Caleres, Inc. — Form 10-K Summary
Reporting period: Fiscal year 2015, a 52-week year ended January 30, 2016. The filing also provides quarterly results for fiscal 2015 and 2014; it is not a 2014 Q4-only filing, despite the request metadata.
Business context
Caleres, formerly Brown Shoe Company, is a footwear retailer and wholesaler operating Famous Footwear and a portfolio of owned and licensed brands. It reported two segments: Famous Footwear and Brand Portfolio. Approximately 66% of 2015 sales were retail, including e-commerce, and 34% wholesale. The business is seasonal, with back-to-school and holiday demand making the third fiscal quarter particularly important.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,577.4 million | $2,571.7 million |
| Gross profit / gross margin | $1,047.8 million / 40.7% | $1,040.1 million / 40.4% |
| Operating earnings / operating margin | $135.1 million / 5.2% | $125.9 million / 4.9% |
| Net earnings attributable to Caleres | $81.5 million; $1.85 diluted EPS | $82.9 million; $1.89 diluted EPS |
| Cash provided by operations | $149.2 million | $118.8 million |
| Cash and cash equivalents at year-end | $118.2 million | $67.4 million |
| Capital expenditures: property and equipment | $73.5 million | $45.0 million |
| Long-term debt | $196.5 million | $196.7 million |
Interest expense declined to $16.6 million from $20.4 million. The 2015 results included a $10.7 million pretax loss on early debt extinguishment. The effective tax rate was 24.8%, including $5.1 million of discrete tax benefits; absent those benefits, management calculated a 29.5% rate.
Liquidity improved: working capital was $484.8 million, the current ratio was 2.24, and the debt-to-capital ratio was 24.6%. Caleres had no revolver borrowings, $6.5 million of letters of credit outstanding, and $525.1 million of additional borrowing availability at year-end. Operating cash flow rose by $30.4 million year over year; investing used $73.8 million and financing used $23.5 million.
Material changes versus prior year
- Sales increased 0.2%; excluding Shoes.com, sold in December 2014, consolidated sales grew 2.0%.
- Operating earnings rose 7.3%, primarily reflecting improved gross margin and the absence of restructuring charges.
- Net earnings attributable to Caleres declined to $81.5 million from $82.9 million. The comparison includes the 2015 debt-extinguishment loss; 2014 included a $4.7 million Shoes.com sale gain and related tax benefits that improved earnings by $9.8 million after tax.
- Famous Footwear sales fell 1.0% to $1,572.7 million, largely due to the Shoes.com disposition; comparable sales increased 1.9% and segment operating earnings rose to $109.0 million.
- Brand Portfolio sales grew 2.3% to $1,004.8 million, but operating earnings fell 9.3% to $66.6 million, as higher selling and administrative costs and markdowns pressured results.
- The company issued $200 million of 6.25% senior notes due 2023 and used proceeds and cash to redeem its 7.125% notes due 2019. The refinancing reduced the stated coupon but generated the extinguishment loss.
Outlook, risks and unusual items
For 2016, management expected Famous Footwear same-store sales growth in the low-single-digit range and Brand Portfolio net sales growth in the mid-single-digit range. Planned capital spending on property, equipment and software was approximately $70 million, including about $16 million for distribution-center expansion and modernization. Management also planned approximately 55 Famous Footwear openings and 40 closures.
Major risks include fashion and consumer-demand shifts, intense price competition, inventory forecasting and markdown exposure, dependence on wholesale customers and major Famous Footwear suppliers, and foreign sourcing concentration. Approximately 76% of footwear sourced in 2015 came from China. Other disclosed exposures include foreign exchange, cybersecurity and information systems, store leases, and licensing relationships. Total minimum operating lease commitments were $757.6 million.
Environmental remediation remains a notable contingency. The Redfield site reserve was $9.8 million at year-end; management stated that actual costs could exceed recorded amounts. The company also disclosed $1.3 million accrued for other closed sites. The California wage-and-hour settlement was completed in 2015, with $1.0 million paid. Management did not expect ordinary-course pending litigation to materially affect results or financial position.
Caleres held $118.2 million in cash, most of which represented foreign subsidiary earnings considered indefinitely reinvested. The filing estimated that recognizing those earnings as not indefinitely reinvested would require approximately $43.8 million of additional deferred taxes. Internal control over financial reporting was reported effective, and the auditor issued unqualified opinions on the financial statements and internal controls.
Fiscal 2015 fourth quarter: net sales were $608.7 million and net earnings attributable to Caleres were $11.4 million, compared with $615.4 million and $16.2 million, respectively, in fiscal 2014’s fourth quarter.
Important facts for investors to verify
- Whether the 2016 sales-growth outlook was achieved, especially given the divergent segment trends and Brand Portfolio margin pressure.
- The drivers and sustainability of Famous Footwear comparable-sales and gross-margin improvements after excluding Shoes.com.
- Cash conversion and returns on the elevated distribution-center and other capital spending.
- The adequacy and timing of Redfield remediation reserves, and potential tax costs if foreign earnings are repatriated.
- Debt covenants, refinancing economics, and the company’s ability to manage substantial lease and purchase commitments.
- Exposure to China-centered sourcing, key wholesale accounts, and major Famous Footwear suppliers.