Caleres, Inc. Form 10-Q Summary
Period clarification: Request metadata identifies “2018 Q3,” but the filing is for the 13 and 39 weeks ended November 2, 2019, compared with periods ended November 3, 2018. This is fiscal 2019 third quarter, not 2018 third quarter. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio, which includes its owned and licensed footwear brands. The business is seasonal, with higher back-to-school and holiday sales; the company notes that the third quarter traditionally contributes substantially to annual earnings.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2019 | 13 weeks ended Nov. 3, 2018 | 39 weeks ended Nov. 2, 2019 | 39 weeks ended Nov. 3, 2018 |
|---|---|---|---|---|
| Net sales | $792.4 | $775.8 | $2,222.6 | $2,114.6 |
| Gross profit | $319.8 | $310.6 | $905.6 | $878.6 |
| Gross margin | 40.4% | 40.0% | 40.7% | 41.6% |
| Operating earnings | $43.5 | $39.7 | $98.1 | $94.8 |
| Operating margin | 5.5% | 5.1% | 4.4% | 4.5% |
| Net earnings attributable to Caleres | $28.0 | $29.2 | $62.4 | $70.0 |
| Diluted EPS | $0.69 | $0.67 | $1.51 | $1.62 |
| Net interest expense | $10.6 | $4.2 | $25.3 | $11.5 |
- Revenue and segments: Third-quarter sales rose 2.1%; Vionic contributed $33.0 of consolidated sales growth, while sales excluding Vionic declined $16.5. Famous Footwear sales fell 0.5%, despite same-store sales growth of 2.5%. Brand Portfolio sales rose 4.9%, but fell excluding Vionic. For the first nine months, sales increased 5.1%, primarily due to acquisitions.
- Profitability: Third-quarter gross margin improved 0.4 percentage points, and operating earnings rose 9.4%. Nine-month gross margin declined 0.9 points, reflecting promotional conditions and acquisition-related inventory costs and markdowns. Nine-month net earnings attributable to Caleres fell 10.9%.
- Cash flow: Nine-month operating cash flow was $145.7, up from $94.4. Investing cash outflow was $41.6, compared with $401.0, which included the prior-year Vionic and Blowfish acquisitions. Financing cash outflow was $81.9, versus $333.2 of inflow in the prior-year period. Cash increased $22.3 to $52.5.
- Debt and liquidity: Total debt was $493.3 at November 2, 2019, down from $547.8 a year earlier; this comprises $295.0 drawn on the revolving facility and approximately $198.3 in long-term debt. Revolver availability was $194.5, with $10.5 of letters of credit outstanding. The company reported compliance with debt covenants. Working capital was $7.4 and the current ratio was 1.01; both figures include the newly recognized current lease obligation of $144.5.
- Other balance-sheet items: Total assets were $2,471.2, including $704.2 of lease right-of-use assets. Current and noncurrent lease obligations totaled $774.2. Shareholders’ equity was $650.8.
Material changes versus the prior comparable period
- Quarterly sales growth was acquisition-led; without Vionic, sales declined. Famous Footwear same-store sales were positive, but its smaller store base reduced total sales.
- Quarterly operating earnings improved, but net earnings attributable to Caleres declined as interest expense rose substantially. Higher interest reflected borrowings used to fund Vionic and $3.9 of accretion and remeasurement expense on the Blowfish mandatory purchase obligation.
- For the nine months, sales and operating earnings increased, but net earnings and diluted EPS decreased. The nine-month operating margin edged down to 4.4%.
- ASC 842 lease accounting was adopted in fiscal 2019. It added lease assets and liabilities to the balance sheet and contributed to higher impairment charges for underperforming stores; prior-year balance-sheet figures were not restated.
- Caleres repurchased 1.59 million shares in the first nine months for $31.2, compared with 100,000 shares in the prior-year period. It paid $8.6 in dividends.
Outlook, management commentary, risks and contingencies
- Tariffs: Management said it had mitigated a significant portion of tariff effects in the third quarter but expected an adverse impact in the fourth quarter of 2019. Approximately 60% of Brand Portfolio branded products were sourced from China, and about 40% of branded products were sourced outside China. Further tariff escalation or a prolonged trade dispute could pressure margins and consumer demand.
- Trading conditions: Management cited a challenging and promotional selling environment, particularly for Brand Portfolio. Brand Portfolio same-store sales fell 5.1% in the quarter and 7.6% for the nine months. Its wholesale unfilled order position declined 11.9% to $354.4; management attributed this partly to more dynamic, replenishment-oriented ordering.
- Guidance: The filing provides no numerical full-year earnings or sales guidance. Management expects incremental interest expense to continue until borrowings used for the Vionic acquisition are repaid and presently expects dividends to continue, subject to Board discretion.
- Special and unusual items: Nine-month charges included $1.9 for the Carlos brand exit, including $1.3 of inventory markdowns; $1.9 of Vionic integration costs; and $5.8 of Vionic purchase-accounting inventory amortization. The filing also reports $5.1 of nine-month long-lived asset impairment charges, primarily related to retail stores and including right-of-use assets.
- Environmental and legal matters: The company recorded a $9.7 reserve for Redfield site remediation, including $5.1 for off-site and $4.6 for on-site work; management cautions actual costs could exceed recorded amounts. Other ordinary-course litigation was not expected by management to have a material adverse effect.
- Other risks: The filing identifies consumer and fashion trends, competition, inventory forecasting, foreign sourcing and supply continuity, cybersecurity and distribution disruption, currency movements, leases, and acquisition integration among its risks. Management concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Confirm the period: this filing covers fiscal 2019 Q3, notwithstanding the request metadata’s “2018 Q3” label.
- Assess how much reported growth depends on Vionic and other acquired brands, versus underlying comparable sales and margins.
- Track tariff costs, sourcing diversification, pricing actions, and the expected fourth-quarter impact.
- Monitor revolving-credit usage, available borrowing capacity, interest expense, and repayment progress on acquisition-related borrowings.
- Consider lease obligations when assessing liquidity and store economics; reported working capital and current ratio include current lease liabilities.
- Review Brand Portfolio trends, the wholesale order backlog, impairment charges, and the Redfield remediation estimate for changes.