Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We delivered strong financial and operational results for the second quarter, with record net sales and earnings. We leveraged our lead brands to capitalize on robust demand in trending footwear categories to meet the needs of our core consumer and drive strong gross profit and operating margins. We also strategically augmented our inventory levels in advance of the fall buying and back-to-school seasons. We continued to execute on our capital return program and repurchased 1.1 million shares of our common stock during the second quarter of 2022.
Financial Highlights
Following is a summary of the financial highlights for the second quarter of 2022:
● Consolidated net sales increased $62.8 million, or 9.3%, to $738.3 million in the second quarter of 2022, compared to $675.5 million in the second quarter of 2021. Our Famous Footwear segment continued its strong performance with net sales of $436.4 million. Net sales of our Brand Portfolio segment increased $85.1 million, or 35.6%, compared to the second quarter of 2021. On a consolidated basis, our direct-to-consumer sales represented approximately 72% of consolidated net sales for the second quarter of 2022, compared to 79% in the second quarter of 2021.
● Consolidated gross profit increased $14.5 million, or 4.5%, to $336.8 million in the second quarter of 2022, compared to $322.3 million in the second quarter of 2021. Our gross profit margin decreased to 45.6% in the second quarter of 2022, compared to 47.7% in the second quarter of 2021, reflecting a higher mix of wholesale versus retail sales combined with higher markdowns and an increase in freight costs associated with e-commerce sales.
● Consolidated operating earnings increased $5.6 million to $68.4 million in the second quarter of 2022, compared to $62.8 million in the second quarter of 2021.
● Consolidated net earnings attributable to Caleres, Inc. were $51.2 million, or $1.38 per diluted share, in the second quarter of 2022, compared to $37.4 million, or $0.97 per diluted share, in the second quarter of 2021.
The following items should be considered in evaluating the comparability of our second quarter results in 2022 and 2021:
● Inflationary Pressures – We continued to experience inflationary pressures on product costs and inbound freight during the second quarter of 2022. The price increases we began implementing in the second half of 2021 have mitigated the majority of these inflationary pressures related to product costs. We believe our ability to limit promotional activity and align inventory to demand will continue to mitigate the impact of these inflationary pressures on our financial results. However, ongoing general inflation continues to impact consumer sentiment and may result in lower consumer spending in the second half of 2022 and beyond.
● 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 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). The fair value adjustment was recorded as interest expense, net in the condensed consolidated statement of earnings. There were no corresponding charges in the second quarter of 2022. The purchase obligation was settled for $54.6 million on November 4, 2021.
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-
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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
Even with ongoing inflationary pressures and uncertainties around consumer sentiment, we believe we are well-positioned to capitalize on opportunities across a broad spectrum of consumer segments by leveraging our diverse portfolio of brands. We will continue to utilize our core competencies in brand building, merchandising, marketing and logistics to further our strategic priorities and execute on our capital return program in an effort to enhance value for our shareholders.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
738.3
100.0
%
$
675.5
100.0
%
$
1,473.4
100.0
%
$
1,314.2
100.0
%
Cost of goods sold
401.5
54.4
%
353.2
52.3
%
809.6
54.9
%
717.0
54.6
%
Gross profit
336.8
45.6
%
322.3
47.7
%
663.8
45.1
%
597.2
45.4
%
Selling and administrative expenses
268.4
36.3
%
259.5
38.4
%
529.2
36.0
%
503.0
38.3
%
Restructuring and other special charges, net
—
—
%
—
—
%
—
—
%
13.5
1.0
%
Operating earnings
68.4
9.3
%
62.8
9.3
%
134.6
9.1
%
80.7
6.1
%
Interest expense, net
(2.5)
(0.3)
%
(12.0)
(1.7)
%
(4.8)
(0.3)
%
(23.8)
(1.8)
%
Other income, net
3.2
0.4
%
3.9
0.5
%
6.6
0.5
%
7.7
0.6
%
Earnings before income taxes
69.1
9.4
%
54.7
8.1
%
136.4
9.3
%
64.6
4.9
%
Income tax provision
(17.5)
(2.4)
%
(16.5)
(2.5)
%
(34.9)
(2.4)
%
(20.1)
(1.5)
%
Net earnings
51.6
7.0
%
38.2
5.6
%
101.5
6.9
%
44.5
3.4
%
Net earnings (loss) attributable to noncontrolling interests
0.4
0.1
%
0.8
0.1
%
(0.2)
(0.0)
%
1.0
0.1
%
Net earnings attributable to Caleres, Inc.
$
51.2
6.9
%
$
37.4
5.5
%
$
101.7
6.9
%
$
43.5
3.3
%
Net Sales
Net sales increased $62.8 million, or 9.3%, to $738.3 million for the second quarter of 2022, compared to $675.5 million for the second quarter of 2021. Net sales for our Brand Portfolio segment increased $85.1 million, or 35.6% during the second quarter of 2022, compared to the second quarter of 2021, led by strong performances by our lead brands. Net sales for our Famous Footwear segment remained strong, but decreased $17.3 million, or 3.8%, in the second quarter of 2022 compared to the second quarter of 2021, primarily reflecting a lower store count and a slower start to the back-to-school season. On a consolidated basis, our direct-to-consumer sales represented approximately 72% of total net sales for the second quarter of 2022. We continued to experience robust growth in our dress, casual and occasion-based styles during the quarter. While demand for our athletics footwear slowed during the quarter, it continues to be one of our top-selling categories. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with Dr. Scholl’s, LifeStride and Blowfish Malibu representing three of Famous Footwear’s top 15 best-selling footwear brands during the quarter.
Net sales increased $159.2 million, or 12.1%, to $1,473.4 million for the six months ended July 30, 2022, compared to $1,314.2 million for the six months ended July 31, 2021. Net sales for our Brand Portfolio segment increased $200.5 million, or 41.0% during the first six months of 2022, compared to the first six months of 2021. Our Famous Footwear segment’s sales momentum continued. However, net sales for Famous Footwear decreased $30.9 million, or 3.6%, in the first six months of 2022 compared to the first six months of 2021, primarily
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reflecting a lower store count and a slower start to the back-to-school season. On a consolidated basis, our direct-to-consumer sales represented approximately 69% of total net sales for the six months ended July 30, 2022.
Gross Profit
Gross profit increased $14.5 million, or 4.5%, to $336.8 million for the second quarter of 2022, compared to $322.3 million for the second quarter of 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased to 45.6% for the second quarter of 2022, compared to 47.7% for the second quarter of 2021, reflecting a higher mix of wholesale versus retail sales combined with higher markdowns and an increase in freight costs associated with e-commerce sales.
Gross profit increased $66.6 million, or 11.2%, to $663.8 million for the six months ended July 30, 2022, compared to $597.2 million for the six months ended July 31, 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased slightly to 45.1% for the first half of 2022, compared to 45.4% for the first half of 2021.
We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $8.9 million, or 3.4%, to $268.4 million for the second quarter of 2022, compared to $259.5 million for the second quarter of 2021. The increase was driven by higher marketing expenses as a result of our strategic investment in consumer marketing to drive deeper connections with our consumers, and higher salary and benefits expenses, partially offset by lower expenses associated with our cash-based incentive compensation plans. In 2021, our first half financial results exceeded the targets established for our annual incentive plans, which resulted in a larger portion of the anticipated plan payouts recorded as expense in the second quarter of 2021. For 2022, anticipated plan payouts are being recognized more ratably during the year. As a percentage of net sales, selling and administrative expenses decreased to 36.4% for the second quarter of 2022, from 38.4% for the second quarter of 2021, reflecting leveraging of expenses on higher net sales.
Selling and administrative expenses increased $26.2 million, or 5.2%, to $529.2 million for the six months ended July 30, 2022, compared to $503.0 million for the six months ended July 31, 2021. The increase primarily reflects the factors described above. As a percentage of net sales, selling and administrative expenses decreased to 36.0% for the six months ended July 30, 2022, from 38.3% for the six months ended July 31, 2021, reflecting leveraging of expenses on 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 six months ended July 31, 2021, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations. There were no corresponding charges during the six months ended July 30, 2022 or the second quarter of 2021. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
Operating Earnings
Operating earnings increased $5.6 million to $68.4 million for the second quarter of 2022, compared to $62.8 million for the second quarter of 2021, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 9.3% for the second quarter of 2022, consistent with the second quarter of 2021.
Operating earnings increased $53.9 million to $134.6 million for the six months ended July 30, 2022, compared to $80.7 million for the six months ended July 31, 2021, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 9.1% for the six months ended July 30, 2022, compared to 6.1% for the six months ended July 31, 2021.
Interest Expense, Net
Interest expense, net decreased $9.5 million, or 78.4%, to $2.5 million for the second quarter of 2022, compared to $12.0 million for the second quarter of 2021, primarily due to the non-recurrence of the $7.1 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation in the second 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 second quarter of 2021. These decreases were partially offset by an increase in interest expense attributable to higher average borrowings under our revolving credit agreement.
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Interest expense, net decreased $19.0 million, or 79.4%, to $4.8 million for the six months ended July 30, 2022, compared to $23.8 million for the six months ended July 31, 2021, primarily due to the non-recurrence of the $13.5 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation in the six months ended July 31, 2021. In addition, after retiring our senior notes, the shift of our higher-rate debt to the lower-rate borrowings under our revolving credit agreement reduced our interest expense by approximately $6.3 million compared to the six months ended July 31, 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 $0.7 million, or 16.7%, to $3.2 million for the second quarter of 2022, compared to $3.9 million for the second quarter of 2021, which reflects a reduction of certain components of net periodic benefit income.
Other income, net decreased $1.1 million, or 13.6%, to $6.6 million for the six months ended July 30, 2022, compared to $7.7 million for the six months ended July 31, 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 25.3% for the second quarter of 2022, compared to 30.3% for the second quarter of 2021. The higher effective 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 were in a full valuation allowance position for federal, state and certain international jurisdictions.
Our consolidated effective tax rate was 25.5% for the six months ended July 30, 2022, compared to 31.1% for the six months ended July 31, 2021. The higher effective tax rate for the first half of 2021 primarily reflects the incremental valuation allowances recorded in the second quarter, as described above, and the non-deductibility of losses at our Canadian division, which were driven by exit-related costs associated with our Naturalizer retail stores in the first quarter of 2021.
Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $51.2 million and $101.7 million for the second quarter and six months ended July 30, 2022, respectively, compared to net earnings of $37.4 million and $43.5 million for the second quarter and six months ended July 31, 2021, respectively, as a result of the factors described above.
FAMOUS FOOTWEAR
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
436.4
100.0
%
$
453.6
100.0
%
$
820.9
100.0
%
$
851.8
100.0
%
Cost of goods sold
222.8
51.1
%
226.2
49.9
%
418.1
50.9
%
444.6
52.2
%
Gross profit
213.6
48.9
%
$
227.4
50.1
%
402.8
49.1
%
$
407.2
47.8
%
Selling and administrative expenses
151.1
34.6
%
141.9
31.3
%
290.6
35.4
%
273.8
32.1
%
Operating earnings
$
62.5
14.3
%
$
85.5
18.8
%
$
112.2
13.7
%
$
133.4
15.7
%
Key Metrics
Same-store sales % change
(3.1)
%
(1.1)
%
(3.5)
%
0.5
%
Same-store sales $ change
$
(13.5)
$
(3.6)
$
(29.1)
$
2.6
Sales change from new and closed stores, net
$
(3.3)
$
122.6
$
(1.4)
$
322.8
Impact of changes in Canadian exchange rate on sales
$
(0.4)
$
0.7
$
(0.4)
$
1.2
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
66
$
67
$
123
$
122
Sales per square foot, excluding e-commerce (trailing twelve months)
$
250
$
219
$
250
$
219
Square footage (thousand sq. ft.)
5,832
6,022
5,832
6,022
Stores opened
—
4
—
8
Stores closed
6
5
13
12
Ending stores
881
912
881
912
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Net Sales
Net sales of $436.4 million in the second quarter of 2022 decreased $17.3 million, or 3.8%, compared to the second quarter of 2021. The elevated consumer demand we experienced in 2021 and the first quarter of 2022 continued for much of the second quarter of 2022. However, we began to see consumer demand, store and e-commerce traffic and conversion moderate somewhat later in the quarter, reflecting cautious consumer sentiment due to inflation and other economic concerns. That trend has continued into the third quarter of 2022. We experienced improvement in our non-athletic footwear categories, and while demand slowed for our athletics footwear, it continues to be one of our top-selling categories. During the second quarter of 2022, we closed six stores, resulting in 881 stores and total square footage of 5.8 million at the end of the second quarter of 2022, compared to 912 stores and total square footage of 6.0 million at the end of the second quarter of 2021. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 77% of our net sales made to program members in the second quarter of 2022, compared to 78% in the second quarter of 2021.
Net sales of $820.9 million in the six months ended July 30, 2022 decreased $30.9 million, or 3.6%, compared to the six months ended July 31, 2021, primarily due to the factors described above. Athletics and casual continue to be our top-selling categories. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride, Dr. Scholl’s and Blowfish Malibu representing three of Famous Footwear’s top 15 best-selling footwear brands for the six months ended July 30, 2022. During the first half of 2022, we closed 13 stores.
Gross Profit
Gross profit decreased $13.8 million, or 6.1%, to $213.6 million for the second quarter of 2022, compared to $227.4 million for the second quarter of 2021. As a percentage of net sales, our gross profit decreased to 48.9% for the second quarter of 2022, compared to 50.1% for the second quarter of 2021. Although the gross profit rate for the second quarter of 2022 was slightly lower than the comparable period of 2021, it remained strong with limited promotional activity for much of the second quarter of 2022.
Gross profit decreased $4.4 million, or 1.1%, to $402.8 million for the six months ended July 30, 2022, compared to $407.2 million for the six months ended July 31, 2021, primarily due to the decrease in net sales. As a percentage of net sales, our gross profit increased to 49.1% for the six months ended July 30, 2022, compared to 47.8% for the six months ended July 31, 2021. Our higher gross profit for the first half of 2022 was primarily due to less promotional activity.
Selling and Administrative Expenses
Selling and administrative expenses increased $9.2 million, or 6.5%, to $151.1 million for the second quarter of 2022, compared to $141.9 million for the second quarter of 2021. The increase was driven by higher advertising expense primarily associated with our back-to-school marketing campaign and higher salary and benefits expenses due in part to wage inflation. As a percentage of net sales, selling and administrative expenses increased to 34.6% for the second quarter of 2022, compared to 31.3% for the second quarter of 2021.
Selling and administrative expenses increased $16.8 million, or 6.1%, to $290.6 million for the six months ended July 30, 2022, compared to $273.8 million for the six months ended July 31, 2021. The increase was primarily due to higher salary and benefits expenses, higher logistics costs and higher advertising expense associated with our strategic investment in consumer marketing. As a percentage of net sales, selling and administrative expenses increased to 35.4% for the six months ended July 30, 2022, compared to 32.1% for the six months ended July 31, 2021.
Operating Earnings
Operating earnings decreased $23.0 million to $62.5 million for the second quarter of 2022, compared to $85.5 million for the second quarter of 2021. As a percentage of net sales, operating earnings were 14.3% for the second quarter of 2022, compared to 18.8% for the second quarter of 2021.
Operating earnings decreased $21.2 million to $112.2 million for the six months ended July 30, 2022, compared to $133.4 million for the six months ended July 31, 2021. As a percentage of net sales, operating earnings were 13.7% for the six months ended July 30, 2022, compared to 15.7% for the six months ended July 31, 2021.
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BRAND PORTFOLIO
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
324.1
100.0
%
$
239.0
100.0
%
$
689.8
100.0
%
$
489.3
100.0
%
Cost of goods sold
200.0
61.7
%
144.1
60.3
%
426.4
61.8
%
300.4
61.4
%
Gross profit
124.1
38.3
%
94.9
39.7
%
263.4
38.2
%
188.9
38.6
%
Selling and administrative expenses
94.7
29.2
%
78.3
32.8
%
192.6
27.9
%
161.7
33.0
%
Restructuring and other special charges, net
—
—
%
—
—
%
—
—
%
13.5
2.8
%
Operating earnings
$
29.4
9.1
%
$
16.6
6.9
%
$
70.8
10.3
%
$
13.7
2.8
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
30
%
34
%
28
%
33
%
Change in wholesale net sales ($)
$
80.1
$
34.9
$
184.3
$
49.7
Unfilled order position at end of period
$
360.4
$
328.7
Same-store sales % change
23.5
%
16.3
%
43.8
%
10.2
%
Same-store sales $ change
$
7.0
$
3.4
$
24.9
$
4.7
Sales change from new and closed stores, net
$
(2.1)
$
17.0
$
(8.8)
$
33.5
Impact of changes in Canadian exchange rate on retail sales
$
0.1
$
0.1
$
0.1
$
0.5
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
276
$
244
$
545
$
433
Sales per square foot, excluding e-commerce (trailing twelve months)
$
1,018
$
561
$
1,018
$
561
Square footage (thousands sq. ft.)
108
125
108
125
Stores opened
3
1
4
2
Stores closed
1
9
5
85
Ending stores
85
87
85
87
(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 of $324.1 million in the second quarter of 2022 increased $85.1 million, or 35.6%, compared to the second quarter of 2021 driven by strong growth in our wholesale business. The net sales increase was broad-based across nearly all of our brands, with our Sam Edelman, Naturalizer and LifeStride brands being the most significant contributors. We continued to experience robust growth in our dress, casual and occasion-based styles for many of our brands, including Sam Edelman and LifeStride, and the sport-inspired category also continued to resonate with our customers. During the second quarter of 2022, we closed one store and opened three stores, resulting in a total of 85 stores and total square footage of 0.1 million at the end of the second quarter of 2022, compared to 87 stores and total square footage of 0.1 million at the end of the second quarter of 2021.
Net sales increased $200.5 million, or 41.0%, to $689.8 million for the six months ended July 30, 2022, compared to $489.3 million for the six months ended July 31, 2021, reflecting strong sales growth from all of our brands, with our Sam Edelman, Naturalizer, LifeStride, Franco Sarto and Allen Edmonds brands being the most significant contributors.
In the first quarter of 2021, we completed the strategic realignment of our Naturalizer retail business and permanently closed the remaining 73 Naturalizer stores in North America that were scheduled for closure. We have continued to focus on growing the brand’s e-commerce business through naturalizer.com, our retail partners and their websites, and the two ongoing flagship stores in the United States. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $1,018 for the twelve months ended July 30, 2022, compared to $561 for the twelve months ended July 31, 2021. With the closure of nearly all of our Naturalizer retail stores, the majority of the retail stores in our Brand Portfolio segment are for our Allen Edmonds brand, which have higher retail price points than the Naturalizer brand.
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Our unfilled order position for our wholesale sales increased $31.7 million, or 9.6 %, to $360.4 million at July 30, 2022, compared to $328.7 million at July 31, 2021. The increase in our backlog order levels primarily reflects higher consumer demand compared to last year.
Gross Profit
Gross profit increased $29.2 million, or 30.8%, to $124.1 million for the second quarter of 2022, compared to $94.9 million for the second quarter of 2021, primarily reflecting higher net sales. As a percentage of net sales, our gross profit decreased to 38.3% for the second quarter of 2022, compared to 39.7% for the second quarter of 2021, primarily reflecting a higher mix of wholesale versus retail sales.
Gross profit increased $74.5 million, or 39.5%, to $263.4 million for the six months ended July 30, 2022, compared to $188.9 million for the six months ended July 31, 2021, reflecting higher net sales. As a percentage of net sales, our gross profit decreased slightly to 38.2% for the six months ended July 30, 2022, compared to 38.6% for the six months ended July 31, 2021. While we have experienced inflationary pressures related to product costs and inbound freight through the six months ended July 30, 2022, we have been able to successfully offset the majority of these impacts through price increases. We anticipate inflationary pressures to continue throughout 2022 and will continue to focus on mitigating the impact.
Selling and Administrative Expenses
Selling and administrative expenses increased $16.4 million, or 20.9%, to $94.7 million for the second quarter of 2022, compared to $78.3 million for the second quarter of 2021. The increase was primarily due to higher variable salary expenses and wage inflation, higher marketing expenses and higher warehouse and logistics costs. As a percentage of net sales, selling and administrative expenses decreased to 29.2% for the second quarter of 2022, compared to 32.8% for the second quarter of 2021, reflecting better leveraging of expenses over a higher net sales base.
Selling and administrative expenses increased $30.9 million, or 19.2%, to $192.6 million for the six months ended July 30, 2022, compared to $161.7 million for the six months ended July 31, 2021. The increase was driven by higher variable salary expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 27.9% for the six months ended July 30, 2022, compared to 33.0% for the six months ended July 31, 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 six months ended July 31, 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 second quarter of 2021 or the six months ended July 30, 2022.
Operating Earnings
Operating earnings increased to $29.4 million for the second quarter of 2022, compared to $16.6 million for the second quarter of 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 9.1% for the second quarter of 2022, compared to 6.9% in the second quarter of 2021.
Operating earnings increased to $70.8 million for the six months ended July 30, 2022, compared to $13.7 million for the six months ended July 31, 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 10.3% for the six months ended July 30, 2022, compared to 2.8% in the six months ended July 31, 2021.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
Twenty-Six Weeks Ended
July 30, 2022
July 31, 2021
July 30, 2022
July 31, 2021
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
(22.1)
100.0
%
$
(17.1)
100.0
%
$
(37.2)
100.0
%
$
(26.9)
100.0
%
Cost of goods sold
(21.2)
95.8
%
(17.1)
100.0
%
(34.7)
93.4
%
(28.0)
103.9
%
Gross profit
(0.9)
4.2
%
—
—
%
(2.5)
6.6
%
1.1
(3.9)
%
Selling and administrative expenses
22.6
(102.0)
%
39.3
(229.2)
%
45.8
(123.2)
%
67.5
(250.9)
%
Operating loss
$
(23.5)
106.2
%
$
(39.3)
229.2
%
$
(48.3)
129.8
%
$
(66.4)
247.0
%
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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 $22.1 million for the second quarter of 2022 is $5.0 million, or 29.0%, higher than the second quarter of 2021. The net sales elimination of $37.2 million for the six months ended July 30, 2022 is $10.3 million, or 38.4%, higher than the six months ended July 31, 2021. The increases for both periods reflect an increase in product sold from our Brand Portfolio segment to Famous Footwear, as we continue to focus on maximizing the vertical opportunity between our segments.
Selling and administrative expenses decreased $16.7 million, to $22.6 million in the second quarter of 2022, compared to $39.3 million for the second quarter of 2021. The decrease primarily reflects lower expenses for our cash-based incentive compensation plans and certain other employee benefits. In 2021, our first half financial results exceeded the targets established for our annual incentive plans, which resulted in a larger portion of the anticipated plan payouts recorded as expense in the second quarter of 2021. For 2022, anticipated incentive plan payouts are being recognized more ratably during the year.
Selling and administrative expenses decreased $21.6 million, to $45.8 million for the six months ended July 30, 2022, compared to $67.5 million for the six months ended July 31, 2021. The decrease primarily reflects lower expenses for our cash-based incentive compensation plans and certain other employee benefits and lower expenses associated with our cash-based director compensation plans reflecting lower growth in our stock price during the six months ended July 30, 2022 compared to the six months ended July 31, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
($ millions)
July 30, 2022
July 31, 2021
(1)
January 29, 2022
Borrowings under revolving credit agreement
$
348.5
$
100.0
$
290.0
Current portion of long-term debt
—
99.5
—
Long-term debt
—
99.5
—
Total debt
$
348.5
$
299.0
$
290.0
(1) As presented here, total debt as of July 31, 2021 excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $52.6 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 $348.5 million at July 30, 2022 increased $49.5 million, from $299.0 million at July 31, 2021, and increased $58.5 million, from $290.0 million at January 29, 2022. The increase in total debt from July 31, 2021 and January 29, 2022 is due primarily to higher inventory purchases during the quarter to prepare for our back-to-school selling season, as well as $41.7 million of repurchases of our common stock. In August 2021, we redeemed $100.0 million aggregate principal amount of our senior notes and on January 3, 2022, we redeemed the remaining $100.0 million of senior notes. We shifted this higher interest rate debt to borrowings under the revolving credit facility, which has resulted in significant interest expense savings for the Company. While this reduction in interest expense is expected to continue, the interest on our revolving credit facility is based on a variable interest rate, which may result in higher interest expense in a rising interest rate environment. Net interest expense for the second quarter of 2022 decreased $9.5 million to $2.5 million, compared to $12.0 million for the second quarter of 2021. The decrease is primarily attributable to the non-recurrence of the $7.1 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the second 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 second 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 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
34
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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 July 30, 2022, we had $348.5 million in borrowings and $10.8 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $140.7 million at July 30, 2022. We were in compliance with all covenants and restrictions under the Credit Agreement as of July 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 $100.0 million of Senior Notes at 100.0%. Refer to further discussion regarding the Senior Notes in Note 10 to the condensed consolidated financial statements.
Working Capital and Cash Flow
Twenty-Six Weeks Ended
($ millions)
July 30, 2022
July 31, 2021
Change
Net cash provided by operating activities
$
27.2
$
135.5
$
(108.3)
Net cash used for investing activities
(20.7)
(9.4)
(11.3)
Net cash provided by (used for) provided by financing activities
9.3
(159.7)
169.0
Effect of exchange rate changes on cash and cash equivalents
—
—
—
Increase (decrease) in cash and cash equivalents
$
15.8
$
(33.6)
$
49.4
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $108.3 million lower in the six months ended July 30, 2022 as compared to the six months ended July 31, 2021, primarily reflecting the following factors:
● A larger increase in inventory during the six months ended July 30, 2022, compared to the six months ended July 31, 2021, primarily reflecting higher inventory in preparation for the back-to-school season as well as earlier arrival of inventory for the Brand Portfolio segment due to improved transportation lead times;
● A decrease in accrued expenses and other liabilities during the six months ended July 30, 2022, compared to an increase during the six months ended July 31, 2021 due in part to higher accruals for incentive compensation payments in 2021, reflecting operating results that exceeded the targets established for the annual incentive plan; and
● An increase in accounts receivable during the six months ended July 30, 2022, compared to a decrease in the six months ended July 31, 2021, attributable to higher wholesale sales during the period; partially offset by
● Higher net earnings in the six months ended July 30, 2022, compared to the six months ended July 31, 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 July 30, 2022 and July 31, 2021, we had $39.9 million and $48.0 million, respectively, of accounts payable subject to supply chain financing arrangements.
Cash used for investing activities was $11.3 million higher for the six months ended July 30, 2022 as compared to the six months ended July 31, 2021, reflecting higher capital expenditures. In 2022, we expect our purchases of property and equipment and capitalized software to be between $45 million and $55 million, as compared to $24.1 million in 2021. In the first quarter of 2022, we tested a new prototype Famous Footwear store that offers an enhanced shopping experience, highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner. We have also continued to invest in refreshing our Famous Footwear stores in the first half of 2022. We plan to invest in additional prototype stores and store renovations throughout 2022, which we believe will reinforce our national presence and further differentiate our store experience from that of our competitors.
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Cash provided by financing activities was $169.0 million higher for the six months ended July 30, 2022 as compared to the six months ended July 31, 2021, primarily due to net borrowings on our revolving credit agreement of $58.5 in the six months ended July 30, 2022, compared to net repayments of $150.0 million in the comparable period in 2021. In addition, we repurchased $41.7 million of our common stock under our share repurchase programs during the six months ended July 30, 2022, with no corresponding share repurchases during the six months ended July 31, 2021.
A summary of key financial data and ratios at the dates indicated is as follows:
July 30, 2022
July 31, 2021
January 29, 2022
Operating working capital ($ millions) (1)
$
296.4
$
100.4
$
193.8
Current ratio (2)
0.89:1
0.82:1
0.82:1
Debt-to-capital ratio (3)
47.5
%
54.9
%
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, 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 30, 2022 was $296.4 million, which was $196.0 million and $102.6 million higher than at July 31, 2021 and January 29, 2022, respectively. The increase in operating working capital from July 31, 2021 and January 29, 2022 primarily reflects higher inventories and the settlement of the Blowfish Malibu mandatory purchase obligation in the fourth quarter of 2021, partially offset by higher trade accounts payable. The increase in operating working capital from January 29, 2022 primarily reflects higher inventories, partially offset by higher trade payables. Our current ratio was 0.89 to 1 as of July 30, 2022, compared to 0.82:1 at July 31, 2021 and January 29, 2022. Our debt-to-capital ratio was 47.5% as of July 30, 2022, compared to 54.9% as of July 31, 2021 and 47.3% at January 29, 2022. The decrease in our debt-to-capital ratio from July 31, 2021 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 second quarter of both 2022 and 2021. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings and obligations for our supplemental executive retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 29, 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements, if any, and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) supply chain disruptions and inflationary pressures; (ii) the coronavirus pandemic and its adverse impact on our
36
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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.
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.