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EX-32.1 - EXHIBIT 32.1 - CALERES INCexhibit321certificationsq2.htm
EX-31.2 - EXHIBIT 31.2 - CALERES INCexhibit312certificationsq2.htm
EX-31.1 - EXHIBIT 31.1 - CALERES INCexhibit311certificationsq2.htm
EX-10.1 - EXHIBIT 10.1 - CALERES INCexhibit101severanceagreeme.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 August 4, 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 ¨
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 August 31, 2018, 43,199,345 common shares were outstanding.

1



INDEX
 




2



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

($ thousands)
August 4, 2018

 
July 29, 2017

 
February 3, 2018

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
102,884


$
52,942


$
64,047

Receivables, net
153,421


143,616


152,613

Inventories, net
715,705


722,005


569,379

Prepaid expenses and other current assets
62,159


36,972


60,750

Total current assets
1,034,169

 
955,535

 
846,789

 
 
 
 
 
 
Other assets
89,701


69,589


90,659

Goodwill
134,546

 
127,081

 
127,081

Intangible assets, net
227,503

 
214,114

 
212,087

Property and equipment
549,051

 
539,732

 
542,812

Allowance for depreciation
(341,325
)
 
(321,894
)
 
(330,013
)
Property and equipment, net
207,726


217,838


212,799

Total assets
$
1,693,645

 
$
1,584,157

 
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$

 
$
35,000

 
$

Trade accounts payable
400,391


402,812


272,962

Other accrued expenses
195,987


170,499


157,197

Total current liabilities
596,378

 
608,311

 
430,159

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,702


197,233


197,472

Deferred rent
52,396


52,227


53,071

Other liabilities
109,975


85,212


89,751

Total other liabilities
360,073

 
334,672

 
340,294

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
432

 
430

 
430

Additional paid-in capital
140,146

 
124,851

 
136,460

Accumulated other comprehensive loss
(16,769
)
 
(28,051
)
 
(15,170
)
Retained earnings
612,044

 
542,499

 
595,769

Total Caleres, Inc. shareholders’ equity
735,853


639,729


717,489

Noncontrolling interests
1,341


1,445


1,473

Total equity
737,194

 
641,174

 
718,962

Total liabilities and equity
$
1,693,645

 
$
1,584,157

 
$
1,489,415

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands, except per share amounts)
August 4, 2018

July 29, 2017

August 4, 2018

July 29, 2017

Net sales
$
706,612

$
676,954

$
1,338,754

$
1,308,463

Cost of goods sold
413,511

389,493

770,731

750,094

Gross profit
293,101

287,461

568,023

558,369

Selling and administrative expenses
258,835

256,170

509,033

502,681

Restructuring and other special charges, net
2,123

2,865

3,900

3,973

Operating earnings
32,143

28,426

55,090

51,715

Interest expense, net
(3,602
)
(4,375
)
(7,285
)
(9,184
)
Other income, net
3,078

2,670

6,169

5,106

Earnings before income taxes
31,619

26,721

53,974

47,637

Income tax provision
(8,008
)
(9,047
)
(13,183
)
(15,079
)
Net earnings
23,611

17,674

40,791

32,558

Net (loss) earnings attributable to noncontrolling interests
(35
)
79

(67
)
61

Net earnings attributable to Caleres, Inc.
$
23,646

$
17,595

$
40,858

$
32,497

 




 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.55

$
0.41

$
0.95

$
0.76

 




 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.55

$
0.41

$
0.94

$
0.75

 




 
 
Dividends per common share
$
0.07

$
0.07

$
0.14

$
0.14

See notes to condensed consolidated financial statements.

4




CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
August 4, 2018

July 29, 2017

August 4, 2018

July 29, 2017

Net earnings
$
23,611

$
17,674

$
40,791

$
32,558

Other comprehensive (loss) income, net of tax:
 

 

 

 

Foreign currency translation adjustment
(251
)
1,820

(1,059
)
1,280

Pension and other postretirement benefits adjustments
468

309

902

727

Derivative financial instruments
(921
)
(402
)
(1,442
)
376

Other comprehensive (loss) income, net of tax
(704
)
1,727

(1,599
)
2,383

Comprehensive income
22,907

19,401

39,192

34,941

Comprehensive (loss) income attributable to noncontrolling interests
(92
)
99

(132
)
76

Comprehensive income attributable to Caleres, Inc.
$
22,999

$
19,302

$
39,324

$
34,865

See notes to condensed consolidated financial statements.


5



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Twenty-Six Weeks Ended
($ thousands)
August 4, 2018

July 29, 2017

Operating Activities
 
 

Net earnings
$
40,791

$
32,558

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

 

Depreciation
21,911

22,874

Amortization of capitalized software
5,325

7,243

Amortization of intangible assets
2,284

2,046

Amortization of debt issuance costs and debt discount
954

864

Share-based compensation expense
8,054

5,804

Loss on disposal of property and equipment
852

471

Impairment charges for property and equipment
933

2,119

Deferred rent
(675
)
1,103

Provision for doubtful accounts
124

294

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

 

Receivables
3,619

9,211

Inventories
(140,907
)
(134,465
)
Prepaid expenses and other current and noncurrent assets
(4,814
)
8,158

Trade accounts payable
124,882

136,108

Accrued expenses and other liabilities
28,561

19,399

Other, net
(887
)
493

Net cash provided by operating activities
91,007

114,280

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(18,559
)
(24,251
)
Capitalized software
(2,951
)
(3,152
)
Acquisition cost, net of cash received
(16,793
)

Net cash used for investing activities
(38,303
)
(27,403
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement

400,000

Repayments under revolving credit agreement

(475,000
)
Dividends paid
(6,053
)
(6,030
)
Acquisition of treasury stock
(3,288
)
(5,993
)
Issuance of common stock under share-based plans, net
(4,365
)
(2,490
)
Net cash used for financing activities
(13,706
)
(89,513
)
Effect of exchange rate changes on cash and cash equivalents
(161
)
246

Increase (decrease) in cash and cash equivalents
38,837

(2,390
)
Cash and cash equivalents at beginning of period
64,047

55,332

Cash and cash equivalents at end of period
$
102,884

$
52,942

See notes to condensed consolidated financial statements.

6



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

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

Note 2
Impact of New Accounting Pronouncements

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

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

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

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amended Accounting Standards Codification ("ASC") 715, Compensation — Retirement

7



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 was effective for the Company at the beginning of the 2018 fiscal year. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified $2.7 million and $5.1 million of non-service cost components of net periodic benefit income for the thirteen and twenty-six weeks ended July 29, 2017, respectively, to other income, net in the condensed consolidated statements of earnings. For the thirteen and twenty-six weeks ended August 4, 2018, $3.1 million and $6.2 million, respectively, of non-service cost components of net periodic benefit income is presented as other income. Refer to Note 12 to the condensed consolidated financial statements for additional information.

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

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

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

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

Note 3
Acquisitions

Acquisition of Blowfish, LLC
On July 6, 2018, the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Blowfish, LLC ("Blowfish", or "Blowfish Malibu"), pursuant to which the Company acquired a controlling interest in Blowfish. The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula, as specified in the Purchase Agreement. The aggregate purchase price is estimated to be $28.1 million, including

8



approximately $9.1 million preliminarily assigned to the mandatory purchase obligation, which will be paid upon settlement in 2021. The remaining $19.0 million (or $16.8 million, net of $2.2 million of cash received) was funded with cash. The preliminary estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheet, is presented on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments will be recorded as interest expense. The operating results of Blowfish since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment.

Blowfish Malibu, which was founded in 2005, designs and sells women's and children's footwear that captures the fresh youthful spirit and casual living that is distinctively Southern California. Footwear is marketed under the "Blowfish" and Blowfish Malibu" tradenames. The acquisition allows for continued expansion of the Company's overall business and provides additional exposure to the growing sneaker and casual lifestyle segment of the market.

The Brand Portfolio segment recognized $0.5 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) in incremental cost of goods sold in the thirteen weeks ended August 4, 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition-related costs of $0.2 million ($0.2 million on an after-tax basis) in the thirteen weeks ended August 4, 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the consolidated financial statements for additional information related to the acquisition costs.

The assets and liabilities of Blowfish Malibu were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company has preliminarily allocated the purchase price as of the acquisition date, July 6, 2018 as follows: 

($ thousands)
 
July 6, 2018

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

Receivables
 
4,612

Inventories
 
6,400

Prepaid expense and other current assets
 
317

Total current assets
 
13,536

Other assets
 
539

Goodwill
 
7,465

Intangible assets
 
15,800

Property and equipment
 
112

Total assets
 
$
37,452

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

Other accrued expenses
 
5,739

Total current liabilities
 
8,654

Deferred income taxes
 
581

Other liabilities
 
77

Total liabilities
 
9,312

Net assets
 
$
28,140


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

9



make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows (Level 3 fair value measurements). Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies.

A third-party valuation specialist assisted the Company with its preliminary fair value estimates for inventory, intangible assets other than goodwill and the mandatory purchase obligation. The Company used all available information to make its best estimate of fair values at the acquisition date.

Goodwill and intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to synergies and an assembled workforce and is not deductible for tax purposes. Refer to Note 9 to the consolidated financial statements for additional information regarding goodwill and intangible assets.

During the period from the acquisition date through August 4, 2018, Blowfish Malibu contributed $2.5 million of net sales and had an immaterial impact on the Company's earnings.

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 and twenty-six weeks ended July 29, 2017, the Company recognized $1.9 million in cost of goods sold ($1.2 million on an after-tax basis, or $0.03 per diluted share) and $4.9 million in cost of goods sold ($3.0 million on an after-tax basis, or $0.07 per diluted share), respectively, related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017. As further discussed in Note 6 to the consolidated financial statements, the Company also incurred acquisition and integration costs during the twenty-six weeks ended August 4, 2018 and July 29, 2017.

Note 4
Revenues

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

10




The impact of the adoption of Topic 606 on the condensed balance sheet as of August 4, 2018 was as follows:
 
 
August 4, 2018
($ thousands)
 
As reported
 
Balances without adoption of Topic 606
 
Effect of change
Higher/(Lower)
 
 
 
 
 
 
 
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
 
Receivables, net
 
$
153,421

 
$
148,263

 
$
5,158

Inventories, net
 
715,705

 
719,930

 
(4,225
)
Prepaid expenses and other current assets
 
62,159

 
55,953

 
6,206

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 

Other accrued expenses
 
195,987

 
183,979

 
12,008

 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Retained earnings
 
612,044

 
616,913

 
(4,869
)


11



Adoption of the standard also required various changes that impacted the statement of earnings. These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the statement of earnings for the thirteen and twenty-six weeks ended August 4, 2018 was as follows:

 
 
For the Thirteen Weeks Ended August 4, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
706,612

 
$
707,262

 
$
(650
)
Cost of goods sold
 
413,511

 
413,594

 
(83
)
Gross profit
 
293,101


293,668

 
(567
)
Selling and administrative expenses
 
258,835

 
259,462

 
(627
)
Restructuring and other special charges, net
 
2,123

 
2,123

 

Operating earnings
 
$
32,143


$
32,083

 
$
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Twenty-Six Weeks Ended August 4, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
1,338,754

 
$
1,340,183

 
$
(1,429
)
Cost of goods sold
 
770,731

 
770,806

 
(75
)
Gross profit
 
568,023

 
569,377

 
(1,354
)
Selling and administrative expenses
 
509,033

 
510,250

 
(1,217
)
Restructuring and other special charges, net
 
3,900

 
3,900

 

Operating earnings
 
$
55,090

 
$
55,227

 
$
(137
)

The adoption of Topic 606 had an immaterial impact on net earnings and earnings per share for the thirteen and twenty-six weeks ended August 4, 2018.

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

12




Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the periods ended August 4, 2018:
 
 
For the Thirteen Weeks Ended August 4, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
Retail stores
 
$
401,008

 
$
43,587

 
$
444,595

Landed wholesale
 

 
164,454

 
164,454

First-cost wholesale
 

 
27,160

 
27,160

E-commerce
 
28,332

 
37,273

 
65,605

Licensing and royalty
 

 
4,582

 
4,582

Other (1)
 
132

 
84

 
216

Net sales
 
$
429,472


$
277,140


$
706,612

 
 
 
 
 
 
 
 
 
For the Twenty-Six Weeks Ended August 4, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail stores
 
$
739,264

 
$
86,371

 
$
825,635

Landed wholesale
 

 
332,264

 
332,264

First-cost wholesale
 

 
40,565

 
40,565

E-commerce
 
53,346

 
78,223

 
131,569

Licensing and royalty
 

 
8,294

 
8,294

Other (1)
 
273

 
154

 
427

Net sales
 
$
792,883

 
$
545,871

 
$
1,338,754

(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.


13



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.

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)
August 4, 2018

 
February 3, 2018

Customer allowances and discounts
$
21,838

 
$
20,259

Rewards program liability
14,780

 
8,130

Returns reserve
10,774

 
8,332

Gift card liability
4,420

 
5,509


Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during the twenty-six weeks ended August 4, 2018, the Rewards program liability increased $8.9 million due to purchases and $6.4 million due to the adoption of Topic 606 and decreased $8.7 million due to expirations and redemptions. The change in the balance of the returns reserve is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018.


14



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

July 29, 2017

August 4, 2018

July 29, 2017

NUMERATOR
 

 

 

 

Net earnings
$
23,611

$
17,674

$
40,791

$
32,558

Net loss (earnings) attributable to noncontrolling interests
35

(79
)
67

(61
)
Net earnings allocated to participating securities
(673
)
(490
)
(1,148
)
(895
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
22,973

$
17,105

$
39,710

$
31,602

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,964

41,783

41,937

41,807

Dilutive effect of share-based awards
117

171

120

172

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,081

41,954

42,057

41,979

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.55

$
0.41

$
0.95

$
0.76

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.55

$
0.41

$
0.94

$
0.75

 
Options to purchase 16,667 shares of common stock for the thirteen and twenty-six weeks ended July 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 and twenty-six weeks ended August 4, 2018.

During the twenty-six weeks ended August 4, 2018 and July 29, 2017, the Company repurchased 100,000 and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. The Company did not purchase any shares during the thirteen weeks ended August 4, 2018 or July 29, 2017. As of August 4, 2018, the Company has repurchased a total of 1.4 million shares under this program.

Note 6
Restructuring and Other Initiatives
 
During the thirteen and twenty-six weeks ended August 4, 2018, the Company incurred integration and reorganization costs, primarily for severance, related to the men's business totaling $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) and $3.7 million ($2.7 million on an after-tax basis, or $0.07 per diluted share), respectively. Of the $1.9 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended August 4, 2018, $1.8 million was reflected within the Brand Portfolio segment and $0.1 million was reflected within the Other category. Of the $3.7 million in costs for the twenty-six weeks ended August 4, 2018, $3.4 million was reflected within the Brand Portfolio segment and $0.3 million was reflected within the Other category. The Company also incurred acquisition costs associated with the acquisition of Blowfish Malibu of $0.2 million during the thirteen weeks ended August 4, 2018, which is presented as restructuring and other special charges, net in the condensed consolidated statements of earnings and reflected within the Other category. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.


15



During the thirteen and twenty-six weeks ended July 29, 2017, the Company incurred integration and reorganization costs, primarily for professional fees and severance expense, totaling $2.9 million ($1.9 million on an after-tax basis, or $0.04 per diluted share) and $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share), respectively, related to the men's business. Of the $2.9 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended July 29, 2017, $2.2 million is reflected within the Other category and $0.7 million is reflected within the Brand Portfolio segment. Of the $4.0 million in restructuring and other special charges for the twenty-six weeks ended July 29, 2017, $2.5 million is reflected within the Other category and $1.5 million is reflected within the Brand Portfolio segment.
 
Note 7
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended August 4, 2018 and July 29, 2017:  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended August 4, 2018
External sales
$
429,472

$
277,140

$

$
706,612

Intersegment sales

27,881


27,881

Operating earnings (loss)
33,240

13,607

(14,704
)
32,143

Segment assets
650,366

860,093

183,186

1,693,645

 
 
 
 
 
Thirteen Weeks Ended July 29, 2017
External sales
$
404,930

$
272,024

$

$
676,954

Intersegment sales

29,850


29,850

Operating earnings (loss)
25,112

15,916

(12,602
)
28,426

Segment assets
636,399

839,674

108,084

1,584,157

 
Twenty-Six Weeks Ended August 4, 2018
External sales
$
792,883

$
545,871

$

$
1,338,754

Intersegment sales

42,656


42,656

Operating earnings (loss)
55,097

26,094

(26,101
)
55,090

 
 
 
 
 
Twenty-Six Weeks Ended July 29, 2017
External sales
$
771,424

$
537,039

$

$
1,308,463

Intersegment sales

44,550


44,550

Operating earnings (loss)
45,391

29,230

(22,906
)
51,715

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

Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
August 4, 2018

July 29, 2017

August 4, 2018

July 29, 2017

Operating earnings
$
32,143

$
28,426

$
55,090

$
51,715

Interest expense, net
(3,602
)
(4,375
)
(7,285
)
(9,184
)
Other income, net
3,078

2,670

6,169

5,106

Earnings before income taxes
$
31,619

$
26,721

$
53,974

$
47,637



16



Note 8
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
August 4, 2018

July 29, 2017

February 3, 2018

Raw materials
$
17,697

$
18,951

$
17,531

Work-in-process
799

840

689

Finished goods
697,209

702,214

551,159

Inventories, net
$
715,705

$
722,005

$
569,379


Note 9
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
August 4, 2018

July 29, 2017

February 3, 2018

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
301,788

285,988

285,988

Other
1,900



Total intangible assets
306,488

288,788

288,788

Accumulated amortization
(78,985
)
(74,674
)
(76,701
)
Total intangible assets, net
227,503

214,114

212,087

Goodwill
 

 

 

Brand Portfolio
134,546

127,081

127,081

Total goodwill
134,546

127,081

127,081

Goodwill and intangible assets, net
$
362,049

$
341,195

$
339,168


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Blowfish Malibu on July 6, 2018. The preliminary allocation of the purchase price resulted in estimated incremental intangible assets of $15.8 million, consisting of trademarks and customer relationships of $9.9 million and $5.9 million, respectively, and incremental goodwill of $7.5 million. In addition, during the thirteen and twenty-six weeks ended August 4, 2018, the Company acquired software licenses with an original cost of $0.1 million and $1.9 million, respectively, which are included in intangible assets, net of accumulated amortization, on the condensed consolidated balance sheets.

The Company's intangible assets as of August 4, 2018, July 29, 2017 and February 3, 2018 were as follows:
($ thousands)
 
 
 
August 4, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
175,188

 
$
78,197

 
$
96,991

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15-20 years
 
11,300

 
618

 
10,682

Software licenses
 
3 years
 
1,900

 
170

 
1,730

 
 
 
 
$
306,488

 
$
78,985

 
$
227,503

 
 
 
 
July 29, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
74,449

 
$
90,839

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
225

 
5,175

 
 
 
 
$
288,788

 
$
74,674

 
$
214,114


17



 
 
 
 
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 $1.3 million and $1.0 million for the thirteen weeks ended August 4, 2018 and July 29, 2017, respectively, and $2.3 million and $2.0 million for the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively. The Company estimates that amortization expense related to intangible assets will be approximately $5.1 million in each of the years from 2019 through 2023.
 
Note 10
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the twenty-six weeks ended August 4, 2018 and July 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)
40,858

(67
)
40,791

Other comprehensive loss
(1,599
)
(65
)
(1,664
)
Dividends paid
(6,053
)

(6,053
)
Acquisition of treasury stock
(3,288
)

(3,288
)
Issuance of common stock under share-based plans, net
(4,365
)

(4,365
)
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
8,054


8,054

Equity at August 4, 2018
$
735,853

$
1,341

$
737,194

 
($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings
32,497

61

32,558

Other comprehensive income
2,383

15

2,398

Dividends paid
(6,030
)

(6,030
)
Acquisition of treasury stock
(5,993
)

(5,993
)
Issuance of common stock under share-based plans, net
(2,490
)

(2,490
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441


441

Share-based compensation expense
5,804


5,804

Equity at July 29, 2017
$
639,729

$
1,445

$
641,174



18



Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended August 4, 2018 and July 29, 2017:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance at May 5, 2018
$
427

$
(16,738
)
$
246

$
(16,065
)
Other comprehensive loss before reclassifications
(251
)

(825
)
(1,076
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss

630

(121
)
509

Tax (benefit) provision

(162
)
25

(137
)
Net reclassifications

468

(96
)
372

Other comprehensive (loss) income
(251
)
468

(921
)
(704
)
Balance at August 4, 2018
$
176

$
(16,270
)
$
(675
)
$
(16,769
)
 
 
 
 
 
Balance at April 29, 2017
$
(348
)
$
(29,666
)
$
236

$
(29,778
)
Other comprehensive income (loss) before reclassifications
1,820


(295
)
1,525

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

500

(164
)
336

Tax (benefit) provision

(191
)
57

(134
)
Net reclassifications

309

(107
)
202

Other comprehensive income (loss)
1,820

309

(402
)
1,727

Balance at July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
 
 
 
 
 
Balance February 3, 2018
$
1,235

$
(17,172
)
$
767

$
(15,170
)
Other comprehensive loss before reclassifications
(1,059
)

(1,233
)
(2,292
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

1,215

(266
)
949

Tax (benefit) provision

(313
)
57

(256
)
Net reclassifications

902

(209
)
693

Other comprehensive (loss) income
(1,059
)
902

(1,442
)
(1,599
)
Balance August 4, 2018
$
176

$
(16,270
)
$
(675
)
$
(16,769
)
 
 
 
 
 
Balance January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive income before reclassifications
1,280


458

1,738

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

1,179

(117
)
1,062

Tax (benefit) provision

(452
)
35

(417
)
Net reclassifications

727

(82
)
645

Other comprehensive income
1,280

727

376

2,383

Balance July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
(1)
Amounts reclassified are included in other income, net. See Note 12 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense, net. See Notes 13 and 14 to the condensed consolidated financial statements for additional information related to derivative financial instruments.


19



Note 11
Share-Based Compensation
 
The Company recognized share-based compensation expense of $4.5 million and $3.1 million during the thirteen weeks and $8.1 million and $5.8 million during the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively.

The Company issued 17,526 shares of common stock during the thirteen weeks ended August 4, 2018 and had net repurchases of 12,472 shares of common stock during the thirteen weeks ended July 29, 2017 for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement. During the twenty-six weeks ended August 4, 2018 and July 29, 2017, the Company issued 273,531 and 241,886 shares of common stock, respectively, related to these share-based plans.

Restricted Stock 
The following table summarizes restricted stock activity for the periods ended August 4, 2018 and July 29, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
August 4, 2018
 
 
July 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
May 5, 2018
1,244,332

 
$
28.80

 
April 29, 2017
1,217,334

 
$
27.96

Granted
39,142

 
34.33

 
Granted
4,492

 
27.83

Forfeited
(750
)
 
35.53

 
Forfeited
(17,500
)
 
28.56

Vested
(76,826
)
 
27.81

 
Vested
(10,000
)
 
18.80

August 4, 2018
1,205,898

 
$
29.04

 
July 29, 2017
1,194,326

 
$
28.03

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
 
Twenty-Six Weeks Ended
 
August 4, 2018
 
 
July 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
333,833

 
32.07

 
Granted
356,312

 
26.91

Forfeited
(17,300
)
 
27.82

 
Forfeited
(30,000
)
 
27.75

Vested
(285,436
)
 
28.06

 
Vested
(260,035
)
 
17.07

August 4, 2018
1,205,898

 
$
29.04

 
July 29, 2017
1,194,326

 
$
28.03


Of the 39,142 restricted shares granted during the thirteen weeks ended August 4, 2018, 3,642 shares have a cliff-vesting term of one year and 35,500 shares have a graded-vesting term of three years. Of the 333,833 restricted shares granted during the twenty-six weeks ended August 4, 2018, 3,642 shares have a cliff-vesting term of one year, 9,500 shares have a cliff-vesting term of four years, and 320,691 shares have a graded-vesting term of three years. All of the restricted shares granted during the thirteen weeks ended July 29, 2017 have a cliff-vesting term of one year. Of the 356,312 restricted shares granted during the twenty-six weeks ended July 29, 2017, 4,492 shares have a cliff-vesting term of one year, 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 August 4, 2018 and July 29, 2017, the Company granted no performance share awards. During the twenty-six weeks ended August 4, 2018 and July 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

20



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 periods ended August 4, 2018 and July 29, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
August 4, 2018
 
 
July 29, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
May 5, 2018
62,042

 
$
6.90

 
April 29, 2017
97,292

 
$
6.39

Granted

 

 
Granted

 

Exercised
(15,875
)
 
3.00

 
Exercised
(5,250
)
 
5.93

Forfeited

 

 
Forfeited

 

Expired
(1,500
)
 
5.95

 
Expired

 

August 4, 2018
44,667

 
$
8.32

 
July 29, 2017
92,042

 
$
6.42

 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
 
Twenty-Six Weeks Ended
 
August 4, 2018
 
 
July 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
(32,375
)
 
3.52

 
Exercised
(11,250
)
 
5.74

Forfeited

 

 
Forfeited

 

Expired
(4,000
)
 
5.80

 
Expired
(47,248
)
 
15.94

August 4, 2018
44,667

 
$
8.32

 
July 29, 2017
92,042

 
$
6.42


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 37,167 and 45,830 RSUs to non-employee directors, including 747 and 910 RSUs for dividend equivalents, during the thirteen weeks ended August 4, 2018 and July 29, 2017, respectively, with weighted-average grant date fair values of $34.33 and $27.84, respectively. The Company granted 37,948 and 46,712 RSUs to non-employee directors, including 1,528 and 1,792 RSUs for dividend equivalents, during the twenty-six weeks ended August 4, 2018 and July 29, 2017, respectively, with weighted-average grant date fair values of $34.30 and $27.81, respectively.


21



Note 12
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
August 4, 2018

July 29, 2017

August 4, 2018

July 29, 2017

Service cost
$
2,097

$
2,383

$

$

Interest cost
3,550

3,727

14

16

Expected return on assets
(7,272
)
(6,913
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
1,048

996

(32
)
(35
)
Prior service income
(386
)
(461
)


Total net periodic benefit income
$
(963
)
$
(268
)
$
(18
)
$
(19
)
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
Other Postretirement Benefits
 
Twenty-Six Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
August 4, 2018

July 29, 2017

August 4, 2018

July 29, 2017

Service cost
$
4,479

$
4,850

$

$

Interest cost
7,091

7,474

29

34

Expected return on assets
(14,504
)
(13,793
)


Amortization of:
 
 
 
 
Actuarial loss (gain)
2,061

2,148

(62
)
(73
)
Prior service income
(784
)
(896
)


Total net periodic benefit income
$
(1,657
)
$
(217
)
$
(33
)
$
(39
)

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

Note 13
Risk Management and Derivatives
 
In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions. 
 
Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major international financial institutions and have varying maturities through August 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.
 

22



As of August 4, 2018, July 29, 2017 and February 3, 2018, the Company had forward contracts maturing at various dates through August 2019, August 2018 and February 2019, respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 
(U.S. $ equivalent in thousands)
August 4, 2018

July 29, 2017

February 3, 2018

Financial Instruments
 
 
 
Euro
$
14,852

$
14,725

$
21,223

U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
15,992

18,110

16,874

Chinese yuan
12,394

11,887

12,058

New Taiwanese dollars
526

567

596

Other currencies
391

444

415

Total financial instruments
$
44,155

$
45,733

$
51,166

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of August 4, 2018, July 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
 

 
 
 

August 4, 2018
Prepaid expenses and other current assets
$
305

 
Other accrued expenses
$
1,380

July 29, 2017
Prepaid expenses and other current assets
918

 
Other accrued expenses
1,083

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

 
Other accrued expenses
542

 

23



For the thirteen and twenty-six weeks ended August 4, 2018 and July 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)
August 4, 2018
July 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 Recognized in OCL on Derivatives

Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(17
)
$
(4
)
$
(8
)
$
6

Cost of goods sold
(283
)
28

(55
)
158

Selling and administrative expenses
(730
)
97

(194
)

Interest expense, net


(14
)

 
 
 
 
 
 
Twenty-Six Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
August 4, 2018