Caleres, Inc. — Form 10-Q summary
Period clarification: The request identifies 2019 Q1, but the supplied filing is for the thirteen weeks ended May 2, 2020 (fiscal first quarter 2020), compared with the thirteen weeks ended May 4, 2019. The filing was signed June 10, 2020.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio. COVID-19 drove the temporary closure of all North American retail stores beginning March 19, 2020, through quarter-end; wholesale customers also closed stores and canceled orders. E-commerce continued, and management reported strong growth in that channel. After quarter-end, the company began phased store reopenings; approximately 60% of stores were open as of the filing, with most expected to resume in-store service by the end of June. The company cautioned that its business is seasonal and interim results, particularly during the pandemic, may not predict full-year results.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $397.2 million | $677.8 million | Down $280.6 million, or 41.4% |
| Gross profit / margin | $121.9 million / 30.7% | $279.8 million / 41.3% | Profit down 56.4%; margin down 10.6 percentage points |
| Operating earnings (loss) | ($426.2) million | $16.9 million | Includes $262.7 million goodwill and intangible impairment and $60.2 million restructuring and special charges |
| Net earnings (loss) attributable to Caleres | ($345.8) million | $9.1 million | Basic and diluted loss per share of $8.95, versus earnings per share of $0.22 |
| Operating cash flow | $0.7 million | $49.9 million | Down $49.2 million |
| Cash and cash equivalents | $187.7 million | $35.8 million | Up from $45.2 million at February 1, 2020, primarily reflecting borrowing |
| Total debt | $637.0 million | $516.0 million | Includes $438.5 million revolver borrowings and $198.5 million long-term debt |
| Liquidity | Working capital: ($67.7) million; current ratio: 0.94 | Working capital: ($24.0) million; current ratio: 0.97 | Revolver availability was $104.2 million at quarter-end |
Net cash used in investing was $4.5 million, mainly capital expenditures and capitalized software; financing provided $146.5 million, chiefly net revolver borrowings. The quarter-end debt-to-capital ratio was 69.1%, versus 45.1% a year earlier. The company reported compliance with credit-facility and senior-note covenants at May 2, 2020.
Material changes and unusual items
- Famous Footwear sales fell 45.7% to $191.3 million; segment operating loss was $67.5 million. E-commerce sales increased 71%, while store closures substantially reduced reported store sales.
- Brand Portfolio sales fell 36.3% to $217.2 million; segment operating loss was $345.7 million, including the $262.7 million impairment. Wholesale orders were particularly affected: unfilled orders fell 50.0% year over year to $188.3 million.
- The $262.7 million non-cash impairment comprised $240.3 million of goodwill and $22.4 million of indefinite-lived trademarks. COVID-19-related expenses totaled $93.6 million, including inventory markdowns, store-asset impairments, factory-order cancellation costs, expected credit losses and other special costs.
- The company recorded an $8.7 million provision for expected credit losses, primarily reflecting pandemic-related financial deterioration among wholesale customers. It adopted the expected-credit-loss accounting standard and recorded a $2.1 million cumulative reduction to retained earnings.
- Management increased revolver capacity by $100 million to as much as $600 million, subject to borrowing-base limits, with a further potential increase of up to $150 million. The amendment raised borrowing spreads by 75 basis points and the unused-line fee by 5 basis points.
- Caleres deferred payments to vendors for up to 90 days beyond typical terms and negotiated lease-payment modifications. It also reduced staffing-related costs, marketing, inventory purchases and capital spending. The company paid a $0.07-per-share dividend and repurchased 1.51 million shares for approximately $12.9 million during the quarter.
Outlook, commentary and risks
Management gave no quantified sales or earnings forecast and said the pandemic’s duration, consumer-spending effects and potential further operating restrictions could not be reasonably estimated. It expected gradual store reopenings and e-commerce strength to support operating cash flow and progress on vendor payments and revolver repayment, while emphasizing disciplined inventory and expense management. Planned 2020 property, equipment and software spending was $20 million to $30 million, with possible further reductions depending on pandemic effects. Management presently expected dividends to continue, subject to board discretion and business conditions.
Key risks include continued store disruption, consumer confidence and demand, further wholesale order cancellations, inventory management, credit losses, liquidity and borrowing costs, lease commitments, supply-chain and tariff exposure, competition, and potential additional asset impairments. The company also disclosed environmental remediation reserves of $9.5 million; ultimate costs may exceed recorded amounts. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is a 2020 Q1 filing, not a 2019 Q1 filing.
- Track actual store reopening progress, comparable sales and e-commerce performance, and whether consumer demand and wholesale orders recover.
- Assess revolver availability, borrowing-base restrictions, covenant headroom, deferred vendor and lease payments, and the timing of debt repayment.
- Review whether expected credit losses, inventory markdowns and goodwill or trademark impairments require further charges.
- Check the realization and timing of the $20 million to $30 million capital-spending plan, future dividends, and post-quarter share repurchases.