CALERES, INC. OVERVIEW Financial Highlights
The following is a summary of the financial highlights for the third quarter of 2019:
• Consolidated net sales increased
the third quarter of 2019, driven by our 2018 acquisition of Vionic, which
contributed net sales growth of
eliminations (
our net sales were lower by
environment during the quarter, particularly in our Brand Portfolio segment.
Our Famous Footwear segment reported a
sales, while same-store sales improved by 2.5% in the third quarter. We also
delivered our eighth consecutive year of positive back-to-school same-store
sales.
• Consolidated gross profit increased
in the third quarter of 2019, compared to
of 2018. Our gross profit margin increased to 40.4% in the third quarter of
2019, compared to 40.0% in the third quarter of 2018.
• Consolidated operating earnings increased
million in the third quarter of 2019, compared to
quarter of 2018.
• Consolidated net earnings attributable to
or
million, or $0.67 per diluted share, in the third quarter of 2018.
The following items should be considered in evaluating the comparability of our third quarter results in 2019 and 2018:
• Acquisition of Vionic - In
with strong consumer loyalty and a complementary fit to the other brands
within our Brand Portfolio segment. Vionic contributed
net sales (both on a Brand Portfolio basis and a consolidated basis, net of
eliminations) for the third quarter of 2019 compared to
million on a consolidated basis, net of eliminations) for the third quarter of
2018. We incurred integration-related charges of
the third quarter of 2019, which are presented as restructuring and other
special charges, net. Refer to Note 3 and Note 6 to the condensed
consolidated financial statements for additional information related to these
costs.
• Blowfish Malibu - In
lifestyle segment of the market. As further discussed in Note 3 and Note 16
to the condensed consolidated financial statements, the noncontrolling
interest is subject to a mandatory purchase obligation after a three-year
period, based upon an earnings multiple formula. During the third quarter of
2019, we recorded accretion and remeasurement adjustments of
(
recorded as interest expense, net in the condensed consolidated statements of
earnings.
• Incentive and Share-Based Compensation Plans - During the third quarter of
2019, our incentive and share-based compensation expenses
decreased by approximately
due to lower anticipated payments associated with these plans and lower
expenses for our cash-equivalent restricted stock units granted to directors,
reflecting the Company's lower stock price.
• Tariffs - In
a tariff of 15% on approximately
referred to as List 4, was divided into two parts. The tariffs for products
on List 4a became effective as of
imported goods on List 4b are subject to a delay until
Approximately 60% of our branded products within our Brand Portfolio
segment are sourced from
included on List 4a. We continue to seek to mitigate the impacts of the
tariffs in a number of ways, including diversifying production away from
selectively exploring price increases where they will be least disruptive to
our customers. Through these actions, we believe we have mitigated a
significant portion of the increased tariffs on our third quarter of 2019
financial results. We also expect an adverse impact from the tariffs on our
fourth quarter of 2019 financial results. As more fully described in Risk
Factors in Part II, Item 1A, a prolonged trade war and further escalation of
tariffs may result in lower gross margins in the future on products that we
source from China .
• Lease Accounting - We adopted ASU 2016-02, Leases (Topic 842), during the
first quarter of 2019 using the modified retrospective transition method.
Therefore, prior period financial information in the condensed consolidated
financial statements has not been adjusted and is presented under the guidance
in ASC 840. As a result of the adoption of the ASU, we recorded an operating
lease right-of-use asset of
million as of
resulted in higher impairment charges for under-performing retail stores as a
direct result of including the right-of use-asset in the asset group that is
evaluated for impairment. We recognized right-of-use impairment charges of
the comparable periods in 2018. Refer to Note 10 to the condensed
consolidated financial statements for additional information on the adoption
of this ASU.
• Segment Presentation - During the first quarter of 2019, we changed our
segment presentation to present net sales of the Brand Portfolio segment
inclusive of both external and intersegment sales, with the elimination of
intersegment sales and profit from Brand Portfolio to Famous Footwear
reflected within the Eliminations and Other category. This presentation
reflects the independent business models of both Brand Portfolio and Famous
Footwear, as well as growth in intersegment activity driven by the
acquisitions of Vionic and Blowfish Malibu. Prior period information has been
recast to conform to the current presentation.
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Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
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Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
% of Net % of Net % of Net % of Net
($ millions) Sales Sales Sales Sales
Net sales $ 792.4 100.0 % $ 775.8 100.0 % $ 2,222.6 100.0 % $ 2,114.6 100.0 %
Cost of goods sold 472.6 59.6 % 465.2 60.0 % 1,317.0 59.3 % 1,236.0 58.4 %
Gross profit 319.8 40.4 % 310.6 40.0 % 905.6 40.7 % 878.6 41.6 %
Selling and
administrative expenses 275.3 34.8 % 265.6 34.2 % 805.0 36.2 % 774.6 36.7 %
Restructuring and other
special charges, net 1.0 0.1 % 5.3 0.7 % 2.5 0.1 % 9.2 0.4 %
Operating earnings 43.5 5.5 % 39.7 5.1 % 98.1 4.4 % 94.8 4.5 %
Interest expense, net (10.5 ) (1.3 )% (4.2 ) (0.5 )% (25.2 ) (1.2 )% (11.5 ) (0.5 )% Other income, net
2.6 0.3 % 3.1 0.4 % 7.9 0.4 % 9.3 0.4 %
Earnings before income
taxes 35.6 4.5 % 38.6 5.0 % 80.8 3.6 % 92.6 4.4 %
Income tax provision (7.8 ) 1.0 % (9.4 ) (1.2 )% (18.7 ) (0.8 )% (22.7 ) (1.1 )% Net earnings
27.8 3.5 % 29.2 3.8 % 62.1 2.8 % 69.9 3.3 %
Net (loss) earnings
attributable to
noncontrolling
interests (0.2 ) 0.0 % 0.0 0.0 % (0.3 ) (0.0 )% (0.1 ) (0.0 )%
Net earnings
attributable to
Caleres, Inc. $ 28.0 3.5 % $ 29.2 3.8 % $ 62.4 2.8 % $ 70.0 3.3 %
Net Sales
Net sales increased $16.6 million , or 2.1% to $792.4 million for the third
quarter of 2019, compared to $775.8 million for the third quarter of 2018. Our
Brand Portfolio segment reported a $16.9 million , or 4.9%, increase in net
sales, driven by net sales of our Vionic brand, which was acquired in October
2018 . The sales growth from the Vionic acquisition was partially offset by
lower net sales of our Sam Edelman and Fergie brands. Our Famous Footwear
segment reported a $2.2 million , or 0.5% decrease in net sales, driven by a
decrease in our store base, which resulted in a $12.6 million decrease in sales
from new and closed stores, while same-store sales improved by 2.5%. We also
experienced a strong back-to-school selling season, delivering our eighth
consecutive year of positive same-store sales.
Net sales increased $108.0 million , or 5.1% to $2,222.6 million for the nine
months ended November 2, 2019 compared to $2,114.6 million for the nine months
ended November 3, 2018 . Our Brand Portfolio segment reported a $128.9 million ,
or 13.8%, increase in net sales driven by our recent acquisitions. Our Famous
Footwear segment reported a $23.0 million , or 1.9%, decrease in net sales,
driven by a decrease in our store base, which resulted in a $36.0 million
decrease in sales from new and closed stores.
Same-store sales changes are calculated by comparing the sales in stores that
have been open at least 13 months to the comparable retail calendar weeks in the
prior year. Relocated stores are treated as new stores, and closed stores are
excluded from the calculation. Sales change from new and closed stores, net
reflects the change in net sales due to stores that have been opened or closed
during the period and are therefore excluded from the same-store sales
calculation. E-commerce sales for those e-commerce websites that function as an
extension of a retail chain are included in the same-store sales calculation.
Gross Profit
Gross profit increased $9.2 million , or 3.0%, to $319.8 million for the third
quarter of 2019, compared to $310.6 million for the third quarter of 2018,
driven by sales growth from our recent acquisitions. As a percentage of net
sales, gross profit increased to 40.4% for the third quarter of 2019, compared
to 40.0% for the third quarter of 2018. Cost of goods sold in the third quarter
of 2018 included $1.8 million related to the amortization of the inventory
adjustment required by purchase accounting for Blowfish and Vionic. The mix of
retail versus wholesale net sales declined to 64% and 36% in the third quarter
of 2019, compared to 67% and 33%, respectively, in the third quarter of 2018,
driven by our recent acquisitions.
Gross profit increased $27.0 million , or 3.1%, to $905.6 million for the nine
months ended November 2, 2019 , compared to $878.6 million for the nine months
ended November 3, 2018 , reflecting sales growth from our recent acquisitions,
partially offset by a lower gross profit rate. As a percentage of net sales,
gross profit decreased to 40.7% for the nine months ended November 2, 2019 ,
compared to 41.6% for the nine months ended November 3, 2018 , reflecting the
promotional retail environment. In addition, cost of goods sold for the nine
months ended November 2, 2019 includes $7.2 million related to the amortization
of the inventory adjustment required by purchase accounting for Blowfish and
Vionic and incremental markdowns related to the Carlos brand exit. Cost of
goods sold for the nine months ended November 3, 2018 included $2.4 million
related to the amortization of the inventory adjustment required by purchase
accounting. The mix of retail and wholesale net sales were 61% and 39%,
respectively, in the nine months ended November 2, 2019 , compared to 69% and
31%, respectively, in the nine months ended November 3, 2018 .
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.
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Selling and Administrative Expenses
Selling and administrative expenses increased$9.7 million , or 3.8%, to$275.3 million for the third quarter of 2019, compared to$265.6 million for the third quarter of 2018. The increase was driven by additional costs associated with our Vionic brand, which was acquired late in the third quarter of 2018. Excluding the Vionic acquisition, our expenses would be lower by$4.0 million , which primarily represents lower expenses of approximately$5.0 million associated with cash and stock-based incentive compensation plans. As a percentage of net sales, selling and administrative expenses increased to 34.8% for the third quarter of 2019, from 34.2% for the third quarter of 2018. Selling and administrative expenses increased$30.4 million , or 3.9%, to$805.0 million for the nine months endedNovember 2, 2019 , compared to$774.6 million for the nine months endedNovember 3, 2018 . The increase was driven by additional costs associated with our recently acquired Vionic and Blowfish Malibu brands, including higher amortization expense on the intangible assets, partially offset by lower expenses associated with cash and stock-based incentive compensation plans. As a percentage of net sales, selling and administrative expenses decreased to 36.2% for the nine months endedNovember 2, 2019 , from 36.7% for the nine months endedNovember 3, 2018 , reflecting better leveraging of our expenses over higher net sales.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of$1.0 million ($0.7 million on an after-tax basis, or$0.02 per diluted share) and$2.5 million ($1.8 million on an after-tax basis, or$0.04 per diluted share) were incurred in the third quarter and nine months endedNovember 2, 2019 , respectively, for integration-related costs for Vionic and costs associated with the exit of our Carlos brand. Restructuring and other special charges of$5.3 million ($4.4 million on an after-tax basis, or$0.10 per diluted share) and$9.2 million ($7.3 million on an after-tax basis, or$0.17 per diluted share) were incurred in the third quarter and nine months endedNovember 3, 2018 , respectively, primarily for the transition ofAllen Edmonds' consumer-facing activities toSt. Louis and acquisition and integration-related costs for Vionic and BlowfishMalibu . Operating Earnings Operating earnings increased$3.8 million , or 9.4%, to$43.5 million for the third quarter of 2019, compared to$39.7 million for the third quarter of 2018, reflecting earnings contribution from our recently acquired brands and lower restructuring charges. As a percentage of net sales, operating earnings increased to 5.5% for the third quarter of 2019, compared to 5.1% for the third quarter of 2018. Operating earnings increased$3.3 million , or 3.5% to$98.1 million for the nine months endedNovember 2, 2019 , compared to$94.8 million for the nine months endedNovember 3, 2018 , primarily reflecting earnings contribution from our recently acquired brands, partially offset by lower sales and gross margin at Famous Footwear and higher selling and administrative expenses. As a percentage of net sales, operating earnings decreased slightly to 4.4% for the nine months endedNovember 2, 2019 , compared to 4.5% for the nine months endedNovember 3, 2018 . Interest Expense, Net Interest expense, net increased$6.3 million , or 150.0%, to$10.5 million for the third quarter of 2019, compared to$4.2 million for the third quarter of 2018, reflecting the fair value adjustment to the Blowfish Malibu mandatory purchase obligation of$3.9 million in the third quarter of 2019, as well as higher average borrowings under our revolving credit agreement that was used to fund the acquisition of Vionic inOctober 2018 . Refer to Note 16 to the condensed consolidated financial statements for further discussion regarding the mandatory purchase obligation. Interest expense, net increased$13.7 million , or 119.1%, to$25.2 million for the nine months endedNovember 2, 2019 , compared to$11.5 million for the nine months endedNovember 3, 2018 , reflecting higher average borrowings under our revolving credit agreement during the nine months endedNovember 2, 2019 and the fair value adjustment to the mandatory purchase obligation associated with the Blowfish Malibu acquisition of$4.4 million .
Other Income, Net
Other income, net decreased
Other income, net decreased
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 21.9% for the third quarter of 2019, compared to 24.5% for the third quarter of 2018. Discrete tax benefits recognized during the third quarter of 2019 and 2018 were immaterial. For the nine months endedNovember 2, 2019 , our consolidated effective tax rate was 23.1%, compared to 24.5% for the nine months endedNovember 3, 2018 . We recognized discrete tax benefits of$0.7 million during the nine months endedNovember 3, 2018 , reflecting greater deductibility of certain 2017 expenses than originally estimated and share-based compensation. If these discrete tax benefits had not been recognized, our effective tax rate would have been 25.4% for the nine months endedNovember 3, 2018 .
Net Earnings Attributable to
Net earnings attributable toCaleres, Inc. were$28.0 million and$62.4 million for the third quarter and nine months endedNovember 2, 2019 , respectively, compared to net earnings of$29.2 million and$70.0 million for the third quarter and nine months endedNovember 3, 2018 , respectively, as a result of the factors described above. 34
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Table of Contents FAMOUS FOOTWEAR
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Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
($ millions, except % of Net % of Net % of Net % of Net
sales per square foot) Sales Sales Sales Sales
Operating Results
Net sales $ 446.6 100.0 % $ 448.8 100.0 % $ 1,218.6 100.0 % $ 1,241.6 100.0 %
Cost of goods sold 263.3 59.0 % 266.3 59.3 % 700.3 57.5 % 706.8 56.9 %
Gross profit 183.3 41.0 % $ 182.5 40.7 % 518.3 42.5 % $ 534.8 43.1 %
Selling and
administrative
expenses 155.6 34.8 % 158.1 35.3 % 448.3 36.8 % 455.3 36.7 %
Operating earnings $ 27.7 6.2 % $ 24.4 5.4 % $ 70.0 5.7 % $ 79.5 6.4 %
Key Metrics
Same-store sales %
change 2.5 % 2.8 % 1.1 % 1.7 %
Same-store sales $
change $ 10.6 $ 11.9 $ 13.6 $ 19.8
Impact of retail
calendar shift $ - $ (27.9 ) $ - $ (6.2 )
Sales change from new
and closed stores, net $ (12.6 ) $ (7.9 ) $ (36.0 ) $ (16.4 )
Impact of changes in
Canadian exchange rate
on sales $ (0.2 ) $ (0.4 ) $ (0.6 ) $ (0.1 )
Sales per square foot,
excluding e-commerce
(thirteen and
thirty-nine weeks
ended) $ 63 $ 61 $ 172 $ 172
Sales per square foot,
excluding e-commerce
(trailing twelve
months) $ 221 $ 224 $ 221 $ 224
Square footage
(thousand sq. ft.) 6,349 6,657 6,349 6,657
Stores opened 4 9 11 15
Stores closed 17 10 43 34
Ending stores 960 1,007 960 1,007
Net Sales
Net sales decreased $2.2 million , or 0.5%, to $446.6 million for the third
quarter of 2019, compared to $448.8 million for the third quarter of 2018. The
sales decrease was driven by a reduction in our store base, partially offset by
a 2.5% increase in same-store sales. Famous Footwear continues to
experience strong growth in e-commerce sales. During the third quarter of 2019,
we experienced growth in sales of sandals and boots. We opened four stores and
closed 17 stores during the third quarter of 2019, resulting in 960 stores and
total square footage of 6.3 million at the end of the third quarter of 2019,
compared to 1,007 stores and total square footage of 6.7 million at the end of
the third quarter of 2018. Subsequent to quarter-end, we also announced the
opening of a new store in New York City , which will enable us to broaden the
reach of the brand featuring world-class, in-demand brands at a great value.
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 79% of our net sales made to program members in the third quarter
of 2019, compared to 77% in the third quarter of 2018. We believe the relaunch
of Rewards in early 2019 has driven increased consumer engagement among existing
members and has resulted in continued growth in our new and reactivated
membership base.
Net sales decreased $23.0 million , or 1.9% to $1,218.6 million for the nine
months ended November 2, 2019 , compared to $1,241.6 million for the nine months
ended November 3, 2018 . The sales decrease was driven by a decrease in our store
base, which resulted in a $36.0 million decrease in sales from new and closed
stores, partially offset by a 1.1% increase in same-store sales in the nine
months ended November 2, 2019 . On a trailing twelve-month basis, sales per
square foot, excluding e-commerce, decreased 1.3% to $221 for the twelve months
ended November 2, 2019 , compared to $224 for the twelve months ended November 3,
2018 .
Gross Profit
Gross profit increased $0.8 million , or 0.4%, to $183.3 million for the third
quarter of 2019, compared to $182.5 million for the third quarter of
2018 reflecting a higher gross profit rate, partially offset by lower net
sales. As a percentage of net sales, our gross profit increased to 41.0% for
the third quarter of 2019, compared to 40.7% for the third quarter of
2018, driven by an increased mix of higher margin product and lower freight
expenses.
Gross profit decreased $16.5 million , or 3.1%, to $518.3 million for the nine
months ended November 2, 2019 , compared to $534.8 million for the nine months
ended November 3, 2018 . As a percentage of net sales, our gross profit
decreased to 42.5% for the nine months ended November 2, 2019 , compared to 43.1%
for the nine months ended November 3, 2018 , reflecting the promotional retail
environment and higher freight expenses due to strong growth in e-commerce sales
in the nine months ended November 2, 2019 . We expect the trend toward a higher
mix of e-commerce sales to continue.
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Selling and Administrative Expenses
Selling and administrative expenses decreased$2.5 million , or 1.6%, to$155.6 million for the third quarter of 2019, compared to$158.1 million for the third quarter of 2018. The decrease was primarily driven by lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses and higher right-of-use asset impairment charges. We also expanded our television marketing this quarter, contributing to the same-store sales improvement. As a percentage of net sales, selling and administrative expenses decreased to 34.8% for the third quarter of 2019, compared to 35.3% for the third quarter of 2018. Selling and administrative expenses decreased$7.0 million , or 1.6%, to$448.3 million for the nine months endedNovember 2, 2019 , compared to$455.3 million for the nine months endedNovember 3, 2018 , reflecting lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses, due in part to the launch of our new Rewards program in the first quarter of 2019, and higher right-of-use asset impairment charges. The adoption of ASC 842 has resulted in higher impairment charges for under-performing stores as a direct result of including the right-of-use asset in the asset group that is evaluated for impairment. We recognized$4.1 million of impairment charges in the nine months endedNovember 2, 2019 , compared to zero in the prior year. As a percentage of net sales, selling and administrative expenses increased slightly to 36.8% for the nine months endedNovember 2, 2019 , compared to 36.7% for the nine months endedNovember 3, 2018 . Operating Earnings Operating earnings increased$3.3 million , or 13.4%, to$27.7 million for the third quarter of 2019, compared to$24.4 million for the third quarter of 2018, reflecting the factors described above. As a percentage of net sales, operating earnings increased to 6.2% for the third quarter of 2019, compared to 5.4% for the third quarter of 2018. Operating earnings decreased$9.5 million , or 11.9%, to$70.0 million for the nine months endedNovember 2, 2019 , compared to$79.5 million for the nine months endedNovember 3, 2018 , reflecting the factors described above. As a percentage of net sales, operating earnings decreased to 5.7% for the nine months endedNovember 2, 2019 , compared to 6.4% for the nine months endedNovember 3, 2018 . BRAND PORTFOLIO
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Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
($ millions, except sales per % of Net % of Net % of Net % of Net
square foot) Sales Sales Sales Sales
Operating Results
Net sales $ 359.9 100.0 % $ 343.0 100.0 % $ 1,060.5 100.0 % $ 931.6 100.0 %
Cost of goods sold 226.1 62.8 % 216.4 63.1 % 675.0 63.7 % 587.9 63.1 %
Gross profit 133.8 37.2 % 126.6 36.9 % 385.5 36.3 % 343.7 36.9 % Selling and administrative expenses 114.4 31.8 % 100.4
29.3 % 338.7 31.9 % 286.6 30.8 %
Restructuring and other special
charges, net - 0.0 % 1.1 0.3 % 0.6 0.0 % 4.4 0.4 %
Operating earnings $ 19.4 5.4 % $ 25.1 7.3 % $ 46.2 4.4 % $ 52.7 5.7 %
Key Metrics
Direct-to-consumer (% of net sales)
(1) 45 % 41 % 41 % 41 %
Wholesale/retail sales mix (%) 80%/20% 79%/21% 81%/19% 76%/24%
Change in wholesale net sales ($)
(2) $ 20.2 $ 24.7 $ 143.7 $ 30.6
Unfilled order position at end of
period $ 354.4 $ 402.1
Same-store sales % change (5.1 )% 1.7 % (7.6 )% (0.2 )%
Same-store sales $ change $ (3.5 ) $ 0.9 $ (15.1 ) $ (0.3 )
Sales change from new and closed
stores, net $ 0.4 $ 0.6 $ 1.1 $ 4.0
Impact of changes in Canadian
exchange rate on retail sales $ (0.2 ) $ (0.6 ) $ (0.8 ) $ -
Sales per square foot, excluding
e-commerce (thirteen and twenty-six
weeks ended) $ 102 $ 108 $ 292 $ 321
Sales per square foot, excluding
e-commerce (trailing twelve months) $ 394 $ 441 $ 394 $ 441
Square footage (thousands sq. ft.) 400 400 400 400
Stores opened 2 1 5 5
Stores closed 1 2 2 9
Ending stores 232 232 232 232
(1) Direct-to-consumer includes sales of our retail stores and e-commerce sites,
sales to online-only retailers and sales through our customers' websites
that we fulfill on a drop-ship basis.
(2) Includes sales from our acquired Vionic and Blowfish Malibu brands, which
contributed net sales growth of $32.8 million and $6.5 million ,
respectively, for the third quarter of 2019, and $134.6 million and
$38.4 million , respectively, for the first nine months of 2019.
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Table of ContentsNet Sales Net sales increased$16.9 million , or 4.9%, to$359.9 million for the third quarter of 2019, compared to$343.0 million for the third quarter of 2018 driven by net sales from the acquisition of Vionic inOctober 2018 , which contributed$32.8 million to our net sales growth in the third quarter of 2019. Excluding Vionic, our net sales declined$16.2 million , due in part to the highly promotional retail environment. We experienced lower net sales of ourSam Edelman and Fergie brands, partially offset by higher net sales of our Blowfish and Franco Sarto brands. Sales were also impacted by a same-store-sales decline of 5.1% in our retail stores. However, e-commerce sales continue to grow as a percentage of the business. During the third quarter of 2019, we experienced strong domestic boot sales, despite the later start to fall weather. We opened two stores and closed one store during the third quarter of 2019, resulting in a total of 232 stores and total square footage of 0.4 million at the end of the third quarter of 2019, consistent with the third quarter of 2018. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, decreased to$394 for the twelve months endedNovember 2, 2019 , compared to$441 for the twelve months endedNovember 3, 2018 . Net sales increased$128.9 million , or 13.8%, to$1,060.5 million for the nine months endedNovember 2, 2019 , compared to$931.6 million for the nine months endedNovember 3, 2018 , driven by net sales from our acquisitions of Vionic inOctober 2018 and Blowfish Malibu inJuly 2018 , which contributed$134.6 million and$38.4 million , respectively, to our net sales growth in the first nine months of 2019. The sales growth from acquisitions was partially offset by the planned reduction inAllen Edmonds sales and lowerSam Edelman sales and 7.6% decline in same-store sales in our retail stores. During the nine months endedNovember 2, 2019 , we opened five stores and closed two stores. Our unfilled order position for our wholesale sales decreased$47.7 million , or 11.9%, to$354.4 million atNovember 2, 2019 , compared to$402.1 million atNovember 3, 2018 . The decrease in our backlog order levels reflects an industry shift to a more dynamic and on-demand ordering pattern, with lower initial orders but higher replenishment later in the season.
Gross Profit
Gross profit increased$7.2 million , or 5.7%, to$133.8 million for the third quarter of 2019, compared to$126.6 million for the third quarter of 2018, primarily reflecting net sales growth from the Vionic acquisition late in the third quarter of 2018. As a percentage of net sales, our gross profit increased to 37.2% for the third quarter of 2019, compared to 36.9% for the third quarter of 2018. Cost of goods sold in the third quarter of 2018 included$1.8 million related to the amortization of the inventory adjustment required by purchase accounting for both Blowfish Malibu and Vionic. Excluding this adjustment, our gross profit as a percentage of net sales declined approximately 30 basis points due, in part, to the promotional retail environment and the impact of tariffs. Gross profit increased$41.8 million , or 12.2%, to$385.5 million for the nine months endedNovember 2, 2019 , compared to$343.7 million for the nine months endedNovember 3, 2018 , reflecting our net sales growth, partially offset by higher incremental cost of goods sold in the nine months endedNovember 2, 2019 related to purchase accounting inventory adjustments and incremental markdowns related to the Carlos brand exit. As a percentage of net sales, our gross profit decreased to 36.3% for the nine months endedNovember 2, 2019 , compared to 36.9% for the nine months endedNovember 3, 2018 , due in part to a higher mix of wholesale versus retail sales. As discussed in the Overview section, theU.S. Administration has implemented a tariff on many consumer products imported into theU.S. fromChina . Although we have increased the sourcing of our branded footwear within our Brand Portfolio segment from other countries in recent years to approximately 40%, the majority of our footwear is sourced fromChina . We believe we have mitigated a significant portion of the impact of the increased tariffs on our fiscal 2019 financial results. However, a prolonged trade war and further escalation of tariffs may result in lower gross margins in the future on products that we source fromChina .
Selling and Administrative Expenses
Selling and administrative expenses increased$14.0 million , or 13.9%, to$114.4 million for the third quarter of 2019, compared to$100.4 million for the third quarter of 2018, reflecting higher expenses from our Vionic acquisition late in the third quarter of 2018. As a percentage of net sales, selling and administrative expenses increased to 31.8% for the third quarter of 2019, compared to 29.3% for the third quarter of 2018. Selling and administrative expenses increased$52.1 million , or 18.2%, to$338.7 million for the nine months endedNovember 2, 2019 , compared to$286.6 million for the nine months endedNovember 3, 2018 , driven by higher expenses from our Vionic and Blowfish Malibu acquisitions. As a percentage of net sales, selling and administrative expenses increased to 31.9% for the nine months endedNovember 2, 2019 , compared to 30.8% for the nine months endedNovember 3, 2018 .
Restructuring and Other Special Charges, Net
Restructuring and other special charges were$1.1 million in the third quarter of 2018 related to the integration and reorganization of our men's business and acquisition and integration-related costs associated with the acquisitions of Blowfish Malibu and Vionic in July andOctober 2018 , respectively, with no corresponding charges in the third quarter of 2019. Restructuring and other special charges were$0.6 million , primarily related to the acquisition of Vionic, in the nine months endedNovember 2, 2019 , and$4.4 million , related to the integration and reorganization of our men's business and acquisition and integration-related costs associated with the acquisitions of Blowfish Malibu and Vionic in July andOctober 2018 , respectively, in the nine months endedNovember 3, 2018 . Refer to Note 6 to the condensed consolidated financial statements for additional information related to these charges. Operating Earnings Operating earnings decreased$5.7 million , or 22.8%, to$19.4 million for the third quarter of 2019, compared to$25.1 million for the third quarter of 2018 as a result of the factors described above. As a percentage of net sales, operating earnings decreased to 5.4% for the third quarter of 2019, compared to 7.3% in the third quarter of 2018. 37
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Operating earnings decreased$6.5 million , or 12.2%, to$46.2 million for the nine months endedNovember 2, 2019 , compared to$52.7 million for the nine months endedNovember 3, 2018 . As a percentage of net sales, operating earnings decreased to 4.4% for the nine months endedNovember 2, 2019 , compared to 5.7% in the nine months endedNovember 3, 2018 . ELIMINATIONS AND OTHER Thirteen Weeks Ended Thirty-Nine Weeks Ended November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018 ($ millions) % of Net Sales % of Net Sales % of Net Sales % of Net Sales Operating Results Net sales$ (14.1 ) 100.0 %$ (16.0 ) 100.0 %$ (56.5 ) 100.0 %$ (58.6 ) 100.0 % Cost of goods sold (16.8 ) 119.1 % (17.6 ) 110.0 % (58.3 ) 103.2 % (58.8 ) 100.3 % Gross profit 2.7 (19.1 )% 1.6 (9.8 )% 1.8 (3.2 )% 0.2 (0.3) % Selling and administrative expenses 5.4 (38.3 )% 7.1 (44.4 )% 18.1 (32.0 )% 32.6 (55.6 )% Restructuring and other special charges, net 0.9 (6.4 )% 4.3 (26.9 )% 1.8 (3.2 )% 4.8 (8.2 )% Operating loss$ (3.6 ) 25.5 %$ (9.8 ) 61.3 %$ (18.1 ) 32.0 %$ (37.2 ) 63.5 % 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 increase of$1.9 million and$2.1 for the third quarter and nine months endedNovember 2, 2019 , respectively, reflects a lower sales elimination for product sold from our Brand Portfolio segment to Famous Footwear. Selling and administrative expenses of$5.4 million and$18.1 million were incurred in the third quarter and first nine months of 2019, respectively, compared to$7.1 million and$32.6 million for the third quarter and first nine months of 2018, respectively. The decrease for the respective periods was primarily driven by lower expenses for our cash and share-based incentive compensation plans.
LIQUIDITY AND CAPITAL RESOURCES
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Borrowings
($ millions) November 2, 2019 November 3, 2018 February 2, 2019 Borrowings under revolving credit agreement $ 295.0 $ 350.0 $ 335.0 Long-term debt 198.3 197.8 197.9 Total debt $ 493.3 $ 547.8 $ 532.9 Total debt obligations of$493.3 million atNovember 2, 2019 decreased$54.5 million , from$547.8 million atNovember 3, 2018 , and decreased$39.6 million , from$532.9 million atFebruary 2, 2019 . The decrease fromNovember 3, 2018 includes$55.0 in repayments on our revolving credit agreement. The decrease fromFebruary 2, 2019 includes$40.0 million in repayments under our revolving credit agreement. Net interest expense for the third quarter of 2019 increased$6.4 million to$10.6 million , compared to$4.2 million for the third quarter of 2019. Net interest expense increased$13.7 million to$25.2 million for the nine months endedNovember 2, 2019 , compared to$11.5 million for the nine months endedNovember 3, 2018 . The increases in the respective periods are attributable to the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 3 and Note 16 to the condensed consolidated financial statements and higher average borrowings under our revolving credit agreement, which was used to fund the Vionic acquisition in the third quarter of 2018.
Credit Agreement
As further discussed in Note 11, the Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to$500.0 million , with the option to increase by up to$250.0 million . AtNovember 2, 2019 , we had$295.0 million in borrowings and$10.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was$194.5 million atNovember 2, 2019 . We were in compliance with all covenants and restrictions under the Credit Agreement as ofNovember 2, 2019 . We anticipate incremental interest expense going forward until the borrowings to fund the acquisition of Vionic have been repaid. Refer to further discussion regarding the Credit Agreement in Note 11 to the condensed consolidated financial statements. 38
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Table of Contents$200 Million Senior Notes OnJuly 27, 2015 , we issued$200.0 million aggregate principal amount of Senior Notes due onAugust 15, 2023 (the "Senior Notes"). Our Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries ofCaleres, Inc. that is an obligor under the Credit Agreement. The Senior Notes bear interest at 6.25%, which is payable onFebruary 15 andAugust 15 of each year. We may redeem some or all of the Senior Notes at various redemption prices. The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As ofNovember 2, 2019 , we were in compliance with all covenants and restrictions relating to the Senior Notes. Working Capital and Cash Flow
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Thirty-Nine Weeks Ended
($ millions) November 2, 2019 November 3, 2018 Change Net cash provided by operating activities $ 145.7 $ 94.4$ 51.3 Net cash used for investing activities (41.6 ) (401.0 ) 359.4 Net cash (used for) provided by financing activities (81.9 ) 333.2 (415.1 ) Effect of exchange rate changes on cash and cash equivalents 0.1 (0.2 ) 0.3 Increase in cash and cash equivalents $ 22.3 $ 26.4$ (4.1 )
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was
• A decrease in inventories in the nine months ended
to an increase in the comparable period in 2018; and
• A decrease in receivables in the nine months ended
to an increase in the nine months ended
• A decrease in trade accounts payable in the nine months ended
2019, compared to an increase in the comparable period in 2018, driven by
lower purchases of inventory in the nine months ended
• A decrease in accrued expenses and other liabilities in the nine months ended
2018, due in part to lower anticipated payments of our cash-based incentive
compensation plans in 2019 and higher accrued liabilities in 2018 associated
with our new distribution center in Chino, California .
Cash used for investing activities was $359.4 million lower in the nine months
ended November 2, 2019 as compared to the nine months ended November 3, 2018 ,
reflecting the acquisitions of Vionic and Blowfish Malibu in the nine months
ended November 3, 2018 .
Cash used for financing activities was $415.1 million higher for the nine months
ended November 2, 2019 as compared to the nine months ended November 3, 2018 ,
reflecting $40.0 million of net repayments under our revolving credit agreement
in the nine months ended November 2, 2019 , compared to net borrowings of $350.0
million in the comparable period in 2018 related to the Vionic acquisition,
and more shares repurchased under our stock repurchase programs during the nine
months ended November 2, 2019 .
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Table of Contents
A summary of key financial data and ratios at the dates indicated is as
follows:
November 2, 2019 November 3, 2018 February 2, 2019
Working capital ($ millions) (1) $ 7.4 $ 167.2 $ 123.1
Current ratio (2) 1.01:1 1.19:1 1.14:1
Debt-to-capital ratio (3) 43.8 % 41.7 % 45.6 %
(1) Working capital has been computed as total current assets less total
current liabilities. The working capital as of
of ASC 842, as further discussed in Note 2 and Note 10 to the condensed
consolidated financial statements.
(2) The current ratio has been computed by dividing total current assets by
total current liabilities. The current ratio as of
(3) The debt-to-capital ratio has been computed by dividing total debt by total
capitalization. Total debt is defined as long-term debt and borrowings
under the Credit Agreement. Total capitalization is defined as total debt
and total equity.
Working capital at November 2, 2019 was $7.4 million , which was $159.8 million
and $115.7 million lower than at November 3, 2018 and February 2, 2019 ,
respectively. Our current ratio was 1.01 to 1 as of November 2, 2019 , compared
to 1.19 to 1 at November 3, 2018 and 1.14:1 at February 2, 2019 . The decrease in
both working capital and the current ratio from November 3, 2018 and February 2,
2019 primarily reflects the impact of the adoption of ASC 842 on the balance
sheet as further discussed in Note 2 to the condensed consolidated financial
statements, including the addition of current operating lease obligations of
$144.5 million . Our debt-to-capital ratio was 43.8% as of November 2, 2019 ,
compared to 41.7% as of November 3, 2018 and 45.6% at February 2, 2019 . The
increase in our debt-to-capital ratio from November 3, 2018 primarily reflects
lower shareholders' equity due to the impact of the net loss in fiscal 2018.
At
We declared and paid dividends of$0.07 per share in both the third quarter of 2019 and 2018. 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. CONTRACTUAL OBLIGATIONS Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations. Except for changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, changes in borrowings under our revolving credit agreement, changes in the mandatory purchase obligation associated with the acquisition of Blowfish Malibu and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to the contractual obligations identified in our Annual Report on Form 10-K for the year endedFebruary 2, 2019 .
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 other than the adoption of ASC 842, as further described in Note 10 to the condensed consolidated financial statements. 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 endedFebruary 2, 2019 .
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.
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Table of Contents 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 consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) rapidly changing fashion trends and purchasing patterns; (iii) intense competition within the footwear industry; (iv) political and economic conditions or other threats to the continued and uninterrupted flow of inventory fromChina and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (v) imposition of tariffs; (vi) the ability to accurately forecast sales and manage inventory levels; (vii) cybersecurity threats or other major disruption to the Company's information technology systems; (viii) customer concentration and increased consolidation in the retail industry; (ix) transitional challenges with acquisitions; (x) a disruption in the Company's distribution centers; (xi) foreign currency fluctuations; (xii) changes to tax laws, policies and treaties; (xiii) the ability to recruit and retain senior management and other key associates; (xiv) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xv) the ability to secure/exit leases on favorable terms; (xvi) the ability to maintain relationships with current suppliers; and (xvii) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights. The Company's reports to theSecurities 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 endedFebruary 2, 2019 , 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.
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