Item 2. Management’s Discussion and Analysis
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business Overview
We are a global footwear company that operates retail 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 retailers and consumers a diversified portfolio of leading footwear brands. Outfitted in our brands, customers can step confidently into every aspect of their lives. 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.
Known Trends Impacting Our Business
Based on the current macroeconomic environment and our recent operating results, we believe the following trends may continue to impact our business and operating results:
ERP Implementation
We are in the process of a multi-year cloud-based ERP implementation. The first phase of the implementation, including the wholesale and financial modules, went live in the second quarter of 2024. The implementation brought operational challenges, as several key reports were delayed, resulting in a lack of visibility to the data and tools we rely on to manage our wholesale business. As a result, net sales were unfavorably impacted during the quarter in our Brand Portfolio segment related to our wholesale business and our direct-to-consumer channels, including our e-commerce and drop-ship platforms. While our business operations and financial results for the second quarter of 2024 were adversely impacted by the implementation, we believe we have taken the necessary steps to address the issues that temporarily impacted our visibility.
Macroeconomic Environment
Macroeconomic factors, including, among others, inflation, elevated interest rates, increased real estate costs and higher consumer debt levels continued to impact consumer discretionary spending and our financial results during the first half of 2024. We continued to experience lighter consumer traffic in our retail stores during the second quarter, resulting in lower net sales. While we believe that the structural changes we have 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. 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.
Liquidity
Our liquidity position remains strong, with $51.8 million in cash and cash equivalents and excess availability on our revolving credit agreement of $344.1 million as of August 3, 2024. Borrowings on our revolving credit agreement totaled $146.5 million as of August 3, 2024. During the first half of 2024, we reduced the borrowings on our revolving credit agreement by $35.5 million. While our interest expense for the remainder of 2024 will continue to be negatively impacted by the elevated interest rates, we expect to continue to reduce the borrowings under our revolving credit agreement to mitigate the impact of the high interest rate environment.
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Financial Highlights
Highlights of our consolidated and segment results for the second quarter of 2024 and 2023 are as follows:
Thirteen Weeks Ended
($ millions, except per share amounts)
August 3, 2024
July 29, 2023
Change (1)
Consolidated net sales
$683.3
$695.5
($12.2)
(1.8)
%
Famous Footwear segment net sales
$420.3
$414.2
$6.1
1.5
%
Famous Footwear comparable sales % change
(2.9)
%
(4.3)
%
n/m
n/m
Brand Portfolio segment net sales
$285.5
$300.9
($15.4)
(5.1)
%
Gross profit
$310.9
$314.2
($3.3)
(1.0)
%
Gross margin
45.5
%
45.2
%
n/m
33 bps
Operating earnings
$42.5
$49.7
($7.2)
(14.4)
%
Diluted earnings per share
$0.85
$0.95
($0.10)
(10.5)
%
(1) n/m – not meaningful
Metrics Used in the Evaluation of Our Business
The following are a few key metrics by which we evaluate our business, identify trends 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 other retailers may calculate the metric differently. Management uses the comparable sales metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. Our comparable sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open for at least 13 months. In addition, in order to be included in the 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 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. In fiscal years with 53 weeks (e.g. 2023), the 53 rd week of comparable sales is included in the calculation. In the following year (e.g. 2024), the prior fiscal year period is shifted by one week to compare similar calendar weeks. We believe the comparable sales metric is useful to shareholders and investors in assessing our retail sales performance of existing locations with comparable prior year sales, separate from the impact of store openings or store closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store. Management uses the sales per square foot metric as a measure of an individual store’s success to determine whether it is performing in line with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales and the retail operations of our joint venture in China, by the total square footage of the retail store base in North America at the end of each month of the respective period.
Dire ct-to-consumer sales
Direct-to-consumer sales includes sales from our retail stores, our company-owned websites and sales through our customers’ websites that we fulfill on a drop-ship basis. While we take an omni-channel approach to reach consumers, we believe that our direct-to-consumer channels reinforce the image of our brands and strengthens our connection with the end consumer. In addition, direct-to-consumer sales generally result in a higher gross margin for the Company as compared to wholesale sales. As a result, management monitors trends in direct-to-consumer sales as a percentage of our Brand Portfolio segment and total consolidated net sales.
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RESULTS OF OPERATIONS
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
Twenty-Six Weeks Ended
August 3, 2024
July 29, 2023
August 3, 2024
July 29, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
683.3
100.0
%
$
695.5
100.0
%
$
1,342.5
100.0
%
$
1,358.3
100.0
%
Cost of goods sold
372.4
54.5
%
381.3
54.8
%
722.5
53.8
%
741.4
54.6
%
Gross profit
310.9
45.5
%
314.2
45.2
%
620.0
46.2
%
616.9
45.4
%
Selling and administrative expenses
268.4
39.3
%
262.8
37.8
%
534.7
39.8
%
515.9
38.0
%
Restructuring and other special charges, net
—
—
%
1.7
0.3
%
—
—
%
1.7
0.1
%
Operating earnings
42.5
6.2
%
49.7
7.1
%
85.3
6.4
%
99.3
7.3
%
Interest expense, net
(3.3)
(0.5)
%
(5.1)
(0.7)
%
(7.1)
(0.5)
%
(10.8)
(0.8)
%
Other income, net
1.2
0.2
%
1.6
0.2
%
2.2
0.1
%
3.1
0.2
%
Earnings before income taxes
40.4
5.9
%
46.2
6.6
%
80.4
6.0
%
91.6
6.7
%
Income tax provision
(10.1)
(1.5)
%
(11.8)
(1.7)
%
(19.3)
(1.5)
%
(22.4)
(1.6)
%
Net earnings
30.3
4.4
%
34.4
4.9
%
61.1
4.5
%
69.2
5.1
%
Net earnings attributable to noncontrolling interests
0.3
0.0
%
0.5
0.0
%
0.2
0.0
%
0.5
0.0
%
Net earnings attributable to Caleres, Inc.
$
30.0
4.4
%
$
33.9
4.9
%
$
60.9
4.5
%
$
68.7
5.1
%
Net Sales
Net sales decreased $12.2 million, or 1.8%, to $683.3 million for the second quarter of 2024, compared to $695.5 million for the second quarter of 2023, driven by a $15.4 million, or 5.1%, decline in net sales for our Brand Portfolio segment due primarily to lower wholesale sales. Our net sales in the second quarter of 2024 were unfavorably impacted by operational disruptions related to the launch of our new cloud-based ERP system, primarily while our e-commerce and drop-ship platforms were either offline or ramping up after the launch. As we progressed through the quarter, the development of several key operational reports was delayed, resulting in a lack of visibility to certain data and tools we rely on to manage the wholesale business. In addition, during the second quarter of 2024, we continued to experience weakness in sandals and dress footwear, while our fashion sneakers and casual footwear categories both experienced gains compared to the second quarter of 2023. The decrease in the Brand Portfolio segment net sales was partially offset by an increase in net sales in the Famous Footwear segment of $6.1 million, or 1.5% during the second quarter of 2024. Our kids business continued to perform well during the second quarter, while certain adult footwear categories underperformed. We also experienced growth in sales from our owned e-commerce businesses, which increased approximately 4.7% on a consolidated basis compared to the second quarter of 2023. Our direct-to-consumer sales represented approximately 75% of consolidated net sales for the second quarter of 2024, compared to 74% in the second quarter of 2023. 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 $15.8 million, or 1.2%, to $1,342.5 million for the six months ended August 3, 2024, compared to $1,358.3 million for the six months ended July 29, 2023. Net sales for our Brand Portfolio segment decreased $23.7 million, or 3.8% during the first six months of 2024, compared to the first six months of 2023. This decrease was partially offset by an increase in net sales for Famous Footwear of
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$6.4 million, or 0.8%, in the first six months of 2024, compared to the first six months of 2023, due in part to a decline in customer traffic in our retail stores. Comparable sales declined 2.6% in the six months ended August 3, 2024. On a consolidated basis, our direct-to-consumer sales grew to approximately 72% of total net sales for the six months ended August 3, 2024, compared to 71% for the six months ended July 29, 2023.
Gross Profit
Gross profit decreased $3.3 million, or 1.0%, to $310.9 million for the second quarter of 2024, compared to $314.2 million for the second quarter of 2023. As a percentage of net sales, gross profit increased to 45.5% for the second quarter of 2024, compared to 45.2% for the second quarter of 2023, driven by improvement in the Brand Portfolio segment gross margin. The increase primarily reflects higher merchandise margins and a higher mix of retail sales, including e-commerce sales from our owned brands and sales from our branded retail stores, both of which have higher gross margins than our wholesale sales. These increases were partially offset by a decrease in the gross margin in the Famous Footwear segment, driven by higher levels of promotional activity.
Gross profit decreased $3.1 million, or 0.5%, to $620.0 million for the six months ended August 3, 2024, compared to $616.9 million for the six months ended July 29, 2023. As a percentage of net sales, gross profit increased to 46.2% for the six months ended August 3, 2024, compared to 45.4% for the six months ended July 29, 2023, 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.
We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $5.6 million, or 2.1%, to $268.4 million for the second quarter of 2024, compared to $262.8 million for the second quarter of 2023. The increase was driven by a number of factors, including higher salary and benefit expenses, higher facilities costs, reflecting an increase in depreciation expense associated with the investment in Famous Footwear store renovations and upgrades to the FLAIR (Famous Localized and Immersive Retail) store concept and higher store rent expense as leases are renewed, higher marketing expenses driven by marketing investments for our Sam Edelman and Vionic brands, and higher information technology and consulting expense associated with the implementation of our cloud-based ERP platform. These increases were partially offset by lower expenses for our cash and share-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 39.3% for the second quarter of 2024, from 37.8% for the second quarter of 2023.
Selling and administrative expenses increased $18.8 million, or 3.6%, to $534.7 million for the six months ended August 3, 2024, compared to $515.9 million for the six months ended July 29, 2023. The increase was primarily due to higher salary and benefit expenses, higher marketing expenses driven by marketing investments for our Sam Edelman and Vionic brands and higher information technology and consulting expense associated with the implementation of our cloud-based ERP platform, partially offset by lower expenses for our cash and share-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 39.8% for the six months ended August 3, 2024, from 38.0% for the six months ended July 29, 2023.
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. 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 A ugust 3, 2024.
Operating Earnings
Operating earnings decreased $7.2 million to $42.5 million for the second quarter of 2024, compared to $49.7 million for the second quarter of 2023, reflecting the factors described above. As a percentage of net sales, operating earnings were 6.2% for the second quarter of 2024, compared to 7.1% for the second quarter of 2023.
Operating earnings decreased $14.0 million to $85.3 million for the six months ended August 3, 2024, compared to $99.3 million for the six months ended July 29, 2023, primarily reflecting lower net sales. As a percentage of net sales, operating earnings were 6.4% for the six months ended August 3, 2024, compared to 7.3% for the six months ended July 29, 2023.
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Interest Expense, Net
Interest expense, net decreased $1.8 million, or 35.0%, to $3.3 million for the second quarter of 2024, compared to $5.1 million for the second quarter of 2023. Interest expense, net decreased $3.7 million, or 33.9%, to $7.1 million for the six months ended August 3, 2024, compared to $10.8 million for the six months ended July 29, 2023. The decreases reflect lower average borrowings on the revolving credit facility, partially offset by higher weighted-average interest rates. The interest on our revolving credit facility is based on a variable rate, which adversely impacts our interest expense in the current elevated interest rate environment. While our interest expense for the remainder of 2024 will continue to be negatively impacted 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 $0.4 million, or 27.2%, to $1.2 million for the second quarter of 2024, compared to $1.6 million for the second quarter of 2023, and decreased $0.9 million, or 30.2%, to $2.2 million for the six months ended August 3, 2024, compared to $3.1 million for the six months ended July 29, 2023. The decreases are primarily attributable to higher amortization of the actuarial loss related to our pension plans. Refer to Note 13 of the condensed consolidated financial statements for further information. These decreases were partially offset by non-operating income associated with logistics services, which the Company began providing in the second half of 2023.
Income Tax Provision
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 25.0% for the second quarter of 2024, compared to 25.6% for the second quarter of 2023. Our consolidated effective tax rate was 24.0% for the six months ended August 3, 2024, compared to 24.5% for the six months ended July 29, 2023. The lower effective tax rate was driven by discrete tax benefits related to share-based compensation of approximately $1.0 million in the six months ended August 3, 2024 compared to $0.6 million in the six months ended July 29, 2023.
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 became 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 tax provision or effective tax rate.
Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $30.0 million and $60.9 million for the second quarter and six months ended August 3, 2024, respectively, compared to $33.9 million and $68.7 million for the second quarter and six months ended July 29, 2023, respectively, as a result of the factors described above.
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FAMOUS FOOTWEAR
Thirteen Weeks Ended
Twenty-Six Weeks Ended
August 3, 2024
July 29, 2023
August 3, 2024
July 29, 2023
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
420.3
100.0
%
$
414.2
100.0
%
$
769.8
100.0
%
$
763.4
100.0
%
Cost of goods sold
231.0
55.0
%
222.7
53.8
%
419.5
54.5
%
412.8
54.1
%
Gross profit
189.3
45.0
%
$
191.5
46.2
%
350.3
45.5
%
$
350.6
45.9
%
Selling and administrative expenses
154.9
36.8
%
150.7
36.4
%
299.1
38.8
%
292.7
38.3
%
Restructuring and other special charges, net
—
—
%
0.2
0.0
%
—
—
%
0.2
0.0
%
Operating earnings
$
34.4
8.2
%
$
40.6
9.8
%
$
51.2
6.7
%
$
57.7
7.6
%
Key Metrics
Comparable sales % change
(2.9)
%
(4.3)
%
(2.6)
%
(6.3)
%
Comparable sales $ change
$
(12.6)
$
(18.3)
$
(20.5)
$
(50.1)
Sales change from new and closed stores, net
$
18.9
$
(3.5)
$
27.2
$
(6.5)
Impact of changes in Canadian exchange rate on sales
$
(0.2)
$
(0.4)
$
(0.3)
$
(0.9)
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
66
$
65
$
120
$
119
Sales per square foot, excluding e-commerce (trailing twelve months)
$
247
$
249
$
247
$
249
Square footage (thousand sq. ft.)
5,616
5,672
5,616
5,672
Stores opened
3
—
6
2
Stores closed
3
5
11
14
Ending stores
855
861
855
861
Net Sales
Net sales of $420.3 million in the second quarter of 2024 increased $6.1 million, or 1.5%, compared to the second quarter of 2023. Comparable sales, which reflects the calendar shift due to the 53 rd week in 2023, decreased 2.9% driven primarily by a decrease in traffic in our retail stores. Despite the continued challenging retail environment, we experienced growth in our e-commerce sales in the second quarter of 2024, and penetration increased to approximately 12% of net sales in the second quarter of 2024 compared to 11% in the second quarter of 2023. While our kids category, which is a key differentiator for Famous Footwear, performed well by once again exceeding last year’s volume, we experienced a decline in our adult footwear categories.
We opened three stores and closed three stores during the second quarter of 2024, resulting in 855 stores and total square footage of 5.6 million at the end of the quarter, compared to 861 stores and total square footage of 5.7 million at the end of the second quarter of 2023. 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 75% of our net sales made to program members in the second quarter of 2024, compared to 77% in the second quarter of 2023.
Net sales of $769.8 million in the six months ended August 3, 2024 increased $6.4 million, or 0.8%, compared to the six months ended July 29, 2023, primarily due to the factors described above. Comparable sales declined 2.6% in the six months ended August 3, 2024, driven by a decline in customer 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 August 3, 2024. During the first half of 2024, we opened six stores and closed 11 stores. During the six months ended August 3, 2024, we also converted 10 stores to the new FLAIR concept, which has been successful in driving sales growth. We expect additional FLAIR store conversions in the second half of 2024.
Gross Profit
Gross profit decreased $2.2 million, or 1.1%, to $189.3 million for the second quarter of 2024, compared to $191.5 million for the second quarter of 2023. As a percentage of net sales, our gross profit decreased to 45.0% for the second quarter of 2024, from 46.2% for the second quarter of 2023 as a result of higher levels of promotional activity.
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Gross profit decreased $0.3 million, or 0.1%, to $350.3 million for the six months ended August 3, 2024, compared to $350.6 million for the six months ended July 29, 2023. As a percentage of net sales, our gross profit decreased to 45.5% for the six months ended August 3, 2024, compared to 45.9% for the six months ended July 29, 2023, driven by higher levels of promotional activity, partially offset by lower freight costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $4.2 million, or 2.9%, to $154.9 million for the second quarter of 2024, compared to $150.7 million for the second quarter of 2023. The increase was primarily driven by higher salary and benefits expenses and higher facilities costs, including depreciation expense, as we continued to invest in store renovations and upgrades to the FLAIR store concept. As a percentage of net sales, selling and administrative expenses increased to 36.8% for the second quarter of 2024, compared to 36.4% for the second quarter of 2023.
Selling and administrative expenses increased $6.4 million, or 2.2%, to $299.1 million for the six months ended August 3, 2024, compared to $292.7 million for the six months ended July 29, 2023. The increase was driven by the same factors as above. As a percentage of net sales, selling and administrative expenses increased to 38.8% for the six months ended August 3, 2024, compared to 38.3% for the six months ended July 29, 2023.
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. 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 August 3, 2024.
Operating Earnings
Operating earnings decreased $6.2 million to $34.4 million for the second quarter of 2024, compared to $40.6 million for the second quarter of 2023, primarily reflecting the factors described above. As a percentage of net sales, operating earnings declined to 8.2% for the second quarter of 2024, compared to 9.8% for the second quarter of 2023.
Operating earnings decreased $6.5 million to $51.2 million for the six months ended August 3, 2024, compared to $57.7 million for the six months ended July 29, 2023. As a percentage of net sales, operating earnings were 6.7% for the six months ended August 3, 2024, compared to 7.6% for the six months ended July 29, 2023.
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BRAND PORTFOLIO
Thirteen Weeks Ended
Twenty-Six Weeks Ended
August 3, 2024
July 29, 2023
August 3, 2024
July 29, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
285.5
100.0
%
$
300.9
100.0
%
$
602.7
100.0
%
$
626.4
100.0
%
Cost of goods sold
163.6
57.3
%
176.8
58.7
%
333.0
55.3
%
358.4
57.2
%
Gross profit
121.9
42.7
%
124.1
41.3
%
269.7
44.7
%
268.0
42.8
%
Selling and administrative expenses
98.3
34.4
%
96.4
32.1
%
204.7
33.9
%
197.6
31.6
%
Restructuring and other special charges, net
—
—
%
0.9
0.3
%
—
—
%
0.9
0.1
%
Operating earnings
$
23.6
8.3
%
$
26.8
8.9
%
$
65.0
10.8
%
$
69.5
11.1
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
33
%
33
%
33
%
32
%
Change in wholesale net sales ($)
$
(14.5)
$
(27.4)
$
(27.2)
$
(69.7)
Change in retail net sales ($)
$
(0.9)
$
4.2
$
3.5
$
6.3
Unfilled order position at end of period
$
251.6
$
246.8
Company-Operated Stores:
North America
Stores opened
3
1
3
2
Stores closed
3
2
4
4
Ending stores - North America
61
61
61
61
East Asia
Ending stores - East Asia
43
33
43
33
Total Company-Operated Stores
104
94
104
94
International franchise locations
106
97
106
97
Total
210
191
210
191
(1) Direct-to-consumer includes sales of our retail stores and e-commerce sites and sales through our customers’ websites that we fulfill on a drop-ship basis.
Net Sales
Net sales of $285.5 million in the second quarter of 2024 decreased $15.4 million, or 5.1%, compared to the second quarter of 2023 primarily driven by lower wholesale sales in the second quarter of 2024. Our net sales in the second quarter were unfavorably impacted by operational disruptions related to the launch of our new cloud-based ERP system, primarily while our e-commerce and drop-ship platforms were either offline or ramping up after the launch. As we progressed through the quarter, the development of several key operational reports was delayed, resulting in a lack of visibility to certain data and tools we rely on to manage the wholesale business. In addition, during the second quarter of 2024, we continued to experience weakness in sandals and dress footwear, while our fashion sneakers and casual footwear categories both experienced gains compared to the second quarter of 2023. During the second quarter of 2024, we opened three stores and closed three stores in the United States, resulting in a total of 61 stores, consistent with the second quarter of 2023. In addition, we continued to expand our retail store presence in East Asia by opening six new Sam Edelman stores and closing one in the second quarter of 2024, resulting in a total of 43 stores, compared to 33 stores at the end of the second quarter of 2023. There were also 106 international branded stores owned and operated by third parties through franchise agreements at August 3, 2024, compared to 97 international branded stores at July 29, 2023.
Net sales decreased $23.7 million, or 3.8%, to $602.7 million for the six months ended August 3, 2024, compared to $626.4 million for the six months ended July 29, 2023, reflecting softer demand associated with the challenging macroeconomic environment and competitive retail landscape. The sales decline was driven by lower wholesale sales, partially offset by solid growth in the e-commerce business. Our brands with a heavy sneaker concentration, such as Dr. Scholl’s and Vionic, performed better in the first half of 2024 than brands with a higher mix of sandals and dress footwear.
Our unfilled order position for our wholesale sales increased $4.8 million, or 1.9%, to $251.6 million at August 3, 2024, compared to $246.8 million at July 29, 2023.
Gross Profit
Gross profit decreased $2.2 million, or 1.8%, to $121.9 million for the second quarter of 2024, compared to $124.1 million for the second quarter of 2023, driven by lower net sales. As a percentage of net sales, our gross profit increased to 42.7% for the second quarter of 2024,
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compared to 41.3% for the second quarter of 2023, primarily reflecting higher merchandise margins and a higher mix of retail sales, including e-commerce sales from our owned brands and sales from our branded retail stores, both of which have higher gross margins than our wholesale sales.
Gross profit increased $1.7 million, or 0.6%, to $269.7 million for the six months ended August 3, 2024, compared to $268.0 million for the six months ended July 29, 2023. As a percentage of net sales, our gross profit increased to 44.7% for the six months ended August 3, 2024, compared to 42.8% for the six months ended July 29, 2023 reflecting higher merchandise margins and a higher mix of retail sales, including e-commerce sales from our owned brands and sales from our branded retail stores, both of which have higher gross margins than our wholesale sales.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.9 million, or 1.9%, to $98.3 million for the second quarter of 2024, compared to $96.4 million for the second quarter of 2023. The increase was primarily due to higher marketing expenses for certain brands, including Sam Edelman and Vionic. As a percentage of net sales, selling and administrative expenses increased to 34.4% for the second quarter of 2024, compared to 32.1% for the second quarter of 2023.
Selling and administrative expenses increased $7.1 million, or 3.6%, to $204.7 million for the six months ended August 3, 2024, compared to $197.6 million for the six months ended July 29, 2023. The increase was primarily due to higher marketing expenses for certain brands, including Sam Edelman and Vionic, higher salary and benefits expense and higher distribution expenses. As a percentage of net sales, selling and administrative expenses increased to 33.9% for the six months ended August 3, 2024, compared to 31.6% for the six months ended July 29, 2023, 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. 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 August 3, 2024.
Operating Earnings
Operating earnings decreased to $23.6 million for the second quarter of 2024, from $26.8 million for the second quarter of 2023, as a result of the factors described above. As a percentage of net sales, operating earnings were 8.3% for the second quarter of 2024, compared to 8.9% for the second quarter of 2023.
Operating earnings decreased to $65.0 million for the six months ended August 3, 2024, compared to $69.5 million for the six months ended July 29, 2023, as a result of the factors described above. As a percentage of net sales, operating earnings were 10.8% for the six months ended August 3, 2024, compared to 11.1% in the six months ended July 29, 2023.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
Twenty-Six Weeks Ended
August 3, 2024
July 29, 2023
August 3, 2024
July 29, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
(22.5)
100.0
%
$
(19.6)
100.0
%
$
(30.0)
100.0
%
$
(31.5)
100.0
%
Cost of goods sold
(22.2)
98.5
%
(18.2)
92.7
%
(29.9)
99.8
%
(29.8)
94.5
%
Gross profit
(0.3)
1.5
%
(1.4)
7.3
%
(0.1)
0.2
%
(1.7)
5.5
%
Selling and administrative expenses
15.2
(67.4)
%
15.8
(80.5)
%
30.9
(103.0)
%
25.6
(81.2)
%
Restructuring and other special charges, net
—
—
%
0.6
(2.9)
%
—
—
%
0.6
(1.8)
%
Operating loss
$
(15.5)
68.9
%
$
(17.8)
90.7
%
$
(31.0)
103.2
%
$
(27.9)
88.5
%
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
The net sales elimination of $22.5 million for the second quarter of 2024 is $2.9 million, or 14.8%, higher than the second quarter of 2023, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear. The net sales elimination of $30.0 million for the six months ended August 3, 2024 is $1.5 million, or 4.7%, lower than the six months ended July 29, 2023, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.
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Selling and administrative expenses decreased $0.6 million, to $15.2 million in the second quarter of 2024, compared to $15.8 million for the second quarter of 2023. The decrease primarily reflects lower expenses for our cash and share-based incentive compensation, partially offset by higher information technology and consulting expenses associated with the implementation of our cloud-based ERP platform compared to the second quarter of 2023.
Selling and administrative expenses increased $5.3 million, to $30.9 million for the six months ended August 3, 2024, compared to $25.6 million for the six months ended July 29, 2023. The increase primarily reflects higher information technology and consulting expenses associated with the implementation of our cloud-based ERP platform, partially offset by lower expenses related to our cash and share-based incentive compensation.
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. 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 August 3, 2024.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
Total debt obligations of $146.5 million at August 3, 2024 decreased $97.5 million, from $244.0 million at July 29, 2023, and $35.5 million, from $182.0 million at February 3, 2024. Net interest expense for the second quarter of 2024 decreased $1.8 million to $3.3 million, compared to $5.1 million for the second quarter of 2023, primarily due to lower average borrowings on our revolving credit facility. This decrease was partially offset by higher weighted-average interest rates. The interest on our revolving credit facility is based on a variable rate, which adversely impacts our interest expense in the current elevated interest rate environment. While our interest expense for the remainder of 2024 may continue to be impacted 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
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs that matures on October 5, 2026. The aggregate amount available under the revolving credit facility is up to $500.0 million, subject to borrowing base restrictions, and may be increased by up to $250.0 million. Interest on the borrowings is at variable rates based on the SOFR, or the prime rate (as defined in the Credit Agreement), plus a spread.
At August 3, 2024, we had $146.5 million in borrowings and $9.4 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $344.1 million at August 3, 2024. We were in compliance with all covenants and restrictions under the Credit Agreement as of August 3, 2024.
Working Capital and Cash Flow
Twenty-Six Weeks Ended
($ millions)
August 3, 2024
July 29, 2023
Change
Net cash provided by operating activities
$
115.7
$
125.2
$
(9.5)
Net cash used for investing activities
(21.8)
(16.9)
(4.9)
Net cash used for financing activities
(63.4)
(95.0)
31.6
Effect of exchange rate changes on cash and cash equivalents
(0.1)
0.1
(0.2)
Increase in cash and cash equivalents
$
30.4
$
13.4
$
17.0
Reasons for the major variances in cash provided in the table above are as follows:
Cash provided by operating activities was $9.5 million lower in the twenty-six weeks ended August 3, 2024 as compared to the twenty-six weeks ended July 29, 2023, primarily reflecting the following factors:
● A larger increase in inventory during the twenty-six weeks ended August 3, 2024, compared to the twenty-six weeks ended July 29, 2023,
● Lower net earnings in the twenty-six weeks ended August 3, 2024, compared to the twenty-six weeks ended July 29, 2023, and
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● A larger increase in accounts receivable during the twenty-six weeks ended August 3, 2024, compared to the twenty-six weeks ended July 29, 2023; partially offset by
● A larger increase in trade accounts payable during the twenty-six weeks ended August 3, 2024, compared to the twenty-six weeks ended July 29, 2023, driven in part by an unplanned shift to the third quarter of 2024 of a significant payment to one of our largest vendors, and
● A smaller decrease in accrued expenses and other liabilities during the twenty-six weeks ended August 3, 2024, compared to the twenty-six weeks ended July 29, 2023.
We are in the process of a multi-year cloud-based ERP implementation. We funded the first phase of the implementation, which went live in the second quarter of 2024, with cash provided by operating activities. We anticipate the second phase of the implementation for the retail modules to also be funded with cash provided by operating activities.
Cash used for investing activities was $4.9 million higher for the twenty-six weeks ended August 3, 2024 as compared to the twenty-six weeks ended July 29, 2023, reflecting higher capital expenditures, due in part to the Famous Footwear store remodels to the new FLAIR concept. We expect purchases of property and equipment and capitalized software to be between $50 million and $55 million in 2024, compared to $49.6 million in 2023.
Cash used for financing activities was $31.6 million lower for the twenty-six weeks ended August 3, 2024 as compared to the twenty-six weeks ended July 29, 2023, primarily due to net repayments on our revolving credit agreement of $35.5 million in the twenty-six weeks ended August 3, 2024, compared to net repayments of $63.5 million in the comparable period in 2023. In addition, we repurchased $15.1 million of our common stock under our share repurchase programs during the six months ended August 3, 2024, compared to $17.4 million in repurchases during the six months ended July 29, 2023.
A summary of key financial data and ratios at the dates indicated is as follows:
August 3, 2024
July 29, 2023
February 3, 2024
Working capital ($ millions) (1)
$
79.3
$
(41.5)
$
46.0
Current ratio (2)
1.09:1
0.96:1
1.06:1
Debt-to-capital ratio (3)
19.3
%
34.1
%
24.3
%
(1) Working capital has been computed as total current assets less total current liabilities.
(2) The current ratio has been computed by dividing total current assets by total current liabilities.
(3) The debt-to-capital ratio has been computed by dividing the borrowings under our revolving credit agreement by total capitalization. Total capitalization is defined as total debt and total equity .
Working capital at August 3, 2024 was $79.3 million, which was an improvement of $120.8 million from July 29, 2023 and a $33.3 million increase from February 3, 2024. The increase in working capital from July 29, 2023 primarily reflects lower borrowings under our revolving credit agreement. The increase in working capital from February 3, 2024 primarily reflects higher inventory and lower borrowings under our revolving credit agreement, partially offset by higher trade accounts payable. Our current ratio was 1.09:1 as of August 3, 2024, compared to 0.96:1 at July 29, 2023 and 1.06:1 at February 3, 2024. Our debt-to-capital ratio was 19.3% as of August 3, 2024, compared to 34.1% as of July 29, 2023 and 24.3% at February 3, 2024.
We declared and paid dividends of $0.07 per share in the second quarter of both 2024 and 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. However, we presently expect that dividends will continue to be paid.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings and obligations for our supplemental executive retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 3, 2024.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements, if any, and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) changing consumer demands, which may be influenced by general economic conditions and other factors; (ii) inflationary pressures and supply chain disruptions; (iii) rapidly changing consumer preferences and purchasing patterns and fashion trends; (iv) the ability to maintain relationships with current suppliers; (v) customer concentration and increased consolidation in the retail industry; (vi) intense competition within the footwear industry; (vii) foreign currency fluctuations; (viii) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (ix) cybersecurity threats or other major disruption to the Company’s information technology systems, including those related to our ERP upgrade; (x) the ability to accurately forecast sales and manage inventory levels; (xi) a disruption in the Company’s distribution centers; (xii) the ability to recruit and retain senior management and other key associates; (xiii) the ability to secure/exit leases on favorable terms; (xiv) transitional challenges with acquisitions and divestitures; (xv) changes to tax laws, policies and treaties; (xvi) commitments and shareholder expectations relating to environmental, social and governance ("ESG") considerations (xvii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; and (xviii) the ability to attract, retain, and maintain good relationships with licensors and protect our intellectual property rights. The Company’s reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended February 3, 2024, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended February 3, 2024.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.