CALERES INC (CAL)

ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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OVERVIEW

Business Overview

We are a global footwear company that operates retail shoe stores and e-commerce websites, and designs, develops, sources, manufactures and distributes footwear for people of all ages.  Our mission is to inspire people to feel great...feet

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first.  We offer retailers and consumers a diversified portfolio of leading footwear brands.  Outfitted in our brands, customers can step confidently into every aspect of their lives.  As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points.  We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels.  A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands.  Our business strategy is focused on accelerating growth in our Brand Portfolio segment, gaining market share and deepening connections with the millennial family in our Famous Footwear segment, leveraging our “One Caleres” capabilities to increase profitability, and delivering value for our shareholders.

Famous Footwear

Famous Footwear, which is one of America’s leading family–branded footwear retailers, was founded on a simple idea: that everyone deserves to feel the joy that comes from a new pair of shoes. Our Famous Footwear segment includes 846 Famous Footwear stores, famousfootwear.com and famousfootwear.ca in Canada.  This national footprint of mostly off-mall store locations is convenient for Famous Footwear’s target consumer, the millennial family.  We seek to meet the needs of that millennial family and others by providing an assortment of trend-right, brand-name fashion, casual and athletic footwear at a great price.

During 2024, we continued to execute on our three-pronged strategy, which concentrates on merchandising, marketing and consumer experience.  We remained focused on increasing the opportunity between Famous Footwear and the brands within our Brand Portfolio segment, such as Dr. Scholl’s Shoes, LifeStride, Naturalizer and Blowfish Malibu, among others.  Vertical integration provides Famous Footwear with greater access to fashion products from brands that resonate with its consumer, as well as greater ability to be flexible with trends and offer better profit potential.  We also have focused on offering the consumer a balanced assortment of fashion and athletic styles from well-known brands.  We continued to tightly manage our inventory levels in 2024, reducing SKU counts and amplifying key product trends and items to drive sales volume.  As we work to evolve our product offerings, we are testing and adding new and emerging brands across various categories to meet the shifting preferences and behaviors of the consumer, which we believe may attract new Famous Footwear consumers while providing the current consumer with additional options.  We believe our kids category, which continues to grow, is a key competitive differentiator.  With the millennial mom as our target consumer, we believe her primary purchase motivation is her kids and will prioritize these purchases, even with macroeconomic pressures.  As a result, we are making the kids business a critical component of how our associates connect with our consumers, including ensuring every child finds the perfect fit.  Our investments in new and remodeled stores over the last few years have prioritized an elevated experience within our kids department.

We are leaning into our best brands from an inventory, marketing and store presence perspective.  In addition, we continue to invest in enhancing our in-store shopping experience to deliver a more engaging and inspiring experience across the omnichannel.  Our new FLAIR (Famous Localized and Immersive Retail) store concept has been successful at driving sales growth and we plan to continue to transform stores to this enhanced consumer shopping experience in 2025.  The FLAIR store concept highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner.

Brand Portfolio

Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns.  The segment is comprised of the Sam Edelman, Vionic, Naturalizer, Allen Edmonds, Dr. Scholl’s Shoes, LifeStride, Franco Sarto, Blowfish Malibu, Rykä, Vince and Veronica Beard.  Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace.  We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products.  Our Brand Portfolio segment operates 60 retail stores in the United States for our Allen Edmonds and Sam Edelman brands.  This segment also includes our e-commerce businesses that sell our branded footwear.  We also operate a joint venture, which expands our international presence by distributing our Sam Edelman and Naturalizer brands through e-commerce sites, 54 retail stores in East Asia and 120 branded stores owned and operated by third parties through franchise agreements.

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Known Trends Impacting Our Business

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Macroeconomic Environment

Macroeconomic factors, including, among others, inflation, elevated interest rates, increased real estate costs, higher consumer debt levels and continuing fears of a recession, continued to impact consumer discretionary spending and our financial results during 2024.  In addition, the geopolitical landscape remains uncertain, with potential changes to international trade relations, tariffs and import regulations.  We continued to experience lighter consumer traffic in our retail stores during 2024, resulting in lower net sales.  While we believe that the structural changes we’ve implemented in the last few years, as well as our diversified model and operational discipline, enable the Company to drive value in a variety of market conditions, changes in macro-level consumer spending trends may continue to adversely impact our financial results in the future.  We believe our focus on cost control and our commitment to execute our clearly defined strategic initiatives have positioned us for sustainable, long-term growth.

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Liquidity

Our liquidity position remains strong, with $29.6 million in cash and cash equivalents and excess availability on our revolving credit agreement of $272.3 million as of February 1, 2025. During 2024, borrowings on our revolving credit agreement increased by $37.5 million to $219.5 million, primarily driven by $65.0 million of common stock repurchases under our share repurchase programs.  During 2025, we will continue to evaluate our capital allocation priorities in light of business performance and market conditions.

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Recent Development

In February 2025, we signed a definitive agreement to acquire Stuart Weitzman from Tapestry, Inc. for $105 million, subject to customary adjustments.  Stuart Weitzman has been an iconic global luxury women’s footwear brand for over 35 years.  The acquisition of Stuart Weitzman advances our strategic agenda to grow our Brand Portfolio segment with more global and direct-to-consumer reach.  The acquisition, which is expected to close in the summer of 2025, will be funded through our revolving credit agreement.

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Financial Highlights

The following is a summary of the financial highlights for 2024 and 2023:

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The following items should be considered in evaluating the comparability of our 2024 and 2023 results:

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Financial Outlook

While 2024 was a disappointing year relative to our initial expectations, we made meaningful progress in advancing our strategic priorities and positioning our brands for sustainable growth. During 2025, we will focus on improving sales trends and delivering on our financial targets.  We will continue our strategic investment spending while staying disciplined on overall expense levels, and we will remain nimble with product strategies and sourcing to maximize our wins and minimize the impact of tariffs.  We believe we are well-positioned to manage additional tariffs through a combination of factory negotiations, selective price increases and modest gross margin pressure.  Our acquisition of Stuart Weitzman is expected to close in the summer of 2025 and will be a pivotal milestone for us as we have expanded our exposure in contemporary footwear and premium price points.

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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:

Comparable sales

The comparable sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though many retailers may calculate the metric differently.  Management uses the comparable sales metric as a measure of an individual store’s success to determine whether its sales performance is consistent with expectations.  Our comparable sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open at least 13 months.  In addition, in order to be included in the comparable sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year.  Accordingly, closed stores (including temporary store closures) are excluded from the comparable sales metric for each day of the closure.  Relocated stores are treated as new stores and therefore excluded from the calculation.  E-commerce sales for those websites that function as an extension of a retail chain are included in the comparable sales calculation.  We believe the comparable sales metric is useful to shareholders and investors in assessing the performance of our existing retail store locations with comparable prior year sales, separate from the impact of store openings or closures.

Sales per square foot

The sales per square foot metric is commonly used in the retail industry to measure the efficiency of a store’s sales based upon the square footage in a store.  Management uses the sales per square foot metric in our Famous Footwear segment as a measure of an individual store’s success to determine whether it is performing consistent 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.

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Comparison of Financial Results

The following sections discuss the consolidated and segment results of our operations for the year ended February 1, 2025 compared to the year ended February 3, 2024.  For a discussion of the results for the year ended February 3, 2024 compared to the year ended January 28, 2023, refer to Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended February 3, 2024.

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CONSOLIDATED RESULTS

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Net Sales

Net sales decreased $94.6 million, or 3.4%, to $2,722.7 million in 2024, compared to $2,817.3 million last year, reflecting soft consumer demand and the impact of the 53rd week in 2023.  Net sales for our Famous Footwear segment decreased $52.9 million, or 3.3%, compared to 2023 net sales.  Net sales for our Brand Portfolio segment decreased $44.9 million, or 3.5%, compared to 2023.  The 53rd week in 2023 contributed approximately $25 million to our 2023 consolidated net sales, including $18.2 million in our Famous Footwear segment and $6.8 million in our Brand Portfolio segment.  On a consolidated basis, our direct-to-consumer sales represented approximately 72% of total net sales for both 2024 and 2023.

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Gross Profit

Gross profit decreased $41.0 million, or 3.2%, to $1,222.0 million in 2024, compared to $1,263.0 million in 2023, primarily driven by lower net sales.  As a percentage of net sales, our gross profit rate increased slightly to 44.9% in 2024, compared to 44.8% in 2023, primarily due to a higher gross margin rate at our Brand Portfolio segment.  The gross margin at Brand Portfolio benefitted from higher merchandise margins and a higher mix of retail sales, including e-commerce sales from our owned brands and sales from our branded retail stores, both of which have higher gross margins than our wholesale sales.  These increases were partially offset by a decrease in the gross margin rate at our Famous Footwear segment driven by higher levels of promotional activity and clearance sales.

We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.

Selling and Administrative Expenses

Selling and administrative expenses increased $2.6 million, or 0.2%, to $1,065.0 million in 2024, compared to $1,062.4 million last year.  The increase is primarily due to higher salary and benefit expenses, marketing expenses, information technology and consulting expense associated with the implementation of our cloud-based ERP platform, and facilities costs, partially offset by lower expenses for our cash and share-based incentive compensation and incremental expenses associated with the 53rd week in 2023.  As a percentage of net sales, selling and administrative expenses increased to 39.1% in 2024, from 37.7% last year, reflecting deleveraging of expenses on lower net sales.

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Restructuring and Other Special Charges, Net

During 2024, we incurred restructuring costs of $7.1 million ($5.3 million on an after-tax basis, or $0.15 per diluted share).  The costs were primarily for the exit of the Naturalizer retail store operations and other restructuring costs, mainly severance.  During 2023, we incurred restructuring and other special charges of $6.1 million ($4.5 million on an after-tax basis, or $0.13 per diluted share) associated with our expense reduction initiatives.  Refer to further discussion of these charges in the Financial Highlights section above and Note 4 to the consolidated financial statements.

Operating Earnings

Operating earnings decreased $44.6 million to $149.9 million in 2024, compared to $194.5 million last year, reflecting the factors described above.  As a percentage of net sales, operating earnings were 5.5% in 2024, compared 6.9% in 2023.

Interest Expense, Net

Interest expense, net decreased $5.4 million, or 27.8%, to $14.0 million in 2024, compared to $19.4 million last year, reflecting lower average borrowings and a lower weighted-average interest rate on our revolving credit facility.  Refer to Note 11 to the consolidated financial statements for additional information related to our borrowings.

Other (Expense) Income, Net

Other expense was $0.7 million in 2024, compared to other income of $6.2 million in 2023.  During the fourth quarter of 2024, we incurred a pension settlement charge of $2.7 million associated with a lump sum buyout for certain participants in the domestic pension plan.  In addition, we incurred higher amortization of the actuarial loss related to our pension plans in 2024.  Refer to Note 5 to the consolidated financial statements for additional information related to our retirement plans.  The net pension income in 2024 was offset by non-operating expenses associated with logistics services provided to a third party, which the Company began providing in the second half of 2023.

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Income Tax Provision

Our consolidated effective tax rate was 21.5% in 2024, compared to 5.2% in 2023.  Our lower tax rate for 2023 primarily reflected the release of $26.7 million of valuation allowances recorded for certain deferred tax assets.  As a result of the significant loss before income taxes in 2020 driven by the impairment of goodwill and intangible assets during the pandemic, we entered into a three-year cumulative loss position for federal, state and certain international jurisdictions.  At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions.  Due to stronger earnings in 2022 and 2023, the Company was no longer in a cumulative three-year loss position.  Accordingly, the Company released valuation allowances on certain deferred tax assets totaling $26.7 million ($0.75 per diluted share) in 2023.

In 2021, the OECD released Pillar Two Global Anti-Base Erosion model rules, designed to ensure large corporations are taxed at a minimum rate of 15% in all countries of operation.  The OECD continues to release guidance and countries are implementing legislation to adopt the rules, which became effective on January 1, 2024. The United States has not yet enacted legislation implementing Pillar Two. We are continuing to evaluate the Pillar Two rules and their potential impact on future periods, but we do not expect the rules to have a material impact on our tax provision or effective tax rate.

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Refer to Note 6 to the consolidated financial statements for additional information regarding income taxes.

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Net Earnings Attributable to Caleres, Inc.

Consolidated net earnings attributable to Caleres, Inc. were $107.3 million in 2024, compared to $171.4 million last year, reflecting the factors described above.

Geographic Results

We have both domestic and international operations.  Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our domestic e-commerce websites.  International operations primarily consist of wholesale operations in East Asia, Canada and Europe, retail operations in Canada and East Asia and the operation of our international e-commerce websites.  In addition, we license certain of our trade names to third parties who distribute and/or operate retail locations internationally.  The operations in East Asia include first-cost transactions, where footwear is sold at international

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ports to customers who then import the footwear into the United States and other countries.  The breakdown of domestic and international net sales and earnings before income taxes is as follows:

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As a percentage of sales, the pre-tax profitability on international sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs within domestic earnings.

FAMOUS FOOTWEAR

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Net Sales

Net sales decreased $52.9 million, or 3.3%, to $1,556.5 million in 2024, compared to $1,609.4 million last year, reflecting soft consumer demand and the impact of the 53rd week in 2023, which contributed $18.2 million to our 2023 net sales.  Comparable sales decreased 1.3% in 2024 driven by a decline in consumer traffic in our retail stores.  Despite the challenging retail environment, we experienced growth in our e-commerce business and higher penetration of this channel in 2024.  Our e-commerce penetration in 2024 grew to 14% of net sales, from 13% last year. Our kids category, which is a key differentiator for Famous Footwear, continued to outperform our other categories, while our boots category was weaker.  We remain focused on maximizing the vertical integration opportunity between the Brand Portfolio and Famous Footwear segments, with Dr. Scholl’s Shoes, LifeStride, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands in 2024. During 2024, we closed 14 stores on a net basis as we continued to focus on optimizing our store base.  During 2024, we converted 12 stores to the new FLAIR (Famous Localized and Immersive Retail) concept, and these stores continue to outperform our traditionally designed retail stores.  In addition, we opened our first new store with the FLAIR concept in the fourth quarter of 2024.  We ended the year with a total of 34 FLAIR stores and anticipate investing in more store conversions in 2025.

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Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 75% of net sales to loyalty program members in 2024, compared to 77% in 2023.

Gross Profit

Gross profit decreased $32.9 million, or 4.6%, to $686.6 million in 2024, compared to $719.5 million last year, primarily driven by lower net sales.  As a percentage of net sales, our gross profit rate decreased to 44.1% in 2024, compared to 44.7% in 2023 as a result of higher levels of promotional activity and clearance sales.

Selling and Administrative Expenses

Selling and administrative expenses increased $4.6 million, or 0.8%, to $598.9 million during 2024, compared to $594.3 million last year.  The increase primarily reflects higher facilities costs, including depreciation expense associated with the investments in the FLAIR store concept, and higher salary and benefits expenses, partially offset by lower marketing expenses.  As a percentage of net sales, selling and administrative expenses increased to 38.5% in 2024 from 36.9% last year, reflecting the deleveraging of expenses on lower net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $0.6 million were incurred for severance costs during 2024.  Restructuring and other special charges of $1.4 million were recorded during 2023 for expenses associated with expense reduction initiatives, primarily severance.  Refer to Note 4 to the consolidated financial statements for additional information related to these charges.

Operating Earnings

Operating earnings decreased $36.7 million to $87.1 million for 2024, compared to $123.8 million last year, primarily reflecting lower net sales and gross profit, as described above.  As a percentage of net sales, operating earnings were 5.6% for 2024, compared to 7.7% last year.

BRAND PORTFOLIO

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Net Sales

Net sales decreased $44.9 million, or 3.5%, to $1,226.0 million in 2024, compared to $1,270.9 million last year, driven by lower wholesale sales.  The decrease in sales reflects softer demand associated with the challenging macroeconomic environment, as well as the impact of operational disruptions in the second quarter of 2024 related to the launch of our new cloud-based ERP system, primarily while our e-commerce and drop-ship platforms were either offline or ramping up after the launch.  In addition, the 53rd week in 2023 contributed $6.8 million to net sales last year.

We closed six stores and opened four stores in the United States and expanded our retail store presence in East Asia by opening 20 stores and closing two stores, resulting in a total of 60 stores in the United States and 54 stores in East Asia at the end of 2024.  There were also 120 international branded stores owned and operated by third parties through franchise agreements at the end of 2024, compared to 107 international branded stores at the end of 2023.

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The unfilled order position for our wholesale business increased $25.7 million to $260.2 million at the end of 2024, compared to $234.5 million at the end of last year.

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Gross Profit

Gross profit decreased $9.7 million, or 1.8%, to $536.3 million in 2024, compared to $546.0 million last year.  As a percentage of sales, our gross profit rate increased to 43.7% in 2024, compared to 43.0% last year, reflecting higher merchandise margins and a higher mix of retail sales, including e-commerce sales from our owned brands and sales from our branded retail stores, both of which have higher gross margins than our wholesale sales.

Selling and Administrative Expenses

Selling and administrative expenses increased $10.0 million, or 2.5%, to $407.9 during 2024, compared to $397.9 million last year.  The increase was driven by higher salary and benefits, higher marketing expenses and higher distribution expenses.  As a percentage of net sales, selling and administrative expenses increased to 33.2% in 2024 from 31.4% last year, reflecting deleveraging of expenses over a lower net sales base.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $6.3 million were incurred during 2024.  The costs were primarily associated with the exit of our Naturalizer retail store operations and severance.  Restructuring and other special charges of $2.6 million were recorded during 2023 for expenses associated with our expense reduction initiatives, primarily severance and other costs to integrate the Blowfish Malibu office, showroom and information systems into the St. Louis infrastructure.  Refer to Note 4 to the consolidated financial statements for additional information related to these charges.

Operating Earnings

Operating earnings decreased $23.4 million to $122.1 million in 2024, compared to $145.5 million last year, as a result of the factors described above.  As a percentage of net sales, operating earnings were 10.0% in 2024, compared to 11.4% last year.

ELIMINATIONS AND OTHER

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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 $59.7 million for 2024 is $3.3 million, or 5.1%, lower than in 2023, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses decreased $11.9 million, or 16.9%, to $58.2 million in 2024, compared to $70.1 million last year.  The decrease primarily reflects lower anticipated payments under our cash and share-based incentive compensation plans and other employee benefits.

Restructuring and other special charges of $0.2 million in 2024 were associated with severance.  Restructuring and other special charges of $2.1 million in 2023 were associated with expense reduction initiatives, primarily severance, at our corporate headquarters.  Refer to Note 4 to the consolidated financial statements for additional information related to these charges.

RESTRUCTURING AND OTHER INITIATIVES

Refer to the Financial Highlights section above and Note 4 to the consolidated financial statements for additional information related to these charges.

LIQUIDITY AND CAPITAL RESOURCES

Our borrowings under the revolving credit agreement increased $37.5 million to $219.5 million at the end of 2024, compared to $182.0 million at the end of last year.  We used our revolving credit facility to repurchase $65.5 million of shares of our common stock under our share repurchase program.  This increase was partially offset by cash generated from our operations in 2024.  Net interest expense in 2024 was $14.0 million, compared to $19.4 million in 2023.  The decrease in net interest expense in 2024 reflects lower average borrowings and a lower weighted-average interest rate on our revolving credit facility.

Credit Agreement

As further discussed in Note 11 to the consolidated financial statements, the Company maintains a revolving credit facility (the “Credit Agreement”) for working capital needs. The Credit Agreement, which provides borrowing availability of up to $500.0 million, subject to borrowing base restrictions, that may be further increased by up to $250.0 million, matures on October 5, 2026.  Interest on the borrowings was previously calculated using variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Fifth Amendment), plus a spread.  On April 27, 2023, the Company entered into a Sixth Amendment to Fourth Amended and Restated Credit agreement (as so amended, the “Credit Agreement”) to transition the borrowings on the revolving credit facility from bearing interest based on LIBOR to a term secured overnight financing rate (“SOFR”).

At February 1, 2025, we had $219.5 million of borrowings and $8.2 million in letters of credit outstanding under the Credit Agreement.  Total borrowing availability was $272.3 million at February 1, 2025.  We were in compliance with all covenants and restrictions under the Credit Agreement as of February 1, 2025.

Working Capital and Cash Flow

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Working capital at February 1, 2025 was $78.6 million, which was $32.6 million higher than at February 3, 2024.  The increase in working capital from 2023 primarily reflects higher inventory and trade accounts receivable and lower trade accounts payable, partially offset by higher borrowings under our revolving credit agreement and higher lease obligations.  Our current ratio was 1.10 to 1 at February 1, 2025, compared to 1.06 to 1 at February 3, 2024.  Our debt-to-capital ratio was 26.6% as of February 1, 2025, compared to 24.3% at February 3, 2024, primarily reflecting higher borrowings under our revolving credit agreement in 2024.

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Cash provided by operating activities was $95.6 million lower in 2024 than last year, reflecting the following factors:

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Cash used for investing activities was $2.1 million higher in 2024 than last year, reflecting higher capital expenditures.  In 2025, we expect our purchases of property and equipment and capitalized software to be between $50 million and $55 million.

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Cash used for financing activities was $118.5 million higher in 2024 than last year, primarily due to net borrowings on our revolving credit agreement of $37.5 million in 2024, compared to net repayments on our revolving credit agreement of $125.5 million in 2023.  This increase was partially offset by a $48.1 million increase in repurchases of common stock under our share repurchase programs during 2024.

We paid dividends of $0.28 per share in each of 2024, 2023 and 2022. The 2024 dividends marked the 102nd year of consecutive quarterly dividends.  On March 14, 2025, the Board of Directors declared a quarterly dividend of $0.07 per share, payable on April 11, 2025, to shareholders of record on March 27, 2025.  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.

As of February 1, 2025, we had various contractual or other obligations, including the following:

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We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Certain accounting issues require management estimates and judgments for the preparation of financial statements.  Our most significant policies requiring the use of estimates and judgments are described below.

Inventories

Inventories are one of our most significant assets, representing approximately 30% of total assets at the end of 2024.  We value our inventories at the lower of cost or market for approximately 86% of our consolidated inventories, which represents the divisions using the LIFO cost method. For the remaining portion, our inventories are valued at the lower of cost or net realizable value. For inventory valued at LIFO, we regularly review the inventory for excess, obsolete or impaired inventory and write it down to the lower of cost or market. We apply judgment in determining the market value of inventory, which requires an estimate of net realizable value, including current and expected selling prices, costs to sell and normal gross profit rates. The method used to determine market value varies by business division, based on the unique operating models. At our Famous Footwear segment and certain operations within our Brand Portfolio segment, market value is determined based on net realizable value less an estimate of expected costs to be incurred to sell the product. Accordingly, we record markdowns when it becomes evident that inventory items will be sold at prices below cost. As a result, gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment are lower than the initial markup during periods when permanent price reductions are taken to clear product.  For the majority of our Brand Portfolio segment, we determine market value based upon the net realizable value of inventory less a normal gross profit rate.  We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment.  Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories.  The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.

The determination of markdown reserves for the Brand Portfolio segment requires significant assumptions, estimates and

judgments by management, and is subject to inherent uncertainties and subjectivity.  In determining markdown reserves,

management considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory and quantities of various product styles contained in inventory, as well as demand, among other factors.  The ultimate amount realized from the sale of certain products could differ from management estimates.

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We perform physical inventory counts or cycle counts on merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results.  We record estimated shrinkage between physical inventory counts based on historical results.  Inventory shrinkage is included as a component of cost of goods sold.

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Store Impairment Charges

We regularly analyze the results of all stores and assess the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable.  After allowing for an appropriate start-up period, and consideration of any unusual nonrecurring events, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method.  The fair value of the lease right-of-use assets and property and equipment is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates.  The projected cash flows of the stores (including net sales projections), discount rates and current market lease rates for the remaining lease term of the related stores used to determine fair value require significant management judgment and are the assumptions to which the fair value calculations are most sensitive.

Income Tax Valuation Allowances

We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of assets and liabilities.  Valuation allowances are established if we believe that it is more-likely-than-not that some or all of our deferred tax assets will not be realized.  The evaluation of the realizability of deferred tax assets requires significant assumptions, estimates and judgment by management, including estimates of future taxable income by jurisdiction.  Such estimates are subject to inherent uncertainties and subjectivity.

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During 2020, we entered into a three-year cumulative loss position driven by the significant loss before income taxes.  At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions.  Due to stronger earnings in 2022 and 2023, the Company was no longer in a cumulative three-year loss position as of February 3, 2024.  Accordingly, we released valuation allowances on certain deferred tax assets totaling $17.4 million in 2022 and $26.7 million in 2023.  During 2024, we released valuation allowances totaling $3.7 million. As of February 1, 2025, we have valuation allowances totaling $3.4 million, reflecting the uncertainty regarding the utilization of net operating loss carryforwards.

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Impact of Prospective Accounting Pronouncements

Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.

ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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OVERVIEW

Business Overview

We are a global footwear company that operates retail shoe stores and e-commerce websites, and designs, develops, sources, manufactures and distributes footwear for people of all ages.  Our mission is to inspire people to feel great...feet first.  We offer retailers and consumers a diversified portfolio of leading footwear brands.  Outfitted in our brands, customers can step confidently into every aspect of their lives.  As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points.  We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels.  A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands.  Our business strategy is focused on accelerating growth in our Brand Portfolio segment, gaining market share and deepening connections with the millennial family in our Famous Footwear segment, leveraging our “One Caleres” capabilities to increase profitability, and delivering value for our shareholders.

Famous Footwear

Famous Footwear, which is one of America’s leading family–branded footwear retailers, was founded on a simple idea: that everyone deserves to feel the joy that comes from a new pair of shoes. Our Famous Footwear segment includes 860 Famous Footwear stores, famousfootwear.com and famousfootwear.ca in Canada.  This national footprint of mostly off-mall store locations is convenient for Famous Footwear’s target consumer, the millennial family.  We seek to meet the needs of that millennial family and others by providing an assortment of trend-right, brand-name fashion, casual and athletic footwear at a great price.

During 2023, we continued to execute on our three-pronged strategy, which concentrates on merchandising, marketing and consumer experience.  We remained focused on increasing the opportunity between Famous Footwear and the brands within our Brand Portfolio segment, such as Dr. Scholl’s Shoes, LifeStride, Naturalizer and Blowfish Malibu, among others.  Vertical integration provides Famous Footwear with greater access to fashion products from brands that resonate with its consumer, as well as greater ability to be flexible with trends and offer better profit potential.  We also have focused on offering the consumer a balanced assortment of fashion and athletic styles from well-known brands.  We continued to tightly manage our inventory levels in 2023, reducing SKU counts and amplifying key product trends and items to drive sales volume.  As we work to evolve our product offerings, we are testing and adding new and emerging brands across various categories to meet the shifting preferences and behaviors of the consumer, which we believe may attract new Famous Footwear consumers while providing the current consumer with additional options.  We believe our kids category, which continues to grow, is a key competitive differentiator.  We view this offering as a future growth opportunity and have plans to build on the strength of this category.  With the millennial mom as our target consumer, we believe her primary purchase motivation is her kids and will prioritize these purchases, even with macroeconomic pressures.  As a result, we are making the kids business a critical component of how our associates connect with our consumers, including ensuring every child finds the perfect fit.  Our investments in new and remodeled stores over the last few years have prioritized an elevated experience within our kids department.

We are leaning into our best brands from an inventory, marketing and store presence perspective.  In addition, we continue to invest in enhancing our in-store shopping experience to deliver a more engaging and inspiring experience across the omnichannel.  Our new FLAIR (Famous Localized and Immersive Retail) store concept has been successful at driving sales growth and we plan to continue to transform stores to this enhanced consumer shopping experience in 2024.  The FLAIR store concept highlights our leading assortment of trending brands and elevates those brands in an energetic and exciting manner.

Brand Portfolio

Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative

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marketing campaigns.  The segment is comprised of the Sam Edelman, Vionic, Naturalizer, Allen Edmonds, Dr. Scholl’s Shoes, LifeStride, Franco Sarto, Blowfish Malibu, Rykä, Vince, Bzees, Veronica Beard and Zodiac brands.  Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace.  We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products.  Our Brand Portfolio segment operates 62 retail stores in the United States for our Allen Edmonds, Sam Edelman and Naturalizer brands.  This segment also includes our e-commerce businesses that sell our branded footwear.  We also operate a joint venture, which expands our international presence by distributing our Sam Edelman and Naturalizer brands through e-commerce sites and 36 retail stores in East Asia.

Known Trends Impacting Our Business

Macroeconomic factors, including, among others, inflation, elevated interest rates, increased real estate costs, higher consumer debt levels, the end to the student loan repayment pause, and lingering fears of a recession, continued to impact consumer discretionary spending and our financial results during 2023.  We experienced lighter consumer traffic in our retail stores during 2023, resulting in lower net sales.  While we believe that the structural changes we’ve implemented in the last few years, as well as our diversified model and operational discipline, enable the Company to drive value in a variety of market conditions, changes in macro-level consumer spending trends may continue to adversely impact our financial results in the future.  To mitigate the impact of these macroeconomic factors, we began initiating expense reduction initiatives in the first quarter of 2023.  These actions, which included eliminating open corporate positions, reducing non-merchandise procurement costs and integrating our Blowfish Malibu office and information systems into the St. Louis infrastructure, are expected to result in additional savings in 2024.  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.

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During 2023, we focused on reducing debt to maintain liquidity and reduce interest expense.  Given the continued elevated interest rate environment, our capital allocation priority during 2024 will be to reduce debt levels further.  In addition, given our debt reduction progress and strong operating cash flows during 2023, we used excess capital to repurchase shares.  We will continue to evaluate our capital allocation priorities in light of business performance and market conditions.

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Financial Highlights

The following is a summary of the financial highlights for 2023 and 2022:

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The following items should be considered in evaluating the comparability of our 2023 and 2022 results:

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Financial Outlook

We believe the success of the structural changes we have made in recent years has enabled us to continue to deliver  earnings per share in excess of our $4.00 baseline.  In October 2023, we announced a three-year strategic and financial plan that we believe will drive a higher level of growth and profitability.  We believe that we are uniquely positioned to meet consumer needs and capture growth across trending footwear categories.  We are confident in our ability to execute on our growth strategy and deliver on our long-term financial targets to create sustained value for our shareholders.

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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:

Comparable sales

The comparable sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though many retailers may calculate the metric differently.  Management uses the comparable sales metric as a measure of an individual store’s success to determine whether its sales performance is consistent with expectations.  Our comparable sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open at least 13 months.  In addition, in order to be included in the comparable sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year.  Accordingly, closed stores (including temporary store closures) are excluded from the comparable sales metric for each day of the closure.  Relocated stores are treated as new stores and therefore excluded from the calculation.  E-commerce sales for those websites that function as an extension of a retail chain are included in the comparable sales calculation.  We believe the comparable sales metric is useful to shareholders and investors in assessing the performance of our existing retail store locations with comparable prior year sales, separate from the impact of store openings or closures.

Sales per square foot

The sales per square foot metric is commonly used in the retail industry to measure the efficiency of a store’s sales based upon the square footage in a store.  Management uses the sales per square foot metric in our Famous Footwear segment as a measure of an individual store’s success to determine whether it is performing consistent 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.

Comparison of Financial Results

The following sections discuss the consolidated and segment results of our operations for the year ended February 3, 2024 compared to the year ended January 28, 2023.  For a discussion of the results for the year ended January 28, 2023 compared to the year ended January 29, 2022, refer to Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended January 28, 2023.

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CONSOLIDATED RESULTS

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Net Sales

Net sales decreased $150.8 million, or 5.1%, to $2,817.3 million in 2023, compared to $2,968.1 million last year, reflecting the challenging macroeconomic and retail environment.  Net sales for our Famous Footwear segment decreased $95.7 million, or 5.6%, compared to 2022 net sales.  Net sales for our Brand Portfolio segment decreased $51.9 million, or 3.9%, compared to 2022.  The 53rd week in 2023 contributed approximately $25 million to our consolidated net sales, including $18.2 million in our Famous Footwear segment and $6.8 million in our Brand Portfolio segment.  On a consolidated basis, our direct-to-consumer sales represented approximately 72% of total net sales for both 2023 and 2022.

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Gross Profit

Gross profit decreased $21.9 million, or 1.7%, to $1,263.0 million in 2023, compared to $1,284.9 million in 2022, primarily driven by lower net sales.  As a percentage of net sales, our gross profit rate increased to 44.8% in 2023, compared to 43.3% in 2022, primarily due to a higher gross margin rate at our Brand Portfolio segment driven by lower inventory markdowns, lower inbound freight costs and higher merchandise margins.  These increases were partially offset by a decrease in the gross margin rate at our Famous Footwear segment.

We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.

Selling and Administrative Expenses

Selling and administrative expenses decreased $5.3 million, or 0.5%, to $1,062.4 million in 2023, compared to $1,067.7 million last year.  The decrease is primarily due to lower anticipated payments under our cash-based incentive compensation plans and lower warehouse costs, partially offset by higher facilities costs and incremental expenses associated with the 53rd week in 2023.  As a percentage of net sales, selling and administrative expenses increased to 37.7% in 2023, from 36.0% last year, reflecting deleveraging of expenses on lower net sales.

Restructuring and Other Special Charges, Net

During 2023, we incurred restructuring costs of $6.1 million ($4.5 million on an after-tax basis, or $0.13 per diluted share), associated with our expense reduction initiatives.  During 2022, we incurred restructuring and other special charges of $2.9 million ($2.7 million on an after-tax basis, or $0.07 per diluted share) associated with a CFO transition at our corporate headquarters.  Refer to further discussion of these charges in the Financial Highlights section above and Note 4 to the consolidated financial statements.

Operating Earnings

Operating earnings decreased $19.8 million to $194.5 million in 2023, compared to $214.3 million last year, reflecting the factors described above.  As a percentage of net sales, operating earnings were 6.9% in 2023, compared 7.2% in 2022.

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Interest Expense, Net

Interest expense, net increased $5.1 million, or 35.6%, to $19.4 million in 2023, compared to $14.3 million last year, primarily attributable to higher interest rates on our revolving credit agreement, partially offset by lower average borrowings.  Refer to Note 11 to the consolidated financial statements for additional information related to our borrowings.

Other Income, Net

Other income, net decreased $6.8 million, or 52.1%, to $6.2 million in 2023, compared to $13.0 million in 2022, which is attributable to certain components of net periodic benefit income associated with our pension plans, including interest cost and expected return on assets.  Refer to Note 5 to the consolidated financial statements for additional information related to our retirement plans.

Income Tax Provision

Our consolidated effective tax rate was 5.2% in 2023, compared to 15.7% in 2022.  Our lower tax rates for 2023 and 2022 primarily reflect the release of $26.7 million and $17.4 million, respectively, of valuation allowances recorded for certain deferred tax assets.  As a result of the significant loss before income taxes in 2020 driven by the impairment of goodwill and intangible assets during the pandemic, we entered into a three-year cumulative loss position for federal, state and certain international jurisdictions.  At that time, we increased our valuation allowances on deferred tax assets to $50.0 million, reflecting the uncertainty regarding the utilization of our deferred tax assets in those jurisdictions.  Due to stronger earnings in 2022 and 2023, the Company is no longer in a cumulative three-year loss position.  Accordingly, the Company released valuation allowances on certain deferred tax assets totaling $17.4 million ($0.47 per diluted share) in 2022 and $26.7 million ($0.75 per diluted share) in 2023.

In 2021, the OECD released Pillar Two Global Anti-Base Erosion model rules, designed to ensure large corporations are taxed at a minimum rate of 15% in all countries of operation.  The OECD continues to release guidance and countries are implementing legislation to adopt the rules for tax years beginning in 2024. The United States has not yet enacted legislation implementing Pillar Two. We are continuing to evaluate the Pillar Two rules and their potential impact on future periods, but we do not expect the rules to have a material impact on our effective tax rate.

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Refer to Note 6 to the consolidated financial statements for additional information regarding income taxes.

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Net Earnings Attributable to Caleres, Inc.

Consolidated net earnings attributable to Caleres, Inc. were $171.4 million in 2023, compared to $181.7 million last year, reflecting the factors described above.

Geographic Results

We have both domestic and international operations.  Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our e-commerce websites.  International operations primarily consist of wholesale operations in East Asia, Canada and Europe, retail operations in Canada and East Asia and the operation of our international e-commerce websites.  In addition, we license certain of our trade names to third parties who distribute and/or operate retail locations internationally.  The operations in East Asia include first-cost transactions, where footwear is sold at international ports to customers who then import the footwear into the United States and other countries.  The breakdown of domestic and international net sales and earnings before income taxes is as follows:

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As a percentage of sales, the pre-tax profitability on international sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs within domestic earnings.

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FAMOUS FOOTWEAR

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Net Sales

Net sales decreased $95.7 million, or 5.6%, to $1,609.4 million in 2023, compared to $1,705.1 million last year.  Comparable sales decreased 6.3% in 2023 driven by a decline in consumer traffic in our retail stores as the challenging macroeconomic environment continued to impact sales.  Despite the challenging retail environment, we experienced strong demand for key athletic brands and casual product, such as slippers.  We remain focused on maximizing the vertical integration opportunity between the Brand Portfolio and Famous Footwear segments, with Dr. Scholl’s Shoes, LifeStride, Naturalizer and Blowfish Malibu representing four of Famous Footwear’s top 20 best-selling footwear brands in 2023.  Our e-commerce penetration in 2023 was approximately 13% of net sales, a slight decline from 14% last year.  During 2023, we closed 13 stores on a net basis as we continued to focus on optimizing our store base.

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 77% of net sales to loyalty program members in both 2023 and 2022.

Gross Profit

Gross profit decreased $69.5 million, or 8.8%, to $719.5 million in 2023, compared to $789.0 million last year, primarily driven by lower net sales.  As a percentage of net sales, our gross profit rate decreased to 44.7% in 2023, compared to 46.3% in 2022.  During 2022, strong demand and a higher mix of current inventory resulted in fewer markdowns and minimal clearance selling.  During 2023, we experienced a more normalized mix of clearance product sold and margins on those sales were in line with historical levels.

Selling and Administrative Expenses

Selling and administrative expenses increased $1.1 million, or 0.2%, to $594.3 million during 2023, compared to $593.2 million last year.  The increase primarily reflects higher facilities costs, partially offset by lower salary and benefits expenses, lower advertising expenses and lower distribution costs.  As a percentage of net sales, selling and administrative expenses increased to 36.9% in 2023 from 34.8% last year, reflecting the deleveraging of expenses on lower net sales.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $1.4 million were recorded during 2023 for expenses associated with expense reduction initiatives, primarily severance.  Refer to Note 4 to the consolidated financial statements for additional information related to these charges.  There were no corresponding charges in 2022.

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Operating Earnings

Operating earnings decreased $72.0 million to $123.8 million for 2023, compared to $195.8 million last year, primarily reflecting lower net sales and gross profit, as described above.  As a percentage of net sales, operating earnings were 7.7% for 2023, compared to 11.5% last year.

BRAND PORTFOLIO

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