10-K 1 cal2018020310-k.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
 
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended February 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
callogoblack.jpg
CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
43-0197190
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
8300 Maryland Avenue
63105
St. Louis, Missouri
(Zip Code)
(Address of principal executive offices)
 

(314) 854-4000
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock — par value $0.01 per share
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ    No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨    No þ

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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 Act).  Yes ¨    No þ            

The aggregate market value of the stock held by non-affiliates of the registrant as of July 28, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,133.1 million.
As of March 2, 2018, 43,028,130 common shares were outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.

1



INTRODUCTION
This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission ("SEC") on an annual basis. Part II of the Form 10-K contains the business information and financial statements that many companies include in the financial sections of their annual reports. The other sections of this Form 10-K include further information about our business that we believe will be of interest to investors. We hope investors will find it useful to have all of this information in a single document.

The SEC allows us to report information in the Form 10-K by “incorporating by reference” from another part of the Form 10-K or from the proxy statement. You will see that information is “incorporated by reference” in various parts of our Form 10-K. The proxy statement will be available on our website after it is filed with the SEC in April 2018.

Unless the context otherwise requires, “we,” “us,” “our,” “the Company” or “Caleres” refers to Caleres, Inc. and its subsidiaries.

Information in this Form 10-K is current as of April 4, 2018, unless otherwise specified.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this report, and from time to time throughout the year, we share our expectations for the Company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval and public acceptance of our products; our expected financial performance, including sales performance and the anticipated effect of our strategic actions; the anticipated benefits of acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any statements we make that are not matters of current disclosures or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.

Our forward-looking statements represent our estimates and expectations at the time that we make them. However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so. In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Part I. Item 1A. Risk Factors explains some of the important reasons that actual results may be materially different from those that we anticipate.





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INDEX
 

 
 
 
PART I
 
Page
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
PART II
 
   
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
 
 
 
 
 
 
 
 
Item 9
Item 9A
 
   Evaluation of Disclosure Controls and Procedures
 
Item 9B
 
 
 
PART III
 
   
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
PART IV
 
   
Item 15
Item 16






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PART I

 
 
ITEM 1
BUSINESS
Caleres, Inc., originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear retailer and wholesaler with annual net sales of $2.8 billion. In May 2015, the shareholders of Brown Shoe Company, Inc. approved a rebranding initiative that changed the name of the company to Caleres, Inc. (the "Company"). Current activities include the operation of retail shoe stores and e-commerce websites as well as the design, sourcing and marketing of footwear for women and men. Our 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 our earnings for the year.

Our net sales are comprised of four major categories: women's footwear, men's footwear, children's footwear and accessories. The percentage of net sales attributable to each category is as follows:
 
2017

2016

2015

Women's footwear
59
%
63
%
63
%
Men's footwear
25
%
22
%
23
%
Children's footwear
9
%
9
%
9
%
Accessories
7
%
6
%
5
%

In 2016, we expanded our men's business with the acquisition of Allen Edmonds, as further discussed in the Brand Portfolio section below and Note 2 to the consolidated financial statements. Approximately 69% of footwear sales in 2017 were retail sales, including sales through our e-commerce websites, compared to 67% in 2016 and 66% in 2015, while the remaining 31%, 33% and 34% in the respective years represented wholesale sales.

Employees
We had approximately 12,000 full-time and part-time employees as of February 3, 2018. In the United States, there are no employees subject to union contracts. In Canada, we employ approximately 20 warehouse employees under a union contract, which expires in October 2019.

Competition
With many companies operating retail shoe stores and shoe departments, we compete in a highly fragmented market. In addition, the continuing consumer shift to online and mobile shopping has increased price competition and requires retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms. Our competitors include local, regional and national shoe store chains, department stores, discount stores, mass merchandisers, numerous independent retail operators of various sizes and e-commerce businesses. Quality of products and services, store location, trend-right merchandise selection and availability of brands, pricing, advertising and consumer service are all factors that impact retail competition.

In addition, our wholesale customers sell shoes purchased from competing footwear suppliers. Those competing footwear suppliers own and license brands, many of which are well-known and marketed aggressively. Many retailers, who are our wholesale customers, source directly from factories or through agents. The wholesale footwear business has low barriers to entry, which further intensifies competition.

 
FAMOUS FOOTWEAR
Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and beginning in March 2018, FamousFootwear.ca. Famous Footwear is one of America’s leading family-branded footwear retailers with 1,026 stores at the end of 2017 and net sales of $1.6 billion in 2017. Our core consumers are women who seek leading national brands of athletic, casual and fashionable footwear at a value for themselves and their families.

Famous Footwear stores feature a wide selection of brand-name athletic, casual and dress shoes for the entire family. Brands carried include, among others, Nike, Skechers, adidas, Converse, Vans, New Balance, Sperry, Asics, Under Armour, Sof Sole and Bearpaw, as well as company-owned and licensed brands including, among others, LifeStride, Dr. Scholl’s Shoes, Naturalizer, Fergie Footwear, Carlos

4



by Carlos Santana and Circus by Sam Edelman. Our company-owned and licensed products are sold to our Famous Footwear segment by our Brand Portfolio segment at a profit and represent approximately 7% of the Famous Footwear segment's net sales. We work closely with our vendors to provide our consumers with fresh product and, in some cases, product exclusively designed for and available only in our stores. Famous Footwear’s average retail price is approximately $42 for footwear with retail price points typically ranging from $25 for shoes up to $220 for boots.

Famous Footwear stores are located in strip shopping centers as well as outlet and regional malls in all 50 states, Canada and Guam. The breakdown by venue at the end of each of the last three fiscal years is as follows:
 
 
2017

2016

2015

Strip centers
 
677

699

697

Outlet malls
 
189

190

189

Regional malls
 
160

166

160

Total
 
1,026

1,055

1,046


We expect to open approximately 25 new stores and close approximately 70 stores in 2018, as we continue to focus on store locations with a greater penetration of high-value consumers. New stores typically experience an initial start-up period characterized by lower sales and operating earnings than what is generally achieved by more mature stores. While the duration of this start-up period may vary by type of store, economic environment and geographic location, new stores typically reach a normal level of profitability within approximately four years.

Famous Footwear relies on merchandise allocation systems and processes that use allocation criteria, consumer segmentation and inventory data in an effort to ensure stores are adequately stocked with product and to differentiate the needs of each store based on location, consumer segmentation and other factors. Famous Footwear’s distribution systems allow for merchandise to be delivered to each store weekly, or on a more frequent basis, as needed. Famous Footwear also uses regional third-party pooled distribution sites across the country.

Famous Footwear’s marketing programs include digital marketing and social media, e-commerce advertising, print, national television and in-store advertisements, all of which are designed to further develop and reinforce the Famous Footwear concept and strengthen our connection with consumers. We believe the success of our campaigns is attributable to highlighting key categories and tailoring the timing of such messaging to adapt to seasonal shopping patterns. In 2017, we spent approximately $48.4 million to advertise and market Famous Footwear to our target consumers, a portion of which was recovered from suppliers. In 2016, we integrated our high-value consumer strategy and our digital marketing efforts to include new experiences both in-store and online to drive cohesive messaging. Famous Footwear has an extensive loyalty program (“Rewards”), which informs and rewards frequent consumers with product previews, earned incentives based upon purchase continuity and other periodic promotional offers. In 2017, approximately 75% of our Famous Footwear net sales were generated by our Rewards members. In 2017, we continued to test and optimize media tactics to acquire new high-value consumers, driving an increase in Rewards members for the year. For those already engaged with Famous Footwear, we leveraged insights to improve the consumer's journey, driving stronger engagement. In 2018, we will continue to focus our efforts and investments on driving acquisition, retention and share of wallet with highly valuable consumers.

As part of our omni-channel approach to reach consumers, we also operate Famous.com and FamousFootwear.ca, which offer an expanded product assortment beyond what is sold in Famous Footwear stores. Accessible via desktop, tablet and mobile devices, Famous.com helps consumers explore product assortments, including items available in local stores, and make purchases. Famous.com also allows Rewards members to view their points status and purchase history, manage profile settings and engage further with the brand. Famous Footwear’s mobile app further serves as a hub for Rewards members to shop, find local stores, redeem Rewards certificates and learn about the newest products, latest trends and hottest deals. In 2015, we expanded our in-store fulfillment initiative to increase product selection and reduce the average delivery time for direct-to-consumer purchases, which we believe contributed to the significant increase in Famous.com sales in 2016. During 2017, we leveraged our in-store fulfillment initiative from 2015 to successfully implement our buy online, pick up in store initiative, allowing consumers who are engaging with us on Famous.com to utilize their local store as a quick and convenient fulfillment destination.  We also invested in a new content management system in 2017 to evolve our personalization capabilities on Famous.com, and evolved our fulfillment logic to drive more efficient shipping with multiple pair purchases. In March 2018, we launched FamousFootwear.ca, our new e-commerce site in Canada where we are implementing the same omni-channel capabilities for the Canadian consumer already utilized in the United States such as home delivery and buy online, pick up in store.

The expansion and modernization projects at our distribution centers in Lebanon, Tennessee and Lebec, California, which were completed in the second half of 2016, are providing additional shipping flexibility, operational efficiencies and an expansion of our logistics

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infrastructure capacity. We continue to meet omni-channel demands of today with minor operational changes, including faster order processing and delivery to our consumers. In 2018, we plan to pursue ongoing growth in shipping flexibility, operational efficiencies and our logistics infrastructure capacity.

BRAND PORTFOLIO
Our Brand Portfolio segment offers retailers and consumers a portfolio of leading brands by designing, sourcing and marketing branded footwear for women and men at a variety of price points. Certain of our branded footwear products are sold under brand names that are owned by the Company and others are developed pursuant to licensing agreements. Our Brand Portfolio segment sells footwear on a wholesale basis to retailers. The segment also sells footwear through our branded retail stores and e-commerce businesses. In 2016, we expanded our men's business with the acquisition of Allen Edmonds, as further discussed in the Portfolio of Brands section below and Note 2 to the consolidated financial statements.

Portfolio of Brands
The following is a listing of our principal brands and licensed products:

Naturalizer:  Naturalizer was born in 1927 when we realized women deserved a shoe with a beautiful fit. Our Naturalizer brand is sold throughout the United States and Canada, primarily at Naturalizer retail stores, national chains, online retailers, department stores and independent retailers. At the end of 2017, we operated 145 Naturalizer stores in Canada, the United States and Guam. Naturalizer footwear is also distributed through approximately 50 retail and wholesale partners in 47 countries around the world. Suggested retail price points range from $69 for shoes to $220 for boots.

Sam Edelman: Designer Sam Edelman’s lifestyle brand is inspired by timeless American elegance that bridges the gap between aspiration and attainability to define modern luxury. At the end of 2017, we operated 13 Sam Edelman stores in the United States.  Sam Edelman footwear is sold primarily at national chains, online retailers, department stores, Sam Edelman retail stores, catalogs and specialty retailers at suggested retail price points of $40 for shoes to $250 for boots.

Allen Edmonds: In December 2016, we acquired Allen Edmonds to increase our exposure in men’s footwear, solidifying a new revenue stream to drive overall growth. Allen Edmonds, founded in 1922, is a U.S.-based direct-to-consumer and wholesaler of premium men’s footwear, apparel, leather goods and accessories with a strong manufacturing heritage. Allen Edmonds products are available at premier stores worldwide and select retailers, including our 78 stores in the United States and Italy, and online at AllenEdmonds.com at suggested retail price points from $295 to $445 for shoes and boots.

Dr. Scholl’s Shoes:  Inspired by its founder Dr. William Scholl, Dr. Scholl’s Shoes remains forever passionate about creating iconic, effortless footwear for a healthy life. This footwear reaches consumers at a wide range of distribution channels: national chains, mass merchandisers, online, our Famous Footwear retail stores and specialty retailers.  Suggested price points range from $50 for shoes to $175 for boots.  We have a long-term license agreement with Bayer HealthCare, LLC to sell Dr. Scholl’s Shoes, which is renewable through December 2026 for sales in the United States and Canada.

LifeStride:  For more than 70 years, LifeStride has created quality footwear for women who value both style and all-day comfort.  The brand is sold in national chains, our Famous Footwear retail stores, online and department stores at suggested retail price points ranging from $40 for shoes to $100 for boots.

Franco Sarto:  The Franco Sarto brand embodies timeless, wearable style inspired by the craft and design of Italian footwear. The brand is sold in major national chains, online, department stores, catalogs, our Famous Footwear stores and independent retailers at suggested retail price points from $79 for shoes to $259 for boots.

Vince: The Vince women's shoe collection launched in 2012 and was expanded in 2014 to include the Vince men's footwear collection. The brand is primarily sold in premier department stores, online, national chains and specialty retailers at suggested price points ranging from $195 for shoes to $395 for boots. We have a license agreement with Vince, LLC to sell Vince footwear that expires in December 2018.

Rykä: For over 25 years, Rykä has been innovating athletic footwear exclusively for women. The brand is distributed through national chains, online retailers, independent retailers, department stores and our Famous Footwear retail stores at suggested retail price points from $50 to $90.


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Fergie Footwear by Fergie: We have created a namesake footwear line in collaboration with Grammy Award-winning artist Fergie (Fergie Duhamel, formerly Stacy Ferguson). Fergie Footwear is currently being sold at national chains, our Famous Footwear retail stores, online and at department stores at suggested retail price points of $40 for shoes to $199 for boots. We have a license agreement with Krystal Ball Productions, Inc. to sell Fergie/Fergalicious footwear that expires in December 2018.

Bzees: Bzees is the brand of women’s sporty footwear that energizes the mind and body from the feet up. The brand is distributed through national chains, department stores, specialty retailers, independent retailers, our retail stores and online retailers at suggested retail price points from $59 for shoes to $140 for boots.

Carlos by Carlos Santana: The Carlos by Carlos Santana collection of women’s footwear is sold at national chains, major department stores, our Famous Footwear stores and online. Suggested retail price points range from $59 for shoes to $179 for boots. We have a license agreement with Santana Tesoro, LLC to sell Carlos by Carlos Santana footwear that expires in December 2018, with extension options through December 2022.

Via Spiga:  Established in 1985, Via Spiga is named after the main street in one of the most famed shopping districts in Milan, Italy.  The brand is primarily sold in national chains, premier department stores and online at suggested retail price points from $175 for shoes to $495 for boots.

Diane von Furstenberg: The Diane von Furstenberg (DVF) brand is a staple of American luxury design that exemplifies feminine, effortless and classic styles. The brand is distributed through online retailers, specialty retailers, national chains and department stores at suggested price points ranging from $198 for shoes to $598 for boots. In December 2014, we entered into a license agreement with DVF Studio, LLC to produce and distribute the DVF women's shoe collection, which expires in December 2020, with an extension option through December 2023.

Wholesale
Within our Brand Portfolio segment, our brands are distributed on a wholesale basis to over 2,400 retailers, including national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs throughout the United States and Canada, as well as approximately 57 other countries (including sales to our retail operations). Our most significant wholesale customers include Famous Footwear and many of the nation’s largest retailers, including national chains such as DSW, TJX Corporation (including TJ Maxx and Marshalls), Nordstrom Rack and Burlington; online retailers such as Nordstrom.com, Zappos.com and Amazon.com; department stores such as Nordstrom, Macy’s, and Dillard's; mass merchandisers such as Walmart; and independent retailers such as Qurate Retail Group, which includes both QVC and Home Shopping Network. We also sell product to a variety of international retail customers and distributors. The loss of any one or more of our significant customers could have a material negative impact on our Brand Portfolio segment and the Company.

Our Brand Portfolio segment sold approximately 46 million pairs of shoes on a wholesale basis during 2017. We sell footwear to wholesale customers on both a landed and a first-cost basis. Landed sales are those in which we obtain title to the footwear from our overseas suppliers and maintain title until the footwear clears United States customs and is shipped to our wholesale customers. Landed sales generally carry a higher profit rate than first-cost sales as a result of the brand equity associated with the product along with the additional customs, warehousing and logistics services provided to customers and the risks associated with inventory ownership. To allow for the prompt shipment on reorders, we carry inventories of certain styles. First-cost sales are those in which we obtain title to footwear from our overseas suppliers and typically relinquish title to customers at a designated overseas port. Many of these customers then import this product into the United States.

Products sold under license agreements accounted for approximately 23% of the sales of the Brand Portfolio segment in 2017, 26% of the segment's sales in 2016 and 27% of the segment's sales in 2015. Caleres also receives royalty revenues for licensing owned brands, including certain brands listed above, to third parties.


7



Direct-to-Consumer
Our Brand Portfolio segment also includes retail stores for certain brands, including Naturalizer, Allen Edmonds and Sam Edelman. The number of our Brand Portfolio retail stores at the end of the last three fiscal years was as follows:
 
 
2017

 
2016

 
2015

Naturalizer
 
145

 
153

 
159

Allen Edmonds
 
78

 
69

 
N/A

Sam Edelman
 
13

 
12

 
6

Total
 
236

 
234

 
165


At the end of 2017, we operated 84 Naturalizer stores in Canada, 60 Naturalizer stores in the United States and one Naturalizer store in Guam.  Of the 145 Naturalizer stores, approximately 50% are located in regional malls and average approximately 1,300 square feet in size. The other 50% of stores are located in outlet malls and average approximately 2,300 square feet in size. Total Naturalizer store square footage at the end of 2017 was approximately 259,000, compared to 272,000 in 2016. During 2017, we operated 77 Allen Edmonds stores in the United States and one store in Italy, each averaging approximately 1,600 square feet. We operated 13 Sam Edelman stores at the end of 2017. During 2018, we expect to open four Naturalizer stores, one Allen Edmonds store and two Sam Edelman stores and close 13 Naturalizer stores and three Allen Edmonds stores.

In connection with our omni-channel approach to reach consumers, we also operate AllenEdmonds.com, Naturalizer.com, Naturalizer.ca, SamEdelman.com, DrSchollsShoes.com, Ryka.com, FrancoSarto.com, LifeStride.com, Bzees.com, ViaSpiga.com, FergieShoes.com and CarlosShoes.com, which offer substantially the same product selection to consumers as we sell to our retail partners. Vince.com and DVF.com complement our distribution of those brands.

References to our website addresses do not constitute incorporation by reference of the information contained on the websites and the information contained on the websites is not part of this report.

Marketing
We continue to build on the recognition of our portfolio of brands to create differentiation and consumer loyalty. Our marketing teams are responsible for the development and implementation of innovative marketing programs that serve the consumer facing needs of our portfolio of brands as well as that of our retail partners. In 2017, we spent approximately $33.9 million in advertising and marketing support for our Brand Portfolio segment, including digital marketing and social media, print, consumer media advertising, trade shows, production, in-store displays and fixtures and public relations. The marketing teams are also responsible for driving the development of branding and content for our brand websites. We continually focus on enhancing the effectiveness of these marketing efforts through market research, product development and marketing communications that collectively address the ever-changing lives and needs of our consumers. Our marketing teams are instrumental in continuing to drive growth in e-commerce sales, producing relevant and purpose-driven brand positioning and creating meaningful connections with consumers that have increased awareness and loyalty across our portfolio. We continue to leverage consumer insights and data to inform marketing initiatives to capture a greater share of our target consumers’ spend as well as reach new audiences with a high propensity to purchase our products.

Sourcing and Product Development Operations
Our sourcing and product development operations source and develop footwear for our Brand Portfolio segment and also a portion of the footwear sold by our Famous Footwear segment. We have sourcing and product development offices in Clayton, Missouri; Putian, China; New York, New York; Port Washington, Wisconsin; Florence, Italy; Macau; Ho Chi Minh City, Vietnam; Hong Kong and Addis Ababa, Ethiopia.

Sourcing Operations
In 2017, the sourcing operations sourced approximately 45 million pairs of shoes through a global network of third-party independent footwear manufacturers. The majority of our footwear sourced is provided by approximately 51 manufacturers operating approximately 78 manufacturing facilities. In certain countries, we use agents to facilitate and manage the development, production and shipment of product. We attribute our ability to achieve consistent quality, competitive prices and on-time delivery to the breadth of these established relationships. While we generally do not have significant contractual commitments with our suppliers, we do enter into sourcing agreements with certain independent sourcing agents. Prior to production, we monitor the quality of all of our footwear components and also inspect the prototypes of each footwear style.


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In 2017, approximately 68% of the footwear we sourced was from manufacturing facilities in China. The following table provides an overview of our sourcing in 2017:
Country
Millions of Pairs

China
30.8

Vietnam
11.5

Ethiopia
1.6

Other
1.1

Total
45.0


Product Development Operations
We maintain design and product development teams for our brands in Clayton, Missouri; Putian, China; New York, New York and Port Washington, Wisconsin as well as other select fashion locations, including Florence, Italy. These teams, which include independent designers, are responsible for the creation and development of new product styles. Our designers monitor trends in fashion footwear and apparel and work closely with retailers to identify consumer footwear preferences. Our design teams create collections of footwear, and our product development and sourcing offices convert those designs into new footwear styles. In our Dongguan, China office, we operate a sample-making facility that allows us to have greater control over our product development in terms of accuracy, execution and speed-to-market.

Our long-range plans include further expansion into new markets outside of China, developing more progressive processes to improve factory capacity and material planning, and continuing to drive excellence in product value and execution in a continually evolving manufacturing landscape.

Backlog
At February 3, 2018, our Brand Portfolio segment had a backlog of unfilled wholesale orders of approximately $262.1 million, compared to $263.1 million on January 28, 2017. Most orders are for delivery within the next 90 to 120 days, and although orders are subject to cancellation, we have not experienced significant cancellations in the past. The backlog at any particular time is affected by a number of factors, including seasonality, the continuing trend among customers to reduce the lead time on their orders, capacity shifts at foreign manufacturers and the volume of e-commerce drop ship orders that are received immediately rather than in advance. Accordingly, a comparison of backlog from period to period may not be indicative of eventual actual shipments or the growth rate of sales from one period to the next.

 
AVAILABLE INFORMATION
Our Internet address is www.caleres.com. Our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report. We file annual, quarterly and current reports, proxy statements and other information with the SEC. We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished, as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, through our Internet website as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. You may access these SEC filings via the hyperlink to a third-party SEC filings website that we provide on our website.

 
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of the executive officers of the Company and of the offices held by each person. There is no family relationship between any of the named persons. The terms of the following executive officers will expire in May 2018 or upon their respective successors being chosen and qualified.


9



 
 
 
Name
Age
Current Position
Diane M. Sullivan
62
Chief Executive Officer, President and Chairman of the Board of Directors
Richard M. Ausick
64
Division President – Famous Footwear
Daniel R. Friedman
57
Division President – Global Supply Chain
Kenneth H. Hannah
49
Senior Vice President, Chief Financial Officer
Douglas W. Koch
66
Senior Vice President, Chief Human Resources Officer
Malcolm W. Robinson III
57
Division President – Allen Edmonds and International
John W. Schmidt
57
Division President – Brand Portfolio
Mark A. Schmitt
54
Senior Vice President, Chief Information Officer and Logistics

The period of service of each officer in the positions listed and other business experience are set forth below.

Diane M. Sullivan, Chairman of the Board of Directors since February 2014. Chief Executive Officer and President since May 2011. President and Chief Operating Officer from March 2006 to May 2011. President from January 2004 to March 2006.

Richard M. Ausick, Division President – Famous Footwear since January 2010. Division President, Caleres Wholesale from July 2006 to January 2010. Senior Vice President and Chief Merchandising Officer of Famous Footwear from January 2002 to July 2006. Mr. Ausick has announced that he will retire in 2018. As of the date of this filing, his successor has not yet been named.

Daniel R. Friedman, Division President – Global Supply Chain since January 2010. Senior Vice President, Product Development and Sourcing from July 2006 to January 2010. Managing Director at Camuto Group, Inc. from 2002 to July 2006.

Kenneth H. Hannah, Senior Vice President, Chief Financial Officer since February 2015. Executive Vice President and Chief Financial Officer of JC Penney Company, Inc. from May 2012 to March 2014.  Executive Vice President and President–Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President–Solar Materials from 2009 to 2012. Senior Vice President and Chief Financial Officer of MEMC Electronic Materials, Inc. from 2006 to 2009.

Douglas W. Koch, Senior Vice President, Chief Human Resources Officer since January 2016. Senior Vice President and Chief Talent and Strategy Officer from January 2011 to January 2016. Senior Vice President and Chief Talent Officer from May 2005 to January 2011. Senior Vice President, Human Resources from March 2002 to May 2005.

Malcolm W. Robinson III, Division President – Allen Edmonds and International since July 2017. Executive Vice President, One Jeanswear Group - William Rast Division from November 2016 to February 2017. Chief Executive Officer and board member, Tommie Copper from July 2013 to August 2014. President, Maidenform Brands from November 2011 to February 2013. Group President of Wholesale Sportswear, Phillips-Van Heusen Corporation from 2002 to November 2011.

John W. Schmidt, Division President - Brand Portfolio since October 2015. Division President – Contemporary Fashion Brands from January 2011 to September 2015.  Senior Vice President, Better and Image Brands from January 2010 to January 2011.  Senior Vice President and General Manager, Better and Image Brands from March 2008 until January 2010.  Various positions, including Vice President, President, Group President of Wholesale Footwear for Nine West Group from September 1998 to February 2008.

Mark A. Schmitt, Senior Vice President, Chief Information Officer and Logistics since February 2013. Senior Vice President and Chief Information Officer from January 2012 through February 2013.  Senior Director of Management Information Systems for Express Scripts from 2010 through 2011. Various management information systems positions including Group Director with Anheuser-Busch InBev from 1996 to 2009.

 
 
ITEM 1A
RISK FACTORS
Consumer demand for our products may be adversely impacted by economic conditions and other factors.
Worldwide economic conditions continue to be uncertain. Consumer confidence and spending are strongly influenced by general economic conditions and other factors, including fiscal policy, the changing tax and regulatory environment, interest rates, minimum wage rates and regulations, inflation, consumer debt levels, the availability of consumer credit, the liquidity of consumers’ assets, health care costs, currency exchange rates, taxation, energy costs, real estate values, foreclosure rates, unemployment trends, weather conditions and the economic consequences of military action or terrorist activities. Negative economic conditions generally decrease disposable income

10



and, consequently, consumer purchases of discretionary items like our products. Negative trends in economic conditions could also drive up the cost of our products, which may require us to increase our product prices. These increases in our product costs, and possibly prices, may not be offset by comparable increases in consumer disposable income. As a result, our customers may choose to purchase fewer of our products or purchase the lower-priced products of our competitors, and our business, results of operations, financial condition and cash flows could be adversely affected.

If we are unable to anticipate and respond to consumer preferences and fashion trends and successfully apply new technology, we may not be able to maintain or increase our net sales and earnings.
The footwear industry is subject to rapidly changing consumer shopping preferences and patterns and fashion trends. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. In addition, the continuing consumer shift to online and mobile shopping is requiring retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms. The trend toward online and mobile shopping increases the volume of smaller shipments, including single-pair shipments, from our warehouses. The increased volume of smaller shipments may result in higher average distribution costs, including both shipping and processing costs incurred at our distribution centers. The success of both our wholesale and retail operations depends largely on our ability to anticipate, understand and react to these changing consumer shopping patterns. If we fail to respond to changes in consumer shopping patterns, demands and fashion trends, develop new products and designs, and implement effective, responsive merchandising and distribution strategies and programs, we could experience lower sales, excess inventories and lower gross margins, any of which could have an adverse effect on our results of operations and financial condition.

We operate in a highly competitive industry.
Competition is intense in the footwear industry. Certain of our competitors are larger and have greater financial, marketing and technological resources than we do. Other competitors are able to offer footwear on a lateral basis alongside their apparel products, or have successfully branded their trademarks as lifestyle brands, resulting in greater competitive advantages. Low barriers to entry into this industry further intensify competition by allowing new companies to easily enter the markets in which we compete. Some of our suppliers further compound these competitive pressures by allowing consumers to purchase their products directly through supplier-maintained Internet sites and retail stores. In addition, retailers aggressively compete on the basis of price, which puts competitive pressure on us to keep our prices low.

We believe that our ability to compete successfully in the footwear industry depends on a number of factors, including style, price, performance, quality, location and service, as well as the strength of our brand names. We remain competitive by increasing awareness of our brands, improving the efficiency of our supply chain and enhancing the style, comfort, fashion and perceived value of our products. However, our competitors may implement more effective marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, distribution partners and manufacturers, or respond more quickly to changes in consumer preferences than us. As a result, we may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced gross margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of our products, which could adversely impact our financial results.

We rely primarily on foreign sources of production, which subjects our business to risks associated with international trade.
We rely primarily on foreign sourcing for our footwear products through third-party manufacturing facilities located outside the United States. As is common in the industry, we do not have any long-term contracts with our third-party foreign manufacturers. Foreign sourcing is subject to numerous risks, including trade relations, work stoppages, transportation delays (including delays at foreign and domestic ports) and costs (including customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions), domestic and foreign political instability, foreign currency fluctuations, variable economic conditions, expropriation, nationalization, natural disasters, terrorist acts and military conflict and changes in governmental regulations (including the U.S. Foreign Corrupt Practices Act). At the same time, potential changes in manufacturing preferences, including, but not limited to the following, pose additional risk and uncertainty:

Manufacturing capacity may shift from footwear to other industries with manufacturing margins that are perceived to be higher.
Some footwear manufacturers may face labor shortages as workers seek better wages and working conditions in other industries and locations.

As a result of these risks, there can be no assurance that we will not experience reductions in available production capacity, increases in our product costs, late deliveries or terminations of our supplier relationships. Furthermore, these sourcing risks are compounded by the lack of diversification in the geographic location of our foreign sourcing and manufacturing. With the majority of our supply originating in China, a substantial portion of our supply could be at risk in the event of any significant negative development related to relations between United States and China.

11



Although we believe we could find alternative manufacturing sources for the products that we currently source from third-party manufacturing facilities in China or other countries, we may not be able to locate alternative manufacturers on terms as favorable as our current terms, including pricing, payment terms, manufacturing capacity, quality standards and lead times for delivery. In addition, there is substantial competition in the footwear industry for quality footwear manufacturers. Accordingly, our future results will partly depend on our ability to maintain positive working relationships with, and offer competitive terms to, our foreign manufacturers. If supply issues cause us to be unable to provide products consistent with our standards or manufacture our footwear in an efficient and cost-effective manner, our customers may cancel orders, refuse to accept deliveries or demand reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.
Foreign currency fluctuations may result in higher costs and decreased gross profits.
Although we purchase most of our products from foreign manufacturers in United States dollars and otherwise engage in foreign currency hedging transactions, we cannot ensure that we will not experience cost variations with respect to exchange rate changes. Currency exchange rate fluctuations may also adversely impact third parties who manufacture the Company’s products by making their purchases of raw materials or other production costs more expensive and more difficult to finance, resulting in higher prices and lower margins for the Company, its distributors and licensees.

Our operating results depend on preparing accurate sales forecasts and properly managing our inventory levels.
Using sales forecasts, we place orders with manufacturers for some of our products prior to the time we receive all of our customers’ orders to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certain products that we anticipate will be in greater demand. At the retail level, we place orders for product many months in advance of our key selling seasons. Adverse economic conditions and rapidly changing consumer preferences can make it difficult for us and our retail customers to accurately forecast product trends in order to match production with demand. If we fail to accurately assess consumer fashion tastes and the impact of economic factors on consumer spending or to effectively differentiate our retail and wholesale offerings, our inventory levels may exceed customer demand, resulting in inventory write-downs, higher carrying costs, lower gross margins or the sale of excess inventory at discounted prices, which could significantly impact our financial results. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require in a timely manner, we may experience inventory shortages. Inventory shortages may delay shipments to customers (and possibly require us to offer discounts or costly expedited shipping), negatively impact retailer and distributor relationships, adversely impact our sales results and diminish brand awareness and loyalty.

We are reliant upon our information technology systems, and any major disruption of these systems could adversely impact our ability to effectively operate our business.
Our computer network and systems are essential to all aspects of our operations, including design, pricing, production, accounting, reporting, forecasting, ordering, manufacturing, transportation, sales and distribution. Our ability to manage and maintain our inventory and to deliver products in a timely manner depends on these systems. If any of these systems fails to operate as expected, we experience problems with transitioning to upgraded or replacement systems, a breach in security occurs or a natural disaster interrupts system functions, we may experience delays in product fulfillment and reduced efficiency in our operations or be required to expend significant capital to correct the problem, which may have an adverse effect on our results of operations and financial condition.

A cybersecurity breach may adversely affect our sales and reputation.
We routinely possess sensitive consumer and associate information and periodically provide it to third parties for analysis, benefit distribution or compliance purposes. While we believe we have taken reasonable and appropriate steps to protect that information, hackers and data thieves operate sophisticated, large-scale attacks that could breach our information systems, despite ongoing security measures. In addition, we are required to comply with increasingly complex regulations designed to protect our business and personal data. Any breach of our network security, a third-party’s network security or failure to comply with applicable regulations may result in (a) the loss of valuable business data and/or our consumers’ or associates’ personal information, (b) increased costs associated with implementing additional protections and processes, (c) a disruption of our business and a loss of sales, (d) negative media attention, (e) damage to our consumer and associate relationships and reputation, and (f) fines or lawsuits.

Customer concentration and other trends in customer behavior may lead to a reduction in or loss of sales.
Our wholesale customers include national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs. Several of our customers operate multiple department store divisions. Furthermore, we often sell multiple types of branded, licensed and private-label footwear to these same customers. While we believe purchasing decisions in many cases are made independently by the buyers and merchandisers of each of the customers, a decision by a significant customer to decrease the amount of footwear products purchased from us could have a material adverse effect on our business, financial condition or results of operations.


12



In addition, with the growing trend toward retail trade consolidation, including store count reductions at major retail chains, and consumers' continued shift to online shopping, we and our wholesale customers increasingly depend upon a reduced number of key retailers whose bargaining strength is growing. This consolidation may result in the following adverse consequences:

Our wholesale customers may seek more favorable terms for their purchases of our products, which could limit our ability to raise prices, recoup cost increases or achieve our profit goals.
The number of stores that carry our products could decline, thereby exposing us to a greater concentration of accounts receivable risk and negatively impacting our brand visibility.

We also face the following risks with respect to our customers:
Our customers could develop in-house brands or use a higher mix of private-label footwear products, which would negatively impact our sales.
As we sell our products to customers and extend credit based on an evaluation of each customer’s financial condition, the financial difficulties of a customer could cause us to stop doing business with that customer, reduce our business with that customer or be unable to collect from that customer.
Since we transact primarily in United States dollars, our international customers could purchase from competitors who will transact business in their local currency.
If any of our major wholesale customers experiences a significant downturn or disruption in its business or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us.
Retailers are directly sourcing more of their products directly from foreign manufacturers and reducing their reliance on wholesalers, which could have a material adverse effect on our business and results of operations.

Transitional challenges with acquisitions could result in unexpected expenditures of time and resources.
Periodically, we pursue acquisitions of other companies or businesses, such as our 2016 acquisition of Allen Edmonds, as further discussed in Note 2 to the consolidated financial statements. Although we review the records of acquisition candidates, the review may not reveal all existing or potential problems. As a result, we may not accurately assess the value of the business and may, accordingly, ultimately assume unknown adverse operating conditions and/or unanticipated liabilities. Acquisitions may also cause us to incur debt, write-offs of goodwill if the business does not perform as well as expected and substantial amortization expenses associated with other intangible assets. We face the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire or launch such businesses. We also face the risk that we will not be able to integrate acquisitions into our existing operations effectively without substantial expense, delay or other operational or financial problems. Integration may be hindered by, among other things, differing procedures, including internal controls, business practices and technology systems. We may need to allocate more management resources to integration than we planned, which may adversely affect our ability to pursue other profitable activities.

A disruption in the effective functioning of our distribution centers could adversely affect our ability to deliver inventory on a timely basis.
We currently use several distribution centers, which are leased or third-party managed. These distribution centers serve as the source of replenishment of inventory for our footwear stores and e-commerce websites operated by our Famous Footwear and Brand Portfolio segments and serve the wholesale operations of our Brand Portfolio segment. Our success depends on our ability to handle the rapid consumer shift to online shopping and single pair shipments, which requires significant capital to operate with a greater level of sophistication and automation, as well as higher processing and distribution costs. We may be unable to successfully manage, negotiate or renew our third-party distribution center agreements, or we may experience complications with respect to our distribution centers, such as substantial damage to, or destruction of, such facilities due to natural disasters or ineffective information technology systems. In such an event, our other distribution centers may not be able to support the resulting additional distribution demands and we may be unable to locate alternative persons or entities capable of fulfilling our distribution needs, resulting in an adverse effect on our ability to deliver inventory on a timely basis.

Recent changes in tax laws may result in increased volatility in our effective tax rates.
Our financial results are significantly impacted by the effective tax rates of both our domestic and international operations. The Tax Cuts and Jobs Act (the "Act"), which was enacted in December 2017, reduced the federal tax rate from 35% to 21%. Our future earnings could be adversely affected by the change from a worldwide tax system to a quasi-territorial tax system. Other changes in the Act also impact our effective tax rate, such as the permanent non-deductibility of certain expenses and generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries. One-time changes of the Act include a deemed repatriation transition tax on certain foreign earnings and a requirement to revalue our deferred tax assets and liabilities. In addition, our effective income tax rate could be adversely affected by other provisions of the Act that directly affect foreign earnings, such as the global intangible low-taxed income tax and base-erosion and anti-abuse tax provisions. The Treasury Department has announced the intention to release announcements and regulations

13



clarifying the Act that could have a material effect on our effective tax rate. Other factors, such as changes in the mix of earnings in countries with differing statutory tax rates, changes in permitted deductions, changes in tax laws, interpretations, policies and treaties and the outcome of income tax audits in various jurisdictions, may result in higher taxes, lower profitability and increased volatility in our financial results.

Our success depends on our ability to retain senior management and recruit and retain other key associates.
Our success depends on our ability to attract, retain and motivate qualified management, administrative, product development and sales personnel to support existing operations and future growth. In addition, our ability to successfully integrate acquired businesses often depends on our ability to retain incumbent personnel, many of whom possess valuable institutional knowledge and operating experience. Competition for qualified personnel in the footwear industry is intense and we compete for these individuals with other companies that in many cases have superior financial and other resources. The loss of the services of any member of our senior management or key associates, the inability to attract and retain other qualified personnel or the inability to effectively transition positions could adversely affect the sales, design and production of our products as well as the implementation of our strategic initiatives.

Our business, sales and brand value could be harmed by violations of labor, trade or other laws.
We focus on doing business with those suppliers who share our commitment to responsible business practices and the principles set forth in our Production Code of Conduct (the “PCOC”). By requiring our suppliers to comply with the PCOC, we encourage our suppliers to promote best practices and work toward continual improvement throughout their production operations. The PCOC sets forth standards for working conditions and other matters, including compliance with applicable labor practices, workplace environment and compliance with laws. Although we promote ethical business practices, we do not control our suppliers or their labor practices. A failure by any of our suppliers to adhere to these standards or laws could cause us to incur additional costs for our products or cause negative publicity and harm our business and reputation. We also require our suppliers to meet our standards for product safety, including compliance with applicable laws and standards with respect to safety issues, including lead content in paint. Failure by any of our suppliers to adhere to product safety standards could lead to a product recall, which may result in critical media coverage, harm our business and reputation, and cause us to incur additional costs.

In addition, if we, or our suppliers or foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.

Our retail business depends on our ability to secure affordable and desirable leased locations without creating a competitive concentration of stores.
The success of the retail business within our Famous Footwear and Brand Portfolio segments depends, in part, on our ability to secure affordable, long-term leases in desirable locations for our leased retail footwear stores and to secure renewals of such leases. As consumer shopping preferences have evolved, we continue to focus on opening stores in locations with a greater penetration of high-value consumers. No assurance can be given that we will be able to successfully negotiate lease renewals for existing stores or obtain acceptable terms for new stores in desirable locations. In addition, opening new stores in our existing markets may result in reduced net sales in existing stores as our stores become more concentrated in the markets we serve. As a result, the number of consumers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced.

If we are unable to maintain working relationships with our major branded suppliers, our business, results of operations, financial condition and cash flows may be adversely impacted.
Our Famous Footwear segment purchases a substantial portion of its footwear products from major branded suppliers. Purchases from two major branded suppliers, Nike, Inc. and Skechers USA, Inc., collectively comprise approximately 25% and 10%, respectively, of sales for the Famous Footwear segment. As is common in the industry, we do not have any long-term contracts with our suppliers. In addition, the success of our financial performance is dependent on the ability of our Famous Footwear segment to obtain products from our suppliers on a timely basis and on acceptable terms. While we believe our relationships with our current suppliers are good, the loss of any of our major suppliers or product developed exclusively for our Famous Footwear stores could have a material adverse effect on our business, financial condition and results of operations. In addition, negative trends in global economic conditions may adversely impact our suppliers. If these third parties do not perform their obligations or are unable to provide us with the materials and services we need at prices and terms that are acceptable to us, our ability to meet our consumers’ demand could be adversely affected.


14



Our reputation and competitive position are dependent on our ability to license well-recognized brands, license our own brands under successful licensing arrangements and protect our intellectual property rights.
Licenses - Company as Licensee
Although we own most of our wholesale brands, we also rely on our ability to attract, retain and maintain good relationships with licensors that have strong, well-recognized brands and trademarks. Our license agreements are generally for an initial term of two to four years, subject to renewal, and there can be no assurance that we will be able to renew these licenses. Even our longer-term or renewable licenses are typically dependent upon our ability to market and sell the licensed products at specified levels, and the failure to meet such levels may result in the termination or non-renewal of such licenses. Furthermore, many of our license agreements require minimum royalty payments, and if we are unable to generate sufficient sales and profitability to cover these minimum royalty requirements, we may be required to make additional payments to the licensors that could have a material adverse effect on our business and results of operations. In addition, because certain of our license agreements are non-exclusive, new or existing competitors may obtain licenses with overlapping product or geographic terms, resulting in increased competition for a particular market.

Licenses - Company as Licensor
We have entered into numerous license agreements with respect to the brands and trademarks that we own. While we have significant control over our licensees’ products and advertising, we generally cannot control their operational and financial issues. If our licensees are not able to meet annual sales and royalty goals, obtain financing, manage their supply chain, control quality and maintain positive relationships with their customers, our business, results of operations and financial position may be adversely affected. While we would likely have the ability to terminate an underperforming license, it may be difficult and costly to locate an acceptable substitute distributor or licensee, and we may experience a disruption in our sales and brand visibility. In addition, although many of our license agreements prohibit the licensees from entering into licensing arrangements with certain of our competitors, they are generally not prohibited from offering, under other brands, the types of products covered by their license agreements with us.

Trademarks
We believe that our trademarks and trade names are important to our success and competitive position because our distinctive marks create a market for our products and distinguish our products from other products. We cannot, however, guarantee that we will be able to secure protection for our intellectual property in the future or that such protection will be adequate for future operations. Furthermore, we face the risk of ineffective protection of intellectual property rights in jurisdictions where we source and distribute our products, some of which do not protect intellectual property rights to the same extent as the United States. If we are unsuccessful in challenging a party’s products on the basis of infringement of our intellectual property rights, continued sales of these products could adversely affect our sales, devalue our brands and result in a shift in consumer preference away from our products. We may face significant expenses and liability in connection with the protection of our intellectual property rights, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.

Our quarterly sales and earnings may fluctuate, which may result in volatility in, or a decline in, our stock price.
Our quarterly sales and earnings can vary due to a number of factors, many of which are beyond our control, including the following:

Our Famous Footwear retail business is seasonally weighted to the back-to-school season, which falls in our third fiscal quarter. As a result, the success of our back-to-school offering, which is affected by our ability to anticipate consumer demand and fashion trends, could have a disproportionate impact on our full year results.
In our wholesale business, sales of footwear are dependent on orders from our major customers, and they may change delivery schedules, change the mix of products they order or cancel orders without penalty.
Our wholesale customers set the delivery schedule for shipments of our products, which could cause shifts of sales between quarters.
Our estimated annual tax rate is based on projections of our domestic and international operating results for the year, which we review and revise as necessary each quarter.
Our earnings are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, changes in product sales mix, geographic sales trends, weather conditions, consumer sentiment and currency exchange rate fluctuations.

As a result of these specific and other general factors, our operating results will vary from quarter to quarter and the results for any particular quarter may not be indicative of results for the full year. Any shortfall in sales or earnings from the levels expected by investors could cause a decrease in the trading price of our common stock.

15



We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources.
We are a defendant from time to time in lawsuits and regulatory actions (including environmental matters) relating to our business and to our past operations. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and will require that we devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business. See Item 3, Legal Proceedings, for further discussion of pending matters.

A significant portion of our Famous Footwear sales are dependent on our Famous Footwear loyalty program, Rewards, and any decrease in sales from Rewards could have a material adverse impact on our sales.
Rewards is a customer loyalty program that drives sales and traffic for the Famous Footwear segment. Rewards members earn points toward savings certificates for qualifying purchases. Upon reaching specified point values, members are issued a savings certificate, which may be redeemed for purchases at Famous Footwear. Approximately 75% of our fiscal 2017 sales within the Famous Footwear segment were generated by our Rewards members. If our Rewards members do not continue to shop at Famous Footwear, our sales may be adversely affected.

Our business, results of operations, financial condition and cash flows could be adversely affected by the failure of financial institutions to fulfill their commitments under our Credit Agreement.
The First Amendment to our Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on December 18, 2019, is provided by a syndicate of financial institutions, with each institution agreeing severally (and not jointly) to make revolving credit loans to us in an aggregate amount of up to $600.0 million in accordance with the terms of the Credit Agreement. In addition, the Credit Agreement provides for an increase at the Company's option by up to $150.0 million. If one or more of the financial institutions participating in the Credit Agreement were to default on its obligation to fund its commitment, the portion of the facility provided by such defaulting financial institution might not be available to us.

If we are unable to maintain our credit rating, our ability to access capital and interest rates may be negatively impacted.
The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Any negative ratings actions could constrain the capital available to us or our industry and could limit our access to long-term funding or cause such access to be available at a higher borrowing cost for our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest expense will likely increase, which could adversely affect our financial condition and results of operations.

 
 
ITEM 1B
UNRESOLVED STAFF COMMENTS
There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.


 
 
ITEM 2
PROPERTIES
We own our principal executive, sales and administrative offices located in Clayton (“St. Louis”), Missouri.

Our retail operations, included in both our Famous Footwear and Brand Portfolio segments, are conducted throughout the United States, Canada, Guam and Italy and involve the operation of 1,262 shoe stores, including 104 in Canada. All store locations are leased, with approximately 45% of them having renewal options. The footwear sold through our domestic wholesale business is primarily processed through our third-party facility in Chino, California or our leased distribution center in Port Washington, Wisconsin. During 2017, the Company signed a lease for a new wholesale distribution center in Chino, California, which began operations in early 2018.


16



The following table summarizes the location and general use of the Company's primary properties:
Location
 
Owned/Leased
 
Segment
 
Use
 
 
 
 
 
 
 
Clayton, Missouri
 
Owned
 
Famous Footwear and Brand Portfolio
 
Principal corporate, executive, sales and administrative offices
United States, Canada, Guam and Italy
 
Leased
 
Famous Footwear and Brand Portfolio
 
Retail operations
Chino, California (1)
 
Leased
 
Brand Portfolio
 
Distribution center
Lebanon, Tennessee (2)
 
Leased
 
Famous Footwear and Brand Portfolio
 
Distribution center
Lebec, California (3)
 
Leased
 
Famous Footwear
 
Distribution center
New York, New York
 
Leased
 
Brand Portfolio
 
Office space and showrooms
Bentonville, Arkansas
 
Leased
 
Brand Portfolio
 
Showrooms
Dallas, Texas
 
Leased
 
Brand Portfolio
 
Showrooms
Perth, Ontario (4)
 
Owned
 
Famous Footwear and Brand Portfolio
 
Distribution center
Putian, China; Minneapolis, Minnesota; Florence, Italy; Macau; Ho Chi Minh City, Vietnam; Hong Kong and Addis Ababa, Ethiopia
 
Leased
 
Brand Portfolio
 
Office space
Dongguan, China
 
Leased
 
Brand Portfolio
 
Office space and sample-making facility
Santiago, Dominican Republic
 
Leased
 
Brand Portfolio
 
Manufacturing facility
Port Washington, Wisconsin
 
Owned
 
Brand Portfolio
 
Manufacturing facility, office space, recrafting facility and warehouse
Port Washington, Wisconsin (5)
 
Leased
 
Brand Portfolio
 
Distribution center
(1)
This distribution center is approximately 725,000 square feet.
(2)
This distribution center is approximately 540,000 square feet.
(3)
This distribution center is approximately 350,000 square feet.
(4)
This distribution center is approximately 150,000 square feet.
(5)
This distribution center is approximately 38,000 square feet.

We also own a building in Denver, Colorado, which is leased to a third party; and undeveloped land in Colorado and New York. See Item 3, Legal Proceedings, for further discussion of certain of these properties.

 
 
ITEM 3
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 business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position.

Our prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future. We are involved in environmental remediation and ongoing compliance activities at several sites and have been notified that we are or may be a potentially responsible party at several other sites. We are remediating, under the oversight of Colorado authorities, contamination at and beneath our owned facility in Colorado (also known as the “Redfield” site) and groundwater and indoor air in residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and surrounding facilities.

Refer to Note 18 to the consolidated financial statements for additional information related to the Redfield matter and other legal proceedings.


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ITEM 4
MINE SAFETY DISCLOSURES
Not applicable.

 
PART II

 
 
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “CAL.” As of February 3, 2018, we had 3,561 shareholders of record. The following table sets forth the high and low sales prices per share of our common stock as reported on the NYSE and the dividends paid per share for each fiscal quarter during 2017 and 2016.


 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
 
 
 
 
 
Dividend

 
 
 
 
 
Dividend

 
Low

 
High

 
Paid

 
Low

 
High

 
Paid

1st Quarter
$
24.86

 
$
32.83

 
$
0.07

 
$
23.89

 
$
29.49

 
$
0.07

2nd Quarter
24.45

 
29.11

 
0.07

 
21.27

 
27.30

 
0.07

3rd Quarter
22.39

 
31.27

 
0.07

 
23.12

 
26.90

 
0.07

4th Quarter
26.54

 
34.34

 
0.07

 
24.14

 
36.61

 
0.07


Restrictions on the Payment of Dividends
The First Amendment to our Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) and the indenture governing our 6.25% senior notes due in 2023 (the “2023 Senior Notes”) limit the amount of dividends that can be declared and paid. However, we do not believe this limitation materially restricts the Board of Directors’ ability to declare or our ability to pay regular quarterly dividends to our common stockholders.

In addition to this limitation, the declaration and payment of dividends and the amount of dividends will depend on our results of operations, financial condition, future prospects and other factors deemed relevant by our Board of Directors.

Issuer Purchases of Equity Securities
The following table provides information relating to our repurchases of common stock during the fourth quarter of 2017:

 
 
 
 
 
Total Number of Shares

 
Maximum Number of

 
Total Number

 
Average

 
Purchased as Part

 
Shares that May Yet

 
of Shares

 
Price Paid

 
of Publicly Announced

 
Be Purchased Under

Fiscal Period
Purchased (1)

 
per Share (1)

 
Program (2)

 
the Program (2)

October 29, 2017 - November 25, 2017

 
$

 

 
1,223,500

November 26, 2017 - December 30, 2017
4,588

 
32.04

 

 
1,223,500

December 31, 2017 - February 3, 2018
39,955

 
31.32

 

 
1,223,500

Total
44,543

 
$
31.39

 

 
1,223,500


(1)
Reflects shares that were tendered by employees related to certain share-based awards. These 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. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

(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, 225,000, 900,000 and 151,500 shares were repurchased during 2017, 2016 and 2015, respectively. Therefore, there were 1,223,500 shares authorized to be repurchased under the program as of February 3, 2018. Our repurchases of common stock are limited under our debt agreements.



18



Stock Performance Graph
The following performance graph compares the cumulative total return on our common stock with the cumulative total return of the following indices: (i) the S&P© SmallCap 600 Stock Index and (ii) a peer group of companies believed to be engaged in similar businesses. Our peer group consists of DSW, Inc., Genesco, Inc., Shoe Carnival, Inc., Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc.

Our fiscal year ends on the Saturday nearest to each January 31. Accordingly, share prices are as of the last business day in each fiscal year. The graph assumes that the value of the investment in our common stock and each index was $100 at February 2, 2013. The graph also assumes that all dividends were reinvested and that investments were held through February 3, 2018. These indices are included for comparative purposes only and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved and are not intended to forecast or be indicative of possible future performance of the common stock.

chart-a72010daffcefc1cb8f.jpg

*$100 invested on February 2, 2013 in stock or index, including reinvestment of dividends. Index calculated on daily basis.
 
2/2/2013

 
2/1/2014

 
1/31/2015

 
1/30/2016

 
1/28/2017

 
2/3/2018

Caleres, Inc.
$
100.00

 
$
139.82

 
$
169.29

 
$
161.75

 
$
180.88

 
$
176.73

Peer Group
100.00

 
118.77

 
135.05

 
124.09

 
124.01

 
160.33

S&P© SmallCap 600 Stock Index
100.00

 
127.03

 
134.85

 
128.53

 
173.52

 
197.95


 
 
ITEM 6
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with the consolidated financial statements and notes thereto and the other information contained elsewhere in this report. Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks, which can affect annual comparisons. Our 2017 fiscal year included 53 weeks, while our 2016, 2015, 2014 and 2013 fiscal years each included 52 weeks.

19



 
 
2017
 
2016
 
2015
 
2014
 
2013
($ thousands, except per share amounts)
 
(53 Weeks)
 
(52 Weeks)
 
(52 Weeks)
 
(52 Weeks)
 
(52 Weeks)
Operations:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,785,584

 
$
2,579,388

 
$
2,577,430

 
$
2,571,709

 
$
2,513,113

Cost of goods sold
 
1,616,935

 
1,517,397

 
1,529,627

 
1,531,609

 
1,498,825

Gross profit
 
1,168,649

 
1,061,991

 
1,047,803

 
1,040,100

 
1,014,288

Selling and administrative expenses
 
1,023,703

 
927,602

 
912,696

 
910,682

 
909,749

Restructuring and other special charges, net
 
4,915

 
23,404

 

 
3,484

 
1,262

Impairment of assets held for sale
 

 

 

 

 
4,660

Operating earnings
 
140,031

 
110,985

 
135,107

 
125,934

 
98,617

Interest expense
 
(18,089
)
 
(15,111
)
 
(16,589
)
 
(20,445
)
 
(21,254
)
Loss on early extinguishment of debt
 

 

 
(10,651
)
 
(420
)
 

Interest income
 
764

 
1,380

 
899

 
379

 
377

Gain on sale of subsidiary
 

 

 

 
4,679

 

Earnings before income taxes
 
122,706

 
97,254

 
108,766

 
110,127

 
77,740

Income tax provision
 
(35,475
)
 
(31,168
)
 
(26,942
)
 
(27,184
)
 
(23,758
)
Net earnings
 
87,231

 
66,086

 
81,824

 
82,943

 
53,982

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 

 

 

 

 
(4,574
)
Disposition/impairment of discontinued operations, net of tax
 

 

 

 

 
(11,512
)
Net loss from discontinued operations
 

 

 

 

 
(16,086
)
Net earnings
 
87,231

 
66,086

 
81,824

 
82,943

 
37,896

Net earnings (loss) attributable to noncontrolling interests
 
31

 
428

 
345

 
93

 
(177
)
Net earnings attributable to Caleres, Inc.
 
$
87,200

 
$
65,658

 
$
81,479

 
$
82,850

 
$
38,073

Operations:
 
 
 
 
 
 
 
 
 
 
Return on net sales
 
3.1
%
 
2.5
%
 
3.2
%
 
3.2
%
 
1.5
%
Return on beginning Caleres, Inc. shareholders' equity
 
14.2
%
 
10.9
%
 
15.1
%
 
17.4
%
 
9.0
%
Dividends paid
 
$
12,027

 
$
12,104

 
$
12,253

 
$
12,237

 
$
12,105

Purchases of property and equipment
 
$
44,720

 
$
50,523

 
$
73,479

 
$
44,952

 
$
43,968

Capitalized software
 
$
6,458

 
$
9,039

 
$
7,735

 
$
5,086

 
$
5,235

Depreciation and amortization (1)
 
$
65,831

 
$
57,857

 
$
52,606

 
$
54,015

 
$
57,842

Per Common Share:
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
  From continuing operations
 
$
2.03

 
$
1.52

 
$
1.86

 
$
1.90

 
$
1.25

  From discontinued operations
 

 

 

 

 
(0.37
)
Basic earnings per common share attributable to Caleres, Inc. shareholders
 
2.03

 
1.52

 
1.86

 
1.90

 
0.88

Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
  From continuing operations
 
2.02

 
1.52

 
1.85

 
1.89

 
1.25

  From discontinued operations
 

 

 

 

 
(0.37
)
Diluted earnings per common share attributable to Caleres, Inc. shareholders
 
2.02

 
1.52

 
1.85

 
1.89

 
0.88

Dividends paid
 
0.28

 
0.28

 
0.28

 
0.28

 
0.28

Ending Caleres, Inc. shareholders’ equity (2)
 
16.67

 
14.27

 
13.78

 
12.36

 
10.99



20



($ thousands, except per share amounts)
 
2017
 
2016
 
2015
 
2014
 
2013
Financial Position:
 
 
 
 
 
 
 
 
 
 
Receivables, net
 
$
152,613

 
$
153,121

 
$
153,664

 
$
136,646

 
$
129,217

Inventories, net
 
569,379

 
585,764

 
546,745

 
543,103

 
547,531

Working capital
 
416,630

 
316,150

 
484,766

 
420,609

 
420,735

Property and equipment, net
 
212,799

 
219,196

 
179,010

 
149,743

 
143,560

Total assets
 
1,489,415

 
1,475,273

 
1,303,323

 
1,214,327

 
1,146,340

Borrowings under revolving credit agreement
 

 
110,000

 

 

 
7,000

Long-term debt
 
197,472

 
197,003

 
196,544

 
196,712

 
195,947

Caleres, Inc. shareholders’ equity
 
717,489

 
613,117

 
601,484

 
540,910

 
476,699

Average common shares outstanding – basic
 
41,801

 
42,026

 
42,455

 
42,071

 
41,356

Average common shares outstanding – diluted
 
41,980

 
42,181

 
42,656

 
42,274

 
41,653


All data presented reflects the fiscal year ended on the Saturday nearest to January 31. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to the selected financial data above.

 
 
(1)
Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software, intangibles and debt issuance costs and debt discount. The amortization of debt issuance costs and debt discount is reflected within interest expense in our consolidated statements of earnings and totaled $1.8 million in 2017, $1.7 million in 2016, $1.2 million in 2015, $2.4 million in 2014 and $2.5 million in 2013.
(2)
Ending Caleres, Inc. shareholders' equity is calculated by dividing Caleres, Inc. shareholders' equity by common stock shares outstanding at the end of the respective periods.

 
 
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Business Overview
We are a global footwear company with annual net sales of $2.8 billion. Our shoes are worn by people of all ages and from all walks of life. Our mission is to inspire people to feel good...feet first. We offer the consumer a powerful portfolio of footwear stores and global footwear brands. As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points. We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels. A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands. Our business strategy is focused on continuing to evolve our portfolio of brands, driving profit growth to achieve our financial targets, investing in avenues of growth while refocusing our resources and remaining consumer centric.

Famous Footwear
Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and beginning in March 2018, FamousFootwear.ca in Canada. Famous Footwear is one of America’s leading familybranded footwear retailers with 1,026 stores at the end of 2017 and net sales of $1.6 billion in 2017. Our focus for the Famous Footwear segment is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion and athletic footwear at a great price, coupled with exclusive products and engaging marketing programs.

Brand Portfolio
Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns. The segment is comprised of the Naturalizer, Sam Edelman, Allen Edmonds, Dr. Scholl's Shoes, LifeStride, Franco Sarto, Vince, Rykä, Fergie, Bzees, Carlos, Via Spiga and Diane von Furstenberg brands. Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products. Our Brand Portfolio segment operates 236 retail stores in the United States, Canada, Guam and Italy for our Naturalizer, Allen Edmonds and Sam Edelman brands. This segment also includes our e-commerce businesses that sell our branded footwear.


21



Financial Highlights

The following is a summary of the financial highlights for 2017:

Consolidated net sales increased $206.2 million, or 8.0%, to $2,785.6 million in 2017, compared to $2,579.4 million last year, with increases from both of our segments. Our Allen Edmonds business contributed $154.3 million of this increase.

Consolidated operating earnings increased $29.0 million, or 26.2%, to $140.0 million in 2017, compared to $111.0 million last year, primarily driven by an increase in net sales and an improved gross profit rate, partially offset by higher selling and administrative expenses.

Consolidated net earnings attributable to Caleres, Inc. were $87.2 million, or $2.02 per diluted share, in 2017, compared to $65.7 million, or $1.52 per diluted share, last year.

Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks. Our 2017 fiscal year included 53 weeks, while both our 2016 and 2015 fiscal years had only 52 weeks. The difference in the number of weeks included in our fiscal years can affect annual comparisons. The inclusion of the 53rd week in 2017 resulted in an increase to our consolidated net sales of $23.4 million and had an immaterial impact on net earnings.

We continue to improve our balance sheet. In late 2016, we used approximately $260.0 million of proceeds from our revolving credit agreement to fund the Allen Edmonds acquisition. During 2017, we paid down the remaining $110.0 million of borrowings under our revolving credit agreement, driven by our strong operating cash flows. Our debt-to-capital ratio was 21.5% as of February 3, 2018, compared to 33.3% as of January 28, 2017.

The following items should be considered in evaluating the comparability of our 2017 and 2016 results:

Acquisition, integration and reorganization of men's brands – We incurred costs of $8.9 million ($5.6 million on an after-tax basis, or $0.13 per diluted share) during 2017 related to the acquisition, integration and reorganization of men's brands. Approximately $4.0 million was recorded in restructuring and other special charges. An additional $4.9 million related to the amortization of the inventory adjustment required for purchase accounting was included in cost of goods sold. During 2016, we incurred costs of $7.0 million ($5.7 million on an after-tax basis, or $0.13 per diluted share) related to the acquisition and integration of Allen Edmonds. Approximately $5.8 million was recorded in restructuring and other special charges. An additional $1.2 million related to the amortization of the inventory adjustment required for purchase accounting was included in cost of goods sold. Refer to Note 2 and Note 4 to the consolidated financial statements for additional information.
Retail operations restructuring – We incurred costs of $0.9 million ($0.6 million on an after-tax basis, or $0.02 per diluted share) during 2017 associated with the restructuring of our retail operations. Refer to Note 4 to the consolidated financial statements for further discussion.
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% effective January 1, 2018, 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 as of December 31, 2017. Though the individual components of the Act resulted in significant adjustments to both our income tax provision and the income tax balances, the overall net impact to our income tax provision as a result of the Act was a benefit of $0.3 million. Refer to Note 6 to the consolidated financial statements for further discussion.
Impairment of Shoes.com note receivable – During 2016, we incurred costs of $8.0 million ($4.9 million on an after-tax basis, or $0.11 per diluted share) primarily associated with the impairment of the convertible note received as partial consideration in the 2014 disposition of Shoes.com. Refer to Note 4 to the consolidated financial statements for additional information.
Impairment of investment in nonconsolidated affiliate – During 2016, we incurred an impairment charge of $7.0 million ($7.0 million on an after-tax basis, or $0.16 per diluted share) related to our investment in a nonconsolidated affiliate. Refer to Note 4 to the consolidated financial statements for further discussion.
Brand Portfolio business exits and restructuring – During 2016, we incurred costs of $4.2 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) primarily related to the planned exit of our international e-commerce business and other

22



restructuring. Approximately $2.6 million was included in restructuring and other special charges and $1.6 million was included in cost of goods sold. Refer to Note 4 to the consolidated financial statements for additional information.
Outlook for 2018
During 2017, we focused on speed-to-market, speed-to-consumer, e-commerce growth and the diversification of our portfolio of brands, delivering successful results in the midst of a changing retail landscape. In 2018, we will continue to focus on these strategic initiatives, investing in our brands with a consumer-direct perspective, such as Famous Footwear, Naturalizer, Sam Edelman and Allen Edmonds. We expect both our same-store sales at Famous Footwear and our Brand Portfolio net sales will grow in the low single-digit percentage range in 2018. In addition, as a result of the Tax Cuts and Jobs Act, we expect to realize a lower effective tax rate of 25% to 26% in 2018.

Following are the consolidated results and results by segment for 2017, 2016 and 2015:

CONSOLIDATED RESULTS
 
 
2017
 
2016
 
2015
 
 
 
% of

 
 
% of

 
 
% of

($ millions)
 
 
 Net Sales

 
 
Net Sales

 
 
Net Sales

Net sales
 
$
2,785.6

100.0
 %
 
$
2,579.4

100.0
 %
 
$
2,577.4

100.0
 %
Cost of goods sold
 
1,617.0

58.0
 %
 
1,517.4

58.8
 %
 
1,529.6

59.3
 %
Gross profit
 
1,168.6

42.0
 %
 
1,062.0

41.2
 %
 
1,047.8

40.7
 %
Selling and administrative expenses
 
1,023.7

36.8
 %
 
927.6

36.0
 %
 
912.7

35.4
 %
Restructuring and other special charges, net
 
4.9

0.2
 %
 
23.4

0.9
 %
 

 %
Operating earnings
 
140.0

5.0
 %
 
111.0

4.3
 %
 
135.1

5.2
 %
Interest expense
 
(18.1
)
(0.6
)%
 
(15.1
)
(0.6)
 %
 
(16.5
)
(0.6)
 %
Loss on early extinguishment of debt
 


 

 %
 
(10.7
)
(0.4
)%
Interest income
 
0.8

0.0
 %
 
1.4

0.1
 %
 
0.9

0.0
 %
Earnings before income taxes
 
122.7

4.4
 %
 
97.3

3.8
 %
 
108.8

4.2
 %
Income tax provision
 
(35.5
)
(1.3
)%
 
(31.2
)
(1.2)
 %
 
(27.0
)
(1.0)
 %
Net earnings
 
87.2

3.1
 %
 
66.1

2.6
 %
 
81.8

3.2
 %
Net earnings attributable to noncontrolling interests
 
0.0

0.0
 %
 
0.4

0.0
 %
 
0.3

0.0
 %
Net earnings attributable to Caleres, Inc.
 
$
87.2

3.1
 %
 
$
65.7

2.6
 %
 
$
81.5

3.2
 %

Net Sales
Net sales increased $206.2 million, or 8.0%, to $2,785.6 million in 2017, compared to $2,579.4 million last year. Our Brand Portfolio segment reported a $158.7 million, or 16.0%, increase in net sales, reflecting a $154.3 million increase in sales from the Allen Edmonds business we acquired in December 2016 and sales growth from our Sam Edelman, LifeStride, Vince and Naturalizer brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Carlos brands. Net sales of our Famous Footwear segment increased $47.5 million, or 3.0%, primarily driven by a 1.4% increase in same-store sales (on a 52-week basis) and the impact of the 53rd week in 2017, which increased net sales by $19.7 million. The impact of the 53rd week was an increase to our consolidated net sales of $23.4 million.

Net sales increased $2.0 million, or 0.1%, to $2,579.4 million in 2016, compared to $2,577.4 million in 2015, primarily driven by our Famous Footwear segment, which reported a $17.4 million, or 1.1%, increase in net sales, reflecting a 0.6% increase in same-store sales and a net increase in new and closed stores. Net sales of our Brand Portfolio segment declined $15.5 million in 2016, driven by lower net sales of our Dr. Scholl's Shoes, Naturalizer and LifeStride brands, a portion of which reflects the planned reduction of lower margin categories, partially offset by higher sales from our Carlos, Vince and Rykä brands. Our Brand Portfolio retail sales benefited from the acquisition of Allen Edmonds, which contributed $24.3 million in net sales during 2016, but net sales were partially offset by a decrease in same-store sales of 2.9% and a lower Canadian dollar exchange rate.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. 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 thereby excluded from the same-store sales calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. 


23



Gross Profit
Gross profit increased $106.6 million, or 10.0%, to $1,168.6 million in 2017, compared to $1,062.0 million last year, reflecting higher sales volume, primarily driven by the inclusion of a full year of sales from our Allen Edmonds business, and the impact of the 53rd week in 2017. As a percentage of net sales, our gross profit rate increased to 42.0% in 2017, compared to 41.2% in 2016, primarily resulting from an improved mix of our retail versus wholesale sales and a better mix of higher margin brands within our Brand Portfolio segment. Gross profit rates on retail sales are higher than wholesale sales. In aggregate, retail and wholesale net sales were 69% and 31%, respectively, in 2017 compared to 67% and 33% in 2016. These improvements were partially offset by $4.9 million of incremental cost of goods sold in 2017 related to the amortization of the inventory adjustment required for purchase accounting from our Allen Edmonds acquisition in December 2016, compared to $1.2 million in 2016.

Gross profit increased $14.2 million, or 1.4%, to $1,062.0 million in 2016, compared to $1,047.8 million in 2015. As a percentage of net sales, our gross profit rate increased to 41.2% in 2016, compared to 40.7% in 2015, primarily resulting from an improved mix of our higher margin brands, including the planned exit of some lower margin categories, lower inventory markdowns and a higher consolidated mix of retail versus wholesale sales. In aggregate, retail and wholesale net sales were 67% and 33%, respectively, in 2016 compared to 66% and 34% in 2015. These improvements were partially offset by $1.2 million of incremental cost of goods sold related to the amortization of the inventory adjustment required for purchase accounting for the Allen Edmonds acquisition and $1.6 million of inventory markdowns associated with the planned exit of our China e-commerce business.

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

Selling and Administrative Expenses
Selling and administrative expenses increased $96.1 million, or 10.4%, to $1,023.7 million in 2017, compared to $927.6 million last year, primarily driven by higher costs associated with our expanded store base, reflecting the impact of our Allen Edmonds business, incremental expenses associated with the 53rd week and higher cash and stock-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 36.8% in 2017 from 36.0% last year.

Selling and administrative expenses increased $14.9 million, or 1.6%, to $927.6 million in 2016, compared to $912.7 million in 2015. The increase reflects higher costs attributable to our expanded store base, including our Allen Edmonds business acquired in the fourth quarter of 2016, and higher warehouse and distribution costs, due in part to our expanded distribution center in Lebanon, Tennessee, partially offset by lower expenses related to cash-based incentive compensation. As a percentage of net sales, selling and administrative expenses were 36.0% in 2016 and 35.4% in 2015.

Restructuring and Other Special Charges, Net
Restructuring and other special charges of $4.9 million were incurred in 2017, including $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) for integration and reorganization costs, primarily for professional fees and severance expense, related to our men's business, and $0.9 million of costs associated with the restructuring of our retail operations. Restructuring and other special charges of $23.4 million were incurred in 2016, related to the impairment of the Shoes.com note receivable, the impairment of our investment in a nonconsolidated affiliate, the acquisition and integration of Allen Edmonds, the planned exit of our China e-commerce business and other organizational changes within our Brand Portfolio segment. There were no restructuring and other special charges in 2015. Refer to Note 4 to the consolidated financial statements for additional information related to these charges.

Operating Earnings
Operating earnings increased $29.0 million, or 26.2%, to $140.0 million in 2017, compared to $111.0 million last year, primarily reflecting the full year impact of the Allen Edmonds business in 2017, as well as improved operating results at Famous Footwear.

Operating earnings decreased $24.1 million, or 17.9%, to $111.0 million in 2016, compared to $135.1 million in 2015, primarily driven by an increase in restructuring and other special charges, partially offset by a higher gross profit rate. Operating earnings at our Famous Footwear segment declined $25.3 million, reflecting lower product margins and higher rent, freight and distribution expenses. However, we achieved a $9.6 million improvement in operating earnings at our Brand Portfolio segment, driven by gross margin expansion.


24



Interest Expense
Interest expense increased $3.0 million, or 19.7%, to $18.1 million in 2017, compared to $15.1 million last year, reflecting higher interest expense on our revolving credit agreement, which was used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016. Obligations under the revolving credit agreement were fully paid off during the fourth quarter of 2017. In addition, we capitalized interest of $1.4 million in 2016 associated with the expansion and modernization of our Lebanon, Tennessee distribution center, with no interest capitalized in 2017.

Interest expense decreased $1.4 million, or 8.9%, to $15.1 million in 2016, compared to $16.5 million in 2015. In 2016 and 2015, we capitalized interest of $1.4 million and $0.3 million, respectively, associated with the expansion and modernization of our Lebanon, Tennessee distribution center that was completed in 2016. The decrease in interest expense in 2016 also reflects lower interest expense on our senior notes as a result of the 2015 redemption of our senior notes due in 2019 ("2019 Senior Notes") and the issuance of senior notes due in 2023 ("2023 Senior Notes") reducing our interest rate from 7.125% to 6.25%, as further discussed in Liquidity and Capital Resources, partially offset by higher interest on our revolving credit agreement, which was used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016.

Loss on Early Extinguishment of Debt
During 2015, we incurred a loss of $10.7 million related to the redemption of our 2019 senior notes prior to maturity, as further discussed in Note 11 to the consolidated financial statements, with no corresponding costs in 2017 or 2016.

Income Tax Provision
Our consolidated effective tax rate was 28.9% in 2017, compared to 32.0% in 2016 and 24.8% in 2015. Our consolidated effective tax rate is generally below the federal statutory rate because our foreign earnings are subject to lower statutory tax rates.  In 2017, our effective tax rate was also impacted by the Tax Cuts and Jobs Act (the "Act" or "income tax reform"), as further discussed in Note 6 to the consolidated financial statements, and several discrete tax benefits, which totaled $2.3 million for the year. Our discrete tax benefits included $1.3 million related to share-based compensation as a result of the adoption of ASU 2016-09 during 2017, which requires prospective recognition of excess tax benefits and deficiencies in the statements of earnings, as further discussed in Note 1 to the consolidated financial statements.  If the discrete tax benefits had not been recognized, the Company's full fiscal year 2017 effective tax rate would have been 30.8%, which is lower than 2016, reflecting a higher mix of international earnings in the Company's lowest tax rate jurisdictions and the impact of tax reform.

In 2016, our effective tax rate was also impacted by several discrete tax benefits, including the settlement of certain federal and state tax matters, reductions of the valuation allowance related to capital loss carryforwards, and other adjustments, which totaled $2.5 million for the year. If these discrete tax benefits had not been recognized, the Company's full fiscal year 2016 effective tax rate would have been 34.6%, which is higher than 2015, driven by the non-deductibility of certain acquisition and integration expenses and other restructuring items.

Refer to Note 6 to the consolidated financial statements for additional information regarding our tax rates. As a result of income tax reform, we expect to realize a lower annual effective tax rate for 2018 and beyond. For 2018, we anticipate an effective tax rate between 25% and 26%.

Net Earnings Attributable to Caleres, Inc.
We reported net earnings attributable to Caleres, Inc. of $87.2 million in 2017, compared to $65.7 million last year and $81.5 million in 2015.

Geographic Results
We have both domestic and foreign operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail customers and the operation of our e-commerce websites. Foreign operations primarily consist of wholesale operations in the Far East and Canada, retail operations in Canada and Italy and the operation of our international e-commerce websites. In addition, we license certain of our trademarks to third parties who distribute and/or operate retail locations internationally. The Far East operations include first-cost transactions, where footwear is sold at foreign ports to customers who then import the footwear into the United States and other countries. The breakdown of domestic and foreign net sales and earnings before income taxes was as follows:

25



 
2017
 
2016
 
2015
 
 
Earnings Before
 
 
 
Earnings Before
 
 
 
Earnings Before
 
($ millions)
Net Sales

Income Taxes
 
 
Net Sales

Income Taxes
 
 
Net Sales

Income Taxes
 
Domestic
$
2,611.5

 
$
78.2

 
$
2,385.1

 
$
60.9

 
$
2,342.6

 
$
68.2

Foreign
174.1

 
44.5

 
194.3

 
36.4

 
234.8

 
40.6

 
$
2,785.6

 
$
122.7

 
$
2,579.4

 
$
97.3

 
$
2,577.4

 
$
108.8


As a percentage of sales, the pre-tax profitability on foreign sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs in domestic earnings.

FAMOUS FOOTWEAR
 
 
2017
 
2016
 
2015
 
 
 
% of

 
 
% of

 
 
% of

($ millions)
 
 
 Net Sales

 
 
Net Sales

 
 
Net Sales

Net sales
 
$
1,637.6

100.0
%
 
$
1,590.1

100.0
%
 
$
1,572.7

100.0
%
Cost of goods sold
 
913.2

55.8
%
 
887.5

55.8
%
 
866.0

55.1
%
Gross profit
 
724.4

44.2
%
 
702.6

44.2
%
 
706.7

44.9
%
Selling and administrative expenses
 
631.6

38.6
%
 
618.9

38.9
%
 
597.7

38.0
%
Restructuring and other special charges, net
 
0.6

0.0
%
 

%
 

%
Operating earnings
 
$
92.2

5.6
%
 
$
83.7

5.3
%
 
$
109.0

6.9
%
 
 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
Same-store sales % change (on a 52-week basis)
 
1.4
%
 
 
0.6
%
 
 
1.9
%
 
Same-store sales $ change (on a 52-week basis)
 
$
21.7

 
 
$
9.7

 
 
$
27.9

 
Sales change from 53rd week
 
$
19.7

 
 
$

 
 
$

 
Sales change from new and closed stores, net (on a 52-week basis)
 
$
5.5

 
 
$
7.9

 
 
$
2.9

 
Impact of changes in Canadian exchange rate on sales
 
$
0.6

 
 
$
(0.2
)
 
 
$
(1.7
)
 
Sales change of Shoes.com (sold in December 2014)
 
N/A

 
 
N/A

 
 
$
(45.7
)
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (on a 52-week basis)
 
$
218

 
 
$
216

 
 
$
217

 
Square footage (thousands sq. ft.)
 
6,972

 
 
6,986

 
 
6,949

 
 
 
 
 
 
 
 
 
 
 
Stores opened
 
34

 
 
49

 
 
50

 
Stores closed
 
63

 
 
40

 
 
42

 
Ending stores
 
1,026

 
 
1,055

 
 
1,046

 

Net Sales
Net sales increased $47.5 million, or 3.0%, to $1,637.6 million in 2017, compared to $1,590.1 million last year, primarily driven by a 1.4% increase in same-store sales and the impact of the 53rd week in 2017. Famous Footwear experienced growth in e-commerce sales and reported improvement in the online conversion rate, due in part to the successful implementation of our buy online, pick up in store initiative in early 2017. Strong e-commerce sales were partially offset by a decline in customer traffic at our retail store locations. The segment experienced sales growth in lifestyle athletic and sport-influenced product. Sales per square foot, excluding e-commerce, increased 1.1% to $218, compared to $216 last year. Members of Rewards, our customer loyalty program, continue to account for a majority of the segment's sales, with approximately 75% of our net sales to Rewards members in both 2017 and 2016, and 74% in 2015.


26



Net sales increased $17.4 million, or 1.1%, to $1,590.1 million in 2016, compared to $1,572.7 million in 2015. During 2016, the increase was primarily driven by a 0.6% increase in same-store sales and a net increase in new and closed stores. Famous Footwear experienced an increase in e-commerce sales of more than 50% and reported improvement in both online conversion rate and customer traffic, due in part to the expansion of our in-store fulfillment program. Strong e-commerce sales were partially offset by a decline in customer traffic at our retail store locations. The segment experienced sales growth in the lifestyle athletic and sport-influenced product, while boot sales declined. Sales per square foot, excluding e-commerce, decreased 0.8% to $216, compared to $217 in 2015.

Gross Profit
Gross profit increased $21.8 million, or 3.1%, to $724.4 million in 2017, compared to $702.6 million last year due to higher net sales. As a percentage of net sales, our gross profit rate remained consistent at 44.2%. During 2017, our gross profit rate was positively impacted by higher product margins, offset by higher promotional point redemptions by our Rewards members, due to the growth of that program.

Gross profit decreased $4.1 million, or 0.6%, to $702.6 million in 2016 compared to $706.7 million in 2015 due to a lower gross profit rate, partially offset by higher sales. As a percentage of net sales, our gross profit rate declined to 44.2% in 2016 compared to 44.9% in 2015. The decrease in our gross profit rate reflects higher freight expense due to growth in our Famous.com business and the in-store fulfillment program as well as lower initial product margins in certain categories, including athletic and boots.

Selling and Administrative Expenses
Selling and administrative expenses increased $12.7 million, or 2.1%, to $631.6 million during 2017, compared to $618.9 million last year. The increase was primarily driven by an incremental week of expenses associated with the 53rd week in 2017 and higher expenses related to cash-based incentive compensation, partially offset by lower marketing costs. As a percentage of net sales, selling and administrative expenses decreased to 38.6% in 2017 from 38.9% last year.

Selling and administrative expenses increased $21.2 million, or 3.5%, to $618.9 million during 2016, compared to $597.7 million in 2015. The increase reflects higher rent and facilities charges attributable to our expanded store base and higher warehouse and distribution costs, primarily related to our expanded distribution center in Lebanon, Tennessee, partially offset by lower expenses related to cash-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 38.9% in 2016 from 38.0% in 2015.

Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $0.6 million in 2017 related to the restructuring of our retail operations, as further discussed in Note 4 to the consolidated financial statements, with no corresponding costs in 2016 or 2015.

Operating Earnings
Operating earnings increased $8.5 million, or 10.1%, to $92.2 million for 2017, compared to $83.7 million last year, reflecting the growth in net sales and other factors named above. As a percentage of net sales, our operating earnings increased to 5.6% for 2017 from 5.3% for 2016.

Operating earnings decreased $25.3 million, or 23.2%, to $83.7 million for 2016, compared to $109.0 million in 2015. As a percentage of net sales, our operating earnings decreased to 5.3% for 2016, compared to 6.9% for 2015.


27



BRAND PORTFOLIO
 
 
2017
 
2016
 
2015
 
 
 
% of

 
 
% of

 
 
% of

($ millions)
 
 
Net Sales

 
 
Net Sales

 
 
Net Sales

Net sales
 
$
1,148.0

100.0
%
 
$
989.3

100.0
%
 
$
1,004.8

100.0
%
Cost of goods sold
 
703.8

61.3
%
 
629.9

63.7
%
 
663.7

66.1
%
Gross profit
 
444.2

38.7
%
 
359.4

36.3
%
 
341.1

33.9
%
Selling and administrative expenses
 
362.4

31.6
%
 
279.3

28.2
%
 
274.5

27.3
%
Restructuring and other special charges, net
 
1.6

0.1
%
 
3.9

0.4
%
 

%
Operating earnings
 
$
80.2

7.0
%
 
$
76.2

7.7
%
 
$
66.6

6.6
%

 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
Wholesale/retail sales mix (%) (1)
 
74%/26%

 
 
85%/15%

 
 
87%/13%

 
Change in wholesale net sales ($) (1)
 
$
(1.7
)
 
 
$
(38.4
)
 
 
$
32.5

 
Unfilled order position at year-end (1)
 
$
262.1

 
 
$
263.1

 
 
$
274.4

 
 
 
 
 
 
 
 
 
 
 
Same-store sales % change (on a 52-week basis) (2)
 
6.4
%
 
 
(2.9
)%
 
 
(0.7
)%
 
Same-store sales $ change (on a 52-week basis) (2)
 
$
7.5

 
 
$
(3.4
)
 
 
$
(0.8
)
 
Sales change from 53rd week (1)
 
$
3.7

 
 
$

 
 
$

 
Sales change from new and closed stores, net (on a 52-week basis)
 
$
22.2

 
 
$
7.8

 
 
$
(1.8
)
 
Sales change from acquired Allen Edmonds retail stores (on a 52-week basis) (3)
 
$
126.0

 
 
$
19.3

 
 
N/A
 
Impact of changes in Canadian exchange rate on retail sales
 
$
1.0

 
 
$
(0.8
)
 
 
$
(7.6
)
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (on a 52-week basis) (2)
 
$
327

 
 
$
314

 
 
$
343

 
Square footage, end of year (thousands sq. ft.) (4)
 
405

 
 
409

 
 
294

 
 
 
 
 
 
 
 
 
 
 
Stores opened (1)
 
15

 
 
77

 
 
7

 
Stores closed (1)
 
13

 
 
8

 
 
13

 
Ending stores (1)
 
236

 
 
234

 
 
165

 

(1)
These metrics include our Allen Edmonds business acquired in the fourth quarter of 2016. Refer to Note 2 to the consolidated financial statements for additional information.
(2)
These metrics exclude our Allen Edmonds business since the business was not included in our operations in the prior year comparative period.
(3)
This metric represents net sales from our 69 acquired Allen Edmonds retail stores.
(4)
This metric includes our Allen Edmonds retail stores, which total approximately 123,000 and 107,000 square feet at February 3, 2018 and January 28, 2017, respectively.

Net Sales
Net sales increased $158.7 million, or 16.0%, to $1,148.0 million in 2017, compared to $989.3 million last year. The increase was driven by higher net sales of $154.3 million from our Allen Edmonds business, which was acquired in the fourth quarter of 2016, and higher net sales of our Sam Edelman, LifeStride, Vince and Naturalizer brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Carlos brands. Our retail net sales benefited from our acquired Allen Edmonds retail stores, a net increase in new and closed stores, an increase in same-store sales of 6.4% and the impact of the 53rd week in 2017. We opened 15 stores and closed 13 stores during 2017, resulting in a total of 236 stores at the end of 2017. Sales per square foot, excluding e-commerce, increased 3.9% to $327, compared to $314 last year. Our unfilled order position for our wholesale business decreased $1.0 million, or 0.4%, to $262.1 million at the end of 2017, compared to $263.1 million at the end of last year.
 

28



Net sales decreased $15.5 million, or 1.5%, to $989.3 million in 2016, compared to $1,004.8 million in 2015. The decrease was driven by lower net sales of our Dr. Scholl's Shoes, Naturalizer and LifeStride brands, partially offset by higher sales from our Carlos, Vince and Rykä brands. Allen Edmonds contributed $24.3 million in net sales during 2016. Our retail net sales benefited from an increase in sales from new and closed stores driven primarily by our acquisition of Allen Edmonds, partially offset by a decrease in same-store sales of 2.9% and a lower Canadian dollar exchange rate. We opened eight stores and acquired 69 Allen Edmonds stores, and closed eight stores during 2016, resulting in a total of 234 stores at the end of 2016. Sales per square foot, excluding e-commerce, decreased 8.4% to $314 compared to $343 in 2015. Our unfilled order position for our wholesale sales decreased $11.3 million, or 4.1%, to $263.1 million at the end of 2016, compared to $274.4 million at the end of 2015.

Gross Profit
Gross profit increased $84.8 million, or 23.6%, to $444.2 million in 2017, compared to $359.4 million last year, primarily as a result of the recently acquired Allen Edmonds business. As a percentage of sales, our gross profit rate increased to 38.7% in 2017, compared to 36.3% last year primarily resulting from a higher mix of retail versus wholesale sales in 2017. Our retail operations have a higher gross profit rate than our wholesale business. The Brand Portfolio segment recognized $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) in cost of goods sold during 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting, compared to $1.2 million in 2016.

Gross profit increased $18.3 million, or 5.4%, to $359.4 million in 2016, compared to $341.1 million in 2015 driven by higher gross profit rate, partially offset by lower net sales and $1.2 million of incremental cost of goods sold related to the amortization of the inventory adjustment required for purchase accounting for our Allen Edmonds acquisition. We also incurred an incremental $1.6 million for inventory markdowns associated with the planned exit of our China e-commerce business. Our gross profit rate increased to 36.3% in 2016, compared to 33.9% in 2015 primarily resulting from an improved mix of higher margin brands, as well as the planned exit of some lower margin categories. We also experienced a higher mix of retail versus wholesale sales.

Selling and Administrative Expenses
Selling and administrative expenses increased $83.1 million, or 29.8%, to $362.4 million during 2017, compared to $279.3 million last year, primarily driven by higher costs associated with our expanded store base, reflecting the impact of our Allen Edmonds business, higher anticipated payments under our cash-based incentive plans and incremental expenses associated with the 53rd week. As a percentage of net sales, selling and administrative expenses increased to 31.6% in 2017 from 28.2% last year, reflecting the above named factors.

Selling and administrative expenses increased $4.8 million, or 1.7%, to $279.3 million during 2016, compared to $274.5 million in 2015, primarily driven by higher costs associated with our expanded store base, reflecting the impact of our recently acquired Allen Edmonds business, and an increase in warehouse expenses, partially offset by a decrease in anticipated payments under our cash-based incentive plans. As a percentage of net sales, selling and administrative expenses increased to 28.2% in 2016 from 27.3% in 2015, reflecting the above named factors.

Restructuring and Other Special Charges, Net
Restructuring and other special charges of $1.6 million were incurred in 2017 attributable to the integration and reorganization of our men's business and restructuring of our retail operations. In 2016, restructuring and other special charges were $3.9 million attributable to business exit and restructuring charges, certain Allen Edmonds acquisition and integration costs and other charges, with no corresponding costs in 2015. Refer to Note 2 and Note 4 to the consolidated financial statements for additional information related to these charges.

Operating Earnings
Operating earnings increased $4.0 million, or 5.2%, to $80.2 million in 2017, compared to $76.2 million last year, primarily reflecting the full year impact of our Allen Edmonds business, net of the incremental cost of goods sold adjustment of $4.9 million related to purchase accounting, and other factors named above. As a percentage of net sales, operating earnings decreased to 7.0% in 2017 compared to 7.7% last year.

Operating earnings increased $9.6 million, or 14.5%, to $76.2 million in 2016, compared to $66.6 million in 2015. As a percentage of net sales, operating earnings increased to 7.7% in 2016 compared to 6.6% in 2015.

 
OTHER
The Other category includes unallocated corporate administrative and other costs and recoveries. Costs of $32.4 million, $49.0 million, and $40.5 million were incurred in 2017, 2016 and 2015, respectively.


29



The $16.6 million decrease in costs in 2017 compared to 2016 was primarily a result of the following factors:

The non-recurrence of the $7.3 million impairment of the Shoes.com note receivable in 2016, as further discussed in Note 4 to the consolidated financial statements;
The non-recurrence of the $7.0 million impairment of the investment in a nonconsolidated affiliate in 2016, as further discussed in Note 4 to the consolidated financial statements; and
Lower costs associated with our acquisition and integration of Allen Edmonds, as further discussed in Note 2 and Note 4 to the consolidated financial statements.

The $8.5 million increase in costs in 2016 compared to 2015 was primarily a result of the following factors:

The impairment of the Shoes.com note receivable, as further discussed in Note 4 to the consolidated financial statements;
The impairment of the investment in a nonconsolidated affiliate, as further discussed in Note 4 to the consolidated financial statements; and
The costs associated with our acquisition and integration of Allen Edmonds, as further discussed in Note 2 and Note 4 to the consolidated financial statements; partially offset by
Lower expenses related to our cash-based variable compensation plans for our directors and certain employees; and
Lower consulting expenses related to new brand launches.

 
RESTRUCTURING AND OTHER INITIATIVES
During 2017, we incurred restructuring and other special charges of $4.9 million, including $4.0 million related to the integration and reorganization of our men's business and $0.9 million associated with the restructuring of our retail operations. During 2016, we incurred restructuring and other special charges of $23.4 million, including $8.0 million primarily related to the impairment of the Shoes.com note receivable, $7.0 million related to the impairment of our investment in a nonconsolidated affiliate, $5.8 million of costs associated with the acquisition and integration of Allen Edmonds, and $2.6 million of costs associated with the planned exit of our international e-commerce business and other restructuring. There were no restructuring and other special charges in 2015. Refer to the Financial Highlights section above and Note 2 and Note 4 to the consolidated financial statements for additional information related to these charges.

 
IMPACT OF INFLATION AND CHANGING PRICES
While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact on our business over the last three years. Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates. For example, our products are manufactured in other countries, and a decline in the value of the U.S. dollar and the impact of labor shortages in China or other countries may result in higher manufacturing costs. Similarly, any potential significant shortage of quantities or increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations. In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease. Moreover, increases in inflation may not be matched by increases in wages, which also could have a negative impact on consumer spending. If we incur increased costs that are unable to be recovered through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of the cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs. Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors.

 
LIQUIDITY AND CAPITAL RESOURCES
Borrowings


($ millions)
February 3, 2018

 
January 28, 2017

 
(Decrease) Increase

Borrowings under revolving credit agreement
$

 
$
110.0

 
$
(110.0
)
Long-term debt
197.5

 
197.0

 
0.5

Total debt
$
197.5


$
307.0


$
(109.5
)


30



Total debt obligations decreased $109.5 million to $197.5 million at the end of 2017, compared to $307.0 million at the end of last year, as we paid down all of the borrowings under our revolving credit agreement that was used to fund the acquisition of Allen Edmonds. Interest expense in 2017 was $18.1 million, compared to $15.1 million in 2016 and $16.5 million in 2015. The increase in interest expense in 2017 was attributable to higher average borrowings under our revolving credit agreement due to the acquisition of Allen Edmonds. The decrease in interest expense in 2016 primarily reflects a $1.1 million increase in capitalized interest associated with the expansion and modernization of our Lebanon, Tennessee distribution center that was completed in the fourth quarter of 2016. In 2016 and 2015, we capitalized interest of $1.4 million and $0.3 million, respectively, associated with the distribution center. The decrease in interest expense in 2016 also reflects lower interest on our senior notes as a result of the redemption of our senior notes due in 2019 ("2019 Senior Notes") and the issuance of senior notes due in 2023 ("2023 Senior Notes") during 2015, reducing our interest rate from 7.125% to 6.25% as further described below, partially offset by higher average borrowings under our revolving credit agreement, which was used to fund the acquisition of Allen Edmonds.

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”). On December 13, 2016, Allen Edmonds 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 and Allen Edmonds 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.

We were in compliance with all covenants and restrictions under the Credit Agreement as of February 3, 2018. Refer to further discussion regarding the Credit Agreement in Note 11 to the consolidated financial statements.

At February 3, 2018, we had no borrowings and $10.4 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $535.2 million at February 3, 2018.

$200 Million Senior Notes 
As further discussed in Note 11 to the consolidated financial statements, on July 20, 2015, we commenced a cash tender offer for our 2019 Senior Notes. The tender offer expired on July 24, 2015 and $160.7 million aggregate principal amount of the 2019 Senior Notes were tendered. The remaining $39.3 million aggregate principal amount of 2019 Senior Notes was redeemed on August 26, 2015. We incurred a loss on early extinguishment of debt of $10.7 million in 2015 in connection with the redemption of the 2019 Senior Notes.

On July 27, 2015, we issued $200.0 million aggregate principal amount of the 2023 Senior Notes in a private placement.  On October 22, 2015, we commenced an offer to exchange our 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 our indebtedness outstanding.

The 2023 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 2023 Senior Notes mature on August 15, 2023. Prior to August 15, 2018, we may redeem some or all of the 2023 Senior Notes at various redemption prices.

The 2023 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 February 3, 2018, we were in compliance with all covenants and restrictions relating to the 2023 Senior Notes.

31




Working Capital and Cash Flow
 
 
February 3, 2018

 
January 28, 2017

Working capital ($ millions) (1)
 
$
416.6

 
$
316.2

Current ratio (2)
 
1.97:1

 
1.60:1

Debt-to-capital ratio (3)
 
21.5
%
 
33.3
%
(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)
Debt-to-capital 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 February 3, 2018, was $416.6 million, which was $100.4 million higher than at January 28, 2017. The increase in working capital reflects the impact of the Allen Edmonds acquisition in 2016, which was funded initially with borrowings under our revolving credit agreement. A significant portion of the Allen Edmonds purchase price was allocated to intangible assets, which are noncurrent, while the entire purchase price was funded using current liabilities. We paid off the remaining borrowings under our revolving credit agreement during the fourth quarter of 2017. Our current ratio increased to 1.97 to 1 at February 3, 2018, from 1.60 to 1 at January 28, 2017, reflecting the above named factors. Our debt-to-capital ratio was 21.5% as of February 3, 2018, compared to 33.3% at January 28, 2017, primarily reflecting lower borrowings under our revolving credit agreement.


 
2017

 
2016

 
Increase (Decrease)
in Cash and Cash Equivalents

Net cash provided by operating activities
$
191.4

 
$
183.6

 
$
7.8

Net cash used for investing activities
(51.2
)
 
(319.4
)
 
268.2

Net cash (used for) provided by financing activities
(131.8
)
 
72.8

 
(204.6
)
Effect of exchange rate changes on cash and cash equivalents
0.3

 
0.2

 
0.1

Increase (decrease) in cash and cash equivalents
$
8.7

 
$
(62.8
)
 
$
71.5


At February 3, 2018, we had $64.0 million of cash and cash equivalents, over half of which represents the accumulated unremitted earnings of our foreign subsidiaries. 

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

Cash provided by operating activities was $7.8 million higher in 2017 than last year, reflecting the following factors:

An increase in net income taxes, due in part to the impact of income tax reform;
Higher net earnings (after consideration of non-cash items);
An increase in accrued expenses and other liabilities compared to a decrease in 2016, driven by higher anticipated payments under our cash-based incentive compensation plans in 2017; partially offset by
An increase in prepaid expenses and other current and noncurrent assets in 2017 compared to a decrease in 2016, primarily due to higher prepaid rent in 2017 compared to 2016, reflecting a shift in the timing of rent payment due dates relative to the end of our fiscal year.

Cash used for investing activities was $268.2 million lower in 2017 than last year, reflecting the $260 million acquisition of Allen Edmonds in 2016, as further discussed in Note 2 to the consolidated financial statements, and lower purchases of property and equipment in 2017. In 2018, we expect purchases of property and equipment and capitalized software of approximately $50 million.

Cash used for financing activities was $204.6 million higher in 2017 than last year, as we paid off the borrowings under our revolving credit agreement, which funded our Allen Edmonds acquisition. In addition, we repurchased fewer shares under our stock repurchase program during 2017.

We paid dividends of $0.28 per share in each of 2017, 2016 and 2015. The 2017 dividends marked the 95th year of consecutive quarterly dividends. On March 8, 2018, the Board of Directors declared a quarterly dividend of $0.07 per share, payable April 2, 2018, to shareholders

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of record on March 19, 2018, marking the 380th consecutive quarterly dividend to be paid by the Company. 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.

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are listed below.

Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales are recorded, net of returns, allowances and discounts, generally when the merchandise has been shipped and title and risk of loss have passed to the customer. Revenue for products sold that are shipped directly to an individual consumer is recognized upon delivery to the consumer. Reserves for projected merchandise returns, discounts and allowances are determined based on historical experience and current expectations. Revenue is recognized on license fees related to Company-owned brand-names, where the Company is the licensor, when the related sales of the licensee are made. As further discussed in Note 1 to the consolidated financial statements, we will adopt Accounting Standards Codification ("ASC") 606, Revenue with Contracts from Customers, in the first quarter of 2018, which will change how revenue is recognized for certain aspects of our business.

Inventories
Inventories are our most significant asset, representing approximately 38% of total assets at the end of 2017. We value inventories at the lower of cost and net realizable value with 85% of consolidated inventories using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current selling prices. At our Famous Footwear segment and certain retail operations within our Brand Portfolio segment, we recognize markdowns when it becomes evident that inventory items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes the gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment to be lower than the initial markup during periods when permanent price reductions are taken to clear product. Within our Brand Portfolio segment, we generally provide markdown reserves to reduce the carrying values of inventories to a level where, upon sale of the product, we will realize our normal gross profit rate. We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment. Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.

We perform physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of goods sold.

Income Taxes
We record deferred taxes for the effects of timing differences between financial and tax reporting. These differences relate principally to employee benefit plans, accrued expenses, bad debt reserves, depreciation and amortization and inventory.

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. In response to the Act, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We have accounted for the Act in accordance with the provisions of SAB 118. Refer to Note 6 to the consolidated financial statements for additional information regarding the impact of the Act and SAB 118.

We evaluate our foreign investment opportunities and plans, as well as our foreign working capital needs, to determine the level of investment required and, accordingly, determine the level of foreign earnings that we consider indefinitely reinvested. Based upon that evaluation, earnings of our foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Act. If changes occur in future investment opportunities

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and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.

As of February 3, 2018, we have net operating loss and other carryforwards at certain of our subsidiaries. We evaluate these carryforwards for realization based upon their expiration dates and our expectations of future taxable income. As deemed appropriate, valuation reserves are recorded to adjust the recorded value of these carryforwards to the expected realizable value.

We are audited periodically by domestic and foreign tax authorities and tax assessments may arise several years after tax returns have been filed. Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more-likely-than-not threshold for recognition. For tax positions that meet the more-likely-than-not threshold, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled. In evaluating issues raised in such audits and other uncertain tax positions, we provide reserves for exposures as appropriate.

Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. In accordance with ASC 350, Intangibles-Goodwill and Other, a company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment screen or discounted cash flow analysis, goodwill impairment is recognized for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We perform impairment tests during the fourth quarter of each fiscal year unless events indicate an interim test is required. Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present.

We elected to bypass the optional qualitative assessment in 2017. We reviewed goodwill for impairment utilizing a discounted cash flow analysis as of the first day of the fourth quarter of 2017. A fair value-based test is applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the fair value of our reporting units to the carrying value of those reporting units. This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of the reporting unit is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expenses, capital expenditures, depreciation, amortization and working capital requirements are based on the past performance of the reporting units as well as our internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. We also considered assumptions that market participants may use. The estimate of the fair values of our reporting units is based on the best information available to us as of the date of the assessment. In our quantitative assessments of goodwill, our net sales and earnings projections, growth rates and discount rates require significant management judgment and are the assumptions to which the fair value calculation is the most sensitive. Changes in any of these assumptions, including the impact of external factors such as interest rates, could result in the calculated fair value falling below the carrying value in future assessments. 

We tested our indefinite-lived intangible assets utilizing the relief-from-royalty method to determine the estimated fair value of each indefinite-lived intangible asset. The relief-from-royalty method estimates the theoretical royalty savings from ownership of the intangible asset. Key assumptions used in our assessments include net sales projections, discount rates and royalty rates. Royalty rates are established by management based on comparable trademark licensing agreements in the market.  The net sales projections, discount rates and royalty rates utilized in our quantitative assessments of indefinite-lived intangible assets require significant management judgment and are the assumptions to which the fair value calculation is most sensitive. Changes in any of these assumptions could negatively impact the fair value calculation, potentially resulting in an impairment charge in future assessments.

The goodwill impairment testing and other indefinite-lived intangible asset impairment reviews were performed as of the first day of our fourth fiscal quarter and resulted in no impairment charges. The fair values of our reporting units and indefinite-lived intangible assets were substantially in excess of the carrying values as of our most recent impairment testing date, except for the reporting unit and indefinite-lived trademark associated with Allen Edmonds, which was acquired in December 2016. The relationship between the fair value and carrying value of a reporting unit or indefinite-lived trademark is influenced by many factors, including the length of time that has passed since the reporting unit or indefinite-lived trademark was initially acquired. Upon acquisition, the carrying value typically approximates its fair value. Therefore, the fair value of a recently acquired reporting unit or indefinite-lived trademark typically is not substantially in excess of its carrying value. Refer to Note 10 to the consolidated financial statements for additional information related to goodwill and intangible assets.


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Business Combination Accounting
We allocate the purchase price of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date. We also identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill. 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. We have historically relied in part upon the use of reports from third-party valuation specialists to assist in the estimation of fair values for intangible assets other than goodwill, inventory and fixed assets. The carrying values of acquired receivables and trade accounts payable have historically approximated their fair values at the business combination date. With respect to other acquired assets and liabilities, we use all available information to make our best estimates of their fair values at the business combination date.

Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.

Retirement and Other Benefit Plans
We sponsor pension plans in both the United States and Canada. Our domestic pension plans cover substantially all United States employees, and our Canadian pension plans cover certain employees based on plan specifications. In addition, we maintain an unfunded Supplemental Executive Retirement Plan (“SERP”) and sponsor unfunded defined benefit postretirement life insurance plans that cover both salaried and hourly employees who had become eligible for benefits by January 1, 1995.

We determine our expense and obligations for retirement and other benefit plans based on assumptions related to discount rates, expected long-term rates of return on invested plan assets, expected salary increases and certain employee-related factors, such as turnover, retirement age and mortality, among others. Our assumptions reflect our historical experience and our best judgment regarding future expectations. Additional information related to our assumptions is as follows:

Expected long-term rate of return – The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class. The weighted-average expected rate of return on plan assets used to determine our pension expense for 2017 was 8.00%. A decrease of 50 basis points in the weighted-average expected rate of return on plan assets would increase pension expense by approximately $1.7 million. The actual return on plan assets in a given year may differ from the expected long-term rate of return, and the resulting gain or loss is deferred and recognized into the plans’ expense over time.

Discount rate – Discount rates used to measure the present value of our benefit obligations for our pension and other postretirement benefit plans are based on a hypothetical bond portfolio constructed from a subset of high-quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plans. The weighted-average discount rate selected to measure the present value of our benefit obligations under our pension and other postretirement benefit plans was 4.0% for each. A decrease of 50 basis points in the weighted-average discount rate would have increased the projected benefit obligation of the pension and other postretirement benefit plans by approximately $29.2 million and $0.1 million, respectively.

Mortality table – As of February 3, 2018, we are using the RP-2014 Bottom Quartile tables, projected using generational scale MP-2017, an updated projection scale issued by the Society of Actuaries in 2017, grading to 0.75% by 2033, to estimate the plan liabilities. Actuarial gains, related to the change in mortality projection scale, reduced the projected benefit obligation by approximately $3.2 million as of February 3, 2018.

Refer to Note 5 to the consolidated financial statements for additional information related to our retirement and other benefit plans.

Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as of February 3, 2018.


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