Caleres, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the 13 weeks ended May 5, 2018. Comparisons are with the 13 weeks ended April 29, 2017, unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $632.1 million | $631.5 million | Up 0.1% |
| Gross profit / margin | $274.9 million / 43.5% | $270.9 million / 42.9% | Margin up 0.6 percentage points |
| Operating earnings / margin | $22.9 million / 3.6% | $23.3 million / 3.7% | Down 1.5% |
| Net earnings attributable to Caleres | $17.2 million | $14.9 million | Up 15.5% |
| Diluted earnings per share | $0.40 | $0.35 | Up $0.05 |
| Net cash provided by operating activities | $51.3 million | $65.4 million | Down $14.1 million |
Gross-margin improvement reflected the absence of $3.0 million of Allen Edmonds purchase-accounting inventory costs recorded in the prior-year quarter and improved Brand Portfolio margins. Higher selling and administrative costs and restructuring charges more than offset higher gross profit, reducing operating earnings. Net earnings also benefited from lower interest expense and a lower effective tax rate.
Segments and material changes
- Famous Footwear: Sales fell 0.8% to $363.4 million; same-store sales declined 0.8%. Unseasonably cold February and March weather delayed spring demand. Operating earnings increased 7.8% to $21.9 million as lower selling and administrative expenses outweighed lower sales and gross margin.
- Brand Portfolio: Sales rose 1.4% to $268.7 million, with higher sales from Allen Edmonds, Franco Sarto and LifeStride partly offset by lower sales from Vince, Rykä and Via Spiga. Operating earnings decreased 6.2% to $12.5 million as higher selling and administrative and restructuring costs offset gross-profit growth.
- Consolidated selling and administrative expenses increased $3.7 million to $250.2 million. They included $2.2 million of duplicate costs during the transition to a new leased distribution center in Chino, California; management expected a similar amount in Q2 2018.
- Restructuring and other special charges were $1.8 million, primarily for men’s-business integration and reorganization, versus $1.1 million a year earlier. The company expected these costs to be settled by fiscal year-end 2018.
Cash, debt and liquidity
- Cash and cash equivalents were $96.5 million at May 5, 2018, up from $64.0 million at February 3, 2018. Approximately half of the balance represented accumulated unremitted earnings of foreign subsidiaries.
- Operating cash flow was $51.3 million; investing cash outflow was $9.4 million and financing cash outflow was $9.4 million. Capital expenditures and capitalized software totaled $9.4 million in the quarter.
- Total debt was $197.6 million, comprising long-term debt; there were no revolver borrowings. The $200 million senior notes bear 6.25% interest and mature in 2023.
- The revolving credit facility provides up to $600 million, with a potential $150 million increase. At quarter-end, availability was $551.7 million, with $10.1 million of letters of credit outstanding. The company reported compliance with its credit-facility and senior-note covenants.
- Working capital was $426.7 million, the current ratio was 1.97:1 and debt-to-capital was 21.7%. The company paid a quarterly dividend of $0.07 per share.
Outlook, risks and unusual items
Management reported positive trends early in Q2 as warmer weather arrived, and cited continued e-commerce growth. Priorities for 2018 include speed-to-consumer, e-commerce, speed-to-market and brand-portfolio diversification. The filing provides no numerical full-year sales or earnings guidance. Fiscal results are seasonal, and management cautioned that Q1 results may not indicate full-year performance; the third quarter typically contributes a substantial portion of annual earnings.
- Adoption of the new revenue standard reduced opening retained earnings by $4.8 million, primarily for deferral of Famous Footwear loyalty-point revenue. Its Q1 effect on net earnings and EPS was described as immaterial; reported sales were $1.1 million below the amount calculated without adoption.
- The company adopted new pension-cost presentation guidance, reclassifying non-service pension and postretirement benefit components to other income. The Tax Cuts and Jobs Act reduced the U.S. corporate rate; the Q1 effective tax rate was 23.1%, and the company continued evaluating certain tax provisions and provisional estimates.
- Adoption of the lease accounting standard was expected in Q1 2019 and anticipated to have a material balance-sheet impact because of the company’s retail operating leases. The earnings impact was still under assessment; cash-flow impact was not expected to be material.
- Environmental remediation at the Redfield site had a $9.5 million recorded reserve. Management noted ultimate costs could exceed recorded amounts because future actions and costs remain subject to regulatory oversight. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Key disclosed risks include changing consumer demand and fashion trends, competition, overseas sourcing and supply disruption, foreign-exchange movements, inventory forecasting, cybersecurity, distribution-center disruption, acquisition integration, tax changes, and maintaining supplier, retailer and licensor relationships.
Important facts for investors to verify
- Whether warmer-weather trends and e-commerce momentum continued after the quarter, particularly in Famous Footwear same-store sales.
- Whether Chino distribution-center transition costs and men’s-business restructuring costs remained within management’s expectations.
- How revenue-standard loyalty-point deferrals and the lease-standard adoption affect future reported results and balance-sheet measures.
- Updates to Tax Act estimates, including GILTI treatment, and the timing and potential cost of Redfield remediation.
- Cash generation, inventory levels, use of the revolving facility, and compliance with debt covenants as seasonal working-capital needs change.