CALERES INC - FORM 10-Q - June 13, 2018

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EX-32.1 - EXHIBIT 32.1 - CALERES INCexhibit321certificationsq1.htm
EX-31.2 - EXHIBIT 31.2 - CALERES INCexhibit312certificationsq1.htm
EX-31.1 - EXHIBIT 31.1 - CALERES INCexhibit311certificationsq1.htm


 
UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
 

FORM 10-Q 
 
(Mark One)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the quarterly period ended May 5, 2018
 
 
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from  _____________  to  _____________
 
Commission file number: 1-2191 
 
CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes  þ   No ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨     No þ 
 
As of June 1, 2018, 43,187,239 common shares were outstanding.

1


INDEX
 




2


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

($ thousands)
May 5, 2018

 
April 29, 2017

 
February 3, 2018

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
96,481


$
71,816


$
64,047

Receivables, net
125,559


107,021


152,613

Inventories, net
579,902


565,051


569,379

Prepaid expenses and other current assets
62,385


38,318


60,750

Total current assets
864,327

 
782,206

 
846,789

 
 
 
 
 
 
Other assets
88,941


67,289


90,659

Goodwill
127,081

 
127,081

 
127,081

Intangible assets, net
212,819

 
215,127

 
212,087

Property and equipment
542,927

 
533,421

 
542,812

Allowance for depreciation
(334,029
)
 
(315,567
)
 
(330,013
)
Property and equipment, net
208,898


217,854


212,799

Total assets
$
1,502,066

 
$
1,409,557

 
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
—

 
$
85,000

 
$
—

Trade accounts payable
268,917


225,032


272,962

Other accrued expenses
168,746


146,315


157,197

Total current liabilities
437,663

 
456,347

 
430,159

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,587


197,118


197,472

Deferred rent
53,027


50,881


53,071

Other liabilities
99,651


83,478


89,751

Total other liabilities
350,265

 
331,477

 
340,294

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
432

 
430

 
430

Additional paid-in capital
136,909

 
121,826

 
136,460

Accumulated other comprehensive loss
(16,065
)
 
(29,778
)
 
(15,170
)
Retained earnings
591,429

 
527,909

 
595,769

Total Caleres, Inc. shareholders’ equity
712,705


620,387


717,489

Noncontrolling interests
1,433


1,346


1,473

Total equity
714,138

 
621,733

 
718,962

Total liabilities and equity
$
1,502,066

 
$
1,409,557

 
$
1,489,415

See notes to condensed consolidated financial statements.

3


CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
May 5, 2018

April 29, 2017

Net sales
$
632,142

$
631,509

Cost of goods sold
357,221

360,601

Gross profit
274,921

270,908

Selling and administrative expenses
250,197

246,511

Restructuring and other special charges, net
1,778

1,108

Operating earnings
22,946

23,289

Interest expense, net
(3,683
)
(4,809
)
Other income, net
3,091

2,436

Earnings before income taxes
22,354

20,916

Income tax provision
(5,174
)
(6,032
)
Net earnings
17,180

14,884

Net loss attributable to noncontrolling interests
(32
)
(18
)
Net earnings attributable to Caleres, Inc.
$
17,212

$
14,902

 




Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 




Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 




Dividends per common share
$
0.07

$
0.07

See notes to condensed consolidated financial statements.

4



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Net earnings
$
17,180

$
14,884

Other comprehensive (loss) income, net of tax:
 

 

Foreign currency translation adjustment
(808
)
(540
)
Pension and other postretirement benefits adjustments
434

418

Derivative financial instruments
(521
)
778

Other comprehensive (loss) income, net of tax
(895
)
656

Comprehensive income
16,285

15,540

Comprehensive loss attributable to noncontrolling interests
(40
)
(23
)
Comprehensive income attributable to Caleres, Inc.
$
16,325

$
15,563

See notes to condensed consolidated financial statements.


5


CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Operating Activities
 
 

Net earnings
$
17,180

$
14,884

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

 

Depreciation
11,064

11,156

Amortization of capitalized software
2,684

3,560

Amortization of intangible assets
1,037

1,033

Amortization of debt issuance costs and debt discount
432

432

Share-based compensation expense
3,575

2,711

Loss on disposal of property and equipment
284

130

Impairment charges for property and equipment
468

949

Deferred rent
(44
)
(243
)
Provision for doubtful accounts
342

91

Changes in operating assets and liabilities:
 

 

Receivables
26,652

46,002

Inventories
(11,264
)
20,515

Prepaid expenses and other current and noncurrent assets
(3,407
)
11,014

Trade accounts payable
(3,774
)
(41,142
)
Accrued expenses and other liabilities
6,443

(5,836
)
Other, net
(325
)
128

Net cash provided by operating activities
51,347

65,384

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(7,929
)
(10,978
)
Capitalized software
(1,434
)
(1,390
)
Net cash used for investing activities
(9,363
)
(12,368
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
—

195,000

Repayments under revolving credit agreement
—

(220,000
)
Dividends paid
(3,023
)
(3,025
)
Acquisition of treasury stock
(3,288
)
(5,993
)
Issuance of common stock under share-based plans, net
(3,122
)
(2,422
)
Net cash used for financing activities
(9,433
)
(36,440
)
Effect of exchange rate changes on cash and cash equivalents
(117
)
(92
)
Increase in cash and cash equivalents
32,434

16,484

Cash and cash equivalents at beginning of period
64,047

55,332

Cash and cash equivalents at end of period
$
96,481

$
71,816

See notes to condensed consolidated financial statements.

6


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

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

Note 2
Impact of New Accounting Pronouncements

Impact of Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several ASUs to clarify the implementation guidance in ASU 2014-09.  Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted the ASUs in the first quarter of 2018 using the modified retrospective method, which resulted in a cumulative-effect adjustment of $4.8 million to reduce retained earnings, with a corresponding $6.4 million increase to other accrued expenses and a $1.6 million decrease to deferred tax liabilities. Adoption of the standard is not anticipated to significantly impact the statements of earnings on an ongoing basis. Refer to Note 3 to the condensed consolidated financial statements for additional information.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires recognition of the income tax effects of intercompany sales and intra-entity transfers of assets, other than inventory, when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The ASU was adopted during the first quarter of 2018 using a modified retrospective approach, which resulted in a cumulative-effect adjustment to retained earnings of $10.5 million, with a corresponding $5.4 million reduction to an income tax asset and a $5.1 million increase to deferred tax liabilities.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends Accounting Standards Codification ("ASC") 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net periodic benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified $2.4 million of non-service cost components of net periodic benefit income for the thirteen weeks ended April 29, 2017 to other income, net in the

7


condensed consolidated statements of earnings. For the thirteen weeks ended May 5, 2018, $3.1 million of non-service cost components of net periodic benefit income is presented as other income. Refer to Note 11 to the condensed consolidated financial statements for additional information.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The ASU also narrows the definition of a business by requiring a set of assets to include an input and at least one substantive process that together significantly contribute to the ability to create outputs for it to be considered a business. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted the ASU on a prospective basis during the first quarter of 2018, which had no impact on the Company's condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. The ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply modification accounting if the value, vesting conditions or classification of the award changes. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the ASU on a prospective basis in the first quarter of 2018, which had no impact on the Company's condensed consolidated financial statements.

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

Impact of Prospective Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company's implementation team is developing and executing the plan to adopt the ASU. The Company's accounting systems have been upgraded to comply with the requirements of the new standard and the Company is in the process of evaluating the impact of the standard on its leases and processes. The Company anticipates electing the package of practical expedients permitted within the ASU; however, it does not expect to elect the hindsight practical expedient. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its condensed consolidated balance sheets upon adoption in the first quarter of 2019 will be material. The Company is still assessing the impact to the condensed consolidated statements of earnings. As the impact of the ASU is non-cash in nature, the impact to the Company's condensed consolidated statements of cash flows is not expected to be material. Adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations. The Company is monitoring the proposed ASU, Targeted Improvements, Leases (ASC 842) that, if finalized as proposed, would provide an optional transition method that would allow the Company to only apply ASC 842 in the year of adoption and apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods.

Note 3
Revenues

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

8


in the condensed consolidated balance sheets. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The impact of the adoption of Topic 606 on the condensed balance sheet as of May 5, 2018 was as follows:
 
 
May 5, 2018
($ thousands)
 
As reported
 
Balances without adoption of Topic 606
 
Effect of change
Higher/(Lower)
 
 
 
 
 
 
 
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
 
Receivables, net
 
$
125,559

 
$
120,995

 
$
4,564

Inventories, net
 
579,902

 
584,852

 
(4,950
)
Prepaid expenses and other current assets
 
62,385

 
55,756

 
6,629

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 

Other accrued expenses
 
168,746

 
157,627

 
11,119

 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Retained earnings
 
591,429

 
596,305

 
(4,876
)

Adoption of the standard also required various changes that impacted the statement of earnings. These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the statement of earnings for the thirteen weeks ended May 5, 2018 was as follows:
 
 
For the Thirteen Weeks Ended May 5, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
632,142

 
$
633,263

 
$
(1,121
)
Cost of goods sold
 
357,221

 
357,213

 
8

Gross profit
 
274,921


276,050

 
(1,129
)
Selling and administrative expenses
 
250,197

 
251,129

 
(932
)
Restructuring and other special charges, net
 
1,778

 
1,778

 
—

Operating earnings
 
$
22,946


$
23,143

 
$
(197
)

The adoption of Topic 606 had an immaterial impact on net earnings and earnings per share.

Accounting Policy
Revenue is recognized when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company's right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. The Company applies the guidance using the portfolio approach because this methodology would not differ materially

9


from applying the guidance to the individual contracts within the portfolio. The Company elected the practical expedient to exclude sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.

Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the thirteen weeks ended May 5, 2018:
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
Retail stores
 
$
338,256

 
$
42,784

 
$
381,040

Landed wholesale
 
—

 
167,810

 
167,810

First-cost wholesale
 
—

 
13,405

 
13,405

E-commerce
 
25,014

 
40,950

 
65,964

Licensing and royalty
 
—

 
3,712

 
3,712

Other (1)
 
141

 
70

 
211

Net sales
 
$
363,411


$
268,731


$
632,142

(1) Includes breakage revenue from unredeemed gift cards

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

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

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

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

E-commerce
The Company also generates revenue through online and drop-ship sales, cumulatively referred to as "e-commerce". The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.

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

10



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

Information about significant contract balances from contracts with customers is as follows:
($ thousands)
May 5, 2018

 
February 3, 2018

Customer allowances and discounts
$
19,416

 
$
20,259

Rewards program liability
14,920

 
8,130

Returns reserve
12,606

 
8,332

Gift card liability
4,661

 
5,509


During the three months ended May 5, 2018, the Rewards program liability increased $6.4 million due to the adoption of Topic 606 and $5.9 million due to purchases and decreased $5.5 million due to expirations and redemptions. The change in the returns reserve balance is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018.

Note 4
Earnings Per Share
 
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the thirteen weeks ended May 5, 2018 and April 29, 2017:
 
 
Thirteen Weeks Ended
($ thousands, except per share amounts)
May 5, 2018

April 29, 2017

NUMERATOR
 

 

Net earnings
$
17,180

$
14,884

Net loss attributable to noncontrolling interests
32

18

Net earnings allocated to participating securities
(479
)
(408
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
16,733

14,494

 
 
 
DENOMINATOR
 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,910

41,832

Dilutive effect of share-based awards
124

169

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,034

42,001

 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.40

$
0.35

 
Options to purchase 16,667 shares of common stock for the thirteen weeks ended April 29, 2017 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. There were no options to purchase shares excluded from the denominator for the thirteen weeks ended May 5, 2018.

During the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company repurchased 100,000 shares and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. As of May 5, 2018, the Company has repurchased a total of 1.4 million shares under this program.

11



Note 5
Restructuring and Other Initiatives
 
Acquisition of Allen Edmonds
On December 13, 2016, the Company entered into a Stock Purchase Agreement with Apollo Investors, LLC and Apollo Buyer Holding Company, Inc., pursuant to which the Company acquired all outstanding capital stock of Allen Edmonds ("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was $259.9 million, net of cash received of $0.7 million. The operating results of Allen Edmonds are included in the Company’s condensed consolidated financial statements within the Brand Portfolio segment.

Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. During the thirteen weeks ended April 29, 2017, the Company recognized $3.0 million in cost of goods sold ($1.9 million on an after-tax basis, or $0.04 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017.

Integration and Reorganization Costs
During the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company incurred integration and reorganization costs, primarily for severance and professional fees, related to the men's business totaling $1.8 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) and $1.1 million ($0.7 million on an after-tax basis, or $0.01 per diluted share), respectively. Of the $1.8 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended May 5, 2018, $1.6 million was reflected within the Brand Portfolio segment and $0.2 million was reflected within the Other category. Of the $1.1 million in costs for the thirteen weeks ended April 29, 2017, $0.8 million was reflected within the Brand Portfolio segment and $0.3 million was reflected within the Other category. As of May 5, 2018 and April 29, 2017, restructuring reserves of $1.1 million and $0.8 million, respectively, were included in other accrued expenses on the condensed consolidated balance sheets. The Company expects all integration and reorganization costs to be settled by the end of fiscal 2018.
 
Note 6
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the thirteen weeks ended May 5, 2018 and April 29, 2017:  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended May 5, 2018
External sales
$
363,411

$
268,731

$
—

$
632,142

Intersegment sales
—

14,766

—

14,766

Operating earnings (loss)
21,857

12,486

(11,397
)
22,946

Segment assets
555,448

745,460

201,158

1,502,066

 
 
 
 
 
Thirteen Weeks Ended April 29, 2017
External sales
$
366,494

$
265,015

$
—

$
631,509

Intersegment sales
—

14,700

—

14,700

Operating earnings (loss)
20,279

13,314

(10,304
)
23,289

Segment assets
540,417

743,256

125,884

1,409,557

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


12


Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Operating earnings
$
22,946

$
23,289

Interest expense, net
(3,683
)
(4,809
)
Other income, net
3,091

2,436

Earnings before income taxes
$
22,354

$
20,916


Note 7
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Raw materials
$
15,554

$
15,114

$
17,531

Work-in-process
708

863

689

Finished goods
563,640

549,074

551,159

Inventories, net
$
579,902

$
565,051

$
569,379


Note 8
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
285,988

285,988

285,988

Other
1,769

—

—

Total intangible assets
290,557

288,788

288,788

Accumulated amortization
(77,738
)
(73,661
)
(76,701
)
Total intangible assets, net
212,819

215,127

212,087

Goodwill
 

 

 

Brand Portfolio
127,081

127,081

127,081

Total goodwill
127,081

127,081

127,081

Goodwill and intangible assets, net
$
339,900

$
342,208

$
339,168


During the thirteen weeks ended May 5, 2018, the Company acquired software licenses with an original cost of $1.8 million, which are included in intangible assets, net of accumulated amortization, on the condensed consolidated balance sheets.

The Company's intangible assets as of May 5, 2018, April 29, 2017 and February 3, 2018 were as follows:
($ thousands)
 
 
 
May 5, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
77,219

 
$
88,069

Trademarks
 
Indefinite
 
118,100

 
—

 
118,100

Customer relationships
 
15 years
 
5,400

 
495

 
4,905

Software licenses
 
5 years
 
1,769

 
24

 
1,745

 
 
 
 
$
290,557

 
$
77,738

 
$
212,819


13


 
 
 
 
April 29, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
73,526

 
$
91,762

Trademarks
 
Indefinite
 
118,100

 
—

 
118,100

Customer relationships
 
15 years
 
5,400

 
135

 
5,265

 
 
 
 
$
288,788

 
$
73,661

 
$
215,127

 
 
 
 
February 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
76,296

 
$
88,992

Trademarks
 
Indefinite
 
118,100

 
—

 
118,100

Customer relationships
 
15 years
 
5,400

 
405

 
4,995

 
 
 
 
$
288,788

 
$
76,701

 
$
212,087


Amortization expense related to intangible assets was $1.0 million for the thirteen weeks ended May 5, 2018 and April 29, 2017.
 
Note 9
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended May 5, 2018 and April 29, 2017:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at February 3, 2018
$
717,489

$
1,473

$
718,962

Net earnings (loss)
17,212

(32
)
17,180

Other comprehensive loss
(895
)
(8
)
(903
)
Dividends paid
(3,023
)
—

(3,023
)
Acquisition of treasury stock
(3,288
)
—

(3,288
)
Issuance of common stock under share-based plans, net
(3,122
)
—

(3,122
)
Cumulative-effect adjustment from adoption of ASU 2016-16
(10,468
)
—

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

(4,775
)
Share-based compensation expense
3,575

—

3,575

Equity at May 5, 2018
$
712,705

$
1,433

$
714,138

 

14


($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings (loss)
14,902

(18
)
14,884

Other comprehensive income (loss)
656

(5
)
651

Dividends paid
(3,025
)
—

(3,025
)
Acquisition of treasury stock
(5,993
)
—

(5,993
)
Issuance of common stock under share-based plans, net
(2,422
)
—

(2,422
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441

—

441

Share-based compensation expense
2,711

—

2,711

Equity at April 29, 2017
$
620,387

$
1,346

$
621,733


Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the thirteen weeks ended May 5, 2018 and April 29, 2017:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance at February 3, 2018
$
1,235

$
(17,172
)
$
767

$
(15,170
)
Other comprehensive (loss) income before reclassifications
(808
)
—

(408
)
(1,216
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

585

(145
)
440

Tax (benefit) provision
—

(151
)
32

(119
)
Net reclassifications
—

434

(113
)
321

Other comprehensive (loss) income
(808
)
434

(521
)
(895
)
Balance at May 5, 2018
$
427

$
(16,738
)
$
246

$
(16,065
)
 
 
 
 
 
Balance at January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive (loss) income before reclassifications
(540
)
—

753

213

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss
—

679

47

726

Tax benefit
—

(261
)
(22
)
(283
)
Net reclassifications
—

418

25

443

Other comprehensive (loss) income
(540
)
418

778

656

Balance at April 29, 2017
$
(348
)
$
(29,666
)
$
236

$
(29,778
)
(1)
Amounts reclassified are included in other income, net. See Note 11 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense, net. See Notes 12 and 13 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

Note 10
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.6 million and $2.7 million during the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. During the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company issued 256,005 and 254,358 shares of common stock, respectively, for restricted stock grants, stock performance awards issued

15


to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement.

Restricted Stock 
The following table summarizes restricted stock activity for the thirteen weeks ended May 5, 2018 and April 29, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 5, 2018
 
 
April 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
February 3, 2018
1,174,801

 
$
27.92

 
January 28, 2017
1,128,049

 
$
25.85

Granted
294,691

 
31.77

 
Granted
351,820

 
26.90

Forfeited
(16,550
)
 
27.47

 
Forfeited
(12,500
)
 
26.63

Vested
(208,610
)
 
28.15

 
Vested
(250,035
)
 
17.00

May 5, 2018
1,244,332

 
$
28.80

 
April 29, 2017
1,217,334

 
$
27.96


Of the 294,691 restricted shares granted during the thirteen weeks ended May 5, 2018, 285,191 shares have a graded-vesting term of three years and 9,500 shares have a cliff-vesting term of four years. Of the 351,820 restricted shares granted during the thirteen weeks ended April 29, 2017, 12,000 shares have a graded-vesting term of four years and 339,820 shares have a cliff-vesting term of four years. Share-based compensation expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period and expense for graded-vesting grants is recognized ratably over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company granted performance share awards for a targeted 155,000 and 169,500 shares, respectively, with a weighted-average grant date fair value of $31.84 and $26.90, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the three-year service period. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.

Stock Options
The following table summarizes stock option activity for the thirteen weeks ended May 5, 2018 and April 29, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
May 5, 2018
 
 
April 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
February 3, 2018
81,042

 
$
6.28

 
January 28, 2017
150,540

 
$
9.36

Granted
—

 
—

 
Granted
—

 
—

Exercised
(16,500
)
 
4.02

 
Exercised
(6,000
)
 
5.57

Forfeited
—

 
—

 
Forfeited
—

 
—

Expired
(2,500
)
 
5.71

 
Expired
(47,248
)
 
15.94

May 5, 2018
62,042

 
$
6.90

 
April 29, 2017
97,292

 
$
6.39



16


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 781 and 882 RSUs to non-employee directors for dividend equivalents during the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively, with weighted-average grant date fair values of $33.10 and $26.29, respectively.

Note 11
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit (income) cost for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

May 5, 2018

April 29, 2017

Service cost
$
2,382

$
2,467

$
—

$
—

Interest cost
3,541

3,747

15

18

Expected return on assets
(7,232
)
(6,880
)
—

—

Amortization of:
 

 

 

 

Actuarial loss (gain)
1,013

1,152

(30
)
(38
)
Prior service income
(398
)
(435
)
—

—

Total net periodic benefit (income) cost
$
(694
)
$
51

$
(15
)
$
(20
)

As further discussed in Note 2 to the condensed consolidated financial statements, as a result of the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on a retrospective basis during the thirteen weeks ended May 5, 2018, the non-service cost components of net periodic benefit (income) cost are included in other income, net in the condensed consolidated statements of earnings. Service cost is included in selling and administrative expenses.

Note 12
Risk Management and Derivatives
 
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions. 
 
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major international financial institutions and have varying maturities through May 2019. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 
 
The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company's condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss and reclassified to earnings in the period that the hedged transaction is recognized in earnings.
 
As of May 5, 2018, April 29, 2017 and February 3, 2018, the Company had forward contracts maturing at various dates through May 2019, May 2018 and February 2019, respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 

17


(U.S. $ equivalent in thousands)
May 5, 2018

April 29, 2017

February 3, 2018

Financial Instruments
 
 
 
Euro
$
17,180

$
16,446

$
21,223

U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
14,828

20,813

16,874

Chinese yuan
12,520

4,476

12,058

New Taiwanese dollars
514

545

596

United Arab Emirates dirham
—

528

—

Japanese yen
—

416

—

Other currencies
422

66

415

Total financial instruments
$
45,464

$
43,290

$
51,166

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of May 5, 2018, April 29, 2017 and February 3, 2018 are as follows:

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

 
Balance Sheet Location
Fair Value

Foreign Exchange Forward Contracts
 

 
 
 

May 5, 2018
Prepaid expenses and other current assets
$
591

 
Other accrued expenses
$
392

April 29, 2017
Prepaid expenses and other current assets
610

 
Other accrued expenses
187

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

 
Other accrued expenses
542

 
For the thirteen weeks ended May 5, 2018 and April 29, 2017, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
May 5, 2018
April 29, 2017
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
 Loss Recognized in OCL on Derivatives

 (Loss) Gain Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(25
)
$
—

$
(32
)
$
18

Cost of goods sold
(402
)
(92
)
793

3

Selling and administrative expenses
(72
)
237

310

(67
)
Interest expense, net
—

—

4

(1
)
 
 
 
 
 
All gains and losses currently included within accumulated other comprehensive loss associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 13 to the condensed consolidated financial statements. 
 

18


Note 13
Fair Value Measurements
 
Fair Value Hierarchy 
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows: 

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

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

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

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

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

19


condensed consolidated statements of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 
 
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  During the fourth quarter of 2017, the Company converted 210,302 of RSUs payable in cash with a value of $6.3 million to RSUs payable in common stock. Additional information related to RSUs for non-employee directors is disclosed in Note 10 to the condensed consolidated financial statements.
 
Derivative Financial Instruments 
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 12 to the condensed consolidated financial statements. 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 5, 2018, April 29, 2017 and February 3, 2018. The Company did not have any transfers between Level 1, Level 2 or Level 3 during the thirteen weeks ended May 5, 2018 or April 29, 2017.   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

May 5, 2018:
 
 
 
 
 
Cash equivalents – money market funds
$
76,335

 
$
76,335

$
—

$
—

Non-qualified deferred compensation plan assets
6,898

 
6,898

—

—

Non-qualified deferred compensation plan liabilities
(6,898
)
 
(6,898
)
—

—

Deferred compensation plan liabilities for non-employee directors
(2,563
)
 
(2,563
)
—

—

Restricted stock units for non-employee directors
(5,011
)
 
(5,011
)
—

—

Derivative financial instruments, net
199

 
—

199

—

April 29, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
43,531

 
$
43,531

$
—

$
—

Non-qualified deferred compensation plan assets
5,402

 
5,402

—

—

Non-qualified deferred compensation plan liabilities
(5,402
)
 
(5,402
)
—

—

Deferred compensation plan liabilities for non-employee directors
(2,189
)
 
(2,189
)
—

—

Restricted stock units for non-employee directors
(9,276
)
 
(9,276
)
—

—

Derivative financial instruments, net
423

 
—

423

—

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

 
$
53,106

$
—

$
—

Non-qualified deferred compensation plan assets
6,445

 
6,445

—

—

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

—

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

—

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

—

Derivative financial instruments, net
998

 
—

998

—

 
Impairment Charges 
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to historical or projected future operating results, a significant change in the manner of the use of the

20


asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC Topic 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $105.4 million and $95.4 million at May 5, 2018 and April 29, 2017, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
($ thousands)
May 5, 2018

April 29, 2017

Impairment Charges
 
 
Famous Footwear
$
150

$
150

Brand Portfolio
318

799

Total impairment charges
$
468

$
949


Fair Value of the Company’s Other Financial Instruments 
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.

The carrying amounts and fair values of the Company's other financial instruments subject to fair value disclosures are as follows:
 
May 5, 2018
 
April 29, 2017
 
February 3, 2018
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
—

 
$
—

 
$
85,000

 
$
85,000

 
$
—

 
$
—

Long-term debt
197,587

 
209,500

 
197,118

 
209,500

 
197,472

 
210,000

Total debt
$
197,587


$
209,500


$
282,118


$
294,500


$
197,472


$
210,000

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

Note 14
Income Taxes
 
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The provisional income tax benefit recorded in fiscal 2017 of $0.3 million was comprised of a $24.6 million deferred tax benefit for the remeasurement of deferred tax assets and liabilities to the 21% rate at which they are expected to reverse, partially offset by a one-time tax expense on deemed repatriation of $22.9 million and $1.4 million deferred tax expense in connection with Internal Revenue Code section 162(m) and other provisions in the Act. These provisional amounts continue to represent the Company's best estimate based on current information and guidance as of May 5, 2018. As permitted by SEC Staff Accounting Bulletin 118 (“SAB 118”), the Company will continue to analyze all provisional amounts associated with the Act as a result of pending issuance of Notices and Regulations related to the Act. Any subsequent adjustment to these amounts will be recorded to the Company's income tax provision in 2018 when the analysis is complete, for a period not to exceed one year beyond the enactment date.

The Act also includes the Global Intangibles Low-taxed Income ("GILTI") provision, a new minimum tax on global intangible low-taxed income, the Base Erosion Anti-Avoidance ("BEAT") provision, a new tax for certain payments to foreign related parties, and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income from the sale, lease or license of goods and services abroad. The Company is permitted to make an accounting policy election to account for GILTI as either a period charge in the future period the tax arises or as part of deferred taxes related to the investment or subsidiary. As a result of the complexity of the GILTI provisions, the Company is still evaluating the provisions on future periods and has not yet elected

21


an accounting policy related to its treatment of these future tax liabilities. For the thirteen weeks ended May 5, 2018, the Company has recorded a provisional amount for GILTI as a period charge in the income tax provision. The Company is also still evaluating the other provisions of the Act.

The Company’s consolidated effective tax rates were 23.1% and 28.8% for the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. During the thirteen weeks ended May 5, 2018, the Company recognized discrete tax benefits of $0.5 million, primarily related to share-based compensation. During the thirteen weeks ended April 29, 2017, the Company recognized discrete tax benefits of $1.1 million related to share-based compensation. If these discrete tax benefits had not been recognized during the thirteen weeks ended May 5, 2018 and April 29, 2017, the Company's effective tax rates would have been 25.4% and 34.0%, respectively. Excluding the discrete tax items, the Company's tax rate is lower for the thirteen weeks ended May 5, 2018, reflecting a reduction in the U.S. corporate tax rate following enactment of the Act.

Note 15
Commitments and Contingencies
 
Environmental Remediation 
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
 
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.

As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified work plan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the work plan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy work plan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company has submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one.

The cumulative expenditures for both on-site and off-site remediation through May 5, 2018 were $30.2 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at May 5, 2018 is $9.5 million, of which $8.8 million is recorded within other liabilities and $0.7 million is recorded within other accrued expenses. Of the total $9.5 million reserve, $4.9 million is for off-site remediation and $4.6 million is for on-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $14.1 million as of May 5, 2018. The Company expects to spend approximately $0.2 million in the next fiscal year, $0.1 million in each of the following four years and $13.5 million in the aggregate thereafter related to the on-site remediation.
 
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 

22


The Company continues to evaluate its remediation plans in conjunction with its environmental consultants and records its best estimate of remediation liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
 
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.

Note 16
Financial Information for the Company and its Subsidiaries

The Company issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under our revolving credit facility ("Credit Agreement"). The following tables present the condensed consolidating financial information for each of Caleres, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. Guarantors are 100% owned by the Parent. On 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 condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups.

23


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
MAY 5, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
41,795

$
10,011

$
44,675

$
—

$
96,481

Receivables, net
113,763

2,721

9,075

—

125,559

Inventories, net
110,242

441,144

28,516

—

579,902

Prepaid expenses and other current assets
28,677

31,669

6,632

(4,593
)
62,385

Intercompany receivable – current
919

339

14,444

(15,702
)
—

Total current assets
295,396

485,884

103,342

(20,295
)
864,327

Other assets
75,242

12,937

762

—

88,941

Goodwill and intangible assets, net
112,298

40,937

186,665

—

339,900

Property and equipment, net
36,178

160,903

11,817

—

208,898

Investment in subsidiaries
1,341,505

—

(24,043
)
(1,317,462
)
—

Intercompany receivable – noncurrent
783,315

536,213

708,992

(2,028,520
)
—

Total assets
$
2,643,934

$
1,236,874

$
987,535

$
(3,366,277
)
$
1,502,066

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
99,013

$
150,288

$
19,616

$
—

$
268,917

Other accrued expenses
67,588

85,180

20,571

(4,593
)
168,746

Intercompany payable – current
5,467

—

10,235

(15,702
)
—

Total current liabilities
172,068

235,468

50,422

(20,295
)
437,663

Other liabilities
 

 

 

 

 

Long-term debt
197,587

—

—

—

197,587

Other liabilities
102,303

40,200

10,175

—

152,678

Intercompany payable – noncurrent
1,459,271

91,100

478,149

(2,028,520
)
—

Total other liabilities
1,759,161

131,300

488,324

(2,028,520
)
350,265

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
712,705

870,106

447,356

(1,317,462
)
712,705

Noncontrolling interests
—

—

1,433

—

1,433

Total equity
712,705

870,106

448,789

(1,317,462
)
714,138

Total liabilities and equity
$
2,643,934

$
1,236,874

$
987,535

$
(3,366,277
)
$
1,502,066



24


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED MAY 5, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
199,260

$
445,695

$
37,392

$
(50,205
)
$
632,142

Cost of goods sold
134,594

247,799

17,867

(43,039
)
357,221

Gross profit
64,666

197,896

19,525

(7,166
)
274,921

Selling and administrative expenses
66,342

177,886

13,135

(7,166
)
250,197

Restructuring and other special charges, net
525

1,253

—

—

1,778

Operating (loss) earnings
(2,201
)
18,757

6,390

—

22,946

Interest (expense) income
(3,819
)
(12
)
148

—

(3,683
)
Other income (expense)
3,120

—

(29
)
—

3,091

Intercompany interest income (expense)
2,768

(2,799
)
31

—

—

(Loss) earnings before income taxes
(132
)
15,946

6,540

—

22,354

Income tax provision
(952
)
(3,302
)
(920
)
—

(5,174
)
Equity in earnings (loss) of subsidiaries, net of tax
18,296

—

(478
)
(17,818
)
—

Net earnings
17,212

12,644

5,142

(17,818
)
17,180

Less: Net loss attributable to noncontrolling interests
—

—

(32
)
—

(32
)
Net earnings attributable to Caleres, Inc.
$
17,212

$
12,644

$
5,174

$
(17,818
)
$
17,212

 
 
 
 
 
 
Comprehensive income
$
16,325

$
12,626

$
4,995

$
(17,661
)
$
16,285

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(40
)
—

(40
)
Comprehensive income attributable to Caleres, Inc.
$
16,325

$
12,626

$
5,035

$
(17,661
)
$
16,325

 
 
 
 
 
 

25


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MAY 5, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
5,799

$
38,599

$
6,949

$
—

$
51,347

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(3,095
)
(4,334
)
(500
)
—

(7,929
)
Capitalized software
(1,248
)
(186
)
—

—

(1,434
)
Intercompany investing
286

(286
)
—

—

—

Net cash used for investing activities
(4,057
)
(4,806
)
(500
)
—

(9,363
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Dividends paid
(3,023
)
—

—

—

(3,023
)
Acquisition of treasury stock
(3,288
)
—

—

—

(3,288
)
Issuance of common stock under share-based plans, net
(3,122
)
—

—

—

(3,122
)
Intercompany financing
23,397

(23,782
)
385

—

—

Net cash provided by (used for) financing activities
13,964

(23,782
)
385

—

(9,433
)
Effect of exchange rate changes on cash and cash equivalents
—

—

(117
)
—

(117
)
Increase in cash and cash equivalents
15,706

10,011

6,717

—

32,434

Cash and cash equivalents at beginning of period
26,089

—

37,958

—

64,047

Cash and cash equivalents at end of period
$
41,795

$
10,011

$
44,675

$
—

$
96,481



26


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
43,201

$
15,601

$
13,014

$
—

$
71,816

Receivables, net
90,121

3,705

13,195

—

107,021

Inventories, net
117,815

422,911

24,325

—

565,051

Prepaid expenses and other current assets
20,499

15,134

7,313

(4,628
)
38,318

Intercompany receivable – current
1,487

159

18,297

(19,943
)
—

Total current assets
273,123

457,510

76,144

(24,571
)
782,206

Other assets
51,823

14,631

835

—

67,289

Goodwill and intangible assets, net
112,777

218,707

10,724

—

342,208

Property and equipment, net
32,093

173,567

12,194

—

217,854

Investment in subsidiaries
1,370,854

—

(22,994
)
(1,347,860
)
—

Intercompany receivable  –  noncurrent
581,957

409,466

591,105

(1,582,528
)
—

Total assets
$
2,422,627

$
1,273,881

$
668,008

$
(2,954,959
)
$
1,409,557

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
85,000

$
—

$
—

$
—

$
85,000

Trade accounts payable
65,364

140,924

18,744

—

225,032

Other accrued expenses
57,359

78,302

15,282

(4,628
)
146,315

Intercompany payable – current
10,398

—

9,545

(19,943
)
—

Total current liabilities
218,121

219,226

43,571

(24,571
)
456,347

Other liabilities
 

 

 

 

 

Long-term debt
197,118

—

—

—

197,118

Other liabilities
90,110

40,223

4,026

—

134,359

Intercompany payable – noncurrent
1,296,891

80,188

205,449

(1,582,528
)
—

Total other liabilities
1,584,119

120,411

209,475

(1,582,528
)
331,477

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
620,387

934,244

413,616

(1,347,860
)
620,387

Noncontrolling interests
—

—

1,346

—

1,346

Total equity
620,387

934,244

414,962

(1,347,860
)
621,733

Total liabilities and equity
$
2,422,627

$
1,273,881

$
668,008

$
(2,954,959
)
$
1,409,557



27


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
194,440

$
427,539

$
38,045

$
(28,515
)
$
631,509

Cost of goods sold
132,851

231,786

18,530

(22,566
)
360,601

Gross profit
61,589

195,753

19,515

(5,949
)
270,908

Selling and administrative expenses
54,869

182,347

15,244

(5,949
)
246,511

Restructuring and other special charges, net
1,108

—

—

—

1,108

Operating earnings
5,612

13,406

4,271

—

23,289

Interest (expense) income
(4,947
)
(9
)
147

—

(4,809
)
Other income (expense)
2,445

—

(9
)
—

2,436

Intercompany interest income (expense)
2,083

(2,324
)
241

—

—

Earnings before income taxes
5,193

11,073

4,650

—

20,916

Income tax provision
(1,087
)
(3,875
)
(1,070
)
—

(6,032
)
Equity in earnings (loss) of subsidiaries, net of tax
10,796

—

(1,048
)
(9,748
)
—

Net earnings
14,902

7,198

2,532

(9,748
)
14,884

Less: Net loss attributable to noncontrolling interests
—

—

(18
)
—

(18
)
Net earnings attributable to Caleres, Inc.
$
14,902

$
7,198

$
2,550

$
(9,748
)
$
14,902

 
 
 
 
 
 
Comprehensive income
$
15,563

$
7,198

$
2,453

$
(9,674
)
$
15,540

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(23
)
—

(23
)
Comprehensive income attributable to Caleres, Inc.
$
15,563

$
7,198

$
2,476

$
(9,674
)
$
15,563

 
 
 
 
 
 


28



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
8,601

$
55,017

$
1,766

$
—

$
65,384

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(1,915
)
(7,570
)
(1,493
)
—

(10,978
)
Proceeds from disposals of property and equipment
(17,238
)
17,238

—

—

—

Capitalized software
(1,167
)
(223
)
—

—

(1,390
)
Intercompany investing
(2,494
)
2,494

—

—

—

Net cash (used for) provided by investing activities
(22,814
)
11,939

(1,493
)
—

(12,368
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
195,000

—

—

—

195,000

Repayments under revolving credit agreement
(220,000
)
—

—

—

(220,000
)
Dividends paid
(3,025
)
—

—

—

(3,025
)
Acquisition of treasury stock
(5,993
)
—

—

—

(5,993
)
Issuance of common stock under share-based plans, net
(2,422
)
—

—

—

(2,422
)
Intercompany financing
69,855

(60,384
)
(9,471
)
—

—

Net cash provided by (used for) financing activities
33,415

(60,384
)
(9,471
)
—

(36,440
)
Effect of exchange rate changes on cash and cash equivalents
—

—

(92
)
—

(92
)
Increase (decrease) in cash and cash equivalents
19,202

6,572

(9,290
)
—

16,484

Cash and cash equivalents at beginning of period
23,999

9,029

22,304

—

55,332

Cash and cash equivalents at end of period
$
43,201

$
15,601

$
13,014

$
—

$
71,816



29


CONDENSED CONSOLIDATING BALANCE SHEET
FEBRUARY 3, 2018
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
26,089

$
—

$
37,958

$
—

$
64,047

Receivables, net
124,957

3,663

23,993

—

152,613

Inventories, net
146,068

394,438

28,873

—

569,379

Prepaid expenses and other current assets
26,284

30,456

8,394

(4,384
)
60,750

Intercompany receivable  – current
521

74

9,250

(9,845
)
—

Total current assets
323,919

428,631

108,468

(14,229
)
846,789

Other assets
76,317

13,610

732

—

90,659

Goodwill and intangible assets, net
111,108

40,937

187,123

—

339,168

Property and equipment, net
35,474

165,227

12,098

—

212,799

Investment in subsidiaries
1,329,428

—

(23,565
)
(1,305,863
)
—

Intercompany receivable  – noncurrent
774,588

520,362

704,810

(1,999,760
)
—

Total assets
$
2,650,834

$
1,168,767

$
989,666

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

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
136,797

$
102,420

$
33,745

$
—

$
272,962

Other accrued expenses
65,817

74,006

21,758

(4,384
)
157,197

Intercompany payable – current
5,524

—

4,321

(9,845
)
—

Total current liabilities
208,138

176,426

59,824

(14,229
)
430,159

Other liabilities
 

 

 

 

 

Long-term debt
197,472

—

—

—

197,472

Other liabilities
101,784

35,574

5,464

—

142,822

Intercompany payable – noncurrent
1,425,951

98,610

475,199

(1,999,760
)
—

Total other liabilities
1,725,207

134,184

480,663

(1,999,760
)
340,294

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
717,489

858,157

447,706

(1,305,863
)
717,489

Noncontrolling interests
—

—

1,473

—

1,473

Total equity
717,489

858,157

449,179

(1,305,863
)
718,962

Total liabilities and equity
$
2,650,834

$
1,168,767

$
989,666

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



30


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
Financial Highlights
The following is a summary of the financial highlights for the first quarter of 2018:
 
•
Consolidated net sales increased $0.6 million in the first quarter of 2018, driven by the Brand Portfolio segment, which reported a $3.7 million, or 1.4%, increase in net sales. Our Famous Footwear segment reported a $3.1 million, or 0.8%, decrease in net sales, reflecting a late start to the spring selling season due to the unseasonably cold weather in February and March. Same-store sales declined 0.8% for the quarter.

•
Consolidated operating earnings decreased $0.4 million, or 1.5%, to $22.9 million in the first quarter of 2018, compared to $23.3 million in the first quarter of 2017.

•
Consolidated net earnings attributable to Caleres, Inc. were $17.2 million, or $0.40 per diluted share, in the first quarter of 2018, compared to $14.9 million, or $0.35 per diluted share, in the first quarter of 2017.

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

•
We adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, during the first quarter of 2018 on a retrospective basis and reclassified $2.4 million of non-service cost components of net periodic benefit income for the first quarter of 2017 to other income, net in the condensed consolidated statements of earnings. For the first quarter of 2018, $3.1 million of non-service cost components is reflected in other income, net. Refer to Note 2 and Note 11 to the condensed consolidated financial statements for additional information related to the adoption of this ASU.

•
In December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The components of the Act resulted in significant adjustments to both our income tax provision and the income tax balances. Refer to Note 14 to the condensed consolidated financial statements for further discussion.

•
Acquisition, integration and reorganization of men's brands – We incurred costs of $1.8 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) during the first quarter of 2018 and $1.1 million ($0.7 million on an after-tax basis, or $0.01 per diluted share) during the first quarter of 2017 related to the integration and reorganization of our men's brands, which are presented as restructuring and other special charges, net. During the first quarter of 2017, we also incurred costs of $3.0 million ($1.9 million on an after-tax basis, or $0.04 per diluted share) associated with the amortization of the inventory fair value adjustment in connection with the acquisition of Allen Edmonds during the fourth quarter of 2016. These costs are reflected within cost of goods sold. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these costs.

Outlook for the Remainder of 2018
During the first quarter, we delivered improvement in gross margin, net earnings and earnings per share, despite the unseasonably cold weather early in the quarter. We also experienced growth in e-commerce sales, as the continued shift to digital is driving demand. While the winter weather impacted our first quarter results, we have experienced positive trends early in the second quarter upon the arrival of warmer temperatures. Throughout 2018, we will continue to focus on our speed-to-consumer initiative and prioritize opportunities to advance e-commerce sales. We will also remain focused on our initiatives around speed-to-market and the diversification of our portfolio of brands.


31


Following are the consolidated results and the results by segment: 
CONSOLIDATED RESULTS
 
Thirteen Weeks Ended
 
May 5, 2018
 
April 29, 2017
 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

($ millions)
 
 
 
 
 
Net sales
$
632.1

 
100.0
 %
 
$
631.5

 
100.0
 %
Cost of goods sold
357.2

 
56.5
 %
 
360.6

 
57.1
 %
Gross profit
274.9

 
43.5
 %
 
270.9

 
42.9
 %
Selling and administrative expenses
250.2

 
39.6
 %
 
246.5

 
39.0
 %
Restructuring and other special charges, net
1.8

 
0.3
 %
 
1.1

 
0.2
 %
Operating earnings
22.9

 
3.6
 %
 
23.3

 
3.7
 %
Interest expense, net
(3.6
)
 
(0.6
)%
 
(4.8
)
 
(0.8
)%
Other income, net
3.1

 
0.5
 %
 
2.4

 
0.4
 %
Earnings before income taxes
22.4

 
3.5
 %
 
20.9

 
3.3
 %
Income tax provision
(5.2
)
 
(0.8
)%
 
(6.0
)
 
(0.9
)%
Net earnings
17.2

 
2.7
 %
 
14.9

 
2.4
 %
Net loss attributable to noncontrolling interests
(0.0)
 
(0.0
 %)
 
(0.0)
 
(0.0
 %)
Net earnings attributable to Caleres, Inc.
$
17.2

 
2.7
 %
 
$
14.9

 
2.4
 %
 
Net Sales 
Net sales increased $0.6 million, or 0.1%, to $632.1 million for the first quarter of 2018, compared to $631.5 million for the first quarter of 2017. Our Brand Portfolio segment reported a $3.7 million, or 1.4%, increase in net sales, reflecting higher net sales of our Allen Edmonds, Franco Sarto and LifeStride brands, partially offset by lower sales from our Vince, Rykä and Via Spiga brands. Our Famous Footwear segment reported a $3.1 million, or 0.8%, decrease in net sales, due in part to the late start to the spring selling season as a result of the unseasonably cold weather in February and March.

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 therefore excluded from the same-store sales calculation. E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation.
 
Gross Profit 
Gross profit increased $4.0 million, or 1.5%, to $274.9 million for the first quarter of 2018, compared to $270.9 million for the first quarter of 2017, reflecting an improved gross profit rate and higher sales volume.  As a percentage of net sales, gross profit increased to 43.5% for the first quarter of 2018, compared to 42.9% for the first quarter of 2017, primarily reflecting the recognition of $3.0 million ($1.9 million on an after-tax basis, or $0.04 per diluted share) in incremental cost of goods sold in the first quarter of 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting, with no corresponding costs during the first quarter of 2018. We also experienced higher margins within our Brand Portfolio segment, partially offset by a higher sales mix of discounted merchandise within our Famous Footwear segment. Retail and wholesale net sales were 69% and 31% in both the first quarter of 2018 and 2017.  

We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies. 
 
Selling and Administrative Expenses 
Selling and administrative expenses increased $3.7 million, or 1.5%, to $250.2 million for the first quarter of 2018, compared to $246.5 million for the first quarter of 2017, due in part to $2.2 million of duplicate expenses associated with our transition to a new leased Brand Portfolio distribution center in Chino, California. We expect to incur a similar amount of additional costs in the second quarter of 2018. As a percentage of net sales, selling and administrative expenses increased to 39.6% for the first quarter of 2018, from 39.0% for the first quarter of 2017.

32



Restructuring and Other Special Charges, Net
Restructuring and other special charges of $1.8 million ($1.3 million on an after-tax basis, or $0.03 per diluted share), primarily for severance expense, were incurred in the first quarter of 2018 related to the ongoing integration efforts of the men's business within our Brand Portfolio segment. For the first quarter of 2017, we incurred $1.1 million ($0.7 million on an after-tax basis, or $0.01 per diluted share), reflecting integration and reorganization charges related to our men's business. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $0.4 million, or 1.5%, to $22.9 million for the first quarter of 2018, compared to $23.3 million for the first quarter of 2017. Although sales and gross profit were higher in the first quarter of 2018, higher selling and administrative expenses and restructuring and other charges resulted in lower operating earnings. As a percentage of net sales, operating earnings decreased to 3.6% for the first quarter of 2018, compared to 3.7% for the first quarter of 2017.

Interest Expense, Net
Interest expense, net decreased $1.2 million, or 23.4%, to $3.6 million for the first quarter of 2018, compared to $4.8 million for the first quarter of 2017, primarily reflecting lower 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.

Other Income, Net
During the first quarter of 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the non-service cost components of pension and other postretirement benefit income to be included in non-operating income, as further discussed in Note 2 to the condensed consolidated financial statements. As a result of the retrospective adoption of the ASU, we reclassified $2.4 million of non-service cost components of net periodic benefit income for the first quarter of 2017 to other income, net in the condensed consolidated statements of earnings. Other income, net increased $0.7 million, or 26.9%, to $3.1 million for the first quarter of 2018, compared to $2.4 million for the first quarter of 2017, primarily reflecting a higher expected return on assets for our domestic pension plan. Refer to Note 11 to the condensed consolidated financial statements for additional information related to our retirement plans.

Income Tax Provision 
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 23.1% for the first quarter of 2018, compared to 28.8% for the first quarter of 2017. During the first quarter of 2018, we recognized discrete tax benefits of $0.5 million primarily related to share-based compensation. During the first quarter of 2017, our effective tax rate was impacted by discrete tax benefits of $1.1 million related to share-based compensation. If these discrete tax benefits had not been recognized during the first quarter of 2018 and 2017, our effective tax rates would have been 25.4% and 34.0%, respectively, reflecting a reduction in the U.S. corporate tax rate following enactment of the Tax Cuts and Jobs Act (the "Act"). Refer to Note 14 to the condensed consolidated financial statements for further discussion of income taxes and the impact of the Act.

Net Earnings Attributable to Caleres, Inc. 
Net earnings attributable to Caleres, Inc. were $17.2 million for the first quarter of 2018, compared to net earnings of $14.9 million for the first quarter of 2017, as a result of the factors described above.


33


FAMOUS FOOTWEAR
 
 
 
 
 
 
Thirteen Weeks Ended
 
May 5, 2018
 
April 29, 2017
 
 
% of 
Net Sales

 
 
% of 
Net Sales

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

 

 
 

 

Net sales
$
363.4

100.0
%
 
$
366.5

100.0
%
Cost of goods sold
198.2

54.5
%
 
198.8

54.2
%
Gross profit
165.2

45.5
%
 
167.7

45.8
%
Selling and administrative expenses
143.3

39.5
%
 
147.4

40.3
%
Operating earnings
$
21.9

6.0
%
 
$
20.3

5.5
%
 
 
 
 
 
 
Key Metrics
 

 
 
 

 
Same-store sales % change
(0.8
)%
 

 
(0.6
)%
 

Same-store sales $ change
$
(2.7
)
 

 
$
(2.1
)
 

Sales change from new and closed stores, net
$
(0.6
)
 
 
$
4.0

 
Impact of changes in Canadian exchange rate on sales
$
0.2

 
 
$
(0.0
)
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen weeks ended)
$
50

 
 
$
50

 
Sales per square foot, excluding e-commerce (trailing twelve months)
$
222

 

 
$
215

 

Square footage (thousand sq. ft.)
6,712

 

 
6,963

 

 
 
 
 
 
 
Stores opened
2

 

 
9

 

Stores closed
15

 

 
12

 

Ending stores
1,013

 

 
1,052

 

 
Net Sales 
Net sales decreased $3.1 million, or 0.8%, to $363.4 million for the first quarter of 2018, compared to $366.5 million for the first quarter of 2017. Same-store sales declined 0.8% for the first quarter of 2018. The sales decrease was due in part to the late start to the spring selling season as the winter weather in February and March impacted sales in many of our key markets. Approximately two-thirds of our sales are generated in cold or moderate climate zones. Despite the decline in customer traffic at our retail store locations, 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. During the first quarter of 2018, we opened two stores and closed 15 stores, resulting in 1,013 stores and total square footage of 6.7 million at the end of the first quarter of 2018, compared to 1,052 stores and total square footage of 7.0 million at the end of the first quarter of 2017. On a trailing twelve-month basis, sales per square foot, excluding e-commerce, increased 3.1% to $222 for the twelve months ended May 5, 2018, compared to $215 for the twelve months ended April 29, 2017. Members of Rewards, our customer loyalty program, continue to account for a majority of the segment’s sales, with approximately 76% of our net sales made to Rewards program members in both the first quarter of 2018 and 2017, respectively.

Gross Profit 
Gross profit decreased $2.5 million, or 1.5%, to $165.2 million for the first quarter of 2018, compared to $167.7 million for the first quarter of 2017, reflecting lower net sales and a lower gross profit rate. As a percentage of net sales, our gross profit decreased to 45.5% for the first quarter of 2018, compared to 45.8% for the first quarter of 2017, driven by a higher sales mix of discounted merchandise during the first quarter of 2018.
 

34


Selling and Administrative Expenses 
Selling and administrative expenses decreased $4.1 million, or 2.8%, to $143.3 million for the first quarter of 2018, compared to $147.4 million for the first quarter of 2017.  The decrease was driven by lower rent and facilities expense attributable to our smaller store base, as well as incremental benefits from the restructuring of our retail operations completed in the fourth quarter of 2017. As a percentage of net sales, selling and administrative expenses decreased to 39.5% for the first quarter of 2018, compared to 40.3% for the first quarter of 2017.

Operating Earnings  
Operating earnings increased $1.6 million, or 7.8%, to $21.9 million for the first quarter of 2018, compared to $20.3 million for the first quarter of 2017. The increase primarily reflects lower selling and administrative expenses, partially offset by lower net sales. As a percentage of net sales, operating earnings increased to 6.0% for the first quarter of 2018, compared to 5.5% for the first quarter of 2017.

BRAND PORTFOLIO
 
Thirteen Weeks Ended
 
May 5, 2018
 
April 29, 2017
 
 
% of 
Net Sales

 
 
% of 
Net Sales

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

 

 
 

 

Net sales
$
268.7

100.0
%
 
$
265.0

100.0
%
Cost of goods sold
159.0

59.2
%
 
161.8

61.1
%
Gross profit
109.7

40.8
%
 
103.2

38.9
%
Selling and administrative expenses
95.6

35.6
%
 
89.1

33.6
%
Restructuring and other special charges, net
1.6

0.6
%
 
0.8

0.3
%
Operating earnings
$
12.5

4.6
%
 
$
13.3

5.0
%
 
 
 
 
 
 
Key Metrics
 

 

 
 

 

Wholesale/retail sales mix (%)
73%/27%

 

 
74%/26%

 

Change in wholesale net sales ($)
$
(0.1
)
 
 
$
5.5

 
Unfilled order position at end of period
$
311.0

 
 
$
305.9

 
 
 
 
 
 
 
Same-store sales % change(1)
(1.0
)%
 
 
2.3
%
 
Same-store sales $ change(1)
$
(0.5
)
 
 
$
0.6

 
Sales change from new and closed stores, net
$
3.9

 
 
$
1.8

 
Sales change from acquired Allen Edmonds retail stores(2)
N/A
 
 
$
37.1

 
Impact of changes in Canadian exchange rate on retail sales
$
0.4

 
 
$
(0.1
)
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen weeks ended)
$
104

 
 
$
101

 
Sales per square foot, excluding e-commerce (trailing twelve months) (1)
$
440

 
 
$
314

 
Square footage (thousands sq. ft.)
405

 
 
403

 
 
 
 
 
 
 
Stores opened
4

 
 
3

 
Stores closed
5

 
 
4

 
Ending stores
235

 
 
233

 

(1)
These metrics for the thirteen-week period ended April 29, 2017 exclude our Allen Edmonds business, acquired in December 2016, as that business was not included in our operations for 13 months.
(2)
This metric represents first quarter 2017 net sales from our 69 acquired Allen Edmonds retail stores.



35


Net Sales 
Net sales increased $3.7 million, or 1.4%, to $268.7 million for the first quarter of 2018, compared to $265.0 million for the first quarter of 2017. Despite the difficult climate, we experienced positive trends and higher net sales of our Allen Edmonds, Franco Sarto and LifeStride brands, partially offset by lower sales from our Vince, Rykä and Via Spiga brands. Our Allen Edmonds business benefited from a very strong anniversary sale in the first quarter of 2018. We also experienced an increase in sales from new and closed stores, primarily driven by Allen Edmonds store openings, partially offset by a decrease in same-store sales of 1.0%. During the first quarter of 2018, we opened four stores and closed five stores, resulting in a total of 235 stores and total square footage of 0.4 million at the end of the first quarter of 2018, compared to 233 stores and total square footage of 0.4 million at the end of the first quarter of 2017. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, increased to $440 for the twelve months ended May 5, 2018, compared to $314 for the twelve months ended April 29, 2017, primarily driven by the addition of the Allen Edmonds retail stores into this metric.

Gross Profit 
Gross profit increased $6.5 million, or 6.3%, to $109.7 million for the first quarter of 2018, compared to $103.2 million for the first quarter of 2017, reflecting expansion in our gross profit rate and net sales growth. In addition, the first quarter of 2017 included the incremental impact of $3.0 million ($1.9 million on an after-tax basis, or $0.04 per diluted share) in cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting, with no corresponding costs in the first quarter of 2018. As a percentage of net sales, our gross profit increased to 40.8% for the first quarter of 2018, compared to 38.9% for the first quarter of 2017.  Our gross profit rate for the first quarter of 2018 also benefited from the higher mix of retail versus wholesale sales and sales growth in our higher margin brands.

Selling and Administrative Expenses 
Selling and administrative expenses increased $6.5 million, or 7.4%, to $95.6 million for the first quarter of 2018, compared to $89.1 million for the first quarter of 2017, primarily reflecting higher rent expense as we focus on opening stores in prominent locations. We also experienced higher warehouse costs, due in part to $2.2 million of duplicate expenses associated with our transition to a new leased distribution center in Chino, California. We expect to incur a similar amount of additional costs in the second quarter of 2018. As a percentage of net sales, selling and administrative expenses increased to 35.6% for the first quarter of 2018, compared to 33.6% for the first quarter of 2017, reflecting the above named factors.

Restructuring and Other Special Charges, Net
Restructuring and other special charges were $1.6 million and $0.8 million in the first quarter of 2018 and 2017, respectively, related to the integration and reorganization of our men's business. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $0.8 million, or 6.2%, to $12.5 million for the first quarter of 2018, compared to $13.3 million for the first quarter of 2017. As a percentage of net sales, operating earnings decreased to 4.6% for the first quarter of 2018, compared to 5.0% in the first quarter of 2017.
    
OTHER
 
The Other category includes unallocated corporate administrative expenses and other costs and recoveries. Costs of $11.4 million were incurred for the first quarter of 2018, compared to $10.3 million for the first quarter of 2017, driven by higher expenses related to our cash-based director compensation plans, reflecting growth in our stock price.

LIQUIDITY AND CAPITAL RESOURCES
Borrowings 
($ millions)
May 5, 2018

April 29, 2017

February 3, 2018

Borrowings under revolving credit agreement
$
—

$
85.0

$
—

Long-term debt
197.6

197.1

197.5

Total debt
$
197.6

$
282.1

$
197.5

 

36


Total debt obligations of $197.6 million at May 5, 2018 decreased $84.5 million, compared to $282.1 million at April 29, 2017, and increased $0.1 million, compared to $197.5 million at February 3, 2018. The decrease from April 29, 2017 was due to lower borrowings under our revolving credit agreement. We used our revolving credit agreement to fund the acquisition of Allen Edmonds in the fourth quarter of 2016 and paid off the remaining borrowings in the fourth quarter of 2017. As a result of lower average borrowings under our revolving credit agreement, net interest expense for the first quarter of 2018 decreased $1.2 million to $3.6 million, compared to $4.8 million for the first quarter of 2017.

Credit Agreement 
The Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to $600.0 million, with the option to increase by up to $150.0 million. 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.

At May 5, 2018, we had no borrowings and $10.1 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $551.7 million at May 5, 2018. We were in compliance with all covenants and restrictions under the Credit Agreement as of May 5, 2018.

$200 Million Senior Notes 
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 2023 (the "Senior Notes").  Our Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement and bear interest at 6.25%, which is payable on February 15 and August 15 of each year. The Senior Notes mature on August 15, 2023. Prior to August 15, 2018, we may redeem the Senior Notes at a redemption price equal to 100% of the principal amount plus a "make-whole" premium (as defined in the Senior Notes indenture) and accrued and unpaid interest to the redemption date. Subsequent to August 15, 2018, we may redeem some or all of the Senior Notes at various redemption prices.

The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of May 5, 2018, we were in compliance with all covenants and restrictions relating to the 2023 Senior Notes.

Working Capital and Cash Flow
 
Thirteen Weeks Ended
 

($ millions)
May 5, 2018

April 29, 2017

Change

Net cash provided by operating activities
$
51.3

$
65.4

$
(14.1
)
Net cash used for investing activities
(9.4
)
(12.4
)
3.0

Net cash used for financing activities
(9.4
)
(36.4
)
27.0

Effect of exchange rate changes on cash and cash equivalents
(0.1
)
(0.1
)
—

Increase in cash and cash equivalents
$
32.4

$
16.5

$
15.9

 

37


Reasons for the major variances in cash provided (used) in the table above are as follows: 
 
Cash provided by operating activities was $14.1 million lower in the three months ended May 5, 2018 as compared to the three months ended April 29, 2017, primarily reflecting the following factors:  
•
An increase in inventory in the three months ended May 5, 2018 compared to a decrease in the comparable period in 2017, driven in part by the impact of the calendar shift resulting from having a 53rd week in fiscal 2017; and
•
A smaller decrease in accounts receivable in the three months ended May 5, 2018, compared to the three months ended April 29, 2017; partially offset by
•
A smaller decrease in accounts payable in the three months ended May 5, 2018, compared to the three months ended April 29, 2017.

Cash used for investing activities was $3.0 million lower in the three months ended May 5, 2018 as compared to the three months ended April 29, 2017, primarily due to lower purchases of property and equipment during the three months ended May 5, 2018. For fiscal 2018, we expect purchases of property and equipment and capitalized software of approximately $50 million, including the initial capital required for our new leased Brand Portfolio warehouse in California.

Cash used for financing activities was $27.0 million lower for the three months ended May 5, 2018 as compared to the three months ended April 29, 2017, as we paid off the borrowings under our revolving credit agreement during the fourth quarter of 2017, which funded our Allen Edmonds acquisition. In addition, we repurchased fewer shares under our stock repurchase program during the three months ended May 5, 2018.

A summary of key financial data and ratios at the dates indicated is as follows: 
 
May 5, 2018

April 29, 2017

February 3, 2018

Working capital ($ millions) (1)
$
426.7

$
325.9

$
416.6

Current ratio (2)
1.97:1

1.71:1

1.97:1

Debt-to-capital ratio (3)
21.7
%
31.2
%
21.5
%
(1)
Working capital has been computed as total current assets less total current liabilities.
(2)
The current ratio has been computed by dividing total current assets by total current liabilities.
(3)
The debt-to-capital ratio has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity.
  
Working capital at May 5, 2018 was $426.7 million, which was $100.8 million and $10.1 million higher than at April 29, 2017 and February 3, 2018, respectively. Our current ratio was 1.97 to 1 as of May 5, 2018 and February 3, 2018, compared to 1.71 to 1 at April 29, 2017. The increase in working capital and the current ratio from April 29, 2017 primarily reflects lower borrowings under our revolving credit agreement. We used our revolving credit agreement to fund the acquisition of Allen Edmonds in the fourth quarter of 2016 and paid off the remaining borrowings in the fourth quarter of 2017. The increase in working capital from February 3, 2018 was primarily due to higher cash and cash equivalents, partially offset by lower receivables. Our debt-to-capital ratio was 21.7% as of May 5, 2018, compared to 31.2% as of April 29, 2017 and 21.5% at February 3, 2018. The decrease in our debt-to-capital ratio from April 29, 2017 primarily reflects lower borrowings under our revolving credit agreement.
 
At May 5, 2018, we had $96.5 million of cash and cash equivalents. Approximately half of this balance represents the accumulated unremitted earnings of our foreign subsidiaries.

We declared and paid dividends of $0.07 per share in both the first quarter of 2018 and 2017. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.

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


38


Except for changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to the contractual obligations identified in our Annual Report on Form 10-K for the year ended February 3, 2018.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 3, 2018. 

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

FORWARD-LOOKING STATEMENTS
 
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially.  These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) rapidly changing fashion trends and purchasing patterns; (iii) intense competition within the footwear industry; (iv) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (v) foreign currency fluctuations; (vi) the ability to accurately forecast sales and manage inventory levels; (vii) cybersecurity threats or other major disruption to the Company’s information technology systems; (viii) customer concentration and increased consolidation in the retail industry; (ix) transitional challenges with acquisitions; (x) a disruption in the Company’s distribution centers; (xi) changes to tax laws, policies and treaties; (xii) the ability to recruit and retain senior management and other key associates; (xiii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xiv) the ability to secure/exit leases on favorable terms; (xv) the ability to maintain relationships with current suppliers; and (xvi) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights.  The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended February 3, 2018, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended February 3, 2018.  

ITEM 4
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures 
It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and internal control reviews by our internal auditors.
 

39


A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of May 5, 2018, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.  There were no significant changes to internal control over financial reporting during the quarter ended May 5, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
 
We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred. 
 
Information regarding Legal Proceedings is set forth within Note 15 to the condensed consolidated financial statements and incorporated by reference herein. 

ITEM 1A
RISK FACTORS

There have been no material changes that have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 3, 2018.  

ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table provides information relating to our repurchases of common stock during the first quarter of 2018:
 
 
 
 
 
Total Number Purchased as Part of Publicly Announced Program (2)
 
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (1)
 
 
 
 
Fiscal Period
 
 
 
 
 
 
 
 
 
 
February 4, 2018 – March 3, 2018
1,559

 
$
29.24

 
—

 
1,223,500

 
 
 
 
 
 
 
 
March 4, 2018 – April 7, 2018
202,662

 
31.74

 
100,000

 
1,123,500

 
 
 
 
 
 
 
 
April 8, 2018 – May 5, 2018
2,561

 
34.26

 
—

 
1,123,500

 
 
 
 
 
 
 
 
Total
206,782

 
$
31.75

 
100,000

 
1,123,500

 
(1)
Includes shares purchased as part of our publicly announced stock repurchase program and shares that were tendered by employees related to certain share-based awards. The employee shares were tendered in satisfaction of the exercise price

40


of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards.

(2)
On August 25, 2011, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock. We can use the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 100,000 and 225,000 shares were repurchased during the thirteen weeks ended May 5, 2018 and April 29, 2017, respectively. As of May 5, 2018, there were 1,123,500 shares authorized to be repurchased under the program. Our repurchases of common stock are limited under our debt agreements. 
 
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
None. 

ITEM 4
MINE SAFETY DISCLOSURES
 
Not applicable. 

ITEM 5
OTHER INFORMATION
 
None. 


41


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

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

42


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CALERES, INC.
 
 
 
Date: June 13, 2018
 
/s/ Kenneth H. Hannah
 
 
Kenneth H. Hannah
Senior Vice President and Chief Financial Officer  
on behalf of the Registrant and as the
Principal Financial Officer and Principal Accounting Officer


43

CALERES INC Reports