Caleres, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 1, 2015, compared with the periods ended August 2, 2014. The request metadata says “2014 Q2,” which conflicts with the filing’s actual reporting period.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $637.8 million | $635.9 million | $1,240.1 million | $1,227.0 million |
| Gross profit / margin | $262.8 million / 41.2% | $259.6 million / 40.8% | $511.3 million / 41.2% | $502.0 million / 40.9% |
| Operating earnings / margin | $35.7 million / 5.6% | $31.3 million / 4.9% | $66.1 million / 5.3% | $60.0 million / 4.9% |
| Net earnings attributable to Caleres | $16.8 million | $18.1 million | $36.1 million | $33.5 million |
| Diluted EPS | $0.38 | $0.41 | $0.82 | $0.76 |
| Operating cash flow | — | — | $101.3 million | $66.5 million |
Q2 revenue rose 0.3%, while operating earnings increased 14.2%. Q2 net earnings fell 6.5%, primarily because of the debt-extinguishment loss. For the first half, net earnings rose 8.2%. The company reported lower interest expense in both periods.
- Segments, Q2: Famous Footwear sales were $395.9 million, down 2.0%, while operating earnings rose 8.4% to $27.7 million and margin improved to 7.0%. Brand Portfolio sales increased 4.4% to $242.0 million, but operating earnings declined 8.5% to $16.0 million and margin fell to 6.6%.
- Cash and liquidity: At August 1, cash and cash equivalents were $129.3 million, with a further $41.5 million restricted for redemption of the remaining 2019 notes. Working capital was $419.3 million; the current ratio was 1.73:1, versus 1.74:1 a year earlier and 1.99:1 at fiscal year-end.
- Debt: Total debt was $239.2 million at quarter-end, including $39.2 million classified as current; the current portion related to 2019 notes subsequently redeemed. There were no revolving-credit borrowings, $6.3 million in letters of credit and $593.7 million of stated borrowing availability. The debt-to-capital ratio was 29.6%.
- Cash flow and investment: First-half investing cash outflow was $20.5 million, including $24.9 million of property and equipment purchases. Financing cash outflow was $18.5 million. Cash increased $61.9 million in the first half.
Material changes and unusual items
- Caleres issued $200 million of 6.25% senior notes due 2023 and used proceeds, together with cash, to refinance its 7.125% senior notes due 2019. It redeemed $160.7 million of the 2019 notes in Q2 and the remaining $39.3 million on August 26, 2015.
- The Q2 refinancing generated an $8.7 million pretax early-extinguishment loss, or approximately $5.3 million after tax ($0.12 per diluted share). The subsequent August redemption generated an additional $2.0 million loss.
- First-half operating cash flow improved by $34.8 million year over year, mainly reflecting timing-related increases in trade payables and a smaller inventory increase. These working-capital movements are important to the cash-flow comparison.
- Q2 included $1.3 million of discrete tax benefits, including $1.2 million related to the Shoes.com disposition. Without the benefits, the Q2 effective tax rate would have been 32.0%; the reported rate was 26.5%.
Outlook, commentary and risks
Management forecast fiscal 2015 consolidated sales of $2.61 billion to $2.63 billion and diluted EPS of $1.84 to $1.94. It cited Brand Portfolio sales growth and improved Famous Footwear operating margin, while noting continued investment in strategic growth initiatives. The business is seasonal, with the third quarter traditionally contributing a substantial portion of annual earnings; interim results may not indicate full-year performance.
Management identified risks including changing consumer demand and fashion trends, intense competition, reliance on third-party manufacturing and supply chains, inventory forecasting, cybersecurity or distribution disruptions, foreign-currency fluctuations, retail customer concentration, and the ability to manage leases and supplier and licensor relationships.
- Environmental remediation reserves totaled $9.7 million, including $5.0 million for the Redfield on-site remediation and $4.7 million for off-site work. The company cautioned that ultimate costs could exceed recorded reserves.
- A California wage-and-hour class-action settlement was reserved at $1.5 million; final court approval was scheduled for the third quarter of 2015. Management said ordinary-course litigation was not expected to materially affect results or financial position.
- Brand Portfolio retail same-store sales declined 5.2% in Q2, and segment operating earnings fell despite higher sales. Management attributed margin pressure partly to higher selling and administrative costs.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2014 Q2, but the filing is for the quarter ended August 1, 2015.
- Track whether fiscal 2015 sales and diluted-EPS guidance was achieved, accounting for seasonal concentration of earnings in the third quarter.
- Confirm the completed redemption and total refinancing costs, including the additional $2.0 million loss recorded after quarter-end.
- Assess the sustainability of operating cash flow given its reliance on changes in payables and inventory, and monitor liquidity after the restricted cash was used for redemption.
- Monitor Brand Portfolio profitability, Famous Footwear sales trends, and the potential range of environmental and litigation costs.