Item 7. Management’s Discussion and Analysis
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business Overview
We are a global footwear company that operates retail shoe stores and e-commerce websites, and designs, develops, sources, manufactures and distributes footwear for people of all ages. Our mission is to inspire people to feel great...feet first. We offer the consumer a diversified portfolio of leading footwear brands built on deep consumer insights generating unwavering consumer loyalty and trust. As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points. We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels. A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands. Our business
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strategy is focused on continued market share gains, investments in technology, and sustainability, while remaining focused on meeting changing consumer demand.
Famous Footwear
Our Famous Footwear segment includes nearly 900 Famous Footwear stores, famousfootwear.com and famousfootwear.ca in Canada. Famous Footwear, which is one of America’s leading family – branded footwear retailers, was founded on a simple idea: that everyone deserves to feel the joy that comes from a new pair of shoes. Our focus for the Famous Footwear segment is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion, casual and athletic footwear at a great price.
During 2022, we continued to execute on our three-pronged strategy, which concentrates on merchandising, marketing and consumer experience. We remained focused on increasing the opportunity between Famous Footwear and the brands within our Brand Portfolio segment, such as LifeStride, Dr. Scholl’s Shoes, Blowfish Malibu and Naturalizer, among others. We also have focused on offering the consumer a balanced assortment of athletic, sport and fashion styles from well-known brands. We tightly managed our inventory levels in 2022, reducing SKU counts and amplifying key product trends and items to drive sales volume. As we work to evolve our product offerings, we are testing and adding new and emerging brands across various categories to meet the shifting preferences and behaviors of the consumer, which we believe may attract new Famous Footwear consumers while providing the current consumer with additional options. We believe our children’s business is a key competitive differentiator, and we view this offering as a future growth opportunity. We are also optimizing our media investment to acquire new consumers, reactivate previous consumers and retain existing Famous Footwear consumers. While we understand that consumers are still navigating an uncertain macro environment, we continue to believe that Famous Footwear is exceptionally well-positioned to compete and excel, despite these headwinds, due to its leadership position with the family, leading assortment of national brands, nationwide retail locations in key markets and enhanced consumer experience in stores and online.
Brand Portfolio
Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns. The segment is comprised of the Sam Edelman, Vionic, Naturalizer, Allen Edmonds, LifeStride, Dr. Scholl’s Shoes, Blowfish Malibu, Franco Sarto, Rykä, Vince, Bzees, Veronica Beard and Zodiac brands. Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products. Our Brand Portfolio segment operates 63 retail stores in the United States for our Allen Edmonds, Sam Edelman and Naturalizer brands. This segment also includes our e-commerce businesses that sell our branded footwear. We also operate a joint venture, which expands our international presence by distributing our Sam Edelman and Naturalizer brands through e-commerce sites and 29 retail stores in China.
Known Trends Impacting Our Business
Inflationary pressures, including higher product, retail facility and parcel freight costs, wage inflation and the rising interest rate environment, continued to impact our financial results during 2022. The price increases we began implementing in the second half of 2021 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 2023.
Financial Highlights
The following is a summary of the financial highlights for 2022:
● Consolidated net sales increased $190.5 million, or 6.9%, to $2,968.1 million in 2022, compared to $2,777.6 million last year. Net sales of our Brand Portfolio segment increased $241.8 million, or 22.4%, compared to
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2021, driven by strong sales from nearly all of our brands. Our Famous Footwear segment continued its strong performance with net sales of $1,705.1 million.
● Consolidated gross profit increased $57.6 million, or 4.7%, to $1,284.9 million in 2022, compared to $1,227.3 million last year. Our gross profit margin decreased to 43.3% in 2022, compared to 44.2% in 2021.
● Consolidated operating earnings increased to $214.3 million in 2022, compared to $205.8 million last year.
● Consolidated net earnings attributable to Caleres, Inc. were $181.7 million, or $4.92 per diluted share, in 2022, compared to $137.0 million, or $3.56 per diluted share, last year.
The following items should be considered in evaluating the comparability of our 2022 and 2021 results:
● Deferred tax valuation allowances – As a result of the significant loss before income taxes in 2020 driven by the impairment of goodwill and intangible assets during the pandemic, we entered into a three-year cumulative loss position for federal, state and certain international jurisdictions. At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions. During 2021, our net deferred tax asset increased, which required incremental valuation allowances of $4.0 million ($0.10 per diluted share). The increase in the net deferred tax asset was primarily related to operating losses at our Canadian business division, which were driven by exit-related costs associated with the Naturalizer retail stores during the first quarter of 2021. We have experienced strong earnings before income taxes in both 2021 and 2022, but remain in a cumulative loss position at the end of fiscal 2022. During 2022, our net deferred tax asset position declined. As a result, we released approximately $17.4 million ($0.47 per diluted share) of valuation allowances on deferred tax assets in 2022.
● Organizational changes – During 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 during 2021. Refer to Note 4 to the consolidated financial statements for further discussion.
● Blowfish Malibu mandatory purchase obligation – In July 2018, we acquired a controlling interest in Blowfish Malibu. As further discussed in Note 4 to the consolidated financial statements, the remaining interest in Blowfish Malibu was subject to a mandatory purchase obligation after a three-year period, based on an earnings multiple formula. During 2021, we recorded fair value adjustments of $15.4 million ($11.5 million on an after-tax basis, or $0.30 per diluted share), which are presented as interest expense, net in the consolidated statements of earnings (loss). The mandatory purchase obligation of $54.6 million was settled during the fourth quarter of 2021. There were no corresponding charges in 2022.
● Brand Portfolio – business exits – In 2021, the Company incurred costs of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) related to the strategic realignment of the Naturalizer retail store operations. These charges primarily represented lease termination and other store closure costs, including employee severance, for the Naturalizer stores closed in 2021 and are reflected as restructuring and other special charges. There were no corresponding charges in 2022. Refer to Note 4 to the consolidated financial statements for further discussion.
Financial Outlook
We believe the success of the structural changes we have made in recent years will enable us to deliver a new baseline of earnings per share in the future. In 2023, we will focus on several key areas that we believe will enable us to win in the marketplace, despite inflationary pressures, higher interest rates and the ongoing uncertainty in the macro environment.
● We will work to align our product assortment, store experience, digital presence and marketing approach to the needs of the “millennial family” at Famous Footwear.
● We will continue to balance the product mix at Famous Footwear to align the athletic versus non-athletic offerings to consumer demand.
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● We intend to capitalize on the strength of our lead brands within our Brand Portfolio segment, including Sam Edelman, Vionic, Allen Edmonds and Naturalizer.
● We plan to leverage our shared centers of knowledge around design and innovation, digital, marketing, analytics, and sourcing and logistics, which we believe will unlock growth opportunities and increase operating margin.
We believe we are uniquely positioned to meet consumer needs and capture growth across trending footwear categories. We are confident that the investments we have made, the strategic priorities we have set in motion, and our strengthened financial position and potential for ongoing strong cash generation will enable us to reduce our revolver borrowings and create long-term value for our shareholders.
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:
Comparable sales
The comparable 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 many retailers may calculate the metric differently. Management uses the comparable sales metric as a measure of an individual store’s success to determine whether its sales performance is consistent with expectations. Our comparable sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open at least 13 months. In addition, in order to be included in the comparable 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 (including temporary store closures related to the pandemic) are excluded from the comparable 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 comparable sales calculation. We believe the comparable sales metric is useful to shareholders and investors in assessing the performance of our existing retail store locations with comparable prior year sales, separate from the impact of store openings or closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to measure the efficiency of a store’s 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 consistent 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.
Comparison of Financial Results
The following sections discuss the consolidated and segment results of our operations for the year ended January 28, 2023 compared to the year ended January 29, 2022. For a discussion of the results for the year ended January 29, 2022 compared to the year ended January 30, 2021, refer to Part II, Item 7 " Management’s Discussion and Analysis of Financial Condition and Results of Operations " in our Annual Report on Form 10-K for the year ended January 29, 2022.
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CONSOLIDATED RESULTS
2022
2021
2020
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net sales
$
2,968.1
100.0
%
$
2,777.6
100.0
%
$
2,117.1
100.0
%
Cost of goods sold
1,683.2
56.7
%
1,550.3
55.8
%
1,330.1
62.8
%
Gross profit
1,284.9
43.3
%
1,227.3
44.2
%
787.0
37.2
%
Selling and administrative expenses
1,067.7
36.0
%
1,008.0
36.3
%
889.5
42.0
%
Impairment of goodwill and intangible assets
—
—
%
—
—
%
286.5
13.5
%
Restructuring and other special charges, net
2.9
0.1
%
13.5
0.5
%
96.7
4.6
%
Operating earnings (loss)
214.3
7.2
%
205.8
7.4
%
(485.7)
(22.9)
%
Interest expense, net
(14.3)
(0.5)
%
(30.9)
(1.1)
%
(48.2)
(2.3)
%
Loss on early extinguishment of debt
—
—
%
(1.0)
(0.1)
%
—
—
%
Other income, net
13.0
0.5
%
15.3
0.6
%
16.8
0.8
%
Earnings before income taxes
213.0
7.2
%
189.2
6.8
%
(517.1)
(24.4)
%
Income tax (provision) benefit
(33.3)
(1.1)
%
(51.1)
(1.8)
%
78.1
3.7
%
Net earnings (loss)
179.7
6.1
%
138.1
5.0
%
(439.0)
(20.7)
%
Net (loss) earnings attributable to noncontrolling interests
(2.0)
(0.0)
%
1.1
0.1
%
0.1
0.0
%
Net earnings (loss) attributable to Caleres, Inc.
$
181.7
6.1
%
$
137.0
4.9
%
$
(439.1)
(20.7)
%
Net Sales
Net sales increased $190.5 million, or 6.9%, to $2,968.1 million in 2022, compared to $2,777.6 million last year, led by a $241.8 million, or 22.4%, increase in net sales at our Brand Portfolio segment. Consumer demand was strong in 2022 across all of our key brands and channels. Our strong net sales were also driven by more timely receipt of inventory compared to last year, as the global supply chain returned to pre-pandemic efficiency. During 2022, we experienced a shift in consumer preference from sport and athletic products to the fashion and lifestyle categories. Net sales for our Famous Footwear segment decreased $43.2 million, or 2.5%, compared to our record-setting 2021 net sales. On a consolidated basis, our direct-to-consumer sales represented approximately 72% of total net sales for 2022, compared to 75% last year.
Gross Profit
Gross profit increased $57.6 million, or 4.7%, to $1,284.9 million in 2022, compared to $1,227.3 million in 2021, driven by higher net sales. As a percentage of net sales, our gross profit rate decreased to 43.3% in 2022, compared to 44.2% in 2021, reflecting more normalized pricing and promotional activity in our Famous Footwear segment and a higher mix of wholesale compared to retail net sales. These decreases were partially offset by an increase in the gross profit margin of our Brand Portfolio segment, reflecting strong consumer demand for many of our key brands.
We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $59.7 million, or 5.9%, to $1,067.7 million in 2022, compared to $1,008.0 million last year. The increase reflects higher salary and benefits expenses, marketing expense, travel expense and higher retail facilities costs, due in part to rising real estate costs associated with our retail store base. As a percentage of net sales, selling and administrative expenses decreased slightly to 36.0% in 2022 from 36.3% last year.
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 2022 associated with a CFO transition at our corporate headquarters. In 2021, we incurred restructuring costs of $13.5 million, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations. Refer to further discussion of these charges in the Financial Highlights section above and Note 4 to the consolidated financial statements.
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Operating Earnings
Operating earnings increased $8.5 million to $214.3 million in 2022, compared to $205.8 million last year, reflecting the factors described above. As a percentage of net sales, operating earnings were 7.2% in 2022, compared 7.4% in 2021.
Interest Expense, Net
Interest expense, net decreased $16.6 million, or 53.9%, to $14.3 million in 2022, compared to $30.9 million last year, primarily due to the non-recurrence of the fair value adjustments to the Blowfish Malibu mandatory purchase obligation that totaled $15.4 million in 2021. The mandatory purchase obligation was settled for $54.6 million in November 2021. In addition, we redeemed our $200.0 million aggregate principal of senior notes during 2021, prior to maturity, shifting this higher interest rate debt to borrowings under our revolving credit agreement. These decreases were partially offset by an increase in interest expense on our revolving credit agreement in 2022, attributable to higher average borrowings and higher interest rates associated with the rising interest rate environment. Refer to Note 11 to the consolidated financial statements for additional information related to our borrowings and Note 4 for further discussion regarding the mandatory purchase obligation.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt was $1.0 million in 2021, reflecting the redemption of our $200.0 million aggregate principal senior notes prior to maturity, as well as the amendment of our revolving credit facility. There were no corresponding charges in 2022. Refer to Note 11 to the consolidated financial statements for further discussion.
Other Income, Net
Other income, net decreased $2.3 million, or 15.7%, to $13.0 million in 2022, compared to $15.3 million in 2021, which is 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 5 to the consolidated financial statements for additional information related to our retirement plans.
Income Tax Provision
Our consolidated effective tax rate was 15.7% in 2022, compared to 27.0% in 2021. Our lower tax rate for 2022 primarily reflects the release of $17.4 million of valuation allowances recorded for our deferred tax assets for certain jurisdictions. Our effective tax rate for 2021 primarily reflects strong domestic earnings and incremental valuation allowances recorded for our deferred tax assets for certain jurisdictions. As a result of the significant loss before income taxes in 2020 driven by the impairment of goodwill and intangible assets during the pandemic, we entered into a three-year cumulative loss position for federal, state and certain international jurisdictions. At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions. During 2021, our net deferred tax asset increased, which required incremental valuation allowances of $4.0 million. The increase in the net deferred tax asset primarily related to operating losses at our Canadian business division, which were driven by exit-related costs associated with the Naturalizer retail stores during the first quarter of 2021. We have experienced strong earnings before income taxes in both 2021 and 2022 but remain in a cumulative loss position at the end of fiscal 2022. During 2022, our net deferred tax position declined. As a result, we released approximately $17.4 million of the valuation allowances on deferred tax assets in 2022. Refer to Note 6 to the consolidated financial statements for additional information regarding income taxes.
In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA contains certain revisions to the Internal Revenue Code, including a 15% corporate minimum income tax for tax years beginning after December 31, 2022. The IRA also assesses a 1% excise tax on repurchases of corporate stock, which will impact any of our stock repurchases in 2023. We do not expect this provision of the IRA to have a material impact on our financial results in 2023.
Net Earnings Attributable to Caleres, Inc.
Consolidated net earnings attributable to Caleres, Inc. were $181.7 million in 2022, compared to $137.0 million last year, reflecting the factors described above.
Geographic Results
We have both domestic and international operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers
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and the operation of our e-commerce websites. International operations primarily consist of wholesale operations in Eastern Asia, Canada and Europe, retail operations in Canada and China and the operation of our international e-commerce websites. In addition, we license certain of our trade names to third parties who distribute and/or operate retail locations internationally. The operations in Eastern Asia include first-cost transactions, where footwear is sold at international ports to customers who then import the footwear into the United States and other countries. The breakdown of domestic and international net sales and earnings (loss) before income taxes is as follows:
2022
2021
2020
Earnings Before
Earnings Before
Loss Before
($ millions)
Net Sales
Income Taxes
Net Sales
Income Taxes
Net Sales
Income Taxes
Domestic
$
2,763.9
$
168.0
$
2,600.8
$
152.5
$
1,981.1
$
(441.5)
International
204.2
45.0
176.8
36.7
136.0
(75.6)
$
2,968.1
$
213.0
$
2,777.6
$
189.2
$
2,117.1
$
(517.1)
As a percentage of sales, the pre-tax profitability on international sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs in domestic earnings.
FAMOUS FOOTWEAR
2022
2021
2020
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net sales
$
1,705.1
100.0
%
$
1,748.3
100.0
%
$
1,263.6
100.0
%
Cost of goods sold
916.1
53.7
%
908.9
52.0
%
773.7
61.2
%
Gross profit
789.0
46.3
%
839.4
48.0
%
489.9
38.8
%
Selling and administrative expenses
593.2
34.8
%
563.0
32.2
%
497.1
39.4
%
Restructuring and other special charges, net
—
—
%
—
—
%
16.6
1.3
%
Operating earnings (loss)
$
195.8
11.5
%
$
276.4
15.8
%
$
(23.8)
(1.9)
%
Key Metrics
Comparable sales % change
(1.8)
%
12.5
%
1.6
%
Comparable sales $ change
$
(30.1)
$
153.6
$
20.0
Sales change from new and closed stores, net (1)
$
(11.7)
$
329.3
$
(344.4)
Impact of changes in Canadian exchange rate on sales
$
(1.4)
$
1.8
$
(0.1)
Sales per square foot, excluding e-commerce
$
252
$
249
$
159
Square footage (thousand sq. ft.)
5,749
5,912
6,074
Stores opened
6
10
6
Stores closed
27
32
39
Ending stores
873
894
916
(1) This metric includes the impact of temporary store closures. Fiscal 2020 was impacted significantly by store closure days during the pandemic, while 2021 reflects a significantly lower number of store closure days.
Net Sales
Net sales decreased $43.2 million, or 2.5%, to $1,705.1 million in 2022, compared to $1,748.3 million last year. Despite the decrease in net sales from our record-setting 2021 results, we continued to perform at a high level in 2022. Our well-positioned inventory drove our strong performance, with our casual, athletic and children’s categories being the largest contributors. Our e-commerce penetration in 2022 was approximately 14% of net sales, consistent with last year. During 2022, we closed 21 stores on a net basis as we continued to focus on optimizing our store base.
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 net sales to loyalty program members in 2022, compared to 78% in 2021.
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Gross Profit
Gross profit decreased $50.4 million, or 6.0%, to $789.0 million in 2022, compared to $839.4 million last year, primarily driven by lower net sales. As a percentage of net sales, our gross profit rate decreased to 46.3% in 2022, compared to 48.0% in 2021, reflecting more normalized pricing and promotional activity in 2022.
Selling and Administrative Expenses
Selling and administrative expenses increased $30.2 million, or 5.4%, to $593.2 million during 2022, compared to $563.0 million last year. The increase primarily reflects higher salary and benefits expenses, higher logistics and facilities costs and higher advertising expenses. During 2022, we experienced inflation in both wages and real estate costs. As a percentage of net sales, selling and administrative expenses increased to 34.8% in 2022 from 32.2% last year.
Operating Earnings
Operating earnings decreased $80.6 million to $195.8 million for 2022, compared to $276.4 million last year, primarily reflecting lower net sales and higher operating expenses, as described above. As a percentage of net sales, operating earnings were 11.5% for 2022, compared to 15.8% last year.
BRAND PORTFOLIO
2022
2021
2020
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net sales
$
1,322.8
100.0
%
$
1,081.0
100.0
%
$
902.5
100.0
%
Cost of goods sold
825.5
62.4
%
694.2
64.2
%
607.7
67.3
%
Gross profit
$
497.3
37.6
%
$
386.8
35.8
%
$
294.8
32.7
%
Selling and administrative expenses
385.0
29.1
%
337.4
31.2
%
337.4
37.4
%
Impairment of goodwill and intangible assets
—
—
%
—
—
%
286.5
31.8
%
Restructuring and other special charges, net
—
—
%
13.5
1.3
%
79.3
8.8
%
Operating earnings (loss)
$
112.3
8.5
%
$
35.9
3.3
%
$
(408.4)
(45.3)
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
32
%
32
%
32
%
Change in wholesale net sales ($)
$
206.6
$
114.6
$
(396.4)
Unfilled order position at end of period
$
284.6
$
452.4
$
218.2
Comparable sales % change (2)
31.4
%
30.6
%
(31.0)
%
Comparable sales $ change (2)
$
44.4
$
32.9
$
(59.7)
Sales change from new and closed stores, net
$
(9.7)
$
30.4
$
(47.9)
Impact of changes in Canadian exchange rate on retail sales
$
0.5
$
0.6
$
0.0
Sales per square foot, excluding e-commerce (2)
$
1,100
$
906
$
179
Square footage (thousands sq. ft.) (2)
102
116
269
North America stores:
Stores opened
2
—
—
Stores closed
9
87
65
Ending stores - North America
63
70
157
Ending stores - China
29
16
13
Ending stores - Total Brand Portfolio
92
86
170
(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.
(2) These metrics exclude the retail stores of our joint venture in China. Refer to Note 1 to the consolidated financial statements for further discussion of the joint venture.
Net Sales
Net sales increased $241.8 million, or 22.4%, to $1,322.8 million in 2022, compared to $1,081.0 million last year. While the net sales increase was broad-based across nearly all of our brands, our brands with a high-fashion element, including Sam Edelman, Naturalizer, LifeStride, Franco Sarto and Allen Edmonds, were the most significant contributors. During 2022, we experienced a shift in consumer preference from sport and athletic products to the fashion and lifestyle categories,
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especially dress and casual shoes. Our robust sales growth in 2022 was driven by our wholesale business, due in part to the improvement in the supply chain. Our net sales in 2021 were adversely impacted by the delayed receipt of inventory due to supply chain disruptions, including factory shutdowns, border closures, port congestion and shipping vessel and container availability . The lead times required on inventory purchases improved significantly during 2022, which enabled earlier inventory receipts and a more efficient flow of product to our customers. Our supply chain has now returned to pre-pandemic efficiency.
In the first quarter of 2021, we completed the strategic realignment of the Naturalizer retail store operations and permanently closed the remaining 73 Naturalizer stores in North America that were scheduled for closure. We remain focused on growing the Naturalizer brand’s e-commerce business through naturalizer.com, as well as our retail partners and their websites. In our Brand Portfolio segment during 2022, we closed nine stores and opened two stores in the United States, and expanded our retail store presence in China by opening 13 stores, resulting in a total of 63 stores in the United States and 29 stores in China at the end of 2022. Sales per square foot, excluding e-commerce sales, increased to $1,100, compared to $906 last year. 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.
The unfilled order position for our wholesale business decreased $167.8 million to $284.6 million at the end of 2022, compared to $452.4 million at the end of last year. The decrease in our backlog order levels reflects the return of the global supply chain back to pre-pandemic efficiency, as well as more conservative buying by our wholesale customers as they manage their inventory levels more tightly. In addition, due to supply chain constraints during 2021, retailer inventory was lower and backlog levels were higher at January 29, 2022.
Gross Profit
Gross profit increased $110.5 million, or 28.6%, to $497.3 million in 2022, compared to $386.8 million last year, reflecting both higher net sales and a higher gross margin. As a percentage of sales, our gross profit rate increased to 37.6% in 2022, compared to 35.8% last year, primarily reflecting higher average wholesale prices across all of our brands and growth in higher margin sales from the direct-to-consumer channel, partially offset by a higher provision for inventory markdowns. While we continued to experience inflationary pressures in 2022 related to product costs and inbound freight, we were able to successfully offset the majority of these impacts through price increases. We anticipate inflationary pressures to continue into 2023 and will continue to focus on mitigating the impact.
Selling and Administrative Expenses
Selling and administrative expenses increased $47.6 million, or 14.1%, to $385.0 during 2022, compared to $337.4 million last year. The increase represents a number of factors, including higher salary expenses, reflecting both growth in sales volume and wage inflation; higher marketing expenses to drive sales growth, particularly in our digital business; and severance expenses related to management changes at our Vionic division, partially offset by a gain recognized upon the modification of an international licensing contract. As a percentage of net sales, selling and administrative expenses decreased to 29.1% in 2022 from 31.2% last year, reflecting better leveraging of expenses over a higher net sales base.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $13.5 million were recorded during 2021 for expenses associated with the s trategic realignment of the 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 4 to the consolidated financial statements for additional information related to these charges. There were no corresponding charges in 2022.
Operating Earnings
We achieved record operating earnings and operating margin in 2022. Operating earnings increased $76.4 million to $112.3 million in 2022, compared to $35.9 million last year, as a result of the factors described above. As a percentage of net sales, operating earnings were 8.5% in 2022, compared to 3.3% last year.
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ELIMINATIONS AND OTHER
2022
2021
2020
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net sales
$
(59.7)
100.0
%
$
(51.7)
100.0
%
$
(49.0)
100.0
%
Cost of goods sold
(58.3)
97.7
%
(52.8)
102.2
%
(51.3)
104.8
%
Gross profit
$
(1.4)
2.3
%
$
1.1
(2.2)
%
$
2.3
(4.8)
%
Selling and administrative expenses
89.6
(149.9)
%
107.6
(208.3)
%
54.9
(112.2)
%
Restructuring and other special charges, net
2.9
(4.9)
%
—
—
%
0.8
(1.6)
%
Operating loss
$
(93.9)
157.1
%
$
(106.5)
206.1
%
$
(53.4)
109.0
%
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 $59.7 million for 2022 is $8.0 million, or 15.5%, higher than in 2021, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses decreased $18.0 million, or 16.8%, to $89.6 million in 2022, compared to $107.6 million last year. The decrease primarily reflects lower expenses for our cash-based incentive compensation plans and medical and other employee benefits, partially offset by higher share-based compensation.
Restructuring and other special charges of $2.9 million in 2022 were associated with a CFO transition at our corporate headquarters. Refer to Note 4 to the consolidated financial statements for additional information related to these charges. There were no corresponding charges in 2021.
RESTRUCTURING AND OTHER INITIATIVES
Refer to the Financial Highlights section above and Note 4 to the consolidated financial statements for additional information related to these charges.
LIQUIDITY AND CAPITAL RESOURCES
Our borrowings under the revolving credit agreement increased $17.5 million to $307.5 million at the end of 2022, compared to $290.0 million at the end of last year. The increase from 2021 to 2022 reflects $63.2 million of repurchases of our common stock, partially offset by strong cash generation in 2022. Net interest expense in 2022 was $14.3 million, compared to $30.9 million in 2021. The decrease in net interest expense in 2022 was primarily attributable to the non-recurrence of the $15.4 million fair value adjustment to the Blowfish Malibu mandatory purchase obligation recorded in 2021, as further discussed in Note 4 to the consolidated financial statements. In addition, we redeemed our $200.0 million of senior notes in the second half of 2021 and shifted the debt to borrowings under the revolving credit facility, which resulted in interest expense savings for the Company in 2022. However, 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 and is expected to increase in 2023.
Credit Agreement
As further discussed in Note 11 to the 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, extends the maturity date of the credit facility from January 18, 2024 to October 5, 2026, and decreases the borrowing availability under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be further increased by up to $250.0 million.
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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. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is a fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
At January 28, 2023, we had $307.5 million of borrowings and $10.6 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $181.9 million at January 28, 2023. We were in compliance with all covenants and restrictions under the Credit Agreement as of January 28, 2023.
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 at 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%. In conjunction with the redemption of the Senior Notes prior to maturity, we incurred a loss on early extinguishment of debt of $1.0 million. Refer to further discussion regarding the Senior Notes in Note 11 to the consolidated financial statements.
Working Capital and Cash Flow
January 28, 2023
January 29, 2022
Working capital ($ millions) (1)
$
(79.7)
$
(189.1)
Current ratio (2)
0.91:1
0.82:1
Debt-to-capital ratio (3)
41.9
%
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) Debt-to-capital has been computed by dividing the borrowings under our revolving credit agreement by total capitalization. Total capitalization is defined as total debt and total equity.
Working capital at January 28, 2023, was ($79.7) million, which was $109.4 million higher than at January 29, 2022. The increase in working capital from 2021 primarily reflects lower trade accounts payable due to lower inventory receipts in the fourth quarter. Our current ratio was 0.91 to 1 at January 28, 2023, compared to 0.82 to 1 at January 29, 2022. Our debt-to-capital ratio was 41.9% as of January 28, 2023, compared to 47.3% at January 29, 2022, reflecting higher shareholders’ equity attributable to our strong financial results in 2022.
(Decrease) Increase
($ millions)
2022
2021
in Cash Equivalents
Net cash provided by operating activities
$
125.9
$
168.4
$
(42.5)
Net cash used for investing activities
(64.0)
(24.1)
(39.9)
Net cash (used for) provided by financing activities
(58.2)
(202.4)
144.2
Effect of exchange rate changes on cash and cash equivalents
(0.1)
(0.1)
(0.0)
Increase (decrease) in cash and cash equivalents
$
3.6
$
(58.2)
$
61.8
Cash provided by operating activities was $42.5 million lower in 2022 than last year, reflecting the following factors:
● A decrease in trade accounts payable in 2022 compared to an increase last year; and
● A decrease in accrued expenses and other liabilities in 2022 compared to an increase last year; partially offset by
● A decrease in inventory in 2022, compared to an increase in 2021, due in part to the significant in-transit levels at the end of 2021 that were attributable to supply chain disruptions and port congestion;
● The non-recurrence of the settlement of the Blowfish Malibu mandatory purchase obligation in 2021; and
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● Higher earnings in 2022 compared to last year, primarily driven by strong consumer demand and strong financial results by our Brand Portfolio segment.
Supply chain financing : Certain of our suppliers are given the opportunity to sell receivables from us related to products we’ve purchased to participating financial institutions at a rate that leverages our credit rating, which may be more beneficial to the suppliers than the rate they can obtain based upon their own credit rating. 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 consolidated balance sheets and reflected as cash flows from operating activities when settled. As of January 28, 2023 and January 29, 2022, we had $26.0 million and $36.7 million, respectively, of accounts payable subject to supply chain financing arrangements.
Cash used for investing activities was $39.9 million higher in 2022 than last year, reflecting higher capital expenditures. 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 also continued to invest in renovating certain Famous Footwear stores during 2022. We have experienced strong financial performance from the recently converted prototype and renovated stores. Accordingly, we plan to invest in additional prototype stores and store renovations in 2023, which we believe will enhance our brand image and further differentiate our store experience from that of our competitors. In 2022, we also purchased an aircraft that was previously leased by the Company. In 2023, we expect our purchases of property and equipment and capitalized software to be between $60 million and $70 million.
Cash used for financing activities was $144.2 million lower in 2022 than last year, primarily due to the redemption of our $200.0 million aggregate principal Senior Notes and the settlement of the Blowfish Malibu mandatory purchase obligation in 2021. Our strong financial results allowed us to continue to return value to our shareholders through share repurchases and dividend payments. We repurchased approximately 2.6 million shares of common stock for $63.2 million during 2022, a $46.3 million increase compared to 2021. In addition, although our debt obligations grew by $17.5 million in 2022, this was a smaller increase than the $40.0 million in 2021.
We paid dividends of $0.28 per share in each of 2022, 2021 and 2020. The 2022 dividends marked the 100th year of consecutive quarterly dividends. On March 9, 2023, the Board of Directors declared a quarterly dividend of $0.07 per share, payable on April 6, 2023, to shareholders of record on March 23, 2023. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.
As of January 28, 2023, we had various contractual or other obligations, including the following:
Payments Due by Period
Less Than
1-3
3-5
More Than
($ millions)
Total
1 Year
Years
Years
5 Years
Borrowings under Credit Agreement (1)
$
307.5
$
307.5
$
—
$
—
$
—
Operating lease commitments, including imputed interest (2)
664.4
156.6
229.5
138.4
139.9
Purchase obligations (3)
590.4
558.7
24.8
3.1
3.8
Transition tax (4)
7.8
—
7.8
—
—
Other (5)
14.7
5.5
5.6
1.7
1.9
Total
$
1,584.8
$
1,028.3
$
267.7
$
143.2
$
145.6
(1) Refer to further discussion in Note 11 to the consolidated financial statements.
(2) The majority of our retail operating leases contain provisions that allow us to modify amounts payable under the lease or terminate the lease in certain circumstances, such as experiencing actual sales volume below a defined threshold and/or co-tenancy provisions associated with the facility. The contractual obligations presented in the table above reflect the minimum rent obligations, irrespective of our ability to reduce or terminate rental payments in the future. Refer to Note 12 to the consolidated financial statements.
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(3) Purchase obligations include agreements to purchase assets, goods or services that specify all significant terms, including quantity and price provision.
(4) One-time transition tax for the mandatory deemed repatriation of cumulative international earnings related to income tax reform.
(5) Includes obligations of our supplemental executive retirement plan and other postretirement benefits, as discussed in Note 5 to the consolidated financial statements.
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
Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are described below.
Inventories
Inventories are one of our most significant assets, representing approximately 32% of total assets at the end of 2022. We value our inventories at the lower of cost or market for approximately 86% of our consolidated inventories, which represents the divisions using the LIFO cost method. For the remaining portion, our inventories are valued at the lower of cost or net realizable value. For inventory valued at LIFO, we regularly review the inventory for excess, obsolete or impaired inventory and write it down to the lower of cost or market. We apply judgment in determining the market value of inventory, which requires an estimate of net realizable value, including current and expected selling prices, costs to sell and normal gross profit rates. The method used to determine market value varies by business division, based on the unique operating models. At our Famous Footwear segment and certain operations within our Brand Portfolio segment, market value is determined based on net realizable value less an estimate of expected costs to be incurred to sell the product. Accordingly, we record markdowns when it becomes evident that inventory items will be sold at prices below cost. As a result, gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment are lower than the initial markup during periods when permanent price reductions are taken to clear product. For the majority of our Brand Portfolio segment, we determine market value based upon the net realizable value of inventory less a normal gross profit rate. We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment. Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.
The determination of markdown reserves for the Brand Portfolio segment requires significant assumptions, estimates and
judgments by management, and is subject to inherent uncertainties and subjectivity. In determining markdown reserves,
management considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory and quantities of various product styles contained in inventory, as well as demand, among other factors. The ultimate amount realized from the sale of certain products could differ from management estimates.
We perform physical inventory counts or cycle counts on merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of goods sold.
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Store Impairment Charges
We regularly analyze the results of all stores and assess the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The fair value of the lease right-of-use assets is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates. The projected cash flows of the stores (including net sales projections), discount rates and current market lease rates for the remaining lease term of the related stores used to determine fair value require significant management judgment and are the assumptions to which the fair value calculations are most sensitive.
Income Tax Valuation Allowances
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established if we believe that it is more-likely-than-not that some or all of our deferred tax assets will not be realized. The evaluation of the realizability of deferred tax assets requires significant assumptions, estimates and judgment by management, including estimates of future taxable income by jurisdiction. Such estimates are subject to inherent uncertainties and subjectivity.
As of January 28, 2023, we are in a three-year cumulative loss position for federal, state and certain international jurisdictions. We have valuation allowances totaling $39.5 million as of January 28, 2023, reflecting the uncertainty regarding the utilization of net operating loss carryforwards and other deferred tax assets. The primary cause of the three-year cumulative loss position is the significant loss before income taxes in 2020 driven by the impairment of goodwill and intangible assets during the pandemic. At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions. During 2021, our net deferred tax asset increased, which required incremental valuation allowances of $4.0 million. The increase in the net deferred tax asset primarily related to operating losses at our Canadian business division, which were driven by exit-related costs associated with the Naturalizer retail stores during the first quarter of 2021. We have experienced strong earnings before income taxes in both 2021 and 2022 but remain in a cumulative loss position at the end of fiscal 2022. During 2022, our net deferred tax asset position declined. As a result, we released approximately $17.4 million of the valuation allowances on deferred tax assets in 2022.
Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected as they are subject to various risks and uncertainties. These risks and uncertainties include, without limitation, the risks detailed in Item 1A, Risk Factors, and those described in other documents and reports filed from time to time with the SEC, press releases and other communications. We do not undertake any obligation or plan to update these forward-looking statements, even though our situation may change.