CALERES INC annual report, FY2019

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Caleres, Inc. — Form 10-K Summary

Period clarification: The request metadata says “2018 Q4,” but this filing is the annual report for fiscal 2019, ended February 1, 2020. It also reports fourth-quarter results; fiscal 2018 ended February 2, 2019. The filing was signed March 31, 2020.

Business context and reporting period

Caleres is a footwear retailer and wholesaler operating Famous Footwear and a portfolio of footwear brands. Fiscal 2019 comprised 52 weeks. Results are seasonal, with a substantial share of earnings traditionally generated in the third quarter.

Financial results and liquidity

  • Fiscal 2019 sales: $2.922 billion, up 3.1% from $2.835 billion. Growth was principally acquisition-driven; Vionic and Blowfish Malibu contributed $132.1 million and $40.7 million, respectively, to consolidated sales growth.
  • Profitability: Gross profit was $1.184 billion, with a 40.5% gross margin versus 40.8% in fiscal 2018. Operating earnings were $103.8 million (3.6% margin), compared with $0.4 million a year earlier. Net earnings attributable to Caleres were $62.8 million, or $1.53 per diluted share, versus a $5.4 million loss, or $0.13 loss per share.
  • Fiscal fourth quarter: Sales were $698.9 million, compared with $720.3 million in the prior-year quarter. Net earnings attributable to Caleres were $0.4 million, or $0.01 per diluted share, versus a $75.5 million loss, or $1.83 loss per diluted share. The prior-year quarter included a major goodwill and tradename impairment.
  • Segments: Famous Footwear sales declined 1.2% to $1.588 billion; same-store sales rose 2.0%, but operating earnings fell 9.8% to $76.9 million and margin declined to 4.8%. Brand Portfolio sales rose 7.1% to $1.406 billion, substantially reflecting acquisitions; operating earnings were $58.2 million versus a $40.8 million operating loss in 2018.
  • Cash flow and investment: Operating cash flow was $170.8 million, up from $129.6 million. Investing cash outflow was $49.5 million, versus $436.4 million, which included the Vionic and Blowfish acquisitions. Capital expenditures were $44.5 million and capitalized software was $5.6 million. Cash increased $15.0 million to $45.2 million.
  • Debt and liquidity: Year-end revolving-credit borrowings were $275.0 million and long-term debt was $198.4 million; reported total debt obligations were $473.4 million. Availability under the revolver was $214.1 million. Working capital was $31.3 million and the current ratio 1.04, down from $123.1 million and 1.14, respectively; the lease-accounting change added $127.9 million of current lease obligations. By the filing date, revolver borrowings had increased to $440 million as a precautionary liquidity measure. The $200 million senior notes carry 6.25% interest and mature in 2023.
  • Leases: At February 1, 2020, operating lease obligations were $756.9 million on a present-value basis. Fiscal 2019 lease expense was $234.7 million.

Material changes versus the prior comparable period

  • Sales rose, but acquisition contributions offset softness in several brands and a weaker fashion-footwear market in the second half of 2019. Famous Footwear had 43 fewer stores at year-end, while same-store sales improved.
  • Gross margin declined amid promotional retail conditions, increased e-commerce mix and freight costs, and a higher wholesale share of consolidated sales.
  • Operating earnings improved sharply from fiscal 2018, largely because the $98.0 million Allen Edmonds goodwill and intangible-asset impairment did not recur. Fiscal 2019 also included a full year of acquired-business contributions.
  • Net interest expense rose to $33.1 million from $18.3 million, reflecting acquisition-related borrowing and $6.0 million of accretion and fair-value adjustments to the Blowfish Malibu purchase obligation.
  • Cash flow from operations increased, while inventory fell to $618.4 million from $683.2 million. Fiscal 2019 included $33.4 million of treasury-stock purchases and $11.4 million of dividends.

Outlook, risks, contingencies and unusual items

  • COVID-19: Effective March 19, 2020, Caleres temporarily closed its North American retail stores. Management could not estimate the closure duration or quantify the impact on 2020 results, cash flows, consumer demand or wholesale orders. Wholesale customers sought order cancellations, and lower sales and earnings had already been experienced. Most factory partners were reported operational, though temporary supply disruption had occurred.
  • Response and outlook: Management reported furloughs, salary reductions, lower marketing and operating costs, deferred store remodels and openings, and planned reductions or deferrals of capital spending and inventory purchases. Expected 2020 capital expenditures and software spending were $25 million to $35 million, subject to further reductions depending on pandemic impacts. No clear sales or earnings forecast was provided.
  • Other operating risks: Key exposures include fashion and consumer-demand shifts, competition and price pressure, customer concentration and order cancellations, foreign sourcing concentration (31.2 million of 47.7 million pairs sourced in China), tariffs, inventory forecasting, and e-commerce fulfillment costs. A 15% tariff on certain China-sourced products took effect September 1, 2019.
  • Credit and impairment risk: Moody’s and S&P downgraded the company’s credit rating in March 2020. Management warned that prolonged store closures or lower valuations could prompt further impairment testing and material impairment charges. Vionic goodwill was $151.3 million; its valuation was identified by the auditor as a critical audit matter.
  • Special items: Fiscal 2019 included $15.0 million of expense-containment and early-retirement costs, with anticipated annual savings of $8 million to $10 million; $3.5 million of Carlos brand exit and Via Spiga repositioning costs; and acquisition-related costs. Fiscal 2018 included the $98.0 million Allen Edmonds impairment.
  • Contingencies: The Redfield environmental remediation reserve was $9.6 million at year-end; management noted ultimate costs could exceed recorded amounts. Management did not expect ordinary-course litigation to materially affect results or financial position.
  • Controls and audit: Management and Ernst & Young concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

  • Subsequent quarterly filings: store reopening pace, sales trends, wholesale cancellations, cash burn and operating cash flow during COVID-19.
  • Revolver availability, covenant compliance, borrowing costs and the effect of the March 2020 credit-rating downgrades.
  • Whether the planned $25 million to $35 million capital-spending range and $8 million to $10 million annual expense savings remain achievable.
  • Brand Portfolio performance excluding acquisitions, and the continued margin and sales trends at Famous Footwear.
  • Potential impairment exposure, particularly for Vionic goodwill and retail-store assets, and any changes in the Redfield remediation estimate.