Caleres, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended May 2, 2015, compared with the 13 weeks ended May 3, 2014. This differs from the request metadata identifying “2014 Q1.” The company’s name changed from Brown Shoe Company, Inc. to Caleres, Inc. on May 28, 2015.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $602.3 million | $591.2 million | +1.9% |
| Gross profit / margin | $248.5 million / 41.3% | $242.3 million / 41.0% | +2.6%; +0.3 percentage points |
| Operating earnings / margin | $30.3 million / 5.0% | $28.7 million / 4.9% | +5.6% |
| Net earnings attributable to Caleres | $19.3 million | $15.4 million | +25.3% |
| Diluted EPS | $0.44 | $0.35 | +$0.09 |
| Operating cash flow | $21.9 million | $36.4 million | Down $14.5 million |
| Cash and cash equivalents, period-end | $66.3 million | $36.7 million | Up $29.7 million |
| Long-term debt | $199.2 million | $199.1 million | Substantially unchanged |
Interest expense fell to $4.5 million from $5.3 million, reflecting lower average revolving-credit borrowings and reduced fees after a credit-agreement amendment. The quarter included a $1.6 million discrete tax benefit associated with converting an operating subsidiary and reversing valuation allowances; the effective tax rate was 25.9%, versus 34.1%.
Segments and material changes
- Famous Footwear: Sales decreased 1.8% to $360.0 million, chiefly because Shoes.com, sold in December 2014, contributed $12.1 million of prior-year-quarter sales. Same-store sales rose 3.1%. Operating earnings increased 4.6% to $28.0 million; operating margin improved to 7.8% from 7.3%, supported by lower markdowns, product mix, and the disposal of Shoes.com.
- Brand Portfolio: Sales rose 7.9% to $242.3 million, led by Dr. Scholl’s, Sam Edelman, and Naturalizer, partly offset by Franco Sarto. Operating earnings edged down 1.3% to $11.1 million, and margin declined to 4.6% from 5.0%. Gross margin fell to 33.2% from 34.3%, reflecting product mix and higher freight costs. Unfilled orders were $371.2 million, up 0.7%.
- Consolidated sales growth was partly offset by a shift toward wholesale: wholesale represented 35% of sales versus 32% a year earlier. Selling and administrative expenses increased 2.1% to $218.2 million, and rose to 36.3% of sales from 36.1%.
Cash flow, debt, and liquidity
Operating activities provided $21.9 million. Investing used $13.9 million, including $12.9 million of property and equipment purchases; the prior-year period included the $65.1 million Franco Sarto trademark acquisition. Financing used $9.3 million, including dividends of $3.1 million and treasury-stock purchases of $4.9 million. Cash decreased $1.1 million during the quarter.
Working capital was $401.5 million; the current ratio was 2.21:1, versus 2.05:1 a year earlier. The debt-to-capital ratio was 26.4%, versus 28.8%. The company had no revolving-credit borrowings, $6.3 million of letters of credit, and $518.3 million of reported borrowing availability under its $600 million revolving facility. Cash was substantially held by foreign subsidiaries. The $199.2 million of long-term debt primarily represents 7.125% senior notes due 2019. The company reported compliance with credit-facility and senior-note covenants.
Outlook, commentary, and risks
- Management said first-quarter results exceeded expectations and cited continued growth potential. It forecast fiscal 2015 sales of $2.61–$2.63 billion and diluted EPS of $1.84–$1.94.
- Management expects approximately $75 million of fiscal 2015 spending on property, equipment, and capitalized software. It presently expects dividends to continue, subject to board discretion and business conditions.
- The business is seasonal, with the third quarter traditionally contributing a substantial portion of annual earnings; interim results may not indicate full-year performance.
- Key disclosed risks include consumer demand and fashion trends, competition, reliance on overseas manufacturing and supply chains, inventory forecasting, cybersecurity and distribution disruptions, foreign-exchange movements, labor and product-safety compliance, and supplier, licensing, and lease relationships.
- Environmental remediation reserves totaled $9.8 million for the Redfield site and $1.3 million for other identified sites. Management cautioned that ultimate remediation costs may exceed recorded amounts.
- A California wage-and-hour class-action settlement was preliminarily approved; the reserve was $1.5 million, and the final payment could depend on valid claims. Management said ordinary-course litigation was not expected to materially affect results or financial position.
- Other unusual items include $0.4 million of long-lived-asset impairment charges and a $7.0 million fair-value secured convertible note received in the Shoes.com sale.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for Q1 2015, not Q1 2014.
- Assess whether earnings growth is sustainable excluding the $1.6 million discrete tax benefit, and monitor Brand Portfolio margins and freight costs.
- Track Famous Footwear same-store sales and the effects of the Shoes.com divestiture, and evaluate Brand Portfolio order growth against realized sales and margins.
- Review the sustainability of operating cash flow, capital-spending plans, and the availability and covenant conditions of the revolving facility.
- Monitor environmental-remediation estimates, the class-action settlement, and the value and collection/conversion terms of the Shoes.com secured convertible note.