10-Q 1 cal20181103.htm 10-Q Document


 
UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
 
FORM 10-Q 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 3, 2018
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the transition period from  _____________  to  _____________
Commission File Number: 1-2191 

CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(I.R.S. Employer Identification No.)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  þ   No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨     No þ 
 
As of November 30, 2018, 42,877,545 common shares were outstanding.

1



INDEX
 




2



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

($ thousands)
November 3, 2018

 
October 28, 2017

 
February 3, 2018

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
90,491


$
31,379


$
64,047

Receivables, net
192,246


132,942


152,613

Inventories, net
698,265


598,365


569,379

Prepaid expenses and other current assets
63,166


40,982


60,750

Total current assets
1,044,168

 
803,668

 
846,789

 
 
 
 
 
 
Other assets
92,279


68,316


90,659

Goodwill
283,345

 
127,081

 
127,081

Intangible assets, net
370,507

 
213,101

 
212,087

Property and equipment
556,967

 
535,149

 
542,812

Allowance for depreciation
(338,864
)
 
(320,167
)
 
(330,013
)
Property and equipment, net
218,103


214,982


212,799

Total assets
$
2,008,402

 
$
1,427,148

 
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
350,000

 
$
20,000

 
$

Trade accounts payable
317,499


223,832


272,962

Other accrued expenses
209,479


173,487


157,197

Total current liabilities
876,978

 
417,319

 
430,159

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,817


197,348


197,472

Deferred rent
51,930


50,814


53,071

Other liabilities
114,592


86,580


89,751

Total other liabilities
364,339

 
334,742

 
340,294

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
432

 
430

 
430

Additional paid-in capital
143,754

 
127,454

 
136,460

Accumulated other comprehensive loss
(16,624
)
 
(28,122
)
 
(15,170
)
Retained earnings
638,191

 
573,883

 
595,769

Total Caleres, Inc. shareholders’ equity
765,753


673,645


717,489

Noncontrolling interests
1,332


1,442


1,473

Total equity
767,085

 
675,087

 
718,962

Total liabilities and equity
$
2,008,402

 
$
1,427,148

 
$
1,489,415

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net sales
$
775,829

$
774,656

$
2,114,583

$
2,083,119

Cost of goods sold
465,219

457,771

1,235,950

1,207,865

Gross profit
310,610

316,885

878,633

875,254

Selling and administrative expenses
265,522

266,507

774,555

769,188

Restructuring and other special charges, net
5,340


9,240

3,973

Operating earnings
39,748

50,378

94,838

102,093

Interest expense, net
(4,210
)
(4,046
)
(11,495
)
(13,230
)
Other income, net
3,085

2,492

9,254

7,598

Earnings before income taxes
38,623

48,824

92,597

96,461

Income tax provision
(9,468
)
(14,451
)
(22,651
)
(29,530
)
Net earnings
29,155

34,373

69,946

66,931

Net earnings (loss) attributable to noncontrolling interests
2

(14
)
(65
)
47

Net earnings attributable to Caleres, Inc.
$
29,153

$
34,387

$
70,011

$
66,884

 




 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.68

$
0.80

$
1.62

$
1.56

 




 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.67

$
0.80

$
1.62

$
1.55

 




 
 
Dividends per common share
$
0.07

$
0.07

$
0.21

$
0.21

See notes to condensed consolidated financial statements.

4




CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net earnings
$
29,155

$
34,373

$
69,946

$
66,931

Other comprehensive income (loss), net of tax:
 

 

 

 

Foreign currency translation adjustment
14

(633
)
(1,045
)
647

Pension and other postretirement benefits adjustments
451

379

1,353

1,106

Derivative financial instruments
(320
)
183

(1,762
)
559

Other comprehensive income (loss), net of tax
145

(71
)
(1,454
)
2,312

Comprehensive income
29,300

34,302

68,492

69,243

Comprehensive (loss) income attributable to noncontrolling interests
(9
)
(3
)
(141
)
73

Comprehensive income attributable to Caleres, Inc.
$
29,309

$
34,305

$
68,633

$
69,170

See notes to condensed consolidated financial statements.


5



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

Operating Activities
 
 

Net earnings
$
69,946

$
66,931

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

 

Depreciation
33,189

34,354

Amortization of capitalized software
8,282

10,786

Amortization of intangible assets
3,880

3,059

Amortization of debt issuance costs and debt discount
1,610

1,296

Share-based compensation expense
11,615

8,394

Loss on disposal of property and equipment
1,772

1,004

Impairment charges for property and equipment
2,040

2,995

Deferred rent
(1,141
)
(310
)
Provision for doubtful accounts
426

352

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

 

Receivables
(6,457
)
19,826

Inventories
(57,138
)
(11,541
)
Prepaid expenses and other current and noncurrent assets
(9,788
)
890

Trade accounts payable
17,113

(42,702
)
Accrued expenses and other liabilities
21,135

26,588

Other, net
(2,074
)
339

Net cash provided by operating activities
94,410

122,261

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(35,244
)
(34,364
)
Capitalized software
(3,505
)
(4,531
)
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
(400,975
)
(38,895
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
360,000

450,000

Repayments under revolving credit agreement
(10,000
)
(540,000
)
Repayments of capital lease obligation
(114
)

Dividends paid
(9,059
)
(9,033
)
Acquisition of treasury stock
(3,288
)
(5,993
)
Issuance of common stock under share-based plans, net
(4,318
)
(2,477
)
Net cash provided by (used for) financing activities
333,221

(107,503
)
Effect of exchange rate changes on cash and cash equivalents
(212
)
184

Increase (decrease) in cash and cash equivalents
26,444

(23,953
)
Cash and cash equivalents at beginning of period
64,047

55,332

Cash and cash equivalents at end of period
$
90,491

$
31,379

See notes to condensed consolidated financial statements.

6



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

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

Note 2
Impact of New Accounting Pronouncements

Impact of Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several ASUs to clarify the implementation guidance in ASU 2014-09 Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Company adopted the ASUs in the first quarter of 2018 using the modified retrospective method, which resulted in a cumulative-effect adjustment of $4.8 million to reduce retained earnings, with a corresponding $6.4 million increase to other accrued expenses and a $1.6 million decrease to deferred tax liabilities. Adoption of the standard is not anticipated to significantly impact the statements of earnings on an ongoing basis. Refer to Note 4 to the condensed consolidated financial statements for additional information.

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

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

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amended Accounting Standards Codification ("ASC") 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service

7



cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net periodic benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU was effective for the Company at the beginning of the 2018 fiscal year. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified $2.5 million and $7.6 million of non-service cost components of net periodic benefit income for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, to other income, net in the condensed consolidated statements of earnings. For the thirteen and thirty-nine weeks ended November 3, 2018, $3.1 million and $9.3 million, respectively, of non-service cost components of net periodic benefit income is presented as other income. Refer to Note 12 to the condensed consolidated financial statements for additional information.

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

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

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted the ASU in the third quarter of 2018 on a prospective basis, which did not have a material impact on the Company's condensed consolidated financial statements.

Impact of Prospective Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The FASB has subsequently issued ASUs with improvements to the guidance, including ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional transition method to adopt the new standard. Under the new optional transition method, an entity initially applies Topic 842 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company will adopt the ASUs in the first quarter of 2019 using the optional transition method permitted by ASU 2018-11. The Company's implementation team is developing and executing the plan to adopt the ASUs. The Company's accounting systems have been upgraded to comply with the requirements of the new standard and the Company is in the process of evaluating the impact of the standard on its leases and processes. The Company anticipates electing the package of practical expedients and the expedient to group lease and non-lease components as permitted within the ASU; however, it does not expect to elect the hindsight practical expedient. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its condensed consolidated balance sheets upon adoption in the first quarter of 2019 will be material. The Company is still assessing the impact to the condensed consolidated statements of earnings. Impairment charges related to underperforming retail stores are expected to be greater under the new standard due to the additional required right-of-use asset associated with each asset group. As the impact of the ASU is non-cash in nature, the impact to the Company's condensed consolidated statements of cash flows is not expected to be material. Adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which more closely aligns the accounting for share-based payments to nonemployees with the guidance for employees. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company anticipates that the adoption of the ASU in the first quarter of 2019 will not have a material impact on the Company's condensed consolidated financial statements.


8



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. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's financial statement disclosures.

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

Note 3
Acquisitions

Acquisition of Blowfish, LLC
On July 6, 2018, the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Blowfish, LLC ("Blowfish", or "Blowfish Malibu"), pursuant to which the Company acquired a controlling interest in Blowfish. The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula, as specified in the Purchase Agreement. The aggregate purchase price is estimated to be $28.1 million, including approximately $9.1 million preliminarily 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 preliminary estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheet, is presented on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments will be recorded as interest expense. The operating results of Blowfish since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment.

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. 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 Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) and $1.5 million ($1.1 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition-related costs 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) in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs.

9




The assets and liabilities of Blowfish Malibu 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, July 6, 2018, as follows: 

($ thousands)
 
July 6, 2018

ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
 
$
2,207

Receivables
 
4,612

Inventories
 
6,400

Prepaid expense and other current assets
 
317

Total current assets
 
13,536

Other assets
 
539

Goodwill
 
5,701

Intangible assets
 
17,600

Property and equipment
 
112

Total assets
 
$
37,488

 
 
 
LIABILITIES AND EQUITY
 
 
Current liabilities:
 
 
Trade accounts payable
 
$
2,915

Other accrued expenses
 
5,739

Total current liabilities
 
8,654

Deferred income taxes
 
617

Other liabilities
 
77

Total liabilities
 
9,348

Net assets
 
$
28,140


The assets and liabilities of Blowfish Malibu 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 during the second quarter of 2018. The allocation of the purchase price was based on certain preliminary valuations and analyses. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. During the thirteen weeks ended November 3, 2018, the Company recorded a purchase price allocation adjustment of $1.8 million to intangible assets, with a corresponding adjustment to goodwill.

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.

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.


10



During the thirteen and thirty-nine weeks ended November 3, 2018, Blowfish Malibu contributed $6.4 million and $8.9 million of net sales, respectively. Blowfish Malibu experienced a net loss of approximately $0.5 million and $0.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively. The loss primarily reflects incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting, which was $0.9 million and $1.5 million for the thirteen and thirty-nine weeks ended November 3, 2018. The net loss excludes the acquisition costs and incremental interest expense associated with the transaction.

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 is estimated to be $360.7 million (or $352.2 million, net of $8.5 million of cash received). Of the $352.2 million, $344.9 million was funded during the thirteen weeks ended November 3, 2018 and $7.3 million was funded early in the fourth quarter. 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.

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 Company incurred acquisition-related costs of $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share) in the thirteen weeks ended November 3, 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs. In addition, the Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen weeks ended November 3, 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting.


11



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 preliminarily 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
 
$
8,502

Receivables
 
28,930

Inventories
 
65,700

Prepaid expense and other current assets
 
1,489

Total current assets
 
104,621

Goodwill
 
148,763

Intangible assets
 
144,700

Property and equipment
 
6,864

Total assets
 
$
404,948

 
 
 
LIABILITIES AND EQUITY
 
 
Current liabilities:
 
 
Trade accounts payable
 
$
24,085

Other accrued expenses
 
16,632

Total current liabilities
 
40,717

Other liabilities - capital lease obligation
 
3,541

Total liabilities
 
44,258

Net assets
 
$
360,690


The allocation of the purchase price is based on certain preliminary valuations and analyses that have not been completed as of the date of this filing. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. The Company’s purchase price allocation 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. 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.

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.

Pro Forma Information

The table below illustrates the unaudited pro forma impact on operating results as if the acquisition had been completed as of the beginning of 2017. Prior to the acquisition, Vionic’s fiscal calendar ended on December 31 of each year. For purposes of the financial information presented, the Company has combined the operating results of the relevant fiscal quarters for Vionic with the Company’s actual fiscal quarters. For example, the information presented in the thirteen weeks ended columns includes

12



Vionic’s operations for the fiscal months of July through September of each respective period. The information presented in the thirty-nine weeks ended columns includes Vionic’s operations for the fiscal months of January through September for each respective period.
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net sales
$
814,700

$
816,429

$
2,252,727

$
2,205,046

Net earnings attributable to Caleres, Inc.
31,181

33,408

74,680

65,603

Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.72

$
0.78

$
1.73

$
1.53

Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.72

$
0.77

$
1.73

$
1.52


For purposes of the pro forma disclosures, the pro forma adjustments primarily include the following:

The elimination of material costs from thirteen and thirty-nine weeks ended November 3, 2018 that were directly attributable to the acquisition and have no continuing impact on operating results, including:
the non-cash cost of goods sold impact of $0.9 million related to the fair value adjustment to the acquired inventory, and related tax effects; and
transaction costs of $4.1 million, and related tax effects.
Amortization of acquired intangibles of $2.0 million and $5.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $2.0 million and $6.0 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.
Estimated interest expense on additional borrowings under the Company's revolving credit agreement at the Company's current interest rate of 3.75%. Assumes no paydown of the revolving credit agreement during the thirty-nine weeks ended October 28, 2017 and gradual paydown to $285.0 million from October 29, 2017 to November 3, 2018.
Tax impact of the change in tax status of Vionic and the tax impact of the pro forma adjustments based on the estimated statutory tax rate in effect during the respective periods. The tax effect of the pro forma interest expense adjustments for
borrowings under the Company's revolving credit agreement was calculated at 25.74% for the thirteen and thirty-nine weeks ended November 3, 2018 and at 38.9% for the thirteen and thirty-nine weeks ended October 28, 2017, reflecting the Company's effective tax rates. The tax effect of the other pro forma adjustments for the thirty-nine weeks ended November 3, 2018 and October 28, 2017 was calculated utilizing an estimated effective tax rate of 28.0% and 40.0%, respectively.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the Company completed the acquisition on the date assumed, nor is it necessarily indicative of the results of operations that may be expected in future periods.

During the period from the acquisition date through November 3, 2018, Vionic contributed $5.8 million of net sales and reported a net loss of approximately $1.2 million, primarily associated with the incremental cost of goods sold of $0.9 million related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the Company's acquisition costs and any incremental interest expense associated with the transaction.

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

Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. During the thirty-nine weeks ended October 28, 2017, the Company recognized $4.9 million in cost of goods sold ($3.0 million on an after-tax basis, or $0.07 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017. As further discussed in Note 6 to the consolidated financial statements, the Company also incurred acquisition and integration costs during the thirty-nine weeks ended November 3, 2018 and October 28, 2017.

13



Note 4
Revenues

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

The impact of the adoption of Topic 606 on the condensed balance sheet as of November 3, 2018 was as follows:
 
 
November 3, 2018
($ thousands)
 
As reported
 
Balances without adoption of Topic 606
 
Effect of change
Higher/(Lower)
 
 
 
 
 
 
 
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
 
Receivables, net
 
$
192,246

 
$
183,542

 
$
8,704

Inventories, net
 
698,265

 
704,655

 
(6,390
)
Prepaid expenses and other current assets
 
63,166

 
55,018

 
8,148

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 

Other accrued expenses
 
209,479

 
193,606

 
15,873

 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Retained earnings
 
638,191

 
643,602

 
(5,411
)


14



Adoption of the standard also required various changes that impacted the statement of earnings. These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the statement of earnings for the thirteen and thirty-nine weeks ended November 3, 2018 was as follows:

 
 
For the Thirteen Weeks Ended November 3, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
775,829

 
$
777,254

 
$
(1,425
)
Cost of goods sold
 
465,219

 
465,126

 
93

Gross profit
 
310,610


312,128

 
(1,518
)
Selling and administrative expenses
 
265,522

 
266,225

 
(703
)
Restructuring and other special charges, net
 
5,340

 
5,340

 

Operating earnings
 
$
39,748


$
40,563

 
$
(815
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Thirty-Nine Weeks Ended November 3, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
2,114,583

 
$
2,117,437

 
$
(2,854
)
Cost of goods sold
 
1,235,950

 
1,235,932

 
18

Gross profit
 
878,633

 
881,505

 
(2,872
)
Selling and administrative expenses
 
774,555

 
776,475

 
(1,920
)
Restructuring and other special charges, net
 
9,240

 
9,240

 

Operating earnings
 
$
94,838

 
$
95,790

 
$
(952
)

The adoption of Topic 606 had an immaterial impact on net earnings and earnings per share for the thirteen and thirty-nine weeks ended November 3, 2018.

Accounting Policy
Revenue is recognized when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company's right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. The Company applies the guidance using the portfolio approach because this methodology would not differ materially from applying the guidance to the individual contracts within the portfolio. The Company elected the practical expedient to exclude sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.

15




Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the periods ended November 3, 2018:
 
 
For the Thirteen Weeks Ended November 3, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
Retail stores
 
$
408,248

 
$
43,186

 
$
451,434

Landed wholesale
 

 
207,581

 
207,581

First-cost wholesale
 

 
21,345

 
21,345

E-commerce
 
40,383

 
51,080

 
91,463

Licensing and royalty
 

 
3,810

 
3,810

Other (1)
 
134

 
62

 
196

Net sales
 
$
448,765


$
327,064


$
775,829

 
 
 
 
 
 
 
 
 
For the Thirty-Nine Weeks Ended November 3, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail stores
 
$
1,147,512

 
$
129,557

 
$
1,277,069

Landed wholesale
 

 
539,845

 
539,845

First-cost wholesale
 

 
61,910

 
61,910

E-commerce
 
93,729

 
129,303

 
223,032

Licensing and royalty
 

 
12,104

 
12,104

Other (1)
 
407

 
216

 
623

Net sales
 
$
1,241,648

 
$
872,935

 
$
2,114,583

(1) Includes breakage revenue from unredeemed gift cards.

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

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

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

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


16



E-commerce
The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores and e-commerce sales from our wholesale customers' websites that are fulfilled on a drop-ship basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.

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

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

Information about significant contract balances from contracts with customers is as follows:
($ thousands)
November 3, 2018

 
February 3, 2018

Customer allowances and discounts
$
23,835

 
$
20,259

Rewards program liability
16,299

 
8,130

Returns reserve
15,373

 
8,332

Gift card liability
4,169

 
5,509


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 3, 2018, the Rewards program 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. The change in the balance of the returns reserve is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018.


17



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 3, 2018 and October 28, 2017:
 
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

NUMERATOR
 

 

 

 

Net earnings
$
29,155

$
34,373

$
69,946

$
66,931

Net (earnings) loss attributable to noncontrolling interests
(2
)
14

65

(47
)
Net earnings allocated to participating securities
(800
)
(949
)
(1,950
)
(1,841
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
28,353

$
33,438

$
68,061

$
65,043

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,999

41,788

41,958

41,801

Dilutive effect of share-based awards
107

182

116

173

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,106

41,970

42,074

41,974

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.68

$
0.80

$
1.62

$
1.56

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.67

$
0.80

$
1.62

$
1.55

 
Options to purchase 16,667 shares of common stock for the thirteen and thirty-nine weeks ended October 28, 2017 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. There were no options to purchase shares excluded from the denominator for the thirteen and thirty-nine weeks ended November 3, 2018.

During the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company repurchased 100,000 and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. The Company did not purchase any shares during the thirteen weeks ended November 3, 2018 or October 28, 2017. As of November 3, 2018, the Company has repurchased a total of 1.4 million shares under this program.

Note 6
Restructuring and Other Initiatives
 
Vionic Acquisition-Related Costs
During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred acquisition-related costs associated with the acquisition of 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 Other category and are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings. As of November 3, 2018, restructuring reserves of $1.8 million were included in other accrued expenses on the condensed consolidated balance sheet. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.


18




Acquisition, 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 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 Other category. As of November 3, 2018, restructuring reserves of $0.8 million were included in other accrued expenses on the condensed consolidated balance sheets, with no corresponding liability as of October 28, 2017. The Company expects all integration and reorganization costs related to the men's business to be settled by the end of fiscal 2018.

Blowfish Malibu Acquisition and Integration-Related Costs
The Company incurred acquisition and integration-related 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, respectively, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings and reflected within the Other category. As of November 3, 2018, restructuring reserves of $1.1 million were included in other accrued expenses on the condensed consolidated balance sheet. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.

Note 7
Business Segment Information

Following is a summary of certain key financial measures for the Company’s business segments for the periods ended November 3, 2018 and October 28, 2017:  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended November 3, 2018
External sales
$
448,765

$
327,064

$

$
775,829

Intersegment sales

15,968


15,968

Operating earnings (loss)
24,414

26,679

(11,345
)
39,748

Segment assets
548,609

1,272,576

187,217

2,008,402

 
 
 
 
 
Thirteen Weeks Ended October 28, 2017
External sales
$
473,118

$
301,538

$

$
774,656

Intersegment sales

15,218


15,218

Operating earnings (loss)
33,747

24,281

(7,650
)
50,378

Segment assets
544,280

781,421

101,447

1,427,148

 
Thirty-Nine Weeks Ended November 3, 2018
External sales
$
1,241,648

$
872,935

$

$
2,114,583

Intersegment sales

58,624


58,624

Operating earnings (loss)
79,511

52,773

(37,446
)
94,838

 
 
 
 
 
Thirty-Nine Weeks Ended October 28, 2017
External sales
$
1,244,542

$
838,577

$

$
2,083,119

Intersegment sales

59,768


59,768

Operating earnings (loss)
79,137

53,511

(30,555
)
102,093

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


19



Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Operating earnings
$
39,748

$
50,378

$
94,838

$
102,093

Interest expense, net
(4,210
)
(4,046
)
(11,495
)
(13,230
)
Other income, net
3,085

2,492

9,254

7,598

Earnings before income taxes
$
38,623

$
48,824

$
92,597

$
96,461


Note 8
Inventories

The Company's net inventory balance was comprised of the following:
($ thousands)
November 3, 2018

October 28, 2017

February 3, 2018

Raw materials
$
18,002

$
19,091

$
17,531

Work-in-process
496

897

689

Finished goods
679,767

578,377

551,159

Inventories, net
$
698,265

$
598,365

$
569,379


Note 9
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
November 3, 2018

October 28, 2017

February 3, 2018

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
448,288

285,988

285,988

Total intangible assets
451,088

288,788

288,788

Accumulated amortization
(80,581
)
(75,687
)
(76,701
)
Total intangible assets, net
370,507

213,101

212,087

Goodwill
 

 

 

Brand Portfolio
283,345

127,081

127,081

Total goodwill
283,345

127,081

127,081

Goodwill and intangible assets, net
$
653,852

$
340,182

$
339,168


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Vionic on October 18, 2018. The preliminary allocation of the purchase price resulted in estimated 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 $148.8 million. In addition, the Company acquired Blowfish Malibu on July 6, 2018. The preliminary 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 $5.7 million.

20




The Company's intangible assets as of November 3, 2018, October 28, 2017 and February 3, 2018 were as follows:
($ thousands)
 
 
 
November 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
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

 
 
 
 
October 28, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
75,372

 
$
89,916

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
315

 
5,085

 
 
 
 
$
288,788

 
$
75,687

 
$
213,101

 
 
 
 
February 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
76,296

 
$
88,992

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
405

 
4,995

 
 
 
 
$
288,788

 
$
76,701

 
$
212,087


Amortization expense related to intangible assets was $1.8 million and $1.0 million for the thirteen weeks ended November 3, 2018 and October 28, 2017, respectively, and $3.9 million and $3.1 million for the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively. Based upon the Company's preliminary allocation of the purchase price, 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.
 

21



Note 10
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirty-nine weeks ended November 3, 2018 and October 28, 2017:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at February 3, 2018
$
717,489

$
1,473

$
718,962

Net earnings (loss)
70,011

(65
)
69,946

Other comprehensive loss
(1,454
)
(76
)
(1,530
)
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
)
Cumulative-effect adjustment from adoption of ASU 2016-16
(10,468
)

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

(4,775
)
Share-based compensation expense
11,615


11,615

Equity at November 3, 2018
$
765,753

$
1,332

$
767,085

 
($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings
66,884

47

66,931

Other comprehensive income
2,312

26

2,338

Dividends paid
(9,033
)

(9,033
)
Acquisition of treasury stock
(5,993
)

(5,993
)
Issuance of common stock under share-based plans, net
(2,477
)

(2,477
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441


441

Share-based compensation expense
8,394


8,394

Equity at October 28, 2017
$
673,645

$
1,442

$
675,087



22



Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended November 3, 2018 and October 28, 2017:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

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 July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
Other comprehensive (loss) income before reclassifications
(633
)

258

(375
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

615

(118
)
497

Tax (benefit) provision

(236
)
43

(193
)
Net reclassifications

379

(75
)
304

Other comprehensive (loss) income
(633
)
379

183

(71
)
Balance at October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
 
 
 
 
 
Balance 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 November 3, 2018
$
190

$
(15,819
)
$
(995
)
$
(16,624
)
 
 
 
 
 
Balance January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive income before reclassifications
647


716

1,363

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

1,794

(235
)
1,559

Tax (benefit) provision

(688
)
78

(610
)
Net reclassifications

1,106

(157
)
949

Other comprehensive income
647

1,106

559

2,312

Balance October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
(1)
Amounts reclassified are included in other income, net. See Note 12 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense, net. See Notes 13 and 14 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

23




Note 11
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.6 million and $2.6 million during the thirteen weeks and $11.6 million and $8.4 million during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively.

The Company issued 17,225 and 9,832 shares of common stock during the thirteen weeks ended November 3, 2018 and October 28, 2017, 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 3, 2018 and October 28, 2017, the Company issued 290,756 and 251,718 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 3, 2018 and October 28, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
August 4, 2018
1,205,898

 
$
29.04

 
July 29, 2017
1,194,326

 
$
28.03

Granted
45,000

 
33.52

 
Granted
25,000

 
27.13

Forfeited
(27,650
)
 
29.24

 
Forfeited
(19,050
)
 
31.86

Vested

 

 
Vested
(800
)
 
22.90

November 3, 2018
1,223,248

 
$
29.20

 
October 28, 2017
1,199,476

 
$
27.95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
February 3, 2018
1,174,801

 
$
27.92

 
January 28, 2017
1,128,049

 
$
25.85

Granted
378,833

 
32.24

 
Granted
381,312

 
26.92

Forfeited
(44,950
)
 
28.69

 
Forfeited
(49,050
)
 
29.35

Vested
(285,436
)
 
28.06

 
Vested
(260,835
)
 
17.09

November 3, 2018
1,223,248

 
$
29.20

 
October 28, 2017
1,199,476

 
$
27.95


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. All of the restricted shares granted during the thirteen weeks ended October 28, 2017 have a cliff-vesting term of four years. Of the 381,312 restricted shares granted during the thirty-nine weeks ended October 28, 2017, 4,492 shares have a cliff-vesting term of one year, 12,000 shares have a graded-vesting term of four years and 364,820 shares have a cliff-vesting term of four years. Share-based compensation expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period and expense for graded-vesting grants is recognized ratably over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended November 3, 2018 and October 28, 2017, the Company granted no performance share awards. During the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company granted performance share awards for a targeted 155,000 and 169,500 shares, respectively, with a weighted-average grant date fair value of $31.84 and $26.90, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the

24



specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the three-year service period. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.

Stock Options
The following table summarizes stock option activity for the periods ended November 3, 2018 and October 28, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
August 4, 2018
44,667

 
$
8.32

 
July 29, 2017
92,042

 
$
6.42

Granted

 

 
Granted

 

Exercised

 

 
Exercised
(6,000
)
 
6.41

Forfeited

 

 
Forfeited

 

Expired

 

 
Expired
(1,000
)
 
8.33

November 3, 2018
44,667

 
$
8.32

 
October 28, 2017
85,042

 
$
6.39

 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
February 3, 2018
81,042

 
$
6.28

 
January 28, 2017
150,540

 
$
9.36

Granted

 

 
Granted

 

Exercised
(32,375
)
 
3.52

 
Exercised
(17,250
)
 
5.97

Forfeited

 

 
Forfeited

 

Expired
(4,000
)
 
5.80

 
Expired
(48,248
)
 
15.79

November 3, 2018
44,667

 
$
8.32

 
October 28, 2017
85,042

 
$
6.39


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 780 and 838 RSUs for dividend equivalents, during the thirteen weeks ended November 3, 2018 and October 28, 2017, respectively, with weighted-average grant date fair values of $35.66 and $30.68, respectively. The Company granted 38,728 and 47,550 RSUs to non-employee directors, including 2,308 and 2,630 RSUs for dividend equivalents, during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively, with weighted-average grant date fair values of $34.33 and $27.86, respectively.


25



Note 12
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 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Service cost
$
2,240

$
2,426

$

$

Interest cost
3,546

3,736

15

17

Expected return on assets
(7,253
)
(6,896
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
1,030

1,090

(31
)
(36
)
Prior service income
(392
)
(439
)


Curtailment cost

36



Total net periodic benefit income
$
(829
)
$
(47
)
$
(16
)
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
Other Postretirement Benefits
 
Thirty-Nine Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Service cost
$
6,717

$
7,276

$

$

Interest cost
10,636

11,210

44

51

Expected return on assets
(21,757
)
(20,689
)


Amortization of:
 
 
 
 
Actuarial loss (gain)
3,092

3,238

(93
)
(109
)
Prior service income
(1,176
)
(1,335
)


Curtailment cost

36



Total net periodic benefit income
$
(2,488
)
$
(264
)
$
(49
)
$
(58
)

As further discussed in Note 2 to the condensed consolidated financial statements, as a result of the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the first quarter of 2018, 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 13
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 November 2019. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company's condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss and reclassified to earnings in the period that the hedged transaction is recognized in earnings.

26



 
As of November 3, 2018, October 28, 2017 and February 3, 2018, the Company had forward contracts maturing at various dates through November 2019, November 2018 and February 2019, respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 
(U.S. $ equivalent in thousands)
November 3, 2018

October 28, 2017

February 3, 2018

Financial Instruments
 
 
 
Euro
$
13,480

$
18,815

$
21,223

U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
13,877

18,242

16,874

Chinese yuan
6,570

12,613

12,058

New Taiwanese dollars
530

580

596

Other currencies
388


415

Total financial instruments
$
34,845

$
50,250

$
51,166

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of November 3, 2018, October 28, 2017 and February 3, 2018 are as follows:

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

 
Balance Sheet Location
Fair Value

Foreign Exchange Forward Contracts
 

 
 
 

November 3, 2018
Prepaid expenses and other current assets
$
203

 
Other accrued expenses
$
1,414

October 28, 2017
Prepaid expenses and other current assets
760

 
Other accrued expenses
564

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

 
Other accrued expenses
542

 

27



For the thirteen and thirty-nine weeks ended November 3, 2018 and October 28, 2017, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
November 3, 2018
October 28, 2017
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
 Loss Recognized in OCL on Derivatives

 Gain (Loss) Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(78
)
$

$
(4
)
$
6

Cost of goods sold
(286
)
26

(42
)
3

Selling and administrative expenses
(152
)
(146
)
364

109

Interest expense, net


6


 
 
 
 
 
 
Thirty-Nine Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018
October 28, 2017
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
Loss Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(120
)
$
(4
)
$
(44
)
$
30

Cost of goods sold
(970
)
(37
)
695

164

Selling and administrative expenses
(955
)
188

480

42

Interest expense, net


(4
)
(1
)

All gains and losses currently included within accumulated other comprehensive loss associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 14 to the condensed consolidated financial statements. 
 
Note 14
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.


28



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

Measurement of Fair Value 
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value. 
 
Money Market Funds 
The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan Assets and Liabilities 
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan for Non-Employee Directors  
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s 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).  During the fourth quarter of 2017, the Company converted 210,302 of RSUs payable in cash with a value of $6.3 million to RSUs payable in common stock. Additional information related to RSUs for non-employee directors is disclosed in Note 11 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 13 to the condensed consolidated financial statements. 


29



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 3, 2018, an immaterial amount of accretion was recorded. The earnings projections and discount rate utilized in the estimate of the fair value of the mandatory purchase obligation require management judgment and are the assumptions to which the fair value calculation is the most sensitive. Refer to further discussion of the mandatory purchase obligation in Note 3 to the condensed consolidated financial statements.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at November 3, 2018, October 28, 2017 and February 3, 2018. The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirty-nine weeks ended November 3, 2018 or October 28, 2017.   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

November 3, 2018:
 
 
 
 
 
Cash equivalents – money market funds
$
56,668

 
$
56,668

$

$

Non-qualified deferred compensation plan assets
7,223

 
7,223



Non-qualified deferred compensation plan liabilities
(7,223
)
 
(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
)
October 28, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
14,967

 
$
14,967

$

$

Non-qualified deferred compensation plan assets
6,000

 
6,000



Non-qualified deferred compensation plan liabilities
(6,000
)
 
(6,000
)


Deferred compensation plan liabilities for non-employee directors
(2,350
)
 
(2,350
)


Restricted stock units for non-employee directors
(10,118
)
 
(10,118
)


Derivative financial instruments, net
196

 

196


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

 
$
53,106

$

$

Non-qualified deferred compensation plan assets
6,445

 
6,445



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


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


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


Derivative financial instruments, net
998

 

998


 

30



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 $102.8 million and $115.8 million at November 3, 2018 and October 28, 2017, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Impairment Charges
 
 
 
 
Famous Footwear
$
150

$
150

$
450

$
450

Brand Portfolio
957

726

1,590

2,545

Total impairment charges
$
1,107

$
876

$
2,040

$
2,995


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 3, 2018
 
October 28, 2017
 
February 3, 2018
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
350,000

 
$
350,000

 
$
20,000

 
$
20,000

 
$

 
$

Long-term debt
197,817

 
203,500

 
197,348

 
209,000

 
197,472

 
210,000

Total debt
$
547,817


$
553,500


$
217,348


$
229,000


$
197,472


$
210,000

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

Note 15
Income Taxes
 
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The provisional income tax benefit recorded in fiscal 2017 of $0.3 million was comprised of a $24.6 million deferred tax benefit for the remeasurement of deferred tax assets and liabilities to the 21% rate at which they are expected to reverse, partially offset by a one-time tax expense on deemed repatriation of $22.9 million and $1.4 million deferred tax expense in connection with Internal Revenue Code section 162(m) and other provisions in the Act. These provisional amounts continue to represent the Company's best estimate based on current information and guidance as of November 3, 2018. As permitted by SEC Staff Accounting Bulletin 118 (“SAB 118”), the Company will continue to analyze all provisional amounts associated with the Act as a result of pending issuance of Notices and Regulations related to the Act. Any subsequent adjustment to these amounts will be recorded to the Company's income tax provision during the fourth quarter of 2018 when the analysis is complete.

The Act also includes the Global Intangibles Low-Taxed Income ("GILTI") provision, a new minimum tax on global intangible low-taxed income, the Base Erosion Anti-Avoidance ("BEAT") provision, a new tax for certain payments to foreign related parties,

31



and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income from the sale, lease or license of goods and services abroad. The Company is permitted to make an accounting policy election to account for GILTI as either a period charge in the future period the tax arises or as part of deferred taxes related to the investment or subsidiary. As a result of the complexity of the GILTI provisions, the Company is still evaluating the provisions on future periods and has not yet elected an accounting policy related to its treatment of these future tax liabilities. For the thirteen and thirty-nine weeks ended November 3, 2018, the Company has recorded provisional amounts for GILTI as a period charge in the income tax provision. The Company is also still evaluating the BEAT and FDII provisions of the Act.

The Company’s consolidated effective tax rates were 24.5% and 29.6% for the thirteen weeks ended November 3, 2018 and October 28, 2017, respectively. During the thirteen weeks ended October 28, 2017, the Company recognized discrete tax benefits of $0.9 million, reflecting greater deductibility of certain 2016 expenses than originally estimated. If these discrete tax benefits had not been recognized during the thirteen weeks ended October 28, 2017, the Company's effective tax rate would have been 31.5%.

For the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company's consolidated effective tax rates were 24.5% and 30.6%, respectively. During the thirty-nine weeks ended November 3, 2018, the Company recognized discrete tax benefits of $0.7 million, reflecting greater deductibility of certain 2017 expenses than originally estimated and share-based compensation. During the thirty-nine weeks ended October 28, 2017, the Company recognized $2.0 million of discrete tax benefits, primarily related to share-based compensation. If these discrete tax benefits had not been recognized during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company's effective tax rates would have been 25.4% and 32.7%, respectively. The Company's tax rate is lower for the thirteen and thirty-nine weeks ended November 3, 2018, reflecting a reduction in the U.S. corporate tax rate following enactment of the Act.

Note 16
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 3, 2018 were $30.4 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 3, 2018 is $9.5 million, of which $8.8 million is recorded within other liabilities and $0.7 million is recorded within other accrued expenses. Of the total $9.5 million reserve, $4.9 million is for off-site remediation and $4.6 million is for

32



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 3, 2018. The Company expects to spend approximately $0.3 million in the next fiscal year, $0.1 million in each of the following four years and $13.3 million in the aggregate thereafter related to the on-site remediation.
 
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 
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 17
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.

33



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



34



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



35



 
 
 
 
 
 
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


36



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 of capital lease obligation

(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



37



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
8,155

$
7,947

$
15,277

$

$
31,379

Receivables, net
116,974

3,987

11,981


132,942

Inventories, net
127,142

441,683

29,540


598,365

Prepaid expenses and other current assets
20,642

17,872

7,263

(4,795
)
40,982

Intercompany receivable – current
1,597

123

20,677

(22,397
)

Total current assets
274,510

471,612

84,738

(27,192
)
803,668

Other assets
50,565

16,877

874


68,316

Goodwill and intangible assets, net
111,665

40,937

187,580


340,182

Property and equipment, net
32,684

169,604

12,694


214,982

Investment in subsidiaries
1,288,128


(23,180
)
(1,264,948
)

Intercompany receivable  –  noncurrent
744,127

527,670

677,419

(1,949,216
)

Total assets
$
2,501,679

$
1,226,700

$
940,125

$
(3,241,356
)
$
1,427,148

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
20,000

$

$

$

$
20,000

Trade accounts payable
65,604

139,219

19,009


223,832

Other accrued expenses
64,525

95,817

17,940

(4,795
)
173,487

Intercompany payable – current
12,833


9,564

(22,397
)

Total current liabilities
162,962

235,036

46,513

(27,192
)
417,319

Other liabilities
 

 

 

 

 

Long-term debt
197,348




197,348

Other liabilities
93,029

39,150

5,215


137,394

Intercompany payable – noncurrent
1,374,695

121,683

452,838

(1,949,216
)

Total other liabilities
1,665,072

160,833

458,053

(1,949,216
)
334,742

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
673,645

830,831

434,117

(1,264,948
)
673,645

Noncontrolling interests


1,442


1,442

Total equity
673,645

830,831

435,559

(1,264,948
)
675,087

Total liabilities and equity
$
2,501,679

$
1,226,700

$
940,125

$
(3,241,356
)
$
1,427,148



38



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
226,019

$
541,007

$
47,765

$
(40,135
)
$
774,656

Cost of goods sold
152,714

313,646

23,351

(31,940
)
457,771

Gross profit
73,305

227,361

24,414

(8,195
)
316,885

Selling and administrative expenses
61,827

197,481

15,394

(8,195
)
266,507

Operating earnings
11,478

29,880

9,020


50,378

Interest (expense) income
(4,093
)
(1
)
48


(4,046
)
Other income (expense)
2,492




2,492

Intercompany interest income (expense)
1,981

(2,003
)
22



Earnings before income taxes
11,858

27,876

9,090


48,824

Income tax provision
(3,963
)
(9,479
)
(1,009
)

(14,451
)
Equity in earnings (loss) of subsidiaries, net of tax
26,492


(457
)
(26,035
)

Net earnings
34,387

18,397

7,624

(26,035
)
34,373

Less: Net loss attributable to noncontrolling interests


(14
)

(14
)
Net earnings attributable to Caleres, Inc.
$
34,387

$
18,397

$
7,638

$
(26,035
)
$
34,387

 
 
 
 
 
 
Comprehensive income
$
34,305

$
18,397

$
7,457

$
(25,857
)
$
34,302

Less: Comprehensive loss attributable to noncontrolling interests


(3
)

(3
)
Comprehensive income attributable to Caleres, Inc.
$
34,305

$
18,397

$
7,460

$
(25,857
)
$
34,305

 
 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
614,764

$
1,451,191

$
148,985

$
(131,821
)
$
2,083,119

Cost of goods sold
423,224

815,980

74,424

(105,763
)
1,207,865

Gross profit
191,540

635,211

74,561

(26,058
)
875,254

Selling and administrative expenses
179,720

570,272

45,254

(26,058
)
769,188

Restructuring and other special charges, net
3,769

37

167


3,973

Operating earnings
8,051

64,902

29,140


102,093

Interest (expense) income
(13,589
)
(13
)
372


(13,230
)
Other income (expense)
7,598




7,598

Intercompany interest income (expense)
6,085

(6,516
)
431



Earnings before income taxes
8,145

58,373

29,943


96,461

Income tax provision
(2,124
)
(21,407
)
(5,999
)

(29,530
)
Equity in earnings (loss) of subsidiaries, net of tax
60,863


(1,234
)
(59,629
)

Net earnings
66,884

36,966

22,710

(59,629
)
66,931

Less: Net earnings attributable to noncontrolling interests


47


47

Net earnings attributable to Caleres, Inc.
$
66,884

$
36,966

$
22,663

$
(59,629
)
$
66,884

 
 
 
 
 
 
Comprehensive income
$
69,170

$
36,966

$
23,212

$
(60,105
)
$
69,243

Less: Comprehensive income attributable to noncontrolling interests


73


73

Comprehensive income attributable to Caleres, Inc.
$
69,170

$
36,966

$
23,139

$
(60,105
)
$
69,170


39



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash (used for) provided by operating activities
$
(13,179
)
$
97,443

$
37,997

$

$
122,261

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(5,340
)
(25,377
)
(3,647
)

(34,364
)
Capitalized software
(4,079
)
(452
)


(4,531
)
Intercompany investing
(20,058
)
197,763

(177,705
)


Net cash (used for) provided by investing activities
(29,477
)
171,934

(181,352
)

(38,895
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
450,000




450,000

Repayments under revolving credit agreement
(540,000
)



(540,000
)
Dividends paid
(9,033
)



(9,033
)
Acquisition of treasury stock
(5,993
)



(5,993
)
Issuance of common stock under share-based plans, net
(2,477
)



(2,477
)
Intercompany financing
134,315

(270,459
)
136,144



Net cash provided by (used for) financing activities
26,812

(270,459
)
136,144


(107,503
)
Effect of exchange rate changes on cash and cash equivalents


184


184

Decrease in cash and cash equivalents
(15,844
)
(1,082
)
(7,027
)

(23,953
)
Cash and cash equivalents at beginning of period
23,999

9,029

22,304


55,332

Cash and cash equivalents at end of period
$
8,155

$
7,947

$
15,277

$

$
31,379



40



CONDENSED CONSOLIDATING BALANCE SHEET
FEBRUARY 3, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
26,089

$

$
37,958

$

$
64,047

Receivables, net
124,957

3,663

23,993


152,613

Inventories, net
146,068

394,438

28,873


569,379

Prepaid expenses and other current assets
26,284

30,456

8,394

(4,384
)
60,750

Intercompany receivable  – current
521

74

9,250

(9,845
)

Total current assets
323,919

428,631

108,468

(14,229
)
846,789

Other assets
76,317

13,610

732


90,659

Goodwill and intangible assets, net
111,108

40,937

187,123


339,168

Property and equipment, net
35,474

165,227

12,098


212,799

Investment in subsidiaries
1,329,428


(23,565
)
(1,305,863
)

Intercompany receivable  – noncurrent
774,588

520,362

704,810

(1,999,760
)

Total assets
$
2,650,834

$
1,168,767

$
989,666

$
(3,319,852
)
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
136,797

$
102,420

$
33,745

$

$
272,962

Other accrued expenses
65,817

74,006

21,758

(4,384
)
157,197

Intercompany payable – current
5,524


4,321

(9,845
)

Total current liabilities
208,138

176,426

59,824

(14,229
)
430,159

Other liabilities
 

 

 

 

 

Long-term debt
197,472




197,472

Other liabilities
101,784

35,574

5,464


142,822

Intercompany payable – noncurrent
1,425,951

98,610

475,199

(1,999,760
)

Total other liabilities
1,725,207

134,184

480,663

(1,999,760
)
340,294

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
717,489

858,157

447,706

(1,305,863
)
717,489

Noncontrolling interests


1,473


1,473

Total equity
717,489

858,157

449,179

(1,305,863
)
718,962

Total liabilities and equity
$
2,650,834

$
1,168,767

$
989,666

$
(3,319,852
)
$
1,489,415



41



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 2018:
 
Consolidated net sales increased $1.1 million in the third quarter of 2018. Our Brand Portfolio segment drove this increase, reporting a $25.6 million, or 8.5%, increase in net sales, driven in part by our recent acquisitions. Our Famous Footwear segment experienced a $24.3 million, or 5.1%, decline in sales, driven by the retail calendar shift from having a 53-week fiscal year in 2017. The shift resulted in one less week of our high-volume back-to-school selling season in the third quarter of 2018 compared to the third quarter of 2017. However, same-store sales improved 2.8%.

Consolidated gross profit decreased $6.3 million, or 2.0%, to $310.6 million for the third quarter of 2018, compared to $316.9 million for the third quarter of 2017, driven by a more promotional sales environment, strong growth in the mix of e-commerce sales and incremental cost of goods sold of $1.8 million related to the amortization of the inventory adjustment required for purchase accounting for our recent acquisitions.

Consolidated operating earnings decreased $10.7 million, or 21.1%, to $39.7 million in the third quarter of 2018, compared to $50.4 million in the third quarter of 2017.

Consolidated net earnings attributable to Caleres, Inc. were $29.2 million, or $0.67 per diluted share, in the third quarter of 2018, compared to $34.4 million, or $0.80 per diluted share, in the third quarter of 2017.

The following items should be considered in evaluating the comparability of our third quarter results in 2018 and 2017:

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. In connection with the Vionic acquisition, we incurred acquisition-related costs of $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share) during the third quarter of 2018, which are presented as restructuring and other special charges, net. We also incurred incremental cost of goods sold of $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) during the third quarter of 2018 related to the amortization of the inventory adjustment required for purchase accounting. Refer to Notes 3 and 6 to the condensed consolidated financial statements for additional information related to these costs.

Acquisition of Blowfish Malibu – During the second quarter of 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. In connection with the Blowfish Malibu acquisition, we incurred integration-related costs of $0.1 million ($0.1 million on an after-tax basis) during the third quarter of 2018. We also incurred incremental cost of goods sold of $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) related to the amortization of the inventory adjustment required for purchase accounting of Blowfish Malibu during the third quarter of 2018. Refer to Notes 3 and 6 to the condensed consolidated financial statements for additional information related to these costs.

Acquisition, integration and reorganization of men's brands – We incurred costs of $1.2 million ($0.9 million on an after-tax basis, or $0.02 per diluted share) during the third quarter of 2018 related to the integration and reorganization of our men's brands, which are presented as restructuring and other special charges, net. Refer to Note 6 to the condensed consolidated financial statements for additional information related to these costs.

We adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, during the first quarter of 2018 on a retrospective basis and reclassified $2.5 million of non-service cost components of net periodic benefit income for the third quarter of 2017 to other income, net in the condensed consolidated statements of earnings. For the third quarter of 2018, $3.1 million of non-service cost components is reflected in other income, net. Refer to Note 2 and Note 12 to the condensed consolidated financial statements for additional information on the adoption of this ASU.

In December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system

42



and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The components of the Act resulted in significant adjustments to both our income tax provision and the income tax balances. Refer to Note 15 to the condensed consolidated financial statements for further discussion.

Following are the consolidated results and the results by segment: 
CONSOLIDATED RESULTS
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended

Thirty-Nine Weeks Ended
 
November 3, 2018
 
October 28, 2017

November 3, 2018
 
October 28, 2017
 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

($ millions)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
775.8

 
100.0
 %
 
$
774.7

 
100.0
 %
 
$
2,114.6

 
100.0
 %
 
$
2,083.1

 
100.0
 %
Cost of goods sold
465.2

 
60.0
 %
 
457.8

 
59.1
 %
 
1,236.0

 
58.4
 %
 
1,207.8

 
58.0
 %
Gross profit
310.6

 
40.0
 %
 
316.9

 
40.9
 %
 
878.6

 
41.6
 %
 
875.3

 
42.0
 %
Selling and administrative expenses
265.6

 
34.2
 %
 
266.5

 
34.4
 %
 
774.6

 
36.7
 %
 
769.2

 
36.9
 %
Restructuring and other special charges, net
5.3

 
0.7
 %
 

 
 %
 
9.2

 
0.4
 %
 
4.0

 
0.2
 %
Operating earnings
39.7

 
5.1
 %
 
50.4

 
6.5
 %
 
94.8

 
4.5
 %
 
102.1

 
4.9
 %
Interest expense, net
(4.2
)
 
(0.5
)%
 
(4.1
)
 
(0.5
)%
 
(11.5
)
 
(0.5
)%
 
(13.2
)
 
(0.7
)%
Other income, net
3.1

 
0.4
 %
 
2.5

 
0.3
 %
 
9.3

 
0.4
 %
 
7.6

 
0.4
 %
Earnings before income taxes
38.6

 
5.0
 %
 
48.8

 
6.3
 %
 
92.6

 
4.4
 %
 
96.5

 
4.6
 %
Income tax provision
(9.4
)
 
(1.2
)%
 
(14.4
)
 
(1.9
)%
 
(22.7
)
 
(1.1
)%
 
(29.6
)
 
(1.4
)%
Net earnings
29.2

 
3.8
 %
 
34.4

 
4.4
 %
 
69.9

 
3.3
 %
 
66.9

 
3.2
 %
Net earnings (loss) attributable to noncontrolling interests
0.0

 
0.0
 %
 
(0.0)
 
(0.0
 )%
 
(0.1
)
 
(0.0
 )%
 
0.0

 
0.0
 %
Net earnings attributable to Caleres, Inc.
$
29.2

 
3.8
 %
 
$
34.4

 
4.4
 %
 
$
70.0

 
3.3
 %
 
$
66.9

 
3.2
 %
 
Net Sales 
Net sales increased $1.1 million, or 0.2%, to $775.8 million for the third quarter of 2018, compared to $774.7 million for the third quarter of 2017. Our Brand Portfolio segment reported a $25.6 million, or 8.5%, increase in net sales, reflecting higher net sales of our Sam Edelman, Bzees and Dr. Scholl's brands, partially offset by lower sales from Allen Edmonds. Sales in our Brand Portfolio segment also benefited from the recent acquisitions of Blowfish Malibu in July 2018 and Vionic in October 2018, which contributed $6.4 million and $5.8 million in net sales, respectively, for the third quarter of 2018. Our Famous Footwear segment reported a $24.3 million, or 5.1%, decrease in net sales, due in part to the calendar shift as a result of having a 53-week fiscal year in 2017. The shift resulted in one less week of our high-volume back-to-school selling season in the third quarter of 2018 compared to the third quarter of 2017. In addition, our lower retail store base reduced sales by $7.3 million across our retail channels.

Net sales increased $31.5 million, or 1.5%, to $2,114.6 million for the nine months ended November 3, 2018 compared to $2,083.1 million for the nine months ended October 28, 2017. Our Brand Portfolio segment reported a $34.3 million, or 4.1%, increase in net sales, reflecting growth from our Sam Edelman, LifeStride and Franco Sarto brands, partially offset by lower sales from our Allen Edmonds, Vince and Carlos brands. Our newly acquired businesses, Blowfish Malibu and Vionic, also contributed $8.9 million and $5.8 million, respectively, to the net sales growth in the nine months ended November 3, 2018 of our Brand Portfolio segment. Our Famous Footwear segment reported a $2.9 million, or 0.2%, decrease in net sales.

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 on websites that function as an extension of a retail chain are included in the same-store sales calculation.
 

43



Gross Profit 
Gross profit decreased $6.3 million, or 2.0%, to $310.6 million for the third quarter of 2018, compared to $316.9 million for the third quarter of 2017, driven by a more competitive and promotional environment. As a percentage of net sales, gross profit decreased to 40.0% for the third quarter of 2018, compared to 40.9% for the third quarter of 2017, reflecting the competitive selling environment and a higher mix of e-commerce sales. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental shipping and handling required. Cost of goods sold for the third quarter of 2018 also includes $1.8 million related to the amortization of the inventory adjustment required by purchase accounting for our recent acquisitions. Retail and wholesale net sales were 67% and 33%, respectively, in the third quarter of 2018 compared to 71% and 29% in the third quarter of 2017.  

Gross profit increased $3.3 million, or 0.4%, to $878.6 million for the nine months ended November 3, 2018, compared to $875.3 million for the nine months ended October 28, 2017, reflecting higher sales volume, partially offset by a lower gross profit rate, reflecting strong growth in the mix of e-commerce sales. As a percentage of net sales, gross profit decreased slightly to 41.6% for the nine months ended November 3, 2018, compared to 42.0% for the nine months ended October 28, 2017. Retail and wholesale net sales were 69% and 31%, respectively, in the nine months ended November 3, 2018 compared to 70% and 30% in the nine months ended October 28, 2017.

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 decreased $0.9 million, or 0.4%, to $265.6 million for the third quarter of 2018, compared to $266.5 million for the third quarter of 2017, due in part to lower rent and facilities expenses attributable to our smaller store base, partially offset by approximately $2 million of initial start-up and duplicate expenses associated with our ongoing transition to a new leased Brand Portfolio distribution center in California. As a percentage of net sales, selling and administrative expenses decreased to 34.2% for the third quarter of 2018, from 34.4% for the third quarter of 2017.

Selling and administrative expenses increased $5.4 million, or 0.7%, to $774.6 million for the nine months ended November 3, 2018, compared to $769.2 million for the nine months ended October 28, 2017, reflecting the start-up and duplicate expenses associated with the transition to a new leased Brand Portfolio distribution center. As a percentage of net sales, selling and administrative expenses decreased to 36.7% for the nine months ended November 3, 2018, from 36.9% for the nine months ended October 28, 2017.

Restructuring and Other Special Charges, Net
Restructuring and other special charges of $5.3 million ($4.4 million on an after-tax basis, or $0.10 per diluted share) for the third quarter of 2018 and $9.2 million ($7.3 million on an after-tax basis, or $0.17 per diluted share) for the nine months ended November 3, 2018 related primarily to the transition of Allen Edmonds' consumer-facing activities to St. Louis and acquisition and integration-related costs for Vionic and Blowfish Malibu. No restructuring charges were incurred in the third quarter of 2017. Restructuring and other special charges of $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) were incurred in the nine months ended October 28, 2017 for the integration and reorganization of our men's brands. Refer to Note 6 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $10.7 million, or 21.1%, to $39.7 million for the third quarter of 2018, compared to $50.4 million for the third quarter of 2017, primarily as a result of the calendar shift resulting in one less week of our high-volume back-to-school selling season in the third quarter of 2018 compared to the third quarter of 2017 and higher freight and distribution center expenses due to strong growth in e-commerce sales. As a percentage of net sales, operating earnings decreased to 5.1% for the third quarter of 2018, compared to 6.5% for the third quarter of 2017.

Operating earnings decreased $7.3 million, or 7.1%, to $94.8 million for the nine months ended November 3, 2018, compared to $102.1 million for the nine months ended October 28, 2017, driven by duplicate expenses associated with our transition to a new leased distribution center. As a percentage of net sales, operating earnings decreased to 4.5% for the nine months ended November 3, 2018, compared to 4.9% for the nine months ended October 28, 2017.

Interest Expense, Net
Interest expense, net increased $0.1 million, or 1.5%, to $4.2 million for the third quarter of 2018, compared to $4.1 million for the third quarter of 2017, primarily due to borrowings under our revolving credit agreement to fund the acquisition of Vionic in October 2018. In the third quarter of 2017, interest expense was incurred on the remaining borrowings under our revolving credit

44



agreement to fund the acquisition of Allen Edmonds in December 2016. Obligations for the acquisition of Allen Edmonds under the revolving credit agreement were fully paid off during the fourth quarter of 2017.

Interest expense, net decreased $1.7 million, or 13.1%, to $11.5 million for the nine months ended November 3, 2018, compared to $13.2 million for the nine months ended October 28, 2017, due to lower average borrowings under the revolving credit agreement. The revolver was used to fund the acquisition of Vionic in October 2018, while the borrowings for the Allen Edmonds acquisition were outstanding for the full nine months ended October 28, 2017. We anticipate incremental interest expense year-over-year going forward until the borrowings to fund the acquisition of Vionic have been paid off.

Other Income, Net
During the first quarter of 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the non-service cost components of pension and other postretirement benefit income to be included in non-operating income, as further discussed in Note 2 to the condensed consolidated financial statements. As a result of the retrospective adoption of the ASU, we reclassified $2.5 million and $7.6 million of non-service cost components of net periodic benefit income for the third quarter and nine months ended October 28, 2017, respectively, to other income, net in the condensed consolidated statements of earnings. Other income, net increased $0.6 million, or 23.8%, to $3.1 million for the third quarter of 2018, compared to $2.5 million for the third quarter of 2017, primarily reflecting a higher expected return on assets for our domestic pension plan. Other income, net increased $1.7 million, or 21.8%, to $9.3 million for the nine months ended November 3, 2018, compared to $7.6 million for the nine months ended October 28, 2017. Refer to Note 12 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 24.5% for the third quarter of 2018, compared to 29.6% for the third quarter of 2017. The 2018 rate is lower due to the reduction in the U.S. corporate tax rate following enactment of the Tax Cuts and Jobs Act (the "Act"). During the third quarter of 2017, we recognized discrete tax benefits of $0.9 million, reflecting greater deductibility of certain 2016 expenses than originally estimated. If these discrete tax benefits had not been recognized during the third quarter 2017, our effective tax rate would have been 31.5%.

For the nine months ended November 3, 2018, our consolidated effective tax rate was 24.5%, compared to 30.6% for the nine months ended October 28, 2017. During the nine months ended November 3, 2018, we recognized discrete tax benefits of $0.7 million reflecting greater deductibility of certain 2017 expenses than originally estimated and share-based compensation. We recognized $2.0 million of discrete tax benefits during the nine months ended October 28, 2017, primarily related to share-based compensation. If these discrete tax benefits had not been recognized, our effective tax rates would have been 25.4% and 32.7%, for the nine months ended November 3, 2018 and October 28, 2017, respectively. Our tax rate for the nine months ended November 3, 2018 reflects a reduction in the U.S. corporate tax rate following enactment of the Act. Refer to Note 15 to the condensed consolidated financial statements for further discussion of income taxes and the impact of the Act.

Net Earnings Attributable to Caleres, Inc. 
Net earnings attributable to Caleres, Inc. were $29.2 million and $70.0 million for the third quarter and nine months ended November 3, 2018, compared to net earnings of $34.4 million and $66.9 million for the third quarter and nine months ended October 28, 2017, as a result of the factors described above.



45



FAMOUS FOOTWEAR
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

($ millions, except sales per square foot)
 
 
 
 
 
 
 
Operating Results
 

 

 
 

 

 
 

 

 
 

 

Net sales
$
448.8

100.0
%
 
$
473.1

100.0
%
 
$
1,241.6

100.0
%
 
$
1,244.5

100.0
%
Cost of goods sold
266.3

59.3
%
 
275.0

58.1
%
 
706.8

56.9
%
 
695.4

55.9
%
Gross profit
182.5

40.7
%
 
198.1

41.9
%
 
534.8

43.1
%
 
549.1

44.1
%
Selling and administrative expenses
158.1

35.3
%
 
164.4

34.8
%
 
455.3

36.7
%
 
470.0

37.7
%
Operating earnings
$
24.4

5.4
%
 
$
33.7

7.1
%
 
$
79.5

6.4
%
 
$
79.1

6.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 
 
 

 
 
 
 
 
 
 
Same-store sales % change
2.8
%
 

 
0.9
%
 

 
1.7
%
 

 
1.0
%
 

Same-store sales $ change
$
11.9

 

 
$
3.8

 

 
$
19.8

 

 
$
12.2

 

Impact of retail calendar shift
$
(27.9
)
 
 
$

 
 
$
(6.2
)
 
 
$

 
Sales change from new and closed stores, net
$
(7.9
)
 
 
$
1.0

 
 
$
(16.4
)
 
 
$
9.6

 
Impact of changes in Canadian exchange rate on sales
$
(0.4
)
 
 
$
0.5

 
 
$
(0.1
)
 
 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
61

 
 
$
64

 
 
$
172

 
 
$
169

 
Sales per square foot, excluding e-commerce (trailing twelve months)
$
224

 

 
$
217

 

 
$
224

 

 
$
217

 

Square footage (thousand sq. ft.)
6,657

 

 
6,894

 

 
6,657

 

 
6,894

 

 
 
 
 
 
 
 
 
 
 
 
 
Stores opened
9

 

 
12

 

 
15

 

 
33

 

Stores closed
10

 

 
25

 

 
34

 

 
46

 

Ending stores
1,007

 

 
1,042

 

 
1,007

 

 
1,042

 

 
Net Sales 
Net sales decreased $24.3 million, or 5.1%, to $448.8 million for the third quarter of 2018, compared to $473.1 million for the third quarter of 2017. The decrease was primarily driven by the calendar shift, which resulted in one less week of back-to-school sales in the third quarter of 2018 compared to the third quarter of 2017, as well as a decrease in our store base, which resulted in an $7.9 million decrease in sales from new and closed stores. Same-store sales, which uses comparable retail calendar weeks from the prior year, increased 2.8%. We also experienced continued growth in e-commerce sales. Famous Footwear benefited from positive trends in sales of lifestyle athletic, boots and sandals. During the third quarter of 2018, we opened nine stores and closed 10 stores, resulting in 1,007 stores and total square footage of 6.7 million at the end of the third quarter of 2018, compared to 1,042 stores and total square footage of 6.9 million at the end of the third quarter of 2017. On a trailing twelve-month basis, sales per square foot, excluding e-commerce, increased 3.2% to $224 for the twelve months ended November 3, 2018, compared to $217 for the twelve months ended October 28, 2017. Members of Rewards, our customer loyalty program, continue to account for a majority of the segment’s sales, with approximately 77% of our net sales made to Rewards program members in the third quarter of 2018, compared to 76% in the third quarter of 2017.

Net sales decreased $2.9 million, or 0.2%, to $1,241.6 million for the nine months ended November 3, 2018, compared to $1,244.5 million for the nine months ended October 28, 2017. Same-store sales increased 1.7% for the nine months ended November 3, 2018. Famous Footwear also experienced growth in e-commerce sales and reported improvement in both online conversion rate and online customer traffic. Our retail stores generated a higher customer conversion rate despite lower customer traffic.

46




Gross Profit 
Gross profit decreased $15.6 million, or 7.9%, to $182.5 million for the third quarter of 2018, compared to $198.1 million for the third quarter of 2017, reflecting lower net sales and a lower gross profit rate, driven by a more competitive and promotional environment. In the third quarter of 2018, we continued to see a shift away from higher margin performance athletic products into lower margin lifestyle athletic products. As a percentage of net sales, our gross profit decreased to 40.7% for the third quarter of 2018, compared to 41.9% for the third quarter of 2017, reflecting a higher mix of lower margin product and higher freight expenses due to strong growth in e-commerce sales.
 
Gross profit decreased $14.3 million, or 2.6%, to $534.8 million for the nine months ended November 3, 2018, compared to $549.1 million for the nine months ended October 28, 2017. As a percentage of net sales, our gross profit decreased to 43.1% for the nine months ended November 3, 2018, compared to 44.1% for the nine months ended October 28, 2017, reflecting the same factors impacting the quarter.

Selling and Administrative Expenses 
Selling and administrative expenses decreased $6.3 million, or 3.8%, to $158.1 million for the third quarter of 2018, compared to $164.4 million for the third quarter of 2017.  The decrease was driven by lower rent and facilities expense attributable to our smaller store base. Our strong growth in the mix of e-commerce sales have also driven freight and warehouse expenses higher and we expect this trend to continue in future quarters. As a percentage of net sales, selling and administrative expenses increased to 35.3% for the third quarter of 2018, compared to 34.8% for the third quarter of 2017.

Selling and administrative expenses decreased $14.7 million, or 3.1%, to $455.3 million for the nine months ended November 3, 2018, compared to $470.0 million for the nine months ended October 28, 2017, reflecting the same factors impacting the quarter. As a percentage of net sales, selling and administrative expenses decreased to 36.7% for the nine months ended November 3, 2018, compared to 37.7% for the nine months ended October 28, 2017.

Operating Earnings  
Operating earnings decreased $9.3 million, or 27.7%, to $24.4 million for the third quarter of 2018, compared to $33.7 million for the third quarter of 2017. The decrease primarily reflects lower net sales as a result of the shift of one week of back-to-school sales into the second quarter of 2018 compared to the third quarter of 2017 and higher freight and distribution center expenses due to strong growth in e-commerce sales. As a percentage of net sales, operating earnings decreased to 5.4% for the third quarter of 2018, compared to 7.1% for the third quarter of 2017.

Operating earnings increased $0.4 million, or 0.5%, to $79.5 million for the nine months ended November 3, 2018, compared to $79.1 million for the nine months ended October 28, 2017. As a percentage of net sales, operating earnings remained flat at 6.4% for the nine months ended November 3, 2018 and October 28, 2017.



47



BRAND PORTFOLIO
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
October 28, 2017
 
November 3, 2018
 
October 28, 2017
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 

% of 
Net Sales

($ millions, except sales per square foot)
 
 
 
 
 
 
 
Operating Results
 

 

 
 

 

 
 

 

 
 

 

Net sales
$
327.1

100.0
%
 
$
301.5

100.0
%
 
$
872.9

100.0
%
 
$
838.6

100.0
%
Cost of goods sold
199.0

60.8
%
 
182.7

60.6
%
 
529.1

60.6
%
 
512.4

61.1
%
Gross profit
128.1

39.2
%
 
118.8

39.4
%
 
343.8

39.4
%
 
326.2

38.9
%
Selling and administrative expenses
100.4

30.7
%
 
94.5

31.3
%
 
286.6

32.8
%
 
271.2

32.3
%
Restructuring and other special charges, net
1.0

0.3
%
 

%
 
4.4

0.5
%
 
1.5

0.2
%
Operating earnings
$
26.7

8.2
%
 
$
24.3

8.1
%
 
$
52.8

6.1
%
 
$
53.5

6.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 

 
 

 

 
 

 

 
 

 
Wholesale/retail sales mix (%)
79%/21%

 

 
75%/25%

 

 
76%/24%

 

 
75%/25%

 
Change in wholesale net sales ($)
$
24.7

 
 
$
(0.6
)
 
 
$
30.6

 
 
$
7.7

 
Unfilled order position at end of period
$
402.1

 
 
$
302.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store sales % change(1)
1.7
%
 
 
2.4
%
 
 
(0.2
)%
 
 
6.7
%
 
Same-store sales $ change(1)
$
0.9

 
 
$
0.8

 
 
$
(0.3
)
 
 
$
5.8

 
Sales change from new and closed stores, net
$
0.6

 
 
$
0.6

 
 
$
4.0

 
 
$
4.0

 
Sales change from acquired Allen Edmonds retail stores(2)
N/A
 
 
$
35.7

 
 
N/A

 
 
$
103.4

 
Impact of changes in Canadian exchange rate on retail sales
$
(0.6
)
 
 
$
0.6

 
 
$
0.0

 
 
$
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
108

 
 
$
87

 
 
$
321

 
 
$
245

 
Sales per square foot, excluding e-commerce (trailing twelve months) (1)
$
441

 
 
$
323

 
 
$
441

 
 
$
323

 
Square footage (thousands sq. ft.)
400

 
 
403

 
 
400

 
 
403

 
 
 
 
 
 
 
 
 
 
 
 
 
Stores opened
1

 
 
3

 
 
5

 
 
11

 
Stores closed
2

 
 
6

 
 
9

 
 
12

 
Ending stores
232

 
 
235

 
 
232

 
 
235

 

(1)
Because these metrics require inclusion in our results for 13 continuous months, the calculations for the 2017 periods presented exclude our Allen Edmonds business, which was acquired in December 2016.
(2)
This metric represents net sales from our 69 acquired Allen Edmonds retail stores for the thirteen and thirty-nine weeks ended October 28, 2017.


48




Net Sales 
Net sales increased $25.6 million, or 8.5%, to $327.1 million for the third quarter of 2018, compared to $301.5 million for the third quarter of 2017 driven by higher net sales of our Sam Edelman, Bzees and Dr. Scholl's brands, partially offset by lower sales from Allen Edmonds. Our acquisitions of Blowfish Malibu in July 2018 and Vionic in October 2018 also contributed $6.4 million and $5.8 million, respectively, to our net sales growth in the third quarter of 2018. Boots had an outstanding quarter, contributing as a sales growth driver for several brands. In addition, our mix of e-commerce business continued to grow. During the third quarter of 2018, we opened one store and closed two stores, resulting in a total of 232 stores and total square footage of 0.4 million at the end of the third quarter of 2018, compared to 235 stores and total square footage of 0.4 million at the end of the third quarter of 2017. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $441 for the twelve months ended November 3, 2018, compared to $323 for the twelve months ended October 28, 2017, primarily driven by the inclusion of the Allen Edmonds retail stores in this metric for 2018.

Our unfilled order position for our wholesale sales increased $99.7 million, or 33.0%, to $402.1 million at November 3, 2018, compared to $302.4 million at October 28, 2017. The increase in our backlog order levels reflects the acquisitions of Blowfish Malibu and Vionic in 2018.

Net sales increased $34.3 million, or 4.1%, to $872.9 million for the nine months ended November 3, 2018, compared to $838.6 million for the nine months ended October 28, 2017, driven by sales growth from our Sam Edelman, LifeStride and Franco Sarto brands, partially offset by lower sales from our Allen Edmonds, Vince and Carlos brands. Our newly acquired businesses, Blowfish Malibu and Vionic, also contributed $8.9 million and $5.8 million, respectively, to the net sales growth in the nine months ended November 3, 2018. During the nine months ended November 3, 2018, we opened five stores and closed nine stores.

Gross Profit 
Gross profit increased $9.3 million, or 7.8%, to $128.1 million for the third quarter of 2018, compared to $118.8 million for the third quarter of 2017, primarily reflecting net sales growth. During the quarter, we recognized incremental cost of goods sold related to purchase accounting inventory adjustments of $1.8 million, as further discussed in Overview of Management's Discussion and Analysis. As a percentage of net sales, our gross profit decreased slightly to 39.2% for the third quarter of 2018, compared to 39.4% for the third quarter of 2017.

Gross profit increased $17.6 million, or 5.4%, to $343.8 million for the nine months ended November 3, 2018, compared to $326.2 million for the nine months ended October 28, 2017, due in large part to our net sales growth. In addition, the nine months ended October 28, 2017 included the incremental impact of $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) in cost of goods sold related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting, which was higher compared to the $2.4 million ($1.8 million on an after-tax basis, or $0.04 per diluted share) in cost of goods sold related to the amortization of the Blowfish Malibu and Vionic inventory fair value adjustments in the nine months ended November 3, 2018. As a percentage of net sales, our gross profit increased to 39.4% for the nine months ended November 3, 2018, compared to 38.9% for the nine months ended October 28, 2017.

Selling and Administrative Expenses 
Selling and administrative expenses increased $5.9 million, or 6.2%, to $100.4 million for the third quarter of 2018, compared to $94.5 million for the third quarter of 2017, reflecting approximately $2 million in duplicate expenses associated with our transition in early 2018 to a new leased distribution center, partially offset by a decrease in rent and facilities expenses attributable to our lower store base. Our strong growth in the mix of e-commerce sales have also driven freight and warehouse expenses higher and we expect this trend to continue in future quarters. As a percentage of net sales, selling and administrative expenses decreased to 30.7% for the third quarter of 2018, compared to 31.3% for the third quarter of 2017, reflecting the leveraging of our expenses over higher net sales.

Selling and administrative expenses increased $15.4 million, or 5.7%, to $286.6 million for the nine months ended November 3, 2018, compared to $271.2 million for the nine months ended October 28, 2017, reflecting the same factors impacting the quarter. As a percentage of net sales, selling and administrative expenses increased to 32.8% for the nine months ended November 3, 2018, compared to 32.3% for the nine months ended October 28, 2017.

Restructuring and Other Special Charges, Net
Restructuring and other special charges were $1.0 million and $4.4 million in the third quarter and nine months ended November 3, 2018, respectively, related to the integration and reorganization of our men's brands and acquisition and integration-related costs associated with the acquisitions of Blowfish Malibu and Vionic in July and October 2018, respectively. Restructuring and other special charges were $1.5 million in the nine months ended October 28, 2017 related to the integration and reorganization of our

49



men's business. No restructuring and other special charges were incurred in the third quarter of 2017. Refer to Note 6 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings increased $2.4 million, or 9.9%, to $26.7 million for the third quarter of 2018, compared to $24.3 million for the third quarter of 2017, driven by higher sales volume, partially offset by an increase in selling and administrative expenses. As a percentage of net sales, operating earnings increased to 8.2% for the third quarter of 2018, compared to 8.1% in the third quarter of 2017.

Operating earnings decreased $0.7 million, or 1.4%, to $52.8 million for the nine months ended November 3, 2018, compared to $53.5 million for the nine months ended October 28, 2017. As a percentage of net sales, operating earnings decreased to 6.1% for the nine months ended November 3, 2018, compared to 6.4% in the nine months ended October 28, 2017.

OTHER
 
The Other category includes unallocated corporate administrative expenses and other costs and recoveries. Costs of $11.3 million were incurred for the third quarter of 2018, compared to $7.7 million for the third quarter of 2017, primarily reflecting the incremental acquisition-related costs for the acquisition of Vionic in October 2018. Refer to Note 3 and Note 6 to the condensed consolidated financial statements for further discussion.

Unallocated corporate administrative expenses and other costs and recoveries were $37.4 million for the nine months ended November 3, 2018, compared to $30.6 million for the nine months ended October 28, 2017. The $6.8 million increase reflects the acquisition and integration-related costs associated with Vionic and Blowfish Malibu and higher expenses for our cash and share-based incentive compensation plans, due in part to growth in our stock price.
 
LIQUIDITY AND CAPITAL RESOURCES
Borrowings 
($ millions)
November 3, 2018

October 28, 2017

February 3, 2018

Borrowings under revolving credit agreement
$
350.0

$
20.0

$

Long-term debt
197.8

197.3

197.5

Total debt
$
547.8

$
217.3

$
197.5

 
Total debt obligations of $547.8 million at November 3, 2018 increased $330.5 million, compared to $217.3 million at October 28, 2017, and increased $350.3 million, compared to $197.5 million at February 3, 2018. The increase from October 28, 2017 and February 3, 2018, reflects borrowings under our revolving credit agreement to fund the acquisition of Vionic in October 2018. We used our revolving credit agreement to fund the acquisition of Allen Edmonds in the fourth quarter of 2016 and the outstanding balance was paid down throughout 2017. Net interest expense for the third quarter of 2018 increased $0.1 million to $4.2 million, compared to $4.1 million for the third quarter of 2017. As a result of lower average borrowings under our revolving credit agreement, net interest expense decreased $1.7 million to $11.5 million for the nine months ended November 3, 2018, compared to $13.2 million for the nine months ended October 28, 2017.

Credit Agreement 
The Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to $600.0 million, with the option to increase by up to $150.0 million. The Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC and Allen Edmonds are each co-borrowers and guarantors under the Credit Agreement, which matures on December 18, 2019. On October 31, 2018, Vionic was also joined to the Credit Agreement as a co-borrower and guarantor.

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

50



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.

At November 3, 2018, we had $350.0 million in borrowings and $8.7 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $241.3 million at November 3, 2018. We were in compliance with all covenants and restrictions under the Credit Agreement as of November 3, 2018. We anticipate incremental interest expense year-over-year going forward until the borrowings to fund the acquisition of Vionic have been paid off.

$200 Million Senior Notes 
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 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 and bear interest at 6.25%, which is payable on February 15 and August 15 of each year. The Senior Notes mature on August 15, 2023. 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 3, 2018, 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 3, 2018

October 28, 2017

Change

Net cash provided by operating activities
$
94.4

$
122.2

$
(27.8
)
Net cash used for investing activities
(401.0
)
(38.9
)
(362.1
)
Net cash provided by (used for) financing activities
333.2

(107.5
)
440.7

Effect of exchange rate changes on cash and cash equivalents
(0.2
)
0.2

(0.4
)
Increase in cash and cash equivalents
$
26.4

$
(24.0
)
$
50.4

 
Reasons for the major variances in cash provided (used) in the table above are as follows: 
 
Cash provided by operating activities was $27.8 million lower in the nine months ended November 3, 2018 as compared to the nine months ended October 28, 2017, primarily reflecting the following factors:  
A larger increase in inventory in the nine months ended November 3, 2018, compared to to the nine months ended October 28, 2017; and
An increase in accounts receivable in the nine months ended November 3, 2018, compared to a decrease in the comparable period in 2017, driven by an increase in net sales; partially offset by
An increase in trade accounts payable in the nine months ended November 3, 2018, compared to a decrease in the nine months ended October 28, 2017, driven by higher purchases of inventory in the nine months ended November 3, 2018.

Cash used for investing activities was $362.1 million higher in the nine months ended November 3, 2018 as compared to the nine months ended October 28, 2017, primarily due to the acquisition cost for Vionic in October 2018. For fiscal 2018, we expect purchases of property and equipment and capitalized software of approximately $60 million, including the capital required for our new leased Brand Portfolio warehouse in California.

Cash provided by financing activities was $440.7 million higher in the nine months ended November 3, 2018 as compared to the nine months ended October 28, 2017, primarily due to the $360.0 million of borrowings under our revolving credit agreement for the acquisition of Vionic. During 2017, we had net repayments on our revolving credit agreement for the December 2016 Allen Edmonds acquisition.


51



A summary of key financial data and ratios at the dates indicated is as follows: 
 
November 3, 2018

October 28, 2017

February 3, 2018

Working capital ($ millions) (1)
$
167.2

$
386.3

$
416.6

Current ratio (2)
1.19:1

1.93:1

1.97:1

Debt-to-capital ratio (3)
41.7
%
24.4
%
21.5
%
(1)
Working capital has been computed as total current assets less total current liabilities.
(2)
The current ratio has been computed by dividing total current assets by total current liabilities.
(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 3, 2018 was $167.2 million, which was $219.1 million and $249.4 million lower than at October 28, 2017 and February 3, 2018, respectively. Our current ratio was 1.19 to 1 as of November 3, 2018, compared to 1.93 to 1 at October 28, 2017 and 1.97:1 at February 3, 2018. The decrease in working capital and the current ratio from October 28, 2017 and February 3, 2018 primarily reflects higher borrowings under our revolving credit agreement to fund the acquisition of Vionic in October 2018. A significant portion of the purchase price of Vionic is attributed to noncurrent assets, such as tradenames, goodwill and other intangibles that are excluded from working capital. Our debt-to-capital ratio was 41.7% as of November 3, 2018, compared to 24.4% as of October 28, 2017 and 21.5% at February 3, 2018. The increase in our debt-to-capital ratio from October 28, 2017 also reflects higher borrowings under our revolving credit agreement.
 
At November 3, 2018, we had $90.5 million of cash and cash equivalents. The majority 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 2018 and 2017. 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 and capital lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, 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.

As further discussed in Note 3 and Note 14 to the condensed consolidated financial statements, in conjunction with the acquisition of Blowfish Malibu in July of 2018, the Company recorded a mandatory purchase obligation of the noncontrolling interest of $9.0 million. The fair value of the mandatory purchase obligation, which was $9.1 million as of November 3, 2018, will be paid upon settlement in 2021. In addition, in conjunction with the acquisition of Vionic in October of 2018, the Company assumed a capital lease obligation of $3.5 million. During the third quarter of 2018, the Company also signed an operating lease for an additional building on the campus of our wholesale distribution center in California. The lease term is approximately 10 years and requires aggregate minimum lease payments of approximately $3.4 million in 2019, $9.7 million in 2020-2021, $10.2 million in 2022-2023 and $29.7 million thereafter.

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 and changes in operating lease commitments as a result of new stores, store closures and lease renewals) and the mandatory purchase obligation, capital lease obligation and new operating lease described above, 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 3, 2018.

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 Topic 606, as further described in Note 4 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 3, 2018

52




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) foreign currency fluctuations; (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) changes to tax laws, policies and treaties; (xii) the ability to recruit and retain senior management and other key associates; (xiii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xiv) the ability to secure/exit leases on favorable terms; (xv) the ability to maintain relationships with current suppliers; and (xvi) 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 3, 2018, 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 3, 2018.  

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 internal control reviews 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

53



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 3, 2018, 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. 

On July 6, 2018, we acquired Blowfish Malibu. In addition, on October 18, 2018, we acquired Vionic. As a result of these acquisitions, we are in the process of reviewing the internal control structures of Blowfish Malibu and Vionic and, if necessary, will make appropriate internal control enhancements as we integrate the acquired businesses. 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 3, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Our annual assessment of internal control over financial reporting will exclude Blowfish Malibu and Vionic.

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 16 to the condensed consolidated financial statements and incorporated by reference herein. 

ITEM 1A
RISK FACTORS

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 3, 2018.  

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 2018:
 
 
 
 
 
Total Number Purchased as Part of Publicly Announced Program (2)
 
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (1)
 
 
 
 
Fiscal Period
 
 
 
 
 
 
 
 
 
 
August 5, 2018 - September 1, 2018

 
$

 

 
1,123,500

 
 
 
 
 
 
 
 
September 2, 2018 - October 6, 2018

 

 

 
1,123,500

 
 
 
 
 
 
 
 
October 7, 2018 - November 3, 2018

 

 

 
1,123,500

 
 
 
 
 
 
 
 
Total

 
$

 

 
1,123,500

 
(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.


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(2)
On August 25, 2011, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock. We can use the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 100,000 and 225,000 shares were repurchased during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively. The Company did not repurchase any shares during the thirteen weeks ended November 3, 2018 or October 28, 2017. As of November 3, 2018, there were 1,123,500 shares authorized to be repurchased under the program. Our repurchases of common stock are limited under our debt agreements. Subsequent to quarter-end, the Company has repurchased 1,052,576 shares at an aggregate price of $31.5 million. 

ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
None. 

ITEM 4
MINE SAFETY DISCLOSURES
 
Not applicable. 

ITEM 5
OTHER INFORMATION
 
None. 


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ITEM 6
EXHIBITS
Exhibit  
No.
 
 
3.1
 
3.2
 
31.1
31.2
32.1
101.INS
XBRL Instance Document
101.SCH 
101.CAL 
101.LAB 
101.PRE 
101.DEF
† 
† 
† 
† 
XBRL Taxonomy Extension Schema Document  
XBRL Taxonomy Extension Calculation Linkbase Document  
XBRL Taxonomy Extension Label Linkbase Document  
XBRL Taxonomy Presentation Linkbase Document  
XBRL Taxonomy Definition Linkbase Document

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

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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 12, 2018
 
/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 and Principal Accounting Officer


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