Caleres, Inc. — Form 10-Q Summary
Period: Thirteen weeks ended April 30, 2016. The request metadata labels this “2015 Q1,” but the filing is for the first quarter of 2016 and compares results with the thirteen weeks ended May 2, 2015. Financial statements are unaudited.
Business context and performance
Caleres operates Famous Footwear and Brand Portfolio. Management described a difficult retail environment and said cooler weather hurt sales. The business is seasonal, with a substantial portion of annual earnings traditionally occurring in the third fiscal quarter; interim results may not indicate full-year performance.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $584.7 million | $602.3 million | Down 2.9% |
| Gross profit | $247.8 million; 42.4% margin | $248.5 million; 41.3% margin | Profit down 0.3%; margin up 1.1 points |
| Operating earnings | $28.7 million; 4.9% margin | $30.3 million; 5.0% margin | Down 5.3% |
| Net earnings attributable to Caleres | $17.8 million | $19.3 million | Down 7.8% |
| Diluted EPS | $0.41 | $0.44 | Down $0.03 |
| Operating cash flow | $65.2 million | $21.9 million | Up $43.3 million |
Drivers and segment results
- Famous Footwear: Sales rose 1.3% to $364.6 million, with same-store sales up 1.0%. Operating earnings fell 7.9% to $25.8 million, and operating margin declined to 7.1% from 7.8%, mainly as selling and administrative costs rose and gross margin eased.
- Brand Portfolio: Sales fell 9.1% to $220.1 million, reflecting planned exits from lower-margin categories, weaker sales in several brands and cautious wholesale customers. Gross margin improved to 35.9% from 33.2%, but operating earnings declined 13.0% to $9.6 million. The unfilled order position fell 8.5% to $339.7 million.
- Consolidated gross margin benefited from improved Brand Portfolio mix and a higher retail share of sales, partly offset by freight expense, including higher e-commerce-related costs. Selling and administrative expenses increased 0.4% to $219.1 million; as a share of sales, they rose to 37.5% from 36.3%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $149.5 million at April 30, 2016, up from $118.2 million at January 30, 2016. Operating cash flow was supported by decreases in receivables, inventory and certain prepaid assets; lower accrued liabilities partly offset these sources.
- Investing cash outflow was $18.2 million, including $16.4 million of property and equipment purchases. Financing cash outflow was $16.2 million, including $12.1 million for treasury stock and $3.1 million of dividends. Capital expenditure and capitalized software spending is expected to total approximately $70 million in fiscal 2016.
- Long-term debt was $196.7 million, consisting of the 6.25% senior notes due 2023. There were no revolver borrowings, $6.5 million of letters of credit and $485.5 million of borrowing availability. The company reported compliance with debt covenants.
- Working capital was $479.6 million; the current ratio was 2.52:1 and debt-to-capital was 24.4%. Management said most cash represented accumulated earnings of foreign subsidiaries considered indefinitely reinvested.
Outlook, risks and unusual items
- Management’s stated priorities for 2016 were omni-channel investment, distribution-center and fulfillment initiatives, and additional Famous Footwear and Sam Edelman stores. No full-year sales or earnings guidance is provided in the supplied filing text.
- Interest expense declined 19.1% to $3.6 million, primarily following the refinancing of 7.125% notes with 6.25% notes due 2023. The 2016 quarter included a $0.7 million discrete tax benefit from settling a federal tax audit; the prior-year quarter included $1.6 million of discrete tax benefits. Excluding these benefits, the company reported effective tax rates of 32.3% and 32.1%, respectively.
- Environmental remediation reserves totaled $9.9 million for the Redfield site and $1.2 million for closed New York sites. The company cautioned that ultimate remediation costs could exceed recorded amounts. Management did not expect ordinary-course litigation to materially affect results or financial position.
- Disclosed risks include consumer demand and fashion changes, competition, sourcing and inventory risks, cybersecurity or distribution disruptions, foreign exchange, customer concentration, leases, and supplier and licensing relationships. Management reported disclosure controls effective at the reasonable-assurance level and no material quarterly change in internal control over financial reporting.
- The company said the future lease accounting standard is expected to have a significant balance-sheet impact because of its retail operating leases, but is not expected to cause debt-covenant noncompliance.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers Q1 2016, notwithstanding the “2015 Q1” request metadata.
- Assess whether Brand Portfolio sales and order-position declines persist, and whether improved gross margin can translate into operating earnings.
- Review the quality and repeatability of operating cash flow, including the contribution from working-capital changes.
- Monitor store, distribution-center and omni-channel investments against the approximately $70 million fiscal 2016 spending expectation.
- Track cash availability, foreign-subsidiary cash treatment, debt covenants and the progress and ultimate cost of environmental remediation.