Caleres, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended October 31, 2015, and the thirty-nine weeks ended that date, compared with periods ended November 1, 2014. This differs from the request metadata’s “2014 Q3.” Amounts below are in U.S. dollars.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio, which includes branded footwear sold through wholesale and retail channels. Results are seasonal, with higher sales around back-to-school and the Christmas holiday; management cautions that interim results may not indicate full-year results.
Financial performance and liquidity
| Metric | Quarter ended October 31, 2015 | Thirty-nine weeks ended October 31, 2015 |
|---|---|---|
| Net sales | $728.6 million | $1,968.8 million |
| Gross profit / margin | $288.4 million / 39.6% | $799.8 million / 40.6% |
| Operating earnings / margin | $52.2 million / 7.2% | $118.3 million / 6.0% |
| Net earnings attributable to Caleres | $34.0 million | $70.1 million |
| Diluted earnings per share | $0.78 | $1.59 |
- Cash flow: Year-to-date operating cash flow was $84.1 million, compared with $68.5 million a year earlier. Investing used $45.3 million, versus $112.4 million; financing used $19.3 million, versus $0.5 million provided. Cash increased $18.9 million to $86.3 million.
- Balance sheet and liquidity: At October 31, 2015, cash was $86.3 million, inventory $544.3 million, current assets $819.6 million, and current liabilities $375.9 million. Working capital was $443.7 million and the current ratio was 2.18:1.
- Debt: Total debt was $200.0 million, all in senior notes; there were no revolver borrowings and $561.8 million of borrowing availability under the revolving facility. Debt-to-capital was 24.9%. Caleres reported compliance with credit-agreement and note covenants.
- Dividends: The company paid $0.07 per share in the quarter and $0.21 per share year to date.
Material changes versus prior comparable periods
- Quarterly sales declined 0.1% from $729.3 million; excluding Shoes.com, sold in December 2014, sales were up 1.8%. Year-to-date sales rose 0.6%, or 2.5% excluding Shoes.com.
- Quarterly gross margin decreased to 39.6% from 39.9%, and operating earnings fell 1.9% to $52.2 million. Year to date, gross margin improved to 40.6% from 40.5% and operating earnings rose 4.5% to $118.3 million.
- Quarterly net earnings attributable to Caleres increased to $34.0 million from $33.1 million; diluted EPS increased to $0.78 from $0.75. The quarter included a $2.0 million pretax debt-extinguishment loss, while lower interest expense and tax benefits partly affected comparisons.
- Famous Footwear quarterly sales increased 1.6% to $456.2 million, with same-store sales up 4.4%; operating earnings rose 6.0% to $39.6 million. Brand Portfolio sales declined 2.8% to $272.5 million and operating earnings fell 23.9% to $21.0 million.
- Quarter-end inventory was $544.3 million, down $23.4 million from the prior-year quarter; the filing attributes part of the decline to the Shoes.com disposition.
Outlook, commentary, risks, and unusual items
- 2015 outlook: Management expected consolidated sales of approximately $2.61 billion and diluted EPS of $1.80–$1.85, including $0.15 per share for the debt-extinguishment loss. Management anticipated a promotional fourth-quarter retail environment.
- Management cited inventory planning and expense control as key contributors to quarterly performance. Warm weather weighed on boot demand and shifted sales toward lower-priced booties and sandals; freight costs and markdowns also pressured margins. A lower Canadian dollar reduced sales.
- In July 2015, Caleres issued $200 million of 6.25% senior notes due 2023 and redeemed its $200 million 7.125% notes due 2019. The refinancing generated a $10.7 million year-to-date pretax extinguishment loss.
- Year-to-date tax benefits included $4.2 million of discrete benefits; without them, the reported effective tax rate would have been 30.8%, rather than 26.4%.
- Environmental remediation reserves totaled $9.8 million at October 31, 2015. Management states ultimate costs may exceed recorded amounts. A California wage-and-hour class-action settlement reserve was $1.0 million, with payment expected in the fourth quarter of 2015. Management did not expect ordinary-course litigation to have a material adverse effect.
- Disclosed business risks include changing consumer demand and fashion, intense competition, inventory forecasting, reliance on overseas manufacturing and suppliers, currency fluctuations, cybersecurity or distribution disruptions, retailer concentration, and lease and licensing risks. Management reported disclosure controls were effective and no significant quarterly changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2015, not Q3 2014.
- Track whether the 2015 sales and EPS outlook was achieved, especially given promotional conditions and seasonal demand.
- Assess Brand Portfolio’s sales, gross margin, and expense trends against Famous Footwear’s stronger quarterly performance.
- Review the quality and sustainability of cash generation, inventory levels, and the effect of foreign-subsidiary cash on parent-company liquidity.
- Monitor debt terms, covenant headroom, refinancing costs, and the environmental remediation reserve and settlement payments.
- Separate recurring earnings from the debt-extinguishment charge and discrete tax benefits when evaluating period-to-period performance.