Business context and reporting period
Caleres, Inc. is a footwear retailer and brand owner operating through Famous Footwear and Brand Portfolio. This 10-Q reports the 13 and 26 weeks ended August 4, 2018, compared with periods ended July 29, 2017. The request identifies “2017 Q2,” but the filing is for fiscal 2018 Q2.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $706.6M | $677.0M | $1,338.8M | $1,308.5M |
| Gross profit / margin | $293.1M / 41.5% | $287.5M / 42.5% | $568.0M / 42.4% | $558.4M / 42.7% |
| Operating earnings / margin | $32.1M / 4.5% | $28.4M / 4.2% | $55.1M / 4.1% | $51.7M / 4.0% |
| Net earnings attributable to Caleres / diluted EPS | $23.6M / $0.55 | $17.6M / $0.41 | $40.9M / $0.94 | $32.5M / $0.75 |
Q2 sales rose 4.4% and operating earnings increased 13.1%; six-month sales rose 2.3% and operating earnings 6.5%. Q2 gross margin contracted one percentage point, reflecting promotional competition and a shift toward lower-margin product at Famous Footwear. The six-month margin declined 0.3 percentage points.
For the six months, operating cash flow was $91.0M, down from $114.3M; investing cash outflow was $38.3M, including the Blowfish acquisition; financing cash outflow was $13.7M. Cash increased $38.8M to $102.9M. At August 4, 2018, total debt was $197.7M, comprising $197.7M long-term debt and no revolver borrowings. The $600M revolving facility had $591.4M available, with $8.6M in letters of credit; the company reported covenant compliance. Working capital was $437.8M, current ratio 1.73, and debt-to-capital ratio 21.1%.
Material changes and management commentary
- Famous Footwear Q2 sales increased 6.1% to $429.5M, with same-store sales up 2.6%; management attributed part of the increase to the fiscal-calendar shift, which added a high-volume back-to-school week. Operating earnings rose to $33.2M from $25.1M, while gross margin fell to 43.6% from 45.3% amid promotions, product mix and higher e-commerce freight costs.
- Brand Portfolio Q2 sales increased 1.9% to $277.1M; operating earnings declined to $13.6M from $15.9M. Approximately $3M of start-up and duplicate distribution-center expenses contributed to higher selling and administrative costs. Its unfilled wholesale order position was $263.3M, down 4.3% year over year.
- On July 6, 2018, Caleres acquired a controlling interest in Blowfish Malibu for estimated total consideration of $28.1M, including a $9.1M estimated mandatory purchase obligation payable in 2021. Blowfish contributed $2.5M in sales through August 4 and had an immaterial earnings impact. Purchase-price allocation remains preliminary.
- Management said it expected balanced earnings contributions from both segments for the remainder of 2018 and continued investment in the business. Fiscal 2018 capital spending on property, equipment and software was expected to be approximately $50M. The filing provides no numerical earnings or sales guidance.
Risks, contingencies and unusual items
- Restructuring and other special charges were $2.1M in Q2 and $3.9M for six months, principally related to integration and reorganization of the men’s business; Q2 also included Blowfish acquisition costs. Blowfish purchase-accounting inventory amortization added $0.5M to Q2 cost of goods sold.
- The effective tax rate fell to 25.3% in Q2 from 33.9%, and to 24.4% for six months from 31.7%, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Cuts and Jobs Act. Certain tax-law impacts remained under evaluation.
- Environmental remediation liability for the Redfield site was $9.5M; management cautioned that ultimate costs may exceed recorded amounts. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Management identified risks including changing consumer demand and fashion, intense competition, inventory forecasting, reliance on overseas manufacturing and distribution, currency movements, cybersecurity, acquisition integration, leases, suppliers and tax-law changes. The company anticipated a material balance-sheet effect from adopting the new lease standard in 2019, while cash-flow effects were not expected to be material.
- Revenue standard adoption reduced opening retained earnings by $4.8M; its impact on current-period net earnings and EPS was described as immaterial. The company reported disclosure controls effective at the reasonable-assurance level; Blowfish’s internal controls were still under review.
Important facts for investors to verify
- Confirm the intended reporting year: this filing covers Q2 2018, not Q2 2017.
- Assess whether Famous Footwear’s sales growth persists after the extra back-to-school week and whether promotional pressure continues to weigh on margins.
- Track Brand Portfolio distribution-center costs, operating performance and wholesale order backlog.
- Review the final Blowfish purchase-price allocation and the earnings-based mandatory purchase obligation due in 2021.
- Monitor seasonal inventory and working-capital demands, lease-standard implementation, and potential changes in environmental remediation costs.