Caleres, Inc. — Form 10-Q Summary
Business context and reporting period
The filing reports the 13 and 26 weeks ended July 30, 2016, comparing results with periods ended August 1, 2015. Caleres operates Famous Footwear and Brand Portfolio. Note: the request metadata says “2015 Q2,” but the filing itself is for 2016 Q2.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $622.9m | $637.8m | $1,207.7m | $1,240.1m |
| Gross profit / margin | $259.6m / 41.7% | $262.8m / 41.2% | $507.3m / 42.0% | $511.3m / 41.2% |
| Operating earnings / margin | $32.3m / 5.2% | $35.7m / 5.6% | $61.0m / 5.1% | $66.1m / 5.3% |
| Net earnings attributable to Caleres | $19.8m | $16.8m | $37.6m | $36.1m |
| Diluted EPS | $0.46 | $0.38 | $0.86 | $0.82 |
For the first half, operating cash flow was $108.6m, investing cash outflow $31.2m, and financing cash outflow $30.1m. Cash increased $47.6m to $165.7m. Capital expenditures and capitalized software totaled $31.2m. Inventories were $648.9m at July 30, up from $546.7m at January 30, 2016, consistent with seasonal build.
Total debt was $196.8m, with no revolver borrowings and $593.5m of availability; $6.5m of letters of credit were outstanding. The company reported covenant compliance. Working capital was $488.3m, current ratio 1.97:1, and debt-to-capital 24.2%. Management noted most cash represented foreign-subsidiary earnings considered indefinitely reinvested.
Material changes versus comparable periods
- Q2 sales fell 2.3%; first-half sales fell 2.6%. Management cited a challenging retail environment, lower store traffic and planned exits from certain lower-margin categories.
- Gross margin improved, helped by brand mix, category exits and a higher retail-sales mix; higher freight costs associated with e-commerce partially offset gains.
- Q2 operating earnings declined 9.7%, while net earnings rose 16.7%, chiefly because the prior-year quarter included an $8.7m pretax debt-extinguishment loss. First-half operating earnings declined 7.7%; net earnings rose 3.6%.
- Famous Footwear Q2 sales decreased 1.5%, same-store sales decreased 1.1%, and operating earnings fell to $22.6m from $27.7m. Brand Portfolio sales declined 3.8%, but operating earnings increased 9.1% to $17.5m on improved margin and lower expenses.
- Debt fell from $235.1m a year earlier, mainly because the remaining 2019 notes were redeemed in August 2015. The replacement 2023 notes bear 6.25%, versus 7.125% on the former notes.
Outlook, risks and unusual items
No full-year earnings or sales guidance is provided. Management said it would continue inventory and expense management while investing in omnichannel capabilities, speed to market, and distribution and fulfillment initiatives. Fiscal 2016 capital spending and capitalized software were expected to total approximately $70m. Management said it presently expected dividends to continue, subject to Board discretion.
Risks include weak or shifting consumer demand, fashion and competition, inventory forecasting, reliance on overseas manufacturing and supply flows, foreign exchange, cybersecurity and distribution-center disruption, retailer consolidation, and lease and licensing matters. The company expects additional payroll costs from revised federal overtime rules, but does not currently expect a material operating impact.
Environmental remediation reserves totaled $9.8m for the Redfield site and $1.2m for former New York sites; ultimate costs may exceed recorded amounts. Ordinary-course litigation was not expected by management to have a material adverse effect. Management noted the adoption of the new revenue standard may materially affect financial statements, particularly loyalty-program accounting; lease-standard adoption is also expected to have a significant balance-sheet impact.
Important facts for investors to verify
- Confirm the intended period: the filing covers Q2 2016, despite the request metadata identifying Q2 2015.
- Track sales trends, same-store sales and the timing of Famous Footwear back-to-school demand, as well as Brand Portfolio order position, which declined 15.3% year over year to $260.2m.
- Assess whether higher gross margins can be sustained while sales decline and selling and administrative expense rates rise.
- Review inventory growth, seasonal working-capital needs, foreign cash availability, capital spending and share repurchases.
- Monitor remediation estimates, overtime-rule costs, and implementation impacts of revenue and lease accounting standards.