Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 29, 2022
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number: 1-2191
CALERES, INC.
(Exact name of registrant as specified in its charter)
New York
43-0197190
(State or other jurisdiction
(IRS Employer Identification Number)
of incorporation or organization)
8300 Maryland Avenue
63105
St. Louis, Missouri
(Zip Code)
(Address of principal executive offices)
(314) 854-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value of $0.01 per share
CAL
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
As of November 25, 2022, 35,616,045 common shares were outstanding.
INDEX
PART I
Page
Item 1
Financial Statements
3
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4
Controls and Procedures
PART II
Legal Proceedings
Item 1A
Risk Factors
39
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
40
Signature
41
2
PART IFINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ thousands)
October 29, 2022
October 30, 2021
January 29, 2022
Assets
Current assets:
Cash and cash equivalents
$
32,773
74,772
30,115
Receivables, net
161,367
161,892
122,236
Inventories, net
649,257
543,218
596,807
Income taxes
12,046
35,026
33,073
Property and equipment, held for sale
16,777
—
5,455
Prepaid expenses and other current assets
48,864
47,790
48,790
Total current assets
921,084
862,698
836,476
Prepaid pension costs
106,781
96,705
99,139
Lease right-of-use assets
523,011
500,308
503,430
Property and equipment, net
151,798
155,516
150,238
Goodwill and intangible assets, net
218,420
230,625
227,503
Other assets
27,219
28,706
27,140
Total assets
1,948,313
1,874,558
1,843,926
Liabilities and Equity
Current liabilities:
Borrowings under revolving credit agreement
364,500
175,000
290,000
Current portion of long-term debt
99,598
Mandatory purchase obligation - Blowfish Malibu
54,558
Trade accounts payable
279,704
352,084
331,470
31,106
22,371
22,622
Lease obligations
133,227
128,151
128,495
Other accrued expenses
230,377
238,298
253,026
Total current liabilities
1,038,914
1,070,060
1,025,613
Other liabilities:
Noncurrent lease obligations
453,718
452,786
452,909
7,786
2,464
Deferred income taxes
15,044
13,603
14,731
Other liabilities
27,440
29,900
24,822
Total other liabilities
503,988
498,753
494,926
Equity:
Common stock
356
383
376
Additional paid-in capital
177,269
165,475
168,830
Accumulated other comprehensive loss
(7,187)
(8,471)
(8,606)
Retained earnings
228,006
143,711
157,970
Total Caleres, Inc. shareholders’ equity
398,444
301,098
318,570
Noncontrolling interests
6,967
4,647
4,817
Total equity
405,411
305,745
323,387
Total liabilities and equity
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
Net sales
798,258
784,156
2,271,704
2,098,323
Cost of goods sold
458,382
448,805
1,268,019
1,165,792
Gross profit
339,876
335,351
1,003,685
932,531
Selling and administrative expenses
283,119
254,033
812,313
757,070
Restructuring and other special charges, net
2,910
13,482
Operating earnings
53,847
81,318
188,462
161,979
Interest expense, net
(4,003)
(5,069)
(8,886)
(28,803)
Loss on early extinguishment of debt
(649)
Other income, net
2,997
3,844
9,636
11,533
Earnings before income taxes
52,841
79,444
189,212
144,060
Income tax provision
(13,849)
(19,759)
(48,683)
(39,838)
Net earnings
38,992
59,685
140,529
104,222
Net (loss) earnings attributable to noncontrolling interests
(254)
63
(404)
1,057
Net earnings attributable to Caleres, Inc.
39,246
59,622
140,933
103,165
Basic earnings per common share attributable to Caleres, Inc. shareholders
1.09
1.56
3.83
2.70
Diluted earnings per common share attributable to Caleres, Inc. shareholders
1.08
1.54
3.79
2.68
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss) ("OCI"), net of tax:
Foreign currency translation adjustment
(980)
(267)
(1,100)
(423)
Pension and other postretirement benefits adjustments
908
358
1,931
1,071
Other comprehensive (loss) income, net of tax
(72)
91
831
648
Comprehensive income
38,920
59,776
141,360
104,870
Comprehensive (loss) income attributable to noncontrolling interests
(419)
53
(992)
1,040
Comprehensive income attributable to Caleres, Inc.
39,339
59,723
142,352
103,830
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation
23,945
25,617
Amortization of capitalized software
3,669
4,417
Amortization of intangible assets
9,080
9,446
Amortization of debt issuance costs and debt discount
305
732
Fair value adjustments to Blowfish mandatory purchase obligation
15,424
649
Share-based compensation expense
13,249
8,811
Loss on disposal of property and equipment
1,167
640
Impairment charges for property, equipment, and lease right-of-use assets
1,979
3,399
Adjustment to expected credit losses
(303)
(2,711)
313
5,359
Changes in operating assets and liabilities:
Receivables
(38,826)
(32,188)
Inventories
(53,025)
(54,917)
Prepaid expenses and other current and noncurrent assets
(4,496)
(9,056)
(51,547)
71,468
Accrued expenses and other liabilities
(33,667)
25,972
Income taxes, net
34,833
13,627
Other, net
(939)
(1,183)
Net cash provided by operating activities
46,266
189,728
Investing Activities
Purchases of property and equipment
(40,056)
(10,437)
Capitalized software
(5,350)
(4,122)
Net cash used for investing activities
(45,406)
(14,559)
Financing Activities
708,500
363,000
Repayments under revolving credit agreement
(634,000)
(438,000)
Redemption of senior notes
(100,000)
Dividends paid
(7,698)
(8,011)
Debt issuance costs
(1,190)
Acquisition of treasury stock
(63,225)
Issuance of common stock under share-based plans, net
(4,804)
(3,779)
Contributions by noncontrolling interests
3,142
Other
(676)
Net cash provided by (used for) financing activities
1,915
(188,656)
Effect of exchange rate changes on cash and cash equivalents
(117)
(36)
Increase (decrease) in cash and cash equivalents
2,658
(13,523)
Cash and cash equivalents at beginning of period
88,295
Cash and cash equivalents at end of period
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
Total
Caleres, Inc.
Non-
Common Stock
Additional
Comprehensive
Retained
Shareholders’
controlling
($ thousands, except number of shares and per share amounts)
Shares
Dollars
Paid-In Capital
Loss
Earnings
Equity
Interests
Total Equity
BALANCE JULY 30, 2022
36,450,780
364
173,246
(7,280)
212,803
379,133
5,744
384,877
(815)
(165)
Pension and other postretirement benefits adjustments, net of tax of $86
Comprehensive income (loss)
93
1,642
Dividends ($0.07 per share)
(2,498)
(838,025)
(8)
(21,545)
(21,553)
20,699
0
(990)
5,013
BALANCE OCTOBER 29, 2022
35,633,454
BALANCE JULY 31, 2021
38,268,064
162,122
(8,572)
86,764
240,697
4,594
245,291
(257)
(10)
Pension and other postretirement benefits adjustments, net of tax of $87
101
(2,675)
(10,554)
(0)
(27)
3,380
BALANCE OCTOBER 30, 2021
38,257,510
Total Caleres, Inc.
BALANCE JANUARY 29, 2022
37,635,145
Net earnings (loss)
(512)
(588)
Pension and other postretirement benefits adjustments, net of tax of $417
1,419
Dividends ($0.21 per share)
(2,622,845)
(26)
(63,199)
621,154
(4,810)
BALANCE JANUARY 30, 2021
37,966,204
380
160,446
(9,136)
48,557
200,247
3,607
203,854
(406)
(17)
Pension and other postretirement benefits adjustments, net of tax of $269
665
291,306
(3,782)
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation and General
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Caleres, Inc. ("the Company"). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company’s consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.
The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and holiday season sales. Although the third fiscal quarter has historically accounted for a substantial portion of the Company’s earnings for the year, the Company is beginning to experience more equal distribution among the quarters. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.
Certain prior period amounts in the notes to the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Caleres, Inc.
The accompanying condensed consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2022.
Noncontrolling Interests
During 2019, the Company entered into a joint venture with Brand Investment Holding Limited (“Brand Investment Holding”), a member of the Gemkell Group, to sell Sam Edelman, Naturalizer and other branded footwear in China. The Company and Brand Investment Holding are each 50% owners of the joint venture, which is named CLT Brand Solutions (“CLT”). During the thirty-nine weeks ended October 29, 2022, capital contributions of $6.3 million were made to CLT, including $3.1 million received from Brand Investment Holding. Net sales were $5.4 million and $13.2 million for the thirteen and thirty-nine weeks ended October 29, 2022, respectively. Operating losses were $0.3 million and $0.6 million for the thirteen and thirty-nine weeks ended October 29, 2022, respectively. Net sales and operating earnings were $4.7 million and $0.2 million, respectively, for the thirteen weeks and $14.5 million and $2.4 million, respectively, for the thirty-nine weeks ended October 30, 2021.
The Company had a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company was a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture agreements.
The Company consolidates CLT and B&H Footwear into its condensed consolidated financial statements. Net earnings (loss) attributable to noncontrolling interests represents the share of net earnings or losses that is attributable to Brand Investment Holding and CBI. Transactions between the Company and the joint ventures have been eliminated in the condensed consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted. The CARES Act includes a provision that allowed the Company to defer the employer portion of social security payroll tax payments that would have been paid between the enactment date and December 31, 2020, with 50% payable by December 31, 2021 and 50% payable by December 31, 2022. During 2020, the Company deferred approximately $9.4 million of employer social security payroll taxes. As of October 29, 2022, employer social security payroll taxes totaling $5.0 million, which are payable by December 31, 2022, are presented in other accrued expenses on the
8
condensed consolidated balance sheet. As of October 30, 2021, approximately $4.7 million of deferred employer social security payroll taxes are recorded in other accrued expenses and $4.7 million was recorded in other liabilities on the condensed consolidated balance sheet.
Property and Equipment, Held for Sale
The Company is actively marketing to sell its nine-acre corporate headquarters campus (the “Campus”) located in Clayton, Missouri. The Company expects the Campus to qualify as a completed sale within the next year. Accordingly, the Campus has been classified as property and equipment, held for sale on the condensed consolidated balance sheet as of October 29, 2022 and is reflected within the Eliminations and Other category. The Company evaluated the Campus asset group for impairment indicators and determined that no indicators were present as of October 29, 2022.
Note 2 Impact of New Accounting Pronouncements
Impact of Prospective Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities – Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. The guidance requires qualitative and quantitative disclosures about supplier finance programs in annual financial statements, including key terms of the programs, amounts outstanding, balance sheet presentation and a rollforward of amounts outstanding during the year. For interim periods, the ASU requires disclosure of total obligations outstanding that have been confirmed as valid. The ASU is effective for years beginning after December 15, 2022, except for the rollforward requirement, which is effective in fiscal year 2024. Early adoption is permitted. The amendments in the ASU will be applied retrospectively, except for the annual rollforward requirement, which will be applied prospectively. The adoption of the ASU is not expected to have a material impact on the Company’s financial statement disclosures.
9
Note 3 Revenues
Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the periods ended October 29, 2022 and October 30, 2021:
Thirteen Weeks Ended October 29, 2022
Eliminations and
Famous Footwear
Brand Portfolio
Retail stores
415,678
14,810
430,488
E-commerce - Company websites (1)
65,549
53,673
119,222
E-commerce - wholesale drop-ship (1)
40,672
(1,854)
38,818
Total direct-to-consumer sales
481,227
109,155
588,528
Wholesale - e-commerce (1)
59,035
Wholesale - landed
135,161
(5,081)
130,080
Wholesale - first cost
16,424
Licensing and royalty
601
3,454
4,055
Other (2)
123
13
136
481,951
323,242
(6,935)
Thirteen Weeks Ended October 30, 2021
429,914
17,230
447,144
E-commerce -Company websites (1)
63,964
44,101
108,065
22,054
(644)
21,410
493,878
83,385
576,619
47,409
138,813
(10,373)
128,440
27,315
602
3,536
4,138
180
55
235
494,660
300,513
(11,017)
Thirty-Nine Weeks Ended October 29, 2022
1,133,276
43,371
1,176,647
167,604
155,698
323,302
106,348
(3,759)
102,589
1,300,880
305,417
1,602,538
167,494
441,544
(40,408)
401,136
88,205
1,538
10,329
11,867
410
54
464
1,302,828
1,013,043
(44,167)
10
Thirty-Nine Weeks Ended October 30, 2021
1,166,837
44,241
1,211,078
178,367
136,458
314,825
62,529
(1,477)
61,052
1,345,204
243,228
1,586,955
116,948
353,597
(36,445)
317,152
67,651
8,302
8,904
607
106
713
1,346,413
789,832
(37,922)
Traditionally, the majority of the Company’s revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company records a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Company’s loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired.
E-commerce
The Company generates revenue from sales on websites maintained by the Company that are shipped from the Company’s distribution centers or retail stores directly to the consumer, or picked up directly by the consumer from the Company’s stores (“e-commerce – Company websites”); sales from the Company’s wholesale customers’ websites that are fulfilled on a drop-ship basis (“e-commerce – wholesale drop ship”); and other e-commerce sales (“wholesale – e-commerce”), collectively referred to as "e-commerce". The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.
Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many customers purchasing footwear on a landed basis arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.
First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product and subsequently sells to a customer at an overseas port. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company’s symbolic intellectual property, and revenue is therefore recognized over the license term. For royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee’s sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.
11
The Company also licenses its Famous Footwear trade name and logo to a third-party financial institution to offer Famous Footwear-branded credit cards to its consumers. The Company receives royalties based upon cardholder spending, which is recognized as licensing revenue at the time when the credit card is used.
Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.
Information about significant contract balances from contracts with customers is as follows:
Customer allowances and discounts
23,164
20,277
20,328
Loyalty programs liability
17,690
18,354
18,814
Returns reserve
16,619
15,704
12,468
Gift card liability
5,718
5,034
6,804
Changes in contract balances with customers generally reflect differences in relative sales volume for the periods presented. In addition, during the thirty-nine weeks ended October 29, 2022, the loyalty programs liability increased $32.5 million due to points and material rights earned on purchases and decreased $33.6 million due to expirations and redemptions. During the thirty-nine weeks ended October 30, 2021, the loyalty programs liability increased $27.4 million due to points and material rights earned on purchases and decreased $23.0 million due to expirations and redemptions. The liability for loyalty programs is presented within other accrued expenses when earned and is generally expected to be recognized as revenue within one year. The gift card liability is established upon the sale of a gift card and revenue is recognized either upon redemption of the gift card by the consumer or based upon the gift card breakage rate, which is generally within the 24-month period following the sale of the gift card.
The following table summarizes the activity in the Company’s allowance for expected credit losses during the thirty-nine weeks ended October 29, 2022 and October 30, 2021:
Balance, beginning of period
9,601
14,928
Uncollectible accounts written off, net of recoveries
(300)
(2,724)
Balance, end of period
8,998
9,493
Note 4 Earnings Per Share
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of
12
the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the periods ended October 29, 2022 and October 30, 2021:
NUMERATOR
Net loss (earnings) attributable to noncontrolling interests
254
(63)
404
(1,057)
Net earnings allocated to participating securities
(1,723)
(2,140)
(5,951)
(3,737)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
37,523
57,482
134,982
99,428
DENOMINATOR
Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
34,379
36,889
35,207
36,825
Dilutive effect of share-based awards
507
457
450
294
Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
34,886
37,346
35,657
37,119
Options to purchase 16,667 shares of common stock for both the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive.
During the thirteen and thirty-nine weeks ended October 29, 2022, the Company repurchased 838,025 and 2,622,845 shares, respectively, under the 2019 and 2022 publicly announced share repurchase programs, which permit repurchases of up to 5.0 million and 7.0 million shares, respectively. The Company did not repurchase any shares under the share repurchase programs during the thirty-nine weeks ended October 30, 2021. Refer to further discussion in Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.
Note 5 Restructuring and Other Special Charges
Organizational Change
During the thirteen and thirty-nine weeks ended October 29, 2022, the Company incurred costs of $2.9 million ($2.7 million on an after-tax basis, or $0.07 per diluted share) related to a CFO transition at the corporate headquarters, with no corresponding charges for the thirty-nine weeks ended October 30, 2021. These costs were recognized as restructuring and other special charges in the condensed consolidated statement of earnings within the Eliminations and Other category.
Blowfish Mandatory Purchase Obligation
In 2018, the Company acquired a controlling interest in Blowfish Malibu. The remaining interest was subject to a mandatory purchase obligation after a three-year period, which ended on July 31, 2021, based upon an earnings multiple formula as specified in the purchase agreement. Approximately $9.0 million was initially assigned to the mandatory purchase obligation and fair value adjustments were recorded as interest expense. The fair value adjustments on the mandatory purchase obligation totaled $1.9 million ($1.4 million on an after-tax basis, or $0.04 per diluted share) and $15.4 million ($11.5 million on an after-tax basis, or $0.30 per diluted share) for the thirteen and thirty-nine weeks ended October 30, 2021, respectively. There were no corresponding charges during the thirty-nine weeks ended October 29, 2022. The mandatory purchase obligation was settled for $54.6 million on November 4, 2021. Refer to further discussion regarding the mandatory purchase obligation in Note 14 to the condensed consolidated financial statements.
Brand Portfolio – Business Exits
During the thirty-nine weeks ended October 30, 2021, the Company incurred costs of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) related to the strategic realignment of the Naturalizer retail store operations. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed during the first quarter of 2021. These charges are presented in restructuring and special charges on the condensed consolidated statement of earnings within the Brand Portfolio segment for the thirty-nine weeks ended October 30, 2021. There were no corresponding charges during the thirty-nine weeks ended October 29, 2022. As of October 29, 2022 and October 30, 2021, reserves of $0.0 million and $2.5 million, respectively, were included on the condensed consolidated balance sheets.
Note 6 Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended October 29, 2022 and October 30, 2021:
Famous
Brand
Eliminations
Footwear
Portfolio
and Other
Intersegment sales (1)
6,935
Operating earnings (loss)
59,267
22,304
(27,724)
Segment assets
833,268
955,712
159,333
11,017
87,375
11,383
(17,440)
736,858
909,175
228,525
44,167
171,451
93,063
(76,052)
37,922
220,746
25,116
(83,883)
The Eliminations and Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments, as well as the elimination of intersegment sales and profit.
14
Following is a reconciliation of operating earnings to earnings before income taxes:
Note 7 Inventories
The Company’s net inventory balance was comprised of the following:
Raw materials
21,044
14,951
16,764
Work-in-process
629
581
614
Finished goods
627,584
527,686
579,429
Note 8 Goodwill and Intangible Assets
Goodwill and intangible assets were as follows:
Intangible Assets
2,800
342,083
Total intangible assets
344,883
Accumulated amortization
(131,419)
(119,214)
(122,336)
Total intangible assets, net
213,464
225,669
222,547
Goodwill
Brand Portfolio (1)
4,956
Total goodwill
15
The Company’s intangible assets as of October 29, 2022, October 30, 2021 and January 29, 2022 were as follows:
Estimated Useful Lives
(In Years)
Cost Basis
Amortization
Impairment
Net Carrying Value
Trade names
2 - 40
299,488
119,461
10,200
169,827
Indefinite
107,400
92,000
15,400
Customer relationships
15 - 16
44,200
11,958
4,005
28,237
451,088
131,419
106,205
109,545
179,743
9,669
30,526
119,214
112,061
177,227
10,275
29,920
122,336
Amortization expense related to intangible assets was $3.0 million and $3.1 million for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, and $9.1 million and $9.4 million for the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively. The Company estimates that amortization expense related to intangible assets will be approximately $12.1 million in 2022, $11.9 million in 2023 and $11.0 million in each of the fiscal years 2024, 2025 and 2026.
Goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate it might be impaired, using either the qualitative assessment or a quantitative fair value-based test. The Company recorded no goodwill impairment charges during the thirty-nine weeks ended October 29, 2022 or October 30, 2021.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The Company recorded no impairment charges for indefinite-lived intangible assets during the thirty-nine weeks ended October 29, 2022 or October 30, 2021.
Note 9 Leases
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future payments. For operating leases, lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period and consideration of any unusual nonrecurring events, property and equipment
16
at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The fair value of the lease right-of-use assets is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates. The Company recorded no asset impairment charges in the thirteen weeks and asset impairment charges of $2.0 million for the thirty-nine weeks ended October 29, 2022. For the thirteen and thirty-nine weeks ended October 30, 2021, the Company recorded asset impairment charges of $1.1 million and $3.4 million, respectively. The impairment charges are primarily related to capitalized software and underperforming retail stores. Refer to Note 14 to the condensed consolidated financial statements for further discussion on these impairment charges.
As a result of the temporary store closures during the first half of 2020 associated with the pandemic, certain leases were amended to provide rent abatements and/or deferral of lease payments. Deferred payments continue to be reflected in lease obligations on the condensed consolidated balance sheets. Under relief provided by the FASB, entities could make a policy election to account for COVID-19-related lease concessions as if the enforceable rights existed under the original contract, accounting for them as variable rent rather than lease modifications. The Company made a policy election to account for rent abatements as variable rent. Accordingly, during the thirteen and thirty-nine weeks ended October 29, 2022, the Company recorded $0.4 million and $1.1 million, respectively, in lease concessions as a reduction of rent expense within selling and administrative expenses in the condensed consolidated statements of earnings. During the thirteen and thirty-nine-weeks October 30, 2021, the Company recorded $0.1 million and $1.7 million, respectively, in lease concessions. Rent concessions for leases that were extended were recognized as a lease modification.
During the thirty-nine weeks ended October 29, 2022, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $130.7 million on the condensed consolidated balance sheets. As of October 29, 2022, the Company has entered into lease commitments for five retail locations for which the leases have not yet commenced. The Company anticipates that one lease will begin in the current fiscal year and four leases will begin in the next fiscal year. Upon commencement, right-of-use assets and lease liabilities of approximately $0.9 million will be recorded in the current fiscal year and $3.4 million will be recorded in the next fiscal year on the condensed consolidated balance sheets.
The components of lease expense for the thirteen and thirty-nine weeks ended October 29, 2022 and October 30, 2021 were as follows:
Operating lease expense
38,116
35,140
Variable lease expense
10,679
10,982
Short-term lease expense
970
737
Sublease income
Total lease expense
49,765
46,440
109,810
112,838
29,567
30,985
3,340
2,011
(59)
(477)
142,658
145,357
Supplemental cash flow information related to leases is as follows:
Cash paid for lease liabilities (1)
125,967
140,930
Cash received from sublease income
59
477
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Note 10 Financing Arrangements
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. The Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds LLC, Vionic Group LLC and Vionic International LLC are each co-borrowers and guarantors. On April 8, 2022, Blowfish, LLC was joined to the Credit Agreement as a co-borrower and guarantor.
On October 5, 2021, the Company entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be increased by up to $250.0 million. The Credit Agreement also decreased the spread applied to the London Interbank Offered Rate (“LIBOR”) or prime rate by a total of 75 basis points.
Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.
Interest on borrowings is at variable rates based on LIBOR (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, if excess availability falls below the greater of 10.0% of the Loan Cap and $40.0 million for three consecutive business days, and the fixed charge coverage ratio is less than 1.25 to 1.0, the Company would be in default under the Credit Agreement and certain additional covenants would be triggered.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. If an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of October 29, 2022.
At October 29, 2022, the Company had $364.5 million of borrowings outstanding and $10.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $125.4 million at October 29, 2022.
Senior Notes
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of senior notes due on August 15, 2023 (the "Senior Notes"). The Senior Notes bore interest at 6.25%, which was payable on February 15 and August 15 of each year. The Senior Notes were guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that is a borrower or guarantor under the Credit Agreement. On August 16, 2021, the Company redeemed $100.0 million of Senior Notes at 100.0%. In addition, on January 3, 2022, the remaining $100.0 million of Senior Notes were redeemed at 100.0%, extinguishing the Company’s long-term debt.
Loss on Early Extinguishment of Debt
In conjunction with the early redemption of the Senior Notes in August 2021 and the amendment of the revolving credit facility in October 2021, the Company incurred losses totaling $0.6 million.
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Note 11 Shareholders’ Equity
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended October 29, 2022 and October 30, 2021:
Pension and
Foreign
Currency
Postretirement
Translation
Transactions (1)
(Loss) Income
Balance at July 30, 2022
(485)
(6,795)
Other comprehensive loss before reclassifications
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
994
Tax benefit
(86)
Net reclassifications
Other comprehensive (loss) income
Balance at October 29, 2022
(1,300)
(5,887)
Balance at July 31, 2021
(260)
(8,312)
445
(87)
Balance at October 30, 2021
(517)
(7,954)
Balance at January 29, 2022
(788)
(7,818)
2,348
(417)
Balance at January 30, 2021
(111)
(9,025)
1,340
(269)
Note 12 Share-Based Compensation
The Company recognized share-based compensation expense of $5.0 million and $3.4 million during the thirteen weeks and $13.2 million and $8.8 million during the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively.
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The Company had net issuances (repurchases) of 20,699 and (10,554) shares of common stock during the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, for restricted stock grants, stock performance awards issued to employees and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement. During the thirty-nine weeks ended October 29, 2022 and October 30, 2021, the Company had net issuances of 621,154 and 291,306 shares of common stock, respectively, related to share-based plans.
Restricted Stock
The following table summarizes restricted stock activity for the periods ended October 29, 2022 and October 30, 2021:
Weighted-
Total Number
Average
of Restricted
Grant Date
Fair Value
July 30, 2022
1,579,202
17.53
July 31, 2021
1,380,246
14.05
Granted
45,050
26.65
Forfeited
(15,500)
21.00
(9,500)
15.72
Vested
(58,000)
13.16
(3,500)
26.42
1,550,752
17.92
1,367,246
14.01
1,390,397
14.24
January 30, 2021
1,397,227
16.74
726,720
21.45
568,916
18.73
(95,716)
15.35
(78,375)
15.48
(470,649)
13.02
(520,522)
26.26
The Company granted 45,050 restricted shares during the thirteen weeks ended October 29, 2022, which have a graded-vesting term of three years, with 50% vesting after two years and 50% after three years. Of the 726,720 restricted shares granted during the thirty-nine weeks ended October 29, 2022, 716,250 restricted shares have a graded-vesting term of three years, with 50% vesting after two years and 50% after three years, and 10,470 shares have a cliff-vesting term of one year. There were no restricted shares granted during the thirteen weeks ended October 30, 2021. Of the 568,916 restricted shares granted during the thirty-nine weeks October 30 2021, 544,006 shares have a graded-vesting term of three years, with 50% vesting after two years and 50% after three years, 20,000 shares have a cliff-vesting term of two years and 4,910 shares have a cliff-vesting term of one year.
Performance Awards
During the thirty-nine weeks ended October 29, 2022, the Company granted performance share awards for a targeted 87,750 shares, with a weighted-average grant date fair value of $20.99 in connection with the 2020 performance award. During the thirty-nine weeks ended October 30, 2021, the Company granted performance share awards for a targeted 175,500 shares, with a weighted-average grant date fair value of $18.63. There were no performance-based share awards granted by the Company during the thirteen weeks ended October 29, 2022 or October 30, 2021. Vesting of performance-based awards is generally dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the three-year service period.
In connection with the Company’s CFO transition during the thirteen weeks ended October 29, 2022, the Company approved the accelerated vesting of 30,000 performance-based share awards, representing two of the four award tranches from the 2020 performance award. The
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performance conditions had been satisfied for the two award tranches based on the achievement of financial goals for the 2020 and 2021 fiscal periods. The modification to accelerate vesting eliminated the remaining service requirement. These awards had a weighted-average grant date fair value of $13.05 per share, but were revalued using a fair value on the date of modification of $24.31 per share. The modification of these awards resulted in incremental compensation expense of $0.4 million, which is presented in restructuring and other special charges on the condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended October 29, 2022.
During the thirty-nine weeks ended October 29, 2022, the Company granted long-term incentive awards payable in cash for the 2022-2024 performance period, with a target value of $8.3 million and a maximum value of $16.6 million. During the thirty-nine weeks ended October 30, 2021, the Company granted long-term incentive awards payable in cash for the 2021-2023 performance period, with a target value of $6.5 million and a maximum value of $13.0 million. These awards, which vest after a three-year period, are dependent upon the attainment of certain financial goals of the Company for each of the three years and individual achievement of strategic initiatives over the cumulative period of the award. The estimated values of the awards, which are reflected within other liabilities on the condensed consolidated balance sheets, are being expensed ratably over the three-year performance period. There were no performance-based awards payable in cash granted by the Company during the thirteen weeks ended October 29, 2022 or October 30, 2021.
Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs are subject to a vesting requirement (usually one year) and earn dividend equivalents at the same rate as dividends on the Company’s common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value when the dividend equivalents are granted. Gains and losses resulting from changes in the fair value of the RSUs payable in cash subsequent to the vesting period and through the settlement date are recognized in the Company’s condensed consolidated statements of earnings. The Company granted 1,314 and 1,739 RSUs to non-employee directors for dividend equivalents, during the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively, with weighted-average grant date fair values of $24.30 and $22.49, respectively. The Company granted 41,325 and 44,180 RSUs to non-employee directors, including 4,680 and 4,900 for dividend equivalents, during the thirty-nine weeks ended October 29, 2022 and October 30, 2021, respectively, with weighted-average grant date fair values of $27.23 and $27.03, respectively.
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Note 13 Retirement and Other Benefit Plans
The following table sets forth the components of net periodic benefit income for the Company, including the domestic and Canadian plans:
Pension Benefits
Other Postretirement Benefits
Service cost
1,786
1,872
Interest cost
2,811
Expected return on assets
(6,997)
(7,108)
Amortization of:
Actuarial loss (gain)
779
Prior service income
(79)
(129)
Settlement cost
320
Total net periodic benefit income
(1,194)
(1,953)
(19)
5,358
5,615
8,994
8,430
28
(21,005)
(21,331)
2,343
1,808
(78)
(82)
(237)
(386)
(4,227)
(5,864)
(51)
(54)
The non-service cost components of net periodic benefit income are included in other income, net in the condensed consolidated statements of earnings. Service cost is included in selling and administrative expenses.
Note 14 Fair Value Measurements
Fair Value Hierarchy
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows:
In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
22
Measurement of Fair Value
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value.
Money Market Funds
The Company periodically invests in cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities to preserve the Company’s capital for the purpose of funding operations. It does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Non-Qualified Deferred Compensation Plan Assets and Liabilities
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified within prepaid expenses and other current assets in the condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s condensed consolidated statements of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company were previously granted at no cost to non-employee directors. These cash-equivalent RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each cash-equivalent RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). Additional information related to RSUs for non-employee directors is disclosed in Note 12 to the condensed consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the remaining interest in conjunction with the acquisition of Blowfish Malibu in July 2018. The fair value of the mandatory purchase obligation was based on the earnings formula specified in the purchase agreement (Level 3). Fair value adjustments on the mandatory purchase obligation were recorded as interest expense. There were no fair value adjustments for the thirteen and thirty-nine weeks ended October 29, 2022. The Company recorded fair value adjustments of $1.9 million and $15.4 million for the thirteen and thirty-nine weeks ended October 30, 2021, respectively. The mandatory purchase obligation of $54.6 million was paid on November 4, 2021. Refer to further discussion of the mandatory purchase obligation in Note 5 to the condensed consolidated financial statements.
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The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at October 29, 2022, October 30, 2021 and January 29, 2022. During the thirty-nine weeks ended October 29, 2022 and October 30, 2021, there were no transfers into or out of Level 3.
Fair Value Measurements
Level 1
Level 2
Level 3
Asset (Liability)
October 29, 2022:
Non-qualified deferred compensation plan assets
7,769
Non-qualified deferred compensation plan liabilities
(7,769)
Deferred compensation plan liabilities for non-employee directors
(1,805)
Restricted stock units for non-employee directors
(2,220)
October 30, 2021:
Cash equivalents – money market funds
35,000
7,789
(7,789)
(1,764)
(2,558)
(54,558)
January 29, 2022:
7,463
(7,463)
(1,770)
(2,568)
Impairment Charges
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to historical or projected future operating results, a significant change in the manner of the use of the asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC Topic 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $564.6 million and $542.3 million at October 29, 2022 and October 30, 2021, respectively, were assessed for indicators of impairment. This assessment resulted in the following impairment charges, primarily for capitalized software and operating lease right-of-use assets, leasehold improvements and furniture and fixtures in the Company’s retail stores.
Long-Lived Asset Impairment Charges
400
419
1,200
711
1,560
2,199
Total long-lived asset impairment charges
1,111
Fair Value of the Company’s Other Financial Instruments
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.
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The carrying amounts and fair values of the Company’s other financial instruments subject to fair value disclosures are as follows:
Carrying Value (1)
100,000
Total debt
275,000
The fair values of borrowings under revolving credit agreement and current portion of long-term debt approximate their carrying values due to the short-term nature of these borrowings (Level 1).
Note 15 Income Taxes
The Company’s consolidated effective tax rate can vary considerably from period to period, depending on a number of factors. The Company’s consolidated effective tax rates were 26.2% and 24.9% for the thirteen weeks ended October 29, 2022 and October 30, 2021, respectively. The higher effective tax rate for the thirteen weeks ended October 29, 2022 was driven by an increase in permanent adjustments, primarily due to the non-deductible portion of executive compensation.
The Company’s consolidated effective tax rate was 25.7% for the thirty-nine weeks ended October 29, 2022, compared to 27.7% for the nine months ended October 30, 2021. The higher effective tax rate for the thirty-nine weeks ended October 30, 2021 primarily reflects the incremental valuation allowances for the Company’s deferred tax assets for certain jurisdictions recorded in the thirty-nine weeks ended October 30, 2021, as well as the non-deductibility of losses at the Company’s Canadian division, which were driven by exit-related costs associated with Naturalizer retail stores in the first quarter of 2021.
As of October 29, 2022, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s foreign subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Tax Cuts and Jobs Act. The Company periodically evaluates its international investment opportunities and plans, as well as its international working capital needs, to determine the level of investment required and, accordingly, determines the level of international earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s international subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted international earnings.
Note 16 Commitments and Contingencies
Environmental Remediation
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.
25
As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified work plan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the work plan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy work plan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one. In 2019, a final response was received from the oversight authorities, which is allowing the Company to proceed with implementation of the revised plan on a portion of the treatment system. The Company continues to pursue approval from the oversight authorities for the full conversion of the perimeter pump and treat active remediation system to a passive one. The Company also continues to work with the oversight authorities on the off-site work plan.
The cumulative expenditures for both on-site and off-site remediation through October 29, 2022 were $33.0 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at October 29, 2022 is $9.7 million, of which $8.7 million is recorded within other liabilities and $1.0 million is recorded within other accrued expenses. Of the total $9.7 million reserve, $5.0 million is for off-site remediation and $4.7 million is for on-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $13.4 million as of October 29, 2022. The Company expects to spend approximately $0.6 million in 2022, $0.1 million in each of the following four years and $12.4 million in the aggregate thereafter related to the on-site remediation.
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
The Company continues to evaluate its remediation plans in conjunction with its environmental consultants and records its best estimate of remediation liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are expensed as incurred.
26
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We delivered another period of strong financial and operational results for the third quarter, with record quarterly net sales and solid earnings. Our results underscore the strength and versatility of our portfolio of brands, highlight the significant progress we’ve made on our enterprise-wide strategic initiatives and demonstrate the portfolio’s enhanced resilience during periods of macroeconomic uncertainty. We are particularly pleased with the performance of our Brand Portfolio segment, which utilized our diverse portfolio of brands to meet the robust consumer demand and deliver year-over-year improvement in nearly all key financial metrics. During the third quarter of 2022, we also continued to execute on our capital return program and returned $24.1 million to shareholders through dividends and share repurchases.
Financial Highlights
Following is a summary of the financial highlights for the third quarter of 2022:
The following items should be considered in evaluating the comparability of our third quarter results in 2022 and 2021:
Known Trends Impacting Our Business
Inflationary pressures, including higher product costs, higher parcel freight costs, wage inflation and the rising interest rate environment, continued to impact our financial results during the third quarter of 2022. The price increases we began implementing in the second half of 2021 have mitigated the majority of the inflationary pressures related to product costs. Macroeconomic factors, such as inflationary pressures and volatility in interest rates, also impact a number of accounting estimates, including impairment calculations, the value of inventory measured using the LIFO method, and other estimates that utilize fair value. These macroeconomic factors could result in incremental volatility in certain valuations and provisions required in the Company’s financial statements. In addition, ongoing general inflation and macroeconomic challenges continue to impact consumer sentiment and may result in lower consumer spending and a more promotional environment in the fourth quarter of 2022 and beyond.
Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though other retailers may calculate the metric differently. Management uses the same-store sales metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. Our same-store sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open for at least 13 months. In addition, in order to be included in the same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores are excluded from the same-store sales metric for each day of the closure. Relocated stores are treated as new stores and therefore excluded from the calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in assessing our retail sales performance of existing locations with comparable prior year sales, separate from the impact of store openings or store closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store. Management uses the sales per square foot metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period.
Outlook
We are sharply focused on the rapidly evolving market landscape and recognize that the uncertainty about the macro environment and the mounting threat of recessionary pressures could begin to dampen consumer spending habits. We have experienced a slower start to our holiday season sales trends, which may continue through the remainder of the fourth quarter of 2022. However, we believe our core competencies in brand building, product creation, marketing and logistics will enable us to navigate the challenging market environment. In addition, we believe we are well-positioned to capitalize on opportunities across a broad spectrum of consumer segments by leveraging our diverse portfolio of brands. In addition to maintaining our quarterly dividend, we plan to prioritize using available cash to reduce our revolver borrowings and increase overall liquidity.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
% of
($ millions)
Net Sales
798.3
100.0
%
784.2
2,271.7
2,098.3
458.4
57.4
448.8
57.2
1,268.0
55.8
1,165.8
55.6
339.9
42.6
335.4
42.8
1,003.7
44.2
932.5
44.4
283.2
35.5
254.1
32.4
812.3
35.8
757.0
36.1
2.9
0.4
0.1
13.5
0.6
53.8
6.7
81.3
10.4
188.5
8.3
162.0
7.7
(4.0)
(0.5)
(5.1)
(0.7)
(8.9)
(0.4)
(28.8)
(1.4)
(0.6)
(0.1)
(0.0)
3.0
3.8
0.5
9.6
11.5
52.8
6.6
79.4
10.1
189.2
144.1
6.9
(13.8)
(1.7)
(19.7)
(2.5)
(48.7)
(2.1)
(39.9)
(1.9)
39.0
4.9
59.7
7.6
140.5
6.2
104.2
5.0
(0.2)
0.0
1.0
39.2
59.6
140.9
103.2
Net sales increased $14.1 million, or 1.8%, to $798.3 million for the third quarter of 2022, compared to $784.2 million for the third quarter of 2021. Net sales for our Brand Portfolio segment increased $22.7 million, or 7.6% during the third quarter of 2022, compared to the third quarter of 2021, led by strong performances by our Naturalizer, Sam Edelman, Franco Sarto and LifeStride brands. Net sales for our Famous Footwear segment remained strong, but decreased $12.7 million, or 2.6%, in the third quarter of 2022 compared to the record-setting third
quarter of 2021, with same-store sales down 0.8%. On a consolidated basis, our direct-to-consumer sales represented approximately 74% of total net sales for the third quarter of 2022. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride and Dr. Scholl’s representing two of Famous Footwear’s top 15 best-selling footwear brands during the quarter.
Net sales increased $173.4 million, or 8.3%, to $2,271.7 million for the nine months ended October 29, 2022, compared to $2,098.3 million for the nine months ended October 30, 2021. Net sales for our Brand Portfolio segment increased $223.2 million, or 28.3% during the first nine months of 2022, compared to the first nine months of 2021, driven by strong sales growth from nearly all of our brands. Our Famous Footwear segment’s sales momentum continued. However, net sales for Famous Footwear decreased $43.6 million, or 3.2%, in the first nine months of 2022 compared to the exceptionally strong first nine months of 2021, with same stores sales decreasing 2.5%. On a consolidated basis, our direct-to-consumer sales represented approximately 71% of total net sales for the nine months ended October 29, 2022.
Gross Profit
Gross profit increased $4.5 million, or 1.3%, to $339.9 million for the third quarter of 2022, compared to $335.4 million for the third quarter of 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased slightly to 42.6% for the third quarter of 2022, compared to 42.8% for the third quarter of 2021, reflecting a decrease in the gross profit margin of our Famous Footwear segment, an increase in the gross profit margin of our Brand Portfolio segment and a higher mix of retail compared to wholesale sales. The decline in the Famous Footwear segment’s gross profit margin was driven by more normalized pricing and an increase in promotional activity. The improvement in the gross profit margin of our Brand Portfolio segment reflects higher average wholesale prices, growth in higher margin sales from the direct-to-consumer channel and a favorable brand mix.
Gross profit increased $71.2 million, or 7.6%, to $1,003.7 million for the nine months ended October 29, 2022, compared to $932.5 million for the nine months ended October 30, 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased slightly to 44.2% for the nine months ended October 29, 2022, compared to 44.4% for the nine months ended October 30, 2021.
We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $29.1 million, or 11.4%, to $283.2 million for the third quarter of 2022, compared to $254.1 million for the third quarter of 2021. The increase was driven by higher salary and benefits expenses, higher expenses associated with our cash-based incentive compensation plans and higher retail facilities costs. As a percentage of net sales, selling and administrative expenses increased to 35.5% for the third quarter of 2022, from 32.4% for the third quarter of 2021, reflecting leveraging of expenses on higher net sales.
Selling and administrative expenses increased $55.3 million, or 7.3%, to $812.3 million for the nine months ended October 29, 2022, compared to $757.0 million for the nine months ended October 30, 2021. The increase primarily reflects higher salary and benefits expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 35.8% for the nine months ended October 29, 2022, from 36.1% for the nine months ended October 30, 2021, reflecting leveraging of expenses on higher net sales.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $2.9 million ($2.7 million on an after-tax basis, or $0.07 per diluted share) during the third quarter and nine months ended October 29, 2022, related to a CFO transition at our corporate headquarters. We incurred restructuring and other special charges of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) during the nine months ended October 30, 2021, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
Operating Earnings
Operating earnings decreased $27.5 million to $53.8 million for the third quarter of 2022, compared to $81.3 million for the third quarter of 2021, primarily reflecting higher selling and administrative expenses and restructuring and other special charges, as described above. As a percentage of net sales, operating earnings were 6.7% for the third quarter of 2022, compared to 10.4% for the third quarter of 2021.
29
Operating earnings increased $26.5 million to $188.5 million for the nine months ended October 29, 2022, compared to $162.0 million for the nine months ended October 30, 2021, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 8.3% for the nine months ended October 29, 2022, compared to 7.7% for the nine months ended October 30, 2021.
Interest Expense, Net
Interest expense, net decreased $1.1 million, or 21.0%, to $4.0 million for the third quarter of 2022, compared to $5.1 million for the third quarter of 2021, primarily due to the non-recurrence of the $1.9 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the third quarter of 2021, partially offset by higher interest expense on the revolving credit facility. The purchase obligation was settled for $54.6 million on November 4, 2021. In addition, we redeemed our $200 million aggregate principal of senior notes in the second half of 2021. By retiring our senior notes, we shifted debt to our revolving credit agreement, which reduced our interest expense by approximately $1.8 million compared to the third quarter of 2021. These decreases were partially offset by an increase in interest expense under our revolving credit agreement attributable to higher average borrowings and higher interest rates. While the reduction in our total interest expense is expected to continue, the interest on our revolving credit facility is based on a variable interest rate. Therefore, our interest expense will continue to be adversely affected by rising interest rates.
Interest expense, net decreased $19.9 million, or 69.1%, to $8.9 million for the nine months ended October 29, 2022, compared to $28.8 million for the nine months ended October 30, 2021, primarily due to the non-recurrence of the $15.4 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation in the nine months ended October 30, 2021. In addition, after retiring our senior notes, the shift of our higher-rate debt to the lower-rate borrowings under our revolving credit agreement reduced our interest expense by approximately $8.1 million compared to the nine months ended October 30, 2021. These decreases were partially offset by an increase in interest expense our revolving credit agreement attributable to higher average borrowings and higher interest rates.
The loss on early extinguishment of debt was $0.6 million for the three and nine months ended October 30, 2021, reflecting the redemption of $100 million of senior notes prior to its maturity and the amendment of our revolving credit facility. Refer to Note 10 to the condensed consolidated financial statements for further discussion. There were no corresponding charges for the nine months ended October 29, 2022.
Other Income, Net
Other income, net decreased $0.8 million, or 22.0%, to $3.0 million for the third quarter of 2022, compared to $3.8 million for the third quarter of 2021, which reflects a reduction of certain components of net periodic benefit income associated with our pension plans.
Other income, net decreased $1.9 million, or 16.4%, to $9.6 million for the nine months ended October 29, 2022, compared to $11.5 million for the nine months ended October 30, 2021, primarily attributable to certain components of net periodic benefit income associated with our pension plans, including interest cost, amortization of actuarial loss and settlement cost. Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.
Income Tax Provision
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 26.2% for the third quarter of 2022, compared to 24.9% for the third quarter of 2021. The higher effective tax rate for the third quarter of 2022 was driven by an increase in permanent adjustments, primarily due to the non-deductible portion of executive compensation.
Our consolidated effective tax rate was 25.7% for the nine months ended October 29, 2022, compared to 27.7% for the nine months ended October 30, 2021. The higher effective tax rate for the nine months ended October 30, 2021 primarily reflects the incremental valuation allowances for our deferred tax assets for certain jurisdictions, as well as the non-deductibility of losses at our Canadian division, which were driven by exit-related costs associated with our Naturalizer retail stores in the first quarter of 2021.
Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $39.2 million and $140.9 million for the three and nine months ended October 29, 2022, respectively, compared to net earnings of $59.6 million and $103.2 million for the three and nine months ended October 30, 2021, respectively, as a result of the factors described above.
30
FAMOUS FOOTWEAR
($ millions, except sales per square foot)
482.0
494.7
1,302.8
1,346.4
266.4
55.3
259.2
52.4
684.4
52.5
703.7
52.3
215.6
44.7
235.5
47.6
618.4
47.5
642.7
47.7
156.3
148.1
29.9
446.9
34.3
422.0
31.3
59.3
12.3
87.4
17.7
171.5
13.2
220.7
16.4
Key Metrics
Same-store sales % change
(0.8)
26.5
Same-store sales $ change
(3.7)
100.1
(32.8)
102.7
Sales change from new and closed stores, net
(8.5)
2.3
(9.9)
325.1
Impact of changes in Canadian exchange rate on sales
(0.9)
1.7
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
72
194
Sales per square foot, excluding e-commerce (trailing twelve months)
250
238
Square footage (thousand sq. ft.)
5,787
5,977
Stores opened
1
Stores closed
Ending stores
876
905
Net sales of $482.0 million in the third quarter of 2022 decreased $12.7 million, or 2.6%, compared to the record setting third quarter of 2021. Despite the decrease in net sales, we continued to perform at a high level during the third quarter of 2022, led by a solid back-to-school season. Although the back-to-school season started slowly in the second quarter, we experienced strong consumer demand in August and September, especially in children’s footwear. We experienced improvement in our non-athletic footwear categories, and while demand slowed for our athletics footwear, it continues to be one of our top-selling categories. Our sales decline was more pronounced in the northern United States due in part to unseasonably warm weather. Same-store sales decreased 0.8% compared to the third quarter of 2021. During the third quarter of 2022, we opened four stores and closed nine stores, resulting in 876 stores and total square footage of 5.8 million at the end of the third quarter of 2022, compared to 905 stores and total square footage of 6.0 million at the end of the third quarter of 2021. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 77% of our net sales made to program members in the third quarter of 2022, compared to 78% in the third quarter of 2021.
Net sales of $1,302.8 million in the nine months ended October 29, 2022 decreased $43.6 million, or 3.2%, compared to the nine months ended October 30, 2021, as our same-store sales declined 2.5%. Athletics and casual continue to be our top-selling categories. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride and Dr. Scholl’s representing two of Famous Footwear’s top 15 best-selling footwear brands for the nine months ended October 29, 2022.
Gross profit decreased $19.9 million, or 8.4%, to $215.6 million for the third quarter of 2022, compared to $235.5 million for the third quarter of 2021. As a percentage of net sales, our gross profit decreased to 44.7% for the third quarter of 2022, compared to 47.6% for the third quarter of 2021, reflecting more normalized retail pricing and an increase in promotional activity compared to the third quarter of 2021, when inventories were low due to supply chain constraints. Our gross profit margin continues to exceed pre-pandemic levels.
Gross profit decreased $24.3 million, or 3.8%, to $618.4 million for the nine months ended October 29, 2022, compared to $642.7 million for the nine months ended October 30, 2021, primarily due to the decrease in net sales. As a percentage of net sales, our gross profit decreased slightly to 47.5% for the nine months ended October 29, 2022, compared to 47.7% for the nine months ended October 30, 2021.
Selling and administrative expenses increased $8.2 million, or 5.6%, to $156.3 million for the third quarter of 2022, compared to $148.1 million for the third quarter of 2021. The increase was driven by higher salary and benefits expenses due in part to wage inflation and higher
31
facilities costs. As a percentage of net sales, selling and administrative expenses increased to 32.4% for the third quarter of 2022, compared to 29.9% for the third quarter of 2021.
Selling and administrative expenses increased $24.9 million, or 5.9%, to $446.9 million for the nine months ended October 29, 2022, compared to $422.0 million for the nine months ended October 30, 2021. The increase was primarily due to higher salary and benefits expenses, higher logistics and facilities costs and higher advertising expense. As a percentage of net sales, selling and administrative expenses increased to 34.3% for the nine months ended October 29, 2022, compared to 31.3% for the nine months ended October 30, 2021.
Operating earnings decreased $28.1 million to $59.3 million for the third quarter of 2022, compared to $87.4 million for the third quarter of 2021, reflecting both lower sales and gross margins and higher operating expenses, as described above. As a percentage of net sales, operating earnings were 12.3% for the third quarter of 2022, compared to 17.7% for the third quarter of 2021.
Operating earnings decreased $49.2 million to $171.5 million for the nine months ended October 29, 2022, compared to $220.7 million for the nine months ended October 30, 2021, primarily reflecting lower sales and higher operating expenses, as described above. As a percentage of net sales, operating earnings were 13.2% for the nine months ended October 29, 2022, compared to 16.4% for the nine months ended October 30, 2021.
BRAND PORTFOLIO
323.2
300.5
1,013.0
789.8
200.8
62.1
201.6
67.1
627.2
61.9
502.0
63.6
122.4
37.9
98.9
32.9
385.8
38.1
287.8
36.4
31.0
87.5
29.1
292.7
28.9
249.2
31.5
22.3
11.4
93.1
9.2
25.1
3.2
Direct-to-consumer (% of net sales) (1)
34
Change in wholesale net sales ($)
13.0
16.5
197.2
66.2
Unfilled order position at end of period
286.8
380.7
26.0
45.8
24.3
10.6
13.8
35.4
18.6
(1.1)
2.5
(9.7)
36.0
Impact of changes in Canadian exchange rate on retail sales
0.2
0.3
265
236
810
669
1,047
756
Square footage (thousands sq. ft.)
104
124
86
89
90
Net sales of $323.2 million in the third quarter of 2022 increased $22.7 million, or 7.6%, compared to the third quarter of 2021, reflecting strong consumer demand for many of our brands. The net sales increase was broad-based across nearly all of our brands, with our Naturalizer, Sam Edelman, Franco Sarto and LifeStride brands being the most significant contributors. In addition to sales increases in our wholesale business, our digital business also experienced significant growth during the quarter. The lead times required on inventory purchases have significantly improved compared to 2021, which has enabled earlier inventory receipts and a more efficient flow of product to our customers.
32
During the third quarter of 2022, we opened seven stores and closed three stores, resulting in a total of 89 stores and total square footage of 0.1 million at the end of the third quarter of 2022, compared to 90 stores and total square footage of 0.1 million at the end of the third quarter of 2021.
Net sales increased $223.2 million, or 28.3%, to $1,013.0 million for the nine months ended October 29, 2022, compared to $789.8 million for the nine months ended October 30, 2021, reflecting strong sales growth from nearly all of our brands, with our Sam Edelman, Naturalizer, LifeStride, Franco Sarto and Allen Edmonds brands being the most significant contributors. During 2022, we have experienced a shift in consumer preference from sport and casual products to the fashion and lifestyle categories.
In the first quarter of 2021, we completed the strategic realignment of our Naturalizer retail business and permanently closed the remaining 73 Naturalizer stores in North America that were scheduled for closure. We have continued to focus on growing the brand’s e-commerce business through naturalizer.com, as well as our retail partners and their websites. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $1,047 for the twelve months ended October 29, 2022, compared to $756 for the twelve months ended October 30, 2021. With the closure of nearly all of our Naturalizer retail stores, the majority of the retail stores in our Brand Portfolio segment are for our Allen Edmonds brand, which have higher retail price points than the Naturalizer brand.
Our unfilled order position for our wholesale sales decreased $93.9 million, or 24.7%, to $286.8 million at October 29, 2022, compared to $380.7 million at October 30, 2021. The decrease in our backlog order levels compared to last year primarily reflects more conservative buying by our wholesale customers as they manage their inventory levels in response to consumer sentiment.
Gross profit increased $23.5 million, or 23.7%, to $122.4 million for the third quarter of 2022, compared to $98.9 million for the third quarter of 2021, primarily reflecting higher net sales and a higher gross margin rate. As a percentage of net sales, our gross profit increased to 37.9% for the third quarter of 2022, compared to 32.9% for the third quarter of 2021, primarily reflecting higher average wholesale prices, growth in higher margin sales from the direct-to-consumer channel and a favorable brand mix, partially offset by a higher provision for inventory markdowns.
Gross profit increased $98.0 million, or 34.1%, to $385.8 million for the nine months ended October 29, 2022, compared to $287.8 million for the nine months ended October 30, 2021, reflecting higher net sales. As a percentage of net sales, our gross profit increased to 38.1% for the nine months ended October 29, 2022, compared to 36.4% for the nine months ended October 30, 2021. While we have experienced inflationary pressures related to product costs and inbound freight through the nine months ended October 29, 2022, we have been able to successfully offset the majority of these impacts through price increases. We anticipate inflationary pressures to continue throughout 2022 and will continue to focus on mitigating the impact.
Selling and administrative expenses increased $12.6 million, or 14.3%, to $100.1 million for the third quarter of 2022, compared to $87.5 million for the third quarter of 2021. The increase was primarily due to higher variable salary expenses and wage inflation, higher marketing expenses and higher facilities costs. As a percentage of net sales, selling and administrative expenses increased to 31.0% for the third quarter of 2022, compared to 29.1% for the third quarter of 2021.
Selling and administrative expenses increased $43.5 million, or 17.5%, to $292.7 million for the nine months ended October 29, 2022, compared to $249.2 million for the nine months ended October 30, 2021. The increase was driven by higher variable salary expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 28.9% for the nine months ended October 29, 2022, compared to 31.5% for the nine months ended October 30, 2021, reflecting better leveraging of expenses over a higher net sales base.
We incurred restructuring and other special charges of $13.5 million during the nine months ended October 30, 2021 for expenses associated with the strategic realignment of our Naturalizer retail store operations. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges. There were no corresponding charges during the three or nine months ended October 29, 2022.
33
Operating earnings increased to $22.3 million for the third quarter of 2022, from $11.4 million for the third quarter of 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 6.9% for the third quarter of 2022, compared to 3.8% in the third quarter of 2021.
Operating earnings increased to $93.1 million for the nine months ended October 29, 2022, from $25.1 million for the nine months ended October 30, 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 9.2% for the nine months ended October 29, 2022, compared to 3.2% in the nine months ended October 30, 2021.
ELIMINATIONS AND OTHER
(6.9)
(11.0)
(44.2)
(37.9)
(8.8)
127.6
(12.0)
108.8
(43.6)
98.7
105.3
1.9
(27.6)
1.3
2.0
(5.3)
26.7
(385.4)
18.4
(167.1)
72.6
(164.3)
85.9
(226.5)
(42.0)
(6.6)
Operating loss
(27.7)
399.8
(17.4)
158.3
(76.1)
172.2
(83.9)
221.2
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
The net sales elimination of $6.9 million for the third quarter of 2022 is $4.1 million, or 37.1%, lower than the third quarter of 2021 reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear. The net sales elimination of $44.2 million for the nine months ended October 29, 2022 is $6.3 million, or 16.5%, higher than the nine months ended October 30, 2022 reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses increased $8.3 million, to $26.7 million in the third quarter of 2022, compared to $18.4 million for the third quarter of 2021. The increase primarily reflects higher expenses for our cash-based incentive compensation plans. In 2021, our financial results exceeded the targets established for our annual incentive plans earlier in the year, which resulted in a larger portion of the anticipated plan payouts recorded as expense in the first half of 2021 rather than in the third quarter. For 2022, anticipated incentive plan payouts are being recognized more ratably during the year.
Selling and administrative expenses decreased $13.3 million, to $72.6 million for the nine months ended October 29, 2022, compared to $85.9 million for the nine months ended October 30, 2021. The decrease primarily reflects lower expenses for our cash-based incentive compensation plans reflecting the shift in timing of the achievement of our financial performance targets, as described above, as well as lower expenses associated with certain other employee benefits.
Restructuring and other special charges of $2.9 million for the three and nine months ended October 29, 2022 were associated with a CFO transition at our corporate headquarters. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges. There were no corresponding charges for the nine months ended October 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
(1)
364.5
175.0
290.0
99.6
274.6
Total debt obligations of $364.5 million at October 29, 2022 increased $89.9 million, from $274.6 million at October 30, 2021, and increased $74.5 million, from $290.0 million at January 29, 2022. The increase in total debt from October 30, 2021 and January 29, 2022 is due primarily to $63.2 million of repurchases of our common stock. In August 2021, we redeemed $100.0 million aggregate principal amount of our senior notes and on January 3, 2022, we redeemed the remaining $100.0 million of senior notes. We shifted this debt to borrowings under the revolving credit facility, which has resulted in significant interest expense savings for the Company. While this reduction in interest expense is expected to continue, the interest on our revolving credit facility is based on a variable interest rate, which has resulted in higher interest expense in the current rising interest rate environment. Our interest expense will continue to be adversely affected by rising interest rates. Net interest expense for the third quarter of 2022 decreased $1.1 million to $4.0 million, compared to $5.1 million for the third quarter of 2021. The decrease is primarily attributable to the non-recurrence of the $1.9 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the third quarter of 2021. The Blowfish Malibu mandatory purchase obligation of $54.6 million was paid on November 4, 2021, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements. In addition, as discussed above, the redemption of all outstanding senior notes in 2021 also contributed to the decrease in interest expense in the third quarter of 2022. These decreases were partially offset by higher average borrowings under our revolving credit agreement.
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. On October 5, 2021, we entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the “Credit Agreement”) which, among other modifications, extended the maturity date of the credit facility from January 18, 2024, to October 5, 2026 and decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be increased by up to $250.0 million. Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The Credit Agreement decreased the spread applied to the LIBOR or prime rate by a total of 75 basis points. At October 29, 2022, we had $364.5 million in borrowings and $10.1 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $125.4 million at October 29, 2022. We were in compliance with all covenants and restrictions under the Credit Agreement as of October 29, 2022.
On July 27, 2015, we issued $200.0 million aggregate principal amount of senior notes due in 2023 (the "Senior Notes"). The Senior Notes were guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bore interest of 6.25%, which was payable on February 15 and August 15 of each year. On August 16, 2021, we redeemed $100.0 million of the Senior Notes at 100.0%. In addition, on January 3, 2022, we redeemed the remaining $100.0 million of Senior Notes at 100.0%. Refer to further discussion regarding the Senior Notes in Note 10 to the condensed consolidated financial statements.
35
Working Capital and Cash Flow
Change
46.3
189.7
(143.4)
(45.4)
(14.6)
(30.8)
(188.6)
190.5
2.7
(13.5)
16.2
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $143.4 million lower in the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, primarily reflecting the following factors:
Supply chain financing: Certain of our suppliers are given the opportunity to sell receivables from us related to products that we have purchased to participating financial institutions at a rate that leverages our credit rating, which may be more beneficial to the suppliers than the rate they can obtain based upon their own credit rating. We negotiate payment and other terms with our suppliers, regardless of whether the supplier participates in the program, and our responsibility is limited to making payment based on the terms originally negotiated with the supplier. These liabilities continue to be presented as accounts payable in our condensed consolidated balance sheets, with changes reflected within cash flows from operating activities when settled. As of October 29, 2022 and October 30, 2021, we had $17.8 million and $64.0 million, respectively, of accounts payable subject to supply chain financing arrangements.
Cash used for investing activities was $30.8 million higher for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, reflecting higher capital expenditures. In 2022, we expect our purchases of property and equipment and capitalized software to be between $50 million and $60 million, as compared to $24.1 million in 2021. In the first quarter of 2022, we tested a new prototype Famous Footwear store that offers an enhanced shopping experience, highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner. We have also continued to invest in refreshing our Famous Footwear stores in the first nine months of 2022. We have experienced strong financial performance from the recently converted prototype stores. Accordingly, we plan to invest in additional prototype stores and store renovations during the fourth quarter of 2022 and into 2023, which we believe will enhance our brand image and further differentiate our store experience from that of our competitors.
Cash provided by financing activities was $190.5 million higher for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, primarily due to net borrowings on our revolving credit agreement of $74.5 in the nine months ended October 29, 2022, compared to net repayments of $75.0 million in the comparable period in 2021. In addition, we repurchased $63.2 million of our common stock under our share repurchase programs during the nine months ended October 29, 2022, with no corresponding share repurchases during the nine months ended October 30, 2021.
36
A summary of key financial data and ratios at the dates indicated is as follows:
Working capital ($ millions) (1)
(117.8)
(207.4)
(189.1)
Current ratio (2)
0.89:1
0.81:1
0.82:1
Debt-to-capital ratio (3)
47.3
Working capital at October 29, 2022 was ($117.8) million, which was $89.6 million and $71.3 million higher than at October 30, 2021 and January 29, 2022, respectively. The increase in working capital from October 30, 2021 primarily reflects higher inventory, the redemption of our senior notes, lower trade accounts payable and the settlement of the Blowfish Malibu mandatory purchase obligation in the fourth quarter of 2021, partially offset by higher borrowings under the revolving credit agreement. The increase in working capital from January 29, 2022 primarily reflects higher inventories and accounts receivable and lower trade accounts payable, partially offset by higher borrowings under the revolving credit agreement. Our current ratio was 0.89 to 1 as of October 29, 2022, compared to 0.81:1 at October 30, 2021 and 0.82:1 at January 29, 2022. Our debt-to-capital ratio was 47.3% as of October 29, 2022, consistent with October 30, 2021 and January 29, 2022.
We declared and paid dividends of $0.07 per share in the third quarter of both 2022 and 2021. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings and obligations for our supplemental executive retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 29, 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements, if any, and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) supply chain disruptions and inflationary pressures; (ii) the coronavirus pandemic and its adverse impact on our business operations and financial condition; (iii) changing consumer demands, which may be influenced by general economic conditions and other factors; (iv) rapidly changing consumer preferences and purchasing patterns and fashion trends; (v) customer concentration and increased consolidation in the retail industry; (vi) intense competition within the footwear industry; (vii) foreign currency fluctuations; (viii) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (ix) cybersecurity threats or other major disruption to the Company’s information technology systems; (x) the ability to accurately forecast sales and manage inventory levels; (xi) a disruption in the Company’s distribution centers; (xii) the ability to recruit and retain senior management and other key associates; (xiii) the ability to secure/exit leases on favorable terms; (xiv) the ability to maintain relationships with current suppliers; (xv)
37
transitional challenges with acquisitions and divestitures; (xvi) changes to tax laws, policies and treaties; (xvii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; and (xviii) the ability to attract, retain, and maintain good relationships with licensors and protect our intellectual property rights. The Company’s reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 29, 2022, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended January 29, 2022.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
It is the Chief Executive Officer’s and Chief Financial Officer’s ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and ongoing monitoring by our internal auditors.
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved. As of October 29, 2022, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.
Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting during the quarter ended October 29, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred.
Information regarding Legal Proceedings is set forth within Note 16 to the condensed consolidated financial statements and incorporated by reference herein.
ITEM 1A RISK FACTORS
There have been no material changes that have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 29, 2022.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information relating to our repurchases of common stock during the third quarter of 2022:
Maximum Number
Purchased as Part
of Shares that May
Total Number of
of Publicly
Yet be Purchased
Average Price Paid
Announced
Under the
Fiscal Period
Purchased (1)
per Share (1)
Program (2)
July 31, 2022 - August 27, 2022
7,205,404
August 28, 2022 - October 1, 2022
844,433
25.71
838,025
6,367,379
October 2, 2022 - October 29, 2022
32,443
25.70
876,876
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS
ExhibitNo.
3.1
Restated Certificate of Incorporation of Caleres, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed May 29, 2020.
Bylaws of the Company as amended through May 26, 2022, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed May 27, 2022.
10.10*
†
Severance Agreement, effective September 12, 2022, between the Company and Jack P. Calandra, filed herewith.
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
iXBRL Instance Document
101.SCH
iXBRL Taxonomy Extension Schema Document
101.CAL
iXBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
iXBRL Taxonomy Extension Label Linkbase Document
101.PRE
iXBRL Taxonomy Presentation Linkbase Document
101.DEF
iXBRL Taxonomy Definition Linkbase Document
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
* Denotes management contract or compensatory plan arrangements.
† Denotes exhibit is filed with this Form 10-Q.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 6, 2022
/s/ Jack P. Calandra
Jack P. Calandra
Senior Vice President and Chief Financial Officer
on behalf of the Registrant and as the
Principal Financial Officer