Caleres, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2016 Q1, but this filing reports the thirteen weeks ended April 29, 2017, with comparison to the thirteen weeks ended April 30, 2016. The quarter is referred to below as Q1 2017.
Business context and reporting period
Caleres operates Famous Footwear and Brand Portfolio. Results include Allen Edmonds, acquired on December 13, 2016; it contributed $42.5 million of Q1 2017 sales. The company notes that its business is seasonal, with a substantial share of annual earnings traditionally in the third fiscal quarter, so interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $631.5 million | $584.7 million | Up 8.0% |
| Gross profit | $270.9 million | $247.8 million | Up 9.3% |
| Gross margin | 42.9% | 42.4% | Up 0.5 percentage points |
| Operating earnings | $25.7 million | $28.7 million | Down 10.5% |
| Operating margin | 4.1% | 4.9% | Down 0.8 percentage points |
| Net earnings attributable to Caleres | $14.9 million | $17.8 million | Down 16.2% |
| Diluted EPS | $0.35 | $0.41 | Down $0.06 |
| Operating cash flow | $65.4 million | $65.2 million | Up $0.2 million |
Selling and administrative expenses rose 11.4% to $244.1 million, faster than sales. Interest expense increased 39.7% to $5.0 million, primarily reflecting borrowing used to fund the Allen Edmonds acquisition. The effective tax rate was 28.8%, including a $1.1 million discrete tax benefit from share-based compensation accounting changes; absent discrete benefits, management reported rates of 34.0% for 2017 and 32.3% for 2016.
Segments and material changes
- Famous Footwear: Sales increased 0.5% to $366.5 million, while same-store sales declined 0.6%. E-commerce sales rose 25.7%, but lower product margins and higher shipping, rent, facilities, distribution-center depreciation and marketing costs contributed to operating earnings falling 21.3% to $20.3 million. Operating margin declined to 5.5% from 7.1%.
- Brand Portfolio: Sales increased 20.4% to $265.0 million, including Allen Edmonds sales, and operating earnings rose 38.4% to $13.3 million. The segment benefited from improved gross margin and sales mix, partly offset by higher operating expenses and special charges.
- Consolidated mix and costs: Retail represented 69% of sales versus 67% a year earlier. Q1 included $3.0 million of acquisition-related inventory fair-value amortization ($0.04 per diluted share after tax) and $1.1 million of men’s business integration and reorganization costs ($0.01 per diluted share after tax).
Cash, debt and liquidity
Cash was $71.8 million at April 29, 2017, compared with $149.5 million a year earlier and $55.3 million at January 28, 2017. Operating activities provided $65.4 million; investing activities used $12.4 million, including $11.0 million of property and equipment purchases and $1.4 million of capitalized software; financing activities used $36.4 million. Cash increased $16.5 million during the quarter.
Total debt was $282.1 million: $85.0 million drawn on the revolving credit facility and $197.1 million of long-term debt. The company repaid $25.0 million of revolver borrowings during the quarter. Revolver availability was $409.1 million, with $7.3 million of letters of credit outstanding; the company reported compliance with credit-facility and senior-note covenants. The debt-to-capital ratio was 31.2%, versus 24.4% a year earlier and 33.3% at fiscal year-end. Working capital was $325.9 million and the current ratio was 1.71:1.
Outlook, risks and contingencies
Management characterized the quarter as a solid start despite retail-sector challenges. For the rest of 2017, it plans to focus on integrating Allen Edmonds and its speed initiatives, and anticipates balanced earnings contributions from Famous Footwear and Brand Portfolio. It expects approximately $55 million of fiscal 2017 spending on property and equipment and capitalized software. No specific earnings or sales guidance was provided in the supplied filing text.
Risks cited include shifts in consumer demand and fashion, intense competition, reliance on overseas manufacturing and inventory flows, forecasting and inventory management, cybersecurity or distribution disruptions, acquisition integration, customer concentration, foreign exchange, labor and product-safety compliance, leases, suppliers, licensors and tax-law changes.
Environmental remediation is a notable contingency: the recorded reserve was $9.5 million at April 29, 2017, including $4.5 million for on-site and $5.0 million for off-site remediation. The company cautions that ultimate costs could exceed recorded amounts. Management did not expect ordinary-course litigation or other identified remediation sites to have a material adverse effect.
Accounting matters include adoption of the inventory measurement standard with no material impact and adoption of share-based payment guidance, which produced the $1.1 million tax benefit. The company expects revenue-recognition guidance to affect both segments, particularly Famous Footwear loyalty-program accounting; it anticipates a potentially significant initial adjustment to certain liabilities but no significant ongoing earnings impact. Lease accounting adoption is expected to have a material balance-sheet impact because of the company’s retail leases; management did not expect it to cause debt-covenant noncompliance.
Important facts for investors to verify
- Confirm the period: the filing is for Q1 2017, not Q1 2016 as stated in the request metadata.
- Assess how much of sales growth and Brand Portfolio improvement reflects Allen Edmonds acquisition contribution versus underlying performance, and monitor integration costs and results.
- Track Famous Footwear same-store sales, e-commerce profitability, shipping costs and operating margin after its decline.
- Evaluate debt repayment, interest expense, revolver availability and covenant headroom following acquisition financing.
- Monitor inventory levels, cash conversion and the $9.5 million environmental reserve against future remediation developments.
- Review the implementation effects of revenue-recognition and lease-accounting standards, including loyalty-program liabilities and lease-related balance-sheet changes.