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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

     

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended November 2, 2019

 

 

 

 

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)

 

 

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  ☑  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  ☑   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 ☑

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 ☑ 

 

As of November 29, 2019, 40,534,862 common shares were outstanding.

 

 

 

INDEX

 

 

PART I

 

Page

Item 1

Financial Statements

3

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4

Controls and Procedures

41

 

 

 

PART II

 

 

Item 1

Legal Proceedings

42

Item 1A

Risk Factors

42

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3

Defaults Upon Senior Securities

42

Item 4

Mine Safety Disclosures

42

Item 5

Other Information

42

Item 6

Exhibits

43

 

Signature

44

 

 

 

PART I

FINANCIAL INFORMATION

   

ITEM 1

FINANCIAL STATEMENTS

 

CALERES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

   

(Unaudited)

         

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 

Assets

                       

Current assets:

                       
Cash and cash equivalents   $ 52,502     $ 90,491     $ 30,200  
Receivables, net     156,253       192,246       191,722  
Inventories, net     644,646       698,265       683,171  
Prepaid expenses and other current assets     48,245       63,166       71,354  

Total current assets

    901,646       1,044,168       976,447  
                         
Other assets     92,214       92,279       81,440  
Goodwill     245,275       283,345       242,531  
Intangible assets, net     297,570       370,507       307,366  
Lease right-of-use assets     704,244              
Property and equipment     591,370       556,967       579,087  
Allowance for depreciation     (361,109 )     (338,864 )     (348,303 )

Property and equipment, net

    230,261       218,103       230,784  

Total assets

  $ 2,471,210     $ 2,008,402     $ 1,838,568  
                         

Liabilities and Equity

                       

Current liabilities:

                       
Borrowings under revolving credit agreement   $ 295,000     $ 350,000     $ 335,000  
Trade accounts payable     275,699       317,499       316,298  
Lease obligations     144,501              
Other accrued expenses     179,030       209,479       202,038  

Total current liabilities

    894,230       876,978       853,336  
                         

Other liabilities:

                       
Noncurrent lease obligations     629,731              
Long-term debt     198,276       197,817       197,932  

Deferred rent

          51,930       54,850  
Other liabilities     95,623       114,592       97,015  

Total other liabilities

    923,630       364,339       349,797  
                         

Equity:

                       
Common stock     406       432       419  
Additional paid-in capital     152,214       143,754       145,889  
Accumulated other comprehensive loss     (30,318 )     (16,624 )     (31,601 )
Retained earnings     528,538       638,191       519,346  

Total Caleres, Inc. shareholders’ equity

    650,840       765,753       634,053  
Noncontrolling interests     2,510       1,332       1,382  

Total equity

    653,350       767,085       635,435  

Total liabilities and equity

  $ 2,471,210     $ 2,008,402     $ 1,838,568  

 

See notes to condensed consolidated financial statements.

 

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 

   

(Unaudited)

 
   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands, except per share amounts)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 
Net sales   $ 792,375     $ 775,829     $ 2,222,614     $ 2,114,583  
Cost of goods sold     472,605       465,219       1,317,064       1,235,950  

Gross profit

    319,770       310,610       905,550       878,633  
Selling and administrative expenses     275,330       265,522       804,972       774,555  
Restructuring and other special charges, net     969       5,340       2,434       9,240  

Operating earnings

    43,471       39,748       98,144       94,838  
Interest expense, net     (10,559 )     (4,210 )     (25,288 )     (11,495 )
Other income, net     2,633       3,085       7,902       9,254  

Earnings before income taxes

    35,545       38,623       80,758       92,597  
Income tax provision     (7,784 )     (9,468 )     (18,685 )     (22,651 )

Net earnings

    27,761       29,155       62,073       69,946  
Net (loss) earnings attributable to noncontrolling interests     (226 )     2       (338 )     (65 )

Net earnings attributable to Caleres, Inc.

  $ 27,987     $ 29,153     $ 62,411     $ 70,011  
                                 
Basic earnings per common share attributable to Caleres, Inc. shareholders   $ 0.69     $ 0.68     $ 1.51     $ 1.62  
                                 
Diluted earnings per common share attributable to Caleres, Inc. shareholders   $ 0.69     $ 0.67     $ 1.51     $ 1.62  

 

See notes to condensed consolidated financial statements.

 

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

(Unaudited)

 
   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 

Net earnings

  $ 27,761     $ 29,155     $ 62,073     $ 69,946  

Other comprehensive income (loss), net of tax:

                               
Foreign currency translation adjustment     582       14       (397 )     (1,045 )
Pension and other postretirement benefits adjustments     429       451       1,285       1,353  
Derivative financial instruments     63       (320 )     361       (1,762 )

Other comprehensive income (loss), net of tax

    1,074       145       1,249       (1,454 )

Comprehensive income

    28,835       29,300       63,322       68,492  
Comprehensive loss attributable to noncontrolling interests     (239 )     (9 )     (372 )     (141 )

Comprehensive income attributable to Caleres, Inc.

  $ 29,074     $ 29,309     $ 63,694     $ 68,633  

 

See notes to condensed consolidated financial statements.

 

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

(Unaudited)

 
   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

 

Operating Activities

               

Net earnings

  $ 62,073     $ 69,946  

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

               
Depreciation     34,312       33,189  
Amortization of capitalized software     4,910       8,282  
Amortization of intangible assets     9,790       3,880  
Amortization and accretion of debt issuance costs, debt discount and mandatory purchase obligation     5,389       1,610  
Share-based compensation expense     8,933       11,615  
Loss on disposal of property and equipment     874       1,772  
Impairment charges for property, equipment, and lease right-of-use assets     5,105       2,040  
Provision for doubtful accounts     728       426  
Deferred rent           (1,141 )

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

               
Receivables     34,740       (6,457 )
Inventories     37,482       (57,138 )
Prepaid expenses and other current and noncurrent assets     (2,944 )     (9,788 )
Trade accounts payable     (37,537 )     17,113  
Accrued expenses and other liabilities     (18,032 )     21,135  
Other, net     (86 )     (2,074 )

Net cash provided by operating activities

    145,737       94,410  
                 

Investing Activities

               
Purchases of property and equipment     (37,354 )     (35,244 )
Disposals of property and equipment     636        
Capitalized software     (4,893 )     (3,505 )
Acquisition of Blowfish Malibu, net of cash received           (17,284 )

Acquisition of Vionic, net of cash received

          (344,942 )

Net cash used for investing activities

    (41,611 )     (400,975 )
                 

Financing Activities

               
Borrowings under revolving credit agreement     237,000       360,000  
Repayments under revolving credit agreement     (277,000 )     (10,000 )
Dividends paid     (8,631 )     (9,059 )
Acquisition of treasury stock     (31,168 )     (3,288 )
Issuance of common stock under share-based plans, net     (2,605 )     (4,318 )
Contributions by noncontrolling interests     1,500        
Other     (1,022 )     (114 )

Net cash (used for) provided by financing activities

    (81,926 )     333,221  
Effect of exchange rate changes on cash and cash equivalents     102       (212 )

Increase in cash and cash equivalents

    22,302       26,444  

Cash and cash equivalents at beginning of period

    30,200       64,047  

Cash and cash equivalents at end of period

  $ 52,502     $ 90,491  
 

 

See notes to condensed consolidated financial statements.

 

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                           

Accumulated

                                 
                           

Other

           

Total Caleres, Inc.

   

Non-

         

(Unaudited)

 

Common Stock

   

Additional

   

Comprehensive

   

Retained

   

Shareholders’

   

controlling

         

($ thousands, except number of shares and per share amounts)

 

Shares

   

Dollars

   

Paid-In Capital

   

(Loss) Income

   

Earnings

   

Equity

   

Interests

   

Total Equity

 

BALANCE AUGUST 3, 2019

    40,720,927     $ 407     $ 149,881     $ (31,405 )   $ 504,546     $ 623,429     $ 1,249     $ 624,678  
Net earnings (loss)                                     27,987       27,987       (226 )     27,761  
Foreign currency translation adjustment                             595               595       (13 )     582  
Unrealized gain on derivative financial instruments, net of tax of $4                             63               63               63  
Pension and other postretirement benefits adjustments, net of tax of $149                             429               429               429  
Comprehensive income (loss)                             1,087               29,074       (239 )     28,835  
Contributions by noncontrolling interests                                                     1,500       1,500  
Dividends ($0.07 per share)                                     (2,823 )     (2,823 )             (2,823 )
Acquisition of treasury stock     (58,263 )     (1 )                     (1,172 )     (1,173 )             (1,173 )
Issuance of common stock under share-based plans, net     (69,377 )     (0 )     (58 )                     (58 )             (58 )
Share-based compensation expense                     2,391                       2,391               2,391  

BALANCE NOVEMBER 2, 2019

    40,593,287     $ 406     $ 152,214     $ (30,318 )   $ 528,538     $ 650,840     $ 2,510     $ 653,350  
                                                                 

BALANCE AUGUST 4, 2018

    43,205,220     $ 432     $ 140,146     $ (16,769 )   $ 612,044     $ 735,853     $ 1,341     $ 737,194  
Net earnings                                     29,153       29,153       2       29,155  
Foreign currency translation adjustment                             14               14       (11 )     3  
Unrealized loss on derivative financial instruments, net of tax of $82                             (320 )             (320 )             (320 )
Pension and other postretirement benefits adjustments, net of tax of $157                             451               451               451  
Comprehensive income (loss)                             145               29,298       (9 )     29,289  
Dividends ($0.07 per share)                                     (3,006 )     (3,006 )             (3,006 )
Issuance of common stock under share-based plans, net     17,225       0       47                       47               47  
Share-based compensation expense                     3,561                       3,561               3,561  

BALANCE NOVEMBER 3, 2018

    43,222,445     $ 432     $ 143,754     $ (16,624 )   $ 638,191     $ 765,753     $ 1,332     $ 767,085  

 

                           

Accumulated

                                 
                           

Other

           

Total Caleres, Inc.

   

Non-

         

(Unaudited)

 

Common Stock

   

Additional

   

Comprehensive

   

Retained

   

Shareholders’

   

controlling

         

($ thousands, except number of shares and per share amounts)

 

Shares

   

Dollars

   

Paid-In Capital

   

(Loss) Income

   

Earnings

   

Equity

   

Interests

   

Total Equity

 

BALANCE FEBRUARY 2, 2019

    41,886,562     $ 419     $ 145,889     $ (31,601 )   $ 519,346     $ 634,053     $ 1,382     $ 635,435  
Net earnings (loss)                                     62,411       62,411       (338 )     62,073  
Foreign currency translation adjustment                             (363 )             (363 )     (34 )     (397 )
Unrealized gain on derivative financial instruments, net of tax of $83                             361               361               361  
Pension and other postretirement benefits adjustments, net of tax of $448                             1,285               1,285               1,285  
Comprehensive income (loss)                             1,283               63,694       (372 )     63,322  
Contributions by noncontrolling interests                                                     1,500       1,500  
Dividends ($0.21 per share)                                     (8,631 )     (8,631 )             (8,631 )
Acquisition of treasury stock     (1,588,741 )     (16 )                     (31,152 )     (31,168 )             (31,168 )
Issuance of common stock under share-based plans, net     295,466       3       (2,608 )                     (2,605 )             (2,605 )
Cumulative-effect adjustment from adoption of ASC 842                                     (13,436 )     (13,436 )             (13,436 )
Share-based compensation expense                     8,933                       8,933               8,933  

BALANCE NOVEMBER 2, 2019

    40,593,287     $ 406     $ 152,214     $ (30,318 )   $ 528,538     $ 650,840     $ 2,510     $ 653,350  
                                                                 

BALANCE FEBRUARY 3, 2018

    43,031,689     $ 430     $ 136,460     $ (15,170 )   $ 595,769     $ 717,489     $ 1,473     $ 718,962  

Net earnings (loss)

                                    70,011       70,011       (65 )     69,946  

Foreign currency translation adjustment

                            (1,045 )             (1,045 )     (76 )     (1,121 )

Unrealized loss on derivative financial instruments, net of tax of $436

                            (1,762 )             (1,762 )             (1,762 )

Pension and other postretirement benefits adjustments, net of tax of $470

                            1,353               1,353               1,353  
Comprehensive (loss) income                             (1,454 )             68,557       (141 )     68,416  

Dividends ($0.21 per share)

                                    (9,059 )     (9,059 )             (9,059 )
Acquisition of treasury stock     (100,000 )     (1 )                     (3,287 )     (3,288 )             (3,288 )
Issuance of common stock under share-based plans, net     290,756       3       (4,321 )                     (4,318 )             (4,318 )

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

                    11,615                       11,615               11,615  

BALANCE NOVEMBER 3, 2018

    43,222,445     $ 432     $ 143,754     $ (16,624 )   $ 638,191     $ 765,753     $ 1,332     $ 767,085  

 

 

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 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 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 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. 

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, that amended certain disclosure requirements that were redundant or outdated.  The rule expanded the disclosure requirements for the analysis of shareholders' equity for interim financial statements.  The Company adopted the rule during the fourth quarter of 2018 and applied the revised interim disclosure requirements beginning in the Form 10-Q for the first quarter of 2019.  In July 2019, the FASB issued ASU 2019-07, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates.  ASU 2019-07 codifies SEC Release No. 33-10532 and was effective upon issuance.  The remaining elements of this ASU did not have a material impact on the Company's consolidated financial statements.  

 

Impact of Prospective Accounting Pronouncements

In February 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.  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.  The adoption of ASU 2018-13 is not expected to have a material impact on the Company's financial statement disclosures.

 

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.

 

8

 

 

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 $32.7 million, including approximately $13.7 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, was initially valued at $9.0 million on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement.  Accretion and remeasurement adjustments on the mandatory purchase obligation are being recorded as interest expense.  During the thirteen and thirty-nine weeks ended November 2, 2019, the Company recorded interest expense of $3.9 million and $4.4 million, respectively, for accretion and remeasurement adjustments.  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.  The purchase price allocation was completed during the first quarter of 2019.

 

During the thirteen weeks ended November 2, 2019, Blowfish Malibu contributed net sales of $13.5 million to the Brand Portfolio segment ($11.7 million on a consolidated basis, net of eliminations), and net income of $0.9 million on a consolidated basis. During the thirty-nine weeks ended November 2, 2019, Blowfish Malibu contributed net sales of $48.6 million to the Brand Portfolio segment ($42.1 million on a consolidated basis, net of eliminations), and net income of $4.7 million on a consolidated basis.  During the thirteen weeks ended November 3, 2018, Blowfish Malibu contributed net sales of $7.0 million to the Brand Portfolio ($6.4 million on a consolidated basis, net of eliminations), and a net loss of $0.5 million on a consolidated basis.  During the thirty-nine weeks ended November 3, 2018, Blowfish Malibu contributed net sales of $10.1 million ($8.9 million on a consolidated basis, net of eliminations), and a net loss of $0.9 million.  The net income or loss for the respective periods includes amortization expense on the acquired intangible assets.  

 

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.

 

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 thirty-nine weeks ended November 2, 2019 related to the amortization of the inventory fair value adjustment required for purchase accounting.   The fair value adjustment was fully amortized during the first quarter of 2019.

 

The Company incurred integration-related costs of $1.0 million ($0.7 million on an after-tax basis or $0.02 per diluted share) in the thirteen weeks ended November 2, 2019, which were recorded as a component of restructuring and other special charges, net within the Eliminations and Other category.  In the thirty-nine weeks ended November 2, 2019, the Company incurred integration-related costs of $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share), which were recorded as a component of restructuring and other special charges, net.  Of the $1.9 million, $1.8 million is presented within the Eliminations and Other category and $0.1 million is presented in the Brand Portfolio segment.  During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred acquisition and integration-related costs primarily for professional fees associated with the acquisition, totaling $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share), which is reflected within the Eliminations and Other category and is presented as restructuring and other special charges, net.

 

In the thirteen weeks ended November 2, 2019, Vionic contributed net sales of $38.8 million to the Brand Portfolio segment ($38.8 million on a consolidated basis, net of eliminations), and a net loss of $0.6 million.  In the thirty-nine weeks ended November 2, 2019, Vionic contributed net sales of $140.7 million to the Brand Portfolio segment ($138.8 million on a consolidated basis, net of eliminations), and net income of $1.3 million.  During the thirteen and thirty-nine weeks ended November 3, 2018, Vionic contributed net sales of $6.0 million to the Brand Portfolio segment ($5.8 million on a consolidated basis, net of eliminations), and a net loss of $1.2 million.  The net income or loss for the respective periods includes amortization expense on the acquired intangible assets but excludes the incremental interest expense associated with the transaction. 

 

9

 

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

    58,332  

Prepaid expense and other current assets

    3,618  

Total current assets

    102,293  

Goodwill

    151,281  

Intangible assets

    144,700  

Property and equipment

    6,864  

Total assets

  $ 405,138  
         

LIABILITIES AND EQUITY

       

Current liabilities:

       

Trade accounts payable

  $ 19,679  

Other accrued expenses

    21,228  

Total current liabilities

    40,907  

Other liabilities

    3,541  

Total liabilities

    44,448  

Net assets

  $ 360,690  

 

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.  As of November 2, 2019, the purchase price allocation is complete.

 

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 condensed consolidated financial statements for additional information regarding goodwill and intangible assets.

 

Joint Venture With Brand Investment Holding 

During the second quarter of 2019, the Company began operating a joint venture with Brand Investment Holding, a member of the Gemkell Group, to distribute Naturalizer and Sam Edelman branded footwear to greater China, including Hong Kong, Macau and Taiwan.  The Company owns a 50% interest in the joint venture, which is consolidated within the Company’s financial statements.  To date, net sales and operating results have been immaterial.  During the third quarter of 2019, the joint venture was funded with $3.0 million in capital contributions, including $1.5 million from the Company and $1.5 million from Brand Investment Holding. 

 

 

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.

 

10

 

Disaggregation of Revenues

The following table disaggregates revenue by segment and major source for the periods ended November 2, 2019 and November 3, 2018:

 

   

Thirteen Weeks Ended November 2, 2019

   

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

   
                                   

Retail stores

  $ 401,943     $ 40,621     $     $ 442,564    
Landed wholesale-e-commerce/drop ship (1)           85,957             85,957    

Landed wholesale - other

          177,146       (14,071 )     163,075    

First-cost wholesale

          16,124             16,124    
First-cost wholesale - e-commerce (1)           354             354    

E-commerce - Company websites (1)

    44,489       36,692             81,181    

Licensing and royalty

          2,908             2,908    

Other (2)

    151       61             212    

Net sales

  $ 446,583     $ 359,863     $ (14,071 )   $ 792,375    

 

   

Thirteen Weeks Ended November 3, 2018

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 
                                 
Retail stores   $ 408,248     $ 43,186     $     $ 451,434  
Landed wholesale-e-commerce/drop ship (1)           66,698             66,698  
Landed wholesale - other           175,509       (15,968 )     159,541  
First-cost wholesale           21,345             21,345  
First-cost wholesale - e-commerce (1)           422             422  
E-commerce - Company websites (1)     40,383       32,000             72,383  
Licensing and royalty           3,810             3,810  

Other (2)

    134       62             196  

Net sales

  $ 448,765     $ 343,032     $ (15,968 )   $ 775,829  

 

   

Thirty-Nine Weeks Ended November 2, 2019

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 
                                 

Retail stores

  $ 1,108,200     $ 115,819     $     $ 1,224,019  
Landed wholesale-e-commerce/drop ship (1)           212,927             212,927  

Landed wholesale - other

          549,321       (56,463 )     492,858  

First-cost wholesale

          66,826             66,826  
First-cost wholesale - e-commerce (1)           1,528             1,528  

E-commerce - Company websites (1)

    109,954       102,637             212,591  

Licensing and royalty

          11,234             11,234  

Other (2)

    435       196             631  

Net sales

  $ 1,218,589     $ 1,060,488     $ (56,463 )   $ 2,222,614  

 

   

Thirty-Nine Weeks Ended November 3, 2018

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 
                                 
Retail stores   $ 1,147,512     $ 129,557     $     $ 1,277,069  
Landed wholesale-e-commerce/drop ship (1)           160,617             160,617  
Landed wholesale - other           479,173       (58,615 )     420,558  
First-cost wholesale           61,910             61,910  
First-cost wholesale - e-commerce (1)           583             583  
E-commerce - Company websites (1)     93,729       87,390             181,119  
Licensing and royalty           12,104             12,104  
Other (2)     407       216             623  

Net sales

  $ 1,241,648     $ 931,550     $ (58,615 )   $ 2,114,583  

(1) Collectively referred to as "e-commerce" below

(2Includes breakage revenue from unredeemed gift cards

 

11

 

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-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 and subsequently sells to a customer at an overseas port.  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 the Company's wholesale customers' websites that are fulfilled on a drop-ship or first-cost 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)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 
Customer allowances and discounts   $ 25,762     $ 23,835     $ 25,090  
Loyalty programs liability     17,274       16,299       14,637  
Returns reserve     15,040       15,373       13,841  
Gift card liability     4,794       4,169       5,426  

 

Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented.  In addition, during the thirty-nine weeks ended November 2, 2019, the loyalty programs liability increased $24.2 million due to points and material rights accrued for purchases and decreased $21.6 million due to expirations and redemptions.  During the thirty-nine weeks ended November 3, 2018, the loyalty programs liability increased $13.8 million due to purchases and $6.4 million due to the adoption of Topic 606 and decreased $12.0 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 November 2, 2019 and November 3, 2018:

 

   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands, except per share amounts)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 

NUMERATOR

                               

Net earnings

  $ 27,761     $ 29,155     $ 62,073     $ 69,946  

Net loss (earnings) attributable to noncontrolling interests

    226       (2 )     338       65  
Net earnings allocated to participating securities     (946 )     (800 )     (2,042 )     (1,950 )

Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities

  $ 27,041     $ 28,353     $ 60,369     $ 68,061  
                                 

DENOMINATOR

                               
Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders     39,258       41,999       39,983       41,958  
Dilutive effect of share-based awards     55       107       57       116  

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

    39,313       42,106       40,040       42,074  
                                 

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

  $ 0.69     $ 0.68     $ 1.51     $ 1.62  
                                 

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

  $ 0.69     $ 0.67     $ 1.51     $ 1.62  

 

Options to purchase 16,667 shares of common stock for the thirteen and thirty-nine weeks ended November 2, 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 and thirty-nine weeks ended November 3, 2018.

 

During the thirteen weeks ended November 2, 2019 and November 3, 2018, the Company repurchased 58,263 and zero shares, respectively, under the 2011 and 2018 publicly announced share repurchase programs, each of which permits repurchases of up to 2.5 million shares. The Company repurchased 1,588,741 and 100,000 shares during the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively.  As of November 2, 2019, the Company has repurchased a total of 4.3 million shares under the publicly announced share repurchase programs at an aggregate purchase price of $109.0 million. 

 

 

Note 6

Restructuring and Other Initiatives

 

Vionic Acquisition and Integration-Related Costs

During the thirteen weeks ended November 2, 2019, the Company incurred integration-related costs associated with the acquisition of Vionic, primarily for severance, totaling $1.0 million ($0.7 million on an after-tax basis, or $0.02 per diluted share). The costs are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings within the Eliminations and Other category.  During the thirty-nine weeks ended November 2, 2019, the Company incurred integration-related costs, primarily for severance, totaling $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share).  Of the $1.9 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings, $1.8 million is reflected within the Eliminations and Other category and $0.1 million is included in the Brand Portfolio segment. During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred acquisition and integration-related costs associated with Vionic, primarily for professional fees, totaling $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share), which are reflected within the Eliminations and Other category and is presented as restructuring and other special charges, net in the condensed consolidated statements of earnings.  As of November 2, 2019 and  November 3, 2018 restructuring reserves of $1.1 million and $1.8 million, respectively, 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.

 

Blowfish Malibu Acquisition and Integration-Related Costs

The Company incurred acquisition costs associated with the acquisition of Blowfish Malibu of $0.1 million ($0.1 million on an after-tax basis) and $0.3 million ($0.2 million on an after-tax basis, or $0.01 per diluted share) during the thirteen and thirty-nine weeks ended November 3, 2018, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings and reflected within the Eliminations and Other category.  There were no acquisition or integration-related costs associated with Blowfish during the thirteen or thirty-nine weeks ended November 2, 2019.  Refer to further discussion of the acquisition of Blowfish Malibu in Note 3 to the condensed consolidated financial statements.

 

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 thirty-nine weeks ended November 2, 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.  There were no corresponding costs in the thirteen weeks ended November 2, 2019 or the thirty-nine weeks ended November 3, 2018.

 

13

 

Integration and Reorganization of Men's Brands

During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred integration and reorganization costs, primarily for severance and professional fees, related to the men's business totaling $1.2 million ($0.9 million on an after-tax basis, or $0.02 per diluted share) and $4.8 million ($3.6 million on an after-tax basis, or $0.08 per diluted share), respectively.  Of the $1.2 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended November 3, 2018, $1.1 million was reflected within the Brand Portfolio segment and $0.1 million was reflected within the Eliminations and Other category.  Of the $4.8 million in costs for the thirty-nine weeks ended November 3, 2018, $4.4 million was reflected within the Brand Portfolio segment and $0.4 million was reflected within the Eliminations and Other category.  There were no integration and reorganization costs related to the men's business in the thirteen and thirty-nine weeks ended November 2, 2019

 

 

Note 7

Business Segment Information

 

During the first quarter of 2019, the Company changed its segment presentation to disclose 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 November 2, 2019 and November 3, 2018:

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 

Thirteen Weeks Ended November 2, 2019

                               
Net sales   $ 446,583     $ 359,863     $ (14,071 )   $ 792,375  
Intersegment sales (1)           14,071             14,071  
Operating earnings (loss)     27,681       19,398       (3,608 )     43,471  
Segment assets     973,272       1,360,445       137,493       2,471,210  
                                 

Thirteen Weeks Ended November 3, 2018

                               

Net sales

  $ 448,765     $ 343,032     $ (15,968 )   $ 775,829  

Intersegment sales (1)

          15,968             15,968  

Operating earnings (loss)

    24,414       25,114       (9,780 )     39,748  

Segment assets

    548,609       1,272,576       187,217       2,008,402  
                                 

Thirty-Nine Weeks Ended November 2, 2019

                               
Net sales   $ 1,218,589     $ 1,060,488     $ (56,463 )   $ 2,222,614  
Intersegment sales (1)           56,463             56,463  
Operating earnings (loss)     70,036       46,225       (18,117 )     98,144  
                                 

Thirty-Nine Weeks Ended November 3, 2018

                               

Net sales

  $ 1,241,648     $ 931,550     $ (58,615 )   $ 2,114,583  

Intersegment sales (1)

          58,615             58,615  

Operating earnings (loss)

    79,511       52,650       (37,323 )     94,838  

 

(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

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 
Operating earnings   $ 43,471     $ 39,748     $ 98,144     $ 94,838  
Interest expense, net     (10,559 )     (4,210 )     (25,288 )     (11,495 )
Other income, net     2,633       3,085       7,902       9,254  

Earnings before income taxes

  $ 35,545     $ 38,623     $ 80,758     $ 92,597  

 

14

 

 

Note 8

Inventories

 

The Company's net inventory balance was comprised of the following:

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 
Raw materials   $ 19,005     $ 18,002     $ 19,128  
Work-in-process     422       496       745  
Finished goods     625,219       679,767       663,298  

Inventories, net

  $ 644,646     $ 698,265     $ 683,171  

 

 

 

Note 9

Goodwill and Intangible Assets

 

Goodwill and intangible assets were as follows:

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 

Intangible Assets

                       

Famous Footwear

  $ 2,800     $ 2,800     $ 2,800  
Brand Portfolio     388,288       448,288       388,288  

Total intangible assets

    391,088       451,088       391,088  
Accumulated amortization     (93,518 )     (80,581 )     (83,722 )

Total intangible assets, net

    297,570       370,507       307,366  

Goodwill

                       
Brand Portfolio     245,275       283,345       242,531  

Total goodwill

    245,275       283,345       242,531  

Goodwill and intangible assets, net

  $ 542,845     $ 653,852     $ 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 $151.3 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.

 

The Company's intangible assets as of November 2, 2019, November 3, 2018 and February 2, 2019 were as follows:

 

($ thousands)

   

November 2, 2019

 
 

Estimated Useful Lives

 

Cost Basis

   

Accumulated Amortization

   

Net Carrying Value

 

Trademarks

15-40 years

  $ 288,788     $ 89,360     $ 199,428  

Trademarks

Indefinite

    58,100             58,100  

Customer relationships

15-16 years

    44,200       4,158       40,042  
      $ 391,088     $ 93,518     $ 297,570  

 

15

 

     

November 3, 2018

 
 

Estimated Useful Lives

 

Cost Basis

   

Accumulated Amortization

   

Net Carrying Value

 

Trademarks

15-40 years

  $ 288,788     $ 79,686     $ 209,102  

Trademarks

Indefinite

    118,100             118,100  

Customer relationships

15-20 years

    44,200       895       43,305  
      $ 451,088     $ 80,581     $ 370,507  

 

     

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 $1.8 million for the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively, and $9.8 million and $3.9 million for the thirty-nine weeks ended November 2, 2019 and November 3, 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 or thirty-nine weeks ended November 2, 2019.

 

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 or thirty-nine weeks ended November 2, 2019.

 

 

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:

 

 

Lease Term (years)

Renewal Options

Retail stores

5-10

Approximately 45% have options of varying periods

Manufacturing facility

8

None

Office facilities and distribution centers

10-15

5-20 years

Equipment

1-6

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.

 

16

 

The following is a summary of lease assets and liabilities on the condensed consolidated balance sheet at November 2, 2019:

 

($ thousands)

 

November 2, 2019

 

Lease Classification

       

Lease right-of-use assets

  $ 704,244  

Current lease obligations

    (144,501 )

Noncurrent lease obligations

    (629,731 )

Net balance sheet impact

  $ (69,988 )

 

The weighted-average lease term and discount rate as of November 2, 2019 were as follows:

 

   

November 2, 2019

 

Weighted-average remaining lease term (in years)

    6.8  

Weighted-average discount rate

    4.1 %

 

During the thirty-nine weeks ended November 2, 2019, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $124.7 million on the condensed consolidated balance sheets.  As of November 2, 2019, the Company has entered into lease commitments for four retail locations for which the leases have not yet commenced.  The Company anticipates that the leases for all four new retail locations will begin in the next fiscal year. Upon commencement, right-of-use assets and lease liabilities of approximately $4.6 million will be recorded on the condensed consolidated balance sheets. 

 

The components of lease expense for the thirteen and thirty-nine weeks ended November 2, 2019 were as follows:

 

   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 2, 2019

 
Operating lease expense   $ 47,068     $ 139,380  
Variable lease expense     11,794       35,277  
Short-term lease expense     577       2,654  
Sublease income     (73 )     (220 )

Total lease expense

  $ 59,366     $ 177,091  

 

Future minimum rent payments under noncancelable leases with an initial term of one year or more at  November 2, 2019 were as follows:

 

($ thousands)

       
Remainder of 2019   $ 48,312  
2020     173,074  
2021     146,124  
2022     121,234  
2023     101,674  
2024     79,038  
Thereafter     174,913  

Total minimum lease payments (1)

  $ 844,369  
Less imputed interest     (70,137 )

Present value of lease obligations

  $ 774,232  

(1) Minimum lease payments have not been reduced by minimum sublease rental income of $0.2 million due in the future under noncancelable sublease agreements. 

 

Supplemental cash flow information related to leases is as follows:

 

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

 
Cash paid for lease liabilities   $ 136,497  
Cash received from sublease income     220  

 

 

17

 

 

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 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 November 2, 2019.

At November 2, 2019, the Company had $295.0 million borrowings outstanding and $10.5 million in letters of credit outstanding under the Credit Agreement.  Total additional borrowing availability was $194.5 million at November 2, 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 November 2, 2019, the Company was in compliance with all covenants and restrictions relating to the Senior Notes.

 

18

 

 

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 November 2, 2019 and November 3, 2018:

 

($ thousands)

 

Foreign Currency Translation

   

Pension and Other Postretirement Transactions (1)

    Derivative Financial Instrument Transactions (2)    

Accumulated Other Comprehensive (Loss) Income

 

Balance at August 3, 2019

  $ (896 )   $ (30,199 )   $ (310 )   $ (31,405 )

Other comprehensive income before reclassifications

    595             66       661  

Reclassifications:

                               
Amounts reclassified from accumulated other comprehensive loss           578       (4 )     574  
Tax (benefit) provision           (149 )     1       (148 )

Net reclassifications

          429       (3 )     426  

Other comprehensive income

    595       429       63       1,087  

Balance at November 2, 2019

  $ (301 )   $ (29,770 )   $ (247 )   $ (30,318 )
                                 

Balance at August 4, 2018

  $ 176     $ (16,270 )   $ (675 )   $ (16,769 )

Other comprehensive income (loss) before reclassifications

    14             (415 )     (401 )

Reclassifications:

                               

Amounts reclassified from accumulated other comprehensive loss

          607       120       727  

Tax benefit

          (156 )     (25 )     (181 )

Net reclassifications

          451       95       546  

Other comprehensive income (loss)

    14       451       (320 )     145  

Balance at November 3, 2018

  $ 190     $ (15,819 )   $ (995 )   $ (16,624 )
                                 

Balance at February 2, 2019

  $ 62     $ (31,055 )   $ (608 )   $ (31,601 )
Other comprehensive (loss) income before reclassifications     (363 )           160       (203 )

Reclassifications:

                               
Amounts reclassified from accumulated other comprehensive loss           1,733       254       1,987  
Tax benefit           (448 )     (53 )     (501 )

Net reclassifications

          1,285       201       1,486  

Other comprehensive (loss) income

    (363 )     1,285       361       1,283  

Balance at November 2, 2019

  $ (301 )   $ (29,770 )   $ (247 )   $ (30,318 )
                                 

Balance at February 3, 2018

  $ 1,235     $ (17,172 )   $ 767     $ (15,170 )
Other comprehensive loss before reclassifications     (1,045 )           (1,648 )     (2,693 )

Reclassifications:

                               

Amounts reclassified from accumulated other comprehensive loss

          1,823       (147 )     1,676  

Tax (benefit) provision

          (470 )     33       (437 )

Net reclassifications

          1,353       (114 )     1,239  

Other comprehensive (loss) income

    (1,045 )     1,353       (1,762 )     (1,454 )

Balance at November 3, 2018

  $ 190     $ (15,819 )   $ (995 )   $ (16,624 )

 

 

(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 and selling and administrative expenses.  Refer to Note 15 and Note 16 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

 

19

 

 

Note 13

Share-Based Compensation

 

The Company recognized share-based compensation expense of $2.4 million and $3.6 million during the thirteen weeks and $8.9 million and $11.6 million during the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively.

 

The Company had net (repurchases) issuances of (69,377) and 17,225 shares of common stock during the thirteen weeks ended November 2, 2019 and November 3, 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.  During the thirty-nine weeks ended November 2, 2019 and November 3, 2018, the Company issued 295,466 and 290,756 shares of common stock, respectively, related to these share-based plans.

 

Restricted Stock 

The following table summarizes restricted stock activity for the periods ended November 2, 2019 and November 3, 2018:

 

   

Thirteen Weeks Ended

     

Thirteen Weeks Ended

 
   

November 2, 2019

     

November 3, 2018

 
    Total Number of Restricted Shares    

Weighted- Average Grant Date Fair Value

      Total Number of Restricted Shares    

Weighted- Average Grant Date Fair Value

 

August 3, 2019

    1,433,470     $ 27.09  

August 4, 2018

    1,205,898     $ 29.04  
Granted     11,000       22.44   Granted     45,000       33.52  
Forfeited     (78,000 )     30.75   Forfeited     (27,650 )     29.24  
Vested     (10,000 )     32.85   Vested            
November 2, 2019     1,356,470     $ 26.80   November 3, 2018     1,223,248     $ 29.20  

 

   

Thirty-Nine Weeks Ended

     

Thirty-Nine Weeks Ended

 
   

November 2, 2019

     

November 3, 2018

 
    Total Number of Restricted Shares    

Weighted- Average Grant Date Fair Value

      Total Number of Restricted Shares    

Weighted- Average Grant Date Fair Value

 

February 2, 2019

    1,249,223     $ 29.17  

February 3, 2018

    1,174,801     $ 27.92  
Granted     461,234       22.94   Granted     378,833       32.24  
Forfeited     (135,425 )     29.91   Forfeited     (44,950 )     28.69  
Vested     (218,562 )     30.25   Vested     (285,436 )     28.06  
November 2, 2019     1,356,470     $ 26.80   November 3, 2018     1,223,248     $ 29.20  

 

All of the restricted shares granted during the thirteen weeks ended November 2, 2019, have a graded-vesting term of three years.  Of the 461,234 restricted shares granted during the thirty-nine weeks ended November 2, 2019, 12,914 shares have a cliff-vesting term of one year and 448,320 shares have a graded-vesting term of three years.  All of the restricted shares granted during the thirteen weeks ended November 3, 2018, have a graded-vesting term of three years.  Of the 378,833 restricted shares granted during the thirty-nine weeks ended November 3, 2018, 3,642 shares have a cliff-vesting term of one year, 9,500 shares have a cliff-vesting term of four years, and 365,691 shares have a graded-vesting term of three years. 

 

Performance Share Awards

During the thirteen weeks ended November 2, 2019 and November 3, 2018, the Company granted no performance share awards.  During the thirty-nine weeks ended November 2, 2019 and November 3, 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.  

 

20

 

Stock Options
The following table summarizes stock option activity for the periods ended November 2, 2019 and November 3, 2018:

 

   

Thirteen Weeks Ended

     

Thirteen Weeks Ended

 
   

November 2, 2019

     

November 3, 2018

 
    Total Number of Stock Options    

Weighted- Average Grant Date Fair Value

      Total Number of Stock Options    

Weighted- Average Grant Date Fair Value

 

August 3, 2019

    39,667     $ 8.84  

August 4, 2018

    44,667     $ 8.32  

Granted

           

Granted

           

Exercised

    (2,000 )     4.64  

Exercised

           

Forfeited

           

Forfeited

           

Expired

           

Expired

           

November 2, 2019

    37,667     $ 9.06  

November 3, 2018

    44,667     $ 8.32  

 

   

Thirty-Nine Weeks Ended

     

Thirty-Nine Weeks Ended

 
   

November 2, 2019

     

November 3, 2018

 
    Total Number of Stock Options    

Weighted- Average Grant Date Fair Value

      Total Number of Stock Options    

Weighted- Average Grant Date Fair Value

 

February 2, 2019

    42,667     $ 8.64  

February 3, 2018

    81,042     $ 6.28  

Granted

           

Granted

           

Exercised

    (3,000 )     6.00  

Exercised

    (32,375 )     3.52  

Forfeited

    (2,000 )     4.57  

Forfeited

           

Expired

           

Expired

    (4,000 )     5.80  

November 2, 2019

    37,667     $ 9.06  

November 3, 2018

    44,667     $ 8.32  

 

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 1,350 and 780 RSUs to non-employee directors for dividend equivalents, during the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively, with weighted-average grant date fair values of $23.27 and $35.66, respectively.  The Company granted 55,679 and 38,728 RSUs to non-employee directors, including 4,023 and 2,308 RSUs for dividend equivalents, during the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively, with weighted-average grant date fair values of $19.59 and $34.33, 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)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 
Service cost   $ 1,805     $ 2,240     $     $  
Interest cost     3,707       3,546       15       15  
Expected return on assets     (6,933 )     (7,253 )            

Amortization of:

                               
Actuarial loss (gain)     977       1,030       (27 )     (31 )
Prior service income     (372 )     (392 )            

Total net periodic benefit income

  $ (816 )   $ (829 )   $ (12 )   $ (16 )

 

21

 

   

Pension Benefits

   

Other Postretirement Benefits

 
   

Thirty-Nine Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 
Service cost   $ 5,414     $ 6,717     $     $  
Interest cost     11,112       10,636       45       44  
Expected return on assets     (20,792 )     (21,757 )            

Amortization of:

                               
Actuarial loss (gain)     2,929       3,092       (81 )     (93 )
Prior service income     (1,115 )     (1,176 )            

Total net periodic benefit income

  $ (2,452 )   $ (2,488 )   $ (36 )   $ (49 )

 

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 November 2, 2019, November 3, 2018 and February 2, 2019, the Company had forward contracts maturing at various dates through May 2020, November 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. 

 

(U.S. $ equivalent in thousands)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 

Financial Instruments

                       

Euro

  $ 3,235     $ 13,480     $ 13,383  

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

    5,763       13,877       15,196  

Chinese yuan

    2,905       6,570       4,507  

New Taiwanese dollars

          530       461  

Other currencies

    139       388       382  

Total financial instruments

  $ 12,042     $ 34,845     $ 33,929  

 

The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of November 2, 2019, November 3, 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

                   
November 2, 2019 Prepaid expenses and other current assets     17   Other accrued expenses     325  
November 3, 2018 Prepaid expenses and other current assets     203   Other accrued expenses     1,414  

February 2, 2019

Prepaid expenses and other current assets

    159  

Other accrued expenses

    745  

 

22

 

For the thirteen and thirty-nine weeks ended November 2, 2019 and November 3, 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)

 

November 2, 2019

   

November 3, 2018

 

Foreign Exchange Forward Contracts: Income Statement Classification Gains (Losses) - Realized

 

Gain (Loss) Recognized in OCL on Derivatives

   

Gain Reclassified from Accumulated OCL into Earnings

   

Loss Recognized in OCL on Derivatives

   

Gain (Loss) Reclassified from Accumulated OCL into Earnings

 
                                 

Net sales

  $ 69     $ 2     $ (78 )   $  

Cost of goods sold

    38             (286 )     26  

Selling and administrative expenses

    (33 )     2       (152 )     (146 )

 

 
   

Thirty-Nine Weeks Ended

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 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

  $ (51 )   $ (3 )   $ (120 )   $ (4 )

Cost of goods sold

    390       (38 )     (970 )     (37 )

Selling and administrative expenses

    (147 )     (213 )     (955 )     188  

 

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: 

 

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). 

 

23

 

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.

 

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 and thirty-nine weeks ended November 2, 2019, the Company recorded accretion and remeasurement adjustments of $3.9 million and $4.4 million, respectively.  An immaterial amount of accretion was recorded during the thirteen and thirty-nine weeks ended November 3, 2018.  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.

 

24

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at November 2, 2019, November 3, 2018 and February 2, 2019. The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirty-nine weeks ended November 2, 2019 or November 3, 2018.   

 

           

Fair Value Measurements

 

($ thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Asset (Liability)

                               

November 2, 2019:

                               

Non-qualified deferred compensation plan assets

  $ 8,117     $ 8,117     $     $  

Non-qualified deferred compensation plan liabilities

    (8,117 )     (8,117 )            

Deferred compensation plan liabilities for non-employee directors

    (1,879 )     (1,879 )            

Restricted stock units for non-employee directors

    (3,282 )     (3,282 )            

Derivative financial instruments, net

    (308 )           (308 )      
Mandatory purchase obligation - Blowfish Malibu     (13,655 )                 (13,655 )

November 3, 2018:

                               

Cash equivalents – money market funds

  $ 56,668     $ 56,668     $     $  

Non-qualified deferred compensation plan assets

    7,723       7,223              

Non-qualified deferred compensation plan liabilities

    (7,723 )     (7,223 )            

Deferred compensation plan liabilities for non-employee directors

    (2,772 )     (2,772 )            

Restricted stock units for non-employee directors

    (5,395 )     (5,395 )            

Derivative financial instruments, net

    (1,211 )           (1,211 )      

Mandatory purchase obligation - Blowfish Malibu

    (9,138 )                 (9,138 )

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 )

 

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 $658.1 million and $102.8 million at November 2, 2019 and November 3, 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 operating lease right-of-use assets, 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

   

Thirty-Nine Weeks Ended

 

($ thousands)

 

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 

Impairment Charges

                               

Famous Footwear

  $ 769     $ 150     $ 1,509     $ 450  
Brand Portfolio     1,382       957       3,596       1,590  

Total impairment charges

  $ 2,151     $ 1,107     $ 5,105     $ 2,040  

 

Adoption of ASC 842 has resulted in higher impairment charges for under-performing retail stores as a direct result of including the right-of use-asset in the asset group that is evaluated for impairment.

 

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:

 

   

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 
   

Carrying

   

Fair

   

Carrying

   

Fair

   

Carrying

   

Fair

 

($ thousands)

 

Value(1)

   

Value

   

Value(1)

   

Value

   

Value(1)

   

Value

 

Borrowings under revolving credit agreement

  $ 295,000     $ 295,000     $ 350,000     $ 350,000     $ 335,000     $ 335,000  

Long-term debt

    200,000       206,200       200,000       203,500       200,000       205,500  

Total debt

  $ 495,000     $ 501,200     $ 550,000     $ 553,500     $ 535,000     $ 540,500  

(1) Excludes unamortized debt issuance costs and debt discount

 

25

 

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 17

Income Taxes

 

The Company’s consolidated effective tax rates were 21.9% and 24.5% for the thirteen weeks ended November 2, 2019 and November 3, 2018, respectively.  During the thirteen weeks ended November 2, 2019 and November 3, 2018, the Company recognized an immaterial amount of discrete tax benefits.  

 

For the thirty-nine weeks ended November 2, 2019 and November 3, 2018, the Company's consolidated effective tax rates were 23.1% and 24.5%, respectively.  The Company's effective tax rate was impacted by discrete tax benefits of $0.7 million for the thirty-nine weeks ended November 3, 2018, reflecting greater deductibility of certain 2017 expenses than originally estimated and share-based compensation.  If these discrete taxes had not been recognized during the thirty-nine weeks ended November 3, 2018, the Company's effective tax rate would have been 25.4%.

 

As of  November 2, 2019, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s foreign subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Tax Cuts and Jobs Act.  The Company periodically evaluates its foreign investment opportunities and plans, as well as its foreign working capital needs, to determine the level of investment required and, accordingly, determines the level of foreign earnings that is considered indefinitely reinvested.  Based upon that evaluation, earnings of the Company’s foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided.  If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.  Due to the complexity of the hypothetical calculation, it is not practicable to estimate the amount of the deferred tax liability associated with these unremitted foreign earnings.

 

 

 

Note 18

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 November 2, 2019 were $30.9 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 November 2, 2019 is $9.7 million, of which $9.0 million is recorded within other liabilities and $0.7 million is recorded within other accrued expenses.  Of the total $9.7 million reserve, $5.1 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 $14.0 million as of November 2, 2019.  The Company expects to spend approximately $0.5 million in 2019, $0.1 million in each of the following four years and $13.1 million in the aggregate thereafter related to the on-site remediation.

 

26

 

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.

 

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 19

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 the Company's 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 October 31, 2018, Vionic 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, Allen Edmonds and Vionic 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.

 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

November 2, 2019


 

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Assets

                                       

Current assets

                                       

Cash and cash equivalents

  $ 2,487     $ 20,040     $ 29,975     $     $ 52,502  

Receivables, net

    108,118       30,427       17,708             156,253  

Inventories, net

    133,258       476,687       34,701             644,646  
Prepaid expenses and other current assets     28,534       14,494       5,217             48,245  

Intercompany receivable – current

    144       96       10,611       (10,851 )      

Total current assets

    272,541       541,744       98,212       (10,851 )     901,646  

Other assets

    79,868       11,131       1,215             92,214  

Goodwill and intangible assets, net

    107,217       328,562       107,066             542,845  

Lease right-of-use assets

    123,490       548,639       32,115             704,244  

Property and equipment, net

    76,550       143,402       10,309             230,261  
Investment in subsidiaries     1,560,733             (25,950 )     (1,534,783 )      

Intercompany receivable – noncurrent

    602,934       640,835       800,327       (2,044,096 )      

Total assets

  $ 2,823,333     $ 2,214,313     $ 1,023,294     $ (3,589,730 )   $ 2,471,210  
                                         

Liabilities and Equity

                                       

Current liabilities

                                       

Borrowings under revolving credit agreement

  $ 295,000     $     $     $     $ 295,000  

Trade accounts payable

    115,407       128,490       31,802             275,699  

Lease obligations

    11,450       126,438       6,613             144,501  

Other accrued expenses

    65,810       91,013       22,207             179,030  
Intercompany payable – current     5,343             5,508       (10,851 )      

Total current liabilities

    493,010       345,941       66,130       (10,851 )     894,230  

Other liabilities

                                       

Noncurrent lease obligations

    126,347       472,579       30,805             629,731  
Long-term debt     198,276                         198,276  

Other liabilities

    92,293       2,399       931             95,623  

Intercompany payable – noncurrent

    1,262,567       114,458       667,071       (2,044,096 )      

Total other liabilities

    1,679,483       589,436       698,807       (2,044,096 )     923,630  

Equity

                                       

Caleres, Inc. shareholders’ equity

    650,840       1,278,936       255,847       (1,534,783 )     650,840  
Noncontrolling interests                 2,510             2,510  

Total equity

    650,840       1,278,936       258,357       (1,534,783 )     653,350  

Total liabilities and equity

  $ 2,823,333     $ 2,214,313     $ 1,023,294     $ (3,589,730 )   $ 2,471,210  

 

27

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE thirteen weeks ended November 2, 2019

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net sales

  $ 223,640     $ 563,398     $ 59,062     $ (53,725 )   $ 792,375  

Cost of goods sold

    148,245       340,009       30,127       (45,776 )     472,605  

Gross profit

    75,395       223,389       28,935       (7,949 )     319,770  

Selling and administrative expenses

    61,728       204,612       16,939       (7,949 )     275,330  

Restructuring and other special charges, net

    969       -       -       -       969  

Operating (loss) earnings

    12,698       18,777       11,996       -       43,471  

Interest (expense) income

    (10,564 )     (25 )     30       -       (10,559 )

Other income (expense)

    2,653       -       (20 )     -       2,633  

Intercompany interest income (expense)

    2,660       (2,709 )     49       -       -  

(Loss) earnings before income taxes

    7,447       16,043       12,055       -       35,545  

Income tax benefit (provision)

    (2,776 )     (3,651 )     (1,357 )     -       (7,784 )

Equity in earnings (loss) of subsidiaries, net of tax

    23,316       -       (488 )     (22,828 )     -  

Net earnings

    27,987       12,392       10,210       (22,828 )     27,761  

Less: Net loss attributable to noncontrolling interests

    -       -       (226 )     -       (226 )

Net earnings attributable to Caleres, Inc.

  $ 27,987     $ 12,392     $ 10,436     $ (22,828 )   $ 27,987  
                                         

Comprehensive income

  $ 29,074     $ 12,445     $ 10,718     $ (23,402 )   $ 28,835  

Less: Comprehensive loss attributable to noncontrolling interests

    -       -       (239 )     -       (239 )

Comprehensive income attributable to Caleres, Inc.

  $ 29,074     $ 12,445     $ 10,957     $ (23,402 )   $ 29,074  

 

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE thirty-nine weeks ended November 2, 2019

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net sales

  $ 623,292     $ 1,584,601     $ 194,233     $ (179,512 )   $ 2,222,614  

Cost of goods sold

    426,872       940,140       101,464       (151,412 )     1,317,064  

Gross profit

    196,420       644,461       92,769       (28,100 )     905,550  

Selling and administrative expenses

    181,662       600,020       51,390       (28,100 )     804,972  

Restructuring and other special charges, net

    2,434                         2,434  

Operating earnings

    12,324       44,441       41,379             98,144  

Interest (expense) income

    (25,294 )     (77 )     83             (25,288 )

Other income (expense)

    7,960             (58 )           7,902  

Intercompany interest income (expense)

    8,231       (8,292 )     61             -  

Earnings before income taxes

    3,221       36,072       41,465             80,758  

Income tax provision

    (3,159 )     (9,393 )     (6,133 )           (18,685 )

Equity in earnings (loss) of subsidiaries, net of tax

    62,349             (1,111 )     (61,238 )     -  

Net earnings

    62,411       26,679       34,221       (61,238 )     62,073  

Less: Net loss attributable to noncontrolling interests

                (338 )           (338 )

Net earnings attributable to Caleres, Inc.

  $ 62,411     $ 26,679     $ 34,559     $ (61,238 )   $ 62,411  
                                         

Comprehensive income

  $ 63,694     $ 26,641     $ 33,772     $ (60,785 )   $ 63,322  

Less: Comprehensive loss attributable to noncontrolling interests

                (372 )           (372 )

Comprehensive income attributable to Caleres, Inc.

  $ 63,694     $ 26,641     $ 34,144     $ (60,785 )   $ 63,694  

 

28

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE thirty-nine weeks ended November 2, 2019

 

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net cash provided by operating activities

  $ 15,776     $ 79,884     $ 50,077     $     $ 145,737  
                                         

Investing activities

                                       

Purchases of property and equipment

    (20,965 )     (14,365 )     (2,024 )           (37,354 )

Disposals of property and equipment

    636                         636  

Capitalized software

    (4,696 )     (197 )                 (4,893 )

Intercompany investing

    (337 )     337                    

Net cash used for investing activities

    (25,362 )     (14,225 )     (2,024 )           (41,611 )
                                         

Financing activities

                                       

Borrowings under revolving credit agreement

    237,000                         237,000  

Repayments under revolving credit agreement

    (277,000 )                       (277,000 )

Dividends paid

    (8,631 )                       (8,631 )

Acquisition of treasury stock

    (31,168 )                       (31,168 )

Issuance of common stock under share-based plans, net

    (2,605 )                       (2,605 )
Contributions by noncontrolling interests                     1,500               1,500  

Other

    (84 )     (938 )                 (1,022 )

Intercompany financing

    94,559       (53,829 )     (40,730 )            

Net cash used for financing activities

    12,071       (54,767 )     (39,230 )           (81,926 )

Effect of exchange rate changes on cash and cash equivalents

                102             102  

Increase in cash and cash equivalents

    2,485       10,892       8,925             22,302  

Cash and cash equivalents at beginning of period

    2       9,148       21,050             30,200  

Cash and cash equivalents at end of period

  $ 2,487     $ 20,040     $ 29,975     $     $ 52,502  

 

 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

November 3, 2018

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Assets

                                       

Current assets

                                       

Cash and cash equivalents

  $ 4,012     $ 11,817     $ 74,662     $     $ 90,491  

Receivables, net

    145,363       30,040       16,843             192,246  

Inventories, net

    154,706       513,448       30,111             698,265  

Prepaid expenses and other current assets

    34,621       33,869       6,020       (11,344 )     63,166  

Intercompany receivable – current

    291       137       8,038       (8,466 )      

Total current assets

    338,993       589,311       135,674       (19,810 )     1,044,168  

Other assets

    78,640       12,330       1,309             92,279  

Goodwill and intangible assets, net

    109,441       335,419       208,992             653,852  

Property and equipment, net

    43,761       163,019       11,323             218,103  

Investment in subsidiaries

    1,576,825             (24,821 )     (1,552,004 )      

Intercompany receivable – noncurrent

    583,048       560,563       745,589       (1,889,200 )      

Total assets

  $ 2,730,708     $ 1,660,642     $ 1,078,066     $ (3,461,014 )   $ 2,008,402  
                                         

Liabilities and Equity

                                       

Current liabilities

                                       
Borrowings under revolving credit agreement   $ 350,000     $     $     $     $ 350,000  
Trade accounts payable     141,012       151,127       25,360             317,499  

Other accrued expenses

    85,253       111,490       24,080       (11,344 )     209,479  

Intercompany payable – current

    3,363             5,103       (8,466 )      

Total current liabilities

    579,628       262,617       54,543       (19,810 )     876,978  

Other liabilities

                                       

Long-term debt

    197,817                         197,817  

Other liabilities

    119,291       42,185       5,046             166,522  

Intercompany payable – noncurrent

    1,068,219       95,440       725,541       (1,889,200 )      

Total other liabilities

    1,385,327       137,625       730,587       (1,889,200 )     364,339  

Equity

                                       

Caleres, Inc. shareholders’ equity

    765,753       1,260,400       291,604       (1,552,004 )     765,753  

Noncontrolling interests

                1,332             1,332  

Total equity

    765,753       1,260,400       292,936       (1,552,004 )     767,085  

Total liabilities and equity

  $ 2,730,708     $ 1,660,642     $ 1,078,066     $ (3,461,014 )   $ 2,008,402  

 

29

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE thirteen weeks ended November 3, 2018

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net sales

  $ 240,295     $ 540,379     $ 62,672     $ (67,517 )   $ 775,829  

Cost of goods sold

    163,609       325,966       32,262       (56,618 )     465,219  

Gross profit

    76,686       214,413       30,410       (10,899 )     310,610  

Selling and administrative expenses

    64,766       195,318       16,337       (10,899 )     265,522  

Restructuring and other special charges, net

    4,831       509                   5,340  

Operating earnings

    7,089       18,586       14,073             39,748  

Interest (expense) income

    (4,484 )           274             (4,210 )

Other income (expense)

    3,101             (16 )           3,085  

Intercompany interest income (expense)

    2,976       (2,951 )     (25 )            

Earnings before income taxes

    8,682       15,635       14,306             38,623  

Income tax provision

    (3,012 )     (4,122 )     (2,334 )           (9,468 )

Equity in earnings (loss) of subsidiaries, net of tax

    23,483             (662 )     (22,821 )      

Net earnings

    29,153       11,513       11,310       (22,821 )     29,155  

Less: Net earnings attributable to noncontrolling interests

                2             2  

Net earnings attributable to Caleres, Inc.

  $ 29,153     $ 11,513     $ 11,308     $ (22,821 )   $ 29,153  
                                         

Comprehensive income

  $ 29,309     $ 11,451     $ 11,362     $ (22,822 )   $ 29,300  

Less: Comprehensive loss attributable to noncontrolling interests

                (9 )           (9 )

Comprehensive income attributable to Caleres, Inc.

  $ 29,309     $ 11,451     $ 11,371     $ (22,822 )   $ 29,309  

 

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

FOR THE thirty-nine weeks ended November 3, 2018

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net sales

  $ 651,807     $ 1,487,877     $ 164,829     $ (189,930 )   $ 2,114,583  

Cost of goods sold

    448,832       862,345       83,538       (158,765 )     1,235,950  

Gross profit

    202,975       625,532       81,291       (31,165 )     878,633  

Selling and administrative expenses

    204,696       558,714       42,310       (31,165 )     774,555  

Restructuring and other special charges, net

    5,679       3,561                   9,240  

Operating (loss) earnings

    (7,400 )     63,257       38,981             94,838  

Interest (expense) income

    (12,108 )     (25 )     638             (11,495 )

Other income (expense)

    9,305             (51 )           9,254  

Intercompany interest income (expense)

    8,617       (8,650 )     33              

(Loss) earnings before income taxes

    (1,586 )     54,582       39,601             92,597  

Income tax provision

    (2,065 )     (14,257 )     (6,329 )           (22,651 )

Equity in earnings (loss) of subsidiaries, net of tax

    73,662             (1,256 )     (72,406 )      

Net earnings

    70,011       40,325       32,016       (72,406 )     69,946  

Less: Net loss attributable to noncontrolling interests

                (65 )           (65 )

Net earnings attributable to Caleres, Inc.

  $ 70,011     $ 40,325     $ 32,081     $ (72,406 )   $ 70,011  
                                         

Comprehensive income

  $ 68,633     $ 40,235     $ 31,824     $ (72,200 )   $ 68,492  

Less: Comprehensive loss attributable to noncontrolling interests

                (141 )           (141 )

Comprehensive income attributable to Caleres, Inc.

  $ 68,633     $ 40,235     $ 31,965     $ (72,200 )   $ 68,633  

 

30

 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE thirty-nine weeks ended November 3, 2018

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Net cash provided by operating activities

  $ 2,739     $ 76,601     $ 15,070     $     $ 94,410  
                                         

Investing activities

                                       

Purchases of property and equipment

    (14,094 )     (19,571 )     (1,579 )           (35,244 )

Capitalized software

    (3,077 )     (428 )                 (3,505 )
Acquisition of Blowfish Malibu, net of cash received     (17,284 )                       (17,284 )

Acquisition of Vionic, net of cash received

    (344,942 )                       (344,942 )

Intercompany investing

    2       (2 )                  

Net cash used for investing activities

    (379,395 )     (20,001 )     (1,579 )           (400,975 )
                                         

Financing activities

                                       
Borrowings under revolving credit agreement     360,000                         360,000  
Repayments under revolving credit agreement     (10,000 )                       (10,000 )
Repayments under capital lease obligations           (114 )                 (114 )

Dividends paid

    (9,059 )                       (9,059 )

Acquisition of treasury stock

    (3,288 )                       (3,288 )

Issuance of common stock under share-based plans, net

    (4,318 )                       (4,318 )

Intercompany financing

    21,244       (44,669 )     23,425              

Net cash provided by (used for) financing activities

    354,579       (44,783 )     23,425             333,221  

Effect of exchange rate changes on cash and cash equivalents

                (212 )           (212 )

(Decrease) increase in cash and cash equivalents

    (22,077 )     11,817       36,704             26,444  

Cash and cash equivalents at beginning of period

    26,089             37,958             64,047  
Cash and cash equivalents at end of period   $ 4,012     $ 11,817     $ 74,662     $     $ 90,491  

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

February 2, 2019

                   

Non-

                 

($ thousands)

 

Parent

   

Guarantors

   

Guarantors

   

Eliminations

   

Total

 

Assets

                                       

Current assets

                                       

Cash and cash equivalents

  $ 2     $ 9,148     $ 21,050     $     $ 30,200  

Receivables, net

    130,684       32,319       28,719             191,722  

Inventories, net

    175,697       470,610       36,864             683,171  

Prepaid expenses and other current assets

    31,195       32,556       7,603             71,354  

Intercompany receivable – current

    190       42       15,279       (15,511 )      

Total current assets

    337,768       544,675       109,515       (15,511 )     976,447  

Other assets

    68,707       11,824       909             81,440  

Goodwill and intangible assets, net

    108,884       331,810       109,203             549,897  

Property and equipment, net

    62,608       157,270       10,906             230,784  

Investment in subsidiaries

    1,499,209             (24,838 )     (1,474,371 )      

Intercompany receivable – noncurrent

    597,515       578,821       762,281       (1,938,617 )      

Total assets

  $ 2,674,691     $ 1,624,400     $ 967,976     $ (3,428,499 )   $ 1,838,568  
                                         

Liabilities and Equity

                                       

Current liabilities

                                       

Borrowings under revolving credit agreement

  $ 335,000     $     $     $     $ 335,000  

Trade accounts payable

    146,400       130,670       39,228             316,298  

Other accrued expenses

    95,498       86,015       20,525             202,038  

Intercompany payable – current

    10,781             4,730       (15,511 )      

Total current liabilities

    587,679       216,685       64,483       (15,511 )     853,336  

Other liabilities

                                       

Long-term debt

    197,932                         197,932  

Other liabilities

    105,689       41,149       5,027             151,865  

Intercompany payable – noncurrent

    1,149,338       115,114       674,165       (1,938,617 )      

Total other liabilities

    1,452,959       156,263       679,192       (1,938,617 )     349,797  

Equity

                                       

Caleres, Inc. shareholders’ equity

    634,053       1,251,452       222,919       (1,474,371 )     634,053  

Noncontrolling interests

                1,382             1,382  

Total equity

    634,053       1,251,452       224,301       (1,474,371 )     635,435  

Total liabilities and equity

  $ 2,674,691     $ 1,624,400     $ 967,976     $ (3,428,499 )   $ 1,838,568  

 

31

 

 

 

 

ITEM 2

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

 

OVERVIEW

Financial Highlights

 

The following is a summary of the financial highlights for the third quarter of 2019:

 

 

Consolidated net sales increased $16.6 million, or 2.1%, to $792.4 million in the third quarter of 2019, driven by our 2018 acquisition of Vionic, which contributed net sales growth of $33.0 million on a consolidated basis, net of eliminations ($32.8 million to the Brand Portfolio segment). Excluding Vionic, our net sales were lower by $16.5 million, driven by the challenging selling environment during the quarter, particularly in our Brand Portfolio segment.  Our Famous Footwear segment reported a $2.2 million, or 0.5% decline in sales, while same-store sales improved by 2.5% in the third quarter.  We also delivered our eighth consecutive year of positive back-to-school same-store sales.    

 

 

Consolidated gross profit increased $9.2 million, or 3.0%, to $319.8 million in the third quarter of 2019, compared to $310.6 million in the third quarter of 2018.  Our gross profit margin increased to 40.4% in the third quarter of 2019, compared to 40.0% in the third quarter of 2018.

 

 

Consolidated operating earnings increased $3.8 million, or 9.4%, to $43.5 million in the third quarter of 2019, compared to $39.7 million in the third quarter of 2018.

 

 

Consolidated net earnings attributable to Caleres, Inc. were $28.0 million, or $0.69 per diluted share, in the third quarter of 2019, compared to $29.2 million, or $0.67 per diluted share, in the third quarter of 2018.

 

The following items should be considered in evaluating the comparability of our third quarter results in 2019 and 2018:

 

 

Acquisition of Vionic – In October 2018, we acquired Vionic, a growing brand with strong consumer loyalty and a complementary fit to the other brands within our Brand Portfolio segment. Vionic contributed $38.8 million to our net sales (both on a Brand Portfolio basis and a consolidated basis, net of eliminations) for the third quarter of 2019 compared to $6.0 million ($5.8 million on a consolidated basis, net of eliminations) for the third quarter of 2018.  We incurred integration-related charges of $1.0 million during the third quarter of 2019, which are presented as restructuring and other special charges, net.  Refer to Note 3 and Note 6 to the condensed consolidated financial statements for additional information related to these costs.

 

 

Blowfish Malibu – In July 2018, we acquired a controlling interest in Blowfish Malibu, which gives us additional access to the growing sneaker and casual lifestyle segment of the market.  As further discussed in Note 3 and Note 16 to the condensed consolidated financial statements, the noncontrolling interest is subject to a mandatory purchase obligation after a three-year period, based upon an earnings multiple formula.  During the third quarter of 2019, we recorded accretion and remeasurement adjustments of $3.9 million ($2.9 million on an after-tax basis, or $0.07 per diluted share), which is recorded as interest expense, net in the condensed consolidated statements of earnings.

 

 

Incentive and Share-Based Compensation Plans – During the third quarter of 2019, our incentive and share-based compensation expenses decreased by approximately $5.0 million compared to the third quarter of 2018, due to lower anticipated payments associated with these plans and lower expenses for our cash-equivalent restricted stock units granted to directors, reflecting the Company's lower stock price.  

 

 

 

Tariffs In August 2019, the U.S. Administration announced plans to implement a tariff of 15% on approximately $300 billion of products imported into the U.S. from China.  On August 13, 2019, the list of goods subject to the tariff, referred to as List 4, was divided into two parts.  The tariffs for products on List 4a became effective as of September 1, 2019, while the tariffs for imported goods on List 4b are subject to a delay until December 15, 2019.  Approximately 60% of our branded products within our Brand Portfolio segment are sourced from China, the majority of which are product categories included on List 4a.  We continue to seek to mitigate the impacts of the tariffs in a number of ways, including diversifying production away from China.  We now source approximately 40% of our branded products outside of China.  We are also working with our factory partners to reduce cost, while selectively exploring price increases where they will be least disruptive to our customers.  Through these actions, we believe we have mitigated a significant portion of the increased tariffs on our third quarter of 2019 financial results.  We also expect an adverse impact from the tariffs on our fourth quarter of 2019 financial results.  As more fully described in Risk Factors in Part II, Item 1A, a prolonged trade war and further escalation of tariffs may result in lower gross margins in the future on products that we source from China.

 

 

 

Lease Accounting – We adopted ASU 2016-02, Leases (Topic 842), during the first quarter of 2019 using the modified retrospective transition method.  Therefore, prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented under the guidance in ASC 840.  As a result of the adoption of the ASU, we recorded an operating lease right-of-use asset of $729.2 million and lease liabilities of $791.7 million as of February 2, 2019.  In addition, adoption of the standard has resulted in higher impairment charges for under-performing retail stores as a direct result of including the right-of use-asset in the asset group that is evaluated for impairment.  We recognized right-of-use impairment charges of $1.6 million and $4.1 million in the third quarter and nine months ended November 2, 2019, respectively, with no corresponding impairment charges in the comparable periods in 2018.   Refer to Note 10 to the condensed consolidated financial statements for additional information on the adoption of this ASU.

 

 

Segment Presentation – During the first quarter of 2019, we changed our 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 the acquisitions of Vionic and Blowfish Malibu.  Prior period information has been recast to conform to the current presentation.  

 

 

Following are the consolidated results and the results by segment: 

 

CONSOLIDATED RESULTS


   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 

($ millions)

         

% of Net Sales

           

% of Net Sales

           

% of Net Sales

           

% of Net Sales

 

Net sales

  $ 792.4       100.0 %   $ 775.8       100.0 %   $ 2,222.6       100.0 %   $ 2,114.6       100.0 %

Cost of goods sold

    472.6       59.6 %     465.2       60.0 %     1,317.0       59.3 %     1,236.0       58.4 %

Gross profit

    319.8       40.4 %     310.6       40.0 %     905.6       40.7 %     878.6       41.6 %

Selling and administrative expenses

    275.3       34.8 %     265.6       34.2 %     805.0       36.2 %     774.6       36.7 %

Restructuring and other special charges, net

    1.0       0.1 %     5.3       0.7 %     2.5       0.1 %     9.2       0.4 %

Operating earnings

    43.5       5.5 %     39.7       5.1 %     98.1       4.4 %     94.8       4.5 %

Interest expense, net

    (10.5 )     (1.3 )%     (4.2 )     (0.5 )%     (25.2 )     (1.2 )%     (11.5 )     (0.5 )%

Other income, net

    2.6       0.3 %     3.1       0.4 %     7.9       0.4 %     9.3       0.4 %

Earnings before income taxes

    35.6       4.5 %     38.6       5.0 %     80.8       3.6 %     92.6       4.4 %

Income tax provision

    (7.8 )     1.0 %     (9.4 )     (1.2 )%     (18.7 )     (0.8 )%     (22.7 )     (1.1 )%

Net earnings

    27.8       3.5 %     29.2       3.8 %     62.1       2.8 %     69.9       3.3 %

Net (loss) earnings attributable to noncontrolling interests

    (0.2 )     0.0 %     0.0       0.0 %     (0.3 )     (0.0 )%     (0.1 )     (0.0 )%

Net earnings attributable to Caleres, Inc.

  $ 28.0       3.5 %   $ 29.2       3.8 %   $ 62.4       2.8 %   $ 70.0       3.3 %

 

Net Sales

Net sales increased $16.6 million, or 2.1% to $792.4 million for the third quarter of 2019, compared to $775.8 million for the third quarter of 2018. Our Brand Portfolio segment reported a $16.9 million, or 4.9%, increase in net sales, driven by net sales of our Vionic brand, which was acquired in October 2018.  The sales growth from the Vionic acquisition was partially offset by lower net sales of our Sam Edelman and Fergie brands.  Our Famous Footwear segment reported a $2.2 million, or 0.5% decrease in net sales, driven by a decrease in our store base, which resulted in a $12.6 million decrease in sales from new and closed stores, while same-store sales improved by 2.5%.  We also experienced a strong back-to-school selling season, delivering our eighth consecutive year of positive same-store sales.   

 

Net sales increased $108.0 million, or 5.1% to $2,222.6 million for the nine months ended November 2, 2019 compared to $2,114.6 million for the nine months ended November 3, 2018.  Our Brand Portfolio segment reported a $128.9 million, or 13.8%, increase in net sales driven by our recent acquisitions.  Our Famous Footwear segment reported a $23.0 million, or 1.9%, decrease in net sales, driven by a decrease in our store base, which resulted in a $36.0 million decrease in sales from new and closed stores. 

 

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months to the comparable retail calendar weeks in the prior year.  Relocated stores are treated as new stores, and closed stores are excluded from the calculation.  Sales change from new and closed stores, net reflects the change in net sales due to stores that have been opened or closed during the period and are therefore excluded from the same-store sales calculation.  E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation.

 

Gross Profit 

Gross profit increased $9.2 million, or 3.0%, to $319.8 million for the third quarter of 2019, compared to $310.6 million for the third quarter of 2018, driven by sales growth from our recent acquisitions.  As a percentage of net sales, gross profit increased to 40.4% for the third quarter of 2019, compared to 40.0% for the third quarter of 2018.  Cost of goods sold in the third quarter of 2018 included $1.8 million related to the amortization of the inventory adjustment required by purchase accounting for Blowfish and Vionic.  The mix of retail versus wholesale net sales declined to 64% and 36% in the third quarter of 2019, compared to 67% and 33%, respectively, in the third quarter of 2018, driven by our recent acquisitions. 

 

Gross profit increased $27.0 million, or 3.1%, to $905.6 million for the nine months ended November 2, 2019, compared to $878.6 million for the nine months ended November 3, 2018, reflecting sales growth from our recent acquisitions, partially offset by a lower gross profit rate.  As a percentage of net sales, gross profit decreased to 40.7% for the nine months ended November 2, 2019, compared to 41.6% for the nine months ended November 3, 2018, reflecting the promotional retail environment.  In addition, cost of goods sold for the nine months ended November 2, 2019 includes $7.2 million related to the amortization of the inventory adjustment required by purchase accounting for Blowfish and Vionic and incremental markdowns related to the Carlos brand exit.  Cost of goods sold for the nine months ended November 3, 2018 included $2.4 million related to the amortization of the inventory adjustment required by purchase accounting.  The mix of retail and wholesale net sales were 61% and 39%, respectively, in the nine months ended November 2, 2019, compared to 69% and 31%, respectively, in the nine months ended November 3, 2018.

 

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

 

 

Selling and Administrative Expenses 

Selling and administrative expenses increased $9.7 million, or 3.8%, to $275.3 million for the third quarter of 2019, compared to $265.6 million for the third quarter of 2018.  The increase was driven by additional costs associated with our Vionic brand, which was acquired late in the third quarter of 2018.  Excluding the Vionic acquisition, our expenses would be lower by $4.0 million, which primarily represents lower expenses of approximately $5.0 million associated with cash and stock-based incentive compensation plans.  As a percentage of net sales, selling and administrative expenses increased to 34.8% for the third quarter of 2019, from 34.2% for the third quarter of 2018.

 

Selling and administrative expenses increased $30.4 million, or 3.9%, to $805.0 million for the nine months ended November 2, 2019, compared to $774.6 million for the nine months ended November 3, 2018.  The increase was driven by additional costs associated with our recently acquired Vionic and Blowfish Malibu brands, including higher amortization expense on the intangible assets, partially offset by lower expenses associated with cash and stock-based incentive compensation plans.  As a percentage of net sales, selling and administrative expenses decreased to 36.2% for the nine months ended November 2, 2019, from 36.7% for the nine months ended November 3, 2018, reflecting better leveraging of our expenses over higher net sales.

 

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $1.0 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) and $2.5 million ($1.8 million on an after-tax basis, or $0.04 per diluted share) were incurred in the third quarter and nine months ended November 2, 2019, respectively, for integration-related costs for Vionic and costs associated with the exit of our Carlos brand.  Restructuring and other special charges of $5.3 million ($4.4 million on an after-tax basis, or $0.10 per diluted share) and $9.2 million ($7.3 million on an after-tax basis, or $0.17 per diluted share) were incurred in the third quarter and nine months ended November 3, 2018, respectively, primarily for the transition of Allen Edmonds' consumer-facing activities to St. Louis and acquisition and integration-related costs for Vionic and Blowfish Malibu. 

 

Operating Earnings 

Operating earnings increased $3.8 million, or 9.4%, to $43.5 million for the third quarter of 2019, compared to $39.7 million for the third quarter of 2018, reflecting earnings contribution from our recently acquired brands and lower restructuring charges.  As a percentage of net sales, operating earnings increased to 5.5% for the third quarter of 2019, compared to 5.1% for the third quarter of 2018.

 

Operating earnings increased $3.3 million, or 3.5% to $98.1 million for the nine months ended November 2, 2019, compared to $94.8 million for the nine months ended November 3, 2018, primarily reflecting earnings contribution from our recently acquired brands, partially offset by lower sales and gross margin at Famous Footwear and higher selling and administrative expenses.  As a percentage of net sales, operating earnings decreased slightly to 4.4% for the nine months ended November 2, 2019, compared to 4.5% for the nine months ended November 3, 2018.

 

Interest Expense, Net

Interest expense, net increased $6.3 million, or 150.0%, to $10.5 million for the third quarter of 2019, compared to $4.2 million for the third quarter of 2018, reflecting the fair value adjustment to the Blowfish Malibu mandatory purchase obligation of $3.9 million in the third quarter of 2019, as well as higher average borrowings under our revolving credit agreement that was used to fund the acquisition of Vionic in October 2018.  Refer to Note 16 to the condensed consolidated financial statements for further discussion regarding the mandatory purchase obligation.

 

Interest expense, net increased $13.7 million, or 119.1%, to $25.2 million for the nine months ended November 2, 2019, compared to $11.5 million for the nine months ended November 3, 2018, reflecting higher average borrowings under our revolving credit agreement during the nine months ended November 2, 2019 and the fair value adjustment to the mandatory purchase obligation associated with the Blowfish Malibu acquisition of $4.4 million. 

 

Other Income, Net

Other income, net decreased $0.5 million, or 14.7%, to $2.6 million for the third quarter of 2019, compared to $3.1 million for the third quarter of 2018, driven by the lower expected return on assets for our domestic pension plan.

 

Other income, net decreased $1.4 million, or 14.6%, to $7.9 million for the nine months ended November 2, 2019, compared to $9.3 million for the nine months ended November 3, 2018.  Refer to Note 14 to the condensed consolidated financial statements for additional information related to our retirement plans.

 

Income Tax Provision 

Our effective tax rate can vary considerably from period to period, depending on a number of factors.  Our consolidated effective tax rate was 21.9% for the third quarter of 2019, compared to 24.5% for the third quarter of 2018.  Discrete tax benefits recognized during the third quarter of 2019 and 2018 were immaterial. 

 

For the nine months ended November 2, 2019, our consolidated effective tax rate was 23.1%, compared to 24.5% for the nine months ended November 3, 2018.  We recognized discrete tax benefits of $0.7 million during the nine months ended November 3, 2018, reflecting greater deductibility of certain 2017 expenses than originally estimated and share-based compensation.  If these discrete tax benefits had not been recognized, our effective tax rate would have been 25.4% for the nine months ended November 3, 2018.

 

Net Earnings Attributable to Caleres, Inc. 

Net earnings attributable to Caleres, Inc. were $28.0 million and $62.4 million for the third quarter and nine months ended November 2, 2019, respectively, compared to net earnings of $29.2 million and $70.0 million for the third quarter and nine months ended November 3, 2018, respectively, as a result of the factors described above.

 

 

FAMOUS FOOTWEAR


   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

November 2, 2019

   

November 3, 2018

   

November 2, 2019

   

November 3, 2018

 

($ millions, except sales per square foot)

         

% of Net Sales

           

% of Net Sales

           

% of Net Sales

           

% of Net Sales

 

Operating Results

                                                               

Net sales

  $ 446.6       100.0 %   $ 448.8       100.0 %   $ 1,218.6       100.0 %   $ 1,241.6       100.0 %

Cost of goods sold

    263.3       59.0 %     266.3       59.3 %     700.3       57.5 %     706.8       56.9 %

Gross profit

    183.3       41.0 %   $ 182.5       40.7 %     518.3       42.5 %   $ 534.8       43.1 %

Selling and administrative expenses

    155.6       34.8 %     158.1       35.3 %     448.3       36.8 %     455.3       36.7 %

Operating earnings

  $ 27.7       6.2 %   $ 24.4       5.4 %   $ 70.0       5.7 %   $ 79.5       6.4 %
                                                                 

Key Metrics

                                                               

Same-store sales % change

    2.5 %             2.8 %             1.1 %             1.7 %        

Same-store sales $ change

  $ 10.6             $ 11.9             $ 13.6             $ 19.8          
Impact of retail calendar shift   $             $ (27.9 )           $             $ (6.2 )        

Sales change from new and closed stores, net

  $ (12.6 )           $ (7.9 )           $ (36.0 )           $ (16.4 )        

Impact of changes in Canadian exchange rate on sales

  $ (0.2 )           $ (0.4 )           $ (0.6 )           $ (0.1 )        
                                                                 

Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)

  $ 63             $ 61             $ 172             $ 172          

Sales per square foot, excluding e-commerce (trailing twelve months)

  $ 221             $ 224             $ 221             $ 224          

Square footage (thousand sq. ft.)

    6,349               6,657               6,349               6,657          
                                                                 

Stores opened

    4               9               11               15          

Stores closed

    17               10               43               34          

Ending stores

    960               1,007               960               1,007          

 

Net Sales 

Net sales decreased $2.2 million, or 0.5%, to $446.6 million for the third quarter of 2019, compared to $448.8 million for the third quarter of 2018.  The sales decrease was driven by a reduction in our store base, partially offset by a 2.5% increase in same-store sales.  Famous Footwear continues to experience strong growth in e-commerce sales.  During the third quarter of 2019, we experienced growth in sales of sandals and boots.  We opened four stores and closed 17 stores during the third quarter of 2019, resulting in 960 stores and total square footage of 6.3 million at the end of the third quarter of 2019, compared to 1,007 stores and total square footage of 6.7 million at the end of the third quarter of 2018.  Subsequent to quarter-end, we also announced the opening of a new store in New York City, which will enable us to broaden the reach of the brand featuring world-class, in-demand brands at a great value.  Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment's sales, with approximately 79% of our net sales made to program members in the third quarter of 2019, compared to 77% in the third quarter of 2018.  We believe the relaunch of Rewards in early 2019 has driven increased consumer engagement among existing members and has resulted in continued growth in our new and reactivated membership base.       

 

Net sales decreased $23.0 million, or 1.9% to $1,218.6 million for the nine months ended November 2, 2019, compared to $1,241.6 million for the nine months ended November 3, 2018.  The sales decrease was driven by a decrease in our store base, which resulted in a $36.0 million decrease in sales from new and closed stores, partially offset by a 1.1% increase in same-store sales in the nine months ended November 2, 2019.  On a trailing twelve-month basis, sales per square foot, excluding e-commerce, decreased 1.3% to $221 for the twelve months ended November 2, 2019, compared to $224 for the twelve months ended November 3, 2018. 

 

Gross Profit 

Gross profit increased $0.8 million, or 0.4%, to $183.3 million for the third quarter of 2019, compared to $182.5 million for the third quarter of 2018 reflecting a higher gross profit rate, partially offset by lower net sales.  As a percentage of net sales, our gross profit increased to 41.0% for the third quarter of 2019, compared to 40.7% for the third quarter of 2018, driven by an increased mix of higher margin product and lower freight expenses.

 

Gross profit decreased $16.5 million, or 3.1%, to $518.3 million for the nine months ended November 2, 2019, compared to $534.8 million for the nine months ended November 3, 2018.  As a percentage of net sales, our gross profit decreased to 42.5% for the nine months ended November 2, 2019, compared to 43.1% for the nine months ended November 3, 2018, reflecting the promotional retail environment and higher freight expenses due to strong growth in e-commerce sales in the nine months ended November 2, 2019.  We expect the trend toward a higher mix of e-commerce sales to continue.

 

 

Selling and Administrative Expenses 

Selling and administrative expenses decreased $2.5 million, or 1.6%, to $155.6 million for the third quarter of 2019, compared to $158.1 million for the third quarter of 2018.  The decrease was primarily driven by lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses and higher right-of-use asset impairment charges.  We also expanded our television marketing this quarter, contributing to the same-store sales improvement.  As a percentage of net sales, selling and administrative expenses decreased to 34.8% for the third quarter of 2019, compared to 35.3% for the third quarter of 2018.

 

Selling and administrative expenses decreased $7.0 million, or 1.6%, to $448.3 million for the nine months ended November 2, 2019, compared to $455.3 million for the nine months ended November 3, 2018, reflecting lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses, due in part to the launch of our new Rewards program in the first quarter of 2019, and higher right-of-use asset impairment charges.  The adoption of ASC 842 has resulted in higher impairment charges for under-performing stores as a direct result of including the right-of-use asset in the asset group that is evaluated for impairment.  We recognized $4.1 million of impairment charges in the nine months ended November 2, 2019, compared to zero in the prior year.  As a percentage of net sales, selling and administrative expenses increased slightly to 36.8% for the nine months ended November 2, 2019, compared to 36.7% for the nine months ended November 3, 2018.

 

Operating Earnings  

Operating earnings increased $3.3 million, or 13.4%, to $27.7 million for the third quarter of 2019, compared to $24.4 million for the third quarter of 2018, reflecting the factors described above.  As a percentage of net sales, operating earnings increased to 6.2% for the third quarter of 2019, compared to 5.4% for the third quarter of 2018.

 

Operating earnings decreased $9.5 million, or 11.9%, to $70.0 million for the nine months ended November 2, 2019, compared to $79.5 million for the nine months ended November 3, 2018, reflecting the factors described above.  As a percentage of net sales, operating earnings decreased to 5.7% for the nine months ended November 2, 2019, compared to 6.4% for the nine months ended November 3, 2018.

 

 

BRAND PORTFOLIO


 

   

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

   

November 2, 2019

 

November 3, 2018

 

November 2, 2019

 

November 3, 2018

($ millions, except sales per square foot)

          % of Net Sales           % of Net Sales           % of Net Sales           % of Net Sales

Operating Results

                                                       

Net sales

  $ 359.9     100.0 %   $ 343.0     100.0 %   $ 1,060.5     100.0 %   $ 931.6     100.0 %
Cost of goods sold     226.1     62.8 %     216.4     63.1 %     675.0     63.7 %     587.9     63.1 %
Gross profit     133.8     37.2 %     126.6     36.9 %     385.5     36.3 %     343.7     36.9 %
Selling and administrative expenses     114.4     31.8 %     100.4     29.3 %     338.7     31.9 %     286.6     30.8 %
Restructuring and other special charges, net         0.0 %     1.1     0.3 %     0.6     0.0 %     4.4     0.4 %
Operating earnings   $ 19.4     5.4 %   $ 25.1     7.3 %   $ 46.2     4.4 %   $ 52.7     5.7 %
                                                         

Key Metrics

                                                       
Direct-to-consumer (% of net sales) (1)     45 %           41 %           41 %           41 %      

Wholesale/retail sales mix (%)

    80%/20%             79%/21%             81%/19%             76%/24%        

Change in wholesale net sales ($) (2)

  $ 20.2           $ 24.7           $ 143.7           $ 30.6        

Unfilled order position at end of period

  $ 354.4           $ 402.1                                    
                                                         

Same-store sales % change

    (5.1 )%           1.7 %           (7.6 )%           (0.2 )%      

Same-store sales $ change

  $ (3.5 )         $ 0.9           $ (15.1 )         $ (0.3 )      

Sales change from new and closed stores, net

  $ 0.4           $ 0.6           $ 1.1           $ 4.0        

Impact of changes in Canadian exchange rate on retail sales

  $ (0.2 )         $ (0.6 )         $ (0.8 )         $ -        
                                                         

Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)

  $ 102           $ 108           $ 292           $ 321        

Sales per square foot, excluding e-commerce (trailing twelve months)

  $ 394           $ 441           $ 394           $ 441        

Square footage (thousands sq. ft.)

    400             400             400             400        
                                                         

Stores opened

    2             1             5             5        

Stores closed

    1             2             2             9        

Ending stores

    232             232             232             232        

 

(1)

Direct-to-consumer includes sales of our retail stores and e-commerce sites, sales to online-only retailers and sales through our customers' websites that we fulfill on a drop-ship basis.  

(2)

Includes sales from our acquired Vionic and Blowfish Malibu brands, which contributed net sales growth of $32.8 million and $6.5 million, respectively, for the third quarter of 2019, and $134.6 million and $38.4 million, respectively, for the first nine months of 2019.  

 

 

Net Sales 

Net sales increased $16.9 million, or 4.9%, to $359.9 million for the third quarter of 2019, compared to $343.0 million for the third quarter of 2018 driven by net sales from the acquisition of Vionic in October 2018, which contributed $32.8 million to our net sales growth in the third quarter of 2019.  Excluding Vionic, our net sales declined $16.2 million, due in part to the highly promotional retail environment.  We experienced lower net sales of our Sam Edelman and Fergie brands, partially offset by higher net sales of our Blowfish and Franco Sarto brands.  Sales were also impacted by a same-store-sales decline of 5.1% in our retail stores.  However, e-commerce sales continue to grow as a percentage of the business.  During the third quarter of 2019, we experienced strong domestic boot sales, despite the later start to fall weather.  We opened two stores and closed one store during the third quarter of 2019, resulting in a total of 232 stores and total square footage of 0.4 million at the end of the third quarter of 2019, consistent with the third quarter of 2018.  On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, decreased to $394 for the twelve months ended November 2, 2019, compared to $441 for the twelve months ended November 3, 2018.

 

Net sales increased $128.9 million, or 13.8%, to $1,060.5 million for the nine months ended November 2, 2019, compared to $931.6 million for the nine months ended November 3, 2018, driven by net sales from our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $134.6 million and $38.4 million, respectively, to our net sales growth in the first nine months of 2019.  The sales growth from acquisitions was partially offset by the planned reduction in Allen Edmonds sales and lower Sam Edelman sales and 7.6% decline in same-store sales in our retail stores.  During the nine months ended November 2, 2019, we opened five stores and closed two stores.

 

Our unfilled order position for our wholesale sales decreased $47.7 million, or 11.9%, to $354.4 million at November 2, 2019, compared to $402.1 million at November 3, 2018.  The decrease in our backlog order levels reflects an industry shift to a more dynamic and on-demand ordering pattern, with lower initial orders but higher replenishment later in the season.

 

Gross Profit 

Gross profit increased $7.2 million, or 5.7%, to $133.8 million for the third quarter of 2019, compared to $126.6 million for the third quarter of 2018, primarily reflecting net sales growth from the Vionic acquisition late in the third quarter of 2018.  As a percentage of net sales, our gross profit increased to 37.2% for the third quarter of 2019, compared to 36.9% for the third quarter of 2018.  Cost of goods sold in the third quarter of 2018 included $1.8 million related to the amortization of the inventory adjustment required by purchase accounting for both Blowfish Malibu and Vionic.  Excluding this adjustment, our gross profit as a percentage of net sales declined approximately 30 basis points due, in part, to the promotional retail environment and the impact of tariffs. 

 

Gross profit increased $41.8 million, or 12.2%, to $385.5 million for the nine months ended November 2, 2019, compared to $343.7 million for the nine months ended November 3, 2018, reflecting our net sales growth, partially offset by higher incremental cost of goods sold in the nine months ended November 2, 2019 related to purchase accounting inventory adjustments and incremental markdowns related to the Carlos brand exit.  As a percentage of net sales, our gross profit decreased to 36.3% for the nine months ended November 2, 2019, compared to 36.9% for the nine months ended November 3, 2018, due in part to a higher mix of wholesale versus retail sales.

 

As discussed in the Overview section, the U.S. Administration has implemented a tariff on many consumer products imported into the U.S. from China.  Although we have increased the sourcing of our branded footwear within our Brand Portfolio segment from other countries in recent years to approximately 40%, the majority of our footwear is sourced from China.  We believe we have mitigated a significant portion of the impact of the increased tariffs on our fiscal 2019 financial results.  However, a prolonged trade war and further escalation of tariffs may result in lower gross margins in the future on products that we source from China. 

 

Selling and Administrative Expenses 

Selling and administrative expenses increased $14.0 million, or 13.9%, to $114.4 million for the third quarter of 2019, compared to $100.4 million for the third quarter of 2018, reflecting higher expenses from our Vionic acquisition late in the third quarter of 2018.  As a percentage of net sales, selling and administrative expenses increased to 31.8% for the third quarter of 2019, compared to 29.3% for the third quarter of 2018.

 

Selling and administrative expenses increased $52.1 million, or 18.2%, to $338.7 million for the nine months ended November 2, 2019, compared to $286.6 million for the nine months ended November 3, 2018, driven by higher expenses from our Vionic and Blowfish Malibu acquisitions.  As a percentage of net sales, selling and administrative expenses increased to 31.9% for the nine months ended November 2, 2019, compared to 30.8% for the nine months ended November 3, 2018.

 

Restructuring and Other Special Charges, Net

Restructuring and other special charges were $1.1 million in the third quarter of 2018 related to the integration and reorganization of our men's business and acquisition and integration-related costs associated with the acquisitions of Blowfish Malibu and Vionic in July and October 2018, respectively, with no corresponding charges in the third quarter of 2019. 

 

Restructuring and other special charges were $0.6 million, primarily related to the acquisition of Vionic, in the nine months ended November 2, 2019, and $4.4 million, related to the integration and reorganization of our men's business and acquisition and integration-related costs associated with the acquisitions of Blowfish Malibu and Vionic in July and October 2018, respectively, in the nine months ended November 3, 2018.  Refer to Note 6 to the condensed consolidated financial statements for additional information related to these charges.

 

Operating Earnings 

Operating earnings decreased $5.7 million, or 22.8%, to $19.4 million for the third quarter of 2019, compared to $25.1 million for the third quarter of 2018 as a result of the factors described above.  As a percentage of net sales, operating earnings decreased to 5.4% for the third quarter of 2019, compared to 7.3% in the third quarter of 2018.

 

 

Operating earnings decreased $6.5 million, or 12.2%, to $46.2 million for the nine months ended November 2, 2019, compared to $52.7 million for the nine months ended November 3, 2018. As a percentage of net sales, operating earnings decreased to 4.4% for the nine months ended November 2, 2019, compared to 5.7% in the nine months ended November 3, 2018.

 

ELIMINATIONS AND OTHER

   

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

   

November 2, 2019

 

November 3, 2018

 

November 2, 2019

 

November 3, 2018

($ millions)

          % of Net Sales           % of Net Sales           % of Net Sales           % of Net Sales

Operating Results

                                                               

Net sales

  $ (14.1 )     100.0 %   $ (16.0 )     100.0 %   $ (56.5 )     100.0 %   $ (58.6 )     100.0 %
Cost of goods sold     (16.8 )     119.1 %     (17.6 )     110.0 %     (58.3 )     103.2 %     (58.8 )     100.3 %
Gross profit     2.7       (19.1 )%     1.6       (9.8 )%     1.8       (3.2 )%     0.2       (0.3) %
Selling and administrative expenses     5.4       (38.3 )%     7.1       (44.4 )%     18.1       (32.0 )%     32.6       (55.6 )%
Restructuring and other special charges, net     0.9       (6.4 )%     4.3       (26.9 )%     1.8       (3.2 )%     4.8       (8.2 )%
Operating loss   $ (3.6 )     25.5 %   $ (9.8 )     61.3 %   $ (18.1 )     32.0 %   $ (37.2 )     63.5 %

 

The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.  The net sales increase of $1.9 million and $2.1 for the third quarter and nine months ended November 2, 2019, respectively, reflects a lower sales elimination for product sold from our Brand Portfolio segment to Famous Footwear.  Selling and administrative expenses of $5.4 million and $18.1 million were incurred in the third quarter and first nine months of 2019, respectively, compared to $7.1 million and $32.6 million for the third quarter and first nine months of 2018, respectively.  The decrease for the respective periods was primarily driven by lower expenses for our cash and share-based incentive compensation plans. 

 

 

LIQUIDITY AND CAPITAL RESOURCES


Borrowings 

($ millions)

 

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 

Borrowings under revolving credit agreement

  $ 295.0     $ 350.0     $ 335.0  

Long-term debt

    198.3       197.8       197.9  

Total debt

  $ 493.3     $ 547.8     $ 532.9  

 

Total debt obligations of $493.3 million at November 2, 2019 decreased $54.5 million, from $547.8 million at November 3, 2018, and decreased $39.6 million, from $532.9 million at February 2, 2019. The decrease from November 3, 2018 includes $55.0 in repayments on our revolving credit agreement.  The decrease from February 2, 2019 includes $40.0 million in repayments under our revolving credit agreement.  Net interest expense for the third quarter of 2019 increased $6.4 million to $10.6 million, compared to $4.2 million for the third quarter of 2019.  Net interest expense increased $13.7 million to $25.2 million for the nine months ended November 2, 2019, compared to $11.5 million for the nine months ended November 3, 2018.  The increases in the respective periods are attributable to the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 3 and Note 16 to the condensed consolidated financial statements and higher average borrowings under our revolving credit agreement, which was used to fund the Vionic acquisition in the third quarter of 2018.

 

Credit Agreement 

As further discussed in Note 11, the Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to $500.0 million, with the option to increase by up to $250.0 million.  At November 2, 2019, we had $295.0 million in borrowings and $10.5 million in letters of credit outstanding under the Credit Agreement.  Total borrowing availability was $194.5 million at November 2, 2019.  We were in compliance with all covenants and restrictions under the Credit Agreement as of November 2, 2019.  We anticipate incremental interest expense going forward until the borrowings to fund the acquisition of Vionic have been repaid.  Refer to further discussion regarding the Credit Agreement in Note 11 to the condensed consolidated financial statements. 

 

 

$200 Million Senior Notes 

On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 2023 (the "Senior Notes").  Our Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement.  The Senior Notes bear interest at 6.25%, which is payable on February 15 and August 15 of each year.  We may redeem some or all of the Senior Notes at various redemption prices.


The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets.  As of November 2, 2019, we were in compliance with all covenants and restrictions relating to the Senior Notes.

 

Working Capital and Cash Flow


   

Thirty-Nine Weeks Ended

         

($ millions)

 

November 2, 2019

   

November 3, 2018

   

Change

 

Net cash provided by operating activities

  $ 145.7     $ 94.4     $ 51.3  

Net cash used for investing activities

    (41.6 )     (401.0 )     359.4  

Net cash (used for) provided by financing activities

    (81.9 )     333.2       (415.1 )

Effect of exchange rate changes on cash and cash equivalents

    0.1       (0.2 )     0.3  

Increase in cash and cash equivalents

  $ 22.3     $ 26.4     $ (4.1 )

 

Reasons for the major variances in cash provided (used) in the table above are as follows: 

 

Cash provided by operating activities was $51.3 million higher in the nine months ended November 2, 2019 as compared to the nine months ended November 3, 2018, primarily reflecting the following factors:  

 

 

A decrease in inventories in the nine months ended November 2, 2019, compared to an increase in the comparable period in 2018; and

 

A decrease in receivables in the nine months ended November 2, 2019, compared to an increase in the nine months ended November 3, 2018, partially offset by,

  A decrease in trade accounts payable in the nine months ended November 2, 2019, compared to an increase in the comparable period in 2018, driven by lower purchases of inventory in the nine months ended November 2, 2019; and
  A decrease in accrued expenses and other liabilities in the nine months ended November 2, 2019, compared to an increase in the nine months ended November 3, 2018, due in part to lower anticipated payments of our cash-based incentive compensation plans in 2019 and higher accrued liabilities in 2018 associated with our new distribution center in Chino, California.

 

Cash used for investing activities was $359.4 million lower in the nine months ended November 2, 2019 as compared to the nine months ended November 3, 2018, reflecting the acquisitions of Vionic and Blowfish Malibu in the nine months ended November 3, 2018. 

 

Cash used for financing activities was $415.1 million higher for the nine months ended November 2, 2019 as compared to the nine months ended November 3, 2018, reflecting $40.0 million of net repayments under our revolving credit agreement in the nine months ended November 2, 2019, compared to net borrowings of $350.0 million in the comparable period in 2018 related to the Vionic acquisition, and more shares repurchased under our stock repurchase programs during the nine months ended November 2, 2019. 

 

 

A summary of key financial data and ratios at the dates indicated is as follows: 

 

   

November 2, 2019

   

November 3, 2018

   

February 2, 2019

 

Working capital ($ millions) (1)

  $ 7.4     $ 167.2     $ 123.1  

Current ratio (2)

 

1.01:1

   

1.19:1

   

1.14:1

 

Debt-to-capital ratio (3)

    43.8 %     41.7 %     45.6 %

 

 

(1)

Working capital has been computed as total current assets less total current liabilities.  The working capital as of November 2, 2019 includes $144.5 million of operating lease obligations as a result of the adoption of ASC 842, as further discussed in Note 2 and Note 10 to the condensed consolidated financial statements.

 

(2)

The current ratio has been computed by dividing total current assets by total current liabilities.  The current ratio as of November 2, 2019 includes $144.5 million of operating lease obligations.

 

(3)

The debt-to-capital ratio has been computed by dividing total debt by total capitalization.  Total debt is defined as long-term debt and borrowings under the Credit Agreement.  Total capitalization is defined as total debt and total equity.

  

Working capital at November 2, 2019 was $7.4 million, which was $159.8 million and $115.7 million lower than at November 3, 2018 and February 2, 2019, respectively.  Our current ratio was 1.01 to 1 as of November 2, 2019, compared to 1.19 to 1 at November 3, 2018 and 1.14:1 at February 2, 2019. The decrease in both working capital and the current ratio from November 3, 2018 and February 2, 2019 primarily reflects the impact of the adoption of ASC 842 on the balance sheet as further discussed in Note 2 to the condensed consolidated financial statements, including the addition of current operating lease obligations of $144.5 million. Our debt-to-capital ratio was 43.8% as of November 2, 2019, compared to 41.7% as of November 3, 2018 and 45.6% at February 2, 2019.  The increase in our debt-to-capital ratio from November 3, 2018 primarily reflects lower shareholders' equity due to the impact of the net loss in fiscal 2018.

 

At November 2, 2019, we had $52.5 million of cash and cash equivalents.  Approximately half of this balance represents the accumulated unremitted earnings of our foreign subsidiaries.

 

We declared and paid dividends of $0.07 per share in both the third quarter of 2019 and 2018.  The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.  However, we presently expect that dividends will continue to be paid.

 

CONTRACTUAL OBLIGATIONS

 

Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations.

 

Except for changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, changes in borrowings under our revolving credit agreement, changes in the mandatory purchase obligation associated with the acquisition of Blowfish Malibu and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to the contractual obligations identified in our Annual Report on Form 10-K for the year ended February 2, 2019.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year other than the adoption of ASC 842, as further described in Note 10 to the condensed consolidated financial statements.  For further information on the Company's critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 2, 2019. 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements.

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands.  Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) rapidly changing fashion trends and purchasing patterns; (iii) intense competition within the footwear industry; (iv) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (v) imposition of tariffs; (vi) the ability to accurately forecast sales and manage inventory levels; (vii) cybersecurity threats or other major disruption to the Company’s information technology systems; (viii) customer concentration and increased consolidation in the retail industry; (ix) transitional challenges with acquisitions; (x) a disruption in the Company’s distribution centers; (xi) foreign currency fluctuations; (xii) changes to tax laws, policies and treaties; (xiii) the ability to recruit and retain senior management and other key associates; (xiv) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xv) the ability to secure/exit leases on favorable terms; (xvi) the ability to maintain relationships with current suppliers; and (xvii) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights. The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended February 2, 2019, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

 

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended February 2, 2019.  

 

ITEM 4

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures 

It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and ongoing monitoring by our internal auditors.

 

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of November 2, 2019, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level. 

 

Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting during the quarter ended November 2, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

 

PART II

OTHER INFORMATION

 

ITEM 1

LEGAL PROCEEDINGS

 

We are 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 will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred. 

 

Information regarding Legal Proceedings is set forth within Note 18 to the condensed consolidated financial statements and incorporated by reference herein. 

 

ITEM 1A

RISK FACTORS

 

Except as disclosed below, there have been no material changes that have occurred related to our risk factors since the end of the most recent fiscal year.  For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 2, 2019.  

 

The imposition of tariffs on our products may result in higher costs and decreased gross profits.

 

Recent international events have introduced greater uncertainty with respect to trade wars and tariffs, which may affect trade between the United States and other countries, particularly with China.  We rely primarily on foreign sourcing for our footwear through third-party manufacturing facilities located outside the United States, with approximately 60% of our footwear sourced from manufacturing facilities in China.  In August 2019, the U.S. Administration announced plans to implement a tariff of 15% on approximately $300 billion of products imported into the U.S. from China, effective as of September 1, 2019.  While the majority of our footwear sourced from China is subject to the tariff that became effective September 1, 2019, certain types of footwear are subject to a delay until December 15, 2019.  While we continue to focus on mitigating the impact of the increasing tariffs, if we are unable to mitigate the impact of the enacted tariffs or if there is a prolonged trade war involving the further escalation of tariffs, our product costs may increase on a significant portion of our branded footwear that we source internationally.  Higher product costs may in turn result in lower gross margins in the future for products that we source from China.  In addition, while it is too early to predict how the trade wars may impact our business, our net sales may also be impacted by consumers’ fear of an economic slowdown or lower discretionary spending.

 

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table provides information relating to our repurchases of common stock during the third quarter of 2019:

 

Fiscal Period

 

 

 

Total Number of Shares Purchased (1)

   

Average Price Paid per

Share (1)

   

Total Number Purchased as Part of Publicly Announced Program (2)

   

Maximum Number of Shares that May Yet be Purchased Under the Program (2)

 
                                 

August 4, 2019 - August 31, 2019

    2,869     $ 20.30             5,727,373  
                                 

September 1, 2019 - October 5, 2019

    49,377       19.94       49,377       5,677,996  
                                 

October 6, 2019 - November 2, 2019

    9,735       21.04       8,886       5,669,110  
                                 

Total

    61,981     $ 20.13       58,263       5,669,110  

 

 

(1)

Includes shares purchased as part of our publicly announced stock repurchase program and shares that were tendered by employees related to certain share-based awards. The employee shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards.

 

 

(2)

On August 25, 2011, the Board of Directors approved a stock repurchase program ("2011 Program") authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock and on December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the repurchase of an additional 2,500,000 shares of our outstanding common stock.  In addition, on September 2, 2019, the Board of Directors approved a stock repurchase program ("2019 Program") authorizing the repurchase of an additional 5,000,000 shares of our outstanding common stock.  We can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions.  The repurchase programs do not have an expiration date.  Under these plans, the Company repurchased 58,263 and 1,588,741 shares during the thirteen and thirty-nine weeks ended November 2, 2019, respectively.  During the thirty-nine weeks ended November 3, 2018, the Company repurchased 100,000 shares.  As of November 2, 2019, there were 5,669,110 shares authorized to be repurchased under the repurchase programs.  Our repurchases of common stock are limited under our debt agreements.  

 

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

 

None. 

 

ITEM 4

MINE SAFETY DISCLOSURES

 

Not applicable. 

 

ITEM 5

OTHER INFORMATION

 

None. 

 

 

ITEM 6

EXHIBITS

 

Exhibit  

No.

 

 

3.1

 

Restated Certificate of Incorporation of Caleres, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed June 1, 2015.

3.2

 

Bylaws of the Company as amended through March 14, 2019, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 20, 2019.

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

iXBRL Instance Document

101.SCH 

101.CAL 

101.LAB 

101.PRE 

101.DEF

† 

† 

† 

† 

iXBRL Taxonomy Extension Schema Document  

iXBRL Taxonomy Extension Calculation Linkbase Document  

iXBRL Taxonomy Extension Label Linkbase Document  

iXBRL Taxonomy Presentation Linkbase Document  

iXBRL Taxonomy Definition Linkbase Document

104 Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

 

† Denotes exhibit is filed with this Form 10-Q. 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
     

 

 

CALERES, INC.

 

 

 

Date: December 11, 2019

 

/s/ Kenneth H. Hannah

 

 

Kenneth H. Hannah

Senior Vice President and Chief Financial Officer  

on behalf of the Registrant and as the

Principal Financial Officer

 

 

44

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