Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 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 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 $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 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). 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.
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● 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 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
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 (whether temporary or permanent closures) 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.
Beginning in mid-March 2020, all of our Famous Footwear and Brand Portfolio stores in North America were temporarily closed and we began a phased reopening of retail stores in mid-May. Our same-store sales calculation excludes the impact of both permanent and temporary store closures. 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
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. 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.
Outlook
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.
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Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 31, 2021
August 1, 2020
July 31, 2021
August 1, 2020
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
675.5
100.0
%
$
501.4
100.0
%
$
1,314.2
100.0
%
$
898.6
100.0
%
Cost of goods sold
353.2
52.3
%
318.8
63.6
%
717.0
54.6
%
594.1
66.1
%
Gross profit
322.3
47.7
%
182.6
36.4
%
597.2
45.4
%
304.5
33.9
%
Selling and administrative expenses
259.5
38.4
%
201.3
40.1
%
503.0
38.3
%
426.6
47.5
%
Impairment of goodwill and intangible assets
—
—
—
—
—
—
%
262.7
29.2
%
Restructuring and other special charges, net
—
—
%
5.4
1.1
%
13.5
1.0
%
65.6
7.3
%
Operating earnings (loss)
62.8
9.3
%
(24.1)
(4.8)
%
80.7
6.1
%
(450.4)
(50.1)
%
Interest expense, net
(12.0)
(1.7)
%
(13.5)
(2.7)
%
(23.8)
(1.8)
%
(22.9)
(2.6)
%
Other income, net
3.9
0.5
%
3.7
0.7
%
7.7
0.6
%
7.3
0.8
%
Earnings (loss) before income taxes
54.7
8.1
%
(33.9)
(6.8)
%
64.6
4.9
%
(466.0)
(51.9)
%
Income tax (provision) benefit
(16.5)
(2.5)
%
3.2
0.7
%
(20.1)
(1.5)
%
89.1
10.0
%
Net earnings (loss)
38.2
5.6
%
(30.7)
(6.1)
%
44.5
3.4
%
(376.9)
(41.9)
%
Net earnings (loss) attributable to noncontrolling interests
0.8
0.1
%
0.0
0.0
%
1.0
0.1
%
(0.3)
(0.0)
%
Net earnings (loss) attributable to Caleres, Inc.
$
37.4
5.5
%
$
(30.7)
(6.1)
%
$
43.5
3.3
%
$
(376.6)
(41.9)
%
Net Sales
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. 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
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. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
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Selling and Administrative Expenses
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 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 $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 $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 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
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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 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 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.
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 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 $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 $376.6 million for the second quarter and six months ended August 1, 2020, respectively, as a result of the factors described above.
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FAMOUS FOOTWEAR
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 31, 2021
August 1, 2020
July 31, 2021
August 1, 2020
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
453.6
100.0
%
$
333.9
100.0
%
$
851.8
100.0
%
$
525.2
100.0
%
Cost of goods sold
226.2
49.9
%
214.7
64.3
%
444.6
52.2
%
337.0
64.2
%
Gross profit
227.4
50.1
%
$
119.2
35.7
%
407.2
47.8
%
$
188.2
35.8
%
Selling and administrative expenses
141.9
31.3
%
117.6
35.2
%
273.8
32.1
%
238.1
45.3
%
Restructuring and other special charges, net
—
—
%
0.6
0.2
%
—
—
%
16.6
3.2
%
Operating earnings (loss)
$
85.5
18.8
%
$
1.0
0.3
%
$
133.4
15.7
%
$
(66.5)
(12.7)
%
Key Metrics
Same-store sales % change
(1.1)
%
14.7
%
0.5
%
13.9
%
Same-store sales $ change
$
(3.6)
$
42.7
$
2.6
$
64.5
Sales change from new and closed stores, net
$
122.6
$
(128.5)
$
322.8
$
(311.2)
Impact of changes in Canadian exchange rate on sales
$
0.7
$
(0.1)
$
1.2
$
(0.1)
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
67
$
40
$
122
$
62
Sales per square foot, excluding e-commerce (trailing twelve months)
$
219
$
176
$
219
$
176
Square footage (thousand sq. ft.)
6,022
6,210
6,022
6,210
Stores opened
4
3
8
3
Stores closed
5
1
12
16
Ending stores
912
936
912
936
Net Sales
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
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
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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 $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 $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)
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 $66.5 million for the six months ended August 1, 2020. As a percentage of net sales, operating earnings were 15.7% for the second quarter of 2021, compared to an operating loss of 12.7% for the second quarter of 2020.
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BRAND PORTFOLIO
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 31, 2021
August 1, 2020
July 31, 2021
August 1, 2020
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
239.0
100.0
%
$
183.6
100.0
%
$
489.3
100.0
%
$
400.9
100.0
%
Cost of goods sold
144.1
60.3
%
119.6
65.1
%
300.4
61.4
%
283.5
70.7
%
Gross profit
94.9
39.7
%
64.0
34.9
%
188.9
38.6
%
117.4
29.3
%
Selling and administrative expenses
78.3
32.8
%
73.5
40.1
%
161.7
33.0
%
166.2
41.5
%
Impairment of goodwill and intangible assets
—
—
—
—
—
—
%
262.7
65.5
%
Restructuring and other special charges, net
—
—
%
4.6
2.5
%
13.5
2.8
%
48.4
12.1
%
Operating earnings (loss)
$
16.6
6.9
%
$
(14.1)
(7.7)
%
$
13.7
2.8
%
$
(359.9)
(89.8)
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
34
%
38
%
33
%
33
%
Change in wholesale net sales ($)
$
34.9
$
(146.3)
$
49.7
$
(237.3)
Unfilled order position at end of period
$
328.7
$
195.2
Same-store sales % change
16.3
%
(24.7)
%
10.2
%
(24.7)
%
Same-store sales $ change
$
3.4
$
(8.1)
$
4.7
$
(17.6)
Sales change from new and closed stores, net
$
17.0
$
(21.5)
$
33.5
$
(44.6)
Impact of changes in Canadian exchange rate on retail sales
$
0.1
$
(0.1)
$
0.5
$
(0.2)
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
244
$
20
$
433
$
51
Sales per square foot, excluding e-commerce (trailing twelve months)
$
561
$
251
$
561
$
251
Square footage (thousands sq. ft.)
125
355
125
355
Stores opened
1
—
2
—
Stores closed
9
1
85
20
Ending stores
87
202
87
202
(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
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.
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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
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 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 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 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 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.
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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 $359.9 million for the six months ended August 1, 2020, as a result of the factors described above. As a percentage of net sales, operating earnings were 2.8% for the six months ended July 31, 2021, compared to an operating loss of 89.8% for the six months ended August 1, 2020.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 31, 2021
August 1, 2020
July 31, 2021
August 1, 2020
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
(17.1)
100.0
%
$
(16.1)
100.0
%
$
(26.9)
100.0
%
$
(27.4)
100.0
%
Cost of goods sold
(17.1)
100.0
%
(15.6)
96.7
%
(28.0)
103.9
%
(26.3)
95.9
%
Gross profit
—
—
%
(0.5)
3.3
%
1.1
(3.9)
%
(1.1)
4.1
%
Selling and administrative expenses
39.3
(229.2)
%
10.3
(63.7)
%
67.5
(250.9)
%
22.3
(81.1)
%
Restructuring and other special charges, net
—
—
%
0.3
(1.7)
%
—
—
%
0.6
(2.3)
%
Operating loss
$
(39.3)
229.2
%
$
(11.1)
68.7
%
$
(66.4)
247.0
%
$
(24.0)
87.5
%
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 $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 $0.6 million for the three and six months ended August 1, 2020, respectively, were associated with workforce reductions as we sought to minimize our expense structure during the COVID-19 pandemic, as well as incremental expenses associated with deep cleaning our facilities and related supplies. There were no corresponding expenses for the six months ended July 31, 2021. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
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LIQUIDITY AND CAPITAL RESOURCES
Borrowings
($ millions)
July 31, 2021
August 1, 2020
January 30, 2021
Borrowings under revolving credit agreement
$
100.0
$
350.0
$
250.0
Current portion of long-term debt
99.5
—
—
Long-term debt
99.5
198.6
198.9
Total debt (1)
$
299.0
$
548.6
$
448.9
(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. 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. 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
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. On April 14, 2020, we entered into a Fourth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, increased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $600.0 million, subject to borrowing base restrictions, and may be further increased by up to $150.0 million. Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 1.0% imposed by the Credit Agreement) or the prime rate, plus a spread. 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 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
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 2023 (the "Senior Notes"). 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). 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 $100.0 million of Senior Notes at 100.000%, shifting the higher interest debt to borrowings under the revolving credit agreement.
Supplemental Guarantor Financial Information
The Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by all of its existing and future subsidiaries that are guarantors under the Company’s Credit Agreement. The guarantors are 100% owned by Caleres, Inc. ("Parent").
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Table of Contents
On October 31, 2018, Vionic was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds, LLC, Vionic Group, LLC and Vionic International, LLC are each co-borrowers and guarantors under the Credit Agreement. The following tables present summarized financial information for the Parent and guarantors on a combined basis after elimination of intercompany transactions between entities and amounts related to investments in any subsidiary that is a non-guarantor:
($ millions)
July 31, 2021
January 30, 2021
Current assets
$
724.0
$
686.3
Non-current assets
974.3
1,029.5
Current liabilities
904.1
818.4
Non-current liabilities
594.1
740.0
Twenty-Six Weeks
Ended
( $ millions )
July 31, 2021
Net sales (1)
$
1,253.6
Gross profit
555.8
Operating earnings
60.7
Net earnings
42.7
Net earnings attributable to Caleres, Inc.
42.7
(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
Twenty-Six Weeks Ended
($ millions)
July 31, 2021
August 1, 2020
Change
Net cash provided by operating activities
$
135.5
$
67.5
$
68.0
Net cash used for investing activities
(9.4)
(8.6)
(0.8)
Net cash (used for) provided by financing activities
(159.7)
44.5
(204.2)
Effect of exchange rate changes on cash and cash equivalents
—
(0.1)
0.1
(Decrease) increase in cash and cash equivalents
$
(33.6)
$
103.3
$
(136.9)
Reasons for the major variances in cash provided (used) in the table above are as follows:
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; and
● 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
● An increase in inventory during the six months ended July 31, 2021, compared to a decrease during the six months ended August 1, 2020; and
● 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 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 July 31, 2021, we had $48.0 million of accounts payable subject to supply
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Table of Contents
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 $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 $23.3 million in the three months ended August 1, 2020.
A summary of key financial data and ratios at the dates indicated is as follows:
July 31, 2021
August 1, 2020
January 30, 2021
Operating working capital ($ millions) (1)
$
100.4
$
284.9
$
191.8
Current ratio (2)
0.82:1
0.91:1
0.86:1
Debt-to-capital ratio (3)
54.9
%
69.1
%
68.8
%
(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 (including the current portion) and borrowings under revolving credit agreement. Total capitalization is defined as total debt and total equity .
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 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. However, we presently expect that dividends will continue to be paid.
CONTRACTUAL 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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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 30, 2021.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
INFLATION
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
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) the coronavirus pandemic and its adverse impact on our business operations, store traffic and financial condition (ii) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions and other factors; (iii) rapidly changing consumer preferences and purchasing patterns and fashion trends; (iv) intense competition within the footwear industry; (v) customer concentration and increased consolidation in the retail industry; (vi) foreign currency fluctuations; (vii) impairment charges resulting from a long-term decline in our stock price; (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 maintain relationships with current suppliers; (xiv) the ability to secure/exit leases on favorable terms; (xv) 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 30, 2021, 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 30, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.