Caleres, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 29, 2017. Although the request metadata labels the period “2016 Q2,” the filing itself reports 2017 results. Financial statements are unaudited.
Business context and results
Caleres operates Famous Footwear and Brand Portfolio. The December 2016 acquisition of Allen Edmonds contributed materially to Brand Portfolio growth. Management cited a challenging retail environment, while noting a successful start to Famous Footwear’s back-to-school season and continued Brand Portfolio margin expansion.
| Metric | 13 weeks ended July 29, 2017 | Prior-year quarter | 26 weeks ended July 29, 2017 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $677.0m | $622.9m | $1,308.5m | $1,207.7m |
| Gross profit / margin | $287.5m / 42.5% | $259.6m / 41.7% | $558.4m / 42.7% | $507.3m / 42.0% |
| Operating earnings / margin | $31.1m / 4.6% | $32.3m / 5.2% | $56.8m / 4.3% | $61.0m / 5.1% |
| Net earnings attributable to Caleres | $17.6m | $19.8m | $32.5m | $37.6m |
| Diluted EPS | $0.41 | $0.46 | $0.75 | $0.86 |
Quarterly sales rose 8.7%; gross margin improved, but higher selling and administrative expenses, restructuring charges and interest expense reduced operating earnings and net income. First-half sales increased 8.3%, while operating earnings fell 6.9%. The filing notes that the business is seasonal, with the third quarter traditionally contributing a substantial portion of annual earnings.
Segments and material changes
- Famous Footwear: Second-quarter sales were $404.9m, up 3.8%, with same-store sales up 2.8%; operating earnings were $25.1m versus $22.6m. First-half sales rose 2.2%, but operating earnings declined to $45.4m from $48.4m. E-commerce growth and buy-online-pick-up-in-store supported the quarter; management also noted lower store traffic in the first half.
- Brand Portfolio: Second-quarter sales were $272.0m, up 16.8%, including $41.8m from Allen Edmonds; operating earnings fell to $15.9m from $17.5m. First-half sales rose 18.6%, including $84.3m from Allen Edmonds, and operating earnings increased to $29.2m from $27.1m. Higher selling and administrative costs and restructuring weighed on quarterly earnings.
- Allen Edmonds acquisition accounting added cost of goods sold of $1.9m in the quarter and $4.9m in the first half from amortization of the inventory fair-value adjustment. Men’s-business integration and reorganization charges were $2.9m in the quarter and $4.0m year to date; no comparable charges were reported in 2016.
Cash flow, debt and liquidity
- First-half operating cash flow was $114.3m, compared with $108.6m in 2016. Investing cash outflow was $27.4m, including $24.3m of property and equipment purchases and $3.2m of capitalized software. Financing cash outflow was $89.5m, including $75.0m net repayment of revolving borrowings.
- Cash declined $2.4m from the fiscal-year start to $52.9m. Inventory was $722.0m, up from $648.9m a year earlier; the cash-flow statement shows a $134.5m first-half inventory use of cash.
- Total debt was $232.2m: $35.0m under the revolving facility and $197.2m of long-term debt. The facility had $557.7m of borrowing availability, after $7.3m of letters of credit; the company reported covenant compliance. The $200m senior notes bear interest at 6.25% and mature in 2023.
- Working capital was $347.2m and the current ratio was 1.57:1, versus $488.3m and 1.97:1 a year earlier. Debt-to-capital was 26.6%, versus 24.2% a year earlier and 33.3% at January 28, 2017. About 40% of cash represented foreign-subsidiary earnings considered indefinitely reinvested.
- Quarterly dividends were $0.07 per share. Management said it presently expects dividends to continue, subject to Board discretion. Fiscal 2017 capital expenditures and capitalized software were expected to total approximately $55m.
Outlook, risks and other disclosures
- Management described steady cash flow, continued debt repayment after the Allen Edmonds acquisition, and focus on speed-to-market and consumer acquisition. The filing provides no numerical earnings or sales guidance.
- Hurricane Harvey affected a major Houston-area market containing approximately 40 Caleres stores. The company was assessing potential damage and financial impact; the effect on 2017 results was not yet clear.
- Disclosed business risks include consumer and fashion shifts, competition, inventory forecasting, reliance on overseas manufacturing and supply flows, acquisition integration, customer concentration, cybersecurity and distribution disruptions, currency movements, and lease and supplier relationships.
- The company recorded a $9.5m reserve for environmental remediation at the Redfield site and stated that ultimate costs could exceed the reserve. Management did not expect pending ordinary-course litigation to materially affect results or financial position.
- Upcoming accounting changes include revenue recognition, planned for adoption in first-quarter 2018; management anticipated a potentially significant initial liability adjustment, especially for loyalty programs, but no significant ongoing earnings impact. Lease accounting adoption in first-quarter 2019 was expected to have a material balance-sheet impact.
Important facts for investors to verify
- Whether Allen Edmonds integration produces sustainable sales and earnings contributions after acquisition-related inventory adjustments and restructuring costs.
- Whether operating margin recovery can offset higher selling and administrative costs, particularly in Brand Portfolio.
- Inventory levels, seasonal cash needs, and the effect of the lower current ratio on liquidity.
- The eventual financial and operating impact of Hurricane Harvey on the approximately 40 affected-area stores.
- Progress on revolving-debt repayment, covenant compliance, and the company’s ability to maintain planned dividends and capital spending.
- Environmental remediation cost estimates and the initial balance-sheet effects of new revenue and lease accounting standards.