Caleres, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 3, 2018, compared with periods ended October 28, 2017. Although the request metadata says “2017 Q3,” the filing itself is for third-quarter 2018.
Business context and results
Caleres operates Famous Footwear and Brand Portfolio. The third quarter is seasonally significant, and interim results may not indicate full-year performance. The 2018 quarter also had one fewer week of the high-volume back-to-school selling season than the comparable 2017 quarter, due to the prior year’s 53-week fiscal calendar.
| Metric | 13 weeks ended Nov. 3, 2018 | 13 weeks ended Oct. 28, 2017 | 39 weeks ended Nov. 3, 2018 | 39 weeks ended Oct. 28, 2017 |
|---|---|---|---|---|
| Net sales | $775.8 million | $774.7 million | $2,114.6 million | $2,083.1 million |
| Gross profit / margin | $310.6 million / 40.0% | $316.9 million / 40.9% | $878.6 million / 41.6% | $875.3 million / 42.0% |
| Operating earnings / margin | $39.7 million / 5.1% | $50.4 million / 6.5% | $94.8 million / 4.5% | $102.1 million / 4.9% |
| Net earnings attributable to Caleres | $29.2 million | $34.4 million | $70.0 million | $66.9 million |
| Diluted EPS | $0.67 | $0.80 | $1.62 | $1.55 |
Quarterly sales were nearly flat: Brand Portfolio sales rose 8.5% to $327.1 million, including contributions from Blowfish Malibu and Vionic, while Famous Footwear sales fell 5.1% to $448.8 million. Famous Footwear same-store sales increased 2.8%. For the 39-week period, sales increased 1.5%.
Cash flow, debt and liquidity
- Cash from operations was $94.4 million for the 39 weeks, down from $122.3 million. Management attributed the decrease mainly to higher inventory and receivables, partly offset by increased accounts payable.
- Investing cash use was $401.0 million, including $344.9 million for Vionic and $17.3 million for Blowfish Malibu. Financing provided $333.2 million, principally reflecting $360.0 million of revolving-credit borrowings.
- Cash and cash equivalents were $90.5 million at November 3, 2018. Total debt was $547.8 million: $350.0 million on the revolver and $197.8 million of long-term debt. The filing says much of the cash balance represents accumulated unremitted foreign-subsidiary earnings.
- Revolver availability was $241.3 million, with $8.7 million of letters of credit outstanding. The company reported compliance with its credit-facility and senior-note covenants.
- Working capital was $167.2 million; the current ratio was 1.19 and debt-to-capital was 41.7%. The lower liquidity ratios versus prior comparison dates largely reflect borrowing to fund Vionic.
- Fiscal 2018 capital spending on property and equipment and capitalized software was expected to be approximately $60 million. The $200 million senior notes bear 6.25% interest and mature in 2023; the $600 million revolver matures December 18, 2019.
Material changes and unusual items
- Vionic was acquired on October 18 for an estimated $360.7 million, funded mainly with revolver borrowings. Its results were included from the acquisition date; it contributed $5.8 million in sales and reported an approximately $1.2 million loss through quarter-end. Purchase-price allocations remain preliminary.
- Blowfish Malibu, acquired in July, contributed $6.4 million in quarterly sales and reported an approximately $0.5 million loss. Its noncontrolling interest is subject to a mandatory purchase obligation estimated at $9.1 million, payable in 2021.
- Quarterly gross margin declined amid a more promotional environment, a higher e-commerce mix and $1.8 million of acquisition-related inventory fair-value amortization. Management also cited higher freight and distribution costs from e-commerce growth and start-up/duplicate costs during the Brand Portfolio distribution-center transition.
- Quarterly restructuring and special charges were $5.3 million, chiefly related to Vionic acquisition costs, men’s-brand integration/reorganization and Blowfish-related costs. Nine-month charges were $9.2 million.
- The effective tax rate was 24.5% for both 2018 periods, lower than the prior-year rates, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act. Certain tax-law amounts remained provisional, and the company was still evaluating GILTI, BEAT and FDII provisions.
- Topic 606 adoption reduced opening retained earnings by $4.8 million. Its reported effect on current-period earnings and EPS was described as immaterial. The company expected adoption of the new lease standard in early 2019 to have a material balance-sheet impact, with a potentially greater impairment impact for underperforming stores; cash-flow impact was not expected to be material.
Outlook, risks and contingencies
The filing provides no full-year earnings or revenue guidance. Management expected higher year-over-year interest expense until Vionic-related borrowings are repaid, and said e-commerce-related freight and warehouse costs were expected to continue rising. Management presently expected dividends to continue, subject to board discretion and business conditions.
Risks discussed include consumer demand and fashion shifts, intense competition and promotions, inventory forecasting, reliance on overseas manufacturing and uninterrupted supply, foreign-exchange movements, cybersecurity and distribution disruptions, acquisition integration, leases, suppliers, labor/trade/product-safety compliance, taxes and intellectual-property protections. The company recorded a $9.5 million reserve for environmental remediation at the Redfield site; management cautioned that actual costs could exceed recorded amounts. Management stated ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were concluded effective at the reasonable-assurance level; integration reviews of the acquired businesses were ongoing.
Important facts for investors to verify
- Confirm the intended period: the supplied metadata says 2017 Q3, but this filing reports the quarter ended November 3, 2018.
- Track Vionic and Blowfish performance, final purchase-price allocations, integration costs and the effect of acquisition-related debt and interest.
- Monitor liquidity, revolver availability, inventory and working-capital needs, and progress in repaying Vionic-related borrowings.
- Assess whether margin pressure, e-commerce fulfillment costs and distribution-center transition expenses persist.
- Review lease-standard adoption, environmental-remediation estimates and the company’s tax-law estimates as further information becomes available.
- After quarter-end, the company reported repurchasing 1,052,576 shares for an aggregate $31.5 million; verify the timing, funding and effect on the remaining repurchase authorization and liquidity.