Quarterly Report (10-q)

Datum : 13/06/2019 @ 12h02
Quelle : Edgar (US Regulatory)
Name : Caleres Inc (CAL)
Kurs : 21.49  -0.08 (-0.37%) @ 02h00
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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 4, 2019
 
or
[  ]
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
(I.R.S. Employer Identification No.)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value of $0.01 per share
CAL
New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ¨
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 May 31, 2019 , 42,224,221 common shares were outstanding.

1



INDEX
 




2



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

($ thousands)
May 4, 2019

 
May 5, 2018

 
February 2, 2019

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
35,778


$
96,481


$
30,200

Receivables, net
148,487


125,559


191,722

Inventories, net
648,145


579,902


683,171

Prepaid expenses and other current assets
54,902


62,385


71,354

Total current assets
887,312

 
864,327

 
976,447

 
 
 
 
 
 
Other assets
85,711


88,941


81,440

Goodwill
244,407

 
127,081

 
242,531

Intangible assets, net
304,101

 
212,819

 
307,366

Lease right-of-use assets
735,282

 

 

Property and equipment
592,670

 
542,927

 
579,087

Allowance for depreciation
(356,413
)
 
(334,029
)
 
(348,303
)
Property and equipment, net
236,257


208,898


230,784

Total assets
$
2,493,070

 
$
1,502,066

 
$
1,838,568

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
318,000

 
$

 
$
335,000

Trade accounts payable
289,071


268,917


316,298

Lease obligations
136,005

 

 

Other accrued expenses
168,224


168,746


202,038

Total current liabilities
911,300

 
437,663

 
853,336

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Noncurrent lease obligations
662,750

 

 

Long-term debt
198,046


197,587


197,932

Deferred rent


53,027


54,850

Other liabilities
92,342


99,651


97,015

Total other liabilities
953,138

 
350,265

 
349,797

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
422

 
432

 
419

Additional paid-in capital
146,641

 
136,909

 
145,889

Accumulated other comprehensive loss
(31,873
)
 
(16,065
)
 
(31,601
)
Retained earnings
512,046

 
591,429

 
519,346

Total Caleres, Inc. shareholders’ equity
627,236


712,705


634,053

Noncontrolling interests
1,396


1,433


1,382

Total equity
628,632

 
714,138

 
635,435

Total liabilities and equity
$
2,493,070

 
$
1,502,066

 
$
1,838,568

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 4, 2019

May 5, 2018

Net sales
$
677,754

$
632,142

Cost of goods sold
397,918

357,221

Gross profit
279,836

274,921

Selling and administrative expenses
262,111

250,197

Restructuring and other special charges, net
856

1,778

Operating earnings
16,869

22,946

Interest expense, net
(7,340
)
(3,683
)
Other income, net
2,619

3,091

Earnings before income taxes
12,148

22,354

Income tax provision
(3,063
)
(5,174
)
Net earnings
9,085

17,180

Net earnings (loss) attributable to noncontrolling interests
2

(32
)
Net earnings attributable to Caleres, Inc.
$
9,083

$
17,212

 




Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.22

$
0.40

 




Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.22

$
0.40

See notes to condensed consolidated financial statements.

4




CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 4, 2019

May 5, 2018

Net earnings
$
9,085

$
17,180

Other comprehensive (loss) income, net of tax:
 

 

Foreign currency translation adjustment
(958
)
(808
)
Pension and other postretirement benefits adjustments
395

434

Derivative financial instruments
303

(521
)
Other comprehensive loss, net of tax
(260
)
(895
)
Comprehensive income
8,825

16,285

Comprehensive income (loss) attributable to noncontrolling interests
14

(40
)
Comprehensive income attributable to Caleres, Inc.
$
8,811

$
16,325

See notes to condensed consolidated financial statements.


5



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 4, 2019

May 5, 2018

Operating Activities
 
 

Net earnings
$
9,085

$
17,180

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

 

Depreciation
11,434

11,064

Amortization of capitalized software
1,733

2,684

Amortization of intangible assets
3,265

1,037

Amortization of debt issuance costs and debt discount
791

432

Share-based compensation expense
3,314

3,575

Loss on disposal of property and equipment
136

284

Impairment charges for property, equipment and lease right-of-use assets
1,194

468

Provision for doubtful accounts
117

342

Deferred rent

(44
)
Changes in operating assets and liabilities, net of acquired amounts:
 

 

Receivables
43,117

26,652

Inventories
38,492

(11,264
)
Prepaid expenses and other current and noncurrent assets
(6,935
)
(3,407
)
Trade accounts payable
(27,315
)
(3,774
)
Accrued expenses and other liabilities
(27,836
)
6,443

Other, net
(682
)
(325
)
Net cash provided by operating activities
49,910

51,347

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(18,443
)
(7,929
)
Capitalized software
(2,917
)
(1,434
)
Net cash used for investing activities
(21,360
)
(9,363
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
84,000


Repayments under revolving credit agreement
(101,000
)

Dividends paid
(2,947
)
(3,023
)
Acquisition of treasury stock

(3,288
)
Issuance of common stock under share-based plans, net
(2,559
)
(3,122
)
Other
(394
)

Net cash used for financing activities
(22,900
)
(9,433
)
Effect of exchange rate changes on cash and cash equivalents
(72
)
(117
)
Increase in cash and cash equivalents
5,578

32,434

Cash and cash equivalents at beginning of period
30,200

64,047

Cash and cash equivalents at end of period
$
35,778

$
96,481

See notes to condensed consolidated financial statements.

6



CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 
 
(Unaudited)
Common Stock
Additional Paid-In Capital

Accumulated Other Comprehensive (Loss) Income

Retained Earnings

Total Caleres, Inc. Shareholders’ Equity

Non-controlling Interests

 
($ thousands, except number of shares and per share amounts)
Shares
Dollars
Total Equity

BALANCE FEBRUARY 2, 2019
41,886,562

$
419

$
145,889

$
(31,601
)
$
519,346

$
634,053

$
1,382

$
635,435

Net earnings
 
 
 
 
9,083

9,083

2

9,085

Foreign currency translation adjustment
 
 
 
(970
)
 
(970
)
12

(958
)
Unrealized gain on derivative financial instruments, net of tax of $96
 
 
 
303

 
303

 
303

Pension and other postretirement benefits adjustments, net of tax of $138
 
 
 
395

 
395

 
395

Comprehensive (loss) income



(272
)
9,083

8,811

14

8,825

Dividends ($0.07 per share)



 
(2,947
)
(2,947
)
 
(2,947
)
Issuance of common stock under share-based plans, net
347,283

3

(2,562
)
 
 
(2,559
)
 
(2,559
)
Cumulative-effect adjustment from adoption of ASC 842
 
 
 
 
(13,436
)
(13,436
)
 
(13,436
)
Share-based compensation expense
 
 
3,314

 
 
3,314

 
3,314

BALANCE MAY 4, 2019
42,233,845

$
422

$
146,641

$
(31,873
)
$
512,046

$
627,236

$
1,396

$
628,632

 
 
 
 
 
 
 
 
 
BALANCE FEBRUARY 3, 2018
43,031,689

$
430

$
136,460

$
(15,170
)
$
595,769

$
717,489

$
1,473

$
718,962

Net earnings (loss)
 
 
 
 
17,212

17,212

(32
)
17,180

Foreign currency translation adjustment
 
 
 
(808
)
 
(808
)
(8
)
(816
)
Unrealized loss on derivative financial instruments, net of tax of $122
 
 
 
(521
)
 
(521
)
 
(521
)
Pension and other postretirement benefits adjustments, net of tax of $151
 
 
 
434

 
434

 
434

Comprehensive (loss) income
 
 
 
(895
)
17,212

16,317

(40
)
16,277

Dividends ($0.07 per share)
 
 
 
 
(3,023
)
(3,023
)
 
(3,023
)
Acquisition of treasury stock
(100,000
)
(2
)
 
 
(3,286
)
(3,288
)
 
(3,288
)
Issuance of common stock under share-based plans, net
256,005

4

(3,126
)
 
 
(3,122
)
 
(3,122
)
Cumulative-effect adjustment from adoption of ASU 2016-16
 
 
 
 
(10,468
)
(10,468
)
 
(10,468
)
Cumulative-effect adjustment from adoption of ASU 2014-09 (Topic 606)
 
 
 
 
(4,775
)
(4,775
)
 
(4,775
)
Share-based compensation expense
 
 
3,575

 
 
3,575

 
3,575

BALANCE MAY 5, 2018
43,187,694

$
432

$
136,909

$
(16,065
)
$
591,429

$
712,705

$
1,433

$
714,138

See notes to condensed consolidated financial statements.


7



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 interim financial information of Caleres, Inc. ("the Company"). These statements, however, do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 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 2, 2019 .

Note 2
Impact of New Accounting Pronouncements

Impact of Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02,  Leases (Topic 842) , which requires lessees to recognize most leases on the balance sheet. The FASB has subsequently issued ASUs with improvements to the guidance, including ASU 2018-11, Leases (Topic 842): Targeted Improvements , which provides entities with an additional transition method to adopt the new standard. The Company adopted Accounting Standards Codification ("ASC") Topic 842 ("ASC 842") in the first quarter of 2019 using the modified retrospective approach and the optional transition method permitted by ASU 2018-11. Upon adoption, the Company recorded an operating lease right-of-use asset of $729.2 million and lease liabilities of $791.7 million as of February 3, 2019. In addition, a cumulative-effect adjustment to retained earnings of $13.4 million , net of $4.7 million in deferred taxes, was recorded upon adoption. Prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented under the guidance in ASC 840, Leases . The Company elected the package of practical expedients and the expedient to group lease and non-lease components as permitted within the ASU. The hindsight practical expedient was not elected. Refer to Note 10 to the condensed consolidated financial statements for additional information regarding ASC 842.

Impact of Prospective Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,  Financial Instruments - Credit Losses (Topic 326) , which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces today's "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The ASU's provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is adopted. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU in the first quarter of 2020 will not have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13,  Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement . ASU 2018-13 modifies disclosure requirements on fair value measurements, removing and modifying certain disclosures, while adding other disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's financial statement disclosures.


8



In August 2018, the FASB issued ASU 2018-14,  Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20), Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans .  The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-14 is not expected to have a material impact on the Company's financial statement disclosures.

Note 3
Acquisitions

Acquisition of Blowfish, LLC
On July 6, 2018 , the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Blowfish, LLC ("Blowfish", or " Blowfish Malibu "), pursuant to which the Company acquired a controlling interest in Blowfish. The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula, as specified in the Purchase Agreement. The aggregate purchase price is estimated to be $28.0 million , including approximately $9.0 million assigned to the mandatory purchase obligation, which will be paid upon settlement in 2021 . The remaining $19.0 million (or $16.8 million , net of $2.2 million of cash received) was funded with cash. The estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheets, is presented on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments will be recorded as interest expense. The operating results of Blowfish Malibu since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment, with the elimination of sales and profit for sales to the Famous Footwear segment reflected in the Eliminations and Other category.

Blowfish Malibu, which was founded in 2005, designs and sells women's and children's footwear that captures the fresh youthful spirit and casual living that is distinctively Southern California. The footwear is marketed under the "Blowfish" and Blowfish Malibu" tradenames. The acquisition allows for continued expansion of the Company's overall business and provides additional exposure to the growing sneaker and casual lifestyle segment of the market.

The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. 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 (Level 3 fair value measurements). Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies. As of May 4, 2019, the purchase price allocation is complete.

During the thirteen weeks ended May 4, 2019 , Blowfish Malibu contributed net sales of  $19.3 million to the Brand Portfolio segment ( $16.2 million on a consolidated basis, net of eliminations), and net earnings of $0.6 million .

Acquisition of Vionic
On October 18, 2018 , the Company entered into an Equity and Asset Purchase Agreement (the "Agreement") with the equity holders of Vionic Group LLC and Vionic International LLC, and VCG Holdings Ltd., a Cayman Islands corporation (collectively, " Vionic "), pursuant to which the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC and certain related intellectual property from VCG Holdings Ltd for $360.0 million plus adjustments for cash and indebtedness, as defined in the Agreement. The aggregate purchase price was $360.7 million (or $352.7 million , net of $8.0 million of cash received). The purchase was funded with borrowings from the Company's revolving credit agreement. The operating results of Vionic since October 18, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment, with the elimination of sales and profit for sales to the Famous Footwear segment reflected in the Eliminations and Other category.

Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends. As pioneers in foot health with a global team of experts behind the dual gender brand, Vionic brings a fresh perspective to stylish, supportive footwear, offering a vast selection of active, casual and dress styles, sandals and slippers. The acquisition of Vionic allows the Company to continue to expand its portfolio of brands and gives it additional access to the growing contemporary comfort footwear category.

9




The Brand Portfolio segment recognized  $5.8 million  ( $4.3 million on an after-tax basis, or $0.10 per diluted share) in incremental cost of goods sold in the thirteen weeks ended May 4, 2019 related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred integration-related costs of  $0.3 million  ( $0.2 million  on an after-tax basis, or $0.01 per diluted share) in the thirteen weeks ended May 4, 2019, which were recorded as a component of restructuring and other special charges, net. Of the $0.3 million , $0.2 million is presented within the Eliminations and Other category and $0.1 million is presented in the Brand Portfolio segment.

Vionic contributed net sales of  $54.8 million to the Brand Portfolio segment ( $53.1 million on a consolidated basis, net of eliminations), and reported a net loss of approximately $1.3 million , primarily associated with the incremental cost of goods sold of $5.8 million related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the incremental interest expense associated with the acquisition.

Purchase Price Allocation
The assets and liabilities of Vionic were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company has allocated the purchase price as of the acquisition date, October 18, 2018, as follows: 
($ thousands)
 
October 18, 2018

ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
 
$
8,024

Receivables
 
32,319

Inventories
 
58,740

Prepaid expense and other current assets
 
3,618

Total current assets
 
102,701

Goodwill
 
150,413

Intangible assets
 
144,700

Property and equipment
 
6,864

Total assets
 
$
404,678

 
 
 
LIABILITIES AND EQUITY
 
 
Current liabilities:
 
 
Trade accounts payable
 
$
19,679

Other accrued expenses
 
20,768

Total current liabilities
 
40,447

Other liabilities
 
3,541

Total liabilities
 
43,988

Net assets
 
$
360,690


The allocation of the purchase price is based on certain preliminary valuations and analyses. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. The Company’s purchase price allocation required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. 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 (Level 3 fair value measurements). Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies. A third-party valuation specialist assisted the Company with its preliminary fair value estimates for inventory and intangible assets other than goodwill. The Company used all available information to make its best estimate of fair values at the acquisition date. The Company continues to evaluate certain contingent liabilities, but the purchase price allocation is substantially complete as of May 4, 2019.

10




Goodwill and intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized, which is deductible for tax purposes, is primarily attributable to synergies and an assembled workforce. Refer to Note 9 to the consolidated financial statements for additional information regarding goodwill and intangible assets.

Note 4
Revenues

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 excludes 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 periods ended May 4, 2019 and May 5, 2018:
 
 
Thirteen Weeks Ended May 4, 2019
($ thousands)
 
Famous Footwear

 
Brand Portfolio

 
Eliminations and Other

 
Total

 
 
 
 
 
 
 
 
 
Retail stores
 
$
320,242

 
$
36,650

 
$

 
$
356,892

Landed wholesale
 

 
233,370

 
(15,461
)
 
217,909

First-cost wholesale
 

 
14,771

 

 
14,771

E-commerce
 
31,781

 
53,046

 

 
84,827

Licensing and royalty
 

 
3,132

 

 
3,132

Other (1)
 
142

 
81

 

 
223

Net sales
 
$
352,165

 
$
341,050

 
$
(15,461
)
 
$
677,754

 
 
 
 
 
Thirteen Weeks Ended May 5, 2018
($ thousands)
 
Famous Footwear

 
Brand Portfolio

 
Eliminations and Other

 
Total

 
 
 
 
 
 
 
 
 
Retail stores
 
$
338,256

 
$
42,784

 
$

 
$
381,040

Landed wholesale
 

 
182,576

 
(14,766
)
 
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

 
$
283,497

 
$
(14,766
)
 
$
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 estimated returns and exclude sales tax. The Company carries a returns reserve and a corresponding return asset for expected returns of merchandise.

Retail sales to members of the Company's loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-

11



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 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.

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 from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores and e-commerce sales from our wholesale customers' websites that are fulfilled on a drop-ship basis (collectively 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.

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 4, 2019

May 5, 2018

February 2, 2019

Customer allowances and discounts
$
20,063

$
19,416

$
25,090

Loyalty programs liability
15,700

14,920

14,637

Returns reserve
16,621

12,606

13,841

Gift card liability
4,944

4,661

5,426


Changes in contract balances with customers generally reflect differences in relative sales volume for the periods presented. In addition, during the thirteen weeks ended May 4, 2019 , the loyalty programs liability increased $5.2 million due to points accrued for purchases and decreased $4.1 million due to expirations and redemptions. During the thirteen weeks ended May 5, 2018, the loyalty programs liability increased $6.4 million due to the adoption of Topic 606 and $5.9 million due to points accrued for purchases and decreased $5.5 million due to expirations and redemptions.


12



Note 5
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 periods ended May 4, 2019 and May 5, 2018 :
 
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
May 4, 2019

May 5, 2018

NUMERATOR
 

 

Net earnings
$
9,085

$
17,180

Net (earnings) loss attributable to noncontrolling interests
(2
)
32

Net earnings allocated to participating securities
(283
)
(479
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
8,800

$
16,733

 
 
 
DENOMINATOR
 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
40,741

41,910

Dilutive effect of share-based awards
60

124

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
40,801

42,034

 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.22

$
0.40

 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.22

$
0.40

 
Options to purchase 16,667 shares of common stock for the thirteen weeks ended May 4, 2019 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 4, 2019 and May 5, 2018 , the Company repurchased zero and 100,000 shares, respectively, under the 2011 and 2018 publicly announced share repurchase programs, each of which permits repurchases of up to 2.5 million shares. As of May 4, 2019 , the Company has repurchased a total of  2.7 million  shares at an aggregate purchase price of $77.8 million .

Note   6
Restructuring and Other Initiatives
 
Vionic Integration-Related Costs
During the thirteen weeks ended May 4, 2019, the Company incurred integration-related costs associated with the acquisition of Vionic, primarily for severance, totaling  $0.3 million  ( $0.2 million  on an after-tax basis, or  $0.01  per diluted share). Of the $0.3 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings, $0.2 million are reflected within the Eliminations and Other category and $0.1 million are included in the Brand Portfolio segment. As of May 4, 2019 restructuring reserves of $0.5 million were included in other accrued expenses on the condensed consolidated balance sheets. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.


13



Carlos Brand Exit
The Company's license agreement to sell Carlos by Carlos Santana footwear expired in December 2018. In connection with the decision to exit the Carlos brand, the Company incurred restructuring-related costs of $1.9 million ( $1.4 million on an after-tax basis, or $0.03 per diluted share) during the first quarter of 2019. Of these charges included in the Brand Portfolio segment, $1.3 million ( $1.0 million on an after-tax basis or $0.02 per diluted share) primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the statements of earnings and the remaining $0.6 million ( $0.4 million on an after-tax basis, or $0.01 per diluted share) for severance and other related costs is presented in restructuring and other special charges.

Integration and Reorganization of Men's Brands
During the thirteen weeks ended May 5, 2018, the Company incurred integration and reorganization costs related to the men's business, primarily for severance and professional fees, totaling $1.8 million ( $1.3 million on an after-tax basis, or $0.03 per diluted share). 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 Eliminations and Other category. As of May 5, 2018, restructuring reserves of $1.1 million were included in other accrued expenses on the condensed consolidated balance sheets.

Note 7
Business Segment Information

During the first quarter of 2019, the Company changed its segment presentation to present net sales of the Brand Portfolio segment inclusive of both external and intersegment sales, with the elimination of intersegment sales and profit from Brand Portfolio to Famous Footwear reflected within the Eliminations and Other category. This presentation reflects the independent business models of both Brand Portfolio and Famous Footwear, as well as growth in intersegment activity driven by recent acquisitions. Following is a summary of certain key financial measures for the Company’s business segments for the periods ended May 4, 2019 and May 5, 2018 :  
 
Famous Footwear
Brand Portfolio
 Eliminations and Other
 
($ thousands)
Total
Thirteen Weeks Ended May 4, 2019
Net sales
$
352,165

$
341,050

$
(15,461
)
$
677,754

Intersegment sales (1)

15,461


15,461

Operating earnings (loss)
10,813

12,929

(6,873
)
16,869

Segment assets
998,606

1,355,842

138,622

2,493,070

 
 
 
 
 
Thirteen Weeks Ended May 5, 2018
Net sales
$
363,411

$
283,497

$
(14,766
)
$
632,142

Intersegment sales (1)

14,766


14,766

Operating earnings (loss)
21,857

11,627

(10,538
)
22,946

Segment assets
555,448

745,460

201,158

1,502,066

 
 
 
 
 
(1) Included in net sales in the Brand Portfolio segment and eliminated in the Eliminations and Other category

The Eliminations and Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments, as well as the elimination of intersegment sales and profit.  

Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
($ thousands)
May 4, 2019

May 5, 2018

Operating earnings
$
16,869

$
22,946

Interest expense, net
(7,340
)
(3,683
)
Other income, net
2,619

3,091

Earnings before income taxes
$
12,148

$
22,354



14



Note   8
Inventories

The Company's net inventory balance was comprised of the following:
($ thousands)
May 4, 2019

May 5, 2018

February 2, 2019

Raw materials
$
18,618

$
15,554

$
19,128

Work-in-process
478

708

745

Finished goods
629,049

563,640

663,298

Inventories, net
$
648,145

$
579,902

$
683,171


Note   9
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
May 4, 2019

May 5, 2018

February 2, 2019

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
388,288

285,988

388,288

Other

1,769


Total intangible assets
391,088

290,557

391,088

Accumulated amortization
(86,987
)
(77,738
)
(83,722
)
Total intangible assets, net
304,101

212,819

307,366

Goodwill
 

 

 

Brand Portfolio
244,407

127,081

242,531

Total goodwill
244,407

127,081

242,531

Goodwill and intangible assets, net
$
548,508

$
339,900

$
549,897


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Vionic on October 18, 2018. The allocation of the purchase price resulted in incremental intangible assets of $144.7 million , consisting of trademarks and customer relationships of $112.4 million and $32.3 million , respectively, and incremental goodwill of $150.4 million . In addition, the Company acquired Blowfish Malibu on July 6, 2018. The allocation of the purchase price resulted in incremental intangible assets of  $17.6 million , consisting of trademarks and customer relationships of  $11.1 million  and  $6.5 million , respectively, and incremental goodwill of  $5.0 million .

15




The Company's intangible assets as of May 4, 2019 , May 5, 2018 and February 2, 2019 were as follows:
($ thousands)
 
 
 
May 4, 2019
 
 
Estimated Useful Lives
 
Cost Basis

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
288,788

 
$
84,427

 
$
204,361

Trademarks
 
Indefinite
 
58,100

 

 
58,100

Customer relationships
 
15-16 years
 
44,200

 
2,560

 
41,640

 
 
 
 
$
391,088

 
$
86,987

 
$
304,101


 
 
 
 
May 5, 2018
 
 
Estimated Useful Lives
 
Cost Basis

 
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

 
 
 
 
February 2, 2019
 
 
Estimated Useful Lives
 
Cost Basis

 
Accumulated Amortization

 
Impairment

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
288,788

 
$
81,961

 
$

 
$
206,827

Trademarks
 
Indefinite
 
118,100

 

 
60,000

 
58,100

Customer relationships
 
15-16 years
 
44,200

 
1,761

 

 
42,439

 
 
 
 
$
451,088

 
$
83,722

 
$
60,000

 
$
307,366


Amortization expense related to intangible assets was $3.3 million and $1.0 million for the thirteen weeks ended May 4, 2019 and May 5, 2018 , respectively. The Company estimates that amortization expense related to intangible assets will be approximately $13.1 million in 2019, $12.8 million in 2020, $12.7 million in 2021, $12.5 million in 2022 and $12.2 million in 2023.

As a result of its annual goodwill impairment testing in the fourth quarter of 2018, the Company determined that the carrying value of the Allen Edmonds reporting unit exceeded its fair value and recorded $38.0 million in impairment charges. The Company recorded no goodwill impairment charges in the thirteen weeks ended May 4, 2019 or May 5, 2018.

Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The indefinite-lived intangible asset impairment review in the fourth quarter of 2018 resulted in $60.0 million in impairment charges associated with the Allen Edmonds trademark. The Company recorded no impairment charges in the thirteen weeks ended May 4, 2019 or May 5, 2018.

Note 10
Leases
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases.  Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company's leases that are classified as operating leases have lease terms and renewal options as follows:

16



 
Lease Term
Renewal Options
Retail stores
5-10 years
Approximately 45% have options of varying periods
Manufacturing facility
8 years
None
Office facilities and distribution centers
10-15 years
5-20 years
Equipment
1 - 6 years
None

As further discussed in Note 2 to the condensed consolidated financial statements, during the first quarter of 2019, the Company adopted ASC 842 using the modified retrospective transition method. Prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented in compliance with ASC 840. The Company elected the package of practical expedients and the expedient to account for lease and non-lease components as a single component for the entire population of operating lease assets. The Company did not elect the hindsight practical expedient to reevaluate the lease term of existing contracts.

Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.

The following is a summary of lease assets and liabilities on the condensed consolidated balance sheet at May 4, 2019:
($ thousands)
 
May 4, 2019

Lease Classification
 
 
Lease right-of-use assets
 
$
735,282

Current lease obligations
 
(136,005
)
Noncurrent lease obligations
 
(662,750
)
Net balance sheet impact
 
$
(63,473
)

The weighted-average lease term and discount rate as of May 4, 2019 were as follows:
 
May 4, 2019

Weighted-average remaining lease term (in years)
7.1

Weighted-average discount rate
4.1
%

As of May 4, 2019, the Company has entered into lease commitments for seven retail locations for which the leases have not yet commenced. The Company anticipates that the leases for five retail locations will begin in the next two fiscal quarters. Upon commencement, right-of-use assets and lease liabilities of approximately $4.1 million will be recorded on the condensed consolidated balance sheets. Leases for two retail locations are expected to begin in the next fiscal year, resulting in right-of-use assets and lease liabilities of approximately $2.9 million .

17




The components of lease expense for the thirteen weeks ended May 4, 2019 were as follows:
 
 
Thirteen Weeks Ended

($ thousands)
 
May 4, 2019

Operating lease expense
 
$
46,461

Variable lease expense
 
12,184

Short-term lease expense
 
1,115

Sublease income
 
(73
)
Total lease expense
 
$
59,687


Future minimum rent payments under noncancelable leases with an initial term of one year or more at May 4, 2019 were as follows:

($ thousands)


Remainder of 2019
$
135,036

2020
159,990

2021
135,705

2022
113,185

2023
94,496

2024
73,946

Thereafter
168,164

Total minimum lease payments  (1)
$
880,522

Less imputed interest
(81,767
)
Present value of lease obligations
$
798,755


(1) Minimum lease payments have not been reduced by minimum sublease rental income of $0.5 million due in the future under noncancelable sublease agreements.  
Supplemental cash flow information related to leases is as follows:
 
Thirteen Weeks Ended

($ thousands)
May 4, 2019

Cash paid for lease liabilities
$
46,511

Cash received from sublease income
73


Note 11
Long-term and Short-term Financing Arrangements
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. On December 18, 2014 , the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement ("the Former Credit Agreement"), which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Former Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC. Allen Edmonds and Vionic were joined to the Agreement as guarantors on December 13, 2016 and October 31, 2018 , respectively. After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement. On January 18, 2019 , the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") to extend the maturity date to January 18, 2024 and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to $600.0 million to an aggregate amount of up to $500.0 million , with the option to increase by up to  $250.0 million . The Credit Amendment also reduces upfront and unused borrowing fees, provides for less restrictive covenants and offers more flexibility.

Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread.  The interest rate and fees for letters of credit vary based upon the level of excess availability

18



under the Credit Agreement.  There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.

The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets.  In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements.  Furthermore, if excess availability falls below the greater of 10.0% of the lesser of the Loan Cap and $40.0 million for three consecutive business days or an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period.

The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect.  In addition, if the excess availability falls below the greater of (i) 10.0% of the lesser of the Loan Cap and (ii) $40.0 million , and the fixed charge coverage ratio is less than 1.0 to 1.0 , the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of May 4, 2019 .

At May 4, 2019 , the Company had $318.0 million borrowings outstanding and $10.5 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $171.5 million at May 4, 2019 .

$200 Million Senior Notes
On July 27, 2015 , the Company issued $200.0 million aggregate principal amount of 6.25% Senior Notes due 2023 (the "Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the Senior Notes is payable on February 15 and August 15 of each year. The Senior Notes will mature on August 15, 2023 .  The Company may redeem all or a part of the Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Notes indenture), if redeemed during the 12-month period beginning on August 15 of the years indicated below:
 
 
 
 
Year
Percentage

2019
103.125
%
2020
101.563
%
2021 and thereafter
100.000
%

If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase.

The Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of May 4, 2019, the Company was in compliance with all covenants and restrictions relating to the Senior Notes.


19



Note   12
Shareholders’ Equity
 
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended May 4, 2019 and May 5, 2018 :
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions  (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance at February 2, 2019
$
62

$
(31,055
)
$
(608
)
$
(31,601
)
Other comprehensive (loss) income before reclassifications
(970
)

169

(801
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss

533

171

704

Tax benefit

(138
)
(37
)
(175
)
Net reclassifications

395

134

529

Other comprehensive (loss) income
(970
)
395

303

(272
)
Balance at May 4, 2019
$
(908
)
$
(30,660
)
$
(305
)
$
(31,873
)
 
 
 
 
 
Balance at February 3, 2018
$
1,235

$
(17,172
)
$
767

$
(15,170
)
Other comprehensive loss 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
)
 
 
 
 
 
(1)
Amounts reclassified are included in other income, net. Refer to Note 14 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. Refer to Note 15 and Note 16 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 13
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.3 million and $3.6 million during the thirteen weeks ended May 4, 2019 and May 5, 2018 , respectively. The Company issued 347,283 and 256,005 shares of common stock during the thirteen weeks ended May 4, 2019 and May 5, 2018 , respectively, for restricted stock grants, stock performance awards issued 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.

20




Restricted Stock 
The following table summarizes restricted stock activity for the periods ended May 4, 2019 and May 5, 2018 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 4, 2019
 
 
May 5, 2018
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
February 2, 2019
1,249,223

 
$
29.17

 
February 3, 2018
1,174,801

 
$
27.92

Granted
397,550

 
23.42

 
Granted
294,691

 
31.77

Forfeited
(21,425
)
 
29.51

 
Forfeited
(16,550
)
 
27.47

Vested
(204,920
)
 
30.06

 
Vested
(208,610
)
 
28.15

May 4, 2019
1,420,428

 
$
27.43

 
May 5, 2018
1,244,332

 
$
28.80


All 397,550 restricted shares granted during the thirteen weeks ended May 4, 2019 , have a graded-vesting term of three years. 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. 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 4, 2019 and May 5, 2018 , the Company granted performance share awards for a targeted 180,000 and 155,000 shares, respectively, with a weighted-average grant date fair value of $23.42 and $31.84 , 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.

Stock Options
The following table summarizes stock option activity for the periods ended May 4, 2019 and May 5, 2018 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 4, 2019
 
 
May 5, 2018
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
February 2, 2019
42,667

 
$
8.64

 
February 3, 2018
81,042

 
$
6.28

Granted

 

 
Granted

 

Exercised

 

 
Exercised
(16,500
)
 
4.02

Forfeited

 

 
Forfeited

 

Expired

 

 
Expired
(2,500
)
 
5.71

May 4, 2019
42,667

 
$
8.64

 
May 5, 2018
62,042

 
$
6.90



21



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 related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value when the dividend equivalents are granted. The Company granted 1,114 and 781 RSUs for dividend equivalents during the thirteen weeks ended May 4, 2019 and May 5, 2018 , respectively, with weighted-average grant date fair values of $25.08 and $33.10 , respectively.

Note   14
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
May 4, 2019

May 5, 2018

May 4, 2019

May 5, 2018

Service cost
$
1,854

$
2,382

$

$

Interest cost
3,725

3,541

15

15

Expected return on assets
(6,892
)
(7,232
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
928

1,013

(30
)
(30
)
Prior service income
(365
)
(398
)


Total net periodic benefit income
$
(750
)
$
(694
)
$
(15
)
$
(15
)

The non-service cost components of net periodic benefit income are included in other income, net in the condensed consolidated statements of earnings. Service cost is included in selling and administrative expenses.

Note 15
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 2020 . 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 4, 2019 , May 5, 2018 and February 2, 2019 , the Company had forward contracts maturing at various dates through May 2020 , May 2019 and January 2020 , respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 

22



(U.S. $ equivalent in thousands)
May 4, 2019

May 5, 2018

February 2, 2019

Financial Instruments
 
 
 
Euro
$
12,134

$
17,180

$
13,383

U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
13,230

14,828

15,196

Chinese yuan
2,858

12,520

4,507

New Taiwanese dollars
469

514

461

Other currencies
376

422

382

Total financial instruments
$
29,067

$
45,464

$
33,929

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of May 4, 2019 , May 5, 2018 and February 2, 2019 are as follows:

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

 
Balance Sheet Location
Fair Value

Foreign Exchange Forward Contracts
 

 
 
 

May 4, 2019
Prepaid expenses and other current assets
$
183

 
Other accrued expenses
$
459

May 5, 2018
Prepaid expenses and other current assets
591

 
Other accrued expenses
392

February 2, 2019
Prepaid expenses and other current assets
159

 
Other accrued expenses
745

 
For the thirteen weeks ended May 4, 2019 and May 5, 2018 , 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 4, 2019
May 5, 2018
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
 (Loss) Gain Recognized in OCL on Derivatives

 Loss Reclassified from Accumulated OCL into Earnings

Loss
Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(99
)
$

$
(25
)
$

Cost of goods sold
289

(22
)
(402
)
(92
)
Selling and administrative expenses
35

(149
)
(72
)
237

Interest expense, net





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 16 to the condensed consolidated financial statements. 
 
Note 16
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: 


23



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). 
 
Non-Qualified 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 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 were previously granted at no cost to non-employee directors. These cash-equivalent 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 cash-equivalent 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).  Additional information related to RSUs for non-employee directors is disclosed in Note 13 to the condensed consolidated financial statements.

24



 
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 15 to the condensed consolidated financial statements. 

Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July of 2018. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the Purchase Agreement (Level 3). Accretion of the mandatory purchase obligation and any fair value adjustments are recorded as interest expense. During the thirteen weeks ended May 4, 2019 , accretion of $0.1 million was recorded. The earnings projections and discount rate utilized in the estimate of the fair value of the mandatory purchase obligation require management judgment and are the assumptions to which the fair value calculation is the most sensitive. Refer to further discussion of the mandatory purchase obligation in Note 3 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 4, 2019 , May 5, 2018 and February 2, 2019 . The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirteen weeks ended May 4, 2019 or May 5, 2018.   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

May 4, 2019:
 
 
 
 
 
Cash equivalents – money market funds
$
4,500

 
$
4,500

$

$

Non-qualified deferred compensation plan assets
7,865

 
7,865



Non-qualified deferred compensation plan liabilities
(7,865
)
 
(7,865
)


Deferred compensation plan liabilities for non-employee directors
(2,173
)
 
(2,173
)


Restricted stock units for non-employee directors
(4,013
)
 
(4,013
)


Derivative financial instruments, net
(276
)
 

(276
)

Mandatory purchase obligation - Blowfish Malibu
(9,353
)
 


(9,353
)
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


February 2, 2019:
 
 
 
 
 
Cash equivalents – money market funds
$
4,582

 
$
4,582

$

$

Non-qualified deferred compensation plan assets
7,270

 
7,270



Non-qualified deferred compensation plan liabilities
(7,270
)
 
(7,270
)


Deferred compensation plan liabilities for non-employee directors
(2,364
)
 
(2,364
)


Restricted stock units for non-employee directors
(4,419
)
 
(4,419
)


Derivative financial instruments, net
(586
)
 

(586
)

Mandatory purchase obligation - Blowfish Malibu
(9,245
)
 


(9,245
)
 

25



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 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 $685.0 million and $105.4 million at May 4, 2019 and May 5, 2018 , 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, furniture and fixtures in the Company's retail stores and operating lease right-of-use assets, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
($ thousands)
May 4, 2019

May 5, 2018

Impairment Charges
 
 
Famous Footwear
$
400

$
150

Brand Portfolio
794

318

Total impairment charges
$
1,194

$
468


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 4, 2019
 
May 5, 2018
 
February 2, 2019
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
318,000

 
$
318,000

 
$ <