10-Q 1 cal20160730.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 July 30, 2016
 
 
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from  _____________  to  _____________
 
Commission file number: 1-2191 
 
CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ     No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes  þ   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
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 August 26, 2016, 42,920,038 common shares were outstanding.

1



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

($ thousands)
July 30, 2016

 
August 1, 2015

 
January 30, 2016

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
165,729


$
129,345


$
118,151

Restricted cash


41,482



Receivables, net
144,309


144,213


153,664

Inventories, net
648,881


641,128


546,745

Prepaid expenses and other current assets
30,190


41,002


56,505

Total current assets
989,109

 
997,170

 
875,065

 
 
 
 
 
 
Other assets
115,448


142,646


118,349

Goodwill
13,954

 
13,954

 
13,954

Intangible assets, net
115,106

 
118,783

 
116,945

Property and equipment
489,638

 
444,674

 
475,750

Allowance for depreciation
(302,862
)
 
(293,835
)
 
(296,740
)
Net property and equipment
186,776


150,839


179,010

Total assets
$
1,420,393

 
$
1,423,392

 
$
1,303,323

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Current portion of long-term debt
$


$
39,157


$

Trade accounts payable
358,751


382,626


237,802

Other accrued expenses
142,085


135,117


152,497

Total current liabilities
500,836

 
556,900

 
390,299

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
196,774


195,919


196,544

Deferred rent
47,452


40,981


46,506

Other liabilities
60,566


60,364


67,502

Total other liabilities
304,792

 
297,264

 
310,552

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
429

 
437

 
437

Additional paid-in capital
119,241

 
136,127

 
138,881

Accumulated other comprehensive (loss) income
(5,375
)
 
3,027

 
(5,864
)
Retained earnings
499,492

 
428,754

 
468,030

Total Caleres, Inc. shareholders’ equity
613,787


568,345


601,484

Noncontrolling interests
978


883


988

Total equity
614,765

 
569,228

 
602,472

Total liabilities and equity
$
1,420,393

 
$
1,423,392

 
$
1,303,323

See notes to condensed consolidated financial statements.

2



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Twenty-six Weeks Ended
($ thousands, except per share amounts)
July 30, 2016

August 1, 2015

July 30, 2016

August 1, 2015

Net sales
$
622,937

$
637,834

$
1,207,670

$
1,240,117

Cost of goods sold
363,382

375,039

700,322

728,796

Gross profit
259,555

262,795

507,348

511,321

Selling and administrative expenses
227,297

227,061

446,347

445,251

Operating earnings
32,258

35,734

61,001

66,070

Interest expense
(3,479
)
(4,345
)
(7,089
)
(8,808
)
Loss on early extinguishment of debt

(8,690
)

(8,690
)
Interest income
310

238

557

542

Earnings before income taxes
29,089

22,937

54,469

49,114

Income tax provision
(9,410
)
(6,074
)
(16,912
)
(12,860
)
Net earnings
19,679

16,863

37,557

36,254

Net (loss) earnings attributable to noncontrolling interests
(89
)
38

6

168

Net earnings attributable to Caleres, Inc.
$
19,768

$
16,825

$
37,551

$
36,086

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.46

$
0.38

$
0.87

$
0.82

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.46

$
0.38

$
0.86

$
0.82

 
 
 
 
 
Dividends per common share
$
0.07

$
0.07

$
0.14

$
0.14

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
($ thousands)
July 30, 2016

August 1, 2015

 
July 30, 2016

August 1, 2015

Net earnings
$
19,679

$
16,863

 
$
37,557

$
36,254

Other comprehensive (loss) income, net of tax:
 

 

 
 

 

Foreign currency translation adjustment
(804
)
(949
)
 
1,506

443

Pension and other postretirement benefits adjustments
(288
)
(243
)
 
(576
)
(458
)
Derivative financial instruments
(229
)
547

 
(441
)
330

Other comprehensive (loss) income, net of tax
(1,321
)
(645
)
 
489

315

Comprehensive income
18,358

16,218

 
38,046

36,569

Comprehensive (loss) income attributable to noncontrolling interests
(120
)
37

 
(10
)
171

Comprehensive income attributable to Caleres, Inc.
$
18,478

$
16,181

 
$
38,056

$
36,398

See notes to condensed consolidated financial statements.

4



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Twenty-six Weeks Ended
($ thousands)
July 30, 2016

August 1, 2015

Operating Activities
 
 

Net earnings
$
37,557

$
36,254

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

 

Depreciation
18,325

17,500

Amortization of capitalized software
6,366

6,140

Amortization of intangible assets
1,839

1,850

Amortization of debt issuance costs and debt discount
864

617

Loss on early extinguishment of debt

8,690

Share-based compensation expense
4,329

3,680

Tax benefit related to share-based plans
(3,248
)
(2,838
)
Loss (gain) on disposal of property and equipment
519

(1,897
)
Impairment charges for property and equipment
536

857

Deferred rent
946

1,239

Provision for doubtful accounts
105

100

Changes in operating assets and liabilities:
 

 

Receivables
9,301

(7,668
)
Inventories
(101,032
)
(98,445
)
Prepaid expenses and other current and noncurrent assets
24,799

(11,633
)
Trade accounts payable
120,949

166,786

Accrued expenses and other liabilities
(14,353
)
(21,952
)
Other, net
762

1,975

Net cash provided by operating activities
108,564

101,255

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(27,443
)
(24,872
)
Proceeds from disposal of property and equipment

7,111

Capitalized software
(3,778
)
(2,698
)
Net cash used for investing activities
(31,221
)
(20,459
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
103,000

86,000

Repayments under revolving credit agreement
(103,000
)
(86,000
)
Proceeds from issuance of 2023 senior notes

200,000

Redemption of 2019 senior notes

(160,700
)
Restricted cash

(41,482
)
Debt issuance costs

(3,650
)
Dividends paid
(6,089
)
(6,135
)
Acquisition of treasury stock
(23,139
)
(4,921
)
Issuance of common stock under share-based plans, net
(4,086
)
(4,428
)
Tax benefit related to share-based plans
3,248

2,838

Net cash used for financing activities
(30,066
)
(18,478
)
Effect of exchange rate changes on cash and cash equivalents
301

(376
)
Increase in cash and cash equivalents
47,578

61,942

Cash and cash equivalents at beginning of period
118,151

67,403

Cash and cash equivalents at end of period
$
165,729

$
129,345

See notes to condensed consolidated financial statements.

5



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 Christmas 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 January 30, 2016.

Note 2
Impact of New 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 ASU 2015-14 to defer the effective date and ASUs 2016-08 and 2016-10 to clarify the implementation guidance in ASU 2014-09 Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.   The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted beginning after December 15, 2016.  The Company has completed an initial assessment of the ASU. Although the ASU will impact revenue recognition for each of the Company's reportable segments, the Company anticipates a more significant impact on its Famous Footwear segment, primarily due to the ASU's required treatment for loyalty programs (such as Rewards, the Company's loyalty program). While the Company is currently developing its implementation plan, it expects to adopt the ASU in the first quarter of 2018 using the full retrospective method. The Company anticipates that the adoption may have a material impact on the condensed consolidated financial statements.
 
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330), which requires entities to measure inventory at "the lower of cost and net realizable value", simplifying the current guidance under which entities must measure inventory at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using the last-in, first-out (LIFO) method. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. Because approximately 95% of the Company's inventories are valued using the LIFO method, the Company anticipates that the adoption of this ASU will not have a material impact on the condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements. 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 financial statements upon adoption in the first quarter of 2019 will be

6



significant. However, the adoption of the ASU is not expected to trigger non-compliance with any covenant or other restriction under the provisions of any of the Company’s debt obligations. 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies accounting for certain aspects of share-based payments to employees, including income taxes, forfeitures and statutory income tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The ASU requires certain income tax impacts related to share-based plans to be recorded within the income tax provision, rather than as a component of additional paid-in capital, as presented today. While the Company has not yet completed its analysis, the Company anticipates a greater degree of volatility in its income tax provision and effective income tax rate as a result of the required treatment under the new standard.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The ASU’s provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is adopted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

Note 3
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 July 30, 2016 and August 1, 2015:
 
 
Thirteen Weeks Ended
Twenty-six Weeks Ended
($ thousands, except per share amounts)
July 30, 2016

August 1, 2015

July 30, 2016

August 1, 2015

NUMERATOR
 

 

 

 

Net earnings
$
19,679

$
16,863

$
37,557

$
36,254

Net loss (earnings) attributable to noncontrolling interests
89

(38
)
(6
)
(168
)
Net earnings allocated to participating securities
(523
)
(544
)
(1,014
)
(1,195
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
19,245

$
16,281

$
36,537

$
34,891

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
42,043

42,325

42,238

42,319

Dilutive effect of share-based awards
142

123

151

136

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,185

42,448

42,389

42,455


 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.46

$
0.38

$
0.87

$
0.82


 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.46

$
0.38

$
0.86

$
0.82

 
Options to purchase 66,165 shares of common stock for the thirteen and twenty-six weeks ended July 30, 2016 and 61,497 shares of common stock for the thirteen and twenty-six weeks ended August 1, 2015 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive.


7



The Company repurchased 450,000 and 900,000 shares during the thirteen and twenty-six weeks ended July 30, 2016, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. During the twenty-six weeks ended August 1, 2015, 151,500 shares were repurchased. As of July 30, 2016, the Company has repurchased a total of 1.1 million shares at a cost of $28.1 million.

Note 4
Long-term and Short-term Financing Arrangements

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. On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement, which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC (as so amended, the “Credit Agreement”). After giving effect to the amendment, the Company is the lead borrower, and Sidney Rich Associates, Inc. and BG Retail, LLC are each co-borrowers and guarantors under the Credit Agreement. The Credit Agreement matures on December 18, 2019.

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

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread.  The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement.  There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
 
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets.  In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements.  Furthermore, if excess availability falls below 12.5% of the Loan Cap for three consecutive business days or an event of default occurs, the lenders may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any twelve-month period.
 
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect, and a change of control event.  In addition, if the excess availability falls below the greater of (i) 10.0% of the lesser of the Loan Cap and (ii) $50.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of July 30, 2016

At July 30, 2016, the Company had no borrowings outstanding and $6.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $593.5 million at July 30, 2016.   

$200 Million Senior Notes Due 2019 
During 2011, the Company issued $200.0 million aggregate principal amount of 7.125% Senior Notes due 2019 (the “2019 Senior Notes”).  The 2019 Senior Notes were guaranteed on a senior unsecured basis by each of its subsidiaries that was an obligor under the Credit Agreement. Interest on the 2019 Senior Notes was payable on May 15 and November 15 of each year. The 2019 Senior Notes were scheduled to mature on May 15, 2019 but were callable at specified redemption prices, plus accrued and unpaid interest.
 
On July 20, 2015, the Company commenced a cash tender offer (the "Tender Offer") to purchase any and all of the outstanding aggregate principal amount of its 2019 Senior Notes. Upon expiration of the Tender Offer on July 24, 2015, $160.7 million aggregate principal amount of the 2019 Senior Notes were validly tendered at the redemption price of 103.950%, representing the specified redemption price and a tender premium. On August 26, 2015, the remaining outstanding $39.3 million aggregate principal amount of outstanding 2019 Senior Notes were redeemed at the redemption price of 103.563%. During the thirteen and twenty-

8



six weeks ended August 1, 2015, the Company recognized a loss on the early extinguishment of the 2019 Senior Notes of $8.7 million, representing the tender offer and call premiums, the unamortized debt issuance costs and the original issue discount associated with the portion of the 2019 Senior Notes that were redeemed during the thirteen weeks ended August 1, 2015.

$200 Million Senior Notes Due 2023
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of 6.25% Senior Notes due 2023 (the "2023 Senior Notes") in a private placement. On October 22, 2015, the Company commenced an offer to exchange its 2023 Senior Notes outstanding for substantially identical debt securities registered under the Securities Act of 1933. The exchange offer was completed on November 23, 2015 and did not affect the amount of the Company's indebtedness outstanding. The net proceeds from the issuance of the 2023 Senior Notes were approximately $196.3 million after deducting fees and expenses associated with the offering. The Company used the net proceeds, together with cash on hand, to redeem the outstanding 2019 Senior Notes.

The 2023 Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the 2023 Senior Notes is payable on February 15 and August 15 of each year, beginning on February 15, 2016. The 2023 Senior Notes will mature on August 15, 2023.  Prior to August 15, 2018, the Company may redeem some or all of the 2023 Senior Notes at a redemption price equal to 100% of the principal amount of the 2023 Senior Notes plus a "make-whole" premium (as defined in the 2023 Senior Notes indenture) and accrued and unpaid interest to the redemption date.  After August 15, 2018, the Company may redeem all or a part of the 2023 Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest (as defined in the 2023 Senior Notes indenture), if redeemed during the 12-month period beginning on August 15 of the years indicated below:
Year
Percentage

2018
104.688
%
2019
103.125
%
2020
101.563
%
2021 and thereafter
100.000
%
 
If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the 2023 Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase.

The 2023 Senior Notes also contain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of July 30, 2016, the Company was in compliance with all covenants and restrictions relating to the 2023 Senior Notes.


9



Note 5
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended July 30, 2016 and August 1, 2015.  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended July 30, 2016
External sales
$
390,123

$
232,814

$

$
622,937

Intersegment sales

30,589


30,589

Operating earnings (loss)
22,604

17,463

(7,809
)
32,258

Segment assets
644,446

518,636

257,311

1,420,393

 
 
 
 
 
Thirteen Weeks Ended August 1, 2015
External sales
$
395,873

$
241,961

$

$
637,834

Intersegment sales

32,962


32,962

Operating earnings (loss)
27,672

16,005

(7,943
)
35,734

Segment assets
608,353

540,582

274,457

1,423,392

 
 
 
 
 
Twenty-six Weeks Ended July 30, 2016
External sales
$
754,719

$
452,951

$

$
1,207,670

Intersegment sales

46,152


46,152

Operating earnings (loss)
48,358

27,085

(14,442
)
61,001

 
 
 
 
 
Twenty-six Weeks Ended August 1, 2015
External sales
$
755,893

$
484,224

$

$
1,240,117

Intersegment sales

50,288


50,288

Operating earnings (loss)
55,632

27,065

(16,627
)
66,070

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

Following is a reconciliation of operating earnings to earnings before income taxes:   
 
Thirteen Weeks Ended
Twenty-six Weeks Ended
($ thousands)
July 30, 2016

August 1, 2015

July 30, 2016

August 1, 2015

Operating earnings
$
32,258

$
35,734

$
61,001

$
66,070

Interest expense
(3,479
)
(4,345
)
(7,089
)
(8,808
)
Loss on early extinguishment of debt

(8,690
)

(8,690
)
Interest income
310

238

557

542

Earnings before income taxes
$
29,089

$
22,937

$
54,469

$
49,114



10



Note 6
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
July 30, 2016

August 1, 2015

January 30, 2016

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
183,068

183,068

183,068

Total intangible assets
185,868

185,868

185,868

Accumulated amortization
(70,762
)
(67,085
)
(68,923
)
Total intangible assets, net
115,106

118,783

116,945

Goodwill
 

 

 

Brand Portfolio
13,954

13,954

13,954

Total goodwill
13,954

13,954

13,954

Goodwill and intangible assets, net
$
129,060

$
132,737

$
130,899

 
Intangible assets consist primarily of owned and licensed trademarks, of which $20.8 million as of July 30, 2016, August 1, 2015 and January 30, 2016, are not subject to amortization. The remaining intangible assets are subject to amortization and have useful lives ranging from 15 to 40 years as of July 30, 2016. Amortization expense related to intangible assets was $0.9 million for the thirteen weeks ended July 30, 2016 and August 1, 2015 and $1.8 million and $1.9 million for the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. 
 
Note 7
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the twenty-six weeks ended July 30, 2016 and August 1, 2015:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 30, 2016
$
601,484

$
988

$
602,472

Net earnings
37,551

6

37,557

Other comprehensive income (loss)
489

(16
)
473

Dividends paid
(6,089
)

(6,089
)
Acquisition of treasury stock
(23,139
)

(23,139
)
Issuance of common stock under share-based plans, net
(4,086
)

(4,086
)
Tax benefit related to share-based plans
3,248


3,248

Share-based compensation expense
4,329


4,329

Equity at July 30, 2016
$
613,787

$
978

$
614,765

 

11



($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 31, 2015
$
540,910

$
712

$
541,622

Net earnings
36,086

168

36,254

Other comprehensive income
315

3

318

Dividends paid
(6,135
)

(6,135
)
Acquisition of treasury stock
(4,921
)

(4,921
)
Issuance of common stock under share-based plans, net
(4,428
)

(4,428
)
Tax benefit related to share-based plans
2,838


2,838

Share-based compensation expense
3,680


3,680

Equity at August 1, 2015
$
568,345

$
883

$
569,228



12



Accumulated Other Comprehensive (Loss) Income
The following table sets forth the changes in accumulated other comprehensive (loss) income by component for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance April 30, 2016
$
1,410

$
(5,644
)
$
180

$
(4,054
)
Other comprehensive loss before reclassifications
(804
)

(351
)
(1,155
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive (loss) income

(477
)
190

(287
)
Tax provision (benefit)

189

(68
)
121

Net reclassifications

(288
)
122

(166
)
Other comprehensive loss
(804
)
(288
)
(229
)
(1,321
)
Balance July 30, 2016
$
606

$
(5,932
)
$
(49
)
$
(5,375
)
 
 
 
 
 
Balance May 2, 2015
$
647

$
3,018

$
7

$
3,672

Other comprehensive (loss) income before reclassifications
(949
)

625

(324
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive (loss) income

(401
)
(109
)
(510
)
Tax provision

158

31

189

Net reclassification

(243
)
(78
)
(321
)
Other comprehensive (loss) income
(949
)
(243
)
547

(645
)
Balance August 1, 2015
$
(302
)
$
2,775

$
554

$
3,027

 
 
 
 
 
Balance January 30, 2016
$
(900
)
$
(5,356
)
$
392

$
(5,864
)
Other comprehensive income (loss) before reclassifications
1,506


(639
)
867

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

(954
)
313

(641
)
Tax provision (benefit)

378

(115
)
263

Net reclassifications

(576
)
198

(378
)
Other comprehensive income (loss)
1,506

(576
)
(441
)
489

Balance July 30, 2016
$
606

$
(5,932
)
$
(49
)
$
(5,375
)
 
 
 
 
 
Balance January 31, 2015
$
(745
)
$
3,233

$
224

$
2,712

Other comprehensive income before reclassifications
443


365

808

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

(758
)
(38
)
(796
)
Tax provision

300

3

303

Net reclassifications

(458
)
(35
)
(493
)
Other comprehensive income (loss)
443

(458
)
330

315

Balance August 1, 2015
$
(302
)
$
2,775

$
554

$
3,027

(1)
Amounts reclassified are included in selling and administrative expenses. See Note 9 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.

13




(2)
Amounts reclassified are included in net sales, costs of goods sold and selling and administrative expenses. See Notes 10 and 11 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 8
Share-Based Compensation
 
The Company recognized share-based compensation expense of $2.3 million and $2.0 million during the thirteen weeks and $4.3 million and $3.7 million during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. In addition to share-based compensation expense, the Company recognized cash-based expense related to performance share units and cash awards granted under the performance share plans of $0.9 million and $2.5 million during the thirteen weeks and $1.7 million and $4.1 million during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively.
 
The Company issued 20,829 and 20,163 shares of common stock during the thirteen weeks and 408,434 and 364,842 during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively, for stock-based awards, stock options exercised and directors' fees.
 
The following table summarizes restricted stock activity for the periods ended July 30, 2016 and August 1, 2015:
 
Thirteen Weeks Ended July 30, 2016
 
 
Thirteen Weeks Ended August 1, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
April 30, 2016
1,150,749

 
$
25.38

 
May 2, 2015
1,462,416

 
$
18.57

Granted
13,800

 
24.85

 
Granted
8,000

 
31.67

Forfeited
(19,250
)
 
26.59

 
Forfeited
(15,000
)
 
16.04

Vested
(6,000
)
 
11.72

 
Vested
(59,800
)
 
11.61

July 30, 2016
1,139,299

 
$
25.42

 
August 1, 2015
1,395,616

 
$
18.97


 
Twenty-six Weeks Ended July 30, 2016
 
 
Twenty-six Weeks Ended August 1, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
January 30, 2016
1,262,449

 
$
19.55

 
January 31, 2015
1,562,470

 
$
15.61

Granted
350,600

 
26.57

 
Granted
293,421

 
30.11

Forfeited
(48,500
)
 
22.94

 
Forfeited
(49,850
)
 
19.51

Vested
(425,250
)
 
9.22

 
Vested
(410,425
)
 
14.15

July 30, 2016
1,139,299

 
$
25.42

 
August 1, 2015
1,395,616

 
$
18.97


Of the 13,800 and 8,000 restricted shares granted during the thirteen weeks ended July 30, 2016 and August 1, 2015, respectively, all of the shares have a vesting term of four years. Of the 350,600 restricted shares granted during the twenty-six weeks ended July 30, 2016, all of the shares have a vesting term of four years. Of the 293,421 restricted shares granted during the twenty-six weeks ended August 1, 2015, 280,921 have a vesting term of four years and 12,500 of the shares have a vesting term of five years. Share-based compensation expense is recognized on a straight-line basis over the respective vesting periods.

During the thirteen weeks ended July 30, 2016 and August 1, 2015, the Company granted no performance share awards. During the twenty-six weeks ended July 30, 2016 and August 1, 2015, the Company granted performance share awards for a targeted 159,000 and 177,921 shares, respectively, with a weighted-average grant date fair value of $26.64 and $30.12, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded in accordance with the vesting schedule of the units over the three-year service period. The performance share

14



units are settled in cash and their fair value is based on the unadjusted quoted market price for the Company’s common stock on each measurement date.

The following table summarizes stock option activity for the periods ended July 30, 2016 and August 1, 2015:
 
Thirteen Weeks Ended July 30, 2016
 
 
Thirteen Weeks Ended August 1, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
April 30, 2016
229,105

 
$
8.99

 
May 2, 2015
336,886

 
$
9.01

Granted

 

 
Granted

 

Exercised
(6,315
)
 
9.28

 
Exercised
(12,000
)
 
7.83

Forfeited

 

 
Forfeited
(1,500
)
 
15.94

Expired

 

 
Expired

 

July 30, 2016
222,790

 
$
8.98

 
August 1, 2015
323,386

 
$
9.02


 
Twenty-six Weeks Ended July 30, 2016
 
 
Twenty-six Weeks Ended August 1, 2015
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
January 30, 2016
301,295

 
$
8.95

 
January 31, 2015
416,803

 
$
8.42

Granted

 

 
Granted
16,667

 
12.81

Exercised
(56,381
)
 
7.41

 
Exercised
(70,633
)
 
7.13

Forfeited
(7,499
)
 
15.94

 
Forfeited
(3,000
)
 
15.94

Expired
(14,625
)
 
10.75

 
Expired
(36,451
)
 
6.95

July 30, 2016
222,790

 
$
8.98

 
August 1, 2015
323,386

 
$
9.02


Of the 16,667 stock options granted during the twenty-six weeks ended August 1, 20158,333 have a vesting period of four years and 8,334 have a vesting period of five years.

The Company also granted 53,310 and 36,740 restricted stock units to non-employee directors during the thirteen weeks ended July 30, 2016 and August 1, 2015, respectively, with weighted-average grant date fair values of $21.62 and $31.68, respectively. The Company granted 54,163 and 37,444 restricted stock units to non-employee directors during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively, with weighted-average grant date fair values of $21.72 and $31.69, respectively. All restricted stock units for dividend equivalents vested immediately and compensation expense was fully recognized during the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.


15



Note 9
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)
July 30, 2016

August 1, 2015

July 30, 2016

August 1, 2015

Service cost
$
1,904

$
2,993

$

$

Interest cost
3,810

3,578

15

14

Expected return on assets
(7,252
)
(8,190
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
39

143

(55
)
(63
)
Prior service income
(461
)
(481
)


Settlement cost
250




Total net periodic benefit income
$
(1,710
)
$
(1,957
)
$
(40
)
$
(49
)
 
 
 
 
 
 
Pension Benefits
Other Postretirement Benefits
 
Twenty-six Weeks Ended
Twenty-six Weeks Ended
($ thousands)
July 30, 2016

August 1, 2015

July 30, 2016

August 1, 2015

Service cost
$
4,167

$
6,322

$

$

Interest cost
7,671

7,164

30

28

Expected return on assets
(14,475
)
(15,845
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
77

309

(110
)
(111
)
Prior service income
(921
)
(956
)


Settlement cost
250




Total net periodic benefit income
$
(3,231
)
$
(3,006
)
$
(80
)
$
(83
)

Note 10
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 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 July 2017. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses foreign currency 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) income and reclassified to earnings in the period that the hedged transaction is recognized in earnings.

Hedge ineffectiveness is evaluated using the hypothetical derivative method. The amount of hedge ineffectiveness for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015 was not material. 
 

16



As of July 30, 2016, August 1, 2015 and January 30, 2016, the Company had forward contracts maturing at various dates through July 2017, July 2016 and January 2017, respectively. The contract notional amount represents the net amount of all purchase and sale contracts of a foreign currency. 
 
Contract Notional Amount
(U.S. $ equivalent in thousands)
July 30, 2016

August 1, 2015

January 30, 2016

Financial Instruments
 
 
 
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
$
17,404

$
19,650

$
14,118

Euro
13,544

18,035

15,499

Chinese yuan
12,477

15,214

14,623

Japanese yen
1,026

1,208

1,159

United Arab Emirates dirham
939

861

930

New Taiwanese dollars
522

537

570

Other currencies
174

235

219

Total financial instruments
$
46,086

$
55,740

$
47,118

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of July 30, 2016, August 1, 2015 and January 30, 2016 are as follows:

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

 
Balance Sheet Location
Fair Value

 
 
 
 
 
 
Foreign exchange forward contracts:
 

 
 
 

 
 
 
 
 
 
July 30, 2016
Prepaid expenses and other current assets
$
365

 
Other accrued expenses
$
565

August 1, 2015
Prepaid expenses and other current assets
1,166

 
Other accrued expenses
453

January 30, 2016
Prepaid expenses and other current assets
1,000

 
Other accrued expenses
846

 
For the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015, 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)
July 30, 2016
August 1, 2015
 
 
 
 
 
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCI on Derivatives

(Loss) Gain Reclassified from Accumulated OCI into Earnings

Gain Recognized in OCI on Derivatives

Gain Reclassified from Accumulated OCI into Earnings

 
 
 
 
 
Net sales
$
(25
)
$
(36
)
$
35

$
59

Cost of goods sold
(472
)
33

733

7

Selling and administrative expenses
(75
)
(187
)
121

43

Interest expense
14


8




17



 
Twenty-six Weeks Ended
Twenty-six Weeks Ended
($ thousands)
July 30, 2016
August 1, 2015
 
 
 
 
 
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
Loss Recognized in OCI on Derivatives

(Loss) Gain Reclassified from Accumulated OCI into Earnings

Gain (Loss) Recognized in OCI on Derivatives

Gain (Loss) Reclassified from Accumulated OCI into Earnings

 
 
 
 
 
Net sales
$
(189
)
$
(72
)
$
60

$
113

Cost of goods sold
(585
)
116

532

(122
)
Selling and administrative expenses
(24
)
(357
)
33

47

Interest expense
(24
)

(14
)


All gains and losses currently included within accumulated other comprehensive (loss) income 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 11 to the condensed consolidated financial statements. 
 
Note 11
Fair Value Measurements
 
Fair Value Hierarchy 
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows: 

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

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

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

In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as 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). 
 

18



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 as trading securities 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 that is 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 statement of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 
 
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to restricted stock units for non-employee directors is disclosed in Note 8 to the condensed consolidated financial statements.
 
Performance Share Units
Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three-year service period. 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 specified financial goals for the service period. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to performance share units is disclosed in Note 8 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 10 to the condensed consolidated financial statements. 

Secured Convertible Note
The Company received a $7.5 million face value secured convertible note as partial consideration for the December 2014 disposition of Shoes.com. The convertible note requires installments over four years with the first payment of $1.25 million due on July 1, 2017 and quarterly installments of $0.6 million thereafter, plus accrued interest, until it matures on December 12, 2019. Interest accrues at an annual rate of 6% until December 11, 2016, 7% until December 11, 2017, 8% until December 11, 2018, and 9% until the maturity date. The principal and outstanding accrued interest is convertible into common stock of an affiliate of ShoeMe Technologies Limited ("the Purchaser") at a specified conversion price per share, at the Company's option, or automatically upon

19



a qualified initial public offering ("IPO") by the Purchaser at the IPO price. The convertible note is measured at fair value using unobservable inputs (Level 3). The fair value of the convertible note is $7.2 million at July 30, 2016, of which $1.3 million is included in prepaid expenses and other current assets and $5.9 million is included in other assets on the condensed consolidated balance sheets. The fair value of the convertible note of $7.1 million at August 1, 2015 and January 30, 2016 is included in other assets on the condensed consolidated balance sheets. The change in fair value reflects an immaterial amount of interest income for the thirteen and twenty-six weeks ended July 30, 2016 and August 1, 2015.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at July 30, 2016, August 1, 2015 and January 30, 2016. The Company did not have any transfers between Level 1 and Level 2 during the twenty-six weeks ended July 30, 2016 or August 1, 2015.   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

As of July 30, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
132,320

 
$
132,320

$

$

Non-qualified deferred compensation plan assets
4,637

 
4,637



Non-qualified deferred compensation plan liabilities
(4,637
)
 
(4,637
)


Deferred compensation plan liabilities for non-employee directors
(1,705
)
 
(1,705
)


Restricted stock units for non-employee directors
(9,060
)
 
(9,060
)


Performance share units
(2,347
)
 
(2,347
)


Derivative financial instruments, net
(200
)
 

(200
)

Secured convertible note
7,190

 


7,190

As of August 1, 2015:
 
 
 
 
 
Cash equivalents – money market funds
$
91,709

 
$
91,709

$

$

Non-qualified deferred compensation plan assets
3,879

 
3,879



Non-qualified deferred compensation plan liabilities
(3,879
)
 
(3,879
)


Deferred compensation plan liabilities for non-employee directors
(2,423
)
 
(2,423
)


Restricted stock units for non-employee directors
(10,263
)
 
(10,263
)


Performance share units
(3,518
)
 
(3,518
)


Derivative financial instruments, net
713

 

713


Secured convertible note
7,118

 


7,118

As of January 30, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
100,694

 
$
100,694

$

$

Non-qualified deferred compensation plan assets
3,383

 
3,383



Non-qualified deferred compensation plan liabilities
(3,383
)
 
(3,383
)


Deferred compensation plan liabilities for non-employee directors
(1,728
)
 
(1,728
)


Restricted stock units for non-employee directors
(8,879
)
 
(8,879
)


Performance share units
(3,780
)
 
(3,780
)


Derivative financial instruments, net
154

 

154


Secured convertible note
7,117

 


7,117

 
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 expected 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 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $96.6 million were assessed for indicators of impairment and written down

20



to their fair value, resulting in impairment charges of $0.2 million for the thirteen weeks ended July 30, 2016. Of the $0.2 million impairment charge included in selling and administrative expenses, an immaterial amount related to the Famous Footwear segment and $0.2 million related to the Brand Portfolio segment.  Impairment charges of $0.5 million were included in selling and administrative expenses for the twenty-six weeks ended July 30, 2016, of which $0.1 million related to the Famous Footwear segment and $0.4 million related to the Brand Portfolio segment. Long-lived assets held and used with a carrying amount of $82.3 million were assessed for indicators of impairment and written down to their fair value, resulting in impairment charges of $0.5 million for the thirteen weeks ended August 1, 2015. Of the $0.5 million impairment charge included in selling and administrative expenses, $0.3 million related to the Famous Footwear segment and $0.2 million related to the Brand Portfolio segment.  Impairment charges of $0.9 million were included in selling and administrative expenses for the twenty-six weeks ended August 1, 2015, of which $0.5 million related to the Famous Footwear segment and $0.4 million related to the Brand Portfolio segment.

Fair Value of the Company’s Other Financial Instruments 
The fair values of cash and cash equivalents (excluding money market funds discussed above), restricted cash, 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:
 
July 30, 2016
August 1, 2015
January 30, 2016
 
Carrying

 
 
Fair

Carrying

 
 
Fair

Carrying

 
 
Fair

($ thousands)
Value

(1) 
 
Value

Value

(1) 
 
Value

Value

(1) 
 
Value

Current portion of long-term debt
$

 
 
$

$
39,157

 
 
$
40,823

$

 
 
$

Long-term debt
196,774

 
 
205,500

195,919

 
 
202,000

196,544

 
 
196,000

Total debt
$
196,774

 
 
$
205,500

$
235,076

 
 
$
242,823

$
196,544

 
 
$
196,000

(1) 
The carrying value of the long-term debt is net of deferred issuance costs of $3.2 million, $4.1 million and $3.5 million as of July 30, 2016, August 1, 2015 and January 30, 2016, respectively, as a result of the adoption of ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, during the fourth quarter of 2015.
 
The fair value of the Company’s current portion of long-term debt and long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).

Note 12
Income Taxes
 
The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors.  The Company’s consolidated effective tax rates were 32.3% and 26.5% for the thirteen weeks and 31.0% and 26.2% for the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively. 

During the thirteen weeks ended July 30, 2016, the Company recognized a discrete tax benefit of $0.2 million reflecting the favorable settlement of a federal tax audit issue. During the thirteen weeks ended August 1, 2015, the Company recognized discrete tax benefits of $1.3 million. If these discrete tax benefits had not been recognized during the thirteen weeks ended July 30, 2016 and August 1, 2015, the Company's effective tax rates would have been 33.0% and 32.0%, respectively.

The Company recognized discrete tax benefits of $0.9 million during the twenty-six weeks ended July 30, 2016, reflecting the settlement of a federal tax audit issue. During the twenty-six weeks ended August 1, 2015 , the Company recognized discrete tax benefits of $2.9 million.  If these discrete tax benefits had not been recognized during the twenty-six weeks ended July 30, 2016 and August 1, 2015, the Company's effective tax rate would have been 32.7% and 32.1%, respectively.

Note 13
Related Party Transactions
 
C. banner International Holdings Limited
The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China, effective through August 2017. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. B&H Footwear sells Naturalizer footwear to a retail affiliate of CBI on a wholesale basis, which in turn sells the Naturalizer products through department store shops and free-standing stores in China.  The Company, through its consolidated subsidiary, B&H Footwear, sold $1.6 million and $2.1 million during the thirteen weeks and $3.8 million and $4.7 million during the twenty-six weeks ended July 30, 2016 and August 1, 2015, respectively, of Naturalizer footwear on a

21



wholesale basis to CBI. During the second quarter of 2016, the Company communicated its intention to dissolve the joint venture with CBI upon the expiration of the license to sell Naturalizer footwear.

Note 14
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 current 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 May 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 later in 2016. 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 workplan 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 workplan, 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. In 2014, the Company submitted a proposed expanded remedy workplan that was accepted by the oversight authorities during 2015. The Company continues to implement the expanded remedy workplan.

The cumulative expenditures for both on-site and off-site remediation through July 30, 2016 were $28.3 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 July 30, 2016 is $9.8 million, of which $9.0 million is recorded within other liabilities and $0.8 million is recorded within other accrued expenses. Of the total $9.8 million reserve, $4.9 million is for on-site remediation and $4.9 million is for off-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 $15.2 million as of July 30, 2016. The Company expects to spend approximately $0.8 million, $0.2 million, $0.1 million, $0.1 million and $0.1 million during 2016, 2017, 2018, 2019 and 2020, respectively, and $13.9 million in the aggregate thereafter related to the on-site remediation.
 
Other
The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring through 2024. The Company has an accrued liability of $1.2 million at July 30, 2016 to complete the cleanup, maintenance and monitoring at these sites, which has been discounted at 6.4%. Of the $1.2 million reserve, $1.0 million is recorded in other liabilities and $0.2 million is recorded in other accrued expenses. On an undiscounted basis, this liability would be $1.4 million. The Company expects to spend approximately $0.2 million in each of the next five years and $0.4 million in the aggregate thereafter related to these sites. In addition, 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 estimated costs in conjunction with its environmental consultants and records its best estimate of such 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, including various employee-related claims under state and federal law, such as claims for discrimination, wrongful discharge or retaliation and for wage and

22



hour violations. 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 15
Financial Information for the Company and its Subsidiaries

The Company's 2023 Senior Notes are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under the Credit Agreement, as further discussed in Note 4 to the condensed consolidated financial statements. 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.

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

23



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
44,348

$
15,673

$
105,708

$

$
165,729

Receivables, net
112,384

1,787

30,138


144,309

Inventories, net
159,285

467,691

21,905


648,881

Prepaid expenses and other current assets
13,641

11,479

5,070


30,190

Intercompany receivable – current
743

213

21,263

(22,219
)

Total current assets
330,401

496,843

184,084

(22,219
)
989,109

Other assets
93,839

13,728

7,881


115,448

Goodwill and intangible assets, net
114,446

2,800

11,814


129,060

Property and equipment, net
31,087

146,373

9,316


186,776

Investment in subsidiaries
1,055,300


(20,569
)
(1,034,731
)

Intercompany receivable – noncurrent
479,611

374,047

559,593

(1,413,251
)

Total assets
$
2,104,684

$
1,033,791

$
752,119

$
(2,470,201
)
$
1,420,393

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
111,166

$
216,850

$
30,735

$

$
358,751

Other accrued expenses
52,474

72,987

16,624


142,085

Intercompany payable – current
11,924


10,295

(22,219
)

Total current liabilities
175,564

289,837

57,654

(22,219
)
500,836

Other liabilities
 

 

 

 

 

Long-term debt
196,774




196,774

Other liabilities
37,253

67,119

3,646


108,018

Intercompany payable – noncurrent
1,081,306

41,537

290,408

(1,413,251
)

Total other liabilities
1,315,333

108,656

294,054

(1,413,251
)
304,792

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
613,787

635,298

399,433

(1,034,731
)
613,787

Noncontrolling interests


978


978

Total equity
613,787

635,298

400,411

(1,034,731
)
614,765

Total liabilities and equity
$
2,104,684

$
1,033,791

$
752,119

$
(2,470,201
)
$
1,420,393



24



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
194,896

$
408,476

$
69,798

$
(50,233
)
$
622,937

Cost of goods sold
142,295

221,031

39,125

(39,069
)
363,382

Gross profit
52,601

187,445

30,673

(11,164
)
259,555

Selling and administrative expenses
52,841

170,463

15,157

(11,164
)
227,297

Operating (loss) earnings
(240
)
16,982

15,516


32,258

Interest expense
(3,481
)
2



(3,479
)
Interest income
174


136


310

Intercompany interest income (expense)
2,253

(2,276
)
23



(Loss) earnings before income taxes
(1,294
)
14,708

15,675


29,089

Income tax provision
(309
)
(6,436
)
(2,665
)

(9,410
)
Equity in earnings (loss) of subsidiaries, net of tax
21,371


(508
)
(20,863
)

Net earnings
19,768

8,272

12,502

(20,863
)
19,679

Less: Net loss attributable to noncontrolling interests


(89
)</