What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-05 compared with 2023-09-05 · 180 added, 169 removed, 191 unchanged (65% of the section changed)

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Macroeconomic Environment

Macroeconomic factors, including, among others, inflation, the rising interest rate environment, increasing real estate costs, higher consumer debt levels and the upcoming end to the student loan pause, continued to impact consumer discretionary spending and our financial results during the second quarter of 2023.

We experienced a decline in consumer traffic in our retail stores during the second quarter and six months ended July 29, 2023, contributing to a decrease in our net sales.

Macroeconomic factors, including, among others, inflation, the rising interest rate environment, increasing real estate costs, higher consumer debt levels, the end to the student loan repayment pause, and fears of a recession continued to impact consumer discretionary spending and our financial results during the third quarter of 2023.

We continued to experience lighter consumer traffic in our retail stores during the third quarter, resulting in lower net sales.

While we believe that the structural changes we’ve implemented in the last few years, as well as our diversified model and operational discipline, enable the Company to drive value in a variety of market conditions, changes in macro-level consumer spending trends may continue to adversely impact our financial results in the future.

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These actions, which included eliminating open corporate positions, reducing non-merchandise procurement costs and integrating our Blowfish Malibu office and information systems into the St.

Louis infrastructure, are expected to result in additional savings in the second half of 2023.

We have also experienced lower freight costs in the first half of 2023, and expect that trend to continue for the remainder of fiscal 2023.

Louis infrastructure, are expected to result in additional savings for the remainder of 2023 and into 2024.

We believe our focus on cost control and our commitment to execute our clearly defined strategic initiatives have positioned us for sustainable, long-term growth.

Financial Highlights

Highlights of our consolidated and segment results for the second quarter of 2023 and 2022 are as follows:

Highlights of our consolidated and segment results for the third quarter of 2023 and 2022 are as follows:

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July 29, 2023

July 30, 2022

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October 29, 2022

Consolidated net sales

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(1) n/m – not meaningful

The following item should be considered in evaluating the comparability of our second quarter results in 2023 and 2022:

● Expense reduction initiatives – As further discussed in Note 5 to the condensed consolidated financial statements, during the second quarter of 2023, we incurred costs of approximately $1.7 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) associated with the expense reduction initiatives we began initiating at the end of the first quarter of 2023.

These expense reduction initiatives will continue in the second half of 2023 and are expected to result in additional costs of approximately $2.3 million, or $0.05 per diluted share.

The following items should be considered in evaluating the comparability of our third quarter results in 2023 and 2022:

● Expense reduction initiatives – As further discussed in Note 5 to the condensed consolidated financial statements, during the third quarter of 2023, we incurred costs of approximately $2.3 million ($1.7 million on an after-tax basis, or $0.05 per diluted share) associated with the expense reduction initiatives we began initiating at the end of the first quarter of 2023.

These expense reduction initiatives will continue in the fourth quarter of 2023 and are expected to result in additional costs of approximately $3 million, or $0.06 per diluted share.

● 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.

Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.

Metrics Used in the Evaluation of Our Business

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Thirty-Nine Weeks Ended

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Cost of goods sold

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Net earnings attributable to Caleres, Inc.

Net sales decreased $42.8 million, or 5.8%, to $695.5 million for the second quarter of 2023, compared to $738.3 million for the second quarter of 2022.

The challenging macroeconomic environment and competitive retail landscape persisted during the second quarter of 2023, impacting sales of both our Brand Portfolio and Famous Footwear segments.

Net sales of our Brand Portfolio segment decreased $23.2 million, or 7.2%, during the second quarter of 2023, compared to the second quarter of 2022.

As a result of economic conditions and

declines in consumer sentiment, many of our wholesale customers continued to tightly manage inventory levels and moderate purchases, which contributed to the decrease in wholesale net sales compared to the prior year.

Net sales for Famous Footwear decreased $22.2 million, or 5.1%, in the second quarter of 2023 compared to the second quarter of 2022, with comparable sales down 4.3%, due in part to a decline in customer traffic in our retail stores driven by cautious consumer spending.

On a consolidated basis, our direct-to-consumer sales represented approximately 74% of total net sales for the second quarter of 2023, compared to 72% in the second quarter of 2022.

We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with Dr.

Scholl’s, LifeStride, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands during the quarter.

Net sales decreased $115.1 million, or 7.8%, to $1,358.3 million for the six months ended July 29, 2023, compared to $1,473.4 million for the six months ended July 30, 2022.

Net sales for our Brand Portfolio segment decreased $63.4 million, or 9.2% during the first six months of 2023, compared to the first six months of 2022.

Net sales for Famous Footwear decreased $57.5 million, or 7.0%, in the first six months of 2023, compared to the first six months of 2022, due in part to a decline in customer traffic in our retail stores driven by cautious consumer spending.

Comparable sales declined 6.3% in the six months ended July 29, 2023.

On a consolidated basis, our direct-to-consumer sales grew to approximately 71% of total net sales for the six months ended July 29, 2023, compared to 69% for the six months ended July 30, 2022.

Gross profit decreased $22.6 million, or 6.7%, to $314.2 million for the second quarter of 2023, compared to $336.8 million for the second quarter of 2022.

As a percentage of net sales, gross profit decreased to 45.2% for the second quarter of 2023, compared to 45.6% for the second quarter of 2022, driven by a decrease in the Famous Footwear segment gross margin reflecting higher product markdowns in the current period.

In the second quarter of 2022, product markdowns and clearance selling were unusually low due to strong demand and lower inventory levels.

There was a higher mix of clearance selling at Famous Footwear in the second quarter of 2023, and an associated increase in product markdowns, though in line with historic levels.

This decrease was partially offset by an increase in the gross margin of our Brand Portfolio segment, reflecting lower inbound freight costs and lower inventory markdowns.

Gross profit decreased $46.9 million, or 7.1%, to $616.9 million for the six months ended July 29, 2023, compared to $663.8 million for the six months ended July 30, 2022, primarily reflecting lower net sales.

As a percentage of net sales, gross profit increased slightly to 45.4% for the six months ended July 29, 2023, compared to 45.1% for the six months ended July 30, 2022, driven by an increase in the gross margin of our Brand Portfolio segment, partially offset by a decrease in the gross margin of our Famous Footwear segment, due to the same factors described above.

Net sales decreased $36.4 million, or 4.6%, to $761.9 million for the third quarter of 2023, compared to $798.3 million for the third quarter of 2022, driven by a $32.2 million, or 6.7%, decline in net sales for our Famous Footwear segment, reflecting lower consumer traffic in our retail stores and the challenging macroeconomic environment.

Comparable sales for Famous Footwear were down 6.9%.

Despite softening consumer demand trends, our kids category, which is a key differentiator for Famous Footwear, remained strong during the third quarter of 2023, as families prioritized purchases of kids’ footwear during the back-to-school selling season.

We experienced weakness in the athletics and boots categories during the quarter.

Net sales of our Brand Portfolio segment decreased $2.4 million, or 0.8%, during the third quarter of 2023, compared to the third quarter of 2022.

Our e-commerce sales increased during the quarter, while wholesale shipments were lower.

Many of our wholesale customers continued to tightly manage inventory levels and moderate purchases, which contributed to the decrease in wholesale net sales compared to the prior year.

On a consolidated basis, our direct-to-consumer sales represented approximately 73% of total net sales for the third quarter of 2023, compared to 74% in the third quarter of 2022.

We remain focused on maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments, with LifeStride, Dr.

Scholl’s, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands during the quarter.

Net sales decreased $151.5 million, or 6.7%, to $2,120.2 million for the nine months ended October 28, 2023, compared to $2,271.7 million for the nine months ended October 29, 2022.

Net sales for our Famous Footwear segment decreased $89.6 million, or 6.9%, in the first nine months of 2023, compared to the first nine months of 2022, due in part to a decline in consumer traffic in our retail stores driven by cautious consumer spending.

Comparable sales declined 6.5% in the nine months ended October 28, 2023.

Net sales for our Brand Portfolio segment

decreased $65.8 million, or 6.5% during the first nine months of 2023, compared to the first nine months of 2022, reflecting the challenging macroeconomic environment.

Despite the competitive retail landscape, we leveraged our leading speed capabilities in certain brands to drive sales of selected trending product, including casual flats, loafers, moccasins, ballerina flats and fashion sneakers.

On a consolidated basis, our direct-to-consumer sales grew to approximately 72% of total net sales for the nine months ended October 28, 2023, compared to 71% for the nine months ended October 29, 2022.

Gross profit increased $0.5 million, or 0.1%, to $340.4 million for the third quarter of 2023, compared to $339.9 million for the third quarter of 2022.

As a percentage of net sales, gross profit increased to 44.7% for the third quarter of 2023, compared to 42.6% for the third quarter of 2022, driven by an increase in the Brand Portfolio segment gross margin reflecting lower inbound freight costs, lower inventory markdown requirements reflecting our improved inventory position, and higher merchandise margins.

We anticipate the trend of lower freight costs to continue for the remainder of fiscal 2023.

Gross profit decreased $46.5 million, or 4.6%, to $957.2 million for the nine months ended October 28, 2023, compared to $1,003.7 million for the nine months ended October 29, 2022, primarily reflecting lower net sales.

As a percentage of net sales, gross profit increased to 45.1% for the nine months ended October 28, 2023, compared to 44.2% for the nine months ended October 29, 2022, driven by an increase in the gross margin of our Brand Portfolio segment, partially offset by a decrease in the gross margin of our Famous Footwear segment.

We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses.

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Selling and Administrative Expenses

Selling and administrative expenses decreased $5.6 million, or 2.1%, to $262.8 million for the second quarter of 2023, compared to $268.4 million for the second quarter of 2022.

The decrease was driven by lower cash and share-based incentive costs and lower advertising expense, partially offset by higher retail facilities costs.

As a percentage of net sales, selling and administrative expenses increased to 37.8% for the second quarter of 2023, from 36.3% for the second quarter of 2022, reflecting deleveraging of expenses on lower net sales.

Selling and administrative expenses decreased $13.3 million, or 2.5%, to $515.9 million for the six months ended July 29, 2023, compared to $529.2 million for the six months ended July 30, 2022.

The decrease was primarily due to lower cash and share-based incentive costs and lower warehouse costs, partially offset by an increase in facilities costs.

As a percentage of net sales, selling and administrative expenses increased to 38.0% for the six months ended July 29, 2023, from 36.0% for the six months ended July 30, 2022, reflecting deleveraging of expenses on lower net sales.

Selling and administrative expenses decreased $9.5 million, or 3.3%, to $273.7 million for the third quarter of 2023, compared to $283.2 million for the third quarter of 2022.

The decrease was driven by lower anticipated payments under our cash and share-based incentive compensation plans, partially offset by higher advertising expense and higher retail facilities costs.

As a percentage of net sales, selling and administrative expenses increased to 35.9% for the third quarter of 2023, from 35.5% for the third quarter of 2022, reflecting deleveraging of expenses on lower net sales.

Selling and administrative expenses decreased $22.7 million, or 2.8%, to $789.6 million for the nine months ended October 28, 2023, compared to $812.3 million for the nine months ended October 29, 2022.

The decrease was primarily due to lower anticipated payments under our cash and share-based incentive compensation plans and lower warehouse costs, partially offset by an increase in facilities costs.

As a percentage of net sales, selling and administrative expenses increased to 37.2% for the nine months ended October 28, 2023, from 35.8% for the nine months ended October 29, 2022, reflecting deleveraging of expenses on lower net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of approximately $1.7 million for the three and six months ended July 29, 2023 were associated with expense reduction initiatives, primarily severance.

Restructuring and other special charges of approximately $2.3 million ($1.7 million on an after-tax basis, or $0.05 per diluted share) and $3.9 million ($2.9 million on an after-tax basis, or $0.08 per diluted share) for the three and nine months ended October 28, 2023, respectively, were associated with expense reduction initiatives, primarily severance.

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.

Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

There were no corresponding charges for the six months ended July 30, 2022.

Operating Earnings

Operating earnings decreased $18.7 million to $49.7 million for the second quarter of 2023, compared to $68.4 million for the second quarter of 2022, reflecting the factors described above.

As a percentage of net sales, operating earnings were 7.1% for the second quarter of 2023, compared to 9.3% for the second quarter of 2022.

Operating earnings decreased $35.3 million to $99.3 million for the six months ended July 29, 2023, compared to $134.6 million for the six months ended July 30, 2022, primarily reflecting lower net sales and gross profit.

As a percentage of net sales, operating earnings were 7.3% for the six months ended July 29, 2023, compared to 9.1% for the six months ended July 30, 2022.

Operating earnings increased $10.6 million to $64.4 million for the third quarter of 2023, compared to $53.8 million for the third quarter of 2022, reflecting the factors described above.

As a percentage of net sales, operating earnings were 8.5% for the third quarter of 2023, compared to 6.7% for the third quarter of 2022.

Operating earnings decreased $24.8 million to $163.7 million for the nine months ended October 28, 2023, compared to $188.5 million for the nine months ended October 29, 2022, primarily reflecting lower net sales and gross profit.

As a percentage of net sales, operating earnings were 7.7% for the nine months ended October 28, 2023, compared to 8.3% for the nine months ended October 29, 2022.

Interest Expense, Net

Interest expense, net increased $2.6 million, or 98.5%, to $5.1 million for the second quarter of 2023, compared to $2.5 million for the second quarter of 2022.

Interest expense, net increased $5.9 million, or 120.2%, to $10.8 million for the six months ended July 29, 2023, compared to $4.8 million for the six months ended July 30, 2022.

Interest expense, net increased $0.5 million, or 12.1%, to $4.5 million for the third quarter of 2023, compared to $4.0 million for the third quarter of 2022.

Interest expense, net increased $6.4 million, or 71.5%, to $15.3 million for the nine months ended October 28, 2023,

compared to $8.9 million for the nine months ended October 29, 2022.

The increases reflect higher interest expense on the revolving credit facility attributable to higher interest rates, partially offset by lower average borrowings.

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 in the second half of 2023 will continue to be impacted by higher interest rates.

While our interest expense in the fourth quarter of 2023 will continue to be adversely affected by the elevated interest rates, we expect to continue to reduce the borrowings under our revolving credit agreement to mitigate the impact of the high interest rate environment.

Other Income, Net

Other income, net decreased $1.6 million, or 49.8%, to $1.6 million for the second quarter of 2023, compared to $3.2 million for the second quarter of 2022, primarily attributable to lower expected return on assets and higher interest costs for our pension plans.

Other income, net decreased $3.5 million, or 53.2%, to $3.1 million for the six months ended July 29, 2023, compared to $6.6 million for the six months ended July 30, 2022, primarily attributable to lower expected return on assets and higher interest costs for the pension plans.

Other income, net decreased $1.4 million, or 48.2%, to $1.6 million for the third quarter of 2023, compared to $3.0 million for the third quarter of 2022, primarily attributable to lower expected return on assets and higher interest costs for our pension plans.

Other income, net decreased $4.9 million, or 51.6%, to $4.7 million for the nine months ended October 28, 2023, compared to $9.6 million for the nine months ended October 29, 2022, primarily attributable to lower expected return on assets and higher interest costs for the pension plans.

Refer to Note 13 of the condensed consolidated financial statements for additional information regarding our retirement plans.

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Our effective tax rate can vary considerably from period to period, depending on a number of factors.

Our consolidated effective tax rate was 25.6% for the second quarter of 2023, compared to 25.3% for the second quarter of 2022.

Our consolidated effective tax rate was 24.5% for the six months ended July 29, 2023, compared to 25.5% for the six months ended July 30, 2022.

The lower effective tax rate was driven by discrete tax benefits of approximately $0.6 million in the six months ended July 29, 2023, primarily related to share-based compensation.

Our consolidated effective tax rate was 23.5% for the third quarter of 2023, compared to 26.2% for the third quarter of 2022.

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 24.1% for the nine months ended October 28, 2023, compared to 25.7% for the nine months ended October 29, 2022.

The lower effective tax rate was driven by discrete tax benefits of approximately $0.9 million in the nine months ended October 28, 2023, primarily related to share-based compensation.

In 2021, the Organization for Economic Cooperation and Development (OECD) released Pillar Two Global Anti-Base Erosion model rules, designed to ensure large corporations are taxed at a minimum rate of 15% in all countries of operation.

The OECD continues to release guidance and countries are implementing legislation to adopt the rules, which are expected to become effective on January 1, 2024.

The United States has not yet enacted legislation implementing Pillar Two.

We are continuing to evaluate the Pillar Two rules and their potential impact on future periods, but we do not expect the rules to have a material impact on our effective tax rate.

Net Earnings Attributable to Caleres, Inc.

Net earnings attributable to Caleres, Inc.

were $33.9 million and $68.7 million for the second quarter and six months ended July 29, 2023, respectively, compared to $51.2 million and $101.7 million for the second quarter and six months ended July 30, 2022, respectively, as a result of the factors described above.

were $46.9 million and $115.6 million for the third quarter and nine months ended October 28, 2023, respectively, compared to $39.2 million and $140.9 million for the third quarter and nine months ended October 29, 2022, respectively, as a result of the factors described above.

FAMOUS FOOTWEAR

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($ millions, except sales per square foot)

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Impact of changes in Canadian exchange rate on sales

Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)

Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)

Sales per square foot, excluding e-commerce (trailing twelve months)

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Ending stores

Net sales of $414.2 million in the second quarter of 2023 decreased $22.2 million, or 5.1% compared to the second quarter of 2022.

Comparable sales decreased 4.3% compared to the second quarter of 2022.

Cautious consumer spending driven by the challenging macroeconomic environment continued to impact sales in both our retail stores and e-commerce business in the second quarter of 2023.

Our kids category, which is a key differentiator for Famous Footwear, was our strongest gender category in the quarter, reporting solid net sales growth.

Our focus on this essential and growing category was particularly important as we headed into the back-to-school season, as families continued to prioritize purchases of kids’ footwear.

We closed five stores during the second quarter of 2023, resulting in 861 stores and total square footage of 5.7 million at the end of the quarter, compared to 881 stores and total square footage of 5.8 million at the end of the second quarter of 2022.

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 both the second quarter of 2023 and 2022.

Net sales of $763.4 million in the six months ended July 29, 2023 decreased $57.5 million, or 7.0%, compared to the six months ended July 30, 2022, primarily due to the factors described above.

Comparable sales declined 6.3% in the six months ended July 29, 2023, driven by a decline in customer traffic in our retail stores.

Net sales of $449.8 million in the third quarter 2023 decreased $32.2 million, or 6.7%, compared to the third quarter of 2022.

Comparable sales decreased 6.9% compared to the third quarter of 2022.

The challenging macroeconomic environment continued to impact sales as traffic in our retail stores was down in the third quarter of 2023, compared to the third quarter of 2022.

We achieved record-setting sales of product in this category during the back-to-school season and have made investments in the kids category to drive future growth.

We experienced lower sales of seasonal categories, particularly boots, during the quarter.

We opened three stores and closed two stores during the third quarter of 2023, resulting in 862 stores and total square footage of 5.7 million at the end of the quarter, compared to 876 stores and total square footage of 5.8 million at the end of the third quarter of 2022.

Net sales of $1,213.2 million in the nine months ended October 28, 2023 decreased $89.6 million, or 6.9%, compared to the nine months ended October 29, 2022, primarily due to the factors described above.

Comparable sales declined 6.5% in the nine months ended October 28, 2023, driven by a decline in consumer traffic in our retail stores.

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 Dr.

Scholl’s, LifeStride, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands for the six months ended July 29, 2023.

During the first half of 2023, we opened two stores and closed 14 stores.

Gross profit decreased $22.1 million, or 10.4%, to $191.5 million for the second quarter of 2023, compared to $213.6 million for the second quarter of 2022, primarily due to the decrease in net sales.

As a percentage of net sales, our gross profit decreased to 46.2% for the second quarter of 2023, from 48.9% for the second quarter of 2022.

During the second quarter of 2022, there were fewer product markdowns and minimal clearance selling due to higher demand and less inventory due to ongoing supply chain constraints.

In the second quarter of 2023, our Famous Footwear segment experienced a more historical mix of clearance product sold.

Gross profit decreased $52.2 million, or 13.0%, to $350.6 million for the six months ended July 29, 2023, compared to $402.8 million for the six months ended July 30, 2022, primarily due to the decrease in net sales.

As a percentage of net sales, our gross profit decreased to 45.9% for the six months ended July 29, 2023, compared to 49.1% for the six months ended July 30, 2022, driven by the same factors discussed above.

Scholl’s, LifeStride, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands for the nine months ended October 28, 2023.

We opened five stores and closed 16 stores during the nine months ended October 28, 2023.

Although we anticipate the soft consumer demand and challenging macroeconomic landscape to persist in the fourth quarter of 2023, we believe that Famous Footwear is well-situated to grow its leadership position with the Millennial family.

Gross profit decreased $16.8 million, or 7.8%, to $198.8 million for the third quarter of 2023, compared to $215.6 million for the third quarter of 2022, reflecting lower net sales.

As a percentage of net sales, our gross profit decreased to 44.2% for the third quarter of 2023, from 44.7% for the third quarter of 2022.

Gross profit decreased $69.0 million, or 11.2%, to $549.4 million for the nine months ended October 28, 2023, compared to $618.4 million for the nine months ended October 29, 2022, primarily due to the decrease in net sales.

As a percentage of net sales, our gross profit

decreased to 45.3% for the nine months ended October 28, 2023, compared to 47.5% for the nine months ended October 29, 2022.

During the nine-months ended October 29, 2022, there were fewer markdowns and minimal clearance selling due to higher demand and a higher mix of current inventory.

During the nine-months ended October 28, 2023, we experienced a more historical mix of clearance product sold and margins on those clearance sales were in line with historical levels.

Selling and Administrative Expenses

Selling and administrative expenses decreased $0.4 million, or 0.3%, to $150.7 million for the second quarter of 2023, compared to $151.1 million for the second quarter of 2022.

The decrease was driven by lower salary and benefit expenses and lower advertising expense, partially offset by higher retail facilities costs.

As a percentage of net sales, selling and administrative expenses increased to 36.4% for the second quarter of 2023, compared to 34.6% for the second quarter of 2022.

Selling and administrative expenses increased $2.1 million, or 0.7%, to $292.7 million for the six months ended July 29, 2023, compared to $290.6 million for the six months ended July 30, 2022.

The increase was driven by higher facilities costs, including depreciation expense, as we continued to invest in prototype stores and store renovations.

This trend is expected to continue, as we remain committed to investing in our stores to enhance, energize and modernize the store experience.

These increases were partially offset by lower salary and benefits expenses and lower advertising expenses.

As a percentage of net sales, selling and administrative expenses increased to 38.3% for the six months ended July 29, 2023, compared to 35.4% for the six months ended July 30, 2022

Selling and administrative expenses decreased $5.3 million, or 3.4%, to $151.0 million for the third quarter of 2023, compared to $156.3 million for the third quarter of 2022.

The decrease was driven by lower salary and benefit expenses and distribution expense.

As a result of the softer demand, we managed most of our expense categories lower than the prior year.

As a percentage of net sales, selling and administrative expenses increased to 33.6% for the third quarter of 2023, compared to 32.4% for the third quarter of 2022, reflecting deleveraging of expenses on lower net sales.

Selling and administrative expenses decreased $3.1 million, or 0.7%, to $443.8 million for the nine months ended October 28, 2023, compared to $446.9 million for the nine months ended October 29, 2022.

The decrease was driven by lower salary and benefits expenses, lower distribution expenses and lower advertising expenses.

These decreases were partially offset by higher facilities costs, including depreciation expense, as we continued to invest in store remodels.

As a percentage of net sales, selling and administrative expenses increased to 36.6% for the nine months ended October 28, 2023, compared to 34.3% for the nine months ended October 29, 2022, reflecting deleveraging of expenses on lower net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $0.2 million for the three and six months ended July 29, 2023 were associated with expense reduction initiatives, primarily severance.

Restructuring and other special charges of $1.2 million and $1.3 million for the three and nine months ended October 28, 2023, respectively, were associated with expense reduction initiatives, primarily severance.

Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

There were no corresponding charges for the six months ended July 30, 2022.

There were no corresponding charges for the nine months ended October 29, 2022.

Operating Earnings

Operating earnings decreased $21.9 million to $40.6 million for the second quarter of 2023, compared to $62.5 million for the second quarter of 2022, primarily reflecting lower sales and gross profit, as described above.

As a percentage of net sales, operating earnings were 9.8% for the second quarter of 2023, compared to 14.3% for the second quarter of 2022.

Operating earnings decreased $54.5 million to $57.7 million for the six months ended July 29, 2023, compared to $112.2 million for the six months ended July 30, 2022.

As a percentage of net sales, operating earnings were 7.6% for the six months ended July 29, 2023, compared to 13.7% for the six months ended July 30, 2022.

Operating earnings decreased $12.7 million to $46.6 million for the third quarter of 2023, compared to $59.3 million for the third quarter of 2022, primarily reflecting lower sales and gross profit, as described above.

As a percentage of net sales, operating earnings were 10.4% for the third quarter of 2023, compared to 12.3% for the third quarter of 2022.

Operating earnings decreased $67.2 million to $104.3 million for the nine months ended October 28, 2023, compared to $171.5 million for the nine months ended October 29, 2022.

As a percentage of net sales, operating earnings were 8.6% for the nine months ended October 28, 2023, compared to 13.2% for the nine months ended October 29, 2022.

BRAND PORTFOLIO

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October 28, 2023

October 29, 2022

($ millions, except sales per square foot)

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Refer to Note 1 to the condensed consolidated financial statements for further discussion of the joint venture.

Net sales of $300.9 million in the second quarter of 2023 decreased $23.2 million, or 7.2%, compared to the second quarter of 2022.

The challenging macroeconomic environment and competitive retail landscape persisted during the second quarter of 2023, resulting in many of our wholesale customers more tightly managing inventory levels and moderating purchases, which contributed to the decrease in wholesale net sales compared to the prior year.

Even with these challenges, net sales from our owned e-commerce business increased approximately 8% during the second quarter of 2023.

Despite cautious consumer spending, consumers are reacting positively to newness, comfort and versatility.

We are strategically coordinating our marketing efforts and diversified brand offerings to capitalize on opportunities we see in the marketplace.

Our casual, flats and fashion sneaker categories resonated with consumers during the quarter, while demand for our sandals category was weaker than anticipated.

We opened one store and closed two stores in the United States during the second quarter of 2023, resulting in a total of 61 stores and total square footage of 0.1 million, compared to 66 stores and total square footage of 0.1 million at the end of the second quarter of 2022.

In addition, we continued to expand our retail store presence in China by opening three new stores and closing one store, resulting in a total of 33 stores, compared to 19 stores at the end of the second quarter of 2022.

Net sales decreased $63.4 million, or 9.2%, to $626.4 million for the six months ended July 29, 2023, compared to $689.8 million for the six months ended July 30, 2022, reflecting the challenging macroeconomic environment and competitive retail landscape described above.

We continue to experience growth in our owned e-commerce business, which increased 4.8% in the six months ended July 29, 2023, compared to the six months ended July 30, 2022.

Our unfilled order position for our wholesale sales decreased $113.6 million, or 31.5%, to $246.8 million at July 29, 2023, compared to $360.4 million at July 30, 2022.

The decrease in our backlog order levels compared to last year reflects more conservative ordering patterns by our wholesale customers as they manage their inventory levels in response to consumer sentiment.

Gross profit was $124.1 million for the second quarter of 2023, consistent with the second quarter of 2022.

As a percentage of net sales, our gross profit increased to 41.3% for the second quarter of 2023, compared to 38.3% for the second quarter of 2022, reflecting lower inbound freight costs and lower inventory markdowns.

Gross profit increased $4.6 million, or 1.7%, to $268.0 million for the six months ended July 29, 2023, compared to $263.4 million for the six months ended July 30, 2022, reflecting lower inbound freight costs as our supply chain normalized, lower inventory markdowns and higher average prices in our retail operations.

As a percentage of net sales, our gross profit increased significantly to 42.8% for the six months ended July 29, 2023, compared to 38.2% for the six months ended July 30, 2022.

Net sales of $320.8 million in the third quarter of 2023 decreased $2.4 million, or 0.8%, compared to the third quarter of 2022.

The modest decrease in our net sales was a result of the challenging consumer environment that we are currently experiencing.

Our e-commerce sales increased during the quarter, while wholesale shipments were lower.

Net sales from our owned e-commerce business increased approximately 4.7% during the third quarter of 2023.

Our key categories of casual shoes and sneakers both experienced gains in the third quarter of 2023 compared to the third quarter of 2022, as the consumer continued to navigate toward newness in non-seasonal categories, including casual flats, loafers, moccasins, ballerina flats and fashion sneakers.

The gains in these categories were offset by sales weakness in our boots category.

We opened one store in the United States during the third quarter of 2023, resulting in a total of 62 stores and total square footage of 0.1 million, compared to 63 stores and total square footage of 0.1 million at the end of the third quarter of 2022.

In addition, we continued to expand our retail store presence in China by opening one new store, resulting in a total of 34 stores, compared to 26 stores at the end of the third quarter of 2022.

Net sales decreased $65.8 million, or 6.5%, to $947.2 million for the nine months ended October 28, 2023, compared to $1,013.0 million for the nine months ended October 29, 2022, reflecting the challenging macroeconomic environment and competitive retail landscape described above.

Despite the competitive retail landscape, we have leveraged our leading speed capabilities to drive sales of selected trending product.

Speed is a key differentiator for the Brand Portfolio segment, as we are generally able to restock product that is part of the speed program within three months or less to align with consumer demand.

We continue to experience growth in our owned e-commerce business, which increased 4.7% in the nine months ended October 28, 2023, compared to the nine months ended October 29, 2022.

Our unfilled order position for our wholesale sales decreased $42.9 million, or 15.0%, to $243.9 million at October 28, 2023, compared to $286.8 million at October 29, 2022.

Gross profit increased $17.8 million, or 14.5%, to $140.2 million for the third quarter of 2023, compared to $122.4 million for the third quarter of 2022.

As a percentage of net sales, our gross profit increased to 43.7% for the third quarter of 2023, compared to 37.9% for the third quarter of 2022, reflecting lower inbound freight costs, lower inventory markdown requirements reflecting our improved inventory position, and higher merchandise margins.

Gross profit increased $22.3 million, or 5.8%, to $408.1 million for the nine months ended October 28, 2023, compared to $385.8 million for the nine months ended October 29, 2022, reflecting lower inventory markdowns, lower inbound freight costs, higher merchandise margins and higher average prices in our retail operations.

As a percentage of net sales, our gross profit increased significantly to 43.1% for the nine months ended October 28, 2023, compared to 38.1% for the nine months ended October 29, 2022.

Selling and Administrative Expenses

Selling and administrative expenses increased $1.7 million, or 1.8%, to $96.4 million for the second quarter of 2023, compared to $94.7 million for the second quarter of 2022.

The increase was primarily due to higher facilities costs, partially offset by lower salary and benefits expenses.

As a percentage of net sales, selling and administrative expenses increased to 32.0% for the second quarter of 2023, compared to 29.2% for the second quarter of 2022.

Selling and administrative expenses increased $5.0 million, or 2.6%, to $197.6 million for the six months ended July 29, 2023, compared to $192.6 million for the six months ended July 30, 2022.

The increase was driven by higher marketing expenses and higher facilities costs, partially offset by lower salary and benefits expenses.

As a percentage of net sales, selling and administrative expenses increased to 31.6% for the six months ended July 29, 2023, compared to 27.9% for the six months ended July 30, 2022, reflecting deleveraging of expenses over lower net sales.

Selling and administrative expenses increased $1.0 million, or 1.0%, to $101.1 million for the third quarter of 2023, compared to $100.1 million for the third quarter of 2022.

The increase was primarily due to higher marketing expenses, partially offset by lower salary and benefits expenses.

As a percentage of net sales, selling and administrative expenses increased to 31.5% for the third quarter of 2023, compared to 31.0% for the third quarter of 2022.

Selling and administrative expenses increased $6.0 million, or 2.0%, to $298.7 million for the nine months ended October 28, 2023, compared to $292.7 million for the nine months ended October 29, 2022.

The increase was driven by higher marketing expenses and higher facilities costs, partially offset by lower salary and benefits expenses and lower logistics costs.

As a percentage of net sales, selling and administrative expenses increased to 31.5% for the nine months ended October 28, 2023, compared to 28.9% for the nine months ended October 29, 2022, reflecting deleveraging of expenses over lower net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $0.9 million for the three and six months ended July 29, 2023 were associated with expense reduction initiatives, primarily severance.

Restructuring and other special charges of $0.9 million and $1.7 million for the three and nine months ended October 28, 2023, respectively, were associated with expense reduction initiatives, primarily severance.

Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

There were no corresponding charges for the six months ended July 30, 2022.

There were no corresponding charges for the nine months ended October 29, 2022.

Operating Earnings

Operating earnings decreased to $26.8 million for the second quarter of 2023, from $29.4 million for the second quarter of 2022, as a result of the factors described above.

As a percentage of net sales, operating earnings were 8.9% for the second quarter of 2023, compared to 9.1% in the second quarter of 2022.

Operating earnings decreased to $69.5 million for the six months ended July 29, 2023, compared to $70.8 million for the six months ended July 30, 2022, as a result of the factors described above.

As a percentage of net sales, operating earnings were 11.1% for the six months ended July 29, 2023, compared to 10.3% in the six months ended July 30, 2022.

Operating earnings increased to $38.2 million for the third quarter of 2023, from $22.3 million for the third quarter of 2022, as a result of the factors described above.

As a percentage of net sales, operating earnings were 11.9% for the third quarter of 2023, compared to 6.9% in the third quarter of 2022.

Operating earnings increased to $107.7 million for the nine months ended October 28, 2023, compared to $93.1 million for the nine months ended October 29, 2022, as a result of the factors described above.

As a percentage of net sales, operating earnings were 11.4% for the nine months ended October 28, 2023, compared to 9.2% in the nine months ended October 29, 2022.

ELIMINATIONS AND OTHER

Thirteen Weeks Ended

Twenty-Six Weeks Ended

July 29, 2023

July 30, 2022

July 29, 2023

July 30, 2022

Thirty-Nine Weeks Ended

October 28, 2023

October 29, 2022

October 28, 2023

October 29, 2022

Cost of goods sold

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The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.

The net sales elimination of $19.6 million for the second quarter of 2023 is $2.5 million, or 11.4%, lower than the second quarter of 2022.

The net sales elimination of $31.5 million for the six months ended July 29, 2023 is $5.7 million, or 15.3%, lower than the six months ended July 30, 2022.

The decreases for both periods reflect a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses decreased $6.8 million, to $15.8 million in the second quarter of 2023, compared to $22.6 million for the second quarter of 2022.

The decrease primarily reflects lower expenses related to our cash and share-based incentive compensation and other employee benefits.

Selling and administrative expenses decreased $20.2 million, to $25.6 million for the six months ended July 29, 2023, compared to $45.8 million for the six months ended July 30, 2022.

The decrease primarily reflects lower expenses related to our cash and share-based incentive compensation and other employee benefits.

Restructuring and other special charges of $0.6 million for the three and six months ended July 29, 2023 were associated with expense reduction initiatives at our corporate headquarters.

The net sales elimination of $8.6 million for the third quarter of 2023 is $1.7 million, or 24.7%, higher than the third quarter of 2022 reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.

The net sales elimination of $40.2 million for the nine months ended October 28, 2023 is $4.0 million, or 9.1%, lower than the nine months ended October 29, 2022 reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses decreased $5.2 million, to $21.5 million in the third quarter of 2023, compared to $26.7 million for the third quarter of 2022.

Selling and administrative expenses decreased $25.5 million, to $47.1 million for the nine months ended October 28, 2023, compared to $72.6 million for the nine months ended October 29, 2022.

These decreases primarily reflect lower anticipated payments under our cash and share-based incentive compensation and other employee benefits.

Restructuring and other special charges of $0.3 million and $0.9 million for the three and nine months ended October 28, 2023, respectively, were associated with expense reduction initiatives 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 six months ended July 30, 2022.

Restructuring and other special charges of $2.9 million for the nine months ended October 29, 2022 were associated with a CFO transition at our corporate headquarters.

LIQUIDITY AND CAPITAL RESOURCES

Total debt obligations of $244.0 million at July 29, 2023 decreased $104.5 million, from $348.5 million at July 30, 2022, and decreased $63.5 million, from $307.5 million at January 28, 2023.

Net interest expense for the second quarter of 2023 increased $2.5 million to $5.1 million, compared to $2.6 million for the second quarter of 2022, due to higher interest rates.

Total debt obligations of $222.0 million at October 28, 2023 decreased $142.5 million, from $364.5 million at October 29, 2022, and decreased $85.5 million, from $307.5 million at January 28, 2023.

Net interest expense for the third quarter of 2023 increased $0.5 million to $4.5 million, compared to $4.0 million for the third quarter of 2022, primarily due to higher interest rates.

This increase was partially offset by lower average borrowings under our revolving credit agreement.

The interest on our revolving credit facility is based on a variable rate, which has resulted in higher interest expense in the current rising interest rate environment.

While our interest expense in the second half of 2023 will continue to be adversely affected by the elevated interest rates, we expect to continue to reduce the borrowings under our revolving credit agreement to mitigate the impact of the high interest rate environment.

Credit Agreement

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On April 27, 2023, the Company entered into a Sixth Amendment to Fourth Amended and Restated Credit agreement (as so amended, the “Credit Agreement”) to transition the borrowings on the revolving credit facility from bearing interest based on LIBOR to a term secured overnight financing rate (“SOFR”).

At July 29, 2023, we had $244.0 million in borrowings and $10.7 million in letters of credit outstanding under the Credit Agreement.

Total borrowing availability was $245.3 million at July 29, 2023.

We were in compliance with all covenants and restrictions under the Credit Agreement as of July 29, 2023.

At October 28, 2023, we had $222.0 million in borrowings and $10.6 million in letters of credit outstanding under the Credit Agreement.

Total borrowing availability was $267.4 million at October 28, 2023.

We were in compliance with all covenants and restrictions under the Credit Agreement as of October 28, 2023.

Working Capital and Cash Flow

Twenty-Six Weeks Ended

July 29, 2023

July 30, 2022

Thirty-Nine Weeks Ended

October 28, 2023

October 29, 2022

Net cash provided by operating activities

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Reasons for the major variances in cash provided (used) in the table above are as follows:

Cash provided by operating activities was $98.0 million higher in the six months ended July 29, 2023 as compared to the six months ended July 30, 2022, primarily reflecting the following factors:

● A smaller increase in inventory during the twenty-six weeks ended July 29, 2023, compared to the twenty-six weeks ended July 30, 2022, due in part to lower wholesale inventory attributable to strong inventory management and lower in-transit inventory levels as the supply chain delays were mitigated;

● A larger increase in trade accounts payable during the twenty-six weeks ended July 29, 2023, reflecting higher inventory purchases compared to the twenty-six weeks ended July 30, 2022;

Cash provided by operating activities was $110.9 million higher in the nine months ended October 28, 2023 as compared to the nine months ended October 29, 2022, primarily reflecting the following factors:

● An increase in trade accounts payable during the thirty-nine weeks ended October 28, 2023, compared to a decrease during the thirty-nine weeks ended October 29, 2022, reflecting higher inventory purchases;

● A decrease in inventory during the thirty-nine weeks ended October 28, 2023, compared to an increase during the thirty-nine weeks ended October 29, 2022, due in part to lower inventory primarily within our Brand Portfolio segment, as we aggressively managed product receipts in the current year;

partially offset by

● Lower net earnings in the twenty-six weeks ended July 29, 2023, compared to the twenty-six weeks ended July 30, 2022,

● A smaller increase in net income taxes payable during the twenty-six weeks ended July 29, 2023, compared to the twenty-six weeks ended July 30, 2022;

● A larger decrease in accrued expenses and other liabilities during the twenty-six weeks ended July 29, 2023, compared to the twenty-six weeks ended July 30, 2022, due in part to lower balances attributable to our cash-based incentive compensation plans.

Cash used for investing activities was $3.8 million lower for the twenty-six weeks ended July 29, 2023 as compared to the twenty-six weeks ended July 30, 2022, reflecting lower capital expenditures.

In 2023, we expect our purchases of property and equipment and capitalized software to be between $50 million and $60 million, as compared to $64.0 million in 2022.

Cash used for financing activities was $104.3 million higher for the six months ended July 29, 2023 as compared to the six months ended July 30, 2022, primarily due to net repayments on our revolving credit agreement of $63.5 million in the six months ended July 29, 2023, compared to net borrowings of $58.5 million in the comparable period in 2022.

In addition, the issuance of common stock under share-based plans was $6.2 million higher in the six months ended July 29, 2023, compared to the six months ended July 30, 2022.

These increases were partially offset by a $24.2 million decrease in repurchases of our common stock under our share repurchase programs during the six months ended July 29, 2023, compared to the six months ended July 30, 2022.

● Lower net earnings in the thirty-nine weeks ended October 28, 2023, compared to the thirty-nine weeks ended October 29, 2022,

● A smaller increase in net income taxes payable during the thirty-nine weeks ended October 28, 2023, compared to the thirty-nine weeks ended October 29, 2022;

● A larger decrease in accrued expenses and other liabilities during the thirty-nine weeks ended October 28, 2023, compared to the thirty-nine weeks ended October 29, 2022, due in part to lower anticipated payments under our cash-based incentive compensation plans.

Cash used for investing activities was $8.0 million lower for the thirty-nine weeks ended October 28, 2023 as compared to the thirty-nine weeks ended October 29, 2022, reflecting lower capital expenditures.

Our expected purchases of property and equipment and capitalized software to be approximately $50 million in 2023, compared to $64.0 million in 2022.

Cash used for financing activities was $121.4 million higher for the nine months ended October 28, 2023 as compared to the nine months ended October 29, 2022, primarily due to net repayments on our revolving credit agreement of $85.5 million in the nine months ended October 28, 2023, compared to net borrowings of $74.5 million in the comparable period in 2022.

In addition, the issuance of common stock under share-based plans was $5.2 million higher in the nine months ended October 28, 2023, compared to the nine months ended October 29, 2022.

These increases were partially offset by a $45.8 million decrease in repurchases of our common stock under our share repurchase programs during the nine months ended October 28, 2023, compared to the nine months ended October 29, 2022.

A summary of key financial data and ratios at the dates indicated is as follows:

July 29, 2023

July 30, 2022

October 28, 2023

October 29, 2022

January 28, 2023

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Total capitalization is defined as total debt and total equity .

Working capital at July 29, 2023 was a deficit of $41.5 million, which was an improvement of $79.5 million and $38.2 million from July 30, 2022 and January 28, 2023, respectively.

The increase in working capital from July 30, 2022 primarily reflects lower trade accounts payable and accrued expenses, partially offset by lower inventory.

The increase in working capital from January 28, 2023 primarily reflects higher inventory and lower accrued expenses, partially offset by higher trade accounts payable.

Our current ratio was 0.96:1 as of July 29, 2023, compared to 0.89:1 at July 30, 2022 and 0.91:1 at January 28, 2023.

Our debt-to-capital ratio was 34.1% as of July 29, 2023, compared to 47.5% as of July 30, 2022 and 41.9% at January 28, 2023.

We declared and paid dividends of $0.07 per share in the second quarter of both 2023 and 2022.

Working capital at October 28, 2023 was a deficit of $5.0 million, which was an improvement of $112.8 million and $74.7 million from October 29, 2022 and January 28, 2023, respectively.

The increase in working capital from October 29, 2022 primarily reflects lower accrued expenses and trade accounts payable, partially offset by lower inventory.

The increase in working capital from January 28, 2023 primarily reflects lower accrued expenses and higher accounts receivable, partially offset by higher trade accounts payable and lower

Our current ratio was 0.99:1 as of October 28, 2023, compared to 0.89:1 at October 29, 2022 and 0.91:1 at January 28, 2023.

Our debt-to-capital ratio was 29.9% as of October 28, 2023, compared to 47.3% as of October 29, 2022 and 41.9% at January 28, 2023.

We declared and paid dividends of $0.07 per share in the third quarter of both 2023 and 2022.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis