Caleres, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 28, 2017, compared with periods ended October 29, 2016. The supplied request metadata says “2016 Q3,” which conflicts with the filing’s stated 2017 reporting period. Amounts below are in U.S. dollars.
Business context and results
Caleres operates Famous Footwear and Brand Portfolio. Third-quarter sales growth was led by the Brand Portfolio segment, including Allen Edmonds, acquired in December 2016. Management cited warmer-than-usual weather, which delayed boot sales, and estimated Hurricanes Harvey and Irma reduced quarterly sales by about $4 million. The company says its business is seasonal, with the third quarter traditionally contributing substantially to annual earnings.
| Metric | 13 weeks ended Oct. 28, 2017 | 13 weeks ended Oct. 29, 2016 | 39 weeks ended Oct. 28, 2017 | 39 weeks ended Oct. 29, 2016 |
|---|---|---|---|---|
| Net sales | $774.7 million | $732.2 million | $2,083.1 million | $1,939.9 million |
| Gross profit / margin | $316.9 million / 40.9% | $293.8 million / 40.1% | $875.3 million / 42.0% | $801.1 million / 41.3% |
| Operating earnings / margin | $52.9 million / 6.8% | $55.5 million / 7.6% | $109.7 million / 5.3% | $116.5 million / 6.0% |
| Net earnings attributable to Caleres | $34.4 million | $34.7 million | $66.9 million | $72.3 million |
| Diluted EPS | $0.80 | $0.81 | $1.55 | $1.67 |
Quarterly sales rose 5.8%, but operating earnings and net earnings attributable to Caleres declined as selling and administrative costs increased. Gross margin improved, supported by a higher retail-sales mix, stronger higher-margin brands, and sourcing initiatives. For the nine-month period, sales rose 7.4%, while operating earnings fell 5.8% and diluted EPS declined from $1.67 to $1.55.
Segments and material changes
- Famous Footwear: Third-quarter sales increased 1.1% to $473.1 million; same-store sales rose 0.9%. Operating earnings increased to $33.7 million from $32.7 million. E-commerce grew, while store traffic was pressured in part by the hurricanes; boot sales were affected by warm weather.
- Brand Portfolio: Third-quarter sales rose 14.0% to $301.5 million, including $44.1 million from Allen Edmonds. Operating earnings fell to $24.3 million from $30.5 million despite higher sales and gross margin, as selling and administrative expenses increased. Same-store sales, excluding Allen Edmonds, rose 2.4%.
- Allen Edmonds contributed $128.3 million of Brand Portfolio sales in the first nine months. The acquisition added $113.1 million of goodwill and $102.9 million of intangible assets. Purchase-accounting inventory amortization reduced nine-month earnings by $3.0 million after tax, or $0.07 per diluted share; it was fully amortized by July 29, 2017.
- Nine-month restructuring and other special charges were $4.0 million, primarily professional fees and severance related to integration and reorganization of the men’s business. The after-tax impact was $2.6 million, or $0.06 per diluted share.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $122.3 million, down from $137.0 million. Investing used $38.9 million, compared with $48.7 million, while financing used $107.5 million, largely reflecting revolving-credit repayments. Cash declined $24.0 million to $31.4 million.
- At October 28, 2017, total debt was $217.3 million: $20.0 million under the revolving facility and $197.3 million of long-term debt. Debt was down $89.7 million from January 28, 2017. The debt-to-capital ratio was 24.4%; working capital was $386.3 million and the current ratio was 1.93 to 1.
- The $600 million revolving facility had $514.0 million of borrowing availability and $8.9 million of letters of credit outstanding. Caleres reported compliance with credit-facility and senior-note covenants. Senior notes bear 6.25% interest and mature in 2023.
- Management said it expected to repay the remaining $20 million revolver balance during the fourth quarter of 2017. It expected fiscal 2017 property-and-equipment and capitalized-software spending of approximately $55 million. The company declared and paid a $0.07 per-share quarterly dividend and said it presently expected dividends to continue, subject to Board discretion.
Outlook, risks and contingencies
Management reported improved boot sales in November as more seasonal weather arrived and highlighted its speed-to-market initiative. It expressed confidence in its strategy and execution but provided no quantified earnings or sales guidance in the supplied filing text. Risks identified include changing consumer demand and fashion trends, competition, inventory forecasting, dependence on overseas manufacturing and supply chains, acquisition integration, retail-industry consolidation, distribution or IT disruption, foreign-exchange movements, labor and product-safety compliance, leases, and tax-law changes.
Caleres recorded a $9.6 million reserve for environmental remediation at its Redfield site, including $5.0 million for off-site work. Management cautioned that ultimate remediation costs may exceed recorded amounts, subject to regulatory oversight and approval. Management did not expect pending ordinary-course litigation to materially affect results or financial position. Proposed U.S. tax legislation made the impact on future tax expense uncertain. The company also disclosed that adoption of the new lease accounting standard was expected to have a material balance-sheet impact, but not to cause debt-covenant noncompliance.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing states the quarter ended October 28, 2017, although the request metadata identifies 2016 Q3.
- Assess whether Brand Portfolio operating-margin pressure and higher selling and administrative costs persist after Allen Edmonds integration.
- Track seasonal boot demand, Famous Footwear same-store sales and store traffic, and the effects of weather and e-commerce trends.
- Verify repayment of the remaining revolver balance, cash generation, inventory levels, and progress toward the stated capital-spending estimate.
- Monitor environmental-remediation estimates, lease obligations, acquisition integration, and accounting-standard adoption impacts.