash in the amount equal
to the closing price of our stock on the date of exercise less the exercise
price. The maximum amount paid, however, cannot exceed 100% of the exercise
price. In accordance with current authoritative guidance, cash-settled SARs are
classified as Other liabilities on the Consolidated Balance Sheets.




The following table
summarizes the SARs activity:




Weighted-AverageWeighted-
            
            RemainingNumber of
            
            Average
            
            ContractualShares
            
            Exercise
      Price
            
            Term
  (Years)Outstanding at January 31,
2009
            
            158,500
            
            
            $
            9.72Granted
            
            0
            
            
            
            0.00Forfeited or expired
            
            (3,500
            )
            
            
            9.72Exercised
            
            (51,636
            )
            
            
            9.72Outstanding at January 30,
2010
            
            103,364
            
            
            $
            9.72
            
            3.88Exercisable at January 30,
2010
            
            0
            
            
            $
            0.00
            
            0.00


46




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




The fair value of
these liability awards is remeasured at each reporting period until the date of
settlement. Increases or decreases in stock-based compensation expense are
recognized over the vesting period, or immediately for vested awards. The
weighted-average fair value of outstanding, non-vested SAR awards was $5.86 as
of January 30, 2010.




The fair value was
estimated using a trinomial lattice model with the following
assumptions:




January 30,2010Risk free interest rate yield
      curve
            
            0.02% - 2.34%Expected dividend yield
            
            0.0%Expected volatility
            
            60.25%Maximum life
            
            3.88 YearsExercise multiple
            
            1.71 – 1.74Maximum payout
            
            $9.72Employee exit rate
            
            2.2% -
9.0%


The risk free
interest rate was based on the U.S. Treasury yield curve in effect at the end of
the reporting period. We had not paid and did not anticipate paying cash
dividends; therefore, the expected dividend yield was assumed to be zero.
Expected volatility was based on the historical volatility of our stock. The
exercise multiple and employee exit rate are based on historical option
data.




The following table
summarizes information regarding stock-based compensation expense recognized for
SARs:




(In thousands)
            
            2009
            
            2008Stock-based compensation expense before
      the recognizedincome tax benefit
            
            $
            751
            
            $
            26Income tax benefit
            
            $
            295
            
            $
            9


As of January 30,
2010, there was approximately $324,000 in unrecognized compensation expense
related to non-vested SARs. The cost is expected to be recognized over a
weighted-average period of 1.4 years.




Note 10 – Business Risk




We purchase
merchandise from over 160 footwear vendors. In fiscal 2009, two suppliers each
accounted for approximately 10%, or more, of our purchases and together
accounted for approximately 37% of our purchases. A loss of any of our key
suppliers in certain product categories could have a material adverse effect on
our business. As is common in the industry, we do not have any long-term
contracts with suppliers.




Note 11 – Litigation
Matters




On or about April 22, 2008, an arbitration claim was filed by SDI
Industries, Inc. ("SDI") against us with the American Arbitration Association
Western Case Management Center in Los Angeles, California, captioned
SDI Industries,
Inc. (Claimant and Counter-Respondent) v. Shoe Carnival, Inc. (Respondent and
Counterclaimant), in which SDI sought
payment of $1.2 million of unpaid retainage, $700,000 for services not yet
billed, plus additional interest and legal fees. The retainage was withheld from
progress billings for work performed on our distribution center and was recorded
in accrued and other liabilities and fixed assets in our consolidated financial
statements. We filed a Counterclaim and Response in this matter, denying SDI's
claim, and seeking monetary damages of more than $3.0 million. We asserted that
SDI breached our contract with SDI ("Contract") due to its failure to deliver
our distribution center's material handling system pursuant to the
specifications of the Contract.




47




---



Shoe Carnival, Inc. Notes to Consolidated Financial Statements -
continued




On May 30, 2009, the
parties entered into a settlement of the above matter. Under the terms of the
settlement, SDI agreed to forego collection of the $1.2 million in unpaid
retainage and to pay us $1.2 million towards the




remediation of the
distribution center's material handling system. The $1.2 million will be paid in
installments over seven years and is evidenced by a promissory note secured by a
standby letter of credit, renewable annually, in an amount not less than
$200,000 and by a security interest in SDI's accounts receivable. In addition,
both parties agreed to the dismissal of all pending claims under arbitration.
The installment due on the promissory note within the next 12 months has been
recorded in Accounts receivable in our consolidated financial statements. The
remaining balance of the promissory note is recorded in Other as a non-current
asset. SDI remitted the first scheduled payment prior to the due date of July 1,
2009.




We are involved in
various other legal proceedings incidental to the conduct of our business. While
the outcome of any legal proceeding is always uncertain, we do not currently
expect that any such proceedings will have a material adverse effect on our
financial position or results of operations.




Note 12 – Other Related Party
Transactions




Our Chairman and
principal shareholder and his son are members of LC Footwear, LLC. They also
were shareholders of PL Footwear, Inc., which during December 2007 became a
wholly owned subsidiary of LC Footwear, LLC. We purchase name brand merchandise
from LC Footwear, LLC, and PL Footwear, Inc. serves as an import agent for us.
PL Footwear, Inc. represents us on a commission basis in dealings with shoe
factories in mainland China, where most of our private label shoes are
manufactured.




Purchases made from
LC Footwear, LLC were $8,000, $513,000, and $56,000 in fiscal years 2009, 2008
and 2007, respectively. Commissions paid to PL Footwear, Inc. were $763,000,
$894,000 and $892,000 in fiscal years 2009, 2008 and 2007,
respectively.




Note 13 – Quarterly Results (Unaudited)




Quarterly results are
determined in accordance with the accounting policies used for annual data and
include certain items based upon estimates for the entire year. All fiscal
quarters in 2009 and 2008 include results for 13 weeks.




(In thousands, except
per share data)




First
            
            Second
            
            Third
            
            FourthFiscal 2009
            Quarter
            
            Quarter
            
            Quarter
            
            QuarterNet sales
            $
            167,269
            
            $
            152,840
            
            $
            191,523
            
            $
            170,790Gross profit
            
            46,640
            
            
            40,924
            
            
            57,099
            
            
            48,943Operating income
            
            6,584
            
            
            1,904
            
            
            12,219
            
            
            4,423Net income
            
            4,132
            
            
            982
            
            
            7,498
            
            
            2,554Net income per share – Basic
            $
            0.33
            
            $
            0.08
            
            $
            .60
            
            $
            0.20Net income per share – Diluted
            $
            0.33
            
            $
            0.08
            
            $
            .59
            
            $
            0.20First
            
            Second
            
            Third
            
            FourthFiscal 2008
            Quarter
            
            Quarter
            
            Quarter
            
            QuarterNet sales
            $
            162,119
            
            $
            158,480
            
            $
            170,063
            
            $
            156,910Gross profit
            
            47,080
            
            
            42,146
            
            
            46,317
            
            
            38,785Operating income
            
            7,757
            
            
            1,485
            
            
            3,928
            
            
            (4,795
            )Net income
            
            4,784
            
            
            977
            
            
            2,607
            
            
            (3,049
            )Net income per share – Basic
            $
            0.39
            
            $
            0.08
            
            $
            0.21
            
            $
            (0.24
            )Net income per share – Diluted
            $
            0.38
            
            $
            0.08
            
            $
            0.21
            
            $
            (0.24
            )


48




---



SHOE CARNIVAL, INC.SCHEDULE II - VALUATION AND QUALIFYING
      ACCOUNTSBalance at
            
            Charged to
            
            Credited to
            
            Balance atDescriptions
            Beginning
            
            Cost and
            
            Costs and
            
            End of(In thousands)
            of
      Period
            
            Expenses
            
            Expenses
            
            PeriodYear ended February 2, 2008Reserve for sales returns and allowances
            $
            90
            
            $
            60,940
            
            $
            60,933
            
            $
            97Inventory reserve
            $
            3,450
            
            $
            950
            
            $
            300
            
            $
            4,100Year ended January 31, 2009Reserve for sales returns and allowances
            $
            97
            
            $
            61,167
            
            $
            61,170
            
            $
            94Inventory reserve
            $
            4,100
            
            $
            650
            
            $
            450
            
            $
            4,300Year ended January 30, 2010Reserve for sales returns and allowances
            $
            94
            
            $
            69,621
            
            $
            69,609
            
            $
            106Inventory reserve
            $
            4,300
            
            $
            1,069
            
            $
            1,269
            
            $
            4,100




ITEM 9.
            
            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
      ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.




ITEM 9A.  CONTROLS AND PROCEDURES




Management’s Report on Internal Control Over
Financial Reporting




The Company's
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. Internal control over financial reporting is a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board
of directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:


- Pertain to the maintenance of
  records that in reasonable detail accurately and fairly reflect the
  transactions and dispositions of the assets of the Company;
- Provide reasonable assurance that
  transactions are recorded as necessary to permit preparation of financial
  statements in accordance with generally accepted accounting principles, and
  that receipts and expenditures of the Company are being made only in
  accordance with authorizations of management and directors of the Company;
  and
- Provide reasonable assurance
  regarding prevention or timely detection of unauthorized acquisition, use or
  disposition of the Company’s assets that could have a material effect on the
  financial statements.

Because of inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.




Management assessed
the effectiveness of the Company's internal control over financial reporting as
of January 30, 2010. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations ("COSO") of the Treadway
Commission in Internal Control-Integrated Framework.




49




---



Based on its
assessment, management believes that the Company's internal control over
financial reporting was effective as of January 30, 2010.




The Company's
internal control over financial reporting as of January 30, 2010 has been
audited by its independent registered public accounting firm, Deloitte &
Touche LLP, as stated in their report which is included herein.




Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures and Changes in Internal Control over
Financial Reporting




Our Chief Executive
Officer and Chief Financial Officer have concluded, based on their evaluation as
of January 30, 2010, that our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.




Management is
continuously seeking to improve the efficiency and effectiveness of our
operations and internal controls. This results in refinements to processes
throughout the Company. As part of our continued strategy to grow our store base
and increase capacity, we are in the process of redesigning certain elements of
the material handling system in our distribution center. The internal controls
impacted by this project are mainly automated and operational in nature. There
have been no other changes in our internal control over financial reporting that
occurred during the fourth quarter ended January 30, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




50




---



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM




To the Board of
Directors and Shareholders ofShoe Carnival, Inc. Evansville, IN




We have audited the
internal control over financial reporting of Shoe Carnival, Inc. and
subsidiaries (the "Company") as of January 30, 2010, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.




We conducted our
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A company's internal
control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.




Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




In our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 30, 2010, based on the criteria established in Internal Control — Integrated
Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.




We have also audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial
statement schedule as of and for the year ended January 30, 2010 of the Company
and our report dated April 15, 2010, expressed an unqualified opinion on those
financial statements and financial statement schedule .









/s/ Deloitte &
Touche LLPIndianapolis, IndianaApril 15, 2010




51




---



ITEM 9B.  OTHER INFORMATION




None.




52




---



PART III




ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE




The information
required by this Item concerning our Directors, nominees for Director, Code of
Ethics, designation of the Audit Committee financial expert and identification
of the Audit Committee, and concerning any disclosure of delinquent filers under
Section 16(a) of the Exchange Act, is incorporated herein by reference to our
definitive Proxy Statement for the 2010 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of our last fiscal year. Information concerning
our executive officers is included under the caption "Executive Officers" at the
end of PART I, ITEM 1. BUSINESS of this Annual Report on Form 10-K. Such
information is incorporated herein by reference, in accordance with General
Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation
S-K.




We have adopted a
Code of Business Conduct and Ethics (the "Code") that applies to all of our
Directors, officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer and controller. The
Code is posted on our website at www.shoecarnival.com. We intend to disclose any
amendments to the Code by posting such amendments on our website. In addition,
any waivers of the Code for our Directors or executive officers will be
disclosed in a report on Form 8-K.




ITEM 11. EXECUTIVE COMPENSATION




The information
required by this Item concerning remuneration of our officers and Directors and
information concerning material transactions involving such officers and
Directors and Compensation Committee interlocks, including the Compensation
Committee Report and the Compensation Discussion and Analysis, is incorporated
herein by reference to our definitive Proxy Statement for the 2010 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of our last fiscal year.






ITEM 12.
            
            SECURITY OWNERSHIP
      OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS




The information
required by this Item concerning the stock ownership of management, five percent
beneficial owners and securities authorized for issuance under equity
compensation plans is incorporated herein by reference to our definitive Proxy
Statement for the 2010 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A within 120 days after the end of our last fiscal
year.






ITEM 13.
            
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




The information
required by this Item concerning certain relationships and related transactions
and the independence of our Directors is incorporated herein by reference to our
definitive Proxy Statement for the 2010 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of our
last fiscal year.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




The information
required by this Item concerning principal accountant fees and services is
incorporated herein by reference to our definitive Proxy Statement for the 2010
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A
within 120 days after the end of our last fiscal year.




53




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PART IV




ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




1.
            
            Financial Statements:The
      following financial statements of Shoe Carnival, Inc. are set forth in
      PART II, ITEM 8 of this report:Report
      of Independent Registered Public Accounting FirmConsolidated Balance Sheets at January 30, 2010 and January 31,
      2009Consolidated Statements of Income for the years ended January 30,
      2010, January 31, 2009, and February 2, 2008Consolidated Statements of Shareholders’ Equity for the years ended
      January 30, 2010, January 31, 2009, and February 2, 2008Consolidated Statements of Cash Flows for the years ended January
      30, 2010, January 31, 2009, and February 2, 2008Notes
      to Consolidated Financial Statements2.
            
            Financial Statement Schedule:The
      following financial statement schedule of Shoe Carnival, Inc. is set forth
      in PART II, ITEM 8 of this report.Schedule II Valuation and Qualifying Accounts3.
            
            Exhibits:A list
      of exhibits required to be filed as part of this report is set forth in
      the Index to Exhibits, which immediately precedes such exhibits, and is
      incorporated herein by reference.




54




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SIGNATURES




Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




Shoe Carnival, Inc.




Date:
            April 15, 2010
            By:
            /s/ Mark L.
      LemondMark L. LemondPresident and Chief Executive
      Officer


Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.




Signature
            
            Title
            
            Date/s/ J. Wayne
      Weaver
            
            Chairman of the Board and Director
            
            April 15, 2010J. Wayne Weaver/s/ Mark L.
      Lemond
            
            President, Chief Executive Officer and Director
            
            April 15, 2010Mark L. Lemond
            
            (Principal Executive Officer)/s/ William E.
      Bindley
            
            Director
            
            April 15, 2010William E. Bindley/s/ Gerald W.
      Schoor
            
            Director
            
            April 15, 2010Gerald W. Schoor/s/ Kent A.
      Kleeberger
            
            Director
            
            April 15, 2010Kent A. Kleeberger/s/ W. Kerry
      Jackson
            
            Executive Vice President - Chief Financial Officer
            
            April 15, 2010W. Kerry Jackson
            
            and Treasurer (Principal Financial Officer)/s/ Kathy A.
      Yearwood
            
            Vice President - Controller
            
            April 15, 2010Kathy A. Yearwood
            
            (Principal Accounting Officer)


55




---



INDEX TO EXHIBITS




Incorporated
      by Reference ToExhibit
            
            
            
            
            
            
            
            Filing
            
            FiledNo.
            
            Description
            
            Form
            
            Exhibit
            
            Date
            
            Herewith3-A
            
            Restated
      Articles of Incorporation of Registrant
            
            10-K
            
            3-A
            
            4/25/20023-B
            
            By-laws of
      Registrant, as amended to date
            
            8-K
            
            3-B
            
            6/12/20094-A
            
            (i) Amended and
      Restated Credit Agreement and Promissory Notes dated April 16, 1999,
      between Registrant and Mercantile Bank National Association, First Union
      National Bank and Old National Bank
            
            10-K
            
            4(I)
            
            4/29/1999(ii) Amendment
      to Amended and Restated Credit Agreement and Promissory Notes dated March
      24, 2000, between Registrant and Mercantile Bank National Association,
      First Union National Bank and Old National Bank
            
            10-K
            
            4(II)
            
            4/28/2000(iii) Second
      Amendment to Amended and Restated Credit Agreement and Promissory Notes
      dated November 8, 2000, between Registrant and Firstar Bank N.A., First
      Union National Bank, Old National Bank and LaSalle Bank National
      Association
            
            10-Q
            
            4(III)
            
            12/12/2000(iv) Third
      Amendment to Amended and Restated Credit Agreement and Promissory Notes
      dated March 18, 2002, between Registrant and U.S. Bank National
      Association, First Union National Bank, Old National Bank and LaSalle Bank
      National Association
            
            10-K
            
            4(IV)
            
            4/25/2002(v) Fourth
      Amendment to Amended and Restated Credit Agreement and Promissory Notes
      dated March 12, 2003, between Registrant and U.S. Bank National
      Association, Wachovia Bank National Association, Old National Bank and
      LaSalle Bank National Association
            
            10-K
            
            4(V)
            
            5/1/2003(vi) Fifth
      Amendment to Amended and Restated Credit Agreement and Promissory Notes
      dated April 5, 2004, between Registrant and U.S. Bank National
      Association, Wachovia Bank National Association, Old National Bank and
      LaSalle Bank National Association
            
            10-K
            
            4(VI)
            
            4/14/2004(vii)
      Assignment Agreement dated June 1, 2004 among LaSalle Bank National
      Association as Assignor, Fifth Third Bank (Southern Indiana) as Assignee,
      Registrant as Borrower and U.S. Bank National Association as Agent
      relating to the Amended and Restated Credit Agreement as further
      amended
            
            10-Q
            
            4(VII)
            
            6/8/2004(viii) Sixth
      Amendment to Amended and Restated Credit Agreement and Notes dated April
      5, 2005, between Registrant and U.S. Bank National Association, Wachovia
      Bank National Association, Fifth Third Bank (Southern Indiana) and Old
      National Bank
            
            8-K
            
            4(VIII)
            
            4/11/2005


56




---



INDEX TO EXHIBITS -
Continued




Incorporated
      by Reference ToExhibit
            
            
            
            
            
            
            
            Filing
            
            FiledNo.
            
            Description
            
            Form
            
            Exhibit
            
            Date
            
            Herewith(ix) Seventh Amendment to Amended and Restated Credit Agreement and
      Notes dated March 31, 2006, between Registrant and U.S. Bank National
      Association, Wachovia Bank, National Association and Fifth Third
      Bank
            
            8-K
            
            4(IX)
            
            4/4/2006(x) Eighth Amendment to Amended and Restated Credit Agreement and
      Notes dated December 15, 2006, between Registrant and U.S. Bank National
      Association, Wachovia Bank, National Association and Fifth Third
      Bank
            
            8-K
            
            4(X)
            
            12/15/2006(xi) Ninth Amendment to Amended and Restated Credit Agreement and
      Notes dated June 10, 2008, between Registrant and U.S. Bank National
      Association, Wachovia Bank, National Association and Fifth Third
      Bank
            
            10-Q
            
            4(XI)
            
            6/11/20084-B
            
            Credit Agreement, dated as of January 20, 2010, among Shoe
      Carnival, Inc., the financial institutions from time to time party thereto
      as Banks, and Wachovia Bank, National Association, as
Agent
            
            8-K
            
            4.1
            
            1/25/201010-A
            
            Lease, dated as of February 8, 2006, by and between Registrant and
      Big-Shoe Properties, LLC
            
            10-K
            
            10-A
            
            4/13/200610-B*
            
            2006 Executive Incentive Compensation Plan
            
            8-K
            
            10-B
            
            6/15/200610-C*
            
            Form of Award Agreement for restricted stock granted under the Shoe
      Carnival, Inc. 2000 Stock Option and Incentive Plan
            
            8-K
            
            10-C
            
            3/24/200510-D
            
            Lease, dated as of June 22, 2006, by and between the Registrant and
      Outback Holdings, LLC
            
            8-K
            
            10-D
            
            6/28/200610-E*
            
            1993 Stock Option and Incentive Plan of Registrant, as
      amended
            
            10-Q
            
            10-E
            
            9/15/199710-G*
            
            Outside Directors Stock Option Plan
            
            S-8
            
            4.4
            
            7/14/199910-H*
            
            Summary Compensation Sheet
            
            
            
            
            
            
            
            X10-I
            
            Non-competition Agreement dated as of January 15, 1993, between
      Registrant and J. Wayne Weaver
            
            S-1
            
            10-I
            
            2/4/199310-L*
            
            Employee Stock Purchase Plan of Registrant, as
    amended
            
            10-Q
            
            10-L
            
            9/15/199710-M*
            
            Form of Notice of Grant of
      Stock Options and Option Agreement for incentive stock options granted
      under the Registrant's 2000 Stock Option and Incentive
Plan
            
            8-K
            
            10-A
            
            9/2/200410-N*
            
            Form of Notice of Grant of Stock Options and Option Agreement for
      non-qualified stock options granted under the Registrant’s 2000 Stock
      Option and Incentive Plan
            
            8-K
            
            10-B
            
            9/2/2004


57




---



INDEX TO EXHIBITS -
Continued




Incorporated
      by Reference ToExhibit
            
            
            
            
            
            
            
            Filing
            
            FiledNo.
            
            Description
            
            Form
            
            Exhibit
            
            Date
            
            Herewith10-O*
            
            2000 Stock Option
      and Incentive Plan of Registrant, as amended
            
            10-Q
            
            10-O
            
            12/11/200810-S*
            
            Amended and
      Restated Employment and Noncompetition Agreement dated December 11, 2008,
      between Registrant and Mark L. Lemond
            
            8-K
            
            10-S
            
            12/17/200810-T*
            
            Amended and
      Restated Employment and Noncompetition Agreement dated December 11, 2008,
      between Registrant and Timothy Baker
            
            8-K
            
            10-T
            
            12/17/200810-U*
            
            Amended and
      Restated Employment and Noncompetition Agreement dated December 11, 2008,
      between Registrant and Clifton E. Sifford
            
            8-K
            
            10-U
            
            12/17/200810-V*
            
            Amended and
      Restated Employment and Noncompetition Agreement dated December 11, 2008,
      between Registrant and W. Kerry Jackson
            
            8-K
            
            10-V
            
            12/17/200810-W*
            
            Shoe Carnival,
      Inc. Deferred Compensation Plan
            
            8-K
            
            10-W
            
            10/14/200821
            
            A list of
      subsidiaries of Shoe Carnival, Inc
            
            
            
            
            
            
            
            X23
            
            Written consent of
      Deloitte & Touche LLP
            
            
            
            
            
            
            
            X31.1
            
            Certification of
      Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X31.2
            
            Certification of
      Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X32.1
            
            Certification of Chief Executive Officer
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X32.2
            
            Certification of
      Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X


*
            
            The indicated
      exhibit is a management contract, compensatory plan or arrangement
      required to be filed by Item 601 of Regulation
S-K.




58




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