Quarterly Report (10-q)

Datum : 13/06/2018 @ 19h51
Quelle : Edgar (US Regulatory)
Name : Caleres, Inc. (CAL)
Kurs : 28.3  -0.34 (-1.19%) @ 22h50
Caleres, Inc. share price Chart

Quarterly Report (10-q)



 
UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
 

FORM 10-Q 
 
(Mark One)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the quarterly period ended  May 5, 2018
 
 
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from  _____________  to  _____________
 
Commission file number: 1-2191 
 
CALERES, INC.
( Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   þ  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes   þ    No ¨  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes   ¨     No þ  
 
As of June 1, 2018 , 43,187,239 common shares were outstanding.

1



INDEX
 




2



PART I
FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CALERES, INC.
 
 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
(Unaudited)
 
 

($ thousands)
May 5, 2018

 
April 29, 2017

 
February 3, 2018

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
96,481


$
71,816


$
64,047

Receivables, net
125,559


107,021


152,613

Inventories, net
579,902


565,051


569,379

Prepaid expenses and other current assets
62,385


38,318


60,750

Total current assets
864,327

 
782,206

 
846,789

 
 
 
 
 
 
Other assets
88,941


67,289


90,659

Goodwill
127,081

 
127,081

 
127,081

Intangible assets, net
212,819

 
215,127

 
212,087

Property and equipment
542,927

 
533,421

 
542,812

Allowance for depreciation
(334,029
)
 
(315,567
)
 
(330,013
)
Property and equipment, net
208,898


217,854


212,799

Total assets
$
1,502,066

 
$
1,409,557

 
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$

 
$
85,000

 
$

Trade accounts payable
268,917


225,032


272,962

Other accrued expenses
168,746


146,315


157,197

Total current liabilities
437,663

 
456,347

 
430,159

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,587


197,118


197,472

Deferred rent
53,027


50,881


53,071

Other liabilities
99,651


83,478


89,751

Total other liabilities
350,265

 
331,477

 
340,294

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
432

 
430

 
430

Additional paid-in capital
136,909

 
121,826

 
136,460

Accumulated other comprehensive loss
(16,065
)
 
(29,778
)
 
(15,170
)
Retained earnings
591,429

 
527,909

 
595,769

Total Caleres, Inc. shareholders’ equity
712,705


620,387


717,489

Noncontrolling interests
1,433


1,346


1,473

Total equity
714,138

 
621,733

 
718,962

Total liabilities and equity
$
1,502,066

 
$
1,409,557

 
$
1,489,415

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
May 5, 2018

April 29, 2017

Net sales
$
632,142

$
631,509

Cost of goods sold
357,221

360,601

Gross profit
274,921

270,908

Selling and administrative expenses
250,197

246,511

Restructuring and other special charges, net
1,778

1,108

Operating earnings
22,946

23,289

Interest expense, net
(3,683
)
(4,809
)
Other income, net
3,091

2,436

Earnings before income taxes
22,354

20,916

Income tax provision
(5,174
)
(6,032
)
Net earnings
17,180

14,884

Net loss attributable to noncontrolling interests
(32
)
(18
)
Net earnings attributable to Caleres, Inc.
$
17,212

$
14,902

 




Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 




Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 




Dividends per common share
$
0.07

$
0.07

See notes to condensed consolidated financial statements.

4




CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Net earnings
$
17,180

$
14,884

Other comprehensive (loss) income, net of tax:
 

 

Foreign currency translation adjustment
(808
)
(540
)
Pension and other postretirement benefits adjustments
434

418

Derivative financial instruments
(521
)
778

Other comprehensive (loss) income, net of tax
(895
)
656

Comprehensive income
16,285

15,540

Comprehensive loss attributable to noncontrolling interests
(40
)
(23
)
Comprehensive income attributable to Caleres, Inc.
$
16,325

$
15,563

See notes to condensed consolidated financial statements.


5



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Operating Activities
 
 

Net earnings
$
17,180

$
14,884

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 

Depreciation
11,064

11,156

Amortization of capitalized software
2,684

3,560

Amortization of intangible assets
1,037

1,033

Amortization of debt issuance costs and debt discount
432

432

Share-based compensation expense
3,575

2,711

Loss on disposal of property and equipment
284

130

Impairment charges for property and equipment
468

949

Deferred rent
(44
)
(243
)
Provision for doubtful accounts
342

91

Changes in operating assets and liabilities:
 

 

Receivables
26,652

46,002

Inventories
(11,264
)
20,515

Prepaid expenses and other current and noncurrent assets
(3,407
)
11,014

Trade accounts payable
(3,774
)
(41,142
)
Accrued expenses and other liabilities
6,443

(5,836
)
Other, net
(325
)
128

Net cash provided by operating activities
51,347

65,384

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(7,929
)
(10,978
)
Capitalized software
(1,434
)
(1,390
)
Net cash used for investing activities
(9,363
)
(12,368
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement

195,000

Repayments under revolving credit agreement

(220,000
)
Dividends paid
(3,023
)
(3,025
)
Acquisition of treasury stock
(3,288
)
(5,993
)
Issuance of common stock under share-based plans, net
(3,122
)
(2,422
)
Net cash used for financing activities
(9,433
)
(36,440
)
Effect of exchange rate changes on cash and cash equivalents
(117
)
(92
)
Increase in cash and cash equivalents
32,434

16,484

Cash and cash equivalents at beginning of period
64,047

55,332

Cash and cash equivalents at end of period
$
96,481

$
71,816

See notes to condensed consolidated financial statements.

6



CALERES, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1
Basis of Presentation
 
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Caleres, Inc. ("the Company"). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.
 
The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. 

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Caleres, Inc.
 
For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended February 3, 2018 .

Note 2
Impact of New Accounting Pronouncements

Impact of Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several ASUs to clarify the implementation guidance in ASU 2014-09 Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted the ASUs in the first quarter of 2018 using the modified retrospective method, which resulted in a cumulative-effect adjustment of $4.8 million to reduce retained earnings, with a corresponding $6.4 million increase to other accrued expenses and a $1.6 million decrease to deferred tax liabilities. Adoption of the standard is not anticipated to significantly impact the statements of earnings on an ongoing basis. Refer to Note 3 to the condensed consolidated financial statements for additional information.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory,  which requires recognition of the income tax effects of intercompany sales and intra-entity transfers of assets, other than inventory, when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The ASU was adopted during the first quarter of 2018 using a modified retrospective approach, which resulted in a cumulative-effect adjustment to retained earnings of $10.5 million , with a corresponding $5.4 million  reduction to an income tax asset and a  $5.1 million  increase to deferred tax liabilities.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends Accounting Standards Codification ("ASC") 715, Compensation — Retirement Benefits , to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net periodic benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified $2.4 million of non-service cost components of net periodic benefit income for the thirteen weeks ended April 29, 2017 to other income, net in the

7



condensed consolidated statements of earnings. For the thirteen weeks ended May 5, 2018, $3.1 million of non-service cost components of net periodic benefit income is presented as other income. Refer to Note 11 to the condensed consolidated financial statements for additional information.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The standard provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The ASU also narrows the definition of a business by requiring a set of assets to include an input and at least one substantive process that together significantly contribute to the ability to create outputs for it to be considered a business. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted the ASU on a prospective basis during the first quarter of 2018, which had no impact on the Company's condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. The ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply modification accounting if the value, vesting conditions or classification of the award changes. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the ASU on a prospective basis in the first quarter of 2018, which had no impact on the Company's condensed consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities , which amends the hedge accounting model in ASC 815 to better portray the economic results of an entity's risk management activities in its financial statements and simplifies the application of hedge accounting in certain situations. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted the ASU in the first quarter of 2018, which did not have a material impact on the Company's condensed consolidated financial statements.

Impact of Prospective Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) , which requires lessees to recognize most leases on the balance sheet. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company's implementation team is developing and executing the plan to adopt the ASU. The Company's accounting systems have been upgraded to comply with the requirements of the new standard and the Company is in the process of evaluating the impact of the standard on its leases and processes. The Company anticipates electing the package of practical expedients permitted within the ASU; however, it does not expect to elect the hindsight practical expedient. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its condensed consolidated balance sheets upon adoption in the first quarter of 2019 will be material. The Company is still assessing the impact to the condensed consolidated statements of earnings. As the impact of the ASU is non-cash in nature, the impact to the Company's condensed consolidated statements of cash flows is not expected to be material. Adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations. The Company is monitoring the proposed ASU,  Targeted Improvements, Leases (ASC 842)  that, if finalized as proposed, would provide an optional transition method that would allow the Company to only apply ASC 842 in the year of adoption and apply the legacy guidance in ASC 840, Leases , including its disclosure requirements, in the comparative periods.

Note 3
Revenues

Impact of Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
On February 4, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.    Adoption of the standard resulted in a cumulative-effect adjustment to retained earnings of $4.8 million as of February 4, 2018, related to loyalty points issued under the Company's loyalty program ("Rewards") within the Famous Footwear segment. Topic 606 requires a deferral of revenue associated with loyalty points using a relative stand-alone selling price method rather than the incremental cost approach the Company used previously. The standard also requires the reclassification of the returns reserve from receivables to other accrued expenses and the reclassification of the return asset from inventories to prepaid expenses and other current assets

8



in the condensed consolidated balance sheets. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The impact of the adoption of Topic 606 on the condensed balance sheet as of May 5, 2018 was as follows:
 
 
May 5, 2018
($ thousands)
 
As reported
 
Balances without adoption of Topic 606
 
Effect of change
Higher/(Lower)
 
 
 
 
 
 
 
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
 
Receivables, net
 
$
125,559

 
$
120,995

 
$
4,564

Inventories, net
 
579,902

 
584,852

 
(4,950
)
Prepaid expenses and other current assets
 
62,385

 
55,756

 
6,629

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 

Other accrued expenses
 
168,746

 
157,627

 
11,119

 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Retained earnings
 
591,429

 
596,305

 
(4,876
)

Adoption of the standard also required various changes that impacted the statement of earnings. These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the statement of earnings for the thirteen weeks ended May 5, 2018 was as follows:
 
 
For the Thirteen Weeks Ended May 5, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
632,142

 
$
633,263

 
$
(1,121
)
Cost of goods sold
 
357,221

 
357,213

 
8

Gross profit
 
274,921


276,050

 
(1,129
)
Selling and administrative expenses
 
250,197

 
251,129

 
(932
)
Restructuring and other special charges, net
 
1,778

 
1,778

 

Operating earnings
 
$
22,946


$
23,143

 
$
(197
)

The adoption of Topic 606 had an immaterial impact on net earnings and earnings per share.

Accounting Policy
Revenue is recognized when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company's right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. The Company applies the guidance using the portfolio approach because this methodology would not differ materially

9



from applying the guidance to the individual contracts within the portfolio. The Company elected the practical expedient to exclude sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.

Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the thirteen weeks ended May 5, 2018:
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
Retail stores
 
$
338,256

 
$
42,784

 
$
381,040

Landed wholesale
 

 
167,810

 
167,810

First-cost wholesale
 

 
13,405

 
13,405

E-commerce
 
25,014

 
40,950

 
65,964

Licensing and royalty
 

 
3,712

 
3,712

Other (1)
 
141

 
70

 
211

Net sales
 
$
363,411


$
268,731


$
632,142

(1) Includes breakage revenue from unredeemed gift cards

Retail stores
The majority of the Company's revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of returns and exclude sales tax. Merchandise returns are recognized as a reduction of sales at the time the merchandise is returned. In addition, the Company carries a returns reserve and a corresponding return asset for expected returns of merchandise.

Retail sales to members of our Rewards program include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases at Famous Footwear. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The Company has elected to adopt the practical expedient that allows entities to disregard the effect of the time value of money between payment for and receipt of goods when the sale does not include a financing element. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. Upon adoption of Topic 606 as of February 4, 2018, the Rewards program liability, included in other accrued expenses on the condensed consolidated balance sheets, increased $6.4 million , from $8.1 million to $14.5 million .

Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many landed customers arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.

First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.

E-commerce
The Company also generates revenue through online and drop-ship sales, cumulatively referred to as "e-commerce". The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.

Licensing and royalty
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company's symbolic intellectual property, and revenue is therefore recognized over the license term. For royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee's sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.

10




Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.

Information about significant contract balances from contracts with customers is as follows:
($ thousands)
May 5, 2018

 
February 3, 2018

Customer allowances and discounts
$
19,416

 
$
20,259

Rewards program liability
14,920

 
8,130

Returns reserve
12,606

 
8,332

Gift card liability
4,661

 
5,509


During the three months ended May 5, 2018, the Rewards program liability increased $6.4 million due to the adoption of Topic 606 and $5.9 million due to purchases and decreased $5.5 million due to expirations and redemptions. The change in the returns reserve balance is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018.

Note 4
Earnings Per Share
 
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the thirteen weeks ended May 5, 2018 and April 29, 2017 :
 
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
May 5, 2018

April 29, 2017

NUMERATOR
 

 

Net earnings
$
17,180

$
14,884

Net loss attributable to noncontrolling interests
32

18

Net earnings allocated to participating securities
(479
)
(408
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
16,733

14,494

 
 
 
DENOMINATOR
 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,910

41,832

Dilutive effect of share-based awards
124

169

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,034

42,001

 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 
Options to purchase 16,667 shares of common stock for the thirteen weeks ended April 29, 2017 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. There were no options to purchase shares excluded from the denominator for the thirteen weeks ended May 5, 2018.

During the thirteen weeks ended May 5, 2018 and April 29, 2017 , the Company repurchased 100,000 shares and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. As of May 5, 2018 , the Company has repurchased a total of  1.4 million  shares under this program.

11




Note   5
Restructuring and Other Initiatives
 
Acquisition of Allen Edmonds
On December 13, 2016 , the Company entered into a Stock Purchase Agreement with Apollo Investors, LLC and Apollo Buyer Holding Company, Inc., pursuant to which the Company acquired all outstanding capital stock of Allen Edmonds ("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was $259.9 million , net of cash received of $0.7 million . The operating results of Allen Edmonds are included in the Company’s condensed consolidated financial statements within the Brand Portfolio segment.

Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. During the thirteen weeks ended April 29, 2017 , the Company recognized $3.0 million in cost of goods sold ( $1.9 million on an after-tax basis, or $0.04 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017.

Integration and Reorganization Costs
During the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company incurred integration and reorganization costs, primarily for severance and professional fees, related to the men's business totaling $1.8 million ( $1.3 million on an after-tax basis, or $0.03 per diluted share) and $1.1 million ( $0.7 million on an after-tax basis, or $0.01 per diluted share), respectively. Of the $1.8 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended May 5, 2018 , $1.6 million was reflected within the Brand Portfolio segment and $0.2 million was reflected within the Other category. Of the $1.1 million in costs for the thirteen weeks ended April 29, 2017 , $0.8 million was reflected within the Brand Portfolio segment and $0.3 million was reflected within the Other category. As of May 5, 2018 and April 29, 2017, restructuring reserves of $1.1 million and $0.8 million , respectively, were included in other accrued expenses on the condensed consolidated balance sheets. The Company expects all integration and reorganization costs to be settled by the end of fiscal 2018.
 
Note 6
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the thirteen weeks ended May 5, 2018 and April 29, 2017 :  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended May 5, 2018
External sales
$
363,411

$
268,731

$

$
632,142

Intersegment sales

14,766


14,766

Operating earnings (loss)
21,857

12,486

(11,397
)
22,946

Segment assets
555,448

745,460

201,158

1,502,066

 
 
 
 
 
Thirteen Weeks Ended April 29, 2017
External sales
$
366,494

$
265,015

$

$
631,509

Intersegment sales

14,700


14,700

Operating earnings (loss)
20,279

13,314

(10,304
)
23,289

Segment assets
540,417

743,256

125,884

1,409,557

 
The Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments.  


12



Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Operating earnings
$
22,946

$
23,289

Interest expense, net
(3,683
)
(4,809
)
Other income, net
3,091

2,436

Earnings before income taxes
$
22,354

$
20,916


Note   7
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Raw materials
$
15,554

$
15,114

$
17,531

Work-in-process
708

863

689

Finished goods
563,640

549,074

551,159

Inventories, net
$
579,902

$
565,051

$
569,379


Note   8
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
285,988

285,988

285,988

Other
1,769



Total intangible assets
290,557

288,788

288,788

Accumulated amortization
(77,738
)
(73,661
)
(76,701
)
Total intangible assets, net
212,819

215,127

212,087

Goodwill
 

 

 

Brand Portfolio
127,081

127,081

127,081

Total goodwill
127,081

127,081

127,081

Goodwill and intangible assets, net
$
339,900

$
342,208

$
339,168


During the thirteen weeks ended May 5, 2018 , the Company acquired software licenses with an original cost of $ 1.8 million , which are included in intangible assets, net of accumulated amortization, on the condensed consolidated balance sheets.

The Company's intangible assets as of May 5, 2018 , April 29, 2017 and February 3, 2018 were as follows:
($ thousands)
 
 
 
May 5, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
77,219

 
$
88,069

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
495

 
4,905

Software licenses
 
5 years
 
1,769

 
24

 
1,745

 
 
 
 
$
290,557

 
$
77,738

 
$
212,819


13



 
 
 
 
April 29, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
73,526

 
$
91,762

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
135

 
5,265

 
 
 
 
$
288,788

 
$
73,661

 
$
215,127

 
 
 
 
February 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
76,296

 
$
88,992

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
405

 
4,995

 
 
 
 
$
288,788

 
$
76,701

 
$
212,087


Amortization expense related to intangible assets was $1.0 million for the thirteen weeks ended May 5, 2018 and April 29, 2017 .
 
Note   9
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended May 5, 2018 and April 29, 2017 :

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at February 3, 2018
$
717,489

$
1,473

$
718,962

Net earnings (loss)
17,212

(32
)
17,180

Other comprehensive loss
(895
)
(8
)
(903
)
Dividends paid
(3,023
)

(3,023
)
Acquisition of treasury stock
(3,288
)

(3,288
)
Issuance of common stock under share-based plans, net
(3,122
)

(3,122
)
Cumulative-effect adjustment from adoption of ASU 2016-16
(10,468
)

(10,468
)
Cumulative-effect adjustment from adoption of ASU 2014-09 (Topic 606)
(4,775
)

(4,775
)
Share-based compensation expense
3,575


3,575

Equity at May 5, 2018
$
712,705

$
1,433

$
714,138

 

14



($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings (loss)
14,902

(18
)
14,884

Other comprehensive income (loss)
656

(5
)
651

Dividends paid
(3,025
)

(3,025
)
Acquisition of treasury stock
(5,993
)

(5,993
)
Issuance of common stock under share-based plans, net
(2,422
)

(2,422
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441


441

Share-based compensation expense
2,711


2,711

Equity at April 29, 2017
$
620,387

$
1,346

$
621,733


Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the thirteen weeks ended May 5, 2018 and April 29, 2017 :
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions  (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance at February 3, 2018
$
1,235

$
(17,172
)
$
767

$
(15,170
)
Other comprehensive (loss) income before reclassifications
(808
)

(408
)
(1,216
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss

585

(145
)
440

Tax (benefit) provision

(151
)
32

(119
)
Net reclassifications

434

(113
)
321

Other comprehensive (loss) income
(808
)
434

(521
)
(895
)
Balance at May 5, 2018
$
427

$
(16,738
)
$
246

$
(16,065
)
 
 
 
 
 
Balance at January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive (loss) income before reclassifications
(540
)

753

213

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

679

47

726

Tax benefit

(261
)
(22
)
(283
)
Net reclassifications

418

25

443

Other comprehensive (loss) income
(540
)
418

778

656

Balance at April 29, 2017
$
(348
)
$
(29,666
)
$
236

$
(29,778
)
(1)
Amounts reclassified are included in other income, net. See Note 11 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense, net. See Notes 12 and 13 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 10
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.6 million and $2.7 million during the thirteen weeks ended May 5, 2018 and April 29, 2017 , respectively. During the thirteen weeks ended May 5, 2018 and April 29, 2017 , the Company issued 256,005 and 254,358 shares of common stock, respectively, for restricted stock grants, stock performance awards issued

15



to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement.

Restricted Stock 
The following table summarizes restricted stock activity for the thirteen weeks ended May 5, 2018 and April 29, 2017 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 5, 2018
 
 
April 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
February 3, 2018
1,174,801

 
$
27.92

 
January 28, 2017
1,128,049

 
$
25.85

Granted
294,691

 
31.77

 
Granted
351,820

 
26.90

Forfeited
(16,550
)
 
27.47

 
Forfeited
(12,500
)
 
26.63

Vested
(208,610
)
 
28.15

 
Vested
(250,035
)
 
17.00

May 5, 2018
1,244,332

 
$
28.80

 
April 29, 2017
1,217,334

 
$
27.96


Of the 294,691 restricted shares granted during the thirteen weeks ended May 5, 2018 , 285,191 shares have a graded-vesting term of three years and 9,500 shares have a cliff-vesting term of four years. Of the 351,820 restricted shares granted during the thirteen weeks ended April 29, 2017 , 12,000 shares have a graded-vesting term of four years and 339,820 shares have a cliff-vesting term of four years . Share-based compensation expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period and expense for graded-vesting grants is recognized ratably over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended May 5, 2018 and April 29, 2017 , the Company granted performance share awards for a targeted 155,000 and 169,500 shares, respectively, with a weighted-average grant date fair value of $31.84 and $26.90 , respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three -year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the  three -year service period. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.

Stock Options
The following table summarizes stock option activity for the thirteen weeks ended May 5, 2018 and April 29, 2017 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 5, 2018
 
 
April 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
February 3, 2018
81,042

 
$
6.28

 
January 28, 2017
150,540

 
$
9.36

Granted

 

 
Granted

 

Exercised
(16,500
)
 
4.02

 
Exercised
(6,000
)
 
5.57

Forfeited

 

 
Forfeited

 

Expired
(2,500
)
 
5.71

 
Expired
(47,248
)
 
15.94

May 5, 2018
62,042

 
$
6.90

 
April 29, 2017
97,292

 
$
6.39



16



Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 781 and 882 RSUs to non-employee directors for dividend equivalents during the thirteen weeks ended May 5, 2018 and April 29, 2017 , respectively, with weighted-average grant date fair values of $33.10 and $26.29 , respectively.

Note   11
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit (income) cost for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

May 5, 2018

April 29, 2017

Service cost
$
2,382

$
2,467

$

$

Interest cost
3,541

3,747

15

18

Expected return on assets
(7,232
)
(6,880
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
1,013

1,152

(30
)
(38
)
Prior service income
(398
)
(435
)


Total net periodic benefit (income) cost
$
(694
)
$
51

$
(15
)
$
(20
)

As further discussed in Note 2 to the condensed consolidated financial statements, as a result of the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the thirteen weeks ended May 5, 2018, the non-service cost components of net periodic benefit (income) cost are included in other income, net in the condensed consolidated statements of earnings. Service cost is included in selling and administrative expenses.

Note 12
Risk Management and Derivatives
 
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions. 
 
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major international financial institutions and have varying maturities through May 2019 . Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company's condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss and reclassified to earnings in the period that the hedged transaction is recognized in earnings.
 
As of May 5, 2018 , April 29, 2017 and February 3, 2018 , the Company had forward contracts maturing at various dates through May 2019 , May 2018 and February 2019 , respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 

17



(U.S. $ equivalent in thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Financial Instruments
 
 
 
Euro
$
17,180

$
16,446

$
21,223

U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
14,828

20,813

16,874

Chinese yuan
12,520

4,476

12,058

New Taiwanese dollars
514

545

596

United Arab Emirates dirham

528


Japanese yen

416


Other currencies
422

66

415

Total financial instruments
$
45,464

$
43,290

$
51,166

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of May 5, 2018 , April 29, 2017 and February 3, 2018 are as follows:

 
Asset Derivatives
 
Liability Derivatives
($ thousands)
Balance Sheet Location
Fair Value

 
Balance Sheet Location
Fair Value

Foreign Exchange Forward Contracts
 

 
 
 

May 5, 2018
Prepaid expenses and other current assets
$
591

 
Other accrued expenses
$
392

April 29, 2017
Prepaid expenses and other current assets
610

 
Other accrued expenses
187

February 3, 2018
Prepaid expenses and other current assets
1,540

 
Other accrued expenses
542

 
For the thirteen weeks ended May 5, 2018 and April 29, 2017 , the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
May 5, 2018
April 29, 2017
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
 Loss Recognized in OCL on Derivatives

 (Loss) Gain Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(25
)
$

$
(32
)
$
18

Cost of goods sold
(402
)
(92
)
793

3

Selling and administrative expenses
(72
)
237

310

(67
)
Interest expense, net


4

(1
)
 
 
 
 
 
All gains and losses currently included within accumulated other comprehensive loss associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 13 to the condensed consolidated financial statements. 
 

18



Note 13
Fair Value Measurements
 
Fair Value Hierarchy  
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows: 

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 

Measurement of Fair Value  
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value. 
 
Money Market Funds  
The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan Assets and Liabilities 
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan for Non-Employee Directors  
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s

19



condensed consolidated statements of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 
 
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  During the fourth quarter of 2017, the Company converted  210,302  of RSUs payable in cash with a value of  $6.3 million  to RSUs payable in common stock. Additional information related to RSUs for non-employee directors is disclosed in Note 10 to the condensed consolidated financial statements.
 
Derivative Financial Instruments  
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 12 to the condensed consolidated financial statements. 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 5, 2018 , April 29, 2017 and February 3, 2018 . The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirteen weeks ended May 5, 2018 or April 29, 2017 .   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

May 5, 2018:
 
 
 
 
 
Cash equivalents – money market funds
$
76,335

 
$
76,335

$

$

Non-qualified deferred compensation plan assets
6,898

 
6,898



Non-qualified deferred compensation plan liabilities
(6,898
)
 
(6,898
)


Deferred compensation plan liabilities for non-employee directors
(2,563
)
 
(2,563
)


Restricted stock units for non-employee directors
(5,011
)
 
(5,011
)


Derivative financial instruments, net
199

 

199


April 29, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
43,531

 
$
43,531

$

$

Non-qualified deferred compensation plan assets
5,402

 
5,402



Non-qualified deferred compensation plan liabilities
(5,402
)
 
(5,402
)


Deferred compensation plan liabilities for non-employee directors
(2,189
)
 
(2,189
)


Restricted stock units for non-employee directors
(9,276
)
 
(9,276
)


Derivative financial instruments, net
423

 

423


February 3, 2018:
 
 
 
 
 
Cash equivalents – money market funds
$
53,106

 
$
53,106

$

$

Non-qualified deferred compensation plan assets
6,445

 
6,445



Non-qualified deferred compensation plan liabilities
(6,445
)
 
(6,445
)


Deferred compensation plan liabilities for non-employee directors
(2,289
)
 
(2,289
)


Restricted stock units for non-employee directors
(4,343
)
 
(4,343
)


Derivative financial instruments, net
998

 

998


 
Impairment Charges  
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to historical or projected future operating results, a significant change in the manner of the use of the

20



asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC Topic 820, Fair Value Measurement . Long-lived assets held and used with a carrying amount of $105.4 million and $95.4 million at May 5, 2018 and April 29, 2017 , respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Impairment Charges
 
 
Famous Footwear
$
150

$
150

Brand Portfolio
318

799

Total impairment charges
$
468

$
949


Fair Value of the Company’s Other Financial Instruments  
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.

The carrying amounts and fair values of the Company's other financial instruments subject to fair value disclosures are as follows:
 
May 5, 2018
 
April 29, 2017
 
February 3, 2018
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$

 
$

 
$
85,000

 
$
85,000

 
$

 
$

Long-term debt
197,587

 
209,500

 
197,118

 
209,500

 
197,472

 
210,000

Total debt
$
197,587


$
209,500


$
282,118


$
294,500


$
197,472


$
210,000

 
The fair value of borrowings under the revolving credit agreement approximates its carrying value due to its short-term nature (Level 1). The fair value of the Company’s long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).

Note 14
Income Taxes
 
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from  35%  to  21% , the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The provisional income tax benefit recorded in fiscal 2017 of $0.3 million was comprised of a $24.6 million deferred tax benefit for the remeasurement of deferred tax assets and liabilities to the 21% rate at which they are expected to reverse, partially offset by a one-time tax expense on deemed repatriation of $22.9 million and $1.4 million deferred tax expense in connection with Internal Revenue Code section 162(m) and other provisions in the Act. These provisional amounts continue to represent the Company's best estimate based on current information and guidance as of May 5, 2018. As permitted by SEC Staff Accounting Bulletin 118 (“SAB 118”), the Company will continue to analyze all provisional amounts associated with the Act as a result of pending issuance of Notices and Regulations related to the Act. Any subsequent adjustment to these amounts will be recorded to the Company's income tax provision in 2018 when the analysis is complete, for a period not to exceed one year beyond the enactment date.

The Act also includes the Global Intangibles Low-taxed Income ("GILTI") provision, a new minimum tax on global intangible low-taxed income, the Base Erosion Anti-Avoidance ("BEAT") provision, a new tax for certain payments to foreign related parties, and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income from the sale, lease or license of goods and services abroad. The Company is permitted to make an accounting policy election to account for GILTI as either a period charge in the future period the tax arises or as part of deferred taxes related to the investment or subsidiary. As a result of the complexity of the GILTI provisions, the Company is still evaluating the provisions on future periods and has not yet elected

21



an accounting policy related to its treatment of these future tax liabilities. For the thirteen weeks ended May 5, 2018 , the Company has recorded a provisional amount for GILTI as a period charge in the income tax provision. The Company is also still evaluating the other provisions of the Act.

The Company’s consolidated effective tax rates were 23.1% and  28.8%  for the thirteen weeks ended May 5, 2018 and April 29, 2017 , respectively. During the thirteen weeks ended May 5, 2018 , the Company recognized discrete tax benefits of $0.5 million , primarily related to share-based compensation. During the thirteen weeks ended April 29, 2017 , the Company recognized discrete tax benefits of $1.1 million related to share-based compensation. If these discrete tax benefits had not been recognized during the thirteen weeks ended May 5, 2018 and April 29, 2017 , the Company's effective tax rates would have been 25.4% and 34.0% , respectively. Excluding the discrete tax items, the Company's tax rate is lower for the thirteen weeks ended May 5, 2018 , reflecting a reduction in the U.S. corporate tax rate following enactment of the Act.

Note 15
Commitments and Contingencies
 
Environmental Remediation  
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
 
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.

As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified work plan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the work plan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy work plan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company has submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one.

The cumulative expenditures for both on-site and off-site remediation through May 5, 2018 were $30.2 million . The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at May 5, 2018 is $9.5 million , of which $8.8 million is recorded within other liabilities and $0.7 million is recorded within other accrued expenses. Of the total $ 9.5 million reserve, $4.9 million is for off-site remediation and $4.6 million is for on-site remediation. The liability for the on-site remediation was discounted at 4.8% . On an undiscounted basis, the on-site remediation liability would be $14.1 million as of May 5, 2018 . The Company expects to spend approximately $ 0.2 million in the next fiscal year, $0.1 million in each of the following four years and $13.5 million in the aggregate thereafter related to the on-site remediation.
 
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 

22



The Company continues to evaluate its remediation plans in conjunction with its environmental consultants and records its best estimate of remediation liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
 
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. 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. Legal costs associated with litigation are generally expensed as incurred.

Note 16
Financial Information for the Company and its Subsidiaries

The Company issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under our revolving credit facility ("Credit Agreement"). The following tables present the condensed consolidating financial information for each of Caleres, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. Guarantors are 100% owned by the Parent. On December 13, 2016 , Allen Edmonds was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC and Allen Edmonds are each co-borrowers and guarantors under the Credit Agreement.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups.

23



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
MAY 5, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
41,795

$
10,011

$
44,675

$

$
96,481

Receivables, net
113,763

2,721

9,075


125,559

Inventories, net
110,242

441,144

28,516


579,902

Prepaid expenses and other current assets
28,677

31,669

6,632

(4,593
)
62,385

Intercompany receivable – current
919

339

14,444

(15,702
)

Total current assets
295,396

485,884

103,342

(20,295
)
864,327

Other assets
75,242

12,937

762


88,941

Goodwill and intangible assets, net
112,298

40,937

186,665


339,900

Property and equipment, net
36,178

160,903

11,817


208,898

Investment in subsidiaries
1,341,505


(24,043
)
(1,317,462
)

Intercompany receivable – noncurrent
783,315

536,213

708,992

(2,028,520
)

Total assets
$
2,643,934

$
1,236,874

$
987,535

$
(3,366,277
)
$
1,502,066

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
99,013

$
150,288

$
19,616

$

$
268,917

Other accrued expenses
67,588

85,180

20,571

(4,593
)
168,746

Intercompany payable – current
5,467


10,235

(15,702
)

Total current liabilities
172,068

235,468

50,422

(20,295
)
437,663

Other liabilities
 

 

 

 

 

Long-term debt
197,587




197,587

Other liabilities
102,303

40,200

10,175


152,678

Intercompany payable – noncurrent
1,459,271

91,100

478,149

(2,028,520
)

Total other liabilities
1,759,161

131,300

488,324

(2,028,520
)
350,265

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
712,705

870,106

447,356

(1,317,462
)
712,705

Noncontrolling interests


1,433


1,433

Total equity
712,705

870,106

448,789

(1,317,462
)
714,138

Total liabilities and equity
$
2,643,934

$
1,236,874

$
987,535

$
(3,366,277
)
$
1,502,066



24



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED MAY 5, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
199,260

$
445,695

$
37,392

$
(50,205
)
$
632,142

Cost of goods sold
134,594

247,799

17,867

(43,039
)
357,221

Gross profit
64,666

197,896

19,525

(7,166
)
274,921

Selling and administrative expenses
66,342

177,886

13,135

(7,166
)
250,197

Restructuring and other special charges, net
525

1,253



1,778

Operating (loss) earnings
(2,201
)
18,757

6,390


22,946

Interest (expense) income
(3,819
)
(12
)
148


(3,683
)
Other income (expense)
3,120


(29
)