10-Q: Caleres Reports Significant Q1 Earnings Decline Amidst Soft Consumer Spending and Tariff Headwinds

Caleres, Inc. announced a substantial drop in first-quarter net earnings and diluted EPS, driven by lower sales across both Famous Footwear and Brand Portfolio segments, coupled with margin pressures from macroeconomic factors and tariff-related costs.

Summary

• Net sales for the first quarter of 2025 decreased by $45.0 million, or 6.8%, to $614.2 million, compared to $659.2 million in the first quarter of 2024.
• Famous Footwear segment net sales declined by $21.9 million (6.3%), with comparable sales decreasing 4.6% due to slower consumer traffic in retail stores and e-commerce.
• Brand Portfolio segment net sales decreased by $21.8 million (6.9%) in the first quarter of 2025.
• Gross profit fell by $30.4 million, or 9.8%, to $278.7 million, with gross margin contracting to 45.4% from 46.9% in the prior year.
• Operating earnings plummeted by $31.2 million, or 72.9%, to $11.6 million, resulting in an operating margin of 1.9% compared to 6.5% previously.
• Diluted earnings per common share attributable to Caleres, Inc. shareholders decreased significantly to $0.21 from $0.88 in the prior year, a 76.1% reduction.
• Net cash used for operating activities was $5.7 million in Q1 2025, a substantial decrease from $36.1 million provided by operating activities in Q1 2024.
• The company incurred $0.6 million in restructuring and other special charges related to the pending acquisition of Stuart Weitzman.
• Inventories, net, increased to $573.6 million as of May 3, 2025, from $530.6 million as of May 4, 2024.
• Borrowings under the revolving credit agreement increased to $258.5 million as of May 3, 2025, from $191.0 million as of May 4, 2024.
• The company repurchased 300,000 shares of common stock for approximately $5.0 million during the quarter.

Sentiment

Score: 3

Explanation: The financial results for the quarter show significant declines across key metrics (sales, gross profit, operating earnings, EPS), indicating a challenging period. While strategic initiatives like the Stuart Weitzman acquisition and FLAIR store conversions are positive, the immediate financial performance and macroeconomic headwinds suggest a negative short-term outlook. The increase in debt-to-capital ratio and negative operating cash flow further contribute to a cautious sentiment.

Positives

• Direct-to-consumer sales increased their penetration, representing approximately 70% of consolidated net sales in Q1 2025, up from 69% in Q1 2024.
• The company maintains a strong liquidity position with $33.1 million in cash and cash equivalents and $233.4 million in excess borrowing availability on its revolving credit agreement as of May 3, 2025.
• The acquisition of Stuart Weitzman is expected to advance the Brand Portfolio segment's global and direct-to-consumer reach.
• The Famous Footwear segment's kids category continued to outperform the total chain.
• FLAIR concept stores continue to outperform traditionally designed retail stores, with 10 new conversions in Q1 2025 bringing the total to 44.
• The Brand Portfolio segment expanded its international presence, with 54 stores in East Asia (up from 38) and 116 international franchise locations (up from 103).
• The company's unfilled order position for wholesale sales increased by $6.6 million, or 2.6%, to $263.6 million at May 3, 2025.
• Management expects to decrease selling and administrative expenses by approximately $15 million on an annualized basis through structural expense reductions.

Negatives

• Consolidated net sales decreased by 6.8% year-over-year, reflecting declines in both Famous Footwear and Brand Portfolio segments.
• Famous Footwear comparable sales declined by 4.6%, driven by a decrease in consumer traffic in both retail stores and e-commerce.
• Gross margin decreased by 152 basis points to 45.4%, primarily due to lower merchandise margins, incremental costs from tariff escalation, higher inventory markdowns, and increased freight costs.
• Operating earnings fell by 72.9% year-over-year, indicating significant pressure on profitability.
• Diluted earnings per share decreased by 76.1% to $0.21.
• Net cash used for operating activities was negative $5.7 million, a significant reversal from positive cash flow in the prior year, mainly due to a decrease in trade accounts payable, lower net earnings, and an increase in inventory.
• Selling and administrative expenses, as a percentage of net sales, increased to 43.4% from 40.4%, reflecting deleveraging on lower net sales.
• The company experienced higher costs associated with growth in its international business, higher facilities costs (including depreciation from store renovations and rent), and higher information technology expenses.

Risks

• Changes in United States and international trade policies, including tariffs and trade restrictions, may adversely impact business, results of operations, and financial condition.
• Macroeconomic factors continued to impact consumer discretionary spending and financial results, leading to lighter consumer traffic in retail stores.
• Uncertainty surrounding future trade policy developments and potential retaliatory tariffs pose significant risks, potentially increasing costs and reducing margins.
• The imposition of tariffs has resulted in increased market volatility and exacerbated existing inflationary cost pressures and recessionary fears among consumers, which could further negatively impact discretionary spending and sales volume.
• Higher pricing for products due to tariffs may lead customers to shift to private-label footwear or other lower-cost alternatives.
• Transitional challenges with acquisitions and divestitures, specifically the Stuart Weitzman acquisition, could impact operations.
• The company is involved in environmental remediation activities at several sites, including the Redfield site, with a reserve of $9.1 million for anticipated future activities, and ultimate costs may vary and exceed recorded amounts.
• Intense competition within the footwear industry and rapidly changing consumer preferences and purchasing patterns and fashion trends pose ongoing challenges.
• Reliance on third-party manufacturing facilities in China and other countries for a significant amount of inventory creates supply chain risks.
• Cybersecurity threats or other major disruptions to the company's information technology systems, including those related to ERP upgrades, could adversely affect operations.
• The ability to accurately forecast sales and manage inventory levels is critical, and inaccuracies could lead to adverse financial impacts.
• The company's ability to recruit and retain senior management and other key associates, secure/exit leases on favorable terms, and maintain relationships with current suppliers are ongoing operational risks.
• Changes to tax laws, policies, and treaties, such as the OECD's Pillar Two rules, could impact future tax provisions.

Future Outlook

Caleres expects to fund the acquisition of Stuart Weitzman through its revolving credit facility, anticipating higher interest expense in the second half of 2025 due to increased borrowings. The company plans to refinance its revolving credit facility in advance of its October 2026 maturity. Management is focused on optimizing its sourcing strategy and expects to decrease selling and administrative expenses by approximately $15 million on an annualized basis through structural expense reductions. The company anticipates adding nine more FLAIR stores during the second quarter of 2025. While the ultimate costs for environmental remediation may vary, the company believes its operating cash flows are sufficient to meet material cash requirements for at least the next 12 months, and presently expects dividends to continue to be paid.

Management Comments

• "Based on the current macroeconomic environment and our recent operating results, we believe the following trends may continue to impact our business and operating results: Macroeconomic Environment."
• "We continued to experience lighter consumer traffic in our retail stores during the first quarter, resulting in lower net sales."
• "Following the executive order on tariffs, we acted quickly to pause production in China and made other sourcing changes, such as negotiating price concessions with our factories, to mitigate the impact of the tariffs."
• "While we believe that the structural changes we have implemented in the last few years, as well as our diversified model and operational discipline, enable the Company to drive value in a variety of market conditions, changes in macro-level consumer spending trends and the impact of trade policy decisions may continue to adversely impact our financial results in the future."
• "In the near-term, we are focused on the areas within our control, including optimizing our sourcing strategy."
• "In addition, we expect to decrease selling and administrative expenses by approximately $15 million on an annualized basis through structural expense reductions."
• "We believe our focus on cost control and our commitment to execute our clearly defined strategic initiatives have positioned us for sustainable, long-term growth."
• "Our liquidity position remains strong, with $33.1 million in cash and cash equivalents and excess availability on our revolving credit agreement of $233.4 million as of May 3, 2025."
• "During 2025, we expect to refinance our revolving credit facility in advance of its maturity in October 2026."
• "We remain focused on international growth, direct-to-consumer penetration, elevating the consumer experience at Famous Footwear and maximizing the vertical opportunity between the Famous Footwear and Brand Portfolio segments."
• "Our kids category, which is a key differentiator for Famous Footwear, continued to outperform the total chain."
• "These [FLAIR] stores continue to outperform our traditionally designed retail stores."
• "In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position."
• "We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months."
• "However, we presently expect that dividends will continue to be paid."

Industry Context

The report highlights a challenging macroeconomic environment impacting consumer discretionary spending, leading to lighter retail traffic and lower sales across the footwear industry. The company's efforts to optimize sourcing strategies and implement structural expense reductions are in line with broader industry responses to inflationary pressures and trade policy uncertainties. The acquisition of Stuart Weitzman reflects a strategic move towards luxury and direct-to-consumer channels, a trend seen across the retail sector as companies seek higher-margin opportunities and stronger brand connections. The continued investment in store concepts like FLAIR indicates a focus on enhancing in-store experience to combat declining traffic, a common strategy among brick-and-mortar retailers.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company is involved in legal proceedings and litigation arising in the ordinary course of business, which management does not expect to have a material adverse effect on results of operations or financial position.
• The company is involved in environmental remediation activities at several sites, including the Redfield site in Colorado, with a reserve of $9.1 million for anticipated future activities. The ultimate costs may vary and could exceed recorded amounts.

Related Party Transactions

• The company has a joint venture, CLT Brand Solutions (CLT), with Brand Investment Holding Limited (a member of the Gemkell Group), in which each party holds a 50% ownership. During the thirteen weeks ended May 3, 2025, capital contributions of $3.5 million were made to CLT, including $1.8 million received from Brand Investment Holding.

Stakeholder Impact

• **Shareholders**: Experienced a significant decline in diluted earnings per share ($0.21 vs. $0.88), reflecting reduced profitability. Share repurchases continued, but at a lower volume ($5.0 million vs. $15.1 million). Dividends are expected to continue.
• **Employees**: Share-based compensation expense decreased, and the company is implementing structural expense reductions which may impact compensation or headcount.
• **Customers**: Experienced lighter traffic in retail stores and e-commerce. Potential for higher product pricing due to tariffs could shift customers to lower-cost alternatives.
• **Suppliers**: The company paused production in China and negotiated price concessions due to tariffs, impacting suppliers. The voluntary supplier finance program continues, with $11.8 million in accounts payable subject to the program.
• **Creditors**: Borrowings under the revolving credit agreement increased, and the debt-to-capital ratio rose to 29.7%, indicating higher leverage. The company expects to refinance its credit facility.

Next Steps

• Closing of the Stuart Weitzman acquisition, expected in the summer of 2025.
• Refinancing of the revolving credit facility in advance of its October 2026 maturity during 2025.
• Adding nine more FLAIR stores during the second quarter of 2025.
• Continued implementation of the expanded remedy work plan for off-site environmental remediation at the Redfield site.
• Ongoing evaluation of the impact of the OECD's Pillar Two rules on future tax provisions.
• Continued focus on optimizing sourcing strategy and implementing structural expense reductions to decrease selling and administrative expenses by approximately $15 million annually.

Key Dates

Recommendation

Keywords

Footwear, Retail, Wholesale, Famous Footwear, Brand Portfolio, Stuart Weitzman, SEC Filing, 10-Q, Earnings Report, Financial Results, Consumer Discretionary, Tariffs, Supply Chain, E-commerce, Liquidity, Share Repurchase, Operating Earnings, Gross Margin, FLAIR Stores