Caleres, Inc. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended January 28, 2017 (fiscal 2016, 52 weeks), not 2015 Q4. It includes unaudited quarterly results for fiscal 2016 and fiscal 2015.
Business context and reporting period
Caleres is a footwear retailer and wholesaler operating Famous Footwear and a portfolio of footwear brands. Fiscal 2016 sales were split approximately 67% retail and 33% wholesale. The business is seasonal, with back-to-school and holiday sales contributing significantly, particularly in the third quarter. The company acquired premium men’s footwear retailer Allen Edmonds on December 13, 2016.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $2,579.4 million | $2,577.4 million |
| Gross profit / margin | $1,062.0 million / 41.2% | $1,047.8 million / 40.7% |
| Operating earnings / margin | $111.0 million / 4.3% | $135.1 million / 5.2% |
| Net earnings attributable to Caleres | $65.7 million | $81.5 million |
| Diluted EPS | $1.52 | $1.85 |
| Cash from operations | $183.6 million | $149.2 million |
| Cash and cash equivalents at year-end | $55.3 million | $118.2 million |
- Investing cash outflow was $319.5 million, including $259.9 million net cash paid for Allen Edmonds; financing cash inflow was $72.8 million. Capital expenditures were $50.5 million and capitalized software was $9.0 million.
- Year-end debt was $307.0 million: $110.0 million drawn on the revolver and $197.0 million carrying value of long-term debt. The $200 million senior notes bear 6.25% interest and mature in 2023. Revolver availability was $415.4 million; the facility matures in 2019. The company reported compliance with debt covenants.
- Working capital was $316.2 million, down from $484.8 million; current ratio was 1.60 versus 2.24, and debt-to-capital was 33.3% versus 24.6%.
- Operating lease commitments totaled $892.1 million. Annual rent expense was $159.6 million.
- Fiscal 2016 dividends were $0.28 per share. The board declared a further $0.07 quarterly dividend payable in April 2017.
Material changes versus the prior comparable period
- Sales were nearly flat, up 0.1%. Famous Footwear sales rose 1.1% to $1,590.1 million, with same-store sales up 0.6%; Brand Portfolio sales declined 1.5% to $989.3 million.
- Gross margin improved by 0.5 percentage points, reflecting brand and channel mix, planned exits of lower-margin categories, and lower markdowns. Operating earnings fell 17.9%, principally because of $23.4 million in restructuring and other special charges and weaker Famous Footwear profitability.
- Famous Footwear operating earnings declined to $83.7 million from $109.0 million; Brand Portfolio operating earnings increased to $76.2 million from $66.6 million.
- Allen Edmonds contributed $24.3 million in sales after acquisition, with an immaterial earnings impact in 2016. Its purchase price was $259.9 million net of cash acquired; preliminary allocation included $113.1 million goodwill and $103.4 million intangible assets.
- Cash from operations increased $34.4 million, while cash declined by $62.8 million over the year. The company used revolver borrowings to fund the acquisition.
Outlook, commentary, risks and unusual items
- For 2017, management expected Famous Footwear same-store sales growth in the low single digits and Brand Portfolio sales growth in the high teens, including Allen Edmonds. Planned capital expenditures and capitalized software were approximately $55 million.
- Fiscal 2016 included $23.4 million of restructuring and special charges, including an $8.0 million impairment tied primarily to the Shoes.com note receivable, a $7.0 million affiliate investment impairment, $5.8 million of Allen Edmonds acquisition and integration costs, and $2.6 million of business-exit and restructuring charges. Fourth-quarter charges reduced earnings by $20.2 million after tax; the quarter reported a $6.6 million loss attributable to Caleres.
- Key risks include discretionary consumer demand, intense competition and pricing pressure, fashion and inventory forecasting, wholesale customer and supplier concentration, and reliance on foreign sourcing. Approximately 74% of sourced footwear came from China.
- Other exposures include cybersecurity and IT disruption, acquisition integration and valuation, foreign exchange, lease obligations, tax changes, and litigation. Environmental remediation is ongoing at the Redfield site; the recorded reserve was $9.8 million, and management cautioned that ultimate costs could exceed the reserve.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. Allen Edmonds was excluded from the internal-control assessment and audit for 2016.
Important facts for investors to verify
- Whether Allen Edmonds meets management’s expectation of becoming accretive in 2017 and supports the projected Brand Portfolio growth.
- Whether the year-over-year earnings decline reflects mainly identified special items or continuing margin and expense pressure, especially at Famous Footwear.
- Inventory levels, markdown exposure, and performance of Famous Footwear’s e-commerce and loyalty channels.
- Post-acquisition liquidity, revolver usage, debt covenants, and the company’s capacity to meet substantial lease and purchase commitments.
- Final purchase-price allocation for Allen Edmonds and the progress and potential cost of Redfield and other environmental matters.