CALERES, INC. OVERVIEW
We achieved exceptional financial results in the third quarter of 2021, driven by a successful back-to-school season and strong consumer demand. We recorded sequential net sales growth and strong gross margins, and achieved the highest third quarter operating earnings in our history. Our strong performance was driven by our Famous Footwear segment, which reported a 26.5% increase in same-store sales and an operating margin of 17.7%, which was the highest third quarter operating margin in its history. Our Brand Portfolio segment also contributed to our strong results in the third quarter of 2021, with a 12.3% increase in net sales and a 55.8% increase in operating earnings compared to the third quarter of 2020.
Our financial results were negatively impacted in 2020 by the coronavirus ("COVID-19") pandemic, including the temporary closure of all of our retail stores beginning in mid-March, with a phased re-opening beginning in mid-May.
We experienced sequential improvement in sales in the latter part of 2020, driven by the reopening of our retail stores, and continued solid growth of our e-commerce business. During the first nine months of 2021, as the vaccines became widely distributed and governments continued to ease restrictions, consumer sentiment and spending improved, which contributed to higher store traffic and strong growth in our net sales and operating earnings.
Financial Highlights
Following is a summary of the financial highlights for the third quarter of 2021:
Consolidated net sales increased
the third quarter of 2021, compared to
2020. Our Famous Footwear segment's net sales of
? highest quarterly net sales in its history. Net sales in our Brand Portfolio
segment increased
2020. On a consolidated basis, our direct-to-consumer sales represented
approximately 73% of consolidated net sales for the third quarter of 2021,
compared to 71% in the third quarter of 2020.
Consolidated gross profit increased
in the third quarter of 2021, compared to
? of 2020. Our gross profit margin increased to 42.8% in the third quarter of
2021, compared to 39.7% in the third quarter of 2020, reflecting a decline in
promotional activity driven by strong consumer demand, partially offset by
higher inbound freight costs.
Consolidated operating earnings increased
? third quarter of 2021, compared to
Consolidated net earnings attributable to
?
million, or
The following items should be considered in evaluating the comparability of our third quarter results in 2021 and 2020:
Blowfish Malibu mandatory purchase obligation - As further discussed in Note 5
and Note 14 to the condensed consolidated financial statements, the Blowfish
Malibu noncontrolling interest was subject to a mandatory purchase obligation
after a three-year period following the 2018 acquisition, based on an earnings
multiple formula. During the third quarter of 2021, we recorded a final fair
? value adjustment of
per diluted share), compared to an adjustment of
an after-tax basis, or
The fair value adjustments are recorded as interest expense, net in the
condensed consolidated statements of earnings (loss). The purchase obligation
was settled for
third quarter, utilizing borrowings under our revolving credit agreement.
Loss on early extinguishment of debt - During the third quarter of 2021, we
incurred a loss of
? per diluted share) related to the redemption of
Notes in
credit facility prior to its maturity. Refer to Note 10 to the condensed
consolidated financial statements for further discussion.
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Recent Developments - Supply Chain Disruptions
While we achieved strong financial results for the third quarter of 2021, we continue to experience global supply chain disruptions, including a delay in the receipt of inventory due to port congestion, reduced shipping vessel and container availability, and factory closures, as well as higher inbound freight costs, all of which resulted in incremental freight expenses and lower gross profit of approximately$11.5 million for the Brand Portfolio segment during the third quarter of 2021. We are actively working to minimize the impact of these disruptions by diversifying and leveraging our sourcing model, but we anticipate higher inbound freight costs in the fourth quarter of 2021 and into 2022. As ofOctober 30, 2021 , our Brand Portfolio segment has over$100 million of inventory in transit that is not yet available to sell. Depending on the timing of receipt of this inventory, it is possible that certain customers may cancel their orders or demand price concessions for the late receipts. If we are unable to sell this in-transit inventory, we may have to liquidate it through other less profitable channels, which may negatively impact our gross margins. In addition, the supply chain delays and inflationary cost pressures we are currently experiencing may limit our ability to meet incremental consumer demand and may negatively impact net sales during the fourth quarter of 2021 and into 2022. The extent and duration of these supply chain disruptions and higher freight costs are uncertain. However, we are actively working to mitigate these cost pressures and recover a portion of the increased costs through price increases.
Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store 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 same-store sales metric as a measure of an individual store's success to determine whether it is performing in line with expectations. Our same-store 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 same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores (including the temporary store closures for a portion of 2020 for all of our Famous Footwear and Brand Portfolio stores inNorth America ) are excluded from the same-store 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 same-store sales calculation. We believe the same-store 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, by the total square footage of the retail store base at the end of each month of the respective period. This metric was adversely impacted by the temporary retail store closures during a portion of the nine months endedOctober 31, 2020 and therefore, the metric is not comparable to the nine months endedOctober 30, 2021 .
Outlook
While the global supply chain disruptions have caused uncertainty in the macro environment, we are actively working with our suppliers to help offset the impacts to our business and financial performance. Although we believe we are well-positioned to navigate through the supply chain disruptions by responding to the variables within our control, including actively working to mitigate cost pressures through price increases, we expect the inflationary economy and the increase in inbound freight costs to impact our financial results in the fourth quarter of 2021. As we ship spring 2022 orders, we anticipate the price increases currently being implemented will mitigate the impact of the higher freight costs. We continued to make excellent progress toward our balance sheet initiatives during the third quarter of 2021, including redeeming$100.0 million aggregate principal amount of our Senior Notes and securing more advantageous terms on the revolving credit agreement. We believe these actions, in addition to redeeming the remaining$100.0 million of Senior Notes in the fourth quarter, will result in approximately a$12 million decline in annual interest expense.
We will continue to leverage our core competencies and execute on our short and long-term strategic priorities to enhance long-term value for our shareholders.
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Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
% of % of % of % of
($ millions) Net Sales Net Sales Net Sales Net Sales
Net sales $ 784.2 100.0 % $ 647.5 100.0 % $ 2,098.3 100.0 % $ 1,546.1 100.0 %
Cost of goods sold 448.8 57.2 % 390.5 60.3 % 1,165.8 55.6 % 984.6 63.7 %
Gross profit 335.4 42.8 % 257.0 39.7 % 932.5 44.4 % 561.5 36.3 % Selling and administrative expenses
254.1 32.4 % 236.9 36.6 % 757.0 36.1 % 663.5 42.9 % Impairment of goodwill and intangible assets
- - - - - - % 262.7 17.0 %
Restructuring and other special charges, net -
- % - - % 13.5 0.6 % 65.6 4.2 %
Operating earnings (loss) 81.3 10.4 % 20.1 3.1 % 162.0 7.7 % (430.3) (27.8) %
Interest expense, net (5.1) (0.7) % (10.9) (1.7) % (28.8) (1.4) % (33.7) (2.2) % Loss on early extinguishment of debt
(0.6) (0.1) % - - % (0.6) (0.0) % - - %
Other income, net 3.8 0.5 % 5.5 0.9 % 11.5 0.6 % 12.7 0.8 % Earnings (loss) before income taxes
79.4 10.1 % 14.7 2.3 % 144.1 6.9 % (451.3) (29.2) % Income tax (provision) benefit
(19.7) (2.5) % 0.2 (0.0) % (39.9) (1.9) % 89.4 5.8 %
Net earnings (loss) 59.7 7.6 % 14.9 2.3 % 104.2 5.0 % (361.9) (23.4) % Net earnings (loss) attributable to noncontrolling interests 0.1
0.0 % 0.5 0.1 % 1.0 0.1 % 0.2 (0.0) %
Net earnings (loss) attributable to Caleres, Inc. $ 59.6 7.6 %$ 14.4 2.2 %$ 103.2 4.9 %$ (362.1) (23.4) % Net Sales Net sales increased$136.7 million , or 21.1%, to$784.2 million for the third quarter of 2021, compared to$647.5 million for the third quarter of 2020. Our Famous Footwear segment had an extremely successful back-to-school season and continued to benefit from strong consumer demand throughout the quarter, achieving the highest quarterly net sales in the segment's history, with net sales increasing$103.0 million , or 26.3%, compared to the third quarter of 2020. Net sales for our Brand Portfolio segment increased$32.9 million , or 12.3% during the third quarter of 2021, compared to the third quarter of 2020. While Brand Portfolio net sales improved over last year, they remain below pre-pandemic levels, due in part to the brand exits announced in late 2019 and early 2020 and the related closure of all but two Naturalizer retail stores inNorth America . On a consolidated basis, our direct-to-consumer sales represented approximately 73% of total net sales for the third quarter of 2021. Our casual, athletic and sport footwear categories continue to perform well, sandals experienced strong growth during the third quarter of 2021, and demand for the dress category continues to improve, as more people return to the workplace. Net sales increased$552.2 million , or 35.7%, to$2,098.3 million for the nine months endedOctober 30, 2021 , compared to$1,546.1 million for the nine months endedOctober 31, 2020 . As COVID-19 vaccines became more widely available and government restrictions eased, we experienced strong growth in consumer demand during the nine months endedOctober 30, 2021 , which has led to a significant increase in retail store traffic and conversion rates. Our Famous Footwear segment experienced a net sales increase of$429.5 million , or 46.8%, for the nine months endedOctober 30, 2021 , with net sales of$1,346.4 million . Our Brand Portfolio segment reported a$121.4 million , or 18.2%, increase in net sales, with strong sales growth from ourSam Edelman , Blowfish,Vionic and
Allen Edmonds brands. Gross Profit Gross profit increased$78.4 million , or 30.5%, to$335.4 million for the third quarter of 2021, compared to$257.0 million for the third quarter of 2020, reflecting higher net sales and a higher gross profit rate. As a percentage of net sales, gross profit increased to 42.8% for the third quarter of 2021, compared to 39.7% for the third quarter of 2020, reflecting a significant decline in promotional activity in our Famous Footwear segment driven by strong consumer demand, partially offset by an adverse impact of approximately$11.5 million of incremental cost of goods sold in our Brand Portfolio segment associated with supply chain disruptions and related vessel and container shortages. As discussed above, we anticipate the higher inbound freight costs to continue in the fourth quarter of 2021 and into 2022, which may continue to impact our gross profit if we are unable to mitigate or fully recover these additional costs through price increases. Gross profit increased$371.0 million , or 66.1%, to$932.5 million for the nine months endedOctober 30, 2021 , compared to$561.5 million for the nine months endedOctober 31, 2020 , primarily due to higher net sales and a reduction in promotional activity at Famous Footwear. For the nine months endedOctober 31, 2020 , our gross profit was impacted by higher incremental cost of goods sold primarily due to$33.4 million in inventory markdowns reflecting the difficult retail environment driven by the COVID-19 pandemic, as well as$1.6 million in inventory markdowns related to the decision to exit our Fergie brand. As a percentage of net sales, gross profit increased to 44.4% for the nine months endedOctober 30, 2021 , compared to 36.3% for the nine months ended October
31,
2020.
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We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased$17.2 million , or 7.2%, to$254.1 million for the third quarter of 2021, compared to$236.9 million for the third quarter of 2020. The increase was primarily due to higher marketing expenses, due in part to the return to television advertising for our Famous Footwear segment; higher salary expenses and higher expenses associated with our cash and stock-based incentive compensation plan for certain employees. This increase was partially offset by lower rent and facilities expenses, primarily associated with the Naturalizer retail store closures. Salary expenses were lower in the third quarter of 2020, primarily attributable to the steps taken in the first quarter of 2020 to reduce expenses, including workforce reductions, and reduced hours at our retail stores. As a percentage of net sales, selling and administrative expenses decreased to 32.4% for the third quarter of 2021, from 36.6% for the third quarter of 2020, reflecting better leveraging of expenses over higher net sales. Selling and administrative expenses increased$93.5 million , or 14.1%, to$757.0 million for the nine months endedOctober 30, 2021 , compared to$663.5 million for the nine months endedOctober 31, 2020 . The increase for the nine months endedOctober 30, 2021 was primarily due to higher expenses for our cash-based incentive compensation plans for certain employees, and higher salary and marketing expenses. Salary expenses were lower during the nine months endedOctober 31, 2020 as a result of the actions taken to mitigate the impact of the pandemic on our financial results. As a percentage of net sales, selling and administrative expenses decreased to 36.1% for the nine months endedOctober 30, 2021 , from 42.9% for the nine months endedOctober 31, 2020 , reflecting better leveraging of expenses over higher net sales.
Impairment of
During the nine months endedOctober 31, 2020 , we recorded non-cash impairment charges of$262.7 million ($218.5 million on an after-tax basis), including$240.3 million associated with goodwill and$22.4 million associated with the indefinite-lived Allen Edmonds and Via Spiga trade names. There were no corresponding charges for the nine months endedOctober 30, 2021 . Refer to Note 8 to the condensed consolidated financial statements for further discussion of these charges.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of$13.5 million ($11.9 million on an after-tax basis, or$0.31 per diluted share) during the nine months endedOctober 30, 2021 , reflecting expenses associated with the decision to close all Naturalizer retail stores inNorth America with the exception of two Naturalizer flagship retail stores inthe United States . During the nine months endedOctober 31, 2020 , we incurred restructuring and other special charges of$65.6 million ($52.5 million on an after-tax basis) related to the unfavorable business climate, driven by the impact of the pandemic on our business operations. These charges were primarily for impairment associated with lease right-of-use assets and retail store furniture and fixtures, liabilities associated with factory order cancellations and severance. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges. Operating Earnings (Loss) Operating earnings increased$61.2 million to$81.3 million for the third quarter of 2021, compared to$20.1 million for the third quarter of 2020, primarily reflecting higher net sales and gross profit. As a percentage of net sales, operating earnings were 10.4% for the third quarter of 2021, compared to 3.1% for the third quarter of 2020. Operating earnings increased$592.3 million to$162.0 million for the nine months endedOctober 30, 2021 , compared to an operating loss of$430.3 million for the nine months endedOctober 31, 2020 , primarily reflecting higher net sales and gross profit, lower impairment charges and better leveraging of expenses over a higher net sales base. As a percentage of net sales, operating earnings were 7.7% for the nine months endedOctober 30, 2021 , compared to an operating loss of 27.8% for the nine months endedOctober 31, 2020 .
Interest Expense, Net
Interest expense, net decreased$5.8 million , or 53.4%, to$5.1 million for the third quarter of 2021, compared to$10.9 million for the third quarter of 2020, primarily due to a lower fair value adjustment to the Blowfish Malibu mandatory purchase obligation. We recognized a final fair value adjustment of$1.9 million in the third quarter of 2021, compared to an adjustment of$5.1 million in the third quarter of 2020. The adjustment during the third quarter of 2021 reflects the settlement of the purchase of the remaining interest in Blowfish Malibu. The purchase obligation of$54.6 million was paid onNovember 4, 2021 . The decrease in interest expense also reflects lower average borrowings under our revolving credit agreement and a$100.0 million reduction in our outstanding Senior Notes inAugust 2021 , as further discussed below. 31 Table of Contents Interest expense, net decreased$4.9 million , or 14.7%, to$28.8 million for the nine months endedOctober 30, 2021 , compared to$33.7 million for the nine months endedOctober 31, 2020 , primarily due to lower average borrowings under our revolving credit agreement and a reduction in our outstanding Senior Notes. We continued to utilize our strong cash generation to reduce the incremental borrowings that were used to preserve financial flexibility at the onset of the pandemic, reducing the borrowings under our revolving credit agreement from$440.0 million inMarch 2020 to$175.0 million atOctober 30, 2021 . In addition, we redeemed$100.0 million of our Senior Notes inAugust 2021 , shifting this higher interest debt to borrowings under our revolving credit agreement. We also notified our bondholders onNovember 18, 2021 that we would be redeeming the remaining$100.0 million of our Senior Notes inJanuary 2022 .
We believe these actions will result in approximately a
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt was$0.6 million for the three and nine months endedOctober 30, 2021 , reflecting the redemption of$100 million of Senior Notes prior to maturity and the amendment of our revolving credit facility. Refer to Note 10 to the condensed consolidated financial statements for further discussion. Other Income, Net
Other income, net decreased$1.7 million , or 29.6%, to$3.8 million for the third quarter of 2021, compared to$5.5 million for the third quarter of 2020, which reflects a reduction of certain components of net periodic benefit income in 2021, as compared to 2020. Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income. Other income, net decreased$1.2 million , or 9.3%, to$11.5 million for nine months endedOctober 30, 2021 , compared to$12.7 million for the nine months endedOctober 31, 2020 , which reflects a reduction of certain components of net periodic benefit income in 2021, as compared to 2020. Refer to Note 13 of the condensed consolidated financial statements for further detail regarding the components of net periodic benefit income.
Income Tax (Provision) Benefit
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was a provision of 24.9% for the third quarter of 2021, compared to a benefit of 1.9% for the third quarter of 2020. The lower effective tax rate for the third quarter of 2020 reflects the impact of a higher anticipated full year tax benefit, driven by the impact of the CARES Act, which permitted us to carry back 2020 losses to years with a higher federal tax rate, and the mix of projected earnings between international and domestic jurisdictions. For the nine months endedOctober 30, 2021 , our consolidated effective tax rate was 27.7%, compared to 19.8% for the nine months endedOctober 31, 2020 . Our higher tax rate for the nine months endedOctober 30, 2021 primarily reflects strong domestic earnings and incremental valuation allowances for our deferred tax assets for certain jurisdictions. The rate also reflects the non-deductibility of losses at our Canadian business division, which were driven by exit-related costs associated with Naturalizer retail stores during the first quarter. Our effective tax rate for the nine months endedOctober 31, 2020 was impacted by several discrete tax items, including the non-deductibility of a portion of our intangible asset impairment charges, the provision of a valuation allowance related to certain state and Canadian deferred tax assets, and the incremental tax provision related to the vesting of stock awards. Offsetting these impacts was a benefit associated with the CARES Act, which permitted the Company to carry back 2020 losses to years with a higher federal tax rate.
Net Earnings (Loss) Attributable to
Net earnings attributable toCaleres, Inc. were$59.6 million and$103.2 for the third quarter and nine months endedOctober 30, 2021 , respectively, compared to net earnings of$14.4 million and net losses of$362.1 million for the third quarter and nine months endedOctober 31, 2020 , respectively, as a result of the factors described above. 32 Table of Contents FAMOUS FOOTWEAR Thirteen Weeks Ended Thirty-Nine Weeks Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 % of % of % of % of
($ millions, except sales per square foot)Net Sales
Net Sales Net Sales Net Sales Net sales$ 494.7 100.0 %$ 391.7 100.0 %$ 1,346.4 100.0 %$ 916.9 100.0 % Cost of goods sold 259.2 52.4 % 231.7 59.1 % 703.7 52.3 % 568.6 62.0 % Gross profit 235.5 47.6 % $
160.0 40.9 % 642.7 47.7 %
148.1 29.9 % 132.2 33.8 % 422.0 31.3 % 370.4 40.4 %
Restructuring and other special charges,
net - - % - - % - - % 16.6 1.8 %
Operating earnings (loss) $ 87.4 17.7 % $ 27.8 7.1 % $ 220.7 16.4 % $ (38.7) (4.2) %
Key Metrics
Same-store sales % change 26.5 % (9.1) % 11.5 % 3.0 %
Same-store sales $ change $ 100.1 $ (38.3) $ 102.7 $ 26.2
Sales change from new and closed stores,
net $ 2.3 $ (16.6) $ 325.1 $ (327.7)
Impact of changes in Canadian exchange
rate on sales $ 0.6 $ - $ 1.7 $ (0.2)
Sales per square foot, excluding
e-commerce (thirteen and thirty-nine weeks
ended) $ 72 $ 53 $ 194 $ 115
Sales per square foot, excluding
e-commerce (trailing twelve months) $ 238 $ 166 $ 238 $ 166
Square footage (thousand sq. ft.) 5,977 6,135 5,977 6,135 Stores opened 1 - 9 3 Stores closed 8 11 20 27 Ending stores 905 925 905 925 Net Sales Net sales of$494.7 million in the third quarter of 2021 increased$103.0 million , or 26.3%, compared to the third quarter of 2020. We achieved the highest quarterly net sales in our history, driven by an extremely successful back-to-school season. Even after the back-to-school season concluded, sales momentum continued, driven by strong growth from brick-and-mortar as consumers returned to in-store shopping. E-commerce penetration in the third quarter of 2021 was approximately 13% of net sales, compared to approximately 17% in the third quarter of 2020 when retail store traffic was negatively impacted by the pandemic. Although supply chain disruptions led to a delay in inventory receipts, our athletic, casual and sandals categories of footwear performed very well during the quarter. During the third quarter of 2021, we opened one store and closed eight stores, resulting in 905 stores and total square footage of 6.0 million at the end of the third quarter of 2021, compared to 925 stores and total square footage of 6.1 million at the end of the third quarter of 2020. 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 78% of our net sales made to program members in the third quarter of 2021, compared to 80% in the third quarter of 2020. Net sales of$1,346.4 million for the nine months endedOctober 30, 2021 increased$429.5 million , or 46.8%, compared to$916.9 million for the nine months endedOctober 31, 2020 . Our strong performance during the nine months endedOctober 30, 2021 was attributable to a number of factors. As COVID-19 vaccines became more widely available and government restrictions eased, we experienced strong growth in consumer demand, which led to a significant increase in retail store traffic and conversion rates during the nine months endedOctober 30, 2021 . E-commerce penetration has remained strong in 2021 at approximately 13% of net sales in the nine months endedOctober 30, 2021 , compared to approximately 22% in the nine months endedOctober 31, 2020 when our retail stores were temporarily closed from mid-March, with a phased reopening beginning in May. While supply chain disruptions have resulted in delays and lower receipts, our well-positioned inventory drove our record-setting results.
Our casual, athletic and sport categories of footwear continued to be the
strongest performers. During the nine months ended
Gross Profit
Gross profit increased$75.5 million , or 47.2%, to$235.5 million for the third quarter of 2021, compared to$160.0 million for the third quarter of 2020, driven by the sales increase and a higher gross profit rate. As a percentage of net sales, our gross profit increased to 47.6% for the third quarter of 2021, compared to 40.9% for the third quarter of 2020. Due to strong consumer demand and having the right level of inventory for our key brands and styles, we significantly reduced promotional activity, resulting in higher gross margins in both our retail stores and e-commerce business during the third quarter of 2021. Gross profit increased$294.4 million , or 84.5%, to$642.7 million for the nine months endedOctober 30, 2021 , compared to$348.3 million for the nine months endedOctober 31, 2020 , reflecting both higher net sales and gross profit rate.
As a percentage of net sales, our gross
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profit increased to 47.7% for the nine months ended October 30, 2021 , compared
to 38.0% for the nine months ended October 31, 2020 , reflecting a reduction in
promotional activity driven by strong consumer demand and our well-positioned
inventory. In addition, our gross profit margin in the nine months ended
October 31, 2020 was adversely impacted by $6.0 million in incremental inventory
markdowns, reflecting the difficult retail environment in 2020 driven by the
pandemic.
Selling and Administrative Expenses
Selling and administrative expenses increased$15.9 million , or 12.1%, to$148.1 million for the third quarter of 2021, compared to$132.2 million for the third quarter of 2020. The increase was primarily due to higher payroll in the third quarter of 2021 associated with our retail store associates, as well as an increase in marketing expenses, as we resumed our television advertising campaigns. Salary expenses were lower in the third quarter of 2020, primarily attributable to reduced hours at our retail stores. As a percentage of net sales, selling and administrative expenses decreased to 29.9% for the third quarter of 2021, compared to 33.8% for the third quarter of 2020, reflecting better leveraging of expenses over a higher net sales base. Selling and administrative expenses increased$51.6 million , or 13.9%, to$422.0 million for the nine months endedOctober 30, 2021 , compared to$370.4 million for the nine months endedOctober 31, 2020 . The increase was primarily due to higher payroll expenses associated with our retail store associates. Salary expenses were lower in the nine months endedOctober 31, 2020 as a result of our retail stores being temporarily closed for a portion of 2020. Variable expenses, including marketing and logistics, were also higher, reflecting the increase in sales volume in the nine months endedOctober 30, 2021 . In addition, strategic actions were taken to reduce expenses in the first nine months of 2020, particularly to mitigate the impact of the pandemic during the period of retail store closures in the first half of the year. As a percentage of net sales, selling and administrative expenses decreased to 31.3% for the nine months endedOctober 30, 2021 , compared to 40.4% for the nine months endedOctober 31, 2020 , reflecting better leveraging of our expenses over higher net sales.
Restructuring and Other Special Charges, Net
Restructuring and other special charges were$16.6 million for the nine months endedOctober 31, 2020 , consisting primarily of impairment charges on furniture and fixtures in our retail stores and lease right-of use assets reflecting the impact of the pandemic on our business operations. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges. There were no corresponding charges during the three months endedOctober 31, 2020 or nine months endedOctober 30, 2021 .
Operating Earnings (Loss)
Operating earnings increased$59.6 million to operating earnings of$87.4 million for the third quarter of 2021, compared to$27.8 million for the third quarter of 2020. Our operating earnings for the third quarter of 2021 exceeded our full year 2019 operating earnings. As a percentage of net sales, operating earnings were 17.7% for the third quarter of 2021, compared to 7.1% for the third quarter of 2020.
Operating earnings (loss) increased
As
a percentage of net sales, operating earnings were 16.4% for the nine months
ended
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BRAND PORTFOLIO
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020
% of % of % of % of
($ millions, except sales per
square foot) Net Sales Net Sales Net Sales Net Sales
Net sales $ 300.5 100.0 % $ 267.6 100.0 % $ 789.8 100.0 % $ 668.4 100.0 %
Cost of goods sold 201.6 67.1 % 173.3 64.8 % 502.0 63.6 % 456.7 68.3 %
Gross profit 98.9 32.9 % 94.3 35.2 % 287.8 36.4 % 211.7 31.7 %
Selling and administrative
expenses 87.5 29.1 % 87.0 32.5 % 249.2 31.5 % 253.2 37.9 %
Impairment of goodwill and
intangible assets - - % - - % - - % 262.7 39.3 %
Restructuring and other special
charges, net - - % - - % 13.5 1.7 % 48.4 7.2 %
Operating earnings (loss) $ 11.4 3.8 % $ 7.3 2.7 % $ 25.1 3.2 % $ (352.6) (52.7) %
Key Metrics
Direct-to-consumer (% of net
sales) (1) 28 % 26 % 31 % 31 %
Change in wholesale net sales ($) $ 16.5 $ (60.9) $ 66.2 $ (298.3)
Unfilled order position at end of
period $ 380.7 $ 234.7
Same-store sales % change 45.8 % (41.0) % 24.3 % (32.3) %
Same-store sales $ change $ 13.8 $ (25.2) $ 18.6 $ (42.8)
Sales change from new and closed
stores, net $ 2.5 $ (6.2) $ 36.0 $ (50.8)
Impact of changes in Canadian
exchange rate on retail sales $ 0.1 $ 0.0 $ 0.6 $ (0.2)
Sales per square foot, excluding
e-commerce (thirteen and
thirty-nine weeks ended) $ 236 $ 41 $ 669 $ 92
Sales per square foot, excluding
e-commerce (trailing twelve
months) $ 756 $ 190 $ 756 $ 190
Square footage (thousands sq.
ft.) 124 345 124 345
Stores opened 4 - 6 -
Stores closed 1 5 86 25
Ending stores 90 197 90 197
Direct-to-consumer includes sales of our retail stores and e-commerce sites (1) and sales through our customers' websites that we fulfill on a drop-ship
basis.
Net Sales
Net sales increased $32.9 million , or 12.3%, to $300.5 million for the third
quarter of 2021, compared to $267.6 million for the third quarter of 2020. We
continued to experience strong sales growth from our Blowfish Malibu, Sam
Edelman , Allen Edmonds and Vionic brands, which carry a large assortment of
athletic and casual styles. Both Sam Edelman and Allen Edmonds reported growth
in the dress shoe category, as more people return to the workplace and attend
special occasion events. While the segment experienced sequential sales
improvement, our net sales in the third quarter of 2021 continued to be
adversely impacted by the delayed receipt of inventory due to supply chain
disruptions, including port congestion and factory closures. During the third
quarter of 2021, we closed one store and opened four stores, resulting in a
total of 90 stores and total square footage of 0.1 million at the end of
the third quarter of 2021, compared to 197 stores and total square footage of
0.3 million at the end of the third quarter of 2020.
Net sales increased $121.4 million , or 18.2%, to $789.8 for the nine months
ended October 30, 2021 , compared to $668.4 million for the nine months ended
October 31, 2020 , reflecting the same factors as described above. During the
nine months ended October 30, 2021 , we experienced strong sales growth from our
Sam Edelman , Blowfish Malibu, Vionic and Allen Edmonds brands.
In the first quarter of 2021, we closed the remaining 73 Naturalizer stores in
North America that were scheduled for closure as part of our strategic
realignment of the Naturalizer retail store operations. We remain focused on
growing the brand's e-commerce business through naturalizer.com, our retail
partners and their websites, and the two flagship stores in the United States
and three stores in China that we continue to operate. Including the
Naturalizer closures, we closed 86 stores and opened six stores during the nine
months ended October 30, 2021 . On a trailing twelve-month basis, sales per
square foot, excluding e-commerce sales, increased to $756 for the twelve months
ended October 30, 2021 , compared to $190 for the twelve months ended October 31,
2020 .
Our unfilled order position for our wholesale sales increased $146.0 million , or
62.2%, to $380.7 million at October 30, 2021 , compared to $234.7 million at
October 31, 2020 . The increase in our backlog order levels reflects increased
consumer demand trends. In addition, the
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global supply chain disruptions have caused a delay in the receipt of inventory due to port congestion, reduced shipping vessel and container availability.
We
are actively working to diversify and leverage our sourcing model to help offset the impact of these supply chain challenges, but expect the disruptions to continue into 2022.
Gross Profit
Gross profit increased
As
a percentage of net sales, our gross profit decreased to 32.9% for the third quarter of 2021, compared to 35.2% for the third quarter of 2020, reflecting higher inbound freight costs. In connection with the supply chain disruptions described earlier, our freight costs have risen significantly. We anticipate the higher inbound freight costs to continue into 2022, which may continue to impact our gross profit if we are unable to mitigate or fully recover these additional costs from price increases. Gross profit increased$76.1 million , or 35.9%, to$287.8 million for the nine months endedOctober 30, 2021 , compared to$211.7 million for the nine months endedOctober 31, 2020 , due to higher net sales and improved gross profit rate. Our gross profit in the nine months endedOctober 31, 2020 was impacted by higher incremental cost of goods sold primarily due to$27.5 million in inventory markdowns reflecting the difficult retail environment driven by the pandemic, as well as$1.6 million in inventory markdowns related to the decision to exit our Fergie brand. As a percentage of net sales, our gross profit increased to 36.4% for the nine months endedOctober 30, 2021 , compared to 31.7% for the nine months endedOctober 31, 2020 .
Selling and Administrative Expenses
Selling and administrative expenses increased$0.5 million , or 0.6%, to$87.5 million for the third quarter of 2021, compared to$87.0 million for the third quarter of 2020. The increase was driven by higher salary and marketing expenses, partially offset by lower rent and facilities expenses, primarily due to the lower store count. As a percentage of net sales, selling and administrative expenses decreased to 29.1% for the third quarter of 2021, compared to 32.5% for the third quarter of 2020. Selling and administrative expenses decreased$4.0 million , or 1.6%, to$249.2 million for the nine months endedOctober 30, 2021 , compared to$253.2 million for the nine months endedOctober 31, 2020 . The decrease was driven by lower retail facilities costs, primarily due to the lower store count, partially offset by higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 31.5% for the nine months endedOctober 30, 2021 , compared to 37.9% for the nine months endedOctober 31, 2020 .
Impairment of
During the first quarter of 2020, we incurred impairment charges of$262.7 million , including$240.3 million associated with goodwill and$22.4 million associated with intangible assets, including$12.2 million for the Allen Edmonds trade name and$10.2 million for the Via Spiga trade name. There were no corresponding charges in the third quarter of 2020 or for the nine months endedOctober 30, 2021 . Refer to Note 8 to the condensed consolidated financial statements for further discussion of these charges.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of$13.5 million were recorded during the nine months endedOctober 30, 2021 , reflecting expenses associated with the decision to close all but two flagship Naturalizer retail stores inthe United States . These costs primarily represented lease termination and other store closure costs, including employee severance. For the nine months endedOctober 31, 2020 , we recorded restructuring and other special charges of$48.4 million , reflecting expenses associated with the impact of the pandemic on our business operations, primarily impairment charges on store furniture and fixtures and lease right-of-use assets, liabilities due to our factories for order cancellations and severance. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating Earnings (Loss)
Operating earnings increased$4.1 million to$11.4 million for the third quarter of 2021, compared to$7.3 million for the third quarter of 2020, as a result of the factors described above. As a percentage of net sales, operating earnings were 3.8% for the third quarter of 2021, compared to 2.7% in the third quarter of 2020. Operating earnings (loss) increased$377.7 million to operating earnings of$25.1 million for the nine months endedOctober 30, 2021 , compared to an operating loss of$352.6 million for the nine months endedOctober 31, 2020 , as a result of the factors described above. As a percentage of net sales, operating earnings were 3.2% for the nine months endedOctober 30, 2021 , compared to an operating loss of 52.7% for the nine months endedOctober 31, 2020 . 36 Table of Contents ELIMINATIONS AND OTHER Thirteen Weeks Ended Thirty-Nine Weeks Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 % of % of % of % of ($ millions) Net Sales Net Sales Net Sales Net Sales Net sales$ (11.0) 100.0 %$ (11.8) 100.0 %$ (37.9) 100.0 %$ (39.2) 100.0 % Cost of goods sold (12.0) 108.8 % (14.4) 122.4 % (39.9) 105.3 % (40.7) 103.9 % Gross profit 1.0 (8.8) % 2.6 (22.4) % 2.0 (5.3) % 1.5 (3.9) % Selling and administrative expenses 18.4 (167.1) % 17.7 (150.0) % 85.9 (226.5) % 40.0 (101.9) % Restructuring and other special charges, net - - % - - % - - % 0.6 (1.6) % Operating loss$ (17.4) 158.3 %$ (15.1) 127.6 %$ (83.9) 221.2 %$ (39.1) 99.6 % The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries. The net sales elimination of$11.0 million for the third quarter of 2021 is$0.8 million , or 6.7%, lower than the third quarter of 2020, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear. The net sales elimination of$37.9 million for the nine months endedOctober 30, 2021 is$1.3 million , or 3.3%, lower than the nine months endedOctober 31, 2020 , reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear. Selling and administrative expenses increased$0.7 million , to$18.4 million in the third quarter of 2021, compared to$17.7 million for the third quarter of 2020. The increase primarily reflects higher expenses for our cash and stock-based incentive compensation plans for certain employees. Selling and administrative expenses increased$45.9 million , to$85.9 million in the nine months endedOctober 30, 2021 , compared to$40.0 million for the nine months endedOctober 31, 2020 , reflecting higher expenses for our cash and stock-based incentive compensation plans for certain employees and higher expenses associated with certain cash-based director compensation plans that are variable based on our stock price. The increase in the cash-based director compensation plans reflects growth in our stock price during the nine months endedOctober 30, 2021 , compared to a decline in the nine months endedOctober 31, 2020 .
Restructuring and other special charges of
Refer to Note 5 to the condensed consolidated financial statements for
additional information related to these charges. There were no corresponding
expenses for the nine months ended
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LIQUIDITY AND CAPITAL RESOURCES
Borrowings ($ millions) October 30, 2021 October 31, 2020 January 30, 2021
Borrowings under revolving credit agreement $ 175.0 $ 300.0 $ 250.0 Current portion of long-term debt 99.6
- -
Long-term debt - 198.7 198.9
Total debt (1) $ 274.6 $ 498.7 $ 448.9
As presented here, total debt excludes the Blowfish Malibu mandatory purchase
obligation, which was valued at
respectively. The mandatory purchase obligation of
Total debt obligations of$274.6 million atOctober 30, 2021 decreased$224.1 million , from$498.7 million atOctober 31, 2020 , and decreased$174.3 million , from$448.9 million atJanuary 30, 2021 . The decreases from bothOctober 31, 2020 andJanuary 30, 2021 reflect continued progress toward reducing our debt levels. InAugust 2021 , we redeemed$100.0 million aggregate principal amount of our Senior Notes using borrowings under the revolving credit agreement. Due to this redemption, borrowings under our revolving credit facility increased by$75.0 million during the third quarter of 2021, ending the quarter with an outstanding balance of$175.0 million . We continued to utilize our strong cash generation to reduce the incremental borrowings that were used to preserve financial flexibility at the onset of the pandemic, reducing the borrowings under our revolving credit agreement from$440.0 million inMarch 2020 to$175.0 million atOctober 30, 2021 . Net interest expense for the third quarter of 2021 decreased$5.8 million to$5.1 million , compared to$10.9 million for the third quarter of 2020. The decrease is primarily attributable to a$3.2 million decrease in the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 5 and Note 14 to the condensed consolidated financial statements. In addition, the redemption of$100.0 million of our Senior Notes inAugust 2021 and lower average borrowings under our revolving credit agreement contributed to the decrease in interest expense. As further discussed below, we notified the holders of the Senior Notes that we will be redeeming the remaining$100.0 million aggregate principal amount of Senior Notes inJanuary 2022 . The extinguishment of Senior Notes will result in a reduction of annual interest expense of approximately$12 million .
Credit Agreement
As further discussed in Note 10 to the condensed consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. OnOctober 5, 2021 , we entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, extends the maturity date of the credit facility fromJanuary 18, 2024 , toOctober 5, 2026 , and decreases the amount available under the revolving credit facility by$100.0 million to an aggregate amount of up to$500.0 million , subject to borrowing base restrictions, and may be further increased by up to$250.0 million . Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The Credit Agreement decreased the spread applied to the LIBOR or prime rate by a total of 75 basis points. AtOctober 30, 2021 , we had$175.0 million in borrowings and$12.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was$312.5 million atOctober 30, 2021 . We were in compliance with all covenants and restrictions under the Credit Agreement as ofOctober 30, 2021 .
Senior Notes
On
OnAugust 16, 2021 , we redeemed$100.0 million of the Senior Notes at 100.0%, shifting this higher interest debt to borrowings under the revolving credit agreement. Additionally, during the third quarter of 2021, we determined that we would redeem the remaining$100.0 million aggregate principal amount of Senior Notes in the fourth quarter of 2021. OnNovember 18, 2021 , we notified the holders of our Senior Notes that we would be redeeming the remaining$100.0 million inJanuary 2022 . The Senior Notes contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As ofOctober 30, 2021 , we were in compliance with all covenants and restrictions relating to
the
Senior Notes.
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Supplemental Guarantor Financial Information
The Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by all of its existing and future subsidiaries that are guarantors under the Company's Credit Agreement. The guarantors are 100% owned byCaleres, Inc. ("Parent"). OnOctober 31, 2018 ,Vionic was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, andSidney Rich Associates, Inc. ,BG Retail, LLC ,Allen Edmonds, LLC ,Vionic Group, LLC andVionic International, LLC are each co-borrowers and guarantors under the Credit Agreement. The following tables present summarized financial information for the Parent and guarantors on a combined basis after elimination of intercompany transactions between entities and amounts related to investments in any subsidiary that is a non-guarantor: ($ millions) October 30, 2021 January 30, 2021 Current assets $ 781.9 $ 686.3 Non-current assets 959.1 1,029.5 Current liabilities 992.2 818.4 Non-current liabilities 482.2 740.0 Thirty-Nine Weeks Ended ($ millions) October 30, 2021 Net sales (1) $ 1,927.0 Gross profit 871.1 Operating earnings 123.4 Net earnings 109.2 Net earnings attributable to Caleres, Inc. 109.2
(1) Intercompany activity with the non-guarantor entities for the thirty-nine
weeks ended
Working Capital and Cash Flow
Thirty-Nine Weeks Ended
($ millions) October 30, 2021 October 31, 2020 ChangeNet cash provided by operating activities $ 189.7 $ 101.8$ 87.9 Net cash used for investing activities (14.6) (15.5) 0.9 Net cash used for financing activities (188.6) (7.1) (181.5) Effect of exchange rate changes on cash and cash equivalents (0.0) (0.1) 0.1 (Decrease) increase in cash and cash equivalents $ (13.5)
$ 79.1$ (92.6)
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was
An increase in net earnings, after consideration of non-cash items, in the nine
? months ended
primarily driven by the strong consumer demand and positive financial results
of our Famous Footwear segment; and
? A larger increase in accounts payable in the nine months ended
2021, compared to the nine months ended
An increase in inventory during the nine months ended
? primarily reflecting the increase in our in-transit inventory due to supply
chain disruptions, compared to a decrease during the nine months ended October
31, 2020; and
A smaller increase in accrued expenses and other liabilities during the nine
? months ended
2020.
Supply chain financing: Certain of our suppliers are given the opportunity to
sell receivables from us related to products that we've purchased to
participating financial institutions at a rate that leverages our credit rating,
which may be more beneficial to the suppliers than the rate
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they can obtain based upon their own credit rating. We negotiate payment and
other terms with our suppliers, regardless of whether the supplier participates
in the program, and our responsibility is limited to making payment based on the
terms originally negotiated with the supplier. These liabilities continue to be
presented as accounts payable in our condensed consolidated balance sheets, with
changes reflected within cash flows from operating activities when settled.As
of
Cash used for investing activities was$0.9 million lower for the nine months endedOctober 30, 2021 as compared to the nine months endedOctober 31, 2020 , reflecting slightly lower capital expenditures in the nine months endedOctober 30, 2021 . In 2021, we expect our purchases of property and equipment and capitalized software to be between$20 million and$30 million , as compared to$22.1 million in 2020. Cash used for financing activities was$181.5 million higher for the nine months endedOctober 30, 2021 as compared to the nine months endedOctober 31, 2020 , primarily due to the redemption of$100.0 million of senior notes and$75.0 million of net repayments on our revolving credit agreement in the nine months endedOctober 30, 2021 , compared to net borrowings of$25.0 million in the comparable period in 2020. In addition, we did not repurchase any shares under our share repurchase programs during the nine months endedOctober 30, 2021 , compared to$23.3 million in the nine months endedOctober 31, 2020 . A summary of key financial data and ratios at the dates indicated is as follows: October 30, 2021 October 31, 2020 January 30, 2021
Operating working capital ($ millions) (1) $ 120.6 $
244.1 $ 191.8
Current ratio (2) 0.81:1 0.91:1 0.86:1
Debt-to-capital ratio (3) 47.3 % 65.6 % 68.8 %
Operating working capital has been computed as total current assets, (1) excluding cash, less total current liabilities, excluding borrowings under
revolving credit agreement, current portion of long-term debt and lease
obligations.
(2) The current ratio has been computed by dividing total current assets by total
current liabilities.
The debt-to-capital ratio has been computed by dividing total debt by total (3) capitalization. Total debt is defined as long-term debt (including the
current portion) and borrowings under revolving credit agreement. Total
capitalization is defined as total debt and total equity.
Operating working capital atOctober 30, 2021 was$120.6 million , which was$123.5 million lower than atOctober 31, 2020 and$71.2 million lower than atJanuary 30, 2021 . Our current ratio was 0.81 to 1 as ofOctober 30, 2021 , compared to 0.91 to 1 atOctober 31, 2020 and 0.86:1 atJanuary 30, 2021 . The decreases in operating working capital and the current ratio from bothOctober 31, 2020 andJanuary 30, 2021 primarily reflects higher trade accounts payable and accrued expenses, and an increase in the Blowfish Malibu mandatory purchase obligation attributable to strong growth in the brand, partially offset by higher inventory. Our debt-to-capital ratio was 47.3% as ofOctober 30, 2021 , compared to 65.6% as ofOctober 31, 2020 and 68.8% atJanuary 30, 2021 . The decrease in our debt-to-capital ratio fromOctober 31, 2020 andJanuary 30, 2021 primarily reflects lower borrowings on our revolving credit facility and a lower outstanding amount of senior notes atOctober 30, 2021 . We believe the cash provided by our operations, as well as$312.5 million in borrowing availability under the Credit Agreement, provide ample liquidity to meet the Company's working capital needs for the foreseeable future. In addition, the amendment to the revolving credit facility agreement increased the amount by which the Credit Agreement may be further increased from$150.0 million to$250.0 million . We declared and paid dividends of$0.07 per share in the third quarter of both 2021 and 2020. 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, the current portion of our long-term debt and related interest, 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. 40 Table of Contents As further discussed in Note 10 to the condensed consolidated financial statements, during the third quarter of 2021, we redeemed$100.0 million of Senior Notes. We also made the decision during the third quarter of 2021 to redeem the remaining$100.0 million of Senior Notes during the fourth quarter of 2021, prior to the maturity date ofAugust 15, 2023 , and have presented those notes as a current liability on the condensed consolidated balance sheet as ofOctober 30, 2021 . As discussed in Note 5 to the condensed consolidated financial statements, onNovember 4, 2021 , we paid the mandatory purchase obligation totaling$54.6 million , which was associated with the acquisition of Blowfish Malibu inJuly 2018 . Except for these items and 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 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 endedJanuary 30, 2021 .
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 endedJanuary 30, 2021 .
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.
INFLATION
We have experienced inflationary pressures on our product costs for most of 2021. We believe that the rates of inflation we have experienced have not had a significant effect on our net sales or operating earnings for the three and nine months endedOctober 30, 2021 . While we have historically been able to offset our product cost increases by increasing prices, negotiating costs, or changing suppliers, we may not be able to offset price increases in the future, which may have an adverse effect on our results of operations and financial condition.
However, we are actively working to mitigate these cost pressures and recover a portion of the increased costs through price increases.
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) economic conditions, supply chain disruptions and 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; (ii) the coronavirus pandemic and its adverse impact on our business operations, store traffic and financial condition; (iii) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions and other factors; (iv) rapidly changing consumer preferences and purchasing patterns and fashion trends; (v) intense competition within the footwear industry; (vi) customer concentration and increased consolidation in the retail industry; (vii) foreign currency fluctuations; (viii) impairment charges resulting from a long-term decline in our stock price; (ix) cybersecurity threats or other major disruption to the company's information technology systems; (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 maintain relationships with current suppliers; (xiv) the ability to secure/exit leases on favorable terms; (xv) transitional challenges with acquisitions and divestitures; (xvi) changes to tax laws, policies and treaties; (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 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 endedJanuary 30, 2021 , 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. 41 Table of Contents
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