Business context and reporting period
Caleres, Inc. is a footwear retailer and brand owner operating Famous Footwear and Brand Portfolio. This Form 10-Q covers the 13 and 26 weeks ended July 30, 2022, compared with periods ended July 31, 2021. The request metadata says 2021 Q2, but the filing itself reports 2022 Q2.
Management described the quarter as a record for net sales and earnings. Results are seasonal; the third quarter has historically contributed substantially to annual earnings, although sales and earnings are becoming more evenly distributed.
Financial performance and liquidity
| Metric | 13 weeks ended July 30, 2022 | Prior-year quarter | 26 weeks ended July 30, 2022 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $738.3 million | $675.5 million | $1,473.4 million | $1,314.2 million |
| Gross profit / margin | $336.8 million / 45.6% | $322.3 million / 47.7% | $663.8 million / 45.1% | $597.2 million / 45.4% |
| Operating earnings / margin | $68.4 million / 9.3% | $62.8 million / 9.3% | $134.6 million / 9.1% | $80.7 million / 6.1% |
| Net earnings attributable to Caleres | $51.2 million | $37.4 million | $101.7 million | $43.5 million |
| Diluted EPS | $1.38 | $0.97 | $2.70 | $1.13 |
| Operating cash flow | Not separately stated | Not separately stated | $27.3 million | $135.5 million |
- Quarterly revenue rose 9.3%; first-half revenue rose 12.1%. Gross margin fell in the quarter, reflecting a higher wholesale mix, markdowns and e-commerce freight costs. First-half operating margin improved, helped in part by the absence of prior-year special charges.
- Cash and equivalents were $46.0 million at quarter-end. Inventory was $770.7 million, up from $565.5 million a year earlier. First-half operating cash flow declined by $108.3 million year over year, principally due to inventory investment and changes in accrued liabilities and receivables.
- Revolving-credit borrowings were $348.5 million; no senior notes or other long-term debt were outstanding. The company had $140.7 million of additional borrowing availability and $10.8 million of letters of credit. It reported compliance with credit-facility covenants.
- Current assets were $1,018.8 million versus current liabilities of $1,139.8 million; the current ratio was 0.89. Debt-to-capital was 47.5%. Lease obligations were $583.3 million in total, current and noncurrent.
- First-half investing cash outflow was $20.7 million, including property and equipment purchases and capitalized software. Financing activities included $41.7 million of share repurchases and net revolving-credit borrowings of $58.5 million. The company paid dividends of $0.07 per share in the quarter.
Material changes versus the prior comparable period
- Brand Portfolio quarterly sales increased 35.6% to $324.1 million, led by wholesale growth across brands including Sam Edelman, Naturalizer and LifeStride. Famous Footwear sales decreased 3.8% to $436.4 million, amid a lower store count and a slower start to back-to-school selling.
- Famous Footwear quarterly operating earnings fell to $62.5 million from $85.5 million, with operating margin down to 14.3% from 18.8%. Brand Portfolio operating earnings rose to $29.4 million from $16.6 million.
- Quarterly interest expense declined to $2.6 million from $11.9 million, largely because the prior year included a $7.1 million fair-value charge on the Blowfish Malibu purchase obligation. Caleres redeemed its $200 million of senior notes during 2021 and settled the $54.6 million Blowfish obligation in November 2021.
- First-half 2021 included $13.5 million of Naturalizer store-exit charges; no corresponding charges were recorded in the 2022 first half.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. Management said it believes the company is positioned to pursue opportunities across consumer segments and expects operating cash flows to meet material cash requirements for at least the next 12 months.
- Management expected 2022 capital expenditures and capitalized software spending of $45 million to $55 million, versus $24.1 million in 2021, including Famous Footwear store prototypes and renovations. It presently expects dividends to continue, subject to board discretion.
- Management cited inflation in product and inbound freight costs, wage and logistics pressures, and the risk that inflation may weaken consumer sentiment and spending. Price increases and limited promotions had offset much, but not all, of cost inflation. Famous Footwear reported moderation in traffic and conversion late in the quarter, continuing into Q3.
- Other disclosed risks include supply-chain and inventory-forecasting disruptions, changing consumer preferences, competition, foreign currency, reliance on overseas manufacturing, cybersecurity and distribution-center disruptions, and lease-related risks. The filing reported no material changes to the risk factors previously disclosed in the annual report.
- A headquarters-campus sale agreement was signed in April 2022, subject to closing conditions; the sale was expected to close and qualify as completed during fiscal 2022. Environmental remediation reserves totaled $9.9 million, including an undiscounted $13.4 million estimate for on-site remediation. Management did not expect ordinary-course litigation to materially affect results or financial position.
- Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether inventory converts to sales without heavier markdowns, given the year-over-year inventory increase and lower quarterly gross margin.
- Whether Famous Footwear demand stabilizes and whether its sales and operating-margin declines persist.
- Whether operating cash generation improves as inventory levels and working-capital needs normalize; monitor revolver borrowings, borrowing availability and variable-rate interest exposure.
- Progress and final proceeds from the headquarters-campus sale, as well as actual capital spending against the stated $45 million to $55 million range.
- Potential changes in consumer spending, inflation and supply-chain conditions, and any revisions to remediation cost estimates or other contingencies.