Caleres, Inc. — Form 10-Q Summary
Period discrepancy: The supplied filing is for the 13 and 39 weeks ended October 29, 2016 (third quarter of fiscal 2016), not 2015 Q3 as stated in the request metadata. The statements are unaudited. Caleres notes that results are seasonal and the third quarter traditionally contributes substantially to annual earnings.
Financial results
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $732.2M | $728.6M | $1,939.9M | $1,968.8M |
| Gross profit / margin | $293.8M / 40.1% | $288.4M / 39.6% | $801.1M / 41.3% | $799.8M / 40.6% |
| Operating earnings / margin | $55.5M / 7.6% | $52.2M / 7.2% | $116.5M / 6.0% | $118.3M / 6.0% |
| Net earnings attributable to Caleres | $34.7M | $34.0M | $72.3M | $70.1M |
| Diluted EPS | $0.81 | $0.78 | $1.67 | $1.59 |
| Net cash from operating activities | — | $137.0M | $84.1M |
Q3 sales rose 0.5%, operating earnings 6.2%, and attributable net earnings 2.2%. For the first 39 weeks, sales declined 1.5% and operating earnings declined 1.6%, while attributable net earnings increased approximately 3.2%. The 2015 comparison included early-debt-extinguishment losses of $2.0M for Q3 and $10.7M year to date; none were recorded in 2016. Interest expense also fell, partly reflecting the refinancing of 7.125% notes with 6.25% notes and capitalized distribution-center interest.
Segments and material changes
- Famous Footwear: Q3 sales increased 2.6% to $467.8M, with same-store sales up 2.1%; operating earnings fell 17.5% to $32.7M and margin declined to 7.0% from 8.7%. Lower gross margin, higher freight and distribution costs, and store rent weighed on results. E-commerce grew, but store traffic declined; warm fall weather pressured boot sales.
- Brand Portfolio: Q3 sales declined 3.0% to $264.4M, while operating earnings rose 44.7% to $30.5M and margin improved to 11.5% from 7.7%. Gross margin rose to 37.5% from 34.3%, helped by brand mix and lower wholesale allowances. Naturalizer and Dr. Scholl’s sales weakened; Sam Edelman, Vince, and Ryka contributed growth.
- Consolidated Q3 gross margin improved with higher-margin brand mix and a greater retail share of sales, partly offset by freight costs associated with e-commerce. Retail represented 69% of Q3 sales versus 67% a year earlier.
Liquidity, debt, and capital allocation
- At October 29, 2016, cash and cash equivalents were $173.4M; long-term debt was $196.9M, or approximately $23.5M more than cash. The company had no revolver borrowings, $6.5M of letters of credit outstanding, and $531.3M of available borrowing capacity under its $600M facility.
- Working capital was $515.5M; current ratio was 2.46:1, up from 2.31:1 a year earlier. Debt-to-capital was 23.3%, versus 24.6% a year earlier. Caleres reported compliance with debt covenants.
- Year-to-date operating cash flow was $137.0M, investing cash outflow $48.7M, and financing cash outflow $33.2M; cash increased $55.3M. Operating cash flow benefited from working-capital movements, including lower inventory and receivables. Capital expenditures and capitalized software totaled $48.7M; fiscal 2016 spending was expected to be approximately $70M.
- Caleres repurchased 900,000 shares during the first 39 weeks for $23.1M and paid $9.1M in dividends. The quarterly dividend was $0.07 per share; management said it presently expected dividends to continue, subject to Board discretion.
Outlook, risks, and unusual items
- Management cited a solid back-to-school season and said it would continue executing its strategy for consistent, profitable, sustainable growth. The filing gives no specific quantified earnings or sales guidance for the remainder of fiscal 2016.
- Management expected modernization and expansion of its Lebanon, Tennessee distribution center to be completed in Q4 2016. Associated costs and higher retail rent and brand investment affected expenses.
- The effective tax rate increased to 33.6% in Q3 and 32.3% year to date, versus 26.7% and 26.4%, respectively. Management attributed the year-to-date increase, excluding discrete tax benefits, partly to a greater expected share of domestic earnings; it cautioned that tax rates can vary considerably.
- Environmental remediation reserves totaled $9.7M for the Redfield site and $1.2M for closed New York sites. The company said ultimate remediation costs could exceed recorded amounts. Management did not expect pending ordinary-course litigation to materially adversely affect results or financial position.
- Risks identified include changing consumer demand and fashion trends, competition, inventory forecasting, reliance on overseas manufacturing and suppliers, distribution or IT disruption and cybersecurity, foreign exchange, retail customer concentration, leases, and labor, trade, and product-safety compliance. A federal court temporarily enjoined new federal overtime rules in November 2016; their final outcome and company impact were uncertain.
- Caleres anticipated a potentially material impact from adopting the new customer-revenue standard, particularly due to loyalty-program accounting. It also expected lease-accounting adoption to have a significant balance-sheet impact given its retail leases. The filing identifies no material changes to market-risk disclosures or critical accounting estimates.
Investor verification priorities
- Confirm the intended reporting year: this filing covers fiscal 2016 Q3, despite the request’s 2015 Q3 label.
- Track whether Famous Footwear’s margin and operating-earnings declines persist, and whether Brand Portfolio’s improved margin offsets declining sales.
- Assess the sustainability of the cash-flow improvement, including the effect of timing-related working-capital changes, and monitor planned distribution-center spending.
- Review progress and cost estimates for environmental remediation, the outcome of the overtime-rule proceedings, and the eventual effects of revenue- and lease-accounting changes.