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:
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 nine months of 2024. 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 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 $33.4 million in cash and cash equivalents and excess availability on our revolving credit agreement of $252.1 million as of November 2, 2024. During the nine months ended November 2, 2024, borrowings on our revolving credit agreement increased by $53.8 million to $238.5 million, primarily driven by $65.5 million of our common stock repurchases under our share repurchase programs. While our interest expense during the fourth quarter of 2024 will continue to be negatively impacted by the elevated interest rates, we expect to reduce the borrowings under our revolving credit agreement to mitigate the impact of the high interest rate environment.
Financial Highlights
Highlights of our consolidated and segment results for the third quarter of 2024 and 2023 are as follows:
Thirteen Weeks Ended
($ millions, except per share amounts)
November 2, 2024
October 28, 2023
Change (1)
Consolidated net sales
$740.9
$761.9
($21.0)
(2.8)
%
Famous Footwear segment net sales
$428.3
$449.8
($21.5)
(4.8)
%
Famous Footwear comparable sales % change
2.5
%
(6.9)
%
n/m
n/m
Brand Portfolio segment net sales
$322.9
$320.8
$2.1
0.7
%
Gross profit
$327.0
$340.4
($13.4)
(3.9)
%
Gross margin
44.1
%
44.7
%
n/m
(55 bps)
Operating earnings
$56.7
$64.4
($7.7)
(12.0)
%
Diluted earnings per share
$1.19
$1.32
($0.13)
(9.8)
%
(1) n/m – not meaningful
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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.
RESULTS OF OPERATIONS
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
November 2, 2024
October 28, 2023
November 2, 2024
October 28, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
740.9
100.0
%
$
761.9
100.0
%
$
2,083.5
100.0
%
$
2,120.2
100.0
%
Cost of goods sold
413.9
55.9
%
421.5
55.3
%
1,136.6
54.5
%
1,163.0
54.9
%
Gross profit
327.0
44.1
%
340.4
44.7
%
946.9
45.5
%
957.2
45.1
%
Selling and administrative expenses
268.7
36.2
%
273.7
35.9
%
803.3
38.6
%
789.6
37.2
%
Restructuring and other special charges, net
1.6
0.2
%
2.3
0.3
%
1.6
0.1
%
3.9
0.2
%
Operating earnings
56.7
7.7
%
64.4
8.5
%
142.0
6.8
%
163.7
7.7
%
Interest expense, net
(2.9)
(0.4)
%
(4.5)
(0.6)
%
(10.0)
(0.5)
%
(15.3)
(0.7)
%
Other income, net
0.0
0.0
%
1.6
0.2
%
2.2
0.1
%
4.7
0.2
%
Earnings before income taxes
53.8
7.3
%
61.5
8.1
%
134.2
6.4
%
153.1
7.2
%
Income tax provision
(12.7)
(1.7)
%
(14.5)
(1.9)
%
(32.0)
(1.5)
%
(36.9)
(1.7)
%
Net earnings
41.1
5.6
%
47.0
6.2
%
102.2
4.9
%
116.2
5.5
%
Net (loss) earnings attributable to noncontrolling interests
(0.3)
(0.0)
%
0.1
0.0
%
(0.1)
(0.0)
%
0.6
0.0
%
Net earnings attributable to Caleres, Inc.
$
41.4
5.6
%
$
46.9
6.2
%
$
102.3
4.9
%
$
115.6
5.5
%
Net Sales
Net sales decreased $21.0 million, or 2.8%, to $740.9 million for the third quarter of 2024, compared to $761.9 million for the third quarter of 2023, driven by a $21.5 million, or 4.8%, decline in net sales for our Famous Footwear segment largely due to the retail calendar shift associated with the 53 rd week in fiscal year 2023, as well as softer seasonal demand in the boots category. The decrease in the Famous
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Footwear segment net sales was partially offset by an increase in net sales in the Brand Portfolio segment of $2.2 million, or 0.7% during the third quarter of 2024, with our brands with premium positioning generally outperforming our other brands. We also experienced growth in sales from our owned e-commerce businesses, which increased approximately 2.1% on a consolidated basis compared to the third quarter of 2023. Our direct-to-consumer sales represented approximately 72% of consolidated net sales for the third quarter of 2024, compared to 73% in the third quarter of 2023. 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 $36.7 million, or 1.7%, to $2,083.5 million for the nine months ended November 2, 2024, compared to $2,120.2 million for the nine months ended October 28, 2023. Net sales for our Brand Portfolio segment decreased $21.6 million, or 2.3% during the nine months ended November 2, 2024, compared to the nine months ended October 28, 2023. In addition, net sales for our Famous Footwear segment decreased $15.1 million, or 1.2%, in the nine months ended November 2, 2024, compared to the nine months ended October 28, 2023, due in part to a decline in customer traffic in our retail stores. Comparable sales decreased 0.9% in the nine months ended November 2, 2024. On a consolidated basis, our direct-to-consumer sales were approximately 72% of total net sales for both the nine months ended November 2, 2024 and the nine months ended October 28, 2023.
Gross Profit
Gross profit decreased $13.4 million, or 3.9%, to $327.0 million for the third quarter of 2024, compared to $340.4 million for the third quarter of 2023. As a percentage of net sales, gross profit decreased to 44.1% for the third quarter of 2024, compared to 44.7% for the third quarter of 2023, driven by a decrease in the gross margin of our Famous Footwear segment, partially offset by a slight increase in the gross margin of our Brand Portfolio segment. The lower gross margin at Famous Footwear reflects an increase in promotional activity and higher clearance sales, partially due to aged boot inventory. In addition, we experienced higher freight costs, due in part to the higher mix of e-commerce sales.
Gross profit decreased $10.3 million, or 1.1%, to $946.9 million for the nine months ended November 2, 2024, compared to $957.2 million for the nine months ended October 28, 2023. As a percentage of net sales, gross profit increased to 45.5% for the nine months ended November 2, 2024, compared to 45.1% for the nine months ended October 28, 2023, driven by an increase in the gross margin of our Brand Portfolio segment, 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. This increase was partially offset by a decrease in the gross margin in the Famous Footwear segment, driven by higher levels of promotional activity and clearance sales.
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 decreased $5.0 million, or 1.8%, to $268.7 million for the third quarter of 2024, compared to $273.7 million for the third quarter of 2023. The decrease was driven by lower expenses for our cash and share-based incentive compensation. The decrease was partially offset by higher facilities costs, reflecting higher depreciation associated with the investment in Famous Footwear store renovations and upgrades and higher store rent expense as leases are renewed, higher salary and benefit expenses, higher information technology and consulting expense associated with the implementation of our cloud-based ERP platform, and higher marketing expenses driven by marketing investments for certain brands. As a percentage of net sales, selling and administrative expenses increased to 36.2% for the third quarter of 2024, from 35.9% for the third quarter of 2023.
Selling and administrative expenses increased $13.7 million, or 1.7%, to $803.3 million for the nine months ended November 2, 2024, compared to $789.6 million for the nine months ended October 28, 2023. The increase was primarily due to higher salary and benefit expenses, higher marketing expenses, higher information technology and consulting expense associated with the implementation of our cloud-based ERP platform, and higher facilities costs, 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 38.6% for the nine months ended November 2, 2024, from 37.2% for the nine months ended October 28, 2023.
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Restructuring and Other Special Charges, Net
Restructuring and other special charges of $1.6 million for the three and nine months ended November 2, 2024 were associated with restructuring costs, primarily severance. Restructuring and other special charges of $2.3 million and $3.9 million for the three and nine months ended October 28, 2023, respectively, were associated with expense reduction initiatives. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating Earnings
Operating earnings decreased $7.7 million to $56.7 million for the third quarter of 2024, compared to $64.4 million for the third quarter of 2023, reflecting the factors described above. As a percentage of net sales, operating earnings were 7.7% for the third quarter of 2024, compared to 8.5% for the third quarter of 2023.
Operating earnings decreased $21.7 million to $142.0 million for the nine months ended November 2, 2024, compared to $163.7 million for the nine months ended October 28, 2023, primarily reflecting lower net sales. As a percentage of net sales, operating earnings were 6.8% for the nine months ended November 2, 2024, compared to 7.7% for the nine months ended October 28, 2023.
Interest Expense, Net
Interest expense, net decreased $1.6 million, or 35.1%, to $2.9 million for the third quarter of 2024, compared to $4.5 million for the third quarter of 2023. Interest expense, net decreased $5.3 million, or 34.2%, to $10.0 million for the nine months ended November 2, 2024, compared to $15.3 million for the nine months ended October 28, 2023. The decreases primarily reflect lower average borrowings on the revolving credit facility. 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 adversely impacted by the elevated interest rates, we expect 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 to an immaterial amount for the third quarter of 2024, compared to $1.6 million for the third quarter of 2023, and decreased $2.5 million, or 52.7%, to $2.2 million for the nine months ended November 2, 2024, compared to $4.7 million for the nine months ended October 28, 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 provided to a third party, 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 23.6% for the third quarter of 2024, compared to 23.5% for the third quarter of 2023. Our consolidated effective tax rate was 23.8% for the nine months ended November 2, 2024, compared to 24.1% for the nine months ended October 28, 2023. The lower effective tax rate was driven by discrete tax benefits, primarily related to share-based compensation, of approximately $1.1 million in the nine months ended November 2, 2024, compared to $0.9 million in the nine months ended October 28, 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 $41.4 million and $102.3 million for the third quarter and nine months ended November 2, 2024, respectively, compared to $46.9 million and $115.6 million for the third quarter and nine months ended October 28, 2023, respectively, as a result of the factors described above.
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FAMOUS FOOTWEAR
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
November 2, 2024
October 28, 2023
November 2, 2024
October 28, 2023
% of
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
428.3
100.0
%
$
449.8
100.0
%
$
1,198.1
100.0
%
$
1,213.2
100.0
%
Cost of goods sold
244.5
57.1
%
251.0
55.8
%
663.9
55.4
%
663.8
54.7
%
Gross profit
183.8
42.9
%
$
198.8
44.2
%
534.2
44.6
%
$
549.4
45.3
%
Selling and administrative expenses
154.0
36.0
%
151.0
33.6
%
453.2
37.9
%
443.8
36.6
%
Restructuring and other special charges, net
0.2
0.0
%
1.2
0.2
%
0.2
0.0
%
1.3
0.1
%
Operating earnings
$
29.6
6.9
%
$
46.6
10.4
%
$
80.8
6.7
%
$
104.3
8.6
%
Key Metrics
Comparable sales % change
2.5
%
(6.9)
%
(0.9)
%
(6.5)
%
Comparable sales $ change
$
10.3
$
(32.4)
$
(10.2)
$
(82.4)
Sales change from new and closed stores, net
$
(31.7)
$
0.4
$
(4.5)
$
(6.1)
Impact of changes in Canadian exchange rate on sales
$
(0.1)
$
(0.2)
$
(0.4)
$
(1.1)
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
65
$
69
$
185
$
188
Sales per square foot, excluding e-commerce (trailing twelve months)
$
244
$
246
$
244
$
246
Square footage (thousand sq. ft.)
5,592
5,677
5,592
5,677
Stores opened
6
3
12
5
Stores closed
10
2
21
16
Ending stores
851
862
851
862
Net Sales
Net sales of $428.3 million in the third quarter of 2024 decreased $21.5 million, or 4.8%, compared to the third quarter of 2023 driven by the retail calendar shift associated with the 53 rd week in fiscal year 2023. The shift resulted in one less week of our high-volume back-to-school selling season in the third quarter of 2024 compared to the third quarter of last year. Comparable sales, which reflects the calendar shift, increased 2.5%. We experienced a strong start to the third quarter of 2024 with the back-to-school selling season, but sales moderated as the quarter progressed. During the third quarter of 2024, we experienced soft demand in our boots category due in part to the unseasonably warm fall weather. Our sales were also adversely impacted by late product receipts of certain athletic footwear during the important back-to-school selling season. Our kids category, which is a key differentiator for Famous Footwear, continues to outperform many of our categories. Penetration of the kids category to total Famous Footwear sales was 25% in the third quarter of 2024. Our athletics category performed well during the quarter, driven by several of our key brands. We also experienced growth in our e-commerce sales and higher penetration of this channel in the third quarter of 2024. Penetration of e-commerce sales increased to approximately 15% of net sales in the third quarter of 2024, compared to 13% in the third quarter of 2023.
We opened six stores and closed 10 stores during the third quarter of 2024, resulting in 851 stores and total square footage of 5.6 million at the end of the quarter, compared to 862 stores and total square footage of 5.7 million at the end of the third quarter of 2023. Sales to members of our customer loyalty program, Famously You Rewards, continue to account for a majority of the segment’s sales, with approximately 74% of our net sales made to program members in the third quarter of 2024, compared to 77% in the third quarter of 2023.
Net sales of $1,198.1 million in the nine months ended November 2, 2024 decreased $15.1 million, or 1.2%, compared to the nine months ended October 28, 2023, primarily due to the same factors described for the third quarter. Comparable sales declined 0.9% in the nine months ended November 2, 2024, driven by a decline in customer traffic in our retail stores. Athletics and casual continue to be our top-selling categories, while sales in the fashion categories, including boots, were weaker. 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 nine months ended November 2, 2024. During the first nine months of 2024, we opened 12 stores and closed 21 stores. During the nine months ended November 2, 2024, we also converted 11 stores to the new FLAIR (Famous Localized and Immersive Retail) concept, which has been successful in driving sales growth, and ended the quarter with a total of 32 FLAIR stores.
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Gross Profit
Gross profit decreased $15.0 million, or 7.5%, to $183.8 million for the third quarter of 2024, compared to $198.8 million for the third quarter of 2023. As a percentage of net sales, our gross profit decreased to 42.9% for the third quarter of 2024, from 44.2% for the third quarter of 2023 as a result of higher levels of promotional activity. Higher levels of clearance selling, due in part to aged boot inventory, also negatively impacted our gross profit margin during the quarter. In addition, we experienced higher freight costs, due in part to the higher mix of e-commerce sales.
Gross profit decreased $15.2 million, or 2.8%, to $534.2 million for the nine months ended November 2, 2024, compared to $549.4 million for the nine months ended October 28, 2023, driven by lower net sales. As a percentage of net sales, our gross profit decreased to 44.6% for the nine months ended November 2, 2024, compared to 45.3% for the nine months ended October 28, 2023, driven by higher levels of promotional activity and clearance sales.
Selling and Administrative Expenses
Selling and administrative expenses increased $3.0 million, or 2.0%, to $154.0 million for the third quarter of 2024, compared to $151.0 million for the third quarter of 2023. The increase was primarily driven by higher facilities costs, including depreciation expense associated with the investments in the FLAIR store concept, and higher salary and benefits expenses. As a percentage of net sales, selling and administrative expenses increased to 36.0% for the third quarter of 2024, compared to 33.6% for the third quarter of 2023.
Selling and administrative expenses increased $9.4 million, or 2.1%, to $453.2 million for the nine months ended November 2, 2024, compared to $443.8 million for the nine months ended October 28, 2023. The increase was driven by higher facilities costs and higher salary and benefits expenses, partially offset by lower marketing expenses. As a percentage of net sales, selling and administrative expenses increased to 37.9% for the nine months ended November 2, 2024, compared to 36.6% for the nine months ended October 28, 2023.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $0.2 million for the three and nine months ended November 2, 2024 were associated with restructuring costs, 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. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating Earnings
Operating earnings decreased $17.0 million to $29.6 million for the third quarter of 2024, compared to $46.6 million for the third quarter of 2023, primarily reflecting the factors described above. As a percentage of net sales, operating earnings declined to 6.9% for the third quarter of 2024, compared to 10.4% for the third quarter of 2023.
Operating earnings decreased $23.5 million to $80.8 million for the nine months ended November 2, 2024, compared to $104.3 million for the nine months ended October 28, 2023. As a percentage of net sales, operating earnings were 6.7% for the nine months ended November 2, 2024, compared to 8.6% for the nine months ended October 28, 2023.
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BRAND PORTFOLIO
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
November 2, 2024
October 28, 2023
November 2, 2024
October 28, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
322.9
100.0
%
$
320.8
100.0
%
$
925.6
100.0
%
$
947.2
100.0
%
Cost of goods sold
181.3
56.2
%
180.6
56.3
%
514.3
55.6
%
539.1
56.9
%
Gross profit
141.6
43.8
%
140.2
43.7
%
411.3
44.4
%
408.1
43.1
%
Selling and administrative expenses
106.4
33.0
%
101.1
31.5
%
311.1
33.6
%
298.7
31.5
%
Restructuring and other special charges, net
1.1
0.3
%
0.9
0.3
%
1.1
0.1
%
1.7
0.2
%
Operating earnings
$
34.1
10.5
%
$
38.2
11.9
%
$
99.1
10.7
%
$
107.7
11.4
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
34
%
34
%
33
%
33
%
Change in wholesale net sales ($)
$
1.1
$
(4.9)
$
(26.1)
$
(74.5)
Change in retail net sales ($)
$
1.0
$
2.5
$
4.5
$
8.7
Unfilled order position at end of period
$
246.6
$
243.9
Company-Operated Stores:
North America
Stores opened
1
1
4
3
Stores closed
—
—
4
4
Ending stores - North America
62
62
62
62
East Asia
Ending stores - East Asia
49
34
49
34
Total Company-Operated Stores
111
96
111
96
International franchise locations
113
97
113
97
Total
224
193
224
193
(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 $322.9 million in the third quarter of 2024 increased $2.1 million, or 0.7%, compared to the third quarter of 2023. During the third quarter of 2024, we continued to see strong demand for new products, with momentum in fashion sneakers and certain casual footwear categories, including slingbacks, Mary Janes and ballet flats. We also had sales growth in our wide-shaft and tall boot categories, while our short boot category experienced soft demand. Our brands with premium positioning generally outperformed our other brands in the quarter. During the third quarter of 2024, we opened one store in the United States, resulting in a total of 62 stores, consistent with the third quarter of 2023. In addition, we continued to expand our retail store presence in East Asia in the third quarter of 2024 by opening six new Sam Edelman stores and one new Naturalizer store. During the third quarter of 2024, we closed one Naturalizer store, resulting in a total of 49 stores at the end of the third quarter of 2024, compared to 34 stores at the end of the third quarter of 2023. There were also 113 international branded stores owned and operated by third parties through franchise agreements at November 2, 2024, compared to 97 international branded stores at October 28, 2023.
Net sales decreased $21.6 million, or 2.3%, to $925.6 million for the nine months ended November 2, 2024, compared to $947.2 million for the nine months ended October 28, 2023. The sales decline was driven by lower wholesale sales, partially offset by solid growth in the e-commerce business. Our net sales were unfavorably impacted by operational disruptions related to the launch of our new cloud-based ERP system in the second quarter of 2024, primarily while our e-commerce and drop-ship platforms were either offline or ramping up after the launch. As we progressed through the second 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. The decrease in net sales also reflects softer demand associated with the challenging macroeconomic environment and competitive retail landscape.
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Our unfilled order position for our wholesale sales increased $2.7 million, or 1.1%, to $246.6 million at November 2, 2024, compared to $243.9 million at October 28, 2023.
Gross Profit
Gross profit increased $1.4 million, or 1.0%, to $141.6 million for the third quarter of 2024, compared to $140.2 million for the third quarter of 2023, driven by higher net sales. As a percentage of net sales, our gross profit increased slightly to 43.8% for the third quarter of 2024, compared to 43.7% for the third quarter of 2023.
Gross profit increased $3.2 million, or 0.8%, to $411.3 million for the nine months ended November 2, 2024, compared to $408.1 million for the nine months ended October 28, 2023. As a percentage of net sales, our gross profit increased to 44.4% for the nine months ended November 2, 2024, compared to 43.1% for the nine months ended October 28, 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 $5.3 million, or 5.3%, to $106.4 million for the third quarter of 2024, compared to $101.1 million for the third quarter of 2023. The increase was primarily due to higher marketing expenses, higher salary and benefits expense and higher distribution expenses. As a percentage of net sales, selling and administrative expenses increased to 33.0% for the third quarter of 2024, compared to 31.5% for the third quarter of 2023.
Selling and administrative expenses increased $12.4 million, or 4.1%, to $311.1 million for the nine months ended November 2, 2024, compared to $298.7 million for the nine months ended October 28, 2023. The increase was primarily due to higher salary and benefits expense, higher marketing expenses for certain brands, including Sam Edelman and Vionic, and higher distribution expenses. As a percentage of net sales, selling and administrative expenses increased to 33.6% for the nine months ended November 2, 2024, compared to 31.5% for the nine months ended October 28, 2023, reflecting deleveraging of expenses over lower net sales.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $1.1 million for the three and nine months ended November 2, 2024 were associated with restructuring costs, 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. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating Earnings
Operating earnings decreased to $34.1 million for the third quarter of 2024, from $38.2 million for the third quarter of 2023, as a result of the factors described above. As a percentage of net sales, operating earnings were 10.5% for the third quarter of 2024, compared to 11.9% for the third quarter of 2023.
Operating earnings decreased to $99.1 million for the nine months ended November 2, 2024, compared to $107.7 million for the nine months ended October 28, 2023, as a result of the factors described above. As a percentage of net sales, operating earnings were 10.7% for the nine months ended November 2, 2024, compared to 11.4% in the nine months ended October 28, 2023.
ELIMINATIONS AND OTHER
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
November 2, 2024
October 28, 2023
November 2, 2024
October 28, 2023
% of
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net Sales
Net sales
$
(10.3)
100.0
%
$
(8.6)
100.0
%
$
(40.3)
100.0
%
$
(40.2)
100.0
%
Cost of goods sold
(11.8)
115.4
%
(10.0)
116.3
%
(41.8)
103.8
%
(39.9)
99.2
%
Gross profit
1.5
(15.4)
%
1.4
(16.3)
%
1.5
(3.8)
%
(0.3)
0.8
%
Selling and administrative expenses
8.1
(79.6)
%
21.5
(248.9)
%
39.1
(97.1)
%
47.1
(117.3)
%
Restructuring and other special charges, net
0.3
(3.0)
%
0.3
(3.3)
%
0.3
(0.8)
%
0.9
(2.1)
%
Operating loss
$
(6.9)
67.2
%
$
(20.4)
235.9
%
$
(37.9)
94.1
%
$
(48.3)
120.2
%
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
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The net sales elimination of $10.3 million for the third quarter of 2024 is $1.7 million, or 18.7%, higher than the third quarter of 2023, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear. The net sales elimination of $40.3 million for the nine months ended November 2, 2024 is $0.1 million higher than the nine months ended October 28, 2023.
Selling and administrative expenses decreased $13.4 million, to $8.1 million in the third quarter of 2024, compared to $21.5 million for the third quarter of 2023. The decrease 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.
Selling and administrative expenses decreased $8.0 million, to $39.1 million for the nine months ended November 2, 2024, compared to $47.1 million for the nine months ended October 28, 2023. The decrease primarily reflects the same factors described for the quarter.
Restructuring and other special charges of $0.3 million for the three and nine months ended November 2, 2024 were associated with restructuring costs, primarily severance, at our corporate headquarters. 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.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
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.
Total debt obligations of $238.5 million at November 2, 2024 increased $16.5 million, from $222.0 million at October 28, 2023, and $56.5 million, from $182.0 million at February 3, 2024. During the third quarter of 2024, we used our revolving credit facility to repurchase $50.0 million of shares of our common stock under our share repurchase program. Net interest expense for the third quarter of 2024 decreased $1.6 million to $2.9 million, compared to $4.5 million for the third quarter of 2023, reflecting lower average borrowings and a lower weighted-average interest rate on our revolving credit facility.
At November 2, 2024, we had $238.5 million in borrowings and $9.4 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $252.1 million at November 2, 2024. We were in compliance with all covenants and restrictions under the Credit Agreement as of November 2, 2024.
Working Capital and Cash Flow
Thirty-Nine Weeks Ended
($ millions)
November 2, 2024
October 28, 2023
Change
Net cash provided by operating activities
$
75.8
$
157.2
$
(81.4)
Net cash used for investing activities
(40.3)
(37.4)
(2.9)
Net cash used for financing activities
(23.2)
(119.5)
96.3
Effect of exchange rate changes on cash and cash equivalents
0.0
(0.0)
0.0
Increase in cash and cash equivalents
$
12.3
$
0.3
$
12.0
Reasons for the major variances in cash provided in the table above are as follows:
Cash provided by operating activities was $81.4 million lower in the thirty-nine weeks ended November 2, 2024 as compared to the thirty-nine weeks ended October 28, 2023, primarily reflecting the following factors:
● An increase in inventory during the thirty-nine weeks ended November 2, 2024, compared to a decrease in the thirty-nine weeks ended October 28, 2023,
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● A smaller increase in trade accounts payable during the thirty-nine weeks ended November 2, 2024, compared to the thirty-nine weeks ended October 28, 2023,
● Lower net earnings in the thirty-nine weeks ended November 2, 2024, compared to the thirty-nine weeks ended October 28, 2023; partially offset by
● A smaller decrease in accrued expenses and other liabilities during the thirty-nine weeks ended November 2, 2024, compared to the thirty-nine weeks ended October 28, 2023.
We are in the process of a multi-year cloud-based ERP implementation and launched the wholesale and finance modules in the second quarter of 2024. These modules were funded with cash provided by operating activities.
Cash used for investing activities was $2.9 million higher for the thirty-nine weeks ended November 2, 2024 as compared to the thirty-nine weeks ended October 28, 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 $96.3 million lower for the thirty-nine weeks ended November 2, 2024 as compared to the thirty-nine weeks ended October 28, 2023, primarily due to net borrowings on our revolving credit agreement of $56.5 million in the thirty-nine weeks ended November 2, 2024, compared to net repayments of $85.5 million in the comparable period in 2023. In addition, we repurchased $65.0 million of our common stock under our share repurchase program during the nine months ended November 2, 2024, compared to $17.4 million in repurchases during the nine months ended October 28, 2023.
In conjunction with the share repurchases during the thirty-nine weeks ended November 2, 2024, we incurred excise taxes of $0.5 million. The excise taxes payable are presented in other accrued expenses on the condensed consolidated balance sheet and accrued expenses and other liabilities on the consolidated statement of cash flows. The associated share repurchases presented as acquisition of treasury stock on the condensed consolidated cash flow for the thirty-nine weeks ended November 2, 2024 excludes the excise taxes payable. Refer to Note 4 to the condensed consolidated financial statements for further information.
A summary of key financial data and ratios at the dates indicated is as follows:
November 2, 2024
October 28, 2023
February 3, 2024
Working capital ($ millions) (1)
$
63.9
$
(5.0)
$
46.0
Current ratio (2)
1.08:1
0.99:1
1.06:1
Debt-to-capital ratio (3)
28.2
%
29.9
%
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 November 2, 2024 was $63.9 million, which was an improvement of $68.9 million from October 28, 2023 and a $17.9 million increase from February 3, 2024. The increase in working capital from October 28, 2023 primarily reflects higher inventory, lower accrued expenses and higher accounts receivable, partially offset by higher borrowings under our revolving credit agreement. The increase in working capital from February 3, 2024 primarily reflects higher inventory and higher accounts receivable, partially offset by higher borrowings under our revolving credit agreement. Our current ratio was 1.08:1 as of November 2, 2024, compared to 0.99:1 at October 28, 2023 and 1.06:1 at February 3, 2024. Our debt-to-capital ratio was 28.2% as of November 2, 2024, compared to 29.9% as of October 28, 2023 and 24.3% at February 3, 2024.
We declared and paid dividends of $0.07 per share in the third 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
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retirement plan and other postretirement benefits. We also have purchase obligations to purchase inventory, assets and other goods and services. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information on the Company’s critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended 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.