Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We achieved record-setting financial results in the first quarter of 2022, maintaining our momentum from 2021, with strong sales and operating earnings contribution from both our Famous Footwear and Brand Portfolio segments. We utilized our robust cash generation to augment our inventory levels to better align with the strong consumer demand and position us for the upcoming season. We have also taken the opportunity to repurchase over 700,000 shares of common stock, and expect to continue to do so.
Financial Highlights
Following is a summary of the financial highlights for the first quarter of 2022:
● Consolidated net sales increased $96.5 million, or 15.1%, to $735.1 million in the first quarter of 2022, compared to $638.6 million in the first quarter of 2021. Our Famous Footwear segment continued its strong performance with net sales of $384.5 million. Net sales of our Brand Portfolio segment increased $115.4 million, or 46.1%, compared to the first quarter of 2021. On a consolidated basis, our direct-to-consumer sales represented approximately 65% of consolidated net sales for the first quarter of 2022, compared to 74.5% in the first quarter of 2021.
● Consolidated gross profit increased $52.1 million, or 19.0%, to $327.0 million in the first quarter of 2022, compared to $274.9 million in the first quarter of 2021. Our gross profit margin increased to 44.5% in the first quarter of 2022, compared to 43.0% in the first quarter of 2021, reflecting a decline in promotional activity driven by strong consumer demand and an improved sales mix of higher margin product.
● Consolidated operating earnings increased $48.3 million to $66.2 million in the first quarter of 2022, compared to $17.9 million in the first quarter of 2021.
● Consolidated net earnings attributable to Caleres, Inc. were $50.5 million, or $1.32 per diluted share, in the first quarter of 2022, compared to $6.2 million, or $0.16 per diluted share, in the first quarter of 2021.
The following items should be considered in evaluating the comparability of our first quarter results in 2022 and 2021:
● Supply Chain Disruptions and Inflationary Pressures – During the first quarter of 2022, we continued to experience global supply chain disruptions, including a delay in the receipt of inventory due to port congestion and reduced shipping vessel and container availability. We have also experienced inflationary pressures on product costs and inbound freight. In order to mitigate these inflationary pressures, we began implementing price increases in the second half of 2021. We believe our ability to continue full price selling and our disciplined approach to inventory management will continue to mitigate the impact of these supply chain disruptions and inflationary pressures on our financial results. As of April 30, 2022, we have nearly $98 million of inventory in transit that is not yet available to sell, an increase of 105% compared to our in-transit inventory levels at May 1, 2021, but a reduction of 45% from January 29, 2022.
● 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 strategic realignment of Naturalizer retail store operations. There were no corresponding charges recorded during the first quarter of 2022.
● Blowfish Malibu mandatory purchase obligation – As further discussed in Note 5 and Note 14 to the condensed consolidated financial statements, the remaining interest in Blowfish Malibu was 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). The fair value adjustment was recorded as interest expense, net in the condensed consolidated statement of earnings. There were no corresponding charges in the first quarter of 2022. The purchase obligation was settled for $54.6 million on November 4, 2021.
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Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though other retailers may calculate the metric differently. Management uses the same-store sales metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. Our same-store sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open for at least 13 months. In addition, in order to be included in the same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores are excluded from the same-store sales metric for each day of the closure. Relocated stores are treated as new stores and therefore excluded from the calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in assessing our retail sales performance of existing locations with comparable prior year sales, separate from the impact of store openings or store closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store. Management uses the sales per square foot metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period.
Outlook
During the first quarter of 2022, we made significant progress against our key strategic initiatives. We believe we are well-positioned to capitalize on favorable market dynamics, despite the geopolitical concerns, inflationary pressures and ongoing supply chain disruptions. As we progress throughout 2022, we will maintain our focus on aligning inventory with consumer demand, which we believe will capture demand for our brands and products. We will continue to leverage our core competencies and execute on our short and long-term strategic priorities in an effort to enhance long-term value for our shareholders.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
April 30, 2022
May 1, 2021
% of
% of
($ millions)
Net Sales
Net Sales
Net sales
$
735.1
100.0
%
$
638.6
100.0
%
Cost of goods sold
408.1
55.5
%
363.7
57.0
%
Gross profit
327.0
44.5
%
274.9
43.0
%
Selling and administrative expenses
260.8
35.5
%
243.5
38.1
%
Restructuring and other special charges, net
—
—
%
13.5
2.1
%
Operating earnings
66.2
9.0
%
17.9
2.8
%
Interest expense, net
(2.3)
(0.3)
%
(11.8)
(1.8)
%
Other income, net
3.4
0.5
%
3.8
0.6
%
Earnings before income taxes
67.3
9.2
%
9.9
1.6
%
Income tax provision
(17.3)
(2.4)
%
(3.5)
(0.6)
%
Net earnings
50.0
6.8
%
6.4
1.0
%
Net (loss) earnings attributable to noncontrolling interests
(0.5)
(0.1)
%
0.2
0.0
%
Net earnings attributable to Caleres, Inc.
$
50.5
6.9
%
$
6.2
1.0
%
Net Sales
Net sales increased $96.5 million, or 15.1%, to $735.1 million for the first quarter of 2022, compared to $638.6 million for the first quarter of 2021. Net sales for our Brand Portfolio segment increased $115.4 million, or 46.1% during the first quarter of 2022, compared to the first quarter of 2021, and the segment surpassed its pre-pandemic sales levels. Our Famous Footwear segment’s strong sales performance from 2021 carried over to the first quarter of 2022. However, net sales for Famous Footwear decreased $13.6 million, or 3.4%, in the first quarter of 2022 compared to the first quarter of 2021, primarily reflecting a lower store count. On a consolidated basis, our direct-to-consumer sales represented approximately 65% of total net sales for the first quarter of 2022. Our casual, athletic and sport footwear categories continue to resonate with consumers and demand for the dress, occasion and wear-to-work product categories continues to improve with the rebound in
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social events and celebrations and the return-to-office trending higher. During the first quarter of 2022, we remained focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride, Dr. Scholl’s and Blowfish Malibu representing three of our top 15 best-selling brands during the quarter.
Gross Profit
Gross profit increased $52.1 million, or 19.0%, to $327.0 million for the first quarter of 2022, compared to $274.9 million for the first quarter of 2021, reflecting higher net sales and a higher gross profit rate. As a percentage of net sales, gross profit increased to 44.5% for the first quarter of 2022, compared to 43.0% for the first quarter of 2021, as strong consumer demand enabled more full-price selling and minimal promotional activity. The greater sales mix of higher margin brands and product categories within our Brand Portfolio segment also contributed to the gross margin improvement.
We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $17.3 million, or 7.1%, to $260.8 million for the first quarter of 2022, compared to $243.5 million for the first quarter of 2021. The increase primarily reflects higher salary and benefits expenses and cash and stock-based incentive compensation plan expenses driven by our strong financial results in the quarter as well as our expectations for the full year. Our marketing expenses also increased as a result of tailoring our e-commerce marketing to the individual consumer in an effort to drive repeat purchases. As a percentage of net sales, selling and administrative expenses decreased to 35.5% for the first quarter of 2022, from 38.1% for the first quarter of 2021, reflecting better leveraging of expenses over higher net sales.
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) during the first quarter of 2021, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
Operating Earnings
Operating earnings increased $48.3 million to $66.2 million for the first quarter of 2022, compared to $17.9 million for the first quarter of 2021, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 9.0% for the first quarter of 2022, compared to 2.8% for the first quarter of 2021.
Interest Expense, Net
Interest expense, net decreased $9.5 million, or 80.5%, to $2.3 million for the first quarter of 2022, compared to $11.8 million for the first quarter of 2021, primarily due to the non-recurrence of the $6.4 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation in the first quarter of 2021. The purchase obligation was settled for $54.6 million on November 4, 2021. In addition, we redeemed our $200 million aggregate principal of senior notes in the second half of 2021. By retiring our senior notes, we shifted our higher-rate debt to the lower-rate borrowings under our revolving credit agreement, which reduced our interest expense by approximately $3.1 million compared to the first quarter of 2021. These decreases were partially offset by an increase in interest expense attributable to higher average borrowings under our revolving credit agreement.
Other Income, Net
Other income, net decreased $0.4 million, or 10.6%, to $3.4 million for the first quarter of 2022, compared to $3.8 million for the first quarter of 2021, which reflects a reduction of certain components of net periodic benefit income. Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.
Income Tax Provision
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 25.7% for the first quarter of 2022, compared to 35.5% for the first quarter of 2021. The higher effective tax rate for the first quarter of 2021 primarily reflects the non-deductibility of losses at our Canadian division, which were driven by exit-related costs associated with Naturalizer retail stores. This impact on the tax rate was partially offset by discrete tax benefits totaling $1.2 million in the first quarter of 2021.
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Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $50.5 million for the first quarter of April 30, 2022, compared to net earnings of $6.2 million for the first quarter of 2021, as a result of the factors described above.
FAMOUS FOOTWEAR
Thirteen Weeks Ended
April 30, 2022
May 1, 2021
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net sales
$
384.5
100.0
%
$
398.1
100.0
%
Cost of goods sold
195.3
50.8
%
218.3
54.8
%
Gross profit
189.2
49.2
%
$
179.8
45.2
%
Selling and administrative expenses
139.5
36.3
%
131.9
33.2
%
Operating earnings
$
49.7
12.9
%
$
47.9
12.0
%
Key Metrics
Same-store sales % change
(4.0)
%
3.3
%
Same-store sales $ change
$
(15.6)
$
6.2
Sales change from new and closed stores, net
$
2.0
$
200.2
Impact of changes in Canadian exchange rate on sales
$
(0.0)
$
0.4
Sales per square foot, excluding e-commerce (thirteen weeks ended)
$
57
$
55
Sales per square foot, excluding e-commerce (trailing twelve months)
$
251
$
193
Square footage (thousand sq. ft.)
5,870
6,043
Stores opened
—
4
Stores closed
7
7
Ending stores
887
913
Net Sales
Net sales of $384.5 million in the first quarter of 2022 decreased $13.6 million, or 3.4%, compared to the first quarter of 2021, primarily reflecting a lower store count. Consumer demand remained strong and the sales momentum from 2021 continued into 2022, despite the impact of lower government stimulus in the current period. Athletics and casual continue to be our top selling categories while the Caleres brands of LifeStride, Dr. Scholl’s and Blowfish Malibu were all in our top 15 best-selling brands. During the first quarter of 2022, we closed seven stores, resulting in 887 stores and total square footage of 5.9 million at the end of the first quarter of 2022, compared to 913 stores and total square footage of 6.0 million at the end of the first quarter of 2021. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 79% of our net sales made to program members in the first quarter of 2022, compared to 81% in the first quarter of 2021.
Gross Profit
Gross profit increased $9.4 million, or 5.2%, to $189.2 million for the first quarter of 2022, compared to $179.8 million for the first quarter of 2021, driven by a higher gross profit rate. As a percentage of net sales, our gross profit increased to 49.2% for the first quarter of 2022, compared to 45.2% for the first quarter of 2021. Our higher gross profit margin in the first quarter of 2022 was primarily due to more full price selling and a reduction in promotional activity driven by strong demand for our product assortment and disciplined inventory management.
Selling and Administrative Expenses
Selling and administrative expenses increased $7.6 million, or 5.8%, to $139.5 million for the first quarter of 2022, compared to $131.9 million for the first quarter of 2021. The increase was primarily due to higher salaries and benefits expenses and higher logistics costs. As a percentage of net sales, selling and administrative expenses increased to 36.3% for the first quarter of 2022, compared to 33.2% for the first quarter of 2021.
Operating Earnings
Operating earnings increased $1.8 million to $49.7 million for the first quarter of 2022, compared to $47.9 million for the first quarter of 2021. As a percentage of net sales, operating earnings were 12.9% for the first quarter of 2022, compared to 12.0% for the first quarter of 2021.
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BRAND PORTFOLIO
Thirteen Weeks Ended
April 30, 2022
May 1, 2021
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net sales
$
365.7
100.0
%
$
250.3
100.0
%
Cost of goods sold
226.4
61.9
%
156.3
62.4
%
Gross profit
139.3
38.1
%
94.0
37.6
%
Selling and administrative expenses
98.0
26.8
%
83.3
33.3
%
Restructuring and other special charges, net
—
—
%
13.5
5.4
%
Operating earnings (loss)
$
41.3
11.3
%
$
(2.8)
(1.1)
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
26
%
31
%
Change in wholesale net sales ($)
$
104.2
$
14.9
Unfilled order position at end of period
$
401.5
$
264.5
Same-store sales % change
66.0
%
5.1
%
Same-store sales $ change
$
17.9
$
1.3
Sales change from new and closed stores, net
$
(6.7)
$
16.5
Impact of changes in Canadian exchange rate on retail sales
$
(0.0)
$
0.4
Sales per square foot, excluding e-commerce (thirteen weeks ended)
$
269
$
188
Sales per square foot, excluding e-commerce (trailing twelve months)
$
987
$
336
Square footage (thousands sq. ft.)
108
138
Stores opened
1
1
Stores closed
4
76
Ending stores
83
95
(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
Our Brand Portfolio segment achieved record-setting first quarter net sales of $365.7 million in the first quarter of 2022, driven by our strong product design, diverse and targeted assortments, and our strategic approach to inventory management. While the net sales increase of $115.4 million, or 46.1%, compared to the first quarter of 2021, was broad-based across all of our brands, our Sam Edelman, LifeStride, Naturalizer, Blowfish Malibu, Allen Edmonds and Vionic brands were the most significant contributors. We experienced strong growth in the dress, occasion and wear-to-work footwear categories for many of our brands, including Sam Edelman, Naturalizer, LifeStride and Allen Edmonds. Our sport-inspired and casual footwear categories also resonated strongly with our customers during the quarter. In addition, our net sales benefited as our retail partners sought to replenish their inventories during the first quarter of 2022. The incremental sales from inventory replenishment is expected to moderate as we move through fiscal 2022 as our partners return to more normal buying and replenishment patterns. During the first quarter of 2022, we closed four stores and opened one store, resulting in a total of 83 stores and total square footage of 0.1 million at the end of the first quarter of 2022, compared to 95 stores and total square footage of 0.1 million at the end of the first quarter of 2021.
In the first quarter of 2021, we permanently 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 continue to focus 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. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $987 for the twelve months ended April 30, 2022, compared to $336 for the twelve months ended May 1, 2021. With the closure of nearly all of our Naturalizer retail stores, the majority of our Brand Portfolio segment stores are for our Allen Edmonds brand, which have higher retail price points than the Naturalizer brand.
Our unfilled order position for our wholesale sales increased $137.0 million, or 51.8 %, to $401.5 million at April 30, 2022, compared to $264.5 million at May 1, 2021. The increase in our backlog order levels primarily reflects higher consumer demand .
Gross Profit
Gross profit increased $45.3 million, or 48.2%, to $139.3 million for the first quarter of 2022, compared to $94.0 million for the first quarter of 2021, reflecting higher net sales and gross profit rate. As a percentage of net sales, our gross profit increased to 38.1% for the first quarter
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of 2022, compared to 37.6% for the first quarter of 2021. The increase in our gross profit margin was driven by an improved mix of higher margin brands and product categories and a less promotional retail environment. While we have experienced inflationary pressures related to product costs and inbound freight through the first quarter, we have been able to successfully offset these impacts through price increases. We anticipate the inflationary pressures to continue throughout 2022 and will continue to focus on mitigating the impact of these costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $14.7 million, or 17.5%, to $98.0 million for the first quarter of 2022, compared to $83.3 million for the first quarter of 2021. The increase was driven by higher salaries and benefits expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 26.8% for the first quarter of 2022, compared to 33.3% for the first quarter of 2021, reflecting better leveraging of expenses over a higher net sales base.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $13.5 million during the first quarter of 2021 for expenses associated with the strategic realignment of our Naturalizer retail store operations. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed during the first quarter of 2021. Refer 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 2022.
Operating Earnings (Loss)
Operating earnings increased to $41.3 million for the first quarter of 2022, compared to an operating loss of $2.8 million for the first quarter of 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 11.3% for the first quarter of 2022, compared to an operating loss of 1.1% in the first quarter of 2021.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
April 30, 2022
May 1, 2021
% of
% of
($ millions)
Net Sales
Net Sales
Net sales
$
(15.1)
100.0
%
$
(9.8)
100.0
%
Cost of goods sold
(13.6)
89.8
%
(10.9)
110.9
%
Gross profit
(1.5)
10.2
%
1.1
(10.9)
%
Selling and administrative expenses
23.3
(154.0)
%
28.3
(289.0)
%
Operating loss
$
(24.8)
164.2
%
$
(27.2)
278.1
%
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 $15.1 million for the first quarter of 2022 is $5.3 million, or 54.8%, higher than the first quarter of 2021, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses decreased $5.0 million, to $23.3 million in the first quarter of 2022, compared to $28.3 million for the first quarter of 2021. The decrease primarily reflects lower expenses for certain employee benefits and lower expenses associated with our cash-based director compensation plans, reflecting a decrease in our stock price during the first quarter of 2022, compared to an increase in the first quarter of 2021.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
($ millions)
April 30, 2022
May 1, 2021
(1)
January 29, 2022
Borrowings under revolving credit agreement
$
305.0
$
200.0
$
290.0
Long-term debt
—
199.0
—
Total debt
$
305.0
$
399.0
$
290.0
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(1) As presented here, total debt as of May 1, 2021 excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $45.5 million. The mandatory purchase obligation of $54.6 million was paid on November 4, 2021, as further discussed in Note 14 to the condensed consolidated financial statements.
Total debt obligations of $305.0 million at April 30, 2022 decreased $94.0 million, from $399.0 million at May 1, 2021, and increased $15.0 million, from $290.0 million at January 29, 2022. The decrease from May 1, 2021 reflects continued progress toward reducing our debt levels using our strong cash generation over the last twelve months. In August 2021, we redeemed $100.0 million aggregate principal amount of our senior notes and on January 3, 2022, we redeemed the remaining $100.0 million of senior notes. We shifted this higher interest rate debt to borrowings under the revolving credit facility, which is expected to result in net interest expense savings on an ongoing basis. The increase in total debt from January 29, 2022 is due primarily to higher inventory purchases during the quarter to satisfy the stronger consumer demand. Net interest expense for the first quarter of 2022 decreased $9.5 million to $2.3 million, compared to $11.8 million for the first quarter of 2021. The decrease is primarily attributable to the non-recurrence of the $6.4 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the first quarter of 2021. The Blowfish Malibu mandatory purchase obligation of $54.6 million was paid on November 4, 2021, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements. In addition, as discussed above, the redemption of all outstanding senior notes in 2021 also contributed to the decrease in interest expense in the first quarter of 2022. These decreases were partially offset by higher average borrowings under our revolving credit agreement.
Credit Agreement
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. On October 5, 2021, we entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the “Credit Agreement”) which, among other modifications, extended the maturity date of the credit facility from January 18, 2024, to October 5, 2026 and decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be further increased by up to $250.0 million. Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The Credit Agreement decreased the spread applied to the LIBOR or prime rate by a total of 75 basis points. At April 30, 2022, we had $305.0 million in borrowings and $10.8 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $184.2 million at April 30, 2022. We were in compliance with all covenants and restrictions under the Credit Agreement as of April 30, 2022.
Senior Notes
On July 27, 2015, we issued $200.0 million aggregate principal amount of senior notes due in 2023 (the "Senior Notes"). The Senior Notes were guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bore interest of 6.25%, which was payable on February 15 and August 15 of each year. On August 16, 2021, we redeemed $100.0 million of the Senior Notes at 100.0%. In addition, on January 3, 2022, we redeemed the remaining $100.0 million of Senior Notes at 100.0%. Refer to further discussion regarding the Senior Notes in Note 10 to the condensed consolidated financial statements.
Working Capital and Cash Flow
Thirteen Weeks Ended
($ millions)
April 30, 2022
May 1, 2021
Change
Net cash provided by operating activities
$
19.7
$
70.3
$
(50.6)
Net cash used for investing activities
(11.7)
(3.9)
(7.8)
Net cash used for provided by financing activities
(4.4)
(56.6)
52.2
Effect of exchange rate changes on cash and cash equivalents
(0.0)
0.1
(0.1)
Increase in cash and cash equivalents
$
3.6
$
9.9
$
(6.3)
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Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $50.6 million lower in the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021, primarily reflecting the following factors:
● An increase in inventory during the thirteen weeks ended April 30, 2022, primarily reflecting higher inventory in response to consumer demand, as well as earlier purchasing of inventory for the Brand Portfolio segment to offset the increased transportation lead times, compared to a decrease during the thirteen weeks ended May 1, 2021;
● A larger increase in accounts receivable in the thirteen weeks ended April 30, 2022, compared to the thirteen weeks ended May 1, 2021, attributable to higher wholesale sales during the period; and
● A larger decrease in accrued expenses and other liabilities in the thirteen weeks ended April 30, 2022 due in part to higher incentive compensation payments in 2022 due to the strong 2021 financial results, compared to the thirteen weeks ended May 1, 2021; partially offset by
● A larger increase in accounts payable in the thirteen weeks ended April 30, 2022, compared to the thirteen weeks ended May 1, 2021, reflecting higher inventory purchases; and
● Higher net earnings in the thirteen weeks ended April 30, 2022, compared to the thirteen weeks ended May 1, 2021.
Supply chain financing : Certain of our suppliers are given the opportunity to sell receivables from us related to products that we have purchased to participating financial institutions at a rate that leverages our credit rating, which may be more beneficial to the suppliers than the rate they can obtain based upon their own credit rating. We negotiate payment and other terms with our suppliers, regardless of whether the supplier participates in the program, and our responsibility is limited to making payment based on the terms originally negotiated with the supplier. These liabilities continue to be presented as accounts payable in our condensed consolidated balance sheets, with changes reflected within cash flows from operating activities when settled. As of April 30, 2022 and May 1, 2021, we had $45.0 million and $55.0 million, respectively, of accounts payable subject to supply chain financing arrangements.
Cash used for investing activities was $7.8 million higher for the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021, reflecting higher capital expenditures. In 2022, we expect our purchases of property and equipment and capitalized software to be between $35 million and $45 million, as compared to $24.1 million in 2021. We continue to invest in our Famous Footwear store refresh initiative. In addition, in the first quarter of 2022, we tested a new prototype Famous Footwear store that offers an enhanced shopping experience, highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner. We plan to invest in additional prototype stores and store refreshes throughout 2022, which we believe will reinforce our national presence and further differentiate our store experience from that of our competitors.
Cash used for financing activities was $52.2 million lower for the thirteen weeks ended April 30, 2022 as compared to the thirteen weeks ended May 1, 2021, primarily due to net borrowings on our revolving credit agreement of $15.0 in the thirteen weeks ended April 30, 2022, compared to net repayments of $50.0 million in the comparable period in 2021. In addition, we repurchased $14.7 million of shares under our share repurchase programs during the thirteen weeks ended April 30, 2022, with no corresponding share repurchases during the thirteen weeks ended May 1, 2021.
A summary of key financial data and ratios at the dates indicated is as follows:
April 30, 2022
May 1, 2021
January 29, 2022
Operating working capital ($ millions) (1)
$
237.0
$
126.3
$
193.8
Current ratio (2)
0.87:1
0.87:1
0.82:1
Debt-to-capital ratio (3)
46.0
%
65.9
%
47.3
%
(1) Operating working capital has been computed as total current assets, excluding cash and property and equipment, held for sale, less total current liabilities, excluding borrowings under revolving credit agreement 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 revolving credit agreement. Total capitalization is defined as total debt and total equity .
Operating working capital at April 30, 2022 was $237.0 million, which was $110.7 million and $43.2 million higher than at May 1, 2021 and January 29, 2022, respectively. The increase in operating working capital from May 1, 2021 primarily reflects higher receivables and
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the settlement of the Blowfish Malibu mandatory purchase obligation in the fourth quarter of 2021. The increase in operating working capital from January 29, 2022 primarily reflects higher inventories, partially offset by higher trade payables. Our current ratio was 0.87 to 1 as of April 30, 2022, consistent with May 1, 2021, and 0.82:1 at January 29, 2022. Our debt-to-capital ratio was 46.0% as of April 30, 2022, compared to 65.9% as of May 1, 2021 and 47.3% at January 29, 2022. The decrease in our debt-to-capital ratio from May 1, 2021 and January 29, 2022 primarily reflects the extinguishment of our senior notes and higher equity attributable to our strong financial results.
We declared and paid dividends of $0.07 per share in the first quarter of both 2022 and 2021. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings and obligations for our supplemental executive retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 29, 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) supply chain disruptions and inflationary pressures; (ii) the coronavirus pandemic and its adverse impact on our business operations and financial condition; (iii) changing consumer demands, which may be influenced by general economic conditions and other factors; (iv) rapidly changing consumer preferences and purchasing patterns and fashion trends; (v) customer concentration and increased consolidation in the retail industry; (vi) intense competition within the footwear industry; (vii) foreign currency fluctuations; (viii) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (ix) cybersecurity threats or other major disruption to the Company’s information technology systems; (x) the ability to accurately forecast sales and manage inventory levels; (xi) a disruption in the Company’s distribution centers; (xii) the ability to recruit and retain senior management and other key associates; (xiii) the ability to secure/exit leases on favorable terms; (xiv) the ability to maintain relationships with current suppliers; (xv) transitional challenges with acquisitions and divestitures; (xvi) changes to tax laws, policies and treaties; (xvii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; and (xviii) the ability to attract, retain, and maintain good relationships with licensors and protect our intellectual property rights. The Company’s reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 29, 2022, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended January 29, 2022.
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