What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-07 compared with 2021-06-09 · 251 added, 168 removed, 191 unchanged (69% of the section changed)

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We experienced a strong recovery in the first quarter of 2021, recording sequential net sales and earnings growth, and stronger gross margins and balance sheet.

Our upward trajectory was driven in large part by an outstanding performance in our Famous Footwear business, as we continue to leverage our enhanced omni-channel capabilities and capitalize on our direct-to-consumer model.

In the first quarter of last year, our financial results had been significantly impacted by the coronavirus (“COVID-19”) pandemic, including the temporary closure of all of our retail stores from mid-March through the end of the quarter.

We experienced better-than-anticipated consumer demand in the second quarter of 2021, recording sequential net sales growth and significant gross margin improvement.

We also achieved the highest second quarter operating earnings in our history.

We experienced consistently strong sales performance throughout the quarter at Famous Footwear, which contributed to the segment’s highest second quarter net sales in its history.

In the first half of last year, our financial results were negatively impacted by the coronavirus (“COVID-19”) pandemic, including the temporary closure of all of our retail stores beginning in mid-March, with a phased re-opening beginning in mid-May.

We did experience sequential improvement in sales in the second half of 2020, driven by the reopening of our retail stores, and continued solid growth of our e-commerce business.

During the first quarter of 2021, as the vaccine became widely distributed and state and local governments continued to ease restrictions, consumer sentiment and spending began to improve.

The domestic economy and the retail industry have begun to recover, as reflected in our strong financial results.

The additional stimulus measures approved by the federal government also provided a boost in consumer spending.

These factors strengthened demand for our products in the first quarter of 2021, which contributed to strong growth in our net sales and operating earnings.

During the first half of 2021, as the vaccines became widely distributed and governments continued to ease restrictions, consumer sentiment and spending improved, which contributed to higher store traffic and strong growth in our net sales and operating earnings.

While we achieved strong financial results for the second quarter of 2021, we continue to experience global supply chain disruptions as a result of the pandemic.

These disruptions have caused a delay in the receipt of inventory due to port congestion, reduced shipping vessel and container availability, and factory shutdowns as a result of the resurgence of COVID-19 infections, as well as an increase in inbound freight costs.

We are actively working with our suppliers to minimize these disruptions, but we anticipate higher inbound freight costs in the second half of 2021 and beyond.

The extent and duration of these supply chain disruptions and higher freight costs are uncertain.

Financial Highlights

Following is a summary of the financial highlights for the first quarter of 2021:

● Consolidated net sales increased $241.4 million, or 60.8%, to $638.6 million in the first quarter of 2021, compared to $397.2 million in the first quarter of 2020.

The sales increase was primarily driven by our Famous Footwear segment, which experienced sequential improvement in store traffic and conversion rates, contributing to the sales increase of $206.8 million, or 108.2%.

Net sales in our Brand Portfolio segment also increased by $33.1 million, or 15.2%, compared to the first quarter of 2020.

We continued to leverage our enhanced digital platform to grow e-commerce sales in both segments during the first quarter of 2021.

Consolidated net sales from our owned e-commerce websites increased 21.4% compared to the first quarter of 2020.

On a consolidated basis, our direct-to-consumer sales represented 74.5% of consolidated net sales for the first quarter of 2021, compared to 64.3% in the first quarter of 2020.

● Consolidated gross profit increased $153.0 million, or 125.5%, to $274.9 million in the first quarter of 2021, compared to $121.9 million in the first quarter of 2020.

Our gross profit margin increased to 43.0% in the first quarter of 2021, compared to 30.7% in the first quarter of 2020.

Our gross profit margin in the first quarter of 2020 was negatively impacted by incremental inventory markdowns of $33.4 million, as further described below.

● Consolidated operating earnings increased $444.1 million to $17.9 million in the first quarter of 2021, compared to an operating loss of $426.2 million in the first quarter of 2020.

Following is a summary of the financial highlights for the second quarter of 2021:

● Strong consumer demand led to a consolidated net sales increase of $174.1 million, or 34.7%, to $675.5 million in the second quarter of 2021, compared to $501.4 million in the second quarter of 2020.

The sales increase was broad-based and across both segments.

Our Famous Footwear segment contributed a net sales increase of $119.7 million, or 35.8%.

Net sales in our Brand Portfolio segment increased by $55.4 million, or 30.2%, compared to the second quarter of 2020.

On a consolidated basis, our direct-to-consumer sales represented 79% of consolidated net sales for the second quarter of 2021, compared to 80% in the second quarter of 2020.

● Consolidated gross profit increased $139.7 million, or 76.5%, to $322.3 million in the second quarter of 2021, compared to $182.6 million in the second quarter of 2020.

Our gross profit margin increased significantly to 47.7% in the second quarter of 2021, compared to 36.4% in the second quarter of 2020, reflecting a decline in promotional activity driven by strong consumer demand.

● Consolidated operating earnings increased $86.9 million to $62.8 million in the second quarter of 2021, compared to an operating loss of $24.1 million in the second quarter of 2020.

● Consolidated net earnings attributable to Caleres, Inc.

were $6.2 million, or $0.16 per diluted share, in the first quarter of 2021, compared to a net loss of $345.8 million, or $8.95 per diluted share, in the first quarter of 2020.

The following items should be considered in evaluating the comparability of our first quarter results in 2021 and 2020:

● Brand Portfolio – business exits – During the first quarter of 2021, we incurred costs totaling $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share), related to the closure of all but two Naturalizer retail stores in North America.

In the first quarter of 2020, we incurred costs of $1.6 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) in connection with our decision to exit the Fergie brand.

were $37.4 million, or $0.97 per diluted share, in the second quarter of 2021, compared to a net loss of $30.7 million, or $0.83 per diluted share, in the second quarter of 2020.

The following items should be considered in evaluating the comparability of our second quarter results in 2021 and 2020:

● Blowfish Malibu mandatory purchase obligation – As further discussed in Note 5 and Note 14 to the condensed consolidated financial statements, the Blowfish Malibu noncontrolling interest is subject to a mandatory purchase obligation after a three-year period following the 2018 acquisition, based on an earnings multiple formula.

During the first quarter of 2021, we recorded a fair value adjustment of $6.4 million ($4.7 million on an after-tax basis, or $0.13 per diluted share), compared to $3.2 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) in the first quarter of 2020.

During the second quarter of 2021, we recorded a fair value adjustment of $7.1 million ($5.3 million on an after-tax basis, or $0.14 per diluted share), compared to $6.6 million ($4.9 million on an after-tax basis, or $0.13 per diluted share) in the second quarter of 2020.

The fair value adjustments are recorded as interest expense, net in the condensed consolidated statements of earnings (loss).

● Impairment of goodwill and intangible assets – During the first quarter of 2020, we recorded non-cash impairment charges totaling $262.7 million ($218.5 million on an after-tax basis, or $5.66 per diluted share), including $240.3 million of impairment associated with goodwill as a result of the unfavorable business climate and our lower stock price and market capitalization, and $22.4 million associated with our Allen Edmonds and Via Spiga indefinite-lived trade names.

The three-year period following the acquisition ended on July 31, 2021, and we expect to settle the purchase obligation in the third quarter of 2021, utilizing borrowings under our revolving credit agreement.

● Deferred tax valuation allowances – During the second quarter of 2021, we recorded incremental net deferred tax valuation allowances totaling $3.3 million ($0.08 per diluted share), as we are in a full valuation allowance position for federal, state and certain international jurisdictions.

Refer to Note 15 to the condensed consolidated financial statements for further discussion.

● COVID-19-related expenses – During the first quarter of 2020, we incurred $93.6 million ($73.3 million on an after-tax basis, or $1.90 per diluted share) in costs associated with the economic impacts of the COVID-19 pandemic and related impacts on our business and industry.

The $93.6 million was comprised of:

● Impairment charges associated with property and equipment and lease right-of use assets of $34.6 million, presented within restructuring and other special charges;

● Inventory markdowns of $33.4 million, presented within cost of goods sold;

● Expenses associated with factory order cancellations of $14.3 million, presented within restructuring and other special charges;

● Provision for expected credit losses of $8.5 million, presented within restructuring and other special charges;

● Other special charges of $2.8 million, primarily including severance and incremental facility costs such as deep cleaning and supplies, presented within restructuring and other special charges on the condensed consolidated statements of earnings (loss).

● COVID-19-related expenses – During the second quarter of 2020, we incurred $5.4 million ($4.7 million on an after-tax basis, or $0.13 per diluted share) in costs associated with the economic impacts of the COVID-19 pandemic, for severance and related costs, as well as the cost of supplies and deep cleaning our facilities.

Metrics Used in the Evaluation of Our Business

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Our same-store sales calculation excludes the impact of both permanent and temporary store closures.

Accordingly, for the first quarter of 2020, our same-store sales calculation is impacted more heavily by our e-commerce sales penetration, which was higher than in prior periods, given the strong growth in that channel and the fact that our e-commerce sites continued to operate throughout the first quarter of 2020.

Accordingly, for the second quarter of 2020, our same-store sales calculation was impacted more heavily by our e-commerce sales penetration, which was higher than in prior periods, given the strong growth in that channel and the fact that our e-commerce sites continued to operate throughout the second quarter of 2020.

Sales per square foot

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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.

This metric was adversely impacted by the temporary retail store closures during a portion of the first quarter of 2020 and therefore, the metric is not comparable to the first quarter of 2021.

While we experienced a slow start to the first quarter of 2021 related to the lingering impacts of the COVID-19 pandemic, we ended the quarter with strong financial results as we executed on our strategy, including merchandising, marketing and the consumer experience.

expect continued strength at Famous Footwear to be combined with improving performance at the Brand Portfolio segment as we progress through the year.

Throughout the remainder of 2021, we will remain focused on building the momentum at Famous Footwear, leveraging our enhanced direct-to-consumer capabilities to drive e-commerce sales growth, utilizing our data-derived consumer insights to drive greater consumer alignment and engagement, and maintaining our balanced and disciplined approach to cost control and capital spending.

As we continue to align our inventory levels with consumer demand, we will also remain focused on the ongoing global supply chain disruptions by optimizing and maximizing our current inventory and emphasizing trending brands and styles.

This metric was adversely impacted by the temporary retail store closures during a portion of the second quarter of 2020 and therefore, the metric is not comparable to the second quarter of 2021.

We continued to execute at a high level during the second quarter of 2021, achieving another significant sequential increase in net sales and delivering operating earnings in excess of pre-pandemic levels.

The new COVID-19 variants and the impact of the pandemic on the global supply chain have caused uncertainty in the macro environment.

We are actively working with our suppliers to minimize these disruptions, but expect the inflationary economy and the increase in inbound freight costs to impact our financial results in the second half of 2021.

Throughout the remainder of 2021, we will remain focused on building upon our strong performance at Famous Footwear, driving inventory efficiencies, and continuing to create a strong emotional connection with our consumers.

We believe we are well-positioned to navigate through the supply chain disruptions, responding to the variables within our control, to improve financial results in the Brand Portfolio segment.

We will continue to leverage our core competencies and execute on our long-term strategic priorities to enhance long-term value for our shareholders.

Following are the consolidated results and the results by segment:

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Cost of goods sold

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Net earnings (loss) attributable to Caleres, Inc.

Net sales increased $241.4 million, or 60.8%, to $638.6 million for the first quarter of 2021, compared to $397.2 million for the first quarter of 2020.

Our Famous Footwear segment experienced a sales increase of $206.8 million, or 108.2% during the first quarter of 2021, with net sales of $398.1 million exceeding our pre-pandemic first quarter 2019 sales level, achieving the highest net sales in a first quarter in our history.

Our strong performance was attributable to a number of factors, including positive consumer sentiment attributable to the widespread availability of the COVID-19 vaccine and easing of government restrictions, as well as the second round of government stimulus.

We believe that these factors led to a significant improvement in retail store traffic and conversion rates.

Net sales for our Brand Portfolio segment increased $33.1 million, or 15.2% during the first quarter of 2021.

Net sales increased $174.1 million, or 34.7%, to $675.5 million for the second quarter of 2021, compared to $501.4 million for the second quarter of 2020.

Our Famous Footwear segment continued to experience strong consumer demand, with net sales increasing $119.7 million, or 35.8%, compared to the second quarter of 2020.

Famous Footwear’s net sales of $453.6 million were sequentially higher than the first quarter of 2021 and the highest second quarter net sales in our history.

Net sales for our Brand Portfolio segment increased $55.4 million, or 30.2% during the second quarter of 2021.

While Brand Portfolio net sales improved over last year, they remain below pre-pandemic levels, due in part to the brand exits announced in late 2019 and early 2020 and the closure of all but two Naturalizer retail stores in North America.

Our e-commerce and logistics capabilities helped drive a 21.4% increase in e-commerce sales on our owned websites during the first quarter of 2021, with consolidated e-commerce penetration representing approximately 26% of net sales.

On a consolidated basis, our direct-to-consumer sales represented 74.5% of total net sales for the first quarter of 2021.

Our casual, athletic and sport categories of footwear continued to be the strongest performers during the quarter, and demand for dress footwear is beginning to build.

Gross profit increased $153.0 million, or 125.5%, to $274.9 million for the first quarter of 2021, compared to $121.9 million for the first quarter of 2020, due in part to higher net sales.

In addition, we were able to reduce promotional activity at Famous Footwear due to our well-positioned inventory and strong sell-throughs.

Furthermore, our gross profit in the first quarter of 2020 was impacted by higher incremental cost of goods sold primarily due to $33.4 million in inventory markdowns reflecting the difficult retail environment driven by the COVID pandemic, as well as $1.6 million in inventory markdowns related to the decision to exit our Fergie brand.

As a percentage of net sales, gross profit increased to 43.0% for the first quarter of 2021, compared to 30.7% for the first quarter of 2020.

On a consolidated basis, our direct-to-consumer sales represented 79% of total net sales for the second quarter of 2021.

Our casual, athletic and sport footwear categories continued to resonate with consumers, and we experienced strong sales growth in sandals.

Net sales increased $415.6 million, or 46.2%, to $1,314.2 million for the six months ended July 31, 2021, compared to $898.6 million for the six months ended August 1, 2020.

Our strong performance was attributable to a number of factors, including positive consumer sentiment attributable to the widespread availability of the COVID-19 vaccines and easing of government restrictions, as well as additional government stimulus measures.

We believe that these factors led to a significant improvement in retail store traffic.

Our Famous Footwear segment experienced a net sales increase of $326.6 million, or 62.2%, for the six months ended July 31, 2021, with record-setting net sales of $851.8 million.

Our Brand Portfolio segment reported an $88.4 million, or 22.1%, increase in net sales, with strong sales growth from our Sam Edelman, Blowfish, Vionic and Allen Edmonds brands.

Gross profit increased $139.7 million, or 76.5%, to $322.3 million for the second quarter of 2021, compared to $182.6 million for the second quarter of 2020, reflecting higher net sales and a higher gross profit rate.

As a percentage of net sales, gross profit increased to 47.7% for the second quarter of 2021, compared to 36.4% for the second quarter of 2020, reflecting a decline in promotional activity driven by strong consumer demand.

Gross profit increased $292.7 million, or 96.1%, to $597.2 million for the six months ended July 31, 2021, compared to $304.5 million for the six months ended August 1, 2020, primarily due to higher net sales and a reduction in promotional activity at Famous Footwear.

For the six months ended August 1, 2020, our gross profit was impacted by higher incremental cost of goods sold primarily due to $33.4 million in inventory markdowns reflecting the difficult retail environment driven by the COVID-19 pandemic, as well as $1.6 million in inventory markdowns related to the decision to exit our Fergie brand.

As a percentage of net sales, gross profit increased to 45.4% for the six months ended July 31, 2021, compared to 33.9% for the six months ended August 1, 2020.

We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses.

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Selling and Administrative Expenses

Selling and administrative expenses increased $18.3 million, or 8.1%, to $243.5 million for the first quarter of 2021, compared to $225.2 million for the first quarter of 2020.

The increase was primarily due to higher salaries in the first quarter of 2021, combined with higher expenses related to our incentive compensation plans.

In the first quarter of 2020, in response to our retail stores being shut down at the onset of the pandemic we took steps to reduce expense, including workforce reductions, furloughs for a significant portion of our retail store associates and temporary salary reductions for most remaining employees.

Logistics and other variable expenses were also higher in the first quarter of 2021 to support higher sales volume.

As a percentage of net sales, selling and administrative expenses decreased to 38.1% for the first quarter of 2021, from 56.7% for the first quarter of 2020.

Selling and administrative expenses increased $58.2 million, or 28.9%, to $259.5 million for the second quarter of 2021, compared to $201.3 million for the second quarter of 2020.

The increase was primarily due to higher expenses associated with our cash-based incentive compensation plan for certain employees and higher salary expenses in the second quarter of 2021.

Salary expenses were lower during the second quarter of 2020 as a result of the actions taken to mitigate the impact of COVID-19 on our financial results.

In response to the temporary closure of our retail stores at the onset of the pandemic in the first quarter of 2020, we took steps to reduce expenses, including workforce reductions and furloughs for a significant portion of our retail store associates, as well as temporary salary reductions for most remaining employees, which continued through the end of the second quarter of 2020.

Marketing and advertising expenses were also higher in the second quarter of 2021, which were partially offset by lower rent and facilities expenses, primarily associated with the Naturalizer retail store closures.

As a percentage of net sales, selling and administrative expenses decreased to 38.4% for the second quarter of 2021, from 40.1% for the second quarter of 2020.

Selling and administrative expenses increased $76.4 million, or 17.9%, to $503.0 million for the six months ended July 31, 2021, compared to $426.6 million for the six months ended August 1, 2020.

The increase for the six months ended July 31, 2021 was primarily due to higher expenses for our cash-based incentive compensation plan for certain employees and higher salary expenses.

As discussed above, salary expenses were lower during the six months ended August 1, 2020 as a result of the actions taken to mitigate the impact of COVID-19 on our financial results.

As a percentage of net sales, selling and administrative expenses decreased to 38.3% for the second quarter of 2021, from 47.5% for the second quarter of 2020, reflecting better leveraging of expenses over higher net sales.

Impairment of Goodwill and Intangible Assets

During the first quarter of 2020, we incurred impairment charges of $262.7 million ($218.5 million on an after-tax basis), including $240.3 million associated with goodwill and $22.4 million associated with the indefinite-lived Allen Edmonds and Via Spiga trade names.

There were no corresponding charges for the first quarter of 2021.

During the six months ended August 1, 2020, we recorded non-cash impairment charges of $262.7 million ($218.5 million on an after-tax basis), including $240.3 million associated with goodwill and $22.4 million associated with the indefinite-lived Allen Edmonds and Via Spiga trade names.

There were no corresponding charges for the six months ended July 31, 2021.

Refer to Note 5 and Note 8 to the condensed consolidated financial statements for further discussion of these charges.

Restructuring and Other Special Charges, Net

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), reflecting expenses associated with the decision to close all Naturalizer retail stores in North America with the exception of two Naturalizer flagship retail stores in the United States.

Restructuring and other special charges of $60.2 million ($47.7 million on an after-tax basis, or $1.24 per diluted share) were incurred in the first quarter of 2020 related to the unfavorable business climate, driven by the impact of the COVID-19 pandemic on our business operations.

These charges were primarily for impairment associated with retail store furniture and fixtures and lease right-of-use assets and liabilities associated with factory order cancellations.

We incurred restructuring and other special charges of $5.4 million ($4.7 million on an after-tax basis, or $0.13 per diluted share) in the second quarter of 2020, primarily for severance, as well as supplies and deep cleaning of our facilities, driven by the impact of the COVID-19 pandemic on our business operations.

There were no corresponding charges in the second quarter of 2021.

Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.

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 six months ended July 31, 2021, reflecting expenses associated with the decision to close all Naturalizer retail stores in North America with the exception of two Naturalizer flagship retail stores in the United States.

During the six months ended August 1, 2020, we incurred restructuring and other special charges of $65.6 million ($52.5 million on an after-tax basis, or $1.46 per diluted share) related to the unfavorable business climate, driven by the impact of the COVID-19 pandemic on our business operations.

These charges were primarily for impairment associated with lease right-of-use assets and retail store furniture and fixtures, liabilities associated with factory order cancellations and severance.

Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.

Operating Earnings (Loss)

Operating earnings increased $444.1 million to $17.9 million for the first quarter of 2021, compared to an operating loss of $426.2 million for the first quarter of 2020, primarily reflecting higher net sales, gross profit and lower restructuring and impairment charges.

As a percentage of net sales, operating earnings were 2.8% for the first quarter of 2021, compared to an operating loss of 107.3% for the first quarter of 2020.

Operating earnings increased $86.9 million to $62.8 million for the second quarter of 2021, compared to an operating loss of $24.1 million for the second quarter of 2020, primarily reflecting higher net sales and gross profit.

As a percentage of net sales, operating earnings were 9.3% for the second quarter of 2021, compared to an operating loss of 4.8% for the second quarter of 2020.

Operating earnings increased $531.0 million to $80.7 million for the six months ended July 31, 2021, compared to an operating loss of $450.4 million for the six months ended August 1, 2020, primarily reflecting higher net sales and gross profit, lower impairment charges and better leveraging of expenses over a higher net sales base.

As a percentage of net sales, operating earnings were 6.1% for the six months ended July 31, 2021, compared to an operating loss of 50.1% for the six months ended August 1, 2020.

Interest Expense, Net

Interest expense, net increased $2.3 million, or 24.4%, to $11.8 million for the first quarter of 2021, compared to $9.5 million for the first quarter of 2020, reflecting the fair value adjustment to the Blowfish Malibu mandatory purchase obligation of $6.4 million in the first quarter of 2021, compared to $3.2 million in the first quarter of 2020.

Interest expense, net decreased $1.5 million, or 11.0%, to $12.0 million for the second quarter of 2021, compared to $13.5 million for the second quarter of 2020, reflecting lower average borrowings under our revolving credit agreement.

We continued to make debt reduction a priority during the second quarter of 2021, repaying $100.0 million of borrowings under our revolving credit facility, ending the quarter with $100.0 million of revolver borrowings.

This decrease was partially offset by a $0.5 million increase in the fair value adjustment to the

Blowfish Malibu mandatory purchase obligation, to $7.1 million in the second quarter of 2021, compared to $6.6 million in the second quarter of 2020, reflecting continued sales and earnings growth of the Blowfish Malibu brand.

Interest expense, net increased $0.9 million, or 3.8%, to $23.8 million for the six months ended July 31, 2021, compared to $22.9 million for the six months ended August 1, 2020, reflecting a $3.7 million increase in the fair value adjustment to the Blowfish Malibu mandatory purchase obligation, to $13.5 million for the six months ended July 31, 2021, from $9.8 million in the six months ended August 1, 2020.

The increase associated with the mandatory purchase obligation was partially offset by lower average borrowings under our revolving credit agreement.

We continued to make debt reduction a priority during the first quarter of 2021, repaying $50.0 million during the first quarter of 2021 and ending the quarter with $200.0 million of borrowings under our revolving credit facility.

We have continued to utilize our strong cash generation to reduce the incremental borrowings that were used to preserve financial flexibility at the onset of the pandemic, reducing the borrowings under our revolving credit agreement from $440.0 million in March 2020 to $100.0 million at July 31, 2021.

Other Income, Net

Other income, net increased $0.2 million, or 6.8%, to $3.8 million for the first quarter of 2021, compared to $3.6 million for the first quarter of 2020.

Other income, net increased $0.2 million, or 5.1%, to $3.9 million for the second quarter of 2021, compared to $3.7 million for the second quarter of 2020.

Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.

Income Tax Benefit (Provision)

Other income, net increased $0.4 million, or 5.9%, to $7.7 million for six months ended July 31, 2021, compared to $7.3 million for the six months ended August 1, 2020.

Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.

Income Tax (Provision) Benefit

Our effective tax rate can vary considerably from period to period, depending on a number of factors.

Our consolidated effective tax rate was 35.5% for the first quarter of 2021, compared to 19.9% for the first quarter of 2020.

Our higher tax rate for the thirteen weeks ended May 1, 2021 primarily reflects the non-deductibility of losses at our Canadian division, which were driven by exit-related costs associated with Naturalizer retail stores.

The rate was partially offset by discrete tax benefits totaling $1.2 million.

During the first quarter of 2020, our effective tax rate was impacted by several discrete tax items, including the non-deductibility of a portion of the Company's intangible asset impairment charges, the provision of a valuation allowance related to net deferred tax assets of its Canadian business division and the incremental tax provision related to share-based compensation.

Our consolidated effective tax rate was 30.3% for the second quarter of 2021, compared to 9.4% for the second quarter of 2020.

Our higher tax rate for the second quarter of 2021 was driven by discrete tax adjustments of $2.9 million, inclusive of $3.3 million of incremental valuation allowances for our deferred tax assets, as we are in a full valuation allowance position for federal, state and certain international jurisdictions.

During the second quarter of 2020, our effective tax rate was impacted by several discrete tax items totaling $2.7 million, including the non-deductibility of losses at our Canadian business division.

Offsetting this impact was a benefit associated with the CARES Act, which permits the Company to carry back 2020 losses to years with a higher federal tax rate.

For the six months ended July 31, 2021, our consolidated effective tax rate was 31.1%, compared to 19.1% for the six months ended August 1, 2020.

Our higher tax rate for the six months ended July 31, 2021 primarily reflects the incremental valuation allowances recorded in the second quarter, as described above, and the non-deductibility of losses at our Canadian business division, which were driven by exit-related costs associated with Naturalizer retail stores during the first quarter.

Our effective tax rate for the six months ended August 1, 2020 was impacted by several discrete tax items, including the non-deductibility of a portion of our intangible asset impairment charges, the provision of a valuation allowance related to certain state and Canada deferred tax assets, and the incremental tax provision related to the vesting of stock awards.

Offsetting these impacts was a benefit associated with the CARES ACT, which permits the Company to carry back 2020 losses to years with a higher federal tax rate.

Net Earnings (Loss) Attributable to Caleres, Inc.

Net earnings attributable to Caleres, Inc.

were $6.2 million for the first quarter of 2021, compared to a net loss of $345.8 million for the first quarter of 2020, respectively, as a result of the factors described above.

were $37.4 million and $43.5 for the second quarter and six months ended July 31, 2021, respectively, compared to net losses of $30.7 million and $376.6 million for the second quarter and six months ended August 1, 2020, respectively, as a result of the factors described above.

FAMOUS FOOTWEAR

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($ millions, except sales per square foot)

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Impact of changes in Canadian exchange rate on sales

Sales per square foot, excluding e-commerce (thirteen weeks ended)

Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)

Sales per square foot, excluding e-commerce (trailing twelve months)

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Ending stores

Net sales increased $206.8 million, or 108.2%, to $398.1 million for the first quarter of 2021, compared to $191.3 million for the first quarter of 2020, and also exceeded our pre-pandemic first quarter 2019 sales level.

Our strong performance during the first quarter of 2021 was attributable to a number of factors.

Consumer confidence increased during the quarter as a result of the widespread availability of the COVID-19 vaccine and the easing of government restrictions, which led to a significant improvement in retail store traffic and conversion rates.

In addition, the second round of government stimulus positively impacted net sales for the quarter.

We also continue to experience strong growth in our e-commerce business, which increased approximately 17% for the first quarter of 2021.

E-commerce penetration was approximately 16% of net sales in the first quarter of 2021, compared to approximately 28% in the first quarter of 2020 when our retail stores were closed for approximately half of the quarter.

We opened four stores and closed seven stores during the first quarter of 2021, resulting in 913 stores and total square footage of 6.0 million at the end of the first quarter of 2021, compared to 934 stores and total square footage of 6.2 million at the end of the first quarter of 2020.

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 81% of our net sales made to program members in the first quarter of 2021, compared to 79% in the first quarter of 2020.

Gross profit increased $110.7 million, or 160.3%, to $179.8 million for the first quarter of 2021, compared to $69.1 million for the first quarter of 2020, driven by the sales increase.

As a percentage of net sales, our gross profit increased to 45.2% for the first quarter of 2021, compared to 36.1% for the first quarter of 2020.

Due to our well-positioned inventory and strong sell-throughs, we reduced promotional activity.

As a result, both our retail stores and e-commerce business experienced higher gross margins than the first quarter of 2020.

In addition, our gross margin in the first quarter of 2020 was impacted by $6.0 million in incremental inventory markdowns, reflecting the difficult retail environment in 2020 driven by the pandemic.

Famous Footwear achieved net sales of $453.6 million, which was the highest second quarter net sales in our history.

Net sales increased $119.7 million, or 35.8%, compared to the second quarter of 2020.

With the increase in COVID-19 vaccination rates, we have experienced strong growth in our retail store traffic and consistently strong sales performance throughout the quarter.

This trend led to higher in-store sales but a decline in e-commerce penetration in the second quarter of 2021, to approximately 11% of net sales, compared to approximately 25% in the second quarter of 2020 when our retail stores were closed for a portion of the quarter.

Our casual, athletic and sport categories of footwear continue to resonate with customers, and we also experienced strong growth in sandals.

During the second quarter of 2021, we opened four stores and closed five stores, resulting in 912 stores and total square footage of 6.0 million at the end of the second quarter of 2021, compared to 936 stores and total square footage of 6.2 million at the end of the second quarter of 2020.

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 78% of our net sales made to program members in the second quarter of 2021, compared to 79% in the second quarter of 2020.

Net sales increased $326.6 million, or 62.2%, to $851.8 million for the six months ended July 31, 2021, compared to $525.2 million for the six months ended August 1, 2020.

Our strong performance during the six months ended July 31, 2021 was attributable to a number of factors.

Consumer confidence improved during the six months ended July 31, 2021 as a result of the widespread availability of the COVID-19 vaccines and the easing of government restrictions, which led to a significant increase in retail store traffic and conversion rates.

Additional government stimulus measures also positively impacted net sales.

E-commerce penetration was approximately 13% of net sales in the six months ended July 31, 2021, compared to approximately 26% in the six months ended August 1, 2020 when our retail stores were temporarily closed from mid-March, with a phased reopening beginning in May.

Our casual, athletic and sport categories of footwear continued to be the strongest performers.

D uring the six months ended July 31, 2021, we opened eight stores and closed 12 stores.

Gross profit increased $108.2 million, or 90.9%, to $227.4 million for the second quarter of 2021, compared to $119.2 million for the second quarter of 2020, driven by the sales increase and a higher gross profit rate.

As a percentage of net sales, our gross profit increased to 50.1% for the second quarter of 2021, compared to 35.7% for the second quarter of 2020.

Due to our well-positioned inventory and strong sell-throughs, we reduced promotional activity, resulting in higher gross margins in both our retail stores and e-commerce business during the second quarter of 2021.

Gross profit increased $219.0 million, or 116.3%, to $407.2 million for the six months ended July 31, 2021, compared to $188.2 million for the six months ended August 1, 2020, reflecting both higher net sales and gross profit rate.

As a percentage of net sales, our gross profit

increased to 47.8% for the six months ended July 31, 2021, compared to 35.8% for the six months ended August 1, 2020, reflecting a reduction in promotional activity driven by our well-positioned inventory and strong consumer demand.

In addition, our gross profit margin in the six months ended August 1, 2020 was adversely impacted by $6.0 million in incremental inventory markdowns, reflecting the difficult retail environment in 2020 driven by the pandemic.

Selling and Administrative Expenses

Selling and administrative expenses increased $11.3 million, or 9.4%, to $131.9 million for the first quarter of 2021, compared to $120.6 million for the first quarter of 2020.

The increase was primarily due to higher salaries in the first quarter of 2021, as well as an increase in logistics and other variable expenses to support the higher sales volume.

In addition, in the first quarter of 2020, in response to our retail stores being shut down at the onset of the pandemic, we took steps to reduce expense, including workforce reductions, furloughs for a significant portion of our retail store associates and temporary salary reductions for most remaining employees.

As a percentage of net sales, selling and administrative expenses decreased to 33.2% for the first quarter of 2021, compared to 63.0% for the first quarter of 2020.

Selling and administrative expenses increased $24.3 million, or 20.8%, to $141.9 million for the second quarter of 2021, compared to $117.6 million for the second quarter of 2020.

The increase was primarily due to higher salaries in the second quarter of 2021, as well as an increase in marketing expenses.

Salary expenses were lower in the second quarter of 2020, reflecting the actions taken at the onset of the pandemic, including workforce reductions, furloughs for a significant portion of our retail store associates and temporary salary reductions for most remaining employees.

As a percentage of net sales, selling and administrative expenses decreased to 31.3% for the second quarter of 2021, compared to 35.2% for the second quarter of 2020, reflecting better leveraging of expenses over a higher net sales base.

Selling and administrative expenses increased $35.7 million, or 15.0%, to $273.8 million for the six months ended July 31, 2021, compared to $238.1 million for the six months ended August 1, 2020.

The increase was primarily due to higher salaries and higher variable expenses, including logistics, to support the increase in sales volume in the six months ended July 31, 2021.

In addition, strategic actions were taken to reduce expenses in the first half of 2020 to mitigate the impact of COVID-19 during the period of retail store closures.

As a percentage of net sales, selling and administrative expenses decreased to 32.1% for the six months ended July 31, 2021, compared to 45.3% for the six months ended August 1, 2020, reflecting better leveraging of our expenses over higher net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges were $16.0 million for the first quarter of 2020, consisting primarily of impairment charges on furniture and fixtures in our retail stores and lease right-of use assets reflecting the impact of COVID-19 on our business operations.

to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

There were no corresponding charges during the first quarter of 2021.

Restructuring and other special charges were $0.6 million for the second quarter of 2020, consisting primarily of severance.

For the six months ended August 1, 2020, restructuring and other special charges were $16.6 million, consisting primarily of impairment charges on furniture and fixtures in our retail stores and lease right-of use assets reflecting the impact of COVID-19 on our business 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 six months ended July 31, 2021.

Operating Earnings (Loss)

Our record sales performance also led to significant improvement in our operating earnings.

Operating earnings (loss) increased $115.4 million to operating earnings of $47.9 million for the first quarter of 2021, compared to an operating loss of $67.5 million for the first quarter of 2020.

As a percentage of net sales, operating earnings were 12.0% for the first quarter of 2021, compared to an operating loss of 35.3% for the first quarter of 2020.

Operating earnings increased $84.5 million to operating earnings of $85.5 million for the second quarter of 2021, compared to $1.0 million for the second quarter of 2020.

As a percentage of net sales, operating earnings were 18.8% for the second quarter of 2021, compared to 0.3% for the second quarter of 2020.

Operating earnings (loss) increased $199.9 million to operating earnings of $133.4 million for the six months ended July 31, 2021, compared to an operating loss of $66.5 million for the six months ended August 1, 2020.

As a percentage of net sales, operating earnings were 15.7% for the second quarter of 2021, compared to an operating loss of 12.7% for the second quarter of 2020.

BRAND PORTFOLIO

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August 1, 2020

July 31, 2021

August 1, 2020

($ millions, except sales per square foot)

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Restructuring and other special charges, net

Operating loss

Operating earnings (loss)

Direct-to-consumer (% of net sales) (1)

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Impact of changes in Canadian exchange rate on retail sales

Sales per square foot, excluding e-commerce (thirteen weeks ended)

Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)

Sales per square foot, excluding e-commerce (trailing twelve months)

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(1) Direct-to-consumer includes sales of our retail stores and e-commerce sites and sales through our customers’ websites that we fulfill on a drop-ship basis.

Net sales increased $33.1 million, or 15.2%, to $250.3 million for the first quarter of 2021, compared to $217.2 million for the first quarter of 2020.

Net sales improved over last year, yet remain below pre-pandemic levels.

We experienced a rebound in demand for sport and casual product, and demand for dress footwear is also beginning to build.

During the first quarter of 2021, we experienced strong sales growth from our Sam Edelman, Blowfish, Vionic and Ryka brands, which carry a large assortment of athletic and casual styles.

In the first quarter of 2021, we closed the remaining 73 Naturalizer stores in North America scheduled for closure as part of our strategic realignment of the Naturalizer retail store operations.

We will remain focused on growing the brand’s e-commerce business through naturalizer.com, our retail partners and their websites, and the two flagship stores in the United States and four stores in China that we continue to operate.

In total, we closed 76 stores during the first quarter of 2021, including 73 stores in conjunction with the Naturalizer retail store exit described above, and opened one store, resulting in a total of 95 stores and total square footage of 0.1 million at the end of the first quarter of 2021, compared to 203 stores and total square footage of 0.4 million at the end of the first quarter of 2020.

On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $336 for the twelve months ended May 1, 2021, compared to $328 for the twelve

months ended May 2, 2020.

E-commerce sales continued to grow as a percentage of the business during the first quarter, and we expect this trend to continue.

Our unfilled order position for our wholesale sales increased $76.2 million, or 40.5%, to $264.5 million at May 1, 2021, compared to $188.3 million at May 2, 2020.

The increase in our backlog order levels reflects increased demand for product as our wholesale customers placed more orders than last year due to the economic impact of the COVID-19 pandemic in the first quarter of 2020.

We have experienced global supply chain disruptions to our receipt of inventory due to port congestion and reduced shipping vessel and container availability.

We expect this to continue into the third quarter of 2021.

Gross profit increased $40.6 million, or 76.1%, to $94.0 million for the first quarter of 2021, compared to $53.4 million for the first quarter of 2020, due in part to higher net sales.

Our gross profit in 2021 was adversely impacted by the exit of the Naturalizer retail stores, as deeper discounts were provided to clear remaining inventory.

However, our gross profit in the first quarter of 2020 was impacted by higher incremental cost of goods sold primarily due to $27.5 million in inventory markdowns reflecting the difficult retail environment driven by the COVID pandemic, as well as $1.6 million in inventory markdowns related to the decision to exit our Fergie brand.

As a percentage of net sales, our gross profit increased to 37.6% for the first quarter of 2021, compared to 24.6% for the first quarter of 2020.

Net sales increased $55.4 million, or 30.2%, to $239.0 million for the second quarter of 2021, compared to $183.6 million for the second quarter of 2020.

While net sales improved compared to the second quarter of 2020, sales volume still remains below pre-pandemic levels, due in part to the brand exits announced in late 2019 and early 2020 and the closure of all but two Naturalizer retail stores in North America.

During the second quarter of 2021, we experienced strong sales growth from our Sam Edelman, Vionic, Blowfish Malibu, and Ryka brands, which carry a large assortment of athletic and casual styles.

In addition, sales from our Allen Edmonds brand have strengthened, reflecting the increased assortment of casual styles, as well as improving consumer demand for dress footwear.

Net sales in the second quarter of 2021 were adversely impacted by the delayed receipt of inventory due to supply chain disruptions, including port congestion and reduced shipping vessel and container availability.

During the second quarter of 2021, we closed nine stores and opened one store, resulting in a total of 87 stores and total square footage of 0.1 million at the end of the second quarter of 2021, compared to 202 stores and total square footage of 0.4 million at the end of the second quarter of 2020.

Net sales increased $88.4 million, or 22.1%, to $489.3 for the six months ended July 31, 2021, compared to $400.9 million for the six months ended August 1, 2020, reflecting the factors described above.

During the six months ended July 31, 2021, we experienced strong sales growth from our Sam Edelman, Blowfish Malibu, Vionic and Allen Edmonds brands.

In the first quarter of 2021, we closed the remaining 73 Naturalizer stores in North America that were scheduled for closure as part of our strategic realignment of the Naturalizer retail store operations.

We remain focused on growing the brand’s e-commerce business through naturalizer.com, our retail partners and their websites, and the two flagship stores in the United States and two stores in China that we continue to operate.

Including the Naturalizer closures, we closed 85 stores and opened two stores during the six months ended July 31, 2021.

On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $561 for the twelve months ended July 31, 2021, compared to $251 for the twelve months ended August 1, 2020.

Our unfilled order position for our wholesale sales increased $133.5 million, or 68.4%, to $328.7 million at July 31, 2021, compared to $195.2 million at August 1, 2020.

The increase in our backlog order levels reflects increased demand for product as our wholesale customers have placed more orders than last year due to the economic impact of the COVID-19 pandemic in the second quarter of 2020.

In addition, the global supply chain disruptions have caused a delay in the receipt of inventory due to port congestion, reduced shipping vessel and container availability, and factory shutdowns as a result of the resurgence of COVID-19 infections.

We are actively working with our suppliers to minimize these disruptions, but expect the disruptions to continue in the second half of 2021.

Gross profit increased $30.9 million, or 48.3%, to $94.9 million for the second quarter of 2021, compared to $64.0 million for the second quarter of 2020, reflecting higher net sales and a higher gross profit rate.

As a percentage of net sales, our gross profit increased to 39.7% for the second quarter of 2021, compared to 34.9% for the second quarter of 2020, reflecting more full price selling across our portfolio of brands driven by strong consumer demand.

In connection with the supply chain disruptions described earlier and the related capacity shortages, our freight costs are rising.

Though the impact was not significant during the second quarter, we anticipate higher inbound freight costs in the second half of 2021, which may impact our gross profit if we are unable to mitigate or recover these additional costs.

Gross profit increased $71.5 million, or 60.9%, to $188.9 million for the six months ended July 31, 2021, compared to $117.4 million for the six months ended August 1, 2020, due to higher net sales and improved gross profit rate.

Our gross profit in the six months ended August 1, 2020 was impacted by higher incremental cost of goods sold primarily due to $27.5 million in inventory markdowns reflecting the difficult retail environment driven by the COVID pandemic, as well as $1.6 million in inventory markdowns related to the decision to exit our Fergie brand.

As a percentage of net sales, our gross profit increased to 38.6% for the six months ended July 31, 2021, compared to 29.3% for the six months ended August 1, 2020.

Selling and Administrative Expenses

Selling and administrative expenses decreased $9.3 million, or 10.0%, to $83.3 million for the first quarter of 2021, compared to $92.6 million for the first quarter of 2020.

The decrease was driven by lower logistics, retail facilities and salaries expense primarily associated with the Naturalizer retail store closures, partially offset by higher marketing expenses.

As a percentage of net sales, selling and administrative expenses decreased to 33.3% for the first quarter of 2021, compared to 42.6% for the first quarter of 2020.

Selling and administrative expenses increased $4.8 million, or 6.5%, to $78.3 million for the second quarter of 2021, compared to $73.5 million for the second quarter of 2020.

The increase was driven by higher salaries, due in part to the furloughs and temporary salary reductions in the second quarter of 2020 to mitigate the impact of COVID-19 on our financial results, and higher marketing expenses, partially offset by lower rent and facilities expenses, primarily associated with the lower store count.

As a percentage of net sales, selling and administrative expenses decreased to 32.8% for the second quarter of 2021, compared to 40.1% for the second quarter of 2020.

Selling and administrative expenses decreased $4.5 million, or 2.7%, to $161.7 million for the six months ended July 31, 2021, compared to $166.2 million for the six months ended August 1, 2020.

The decrease was driven by lower retail facilities costs, primarily associated with the lower store count, partially offset by higher marketing expenses.

As a percentage of net sales, selling and administrative expenses decreased to 33.0% for the six months ended July 31, 2021, compared to 41.5% for the six months ended August 1, 2020.

Impairment of Goodwill and Intangible Assets

During the first quarter of 2020, we incurred impairment charges of $262.7 million, including $240.3 million associated with goodwill and $22.4 million associated with intangible assets, including $12.2 million for the Allen Edmonds trade name and $10.2 million for the Via Spiga trade name.

There were no corresponding charges in the first quarter of 2021.

There were no corresponding charges in the second quarter of 2020 or for the six months ended July 31, 2021.

Refer to Note 5 and Note 8 to the condensed consolidated financial statements for further discussion of these charges.

Restructuring and Other Special Charges, Net

Restructuring and other special charges were $13.5 million for the first quarter of 2021, reflecting expenses associated with the decision to close all but two flagship Naturalizer retail stores in the U.S.

These costs primarily represent lease termination and other store closure costs, including employee severance.

In the first quarter of 2020, we recorded restructuring and other special charges of $43.8 million, reflecting expenses associated with the impact of COVID-19 on our business operations, primarily impairment charges on store furniture and fixtures and lease right-of-use assets of $19.3 million and liabilities due to our factories for order cancellations of $14.3 million.

Restructuring and other special charges of $4.6 million were recorded during the second quarter of 2020, primarily for severance expense, with no corresponding charges for the second quarter of 2021.

Restructuring and other special charges of $13.5 million were recorded during the six months ended July 31, 2021, reflecting expenses associated with the decision to close all but two flagship Naturalizer retail stores in the United States.

These costs primarily represented lease termination and other store closure costs, including employee severance.

For the six months ended August 1, 2020, we recorded restructuring and other special charges of $48.4 million, reflecting expenses associated with the impact of COVID-19 on our business operations, primarily impairment charges on store furniture and fixtures and lease right-of-use assets, liabilities due to our factories for order cancellations and severance.

Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Loss

Operating loss decreased $342.9 million to $2.8 million for the first quarter of 2021, compared to $345.7 million for the first quarter of 2020 as a result of the factors described above.

As a percentage of net sales, the operating loss was 1.1% for the first quarter of 2021, compared to 159.2% in the first quarter of 2020.

Operating Earnings (Loss)

Operating earnings (loss) for the second quarter of 2021 exceeded pre-pandemic levels.

Operating earnings increased $30.7 million to $16.6 million for the second quarter of 2021, compared to an operating loss of $14.1 million for the second quarter of 2020, as a result of the factors described above.

As a percentage of net sales, operating earnings were 6.9% for the second quarter of 2021, compared to an operating loss of 7.7% in the second quarter of 2020.

Operating earnings (loss) increased $373.6 million to operating earnings of $13.7 million for the six months ended July 31, 2021, compared to a net loss of $359.9 million for the six months ended August 1, 2020, as a result of the factors described above.

As a percentage of net sales, operating earnings were 2.8% for the six months ended July 31, 2021, compared to an operating loss of 89.8% for the six months ended August 1, 2020.

ELIMINATIONS AND OTHER

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Twenty-Six Weeks Ended

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August 1, 2020

July 31, 2021

August 1, 2020

Cost of goods sold

3 unchanged sentences

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 $9.8 million for the first quarter of 2021 is $1.5 million, or 13.6%, lower than the first quarter of 2020, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses increased $16.4 million, to $28.3 million in the first quarter of 2021, compared to $11.9 million for the first quarter of 2020.

The increase was primarily driven by higher expenses for our cash-based incentive compensation plan for certain employees and higher expenses associated with our cash-based director compensation plans, reflecting growth in our stock price during the first quarter of 2021 compared to a decline during the first quarter of 2020.

Restructuring and other special charges were $0.4 million for the first quarter of 2020, with no corresponding costs in the first quarter of 2021.

The expenses incurred during the first quarter of 2020 were associated with workforce reductions as we sought to minimize our expense structure during the COVID-19 pandemic, as well as incremental expenses associated with deep cleaning our facilities and related supplies.

The net sales elimination of $17.1 million for the second quarter of 2021 is $1.0 million, or 6.3%, higher than the second quarter of 2020, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear The net sales elimination of $26.9 million for the six months ended July 31, 2021 is $0.5 million, or 1.9%, lower than the six months ended August 1, 2020, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses increased $29.0 million, to $39.3 million in the second quarter of 2021, compared to $10.3 million for the second quarter of 2020.

The increase was primarily driven by higher expenses for our cash-based incentive compensation plan for certain employees.

Selling and administrative expenses increased $45.2 million, to $67.5 million in the six months ended July 31, 2021, compared to $22.3 million for the six months ended August 1, 2020, reflecting higher expenses for our cash-based incentive compensation plan for certain employees and higher expenses associated with our cash-based director compensation plans, reflecting growth in our stock price during the six months ended July 31, 2021, compared to a decline in the six months ended August 1, 2020.

Restructuring and other special charges of $0.3 million and $0.6 million for the three and six months ended August 1, 2020, respectively, were associated with workforce reductions as we sought to minimize our expense structure during the COVID-19 pandemic, as well as incremental expenses associated with deep cleaning our facilities and related supplies.

There were no corresponding expenses for the six months ended July 31, 2021.

Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

LIQUIDITY AND CAPITAL RESOURCES

July 31, 2021

August 1, 2020

January 30, 2021

Borrowings under revolving credit agreement

Current portion of long-term debt

Long-term debt

Total debt (1)

(1) Total debt excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $45.5 million, $18.4 million and $39.1 million as of May 1, 2021, May 2, 2020 and January 30, 2021, respectively.

Total debt obligations of $399.0 million at May 1, 2021 decreased $238.0 million, from $637.0 million at May 2, 2020, and decreased $49.9 million, from $448.9 million at January 30, 2021.

The decreases from both May 2, 2020 and January 30, 2021 reflect continued progress toward reducing the borrowings under our Credit Agreement.

We reduced the borrowings under our revolving credit facility by $50.0 million, ending the first quarter of 2021 with an outstanding balance of $200.0 million.

Net interest expense for the first quarter of 2021 increased $2.3 million to $11.8 million, compared to $9.5 million for the first quarter of 2020.

The increase is primarily attributable to the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements, partially offset by lower average borrowings under our revolving credit agreement.

(1) As presented here, total debt excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $52.6 million, $25.0 million and $39.1 million as of July 31, 2021, August 1, 2020 and January 30, 2021, respectively.

Total debt obligations of $299.1 million at July 31, 2021 decreased $249.5 million, from $548.6 million at August 1, 2020, and decreased $149.8 million, from $448.9 million at January 30, 2021.

The decreases from both August 1, 2020 and January 30, 2021 reflect continued progress toward reducing the borrowings under our revolving credit agreement.

We reduced the borrowings under our revolving credit facility by $100.0 million during the second quarter of 2021, ending the quarter with an outstanding balance of $100.0 million.

Net interest expense for the second quarter of 2021 decreased $1.5 million to $12.0 million, compared to $13.5 million for the second quarter of 2020.

The decrease is primarily attributable to lower average borrowings under our revolving credit agreement, partially offset by a $0.5 million increase in the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements.

Credit Agreement

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The Credit Agreement increased the spread applied to the LIBOR or prime rate by a total of 75 basis points and increased the unused line fee by 5 basis points.

At May 1, 2021, we had $200.0 million in borrowings and $12.5 million in letters of credit outstanding under the Credit Agreement.

Total borrowing availability was $211.3 million at May 1, 2021.

We were in compliance with all covenants and restrictions under the Credit Agreement as of May 1, 2021.

At July 31, 2021, we had $100.0 million in borrowings and $12.5 million in letters of credit outstanding under the Credit Agreement.

Total borrowing availability was $364.5 million at July 31, 2021.

We were in compliance with all covenants and restrictions under the Credit Agreement as of July 31, 2021.

During the second half of 2021, we plan to continue to prioritize debt reduction.

We are currently in the process of renegotiating and renewing the terms of our revolving credit facility to better reflect our improved capital structure.

$200 Million Senior Notes

1 unchanged sentence

The Senior Notes bear interest at 6.25%, which is payable on February 15 and August 15 of each year.

The Senior Notes contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets.

As of July 31, 2021, we were in compliance with all covenants and restrictions relating to the Senior Notes.

We may redeem some or all of the Senior Notes at a redemption price (expressed as a percentage of principal amount) of 101.563% if redeemed prior to August 15, 2021 and 100.000% if redeemed after August 15, 2021, plus any accrued and unpaid interest and Additional Interest (as defined in the Senior Notes indenture).

The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness,

payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets.

As of May 1, 2021, we were in compliance with all covenants and restrictions relating to the Senior Notes.

During the second quarter of 2021, we determined that we would redeem a portion of our Senior Notes on August 16, 2021.

Accordingly, we classified $100.0 million aggregate principal amount of Senior Notes as a current liability.

On August 16, 2021, we redeemed $100.0 million of Senior Notes at 100.000%, shifting the higher interest debt to borrowings under the revolving credit agreement.

Supplemental Guarantor Financial Information

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On October 31, 2018, Vionic was joined to the Credit Agreement as a guarantor.

After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Credit Agreement.

After giving effect to the joinder, 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 under the Credit Agreement.

The following tables present summarized financial information for the Parent and guarantors on a combined basis after elimination of intercompany transactions between entities and amounts related to investments in any subsidiary that is a non-guarantor:

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January 30, 2021

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Non-current liabilities

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Twenty-Six Weeks

( $ millions )

July 31, 2021

Net sales (1)

1 unchanged sentence

Net earnings attributable to Caleres, Inc.

(1) Intercompany activity with the non-guarantor entities for the thirteen weeks ended May 1, 2021 was not material.

(1) Intercompany activity with the non-guarantor entities for the twenty-six weeks ended July 31, 2021 was not material.

Working Capital and Cash Flow

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August 1, 2020

Net cash provided by operating activities

2 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Increase in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Reasons for the major variances in cash provided (used) in the table above are as follows:

Cash provided by operating activities was $69.6 million higher in the three months ended May 1, 2021 as compared to the three months ended May 2, 2020, primarily reflecting the following factors:

● An increase in net earnings, after consideration of non-cash items, in the three months ended May 1, 2021, compared to the comparable period in 2020;

● A decrease in prepaid expenses and other current and noncurrent assets in the three months ended May 1, 2021, compared to an increase in the three months ended May 2, 2020, due in part to a higher income tax receivable as of May 2, 2020;

● A larger decrease in inventory for the three months ended May 1, 2021, compared to the three months ended May 2, 2020 driven by higher sales, the liquidation of inventory from the Naturalizer retail store closings and supply chain disruptions;

Cash provided by operating activities was $68.0 million higher in the six months ended July 31, 2021 as compared to the six months ended August 1, 2020, primarily reflecting the following factors:

● An increase in net earnings, after consideration of non-cash items, in the six months ended July 31, 2021, compared to the comparable period in 2020, primarily driven by the strong financial results of our Famous Footwear segment;

● A larger increase in accounts payable in the six months ended July 31, 2021, compared to the six months ended August 1, 2020;

partially offset by

● A decrease in accrued expenses and other liabilities for the three months ended May 1, 2021, compared to an increase in the three months ended May 2, 2020;

● A smaller increase in accounts payable in the three months ended May 1, 2021, compared to the three months ended May 2, 2020.

● An increase in inventory during the six months ended July 31, 2021, compared to a decrease during the six months ended August 1, 2020;

● A smaller increase in accrued expenses and other liabilities during the six months ended July 31, 2021 compared to the three months ended August 1, 2020.

Supply chain financing :

Certain of our suppliers are given the opportunity to sell receivables from us related to products we’ve 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.

Certain of our suppliers are given the opportunity to sell receivables from us related to products that we’ve 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 May 1, 2021, we had $55.0 million of accounts payable subject to supply chain financing arrangements.

There was an immaterial amount of accounts payable subject to supply chain financing arrangements at May 2, 2020.

Cash used for investing activities was $0.6 million lower in the three months ended May 1, 2021 as compared to the three months ended May 2, 2020, reflecting slightly lower capital expenditures in the three months ended May 1, 2021.

As of July 31, 2021, we had $48.0 million of accounts payable subject to supply

chain financing arrangements.

There was an immaterial amount of accounts payable subject to supply chain financing arrangements at August 1, 2020.

Cash used for investing activities was $0.8 million higher for the six months ended July 31, 2021 as compared to the six months ended August 1, 2020, reflecting slightly higher capital expenditures in the six months ended July 31, 2021.

In 2021, we expect our purchases of property and equipment and capitalized software to between $20 million and $30 million, as compared to $22.1 million in 2020.

Cash used for financing activities was $203.1 million higher for the three months ended May 1, 2021 as compared to the three months ended May 2, 2020, primarily due to $50.0 million of net repayments under our revolving credit agreement in the three months ended May 1, 2021, compared to net borrowings of $163.5 million in the comparable period in 2020.

In addition, we did not repurchase any shares under our share repurchase programs during the three months ended May 1, 2021, compared to $12.9 million in the three months ended May 2, 2020.

Cash used for financing activities was $204.2 million higher for the six months ended July 31, 2021 as compared to the six months ended August 1, 2020, primarily due to $150.0 million of net repayments on our revolving credit agreement in the six months ended July 31, 2021, compared to net borrowings of $75.0 million in the comparable period in 2020.

In addition, we did not repurchase any shares under our share repurchase programs during the three months ended July 31, 2021, compared to $23.3 million in the three months ended August 1, 2020.

A summary of key financial data and ratios at the dates indicated is as follows:

July 31, 2021

August 1, 2020

January 30, 2021

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Debt-to-capital ratio (3)

(1) Operating working capital has been computed as total current assets, excluding cash, less total current liabilities, excluding borrowings under revolving credit agreement and lease obligations.

(1) Operating working capital has been computed as total current assets, excluding cash, less total current liabilities, excluding borrowings under revolving credit agreement, current portion of long-term debt and lease obligations.

(2) The current ratio has been computed by dividing total current assets by total current liabilities.

(3) The debt-to-capital ratio has been computed by dividing total debt by total capitalization.

Total debt is defined as long-term debt and borrowings under the Credit Agreement.

Total debt is defined as long-term debt (including the current portion) and borrowings under revolving credit agreement.

Total capitalization is defined as total debt and total equity .

Operating working capital at May 1, 2021 was $126.3 million, which was $216.9 million lower than at May 2, 2020 and $65.5 million lower than at January 30, 2021.

Our current ratio was 0.87 to 1 as of May 1, 2021, compared to 0.94 to 1 at May 2, 2020 and 0.86:1 at January 30, 2021.

The decrease in both operating working capital and the current ratio from May 2, 2020 primarily reflects lower inventories driven by higher sales in the three months ended May 1, 2021 and ongoing logistics delays, as well as the reclassification of the mandatory purchase obligation to current liabilities, reflecting the anticipated settlement in the third quarter of 2021.

The decrease in operating working capital from January 30, 2021 primarily reflects lower inventories and a decrease in lease obligations, partially offset by higher trade accounts payable.

Our debt-to-capital ratio was 65.9% as of May 1, 2021, compared to 69.1% as of May 2, 2020 and 68.8% at January 30, 2021.

The decrease in our debt-to-capital ratio from May 2, 2020 and January 30, 2021 primarily reflects lower borrowings or our revolving credit facility at May 1, 2021.

Operating working capital at July 31, 2021 was $100.4 million, which was $184.5 million lower than at August 1, 2020 and $91.4 million lower than at January 30, 2021.

Our current ratio was 0.82 to 1 as of July 31, 2021, compared to 0.91 to 1 at August 1, 2020 and 0.86:1 at January 30, 2021.

The decrease in both operating working capital and the current ratio from August 1, 2020 primarily reflects higher accounts payable at July 31, 2021, as well as the reclassification of the mandatory purchase obligation to current liabilities, reflecting the anticipated settlement in the third quarter of 2021.

The decrease in operating working capital from January 30, 2021 primarily reflects higher trade accounts payable and accrued expenses combined with an increase in the mandatory purchase obligation, partially offset by higher inventory.

Our debt-to-capital ratio was 54.9% as of July 31, 2021, compared to 69.1% as of August 1, 2020 and 68.8% at January 30, 2021.

The decrease in our debt-to-capital ratio from August 1, 2020 and January 30, 2021 primarily reflects lower borrowings on our revolving credit facility at July 31, 2021.

We believe our cash flows from operations, as well as $364.5 million in borrowing availability under the Credit Agreement, provide ample liquidity to meet the Company’s working capital needs for the foreseeable future.

We declared and paid dividends of $0.07 per share in the first quarter of both 2021 and 2020.

We declared and paid dividends of $0.07 per share in the second quarter of both 2021 and 2020.

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.

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CONTRACTUAL OBLIGATIONS

Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations.

Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt (including the current portion), interest on long-term debt, minimum license commitments, financial instruments, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations.

Except for these items and changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, changes in borrowings under our revolving credit agreement, changes in the mandatory purchase obligation associated with the acquisition of Blowfish Malibu and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to the contractual obligations identified in our Annual Report on Form 10-K for the year ended January 30, 2021.

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Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.

We have recently experienced inflationary pressures on our product costs.

We believe that the rates of inflation we have experienced have not had a significant effect on our net sales or operating earnings for the three and six months ended July 31, 2021.

While we have historically been able to offset our product cost increases by increasing prices, negotiating costs, or changing suppliers, we may not be able to offset price increases in the future, which may have an adverse effect on our results of operations and financial condition.

FORWARD-LOOKING STATEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis