Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We delivered another period of strong financial and operational results for the third quarter, with record quarterly net sales and solid earnings. Our results underscore the strength and versatility of our portfolio of brands, highlight the significant progress we’ve made on our enterprise-wide strategic initiatives and demonstrate the portfolio’s enhanced resilience during periods of macroeconomic uncertainty. We are particularly pleased with the performance of our Brand Portfolio segment, which utilized our diverse portfolio of brands to meet the robust consumer demand and deliver year-over-year improvement in nearly all key financial metrics. During the third quarter of 2022, we also continued to execute on our capital return program and returned $24.1 million to shareholders through dividends and share repurchases.
Financial Highlights
Following is a summary of the financial highlights for the third quarter of 2022:
● Consolidated net sales increased $14.1 million, or 1.8%, to $798.3 million in the third quarter of 2022, compared to $784.2 million in the third quarter of 2021. Our Famous Footwear segment continued its strong performance with net sales of $482.0 million. Net sales of our Brand Portfolio segment increased $22.7 million, or 7.6%, compared to the third quarter of 2021. On a consolidated basis, our direct-to-consumer sales represented approximately 74% of consolidated net sales for the third quarter of 2022, compared to 73% in the third quarter of 2021.
● Consolidated gross profit increased $4.5 million, or 1.3%, to $339.9 million in the third quarter of 2022, compared to $335.4 million in the third quarter of 2021. Our gross profit margin decreased slightly to 42.6% in the third quarter of 2022, compared to 42.8% in the third quarter of 2021.
● Consolidated operating earnings decreased $27.5 million to $53.8 million in the third quarter of 2022, compared to $81.3 million in the third quarter of 2021.
● Consolidated net earnings attributable to Caleres, Inc. were $39.2 million, or $1.08 per diluted share, in the third quarter of 2022, compared to $59.6 million, or $1.54 per diluted share, in the third quarter of 2021.
The following items should be considered in evaluating the comparability of our third quarter results in 2022 and 2021:
● Organizational changes – During the third quarter of 2022, we incurred costs of $2.9 million ($2.7 million on an after-tax basis, or $0.07 per diluted share) related to a CFO transition at our corporate headquarters, with no corresponding costs for the third quarter of 2021. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
● 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 third quarter of 2021, we recorded a fair value adjustment of $1.9 million ($1.4 million on an after-tax basis, or $0.04 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 third quarter of 2022. The purchase obligation was settled for $54.6 million on November 4, 2021.
Known Trends Impacting Our Business
Inflationary pressures, including higher product costs, higher parcel freight costs, wage inflation and the rising interest rate environment, continued to impact our financial results during the third quarter of 2022. The price increases we began implementing in the second half of 2021 have mitigated the majority of the inflationary pressures related to product costs. Macroeconomic factors, such as inflationary pressures and volatility in interest rates, also impact a number of accounting estimates, including impairment calculations, the value of inventory measured using the LIFO method, and other estimates that utilize fair value. These macroeconomic factors could result in incremental volatility in certain valuations and provisions required in the Company’s financial statements. In addition, ongoing general inflation and macroeconomic challenges continue to impact consumer sentiment and may result in lower consumer spending and a more promotional environment in the fourth quarter of 2022 and beyond.
27
Table of Contents
Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though other retailers may calculate the metric differently. Management uses the same-store sales metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. Our same-store sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open for at least 13 months. In addition, in order to be included in the same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores are excluded from the same-store sales metric for each day of the closure. Relocated stores are treated as new stores and therefore excluded from the calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in assessing our retail sales performance of existing locations with comparable prior year sales, separate from the impact of store openings or store closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store. Management uses the sales per square foot metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period.
Outlook
We are sharply focused on the rapidly evolving market landscape and recognize that the uncertainty about the macro environment and the mounting threat of recessionary pressures could begin to dampen consumer spending habits. We have experienced a slower start to our holiday season sales trends, which may continue through the remainder of the fourth quarter of 2022. However, we believe our core competencies in brand building, product creation, marketing and logistics will enable us to navigate the challenging market environment. In addition, we believe we are well-positioned to capitalize on opportunities across a broad spectrum of consumer segments by leveraging our diverse portfolio of brands. In addition to maintaining our quarterly dividend, we plan to prioritize using available cash to reduce our revolver borrowings and increase overall liquidity.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
798.3
100.0
%
$
784.2
100.0
%
$
2,271.7
100.0
%
$
2,098.3
100.0
%
Cost of goods sold
458.4
57.4
%
448.8
57.2
%
1,268.0
55.8
%
1,165.8
55.6
%
Gross profit
339.9
42.6
%
335.4
42.8
%
1,003.7
44.2
%
932.5
44.4
%
Selling and administrative expenses
283.2
35.5
%
254.1
32.4
%
812.3
35.8
%
757.0
36.1
%
Restructuring and other special charges, net
2.9
0.4
%
—
—
%
2.9
0.1
%
13.5
0.6
%
Operating earnings
53.8
6.7
%
81.3
10.4
%
188.5
8.3
%
162.0
7.7
%
Interest expense, net
(4.0)
(0.5)
%
(5.1)
(0.7)
%
(8.9)
(0.4)
%
(28.8)
(1.4)
%
Loss on early extinguishment of debt
—
—
%
(0.6)
(0.1)
%
—
—
%
(0.6)
(0.0)
%
Other income, net
3.0
0.4
%
3.8
0.5
%
9.6
0.4
%
11.5
0.6
%
Earnings before income taxes
52.8
6.6
%
79.4
10.1
%
189.2
8.3
%
144.1
6.9
%
Income tax provision
(13.8)
(1.7)
%
(19.7)
(2.5)
%
(48.7)
(2.1)
%
(39.9)
(1.9)
%
Net earnings
39.0
4.9
%
59.7
7.6
%
140.5
6.2
%
104.2
5.0
%
Net (loss) earnings attributable to noncontrolling interests
(0.2)
(0.0)
%
0.1
0.0
%
(0.4)
(0.0)
%
1.0
0.1
%
Net earnings attributable to Caleres, Inc.
$
39.2
4.9
%
$
59.6
7.6
%
$
140.9
6.2
%
$
103.2
4.9
%
Net Sales
Net sales increased $14.1 million, or 1.8%, to $798.3 million for the third quarter of 2022, compared to $784.2 million for the third quarter of 2021. Net sales for our Brand Portfolio segment increased $22.7 million, or 7.6% during the third quarter of 2022, compared to the third quarter of 2021, led by strong performances by our Naturalizer, Sam Edelman, Franco Sarto and LifeStride brands. Net sales for our Famous Footwear segment remained strong, but decreased $12.7 million, or 2.6%, in the third quarter of 2022 compared to the record-setting third
28
Table of Contents
quarter of 2021, with same-store sales down 0.8%. On a consolidated basis, our direct-to-consumer sales represented approximately 74% of total net sales for the third quarter of 2022. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride and Dr. Scholl’s representing two of Famous Footwear’s top 15 best-selling footwear brands during the quarter.
Net sales increased $173.4 million, or 8.3%, to $2,271.7 million for the nine months ended October 29, 2022, compared to $2,098.3 million for the nine months ended October 30, 2021. Net sales for our Brand Portfolio segment increased $223.2 million, or 28.3% during the first nine months of 2022, compared to the first nine months of 2021, driven by strong sales growth from nearly all of our brands. Our Famous Footwear segment’s sales momentum continued. However, net sales for Famous Footwear decreased $43.6 million, or 3.2%, in the first nine months of 2022 compared to the exceptionally strong first nine months of 2021, with same stores sales decreasing 2.5%. On a consolidated basis, our direct-to-consumer sales represented approximately 71% of total net sales for the nine months ended October 29, 2022.
Gross Profit
Gross profit increased $4.5 million, or 1.3%, to $339.9 million for the third quarter of 2022, compared to $335.4 million for the third quarter of 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased slightly to 42.6% for the third quarter of 2022, compared to 42.8% for the third quarter of 2021, reflecting a decrease in the gross profit margin of our Famous Footwear segment, an increase in the gross profit margin of our Brand Portfolio segment and a higher mix of retail compared to wholesale sales. The decline in the Famous Footwear segment’s gross profit margin was driven by more normalized pricing and an increase in promotional activity. The improvement in the gross profit margin of our Brand Portfolio segment reflects higher average wholesale prices, growth in higher margin sales from the direct-to-consumer channel and a favorable brand mix.
Gross profit increased $71.2 million, or 7.6%, to $1,003.7 million for the nine months ended October 29, 2022, compared to $932.5 million for the nine months ended October 30, 2021, reflecting higher net sales. As a percentage of net sales, gross profit decreased slightly to 44.2% for the nine months ended October 29, 2022, compared to 44.4% for the nine months ended October 30, 2021.
We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $29.1 million, or 11.4%, to $283.2 million for the third quarter of 2022, compared to $254.1 million for the third quarter of 2021. The increase was driven by higher salary and benefits expenses, higher expenses associated with our cash-based incentive compensation plans and higher retail facilities costs. As a percentage of net sales, selling and administrative expenses increased to 35.5% for the third quarter of 2022, from 32.4% for the third quarter of 2021, reflecting leveraging of expenses on higher net sales.
Selling and administrative expenses increased $55.3 million, or 7.3%, to $812.3 million for the nine months ended October 29, 2022, compared to $757.0 million for the nine months ended October 30, 2021. The increase primarily reflects higher salary and benefits expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 35.8% for the nine months ended October 29, 2022, from 36.1% for the nine months ended October 30, 2021, reflecting leveraging of expenses on higher net sales.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $2.9 million ($2.7 million on an after-tax basis, or $0.07 per diluted share) during the third quarter and nine months ended October 29, 2022, related to a CFO transition at our corporate headquarters. We incurred restructuring and other special charges of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) during the nine months ended October 30, 2021, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
Operating Earnings
Operating earnings decreased $27.5 million to $53.8 million for the third quarter of 2022, compared to $81.3 million for the third quarter of 2021, primarily reflecting higher selling and administrative expenses and restructuring and other special charges, as described above. As a percentage of net sales, operating earnings were 6.7% for the third quarter of 2022, compared to 10.4% for the third quarter of 2021.
29
Table of Contents
Operating earnings increased $26.5 million to $188.5 million for the nine months ended October 29, 2022, compared to $162.0 million for the nine months ended October 30, 2021, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 8.3% for the nine months ended October 29, 2022, compared to 7.7% for the nine months ended October 30, 2021.
Interest Expense, Net
Interest expense, net decreased $1.1 million, or 21.0%, to $4.0 million for the third quarter of 2022, compared to $5.1 million for the third quarter of 2021, primarily due to the non-recurrence of the $1.9 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the third quarter of 2021, partially offset by higher interest expense on the revolving credit facility. The purchase obligation was settled for $54.6 million on November 4, 2021. In addition, we redeemed our $200 million aggregate principal of senior notes in the second half of 2021. By retiring our senior notes, we shifted debt to our revolving credit agreement, which reduced our interest expense by approximately $1.8 million compared to the third quarter of 2021. These decreases were partially offset by an increase in interest expense under our revolving credit agreement attributable to higher average borrowings and higher interest rates. While the reduction in our total interest expense is expected to continue, the interest on our revolving credit facility is based on a variable interest rate. Therefore, our interest expense will continue to be adversely affected by rising interest rates.
Interest expense, net decreased $19.9 million, or 69.1%, to $8.9 million for the nine months ended October 29, 2022, compared to $28.8 million for the nine months ended October 30, 2021, primarily due to the non-recurrence of the $15.4 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation in the nine months ended October 30, 2021. In addition, after retiring our senior notes, the shift of our higher-rate debt to the lower-rate borrowings under our revolving credit agreement reduced our interest expense by approximately $8.1 million compared to the nine months ended October 30, 2021. These decreases were partially offset by an increase in interest expense our revolving credit agreement attributable to higher average borrowings and higher interest rates.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt was $0.6 million for the three and nine months ended October 30, 2021, reflecting the redemption of $100 million of senior notes prior to its maturity and the amendment of our revolving credit facility. Refer to Note 10 to the condensed consolidated financial statements for further discussion. There were no corresponding charges for the nine months ended October 29, 2022.
Other Income, Net
Other income, net decreased $0.8 million, or 22.0%, to $3.0 million for the third quarter of 2022, compared to $3.8 million for the third quarter of 2021, which reflects a reduction of certain components of net periodic benefit income associated with our pension plans.
Other income, net decreased $1.9 million, or 16.4%, to $9.6 million for the nine months ended October 29, 2022, compared to $11.5 million for the nine months ended October 30, 2021, primarily attributable to certain components of net periodic benefit income associated with our pension plans, including interest cost, amortization of actuarial loss and settlement cost. Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.
Income Tax Provision
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 26.2% for the third quarter of 2022, compared to 24.9% for the third quarter of 2021. The higher effective tax rate for the third quarter of 2022 was driven by an increase in permanent adjustments, primarily due to the non-deductible portion of executive compensation.
Our consolidated effective tax rate was 25.7% for the nine months ended October 29, 2022, compared to 27.7% for the nine months ended October 30, 2021. The higher effective tax rate for the nine months ended October 30, 2021 primarily reflects the incremental valuation allowances for our deferred tax assets for certain jurisdictions, as well as the non-deductibility of losses at our Canadian division, which were driven by exit-related costs associated with our Naturalizer retail stores in the first quarter of 2021.
Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $39.2 million and $140.9 million for the three and nine months ended October 29, 2022, respectively, compared to net earnings of $59.6 million and $103.2 million for the three and nine months ended October 30, 2021, respectively, as a result of the factors described above.
30
Table of Contents
FAMOUS FOOTWEAR
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
482.0
100.0
%
$
494.7
100.0
%
$
1,302.8
100.0
%
$
1,346.4
100.0
%
Cost of goods sold
266.4
55.3
%
259.2
52.4
%
684.4
52.5
%
703.7
52.3
%
Gross profit
215.6
44.7
%
$
235.5
47.6
%
618.4
47.5
%
$
642.7
47.7
%
Selling and administrative expenses
156.3
32.4
%
148.1
29.9
%
446.9
34.3
%
422.0
31.3
%
Operating earnings
$
59.3
12.3
%
$
87.4
17.7
%
$
171.5
13.2
%
$
220.7
16.4
%
Key Metrics
Same-store sales % change
(0.8)
%
26.5
%
(2.5)
%
11.5
%
Same-store sales $ change
$
(3.7)
$
100.1
$
(32.8)
$
102.7
Sales change from new and closed stores, net
$
(8.5)
$
2.3
$
(9.9)
$
325.1
Impact of changes in Canadian exchange rate on sales
$
(0.5)
$
0.6
$
(0.9)
$
1.7
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
72
$
72
$
194
$
194
Sales per square foot, excluding e-commerce (trailing twelve months)
$
250
$
238
$
250
$
238
Square footage (thousand sq. ft.)
5,787
5,977
5,787
5,977
Stores opened
4
1
4
9
Stores closed
9
8
22
20
Ending stores
876
905
876
905
Net Sales
Net sales of $482.0 million in the third quarter of 2022 decreased $12.7 million, or 2.6%, compared to the record setting third quarter of 2021. Despite the decrease in net sales, we continued to perform at a high level during the third quarter of 2022, led by a solid back-to-school season. Although the back-to-school season started slowly in the second quarter, we experienced strong consumer demand in August and September, especially in children’s footwear. We experienced improvement in our non-athletic footwear categories, and while demand slowed for our athletics footwear, it continues to be one of our top-selling categories. Our sales decline was more pronounced in the northern United States due in part to unseasonably warm weather. Same-store sales decreased 0.8% compared to the third quarter of 2021. During the third quarter of 2022, we opened four stores and closed nine stores, resulting in 876 stores and total square footage of 5.8 million at the end of the third quarter of 2022, compared to 905 stores and total square footage of 6.0 million at the end of the third quarter of 2021. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 77% of our net sales made to program members in the third quarter of 2022, compared to 78% in the third quarter of 2021.
Net sales of $1,302.8 million in the nine months ended October 29, 2022 decreased $43.6 million, or 3.2%, compared to the nine months ended October 30, 2021, as our same-store sales declined 2.5%. Athletics and casual continue to be our top-selling categories. We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride and Dr. Scholl’s representing two of Famous Footwear’s top 15 best-selling footwear brands for the nine months ended October 29, 2022.
Gross Profit
Gross profit decreased $19.9 million, or 8.4%, to $215.6 million for the third quarter of 2022, compared to $235.5 million for the third quarter of 2021. As a percentage of net sales, our gross profit decreased to 44.7% for the third quarter of 2022, compared to 47.6% for the third quarter of 2021, reflecting more normalized retail pricing and an increase in promotional activity compared to the third quarter of 2021, when inventories were low due to supply chain constraints. Our gross profit margin continues to exceed pre-pandemic levels.
Gross profit decreased $24.3 million, or 3.8%, to $618.4 million for the nine months ended October 29, 2022, compared to $642.7 million for the nine months ended October 30, 2021, primarily due to the decrease in net sales. As a percentage of net sales, our gross profit decreased slightly to 47.5% for the nine months ended October 29, 2022, compared to 47.7% for the nine months ended October 30, 2021.
Selling and Administrative Expenses
Selling and administrative expenses increased $8.2 million, or 5.6%, to $156.3 million for the third quarter of 2022, compared to $148.1 million for the third quarter of 2021. The increase was driven by higher salary and benefits expenses due in part to wage inflation and higher
31
Table of Contents
facilities costs. As a percentage of net sales, selling and administrative expenses increased to 32.4% for the third quarter of 2022, compared to 29.9% for the third quarter of 2021.
Selling and administrative expenses increased $24.9 million, or 5.9%, to $446.9 million for the nine months ended October 29, 2022, compared to $422.0 million for the nine months ended October 30, 2021. The increase was primarily due to higher salary and benefits expenses, higher logistics and facilities costs and higher advertising expense. As a percentage of net sales, selling and administrative expenses increased to 34.3% for the nine months ended October 29, 2022, compared to 31.3% for the nine months ended October 30, 2021.
Operating Earnings
Operating earnings decreased $28.1 million to $59.3 million for the third quarter of 2022, compared to $87.4 million for the third quarter of 2021, reflecting both lower sales and gross margins and higher operating expenses, as described above. As a percentage of net sales, operating earnings were 12.3% for the third quarter of 2022, compared to 17.7% for the third quarter of 2021.
Operating earnings decreased $49.2 million to $171.5 million for the nine months ended October 29, 2022, compared to $220.7 million for the nine months ended October 30, 2021, primarily reflecting lower sales and higher operating expenses, as described above. As a percentage of net sales, operating earnings were 13.2% for the nine months ended October 29, 2022, compared to 16.4% for the nine months ended October 30, 2021.
BRAND PORTFOLIO
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
323.2
100.0
%
$
300.5
100.0
%
$
1,013.0
100.0
%
$
789.8
100.0
%
Cost of goods sold
200.8
62.1
%
201.6
67.1
%
627.2
61.9
%
502.0
63.6
%
Gross profit
122.4
37.9
%
98.9
32.9
%
385.8
38.1
%
287.8
36.4
%
Selling and administrative expenses
100.1
31.0
%
87.5
29.1
%
292.7
28.9
%
249.2
31.5
%
Restructuring and other special charges, net
—
—
%
—
—
%
—
—
%
13.5
1.7
%
Operating earnings
$
22.3
6.9
%
$
11.4
3.8
%
$
93.1
9.2
%
$
25.1
3.2
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
34
%
28
%
30
%
31
%
Change in wholesale net sales ($)
$
13.0
$
16.5
$
197.2
$
66.2
Unfilled order position at end of period
$
286.8
$
380.7
Same-store sales % change
26.0
%
45.8
%
36.4
%
24.3
%
Same-store sales $ change
$
10.6
$
13.8
$
35.4
$
18.6
Sales change from new and closed stores, net
$
(1.1)
$
2.5
$
(9.7)
$
36.0
Impact of changes in Canadian exchange rate on retail sales
$
0.2
$
0.1
$
0.3
$
0.6
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
265
$
236
$
810
$
669
Sales per square foot, excluding e-commerce (trailing twelve months)
$
1,047
$
756
$
1,047
$
756
Square footage (thousands sq. ft.)
104
124
104
124
Stores opened
7
4
11
6
Stores closed
3
1
8
86
Ending stores
89
90
89
90
(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 $323.2 million in the third quarter of 2022 increased $22.7 million, or 7.6%, compared to the third quarter of 2021, reflecting strong consumer demand for many of our brands. The net sales increase was broad-based across nearly all of our brands, with our Naturalizer, Sam Edelman, Franco Sarto and LifeStride brands being the most significant contributors. In addition to sales increases in our wholesale business, our digital business also experienced significant growth during the quarter. The lead times required on inventory purchases have significantly improved compared to 2021, which has enabled earlier inventory receipts and a more efficient flow of product to our customers.
32
Table of Contents
During the third quarter of 2022, we opened seven stores and closed three stores, resulting in a total of 89 stores and total square footage of 0.1 million at the end of the third quarter of 2022, compared to 90 stores and total square footage of 0.1 million at the end of the third quarter of 2021.
Net sales increased $223.2 million, or 28.3%, to $1,013.0 million for the nine months ended October 29, 2022, compared to $789.8 million for the nine months ended October 30, 2021, reflecting strong sales growth from nearly all of our brands, with our Sam Edelman, Naturalizer, LifeStride, Franco Sarto and Allen Edmonds brands being the most significant contributors. During 2022, we have experienced a shift in consumer preference from sport and casual products to the fashion and lifestyle categories.
In the first quarter of 2021, we completed the strategic realignment of our Naturalizer retail business and permanently closed the remaining 73 Naturalizer stores in North America that were scheduled for closure. We have continued to focus on growing the brand’s e-commerce business through naturalizer.com, as well as our retail partners and their websites. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $1,047 for the twelve months ended October 29, 2022, compared to $756 for the twelve months ended October 30, 2021. With the closure of nearly all of our Naturalizer retail stores, the majority of the retail stores in our Brand Portfolio segment are for our Allen Edmonds brand, which have higher retail price points than the Naturalizer brand.
Our unfilled order position for our wholesale sales decreased $93.9 million, or 24.7%, to $286.8 million at October 29, 2022, compared to $380.7 million at October 30, 2021. The decrease in our backlog order levels compared to last year primarily reflects more conservative buying by our wholesale customers as they manage their inventory levels in response to consumer sentiment.
Gross Profit
Gross profit increased $23.5 million, or 23.7%, to $122.4 million for the third quarter of 2022, compared to $98.9 million for the third quarter of 2021, primarily reflecting higher net sales and a higher gross margin rate. As a percentage of net sales, our gross profit increased to 37.9% for the third quarter of 2022, compared to 32.9% for the third quarter of 2021, primarily reflecting higher average wholesale prices, growth in higher margin sales from the direct-to-consumer channel and a favorable brand mix, partially offset by a higher provision for inventory markdowns.
Gross profit increased $98.0 million, or 34.1%, to $385.8 million for the nine months ended October 29, 2022, compared to $287.8 million for the nine months ended October 30, 2021, reflecting higher net sales. As a percentage of net sales, our gross profit increased to 38.1% for the nine months ended October 29, 2022, compared to 36.4% for the nine months ended October 30, 2021. While we have experienced inflationary pressures related to product costs and inbound freight through the nine months ended October 29, 2022, we have been able to successfully offset the majority of these impacts through price increases. We anticipate inflationary pressures to continue throughout 2022 and will continue to focus on mitigating the impact.
Selling and Administrative Expenses
Selling and administrative expenses increased $12.6 million, or 14.3%, to $100.1 million for the third quarter of 2022, compared to $87.5 million for the third quarter of 2021. The increase was primarily due to higher variable salary expenses and wage inflation, higher marketing expenses and higher facilities costs. As a percentage of net sales, selling and administrative expenses increased to 31.0% for the third quarter of 2022, compared to 29.1% for the third quarter of 2021.
Selling and administrative expenses increased $43.5 million, or 17.5%, to $292.7 million for the nine months ended October 29, 2022, compared to $249.2 million for the nine months ended October 30, 2021. The increase was driven by higher variable salary expenses and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 28.9% for the nine months ended October 29, 2022, compared to 31.5% for the nine months ended October 30, 2021, reflecting better leveraging of expenses over a higher net sales base.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $13.5 million during the nine months ended October 30, 2021 for expenses associated with the strategic realignment of our Naturalizer retail store operations. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges. There were no corresponding charges during the three or nine months ended October 29, 2022.
33
Table of Contents
Operating Earnings
Operating earnings increased to $22.3 million for the third quarter of 2022, from $11.4 million for the third quarter of 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 6.9% for the third quarter of 2022, compared to 3.8% in the third quarter of 2021.
Operating earnings increased to $93.1 million for the nine months ended October 29, 2022, from $25.1 million for the nine months ended October 30, 2021, as a result of the factors described above. As a percentage of net sales, operating earnings were 9.2% for the nine months ended October 29, 2022, compared to 3.2% in the nine months ended October 30, 2021.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 29, 2022
October 30, 2021
October 29, 2022
October 30, 2021
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
(6.9)
100.0
%
$
(11.0)
100.0
%
$
(44.2)
100.0
%
$
(37.9)
100.0
%
Cost of goods sold
(8.8)
127.6
%
(12.0)
108.8
%
(43.6)
98.7
%
(39.9)
105.3
%
Gross profit
1.9
(27.6)
%
1.0
(8.8)
%
(0.6)
1.3
%
2.0
(5.3)
%
Selling and administrative expenses
26.7
(385.4)
%
18.4
(167.1)
%
72.6
(164.3)
%
85.9
(226.5)
%
Restructuring and other special charges, net
2.9
(42.0)
%
—
—
%
2.9
(6.6)
%
—
—
%
Operating loss
$
(27.7)
399.8
%
$
(17.4)
158.3
%
$
(76.1)
172.2
%
$
(83.9)
221.2
%
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
The net sales elimination of $6.9 million for the third quarter of 2022 is $4.1 million, or 37.1%, lower than the third quarter of 2021 reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear. The net sales elimination of $44.2 million for the nine months ended October 29, 2022 is $6.3 million, or 16.5%, higher than the nine months ended October 30, 2022 reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses increased $8.3 million, to $26.7 million in the third quarter of 2022, compared to $18.4 million for the third quarter of 2021. The increase primarily reflects higher expenses for our cash-based incentive compensation plans. In 2021, our financial results exceeded the targets established for our annual incentive plans earlier in the year, which resulted in a larger portion of the anticipated plan payouts recorded as expense in the first half of 2021 rather than in the third quarter. For 2022, anticipated incentive plan payouts are being recognized more ratably during the year.
Selling and administrative expenses decreased $13.3 million, to $72.6 million for the nine months ended October 29, 2022, compared to $85.9 million for the nine months ended October 30, 2021. The decrease primarily reflects lower expenses for our cash-based incentive compensation plans reflecting the shift in timing of the achievement of our financial performance targets, as described above, as well as lower expenses associated with certain other employee benefits.
Restructuring and other special charges of $2.9 million for the three and nine months ended October 29, 2022 were associated with a CFO transition at our corporate headquarters. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges. There were no corresponding charges for the nine months ended October 30, 2021.
34
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
($ millions)
October 29, 2022
October 30, 2021
(1)
January 29, 2022
Borrowings under revolving credit agreement
$
364.5
$
175.0
$
290.0
Current portion of long-term debt
—
99.6
—
Total debt
$
364.5
$
274.6
$
290.0
(1) As presented here, total debt as of October 30, 2021 excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $54.6 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 $364.5 million at October 29, 2022 increased $89.9 million, from $274.6 million at October 30, 2021, and increased $74.5 million, from $290.0 million at January 29, 2022. The increase in total debt from October 30, 2021 and January 29, 2022 is due primarily to $63.2 million of repurchases of our common stock. In August 2021, we redeemed $100.0 million aggregate principal amount of our senior notes and on January 3, 2022, we redeemed the remaining $100.0 million of senior notes. We shifted this debt to borrowings under the revolving credit facility, which has resulted in significant interest expense savings for the Company. While this reduction in interest expense is expected to continue, the interest on our revolving credit facility is based on a variable interest rate, which has resulted in higher interest expense in the current rising interest rate environment. Our interest expense will continue to be adversely affected by rising interest rates. Net interest expense for the third quarter of 2022 decreased $1.1 million to $4.0 million, compared to $5.1 million for the third quarter of 2021. The decrease is primarily attributable to the non-recurrence of the $1.9 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in the third quarter of 2021. The Blowfish Malibu mandatory purchase obligation of $54.6 million was paid on November 4, 2021, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements. In addition, as discussed above, the redemption of all outstanding senior notes in 2021 also contributed to the decrease in interest expense in the third quarter of 2022. These decreases were partially offset by higher average borrowings under our revolving credit agreement.
Credit Agreement
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. On October 5, 2021, we entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the “Credit Agreement”) which, among other modifications, extended the maturity date of the credit facility from January 18, 2024, to October 5, 2026 and decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be increased by up to $250.0 million. Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The Credit Agreement decreased the spread applied to the LIBOR or prime rate by a total of 75 basis points. At October 29, 2022, we had $364.5 million in borrowings and $10.1 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $125.4 million at October 29, 2022. We were in compliance with all covenants and restrictions under the Credit Agreement as of October 29, 2022.
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 $100.0 million of Senior Notes at 100.0%. Refer to further discussion regarding the Senior Notes in Note 10 to the condensed consolidated financial statements.
35
Table of Contents
Working Capital and Cash Flow
Thirty-Nine Weeks Ended
($ millions)
October 29, 2022
October 30, 2021
Change
Net cash provided by operating activities
$
46.3
$
189.7
$
(143.4)
Net cash used for investing activities
(45.4)
(14.6)
(30.8)
Net cash provided by (used for) financing activities
1.9
(188.6)
190.5
Effect of exchange rate changes on cash and cash equivalents
(0.1)
(0.0)
(0.1)
Increase (decrease) in cash and cash equivalents
$
2.7
$
(13.5)
$
16.2
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $143.4 million lower in the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, primarily reflecting the following factors:
● A decrease in trade accounts payable during the nine months ended October 29, 2022, compared to an increase during the nine months ended October 30, 2021, due in part to the earlier receipt of fall product in 2022 and the earlier settlement of the related accounts payable;
● A decrease in accrued expenses and other liabilities during the nine months ended October 29, 2022, compared to an increase during the nine months ended October 30, 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; partially offset by
● Higher net earnings in the nine months ended October 29, 2022, compared to the nine months ended October 30, 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 October 29, 2022 and October 30, 2021, we had $17.8 million and $64.0 million, respectively, of accounts payable subject to supply chain financing arrangements.
Cash used for investing activities was $30.8 million higher for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, reflecting higher capital expenditures. In 2022, we expect our purchases of property and equipment and capitalized software to be between $50 million and $60 million, as compared to $24.1 million in 2021. In the first quarter of 2022, we tested a new prototype Famous Footwear store that offers an enhanced shopping experience, highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner. We have also continued to invest in refreshing our Famous Footwear stores in the first nine months of 2022. We have experienced strong financial performance from the recently converted prototype stores. Accordingly, we plan to invest in additional prototype stores and store renovations during the fourth quarter of 2022 and into 2023, which we believe will enhance our brand image and further differentiate our store experience from that of our competitors.
Cash provided by financing activities was $190.5 million higher for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021, primarily due to net borrowings on our revolving credit agreement of $74.5 in the nine months ended October 29, 2022, compared to net repayments of $75.0 million in the comparable period in 2021. In addition, we repurchased $63.2 million of our common stock under our share repurchase programs during the nine months ended October 29, 2022, with no corresponding share repurchases during the nine months ended October 30, 2021.
36
Table of Contents
A summary of key financial data and ratios at the dates indicated is as follows:
October 29, 2022
October 30, 2021
January 29, 2022
Working capital ($ millions) (1)
$
(117.8)
$
(207.4)
$
(189.1)
Current ratio (2)
0.89:1
0.81:1
0.82:1
Debt-to-capital ratio (3)
47.3
%
47.3
%
47.3
%
(1) Working capital has been computed as total current assets less total current liabilities.
(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 the current portion of long-term debt and borrowings under revolving credit agreement. Total capitalization is defined as total debt and total equity .
Working capital at October 29, 2022 was ($117.8) million, which was $89.6 million and $71.3 million higher than at October 30, 2021 and January 29, 2022, respectively. The increase in working capital from October 30, 2021 primarily reflects higher inventory, the redemption of our senior notes, lower trade accounts payable and the settlement of the Blowfish Malibu mandatory purchase obligation in the fourth quarter of 2021, partially offset by higher borrowings under the revolving credit agreement. The increase in working capital from January 29, 2022 primarily reflects higher inventories and accounts receivable and lower trade accounts payable, partially offset by higher borrowings under the revolving credit agreement. Our current ratio was 0.89 to 1 as of October 29, 2022, compared to 0.81:1 at October 30, 2021 and 0.82:1 at January 29, 2022. Our debt-to-capital ratio was 47.3% as of October 29, 2022, consistent with October 30, 2021 and January 29, 2022.
We declared and paid dividends of $0.07 per share in the third quarter of both 2022 and 2021. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings and obligations for our supplemental executive retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 29, 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements, if any, and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) supply chain disruptions and inflationary pressures; (ii) the coronavirus pandemic and its adverse impact on our business operations and financial condition; (iii) changing consumer demands, which may be influenced by general economic conditions and other factors; (iv) rapidly changing consumer preferences and purchasing patterns and fashion trends; (v) customer concentration and increased consolidation in the retail industry; (vi) intense competition within the footwear industry; (vii) foreign currency fluctuations; (viii) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (ix) cybersecurity threats or other major disruption to the Company’s information technology systems; (x) the ability to accurately forecast sales and manage inventory levels; (xi) a disruption in the Company’s distribution centers; (xii) the ability to recruit and retain senior management and other key associates; (xiii) the ability to secure/exit leases on favorable terms; (xiv) the ability to maintain relationships with current suppliers; (xv)
37
Table of Contents
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.