Caleres, Inc. — Form 10-Q summary
Reporting-period note: The supplied filing is for the 13 and 26 weeks ended August 1, 2020, not 2019 Q2 as stated in the request metadata. Comparatives are the periods ended August 3, 2019. Dollar figures below are in millions unless noted.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio. COVID-19 store closures and wholesale customer disruptions sharply reduced sales. Stores began reopening in mid-May; substantially all were open in some capacity by the end of June. E-commerce remained active and grew, while management reported strong demand for sport and casual footwear.
Financial performance
| Metric | 13 weeks ended Aug. 1, 2020 | 13 weeks ended Aug. 3, 2019 | 26 weeks ended Aug. 1, 2020 | 26 weeks ended Aug. 3, 2019 |
|---|---|---|---|---|
| Net sales | $501.4 | $752.5 | $898.6 | $1,430.2 |
| Gross profit / margin | $182.6 / 36.4% | $305.9 / 40.7% | $304.5 / 33.9% | $585.8 / 41.0% |
| Operating income (loss) | $(24.1) | $37.8 | $(450.4) | $54.7 |
| Net income (loss) attributable to Caleres | $(30.7) | $25.3 | $(376.6) | $34.4 |
| Diluted EPS | $(0.83) | $0.61 | $(9.94) | $0.82 |
| Operating cash flow | Not separately stated | Not separately stated | $67.5 | $116.6 |
- Second-quarter sales fell 33.4%; gross margin declined 4.3 percentage points. Lower sales and higher e-commerce mix, promotions, and freight pressure weighed on profitability.
- Six-month results included $262.7 million of non-cash goodwill and intangible-asset impairment, plus COVID-related charges of $99.0 million, including inventory markdowns and restructuring/impairment costs. The impairment was recorded in the first quarter.
- Second-quarter segment sales and operating results: Famous Footwear sales were $333.9 million, down 20.5%, with $1.0 million operating earnings; Brand Portfolio sales were $183.6 million, down 48.9%, with a $14.1 million operating loss.
- Consolidated e-commerce-related sales grew more than 30% in the second quarter and represented approximately 34% of sales. Famous Footwear e-commerce sales increased 148% in the quarter and 111% in the first half.
Liquidity, debt, and cash flow
- At August 1, 2020, cash and cash equivalents were $148.5 million; total debt was $548.6 million, comprising $350.0 million drawn on the revolving facility and $198.6 million of long-term debt.
- Revolver availability was $166.6 million, with $11.1 million of letters of credit outstanding. The facility’s stated commitment is up to $600 million, subject to borrowing-base limits, with potential further increases. The company reported compliance with debt covenants.
- Working capital was negative $87.9 million; the current ratio was 0.91:1 and debt-to-capital was 69.1%. Management attributed weaker liquidity ratios primarily to lower inventories and higher current lease obligations, and said cash flows and available borrowing capacity were sufficient for foreseeable needs.
- First-half operating cash flow was $67.5 million, investing cash outflow was $8.6 million, and financing cash inflow was $44.5 million. Cash increased $103.3 million from fiscal year-end. Capital spending was reduced; management expected 2020 purchases of property, equipment, and capitalized software of $15–$25 million, subject to possible further cuts.
Outlook, risks, and unusual items
- Management provided no specific full-year earnings or sales guidance in the supplied filing. It said the second half remained unpredictable and the impact of COVID-19 could not be reasonably estimated. Back-to-school sales started more slowly amid virtual learning, with demand expected to extend further into the fall.
- Management cited cost reductions, inventory discipline, e-commerce capabilities, and flexibility as priorities. It expected to continue repaying revolver borrowings in the second half and presently expected dividends to continue, subject to Board discretion and conditions.
- The company recorded a $6.6 million second-quarter fair-value adjustment to the Blowfish Malibu mandatory purchase obligation as interest expense; the obligation had a reported fair value of $25.0 million and is expected to be settled in the third quarter of 2021.
- Other notable items: $2.0 million of lease concessions reduced second-quarter rent expense; the CARES Act loss-carryback provision contributed approximately $5.2 million of tax benefit; and $8.5 million of expected-credit-loss provision was recorded, primarily reflecting pandemic-related deterioration among wholesale customers.
- Key risks include continuing pandemic disruption, consumer demand and store traffic, wholesale order cancellations, inventory and supply-chain management, fashion trends, competition, tariffs, customer concentration, leases, and potential further asset impairment. Environmental remediation reserves were $9.5 million; management noted ultimate costs could exceed recorded amounts. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the correct requested period: the filing is 2020 Q2, not 2019 Q2.
- Track store traffic, reopening conditions, e-commerce growth and profitability, and the duration and pattern of back-to-school demand.
- Monitor liquidity and borrowing-base availability, covenant headroom, debt repayment, and working-capital trends.
- Assess whether inventory markdowns, impairment charges, and wholesale customer credit losses continue or require further reserves.
- Review the assumptions underlying the Blowfish purchase obligation and the timing and amount of future lease and environmental obligations.