Caleres, Inc. — Form 10-Q summary
Reporting period: The filing covers the 13 and 26 weeks ended August 3, 2019, compared with periods ended August 4, 2018. Although the request metadata labels this “2018 Q2,” the filing is for fiscal 2019 second quarter. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio, which sells branded footwear through wholesale, retail, and e-commerce channels. Results are seasonal; management notes that the third fiscal quarter traditionally contributes a substantial portion of annual earnings. The 2019 comparisons include Vionic, acquired in October 2018, and Blowfish Malibu, acquired in July 2018.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $752.5 | $706.6 | $1,430.2 | $1,338.8 |
| Gross profit | $305.9 | $293.1 | $585.8 | $568.0 |
| Gross margin | 40.7% | 41.5% | 41.0% | 42.4% |
| Operating earnings | $37.8 | $32.1 | $54.7 | $55.1 |
| Operating margin | 5.0% | 4.5% | 3.8% | 4.1% |
| Net earnings attributable to Caleres | $25.3 | $23.6 | $34.4 | $40.9 |
| Diluted EPS | $0.61 | $0.55 | $0.82 | $0.94 |
| Net interest expense | $7.4 | $3.6 | $14.7 | $7.3 |
- Segments, Q2: Famous Footwear sales declined 2.2% to $419.8 million; same-store sales rose 1.5%. Brand Portfolio sales increased 17.9% to $359.6 million, while same-store sales fell 9.3%. Brand Portfolio operating earnings were $13.9 million versus $15.9 million; Famous Footwear operating earnings were $31.5 million versus $33.2 million.
- Cash flow, first half: Operating cash flow was $116.6 million, versus $91.0 million. Investing used $30.2 million, including $26.7 million of property and equipment purchases. Financing used $74.0 million, including $30.0 million for share repurchases and $5.8 million of dividends. Cash increased $12.4 million to $42.6 million.
- Liquidity and debt, August 3, 2019: Current assets were $1,053.8 million and current liabilities $1,082.1 million; reported working capital was a $28.3 million deficit and the current ratio was 0.97. Caleres had $300 million drawn on its revolving facility, $10.5 million of letters of credit, and $189.5 million of additional availability. Total debt was reported at $498.2 million, including $198.2 million of long-term debt; the $200 million senior notes bear 6.25% interest and mature in 2023. The company reported compliance with debt covenants.
- Lease obligations: Adoption of ASC 842 resulted in a $723.4 million right-of-use asset and $792.3 million of lease obligations at quarter-end, including $143.2 million current. The lease accounting change materially affects comparisons of working capital and current ratio with prior periods.
- Inventory: Net inventory was $792.1 million, up from $715.7 million a year earlier and $683.2 million at fiscal year-end.
Material changes versus comparable periods
- Q2 sales growth was primarily acquisition-driven: Vionic contributed $46.8 million of consolidated sales and Blowfish Malibu $14.2 million, net of eliminations. Famous Footwear’s sales decline reflected a smaller store base, partly offset by positive same-store sales. Brand Portfolio growth from acquisitions was offset in part by weak comparable-store sales and planned lower Allen Edmonds sales.
- Despite higher Q2 gross profit dollars, gross margin fell 0.8 percentage point, reflecting a difficult promotional environment, weaker sandal sales, greater e-commerce mix, and a higher wholesale share of sales. First-half gross margin fell 1.4 points; purchase-accounting inventory costs and Carlos-brand markdowns also weighed on first-half results.
- Q2 operating earnings and EPS improved year over year, helped by acquired brands, expense leverage, and lower restructuring charges. First-half operating earnings were slightly lower and attributable earnings and EPS declined, with higher interest expense and lower margins among the factors.
- Interest expense more than doubled in both Q2 and the first half, mainly due to revolving-credit borrowings used to fund Vionic. Debt was $300.5 million higher than a year earlier but down $34.7 million from February 2, 2019.
Outlook, commentary, risks, and unusual items
- Tariffs: The filing describes a 15% tariff on approximately $300 billion of China-origin imports, with most Brand Portfolio products sourced from China subject to the earlier effective date and some products delayed until December 15, 2019. About 60% of Brand Portfolio branded products were sourced from China; Caleres reported sourcing approximately 40% outside China and said it believed it had mitigated most of the fiscal 2019 impact. Further escalation or a prolonged trade conflict could pressure future gross margins and consumer demand.
- Management outlook: The filing provides no specific earnings or sales guidance. Management expects higher interest expense until borrowings used for the Vionic acquisition are repaid. It expects dividends to continue, subject to board discretion. The company also notes that higher e-commerce mix is expected to continue and can pressure margins through shipping and handling costs.
- Other business developments: Caleres announced new brand partnerships, a Zodiac relaunch, and a joint venture to distribute Naturalizer and Sam Edelman in greater China beginning in Q3 2019. It was investing in distribution-center automation.
- Unusual items: First-half results included $5.8 million of Vionic purchase-accounting inventory amortization and $1.3 million of Carlos-brand inventory markdowns; the Carlos license expired in December 2018. Vionic integration charges were $0.9 million for the first half. The company repurchased 1.53 million shares for approximately $30.0 million in the first half and, after quarter-end, authorized an additional 5 million-share repurchase program.
- Contingencies: Caleres recorded a $9.6 million environmental remediation reserve for the Redfield site, including $5.0 million for off-site and $4.6 million for on-site remediation. The filing cautions that ultimate costs could exceed reserves. Management did not expect pending ordinary-course litigation to have a material adverse effect.
- Other risk and control disclosures: Consumer demand, changing fashion, competition, inventory forecasting, sourcing and distribution disruptions, foreign exchange, acquisition integration, and tariffs are identified risks. Management concluded disclosure controls were effective at the reasonable assurance level; integration reviews for Vionic and Blowfish were ongoing.
Important facts for investors to verify
- How much of reported sales growth and future profitability is attributable to acquisitions versus organic demand, particularly given Brand Portfolio’s declining same-store sales.
- Whether margins stabilize amid promotional pressure, e-commerce shipping costs, the retail/wholesale mix shift, and China tariffs; monitor sourcing diversification and any pricing response.
- Inventory levels and sell-through, especially in light of the year-over-year inventory increase and seasonal third-quarter importance.
- Debt repayment progress, revolving-facility availability, interest costs, and covenant headroom; consider lease liabilities when assessing liquidity.
- Whether Vionic and Blowfish integration, acquired-brand performance, environmental remediation costs, and planned share repurchases develop as expected.