Acquisitions and Equity Method Investment

12 Months Ended

Feb. 01, 2020

Equity Method Investments and Joint Ventures [Abstract]

ACQUISITIONS AND EQUITY METHOD INVESTMENT

Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $36.2 million CAD ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net, in the consolidated statements of operations. Also during fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

The purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired was finalized as of February 2, 2019 and consisted of the following (in USD):



(in thousands)	Final Purchase Price and Allocation
Purchase price:
Cash consideration, net of cash acquired	$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196
Fair value of pre-existing assets	92,242
	$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	66,072
Other current assets	3,687
Property and equipment	41,008
Goodwill	43,022
Intangible assets	20,689
Accounts payable and other liabilities	(33,196		)
Non-current liabilities	(20,692		)
	$	120,590

The fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets included $15.7 million for tradenames, $3.6 million for favorable leasehold interests, and $1.4 million for customer relationships associated with the Canada loyalty program. The fair value of unfavorable leasehold interests, included in other non-current liabilities, was $7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based on the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair value for property and equipment was determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of the Canada Retail segment’s goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.

During fiscal 2018, our consolidated statements of operations included net sales and net losses for TSL of $220.3 million and $48.9 million, respectively, which included the pre-tax losses from the wind down of operations for the Town Shoes banner, the goodwill impairment charge of $41.8 million, long-lived asset impairment charges of $3.6 million and lease exit charges of $15.5 million. Primarily in fiscal 2018, we incurred $3.1 million of acquisition-related costs as a result of the step acquisition (not included in the TSL net loss disclosed in the previous sentence), which were included in operating expenses in the consolidated statements of operations.

Acquisition of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $166.3 million, net of acquired cash of $9.7 million and a working capital settlement of $5.0 million received during fiscal 2019. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $160.0 million.

The purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired was finalized as of November 2, 2019 and consisted of the following:



(in thousands)	Preliminary Purchase Price and Allocation as of November 5, 2018			Measurement Period Adjustments			Final Purchase Price and Allocation as of November 2, 2019
Purchase price -
Cash consideration, net of cash acquired	$	171,251		$	(4,965	)	$	166,286
Fair value of assets and liabilities acquired:
Accounts receivable	$	83,939		$	3,410		$	87,349
Inventories	74,499			(2,999		)	71,500
Other current assets	7,197			1,105			8,302
Property and equipment	43,906			(1,469		)	42,437
Goodwill	63,614			24,131			87,745
Intangible asset	27,000			(19,000		)	8,000
Other assets	13,351			—			13,351
Accounts payable and other liabilities	(122,811		)	(2,030		)	(124,841		)
Non-current liabilities	(19,444		)	(8,113		)	(27,557		)
	$	171,251		$	(4,965	)	$	166,286

The fair value of the intangible asset relates to customer relationships and was based on the excess earnings method under the income approach. The fair value measurement is based on significant unobservable inputs, including the future cash flows and discount and customer attrition rates. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which consist of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The inventory valuation step-up was recognized to cost of goods sold during fiscal 2018 based on assumed inventory turns.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired, and was primarily attributable to acquiring an established design and sourcing process, which provides us the opportunity to expand our exclusive brand products offering at lower cost of goods in our retail segments and an assembled workforce. We determined that goodwill should be allocated to reporting units within the U.S. Retail and Brand Portfolio segments based on each reporting unit’s estimated benefit from the expected synergies from the Camuto Group acquisition. We allocated $67.8 million of the goodwill to the U.S. Retail segment based primarily on a discounted cash flow of the sourcing benefit. The remaining $20.0 million of goodwill was allocated to the First Cost reporting unit within the Brand Portfolio segment based on the fair value of the reporting unit over the fair value of the net assets allocated to the reporting unit. Goodwill is expected to be deductible for income tax purposes.

Other non-current liabilities included $12.7 million of estimated unpaid foreign payroll and other taxes. We recorded an offsetting indemnification asset to other assets, which we expect to collect under the terms of the securities purchase agreement with the Sellers. See Note 16, Commitments and Contingencies, for additional information.

Measurement period adjustments were the result of refining cash flow assumptions relating to certain synergy assumptions, adjusting accruals and related indemnification receivables based on additional information, and other immaterial adjustments identified as we performed additional analysis of the assets and liabilities acquired. Adjustments to the purchase price were based on a working capital settlement with the Sellers as provided by the purchase agreement. Measurement period adjustments are recognized on a prospective basis in the period of change.

During fiscal 2018, our consolidated statements of operations included net sales from external customers and net losses for Camuto Group of $89.6 million and $16.2 million, respectively. We incurred $22.2 million of acquisition-related costs as a result of the acquisition (not included in the Camuto Group net loss disclosed in the previous sentence), which were included in operating expenses in the consolidated statements of operations.

Equity Investment in ABG-Camuto- On November 5, 2018, we acquired a 40% interest in the newly formed ABG-Camuto joint venture for $56.8 million in partnership with Authentic Brands Group LLC. Also on November 5, 2018, ABG-Camuto acquired several intellectual property rights from the Sellers and entered into a licensing agreement with us, through which ABG-Camuto earns royalties from the net sales of Camuto Group under the brands acquired.

Activity related to our equity investment in ABG-Camuto was as follows:



	Fiscal
(in thousands)	2019			2018
Balance at beginning of period	$	58,125		$	—
Initial investment in ABG-Camuto	—			56,827
Share of net earnings	10,149			1,298
Distributions received	(10,514		)	—
Balance at end of period	$	57,760		$	58,125

Combined Results- The following table provides the supplemental unaudited pro forma net sales and net income of the combined entity had the acquisition dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:



	Fiscal
(in thousands)	2018		2017
Net sales	$	3,562,498	$	3,487,314
Net income	$	74,367	$	17,645

The amounts in the supplemental pro forma results apply our accounting policies, eliminate intercompany transactions, assume the acquisition-related transaction costs were incurred in fiscal 2017, and reflect adjustments for additional expenses that would have been charged assuming borrowings on the revolving line of credit of $160.0 million and the same fair value adjustments to inventory, property and equipment, and acquired intangibles had been applied on the first day of our fiscal 2017. Related to the TSL acquisition, the supplemental pro forma results also exclude the loss related to the remeasurement of previously held assets, the net loss of foreign currency translation related to the previously held balances from accumulated other comprehensive loss, and the goodwill impairment charge. Because the ABG-Camuto investment was integral to the Camuto Group acquisition, the supplemental pro forma results include royalty expenses that would be due to ABG-Camuto using the guaranteed minimum royalties per the license agreement and the related earnings from our equity investment in ABG-Camuto had the transactions occurred on the first day of our fiscal 2017. Accordingly, these supplemental pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisitions actually occurred in the prior year period or indicative of the results of operations for any future period.