Caleres, Inc. — Form 10-K Summary
Period: Fiscal 2018, the 52 weeks ended February 2, 2019; filed April 2, 2019. The request metadata says “2017 Q4,” but this filing reports fiscal 2018. Its fourth quarter comprised 13 weeks. Fiscal 2017 had 53 weeks, affecting year-over-year comparisons. Caleres operates Famous Footwear and a Brand Portfolio footwear business.
Financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,834.8 million | $2,785.6 million |
| Gross profit / margin | $1,156.3 million / 40.8% | $1,168.6 million / 42.0% |
| Operating earnings | $0.4 million | $127.7 million |
| Net earnings (loss) attributable to Caleres | $(5.4) million; $(0.13) diluted EPS | $87.2 million; $2.02 diluted EPS |
| Cash from operating activities | $129.6 million | $191.4 million |
| Cash and cash equivalents at year-end | $30.2 million | $64.0 million |
| Total debt at year-end | $532.9 million | $197.5 million |
| Working capital / current ratio | $123.1 million / 1.14 | $416.6 million / 1.97 |
FY2018 net sales rose 1.8%, including contributions from Vionic and Blowfish Malibu; the extra week in FY2017 added $23.4 million to that year’s consolidated sales. Gross margin contracted amid promotional competition, higher e-commerce freight costs, acquisition-related inventory adjustments, and a shift toward wholesale sales. Operating results included a $98.0 million non-cash impairment of Allen Edmonds goodwill and tradename ($83.0 million after tax). The reported effective tax rate was 4.7%; the filing says it would have been 22.3% excluding the impairment and discrete tax benefits.
Segments and fourth quarter
- Famous Footwear: Sales fell 1.9% to $1,606.8 million; same-store sales increased 1.5% on a 52-week comparable basis. Operating earnings declined to $85.3 million from $92.2 million, and operating margin was 5.3% versus 5.6%.
- Brand Portfolio: Sales rose 7.0% to $1,228.0 million, supported by Vionic and Blowfish Malibu acquisitions. Segment operating loss was $42.2 million, including the $98.0 million impairment; the prior year had $80.2 million of operating earnings. Year-end wholesale backlog was $331.6 million, up from $262.1 million, partly due to the acquisitions.
- Fourth quarter: Sales were $720.3 million and net loss attributable to Caleres was $75.5 million, or $1.83 per diluted share. The quarter included the impairment and acquisition inventory, restructuring, and logistics-transition costs.
Liquidity, debt, and cash flow
Operating cash flow was $129.6 million, down $61.8 million year over year, partly reflecting inventory growth. Investing cash use was $436.4 million, principally for the Vionic and Blowfish Malibu acquisitions and capital spending; financing provided $273.2 million, including revolving-credit borrowings. Capital expenditures were $62.5 million and capitalized software was $4.4 million.
Caleres ended the year with $335.0 million drawn on its revolving facility, $10.5 million of letters of credit, and $154.5 million of borrowing availability. The facility was amended in January 2019, with maturity extended to January 2024 and commitments of up to $500 million, plus an option to increase by $250 million. The company also had $197.9 million carrying value of senior notes, bearing 6.25% interest and due in 2023. It reported compliance with debt covenants. Management said it planned to pay down remaining revolver borrowings over the next two years.
Changes, outlook, and risks
- Acquired Vionic in October 2018 for an estimated $360.7 million, funded with revolver borrowings; acquired a controlling interest in Blowfish Malibu in July for an estimated $28.0 million, including a future mandatory purchase obligation. Both acquisitions contributed to Brand Portfolio sales growth.
- Management’s 2019 outlook called for Brand Portfolio sales growth in the low-to-mid-teens percentage range and Famous Footwear same-store sales growth in the low-to-mid-single-digit range. Plans included digital investment, store and e-commerce alignment, and distribution-center automation. The filing provides no consolidated EPS guidance.
- Caleres decided to exit the Diane von Furstenberg and George Brown Bilt brands; in March 2019 it also decided to exit Carlos by Carlos Santana. Famous Footwear planned approximately 15 store openings and 45 closures in 2019.
- Key risks include intense price competition and promotional activity, changing shopping and fashion preferences, inventory forecasting, reliance on foreign sourcing (about 66% of sourced pairs came from China), potential tariffs and trade disruption, major suppliers and wholesale customers, cybersecurity and distribution operations, and acquisition integration.
- Environmental remediation continues at the Redfield site in Colorado. The recorded reserve was $9.7 million; management cautioned that ultimate costs could exceed the reserve. Ordinary-course litigation was not expected by management to materially affect results or financial position.
- Caleres expected to adopt lease accounting in Q1 2019, adding approximately $0.7 billion of right-of-use assets and $0.8 billion of operating lease liabilities to the balance sheet. Management did not expect a material cash-flow or debt-covenant effect, but anticipated potentially higher impairment charges for underperforming stores.
Investor facts to verify
- Assess recurring earnings and cash generation separately from the $98.0 million Allen Edmonds impairment and other acquisition, inventory, restructuring, and warehouse-transition costs.
- Track whether the acquired Vionic and Blowfish Malibu businesses deliver profitable growth, and review the final Vionic purchase-price allocation and Blowfish mandatory purchase obligation.
- Monitor revolver paydown, borrowing availability, interest expense, working capital, and the effect of the planned store and distribution investments.
- Compare 2019 segment performance with management’s stated sales and same-store-sales outlook, accounting for seasonality and the 53-week FY2017 comparator.
- Review the lease-standard adoption and subsequent store impairment disclosures, as well as changes in Redfield remediation estimates and other contingencies.