Table of Contents
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 3, 2019
[ ]
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - par value of $0.01 per share
CAL
New York Stock Exchange
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ 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 ☑
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 ☑
As of August 30, 2019, 40,715,308 common shares were outstanding.
INDEX
PART I
Page
Item 1
Financial Statements
3
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4
Controls and Procedures
PART II
Legal Proceedings
43
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
44
Signature
45
FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ thousands)
August 3, 2019
August 4, 2018
February 2, 2019
Assets
Current assets:
Cash and cash equivalents
Receivables, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Other assets
Goodwill
Intangible assets, net
Lease right-of-use assets
Property and equipment
Allowance for depreciation
Property and equipment, net
Total assets
Liabilities and Equity
Current liabilities:
Borrowings under revolving credit agreement
Trade accounts payable
Lease obligations
Other accrued expenses
Total current liabilities
Other liabilities:
Noncurrent lease obligations
Long-term debt
Deferred rent
Other liabilities
Total other liabilities
Equity:
Common stock
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Caleres, Inc. shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands, except per share amounts)
Net sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Restructuring and other special charges, net
Operating earnings
Interest expense, net
Other income, net
Earnings before income taxes
Income tax provision
Net earnings
Net loss attributable to noncontrolling interests
Net earnings attributable to Caleres, Inc.
Basic earnings per common share attributable to Caleres, Inc. shareholders
Diluted earnings per common share attributable to Caleres, Inc. shareholders
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment
Pension and other postretirement benefits adjustments
Derivative financial instruments
Other comprehensive income (loss) , net of tax
Comprehensive income
Comprehensive loss attributable to noncontrolling interests
Comprehensive income attributable to Caleres, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation
Amortization of capitalized software
Amortization of intangible assets
Amortization and accretion of debt issuance costs, debt discount and mandatory purchase obligation
Share-based compensation expense
Loss on disposal of property and equipment
Impairment charges for property, equipment, and lease right-of-use assets
Provision for doubtful accounts
Changes in operating assets and liabilities, net of acquired amounts:
Receivables
Inventories
Prepaid expenses and other current and noncurrent assets
Accrued expenses and other liabilities
Other, net
Net cash provided by operating activities
Investing Activities
Purchases of property and equipment
Disposals of property and equipment
Capitalized software
Acquisition cost, net of cash received
Net cash used for investing activities
Financing Activities
Repayments under revolving credit agreement
Dividends paid
Acquisition of treasury stock
Issuance of common stock under share-based plans, net
Other
Net cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Accumulated
Total Caleres, Inc.
Non-
Common Stock
Additional
Comprehensive
Retained
Shareholders’
controlling
($ thousands, except number of shares and per share amounts)
Shares
Dollars
Paid-In Capital
(Loss) Income
Earnings
Equity
Interests
Total Equity
BALANCE MAY 4, 2019
Net earnings (loss)
Unrealized loss on derivative financial instruments, net of tax of $17
Pension and other postretirement benefits adjustments, net of tax of $161
Dividends ($0.07 per share)
BALANCE AUGUST 3, 2019
BALANCE MAY 5, 2018
Unrealized loss on derivative financial instruments, net of tax of $122
Pension and other postretirement benefits adjustments, net of tax of $162
BALANCE AUGUST 4, 2018
BALANCE FEBRUARY 2, 2019
Unrealized gain on derivative financial instruments, net of tax of $79
Pension and other postretirement benefits adjustments, net of tax of $299
Dividends ($0.14 per share)
BALANCE FEBRUARY 3, 2018
Pension and other postretirement benefits adjustments, net of tax of $313
Cumulative-effect adjustment from adoption of ASU 2016-16
Cumulative-effect adjustment from adoption of ASU 2014-09 (Topic 606)
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 2, 2019.
Note 2
Impact of New Accounting Pronouncements
Impact of Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The FASB 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. The Company adopted Accounting Standards Codification ("ASC") Topic 842 ("ASC 842") in the first quarter of 2019 using the modified retrospective approach and the optional transition method permitted by ASU 2018-11. Upon adoption, the Company recorded an operating lease right-of-use asset of $729.2 million and lease liabilities of $791.7 million as of February 3, 2019. In addition, a cumulative-effect adjustment to retained earnings of $13.4 million, net of $4.7 million in deferred taxes, was recorded upon adoption. Prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented under the guidance in ASC 840, Leases. The Company elected the package of practical expedients and the expedient to group lease and non-lease components as permitted within the ASU. The hindsight practical expedient was not elected. Refer to Note 10 to the condensed consolidated financial statements for additional information regarding ASC 842.
Impact of Prospective Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces today's "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The ASU's provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is adopted. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU in the first quarter of 2020 will not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies disclosure requirements on fair value measurements, removing and modifying certain disclosures, while adding other disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-13 is not expected to have a material impact on the Company's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20), Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-14 is not expected to have a material impact on the Company's financial statement disclosures.
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 $28.8 million, including approximately $9.8 million 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 estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheets, 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 are being recorded as interest expense. During the thirteen and twenty-six weeks ended August 3, 2019, we recorded interest expense of $0.4 million and $0.5 million, respectively, for accretion and remeasurement adjustments. The operating results of Blowfish Malibu since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment, with the elimination of sales and profit for sales to the Famous Footwear segment reflected in the Eliminations and Other category.
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. The 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 Company’s purchase price allocation contains uncertainties because it required management to 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. As of August 3, 2019, the purchase price allocation is complete.
During the thirteen weeks ended August 3, 2019, Blowfish Malibu contributed net sales of $15.7 million to the Brand Portfolio segment ($14.2 million on a consolidated basis, net of eliminations), and net loss of $0.4 million. During the twenty-six weeks ended August 3, 2019, Blowfish Malibu contributed net sales of $35.1 million to the Brand Portfolio segment ($30.4 million on a consolidated basis, net of eliminations), and a net income of $0.2 million. During the period from the acquisition date through August 4, 2018, Blowfish Malibu contributed $3.1 million of net sales to the Brand Portfolio segment ($2.5 million of net sales on a consolidated basis, net of eliminations) and had an immaterial impact on the Company's earnings.
Acquisition of Vionic
On October 18, 2018, the Company entered into an Equity and Asset Purchase Agreement (the "Agreement") with the equity holders of Vionic Group LLC and Vionic International LLC, and VCG Holdings Ltd., a Cayman Islands corporation (collectively, "Vionic"), pursuant to which the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC and certain related intellectual property from VCG Holdings Ltd for $360.0 million plus adjustments for cash and indebtedness, as defined in the Agreement. The aggregate purchase price was $360.7 million (or $352.7 million, net of $8.0 million of cash received). The purchase was funded with borrowings from the Company's revolving credit agreement. The operating results of Vionic since October 18, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment, with the elimination of sales and profit for sales to the Famous Footwear segment reflected in the Eliminations and Other category.
Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends. As pioneers in foot health with a global team of experts behind the dual gender brand, Vionic brings a fresh perspective to stylish, supportive footwear, offering a vast selection of active, casual and dress styles, sandals and slippers. The acquisition of Vionic allows the Company to continue to expand its portfolio of brands and gives it additional access to the growing contemporary comfort footwear category.
The Brand Portfolio segment recognized $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share) in incremental cost of goods sold in the twenty-six weeks ended August 3, 2019 related to the amortization of the inventory fair value adjustment required for purchase accounting. The fair value adjustment was fully amortized during the first quarter of 2019.
The Company incurred integration-related costs of $0.6 million ($0.5 million on an after-tax basis or $0.01 per diluted share) in the thirteen weeks ended August 3, 2019, which were recorded as a component of restructuring and other special charges, net. Of the $0.6 million, $0.6 million is presented within the Eliminations and Other category, with an immaterial amount presented in the Brand Portfolio segment. In the twenty-six weeks ended August 3, 2019, the Company incurred integration-related costs of $0.9 million ($0.7 million on an after-tax basis, or $0.03 per diluted share), which were recorded as a component of restructuring and other special charges, net. Of the $0.9 million, $0.8 million is presented within the Eliminations and Other category and $0.1 million is presented in the Brand Portfolio segment.
In the thirteen weeks ended August 3, 2019, Vionic contributed net sales of $47.0 million to the Brand Portfolio segment ($46.8 million on a consolidated basis, net of eliminations), and a net loss of $1.4 million. In the twenty-six weeks ended August 3, 2019, Vionic contributed net sales of $101.8 million to the Brand Portfolio segment ($100.0 million on a consolidated basis, net of eliminations), and a net loss of $2.7 million.
Purchase Price Allocation
The assets and liabilities of Vionic 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 allocated the purchase price as of the acquisition date, October 18, 2018, as follows:
October 18, 2018
ASSETS
Prepaid expense and other current assets
Intangible assets
LIABILITIES AND EQUITY
Total liabilities
Net assets
The Company’s purchase price allocation required management to 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 and intangible assets other than goodwill. The Company used all available information to make its best estimate of fair values at the acquisition date. The Company continues to evaluate certain contingent liabilities, but the purchase price allocation is substantially complete as of August 3, 2019.
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, which is deductible for tax purposes, is primarily attributable to synergies and an assembled workforce. Refer to Note 9 to the consolidated financial statements for additional information regarding goodwill and intangible assets.
Note 4
Revenues
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 excludes 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 periods ended August 3, 2019 and August 4, 2018:
Thirteen Weeks Ended August 3, 2019
Famous Footwear
Brand Portfolio
Eliminations and Other
Total
Retail stores
Landed wholesale
First-cost wholesale
E-commerce - Company websites (1)
Licensing and royalty
Other (2)
Thirteen Weeks Ended August 4, 2018
Twenty-Six Weeks Ended August 3, 2019
(1) Collectively referred to as "e-commerce" below
Twenty-Six Weeks Ended August 4, 2018
(2) Includes breakage revenue from unredeemed gift cards
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 estimated returns and exclude sales tax. The Company carries a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Company's loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. 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 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.
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 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 from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores and e-commerce sales from our wholesale customers' websites that are fulfilled on a drop-ship or first-cost basis (collectively 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.
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:
Customer allowances and discounts
Loyalty programs liability
Returns reserve
Gift card liability
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 3, 2019, the loyalty programs liability increased $16.7 million due to points and material rights accrued for purchases and decreased $14.4 million due to expirations and redemptions. During the twenty-six weeks ended August 4, 2018, the loyalty programs 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.
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 3, 2019 and August 4, 2018:
NUMERATOR
Net earnings allocated to participating securities
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
DENOMINATOR
Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
Dilutive effect of share-based awards
Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
Options to purchase 16,667 shares of common stock for the thirteen and twenty-six weeks ended August 3, 2019 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 thirteen weeks ended August 3, 2019 and August 4, 2018, the Company repurchased 1,530,478 and zero shares, respectively, under the 2011 and 2018 publicly announced share repurchase programs, each of which permits repurchases of up to 2.5 million shares. The Company repurchased 1,530,478 and 100,000, shares during the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively. As of August 3, 2019, the Company has repurchased a total of 4.2 million shares under the publicly announced share repurchase programs at an aggregate purchase price of $107.8 million.
Note 6
Restructuring and Other Initiatives
Vionic Integration-Related Costs
During the thirteen weeks ended August 3, 2019, the Company incurred integration-related costs associated with the acquisition of Vionic, primarily for severance, totaling $0.6 million ($0.5 million on an after-tax basis, or $0.01 per diluted share). Of the $0.6 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings, $0.6 million are reflected within the Eliminations and Other category, with an immaterial amount reflected in the Brand Portfolio segment. During the twenty-six weeks ended August 3, 2019, the Company incurred integration-related costs, primarily for severance, totaling $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share). Of the $0.9 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings, $0.8 million is reflected within the Eliminations and Other category and $0.1 million is included in the Brand Portfolio segment. As of August 3, 2019 restructuring reserves of $0.8 million were included in other accrued expenses on the condensed consolidated balance sheets. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.
Blowfish Malibu Acquisition Costs
The Company incurred acquisition costs associated with the acquisition of Blowfish Malibu of $0.2 million during the thirteen weeks ended August 4, 2018, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings and reflected within the Eliminations and Other category. There were no acquisition or integration-related costs associated with the acquisition of Blowfish during the thirteen and twenty-six weeks ended August 3, 2019. Refer to further discussion of the acquisition of Blowfish Malibu in Note 3 to the condensed consolidated financial statements.
Carlos Brand Exit
The Company's license agreement to sell Carlos by Carlos Santana footwear expired in December 2018. In connection with the decision to exit the Carlos brand, the Company incurred restructuring-related costs of $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) during the twenty-six weeks ended August 3, 2019. Of these charges included in the Brand Portfolio segment, $1.3 million ($1.0 million on an after-tax basis or $0.02 per diluted share) primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the statements of earnings and the remaining $0.6 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) for severance and other related costs is presented in restructuring and other special charges. There were no corresponding costs in the thirteen weeks ended August 3, 2019 or the twenty-six weeks ended August 4, 2018.
Integration and Reorganization of Men's Brands
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 Eliminations and 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 Eliminations and Other category. There were no integration and reorganization costs related to the men's business in the thirteen and twenty-six weeks ended August 3, 2019.
Note 7
Business Segment Information
During the first quarter of 2019, the Company changed its segment presentation to present net sales of the Brand Portfolio segment inclusive of both external and intersegment sales, with the elimination of intersegment sales and profit from Brand Portfolio to Famous Footwear reflected within the Eliminations and Other category. This presentation reflects the independent business models of both Brand Portfolio and Famous Footwear, as well as growth in intersegment activity driven by recent acquisitions. Following is a summary of certain key financial measures for the Company’s business segments for the periods ended August 3, 2019 and August 4, 2018:
Intersegment sales (1)
Operating earnings (loss)
Segment assets
(1) Included in net sales in the Brand Portfolio segment and eliminated in the Eliminations and Other category
The Eliminations and Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments, as well as the elimination of intersegment sales and profit.
Following is a reconciliation of operating earnings to earnings before income taxes:
Note 8
The Company's net inventory balance was comprised of the following:
Raw materials
Work-in-process
Finished goods
Note 9
Goodwill and Intangible Assets
Goodwill and intangible assets were as follows:
Intangible Assets
Total intangible assets
Accumulated amortization
Total intangible assets, net
Total goodwill
Goodwill and intangible assets, net
As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Vionic on October 18, 2018. The allocation of the purchase price resulted in incremental intangible assets of $144.7 million, consisting of trademarks and customer relationships of $112.4 million and $32.3 million, respectively, and incremental goodwill of $151.3 million. In addition, the Company acquired Blowfish Malibu on July 6, 2018. The allocation of the purchase price resulted in incremental intangible assets of $17.6 million, consisting of trademarks and customer relationships of $11.1 million and $6.5 million, respectively, and incremental goodwill of $5.0 million.
The Company's intangible assets as of August 3, 2019, August 4, 2018 and February 2, 2019 were as follows:
Estimated Useful Lives
Cost Basis
Accumulated Amortization
Net Carrying Value
Trademarks
15-40 years
Indefinite
Customer relationships
15-16 years
15-20 years
Software licenses
3 years
Impairment
Amortization expense related to intangible assets was $3.2 million and $1.3 million for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, and $6.5 million and $2.3 million for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively. The Company estimates that amortization expense related to intangible assets will be approximately $13.1 million in 2019, $12.8 million in 2020, $12.7 million in 2021, $12.5 million in 2022 and $12.2 million in 2023.
As a result of its annual goodwill impairment testing in the fourth quarter of 2018, the Company determined that the carrying value of the Allen Edmonds reporting unit exceeded its fair value and recorded $38.0 million in impairment charges. The Company recorded no goodwill impairment charges in the thirteen or twenty-six weeks ended August 3, 2019 or August 4, 2018.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The indefinite-lived intangible asset impairment review in the fourth quarter of 2018 resulted in $60.0 million in impairment charges associated with the Allen Edmonds trademark. The Company recorded no impairment charges in the thirteen or twenty-six weeks ended August 3, 2019 or August 4, 2018.
Note 10
Leases
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company's leases that are classified as operating leases have lease terms and renewal options as follows:
Lease Term (years)
Renewal Options
5-10
Approximately 45% have options of varying periods
Manufacturing facility
8
None
Office facilities and distribution centers
10-15
5-20 years
Equipment
1-6
As further discussed in Note 2 to the condensed consolidated financial statements, during the first quarter of 2019, the Company adopted ASC 842 using the modified retrospective transition method. Prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented in compliance with ASC 840. The Company elected the package of practical expedients and the expedient to account for lease and non-lease components as a single component for the entire population of operating lease assets. The Company did not elect the hindsight practical expedient to reevaluate the lease term of existing contracts.
Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.
The following is a summary of lease assets and liabilities on the condensed consolidated balance sheet at August 3, 2019:
Lease Classification
Current lease obligations
Net balance sheet impact
The weighted-average lease term and discount rate as of August 3, 2019 were as follows:
Weighted-average remaining lease term (in years)
Weighted-average discount rate
During the twenty-six weeks ended August 3, 2019, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $94.8 million on the condensed consolidated balance sheets. As of August 3, 2019, the Company has entered into lease commitments for six retail locations for which the leases have not yet commenced. The Company anticipates that the leases for three new retail locations will begin in the next fiscal quarter. Upon commencement, right-of-use assets and lease liabilities of approximately $2.8 million will be recorded on the condensed consolidated balance sheets. In addition, leases for three new retail locations are expected to begin in the next fiscal year, resulting in right-of-use assets and lease liabilities of approximately $3.9 million.
The components of lease expense for the thirteen and twenty-six weeks ended August 3, 2019 were as follows:
Operating lease expense
Variable lease expense
Short-term lease expense
Sublease income
Total lease expense
Future minimum rent payments under noncancelable leases with an initial term of one year or more at August 3, 2019 were as follows:
Remainder of 2019
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments (1)
Less imputed interest
Present value of lease obligations
(1) Minimum lease payments have not been reduced by minimum sublease rental income of $0.4 million due in the future under noncancelable sublease agreements.
Supplemental cash flow information related to leases is as follows:
Cash paid for lease liabilities
Cash received from sublease income
Note 11
Long-term and Short-term Financing Arrangements
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement ("the Former 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 Former Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC. Allen Edmonds and Vionic were joined to the Agreement as guarantors on December 13, 2016 and October 31, 2018, respectively. After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement. On January 18, 2019, the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") to extend the maturity date to January 18, 2024 and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to $600.0 million to an aggregate amount of up to $500.0 million, with the option to increase by up to $250.0 million. The Credit Amendment also reduces upfront and unused borrowing fees, provides for less restrictive covenants and offers more flexibility.
Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.
Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of 10.0% of the lesser of the Loan Cap and $40.0 million for three consecutive business days or an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i) 10.0% of the lesser of the Loan Cap and (ii) $40.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of August 3, 2019.
At August 3, 2019, the Company had $300.0 million borrowings outstanding and $10.5 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $189.5 million at August 3, 2019.
$200 Million Senior Notes
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of 6.25% Senior Notes due 2023 (the "Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the Senior Notes is payable on February 15 and August 15 of each year. The Senior Notes will mature on August 15, 2023. The Company may redeem all or a part of the Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Notes indenture), if redeemed during the 12-month period beginning on August 15 of the years indicated below:
Year
Percentage
2019
2021 and thereafter
If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase.
The Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of August 3, 2019, the Company was in compliance with all covenants and restrictions relating to the Senior Notes.
Note 12
Shareholders’ Equity
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended August 3, 2019 and August 4, 2018:
Foreign Currency Translation
Pension and Other Postretirement Transactions (1)
Derivative Financial Instrument Transactions (2)
Accumulated Other Comprehensive
Balance at May 4, 2019
Other comprehensive income (loss) before reclassifications
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
Tax benefit
Net reclassifications
Other comprehensive income (loss)
Balance at August 3, 2019
Balance at May 5, 2018
Other comprehensive loss before reclassifications
Tax (benefit) provision
Other comprehensive (loss) income
Balance at August 4, 2018
Balance at February 2, 2019
Other comprehensive (loss) income before reclassifications
Balance at February 3, 2018
(1)
Amounts reclassified are included in other income, net. Refer to Note 14 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 and selling and administrative expenses. Refer Note 15 and Note 16 to the condensed consolidated financial statements for additional information related to derivative financial instruments.
Note 13
Share-Based Compensation
The Company recognized share-based compensation expense of $3.2 million and $4.5 million during the thirteen weeks and $6.5 million and $8.1 million during the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively.
The Company issued 17,560 and 17,526 shares of common stock during thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, 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 3, 2019 and August 4, 2018, the Company issued 364,843 and 273,531 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 3, 2019 and August 4, 2018:
Total Number of
Restricted Shares
Weighted- Average Grant Date Fair Value
May 4, 2019
May 5, 2018
Granted
Forfeited
Vested
February 3, 2018
Of the 52,684 restricted shares granted during the thirteen weeks ended August 3, 2019, 12,914 shares have a cliff-vesting term of one year and 39,770 shares have a graded-vesting term of three years. Of the 450,234 restricted shares granted during the twenty-six weeks ended August 3, 2019, 12,914 shares have a cliff-vesting term of one year and 437,320 shares have a graded-vesting term of three years. 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.
Performance Share Awards
During the thirteen weeks ended August 3, 2019 and August 4, 2018, the Company granted no performance share awards. During the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company granted performance share awards for a targeted 180,000 and 155,000 shares, respectively, with a weighted-average grant date fair value of $23.42 and $31.84, 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.
Stock Options The following table summarizes stock option activity for the periods ended August 3, 2019 and August 4, 2018:
Stock Options
Exercised
Expired
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 related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value when the dividend equivalents are granted. The Company granted 53,215 and 37,167 RSUs to non-employee directors, including 1,559 and 747 RSUs for dividend equivalents, during the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively, with weighted-average grant date fair values of $19.38 and $34.33, respectively. The Company granted 54,329 and 37,948 RSUs to non-employee directors, including 2,673 and 1,528 RSUs for dividend equivalents, during the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, with weighted-average grant date fair values of $19.50 and $34.30, respectively.
Note 14
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
Service cost
Interest cost
Expected return on assets
Amortization of:
Actuarial loss (gain)
Prior service income
Total net periodic benefit income
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 15
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 2020. 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 August 3, 2019, August 4, 2018 and February 2, 2019, the Company had forward contracts maturing at various dates through May 2020, August 2019, and January 2020, 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)
Financial Instruments
Euro
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
Chinese yuan
New Taiwanese dollars
Other currencies
Total financial instruments
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of August 3, 2019, August 4, 2018 and February 2, 2019 are as follows:
Asset Derivatives
Liability Derivatives
Balance Sheet Location
Fair Value
Foreign Exchange Forward Contracts
For the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:
Foreign Exchange Forward Contracts: Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCL on Derivatives
Loss Reclassified from Accumulated OCL into Earnings
Loss Recognized in OCL on Derivatives
(Loss) Gain Reclassified from Accumulated OCL into Earnings
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 16 to the condensed consolidated financial statements.
Note 16
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).
Non-Qualified 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 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).
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company were previously granted at no cost to non-employee directors. These cash-equivalent 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 cash-equivalent RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). Additional information related to RSUs for non-employee directors is disclosed in Note 13 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 15 to the condensed consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July of 2018. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the Purchase Agreement (Level 3). Accretion of the mandatory purchase obligation and any fair value adjustments are recorded as interest expense. During the thirteen and twenty-six weeks ended August 3, 2019, the Company recorded accretion and remeasurement adjustments of $0.4 million and $0.5 million, respectively. The earnings projections and discount rate utilized in the estimate of the fair value of the mandatory purchase obligation require management judgment and are the assumptions to which the fair value calculation is the most sensitive. Refer to further discussion of the mandatory purchase obligation in Note 3 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 August 3, 2019, August 4, 2018 and February 2, 2019. The Company did not have any transfers between Level 1, Level 2 or Level 3 during the twenty-six weeks ended August 3, 2019 or August 4, 2018.
Level 1
Level 2
Level 3
Asset (Liability)
August 3, 2019:
Non-qualified deferred compensation plan assets
Non-qualified deferred compensation plan liabilities
Deferred compensation plan liabilities for non-employee directors
Restricted stock units for non-employee directors
Derivative financial instruments, net
August 4, 2018:
Cash equivalents – money market funds
Mandatory purchase obligation - Blowfish Malibu
February 2, 2019:
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 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 $673.1 million and $103.6 million at August 3, 2019 and August 4, 2018, 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, furniture and fixtures in the Company's retail stores and operating lease right-of-use assets, which were included in selling and administrative expenses for the respective periods.
Total impairment charges
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:
Carrying
Fair
Value
Total debt
(1) Excludes unamortized debt issuance costs and debt discount
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 17
Income Taxes
The Company’s consolidated effective tax rates were 23.7% and 25.3% for the thirteen weeks ended August 3, 2019 and August 4, 2018, respectively. During the thirteen weeks ended August 3, 2019, the Company did not recognize any discrete tax benefits. During the thirteen weeks ended August 4, 2018, the Company recognized discrete tax benefits of $0.2 million related to share-based compensation. If these discrete tax benefits had not been recognized during the thirteen weeks ended August 4, 2018, the Company's effective tax rate would have been 26.0%.
For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company's consolidated effective tax rates were 24.1% and 24.4%, respectively. The Company's effective tax rate was impacted by a discrete tax provision of $0.1 and discrete tax benefits of $0.7 million in the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, primarily related to share-based compensation. If these discrete taxes had not been recognized during the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company's effective tax rate would have been 23.9% and 25.7%, respectively.
As of August 3, 2019, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s foreign subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Tax Cuts and Jobs Act. The Company periodically evaluates its foreign investment opportunities and plans, as well as its foreign working capital needs, to determine the level of investment required and, accordingly, determines the level of foreign earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings. Due to the complexity of the hypothetical calculation, it is not practicable to estimate the amount of the deferred tax liability associated with these unremitted foreign earnings.
Note 18
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 August 3, 2019 were $30.8 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 August 3, 2019 is $9.6 million, of which $8.9 million is recorded within other liabilities and $0.7 million is recorded within other accrued expenses. Of the total $9.6 million reserve, $5.0 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 $14.0 million as of August 3, 2019. The Company expects to spend approximately $0.5 million in 2019, $0.1 million in each of the following four years and $13.1 million in the aggregate thereafter related to the on-site remediation.
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
The Company continues to evaluate its 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 19
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 the Company's 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 October 31, 2018, Vionic 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, Allen Edmonds and Vionic 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.
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
Parent
Guarantors
Eliminations
Current assets
Intercompany receivable – current
Intercompany receivable – noncurrent
Current liabilities
Intercompany payable – noncurrent
Caleres, Inc. shareholders’ equity
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE thirteen weeks ended August 3, 2019
Operating (loss) earnings
Interest (expense) income
Other income (expense)
Intercompany interest income (expense)
(Loss) earnings before income taxes
Income tax benefit (provision)
Equity in earnings (loss) of subsidiaries, net of tax
Less: Net loss attributable to noncontrolling interests
Less: Comprehensive loss attributable to noncontrolling interests
FOR THE twenty-six weeks ended August 3, 2019
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Investing activities
Intercompany investing
Financing activities
Intercompany financing
Increase (decrease) in cash and cash equivalents
Investment in subsidiaries
Intercompany payable – current
FOR THE thirteen weeks ended August 4, 2018
FOR THE twenty-six weeks ended August 4, 2018
Net cash provided by (used for) investing activities
Net cash (used for) provided by financing activities
(Decrease) increase in cash and cash equivalents
CONDENSED CONSOLIDATING BALANCE SHEET
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 second quarter of 2019:
Consolidated net sales increased $45.9 million, or 6.5%, to $752.5 million in the second quarter of 2019, driven by our 2018 acquisitions of Vionic and Blowfish Malibu, which contributed net sales growth of $46.8 million and $11.7 million on a consolidated basis, net of eliminations ($47.0 million and $12.6 million to the Brand Portfolio segment), respectively. Our Famous Footwear segment reported a $9.7 million, or 2.2% decline in sales, while same-store sales improved by 1.5%.
Consolidated gross profit increased $12.8 million, or 4.4%, to $305.9 million in the second quarter of 2019, compared to $293.1 million in the second quarter of 2018.
Consolidated operating earnings increased $5.7 million, or 17.6%, to $37.8 million in the second quarter of 2019, compared to $32.1 million in the second quarter of 2018.
Consolidated net earnings attributable to Caleres, Inc. were $25.3 million, or $0.61 per diluted share, in the second quarter of 2019, compared to $23.6 million, or $0.55 per diluted share, in the second quarter of 2018.
The following items should be considered in evaluating the comparability of our second quarter results in 2019 and 2018:
Acquisition of Vionic – In October 2018, we acquired Vionic, a growing brand with strong consumer loyalty and a complementary fit to the other brands within our Brand Portfolio segment. Vionic contributed $47.0 million to our Brand Portfolio net sales ($46.8 million on a consolidated basis, net of eliminations) for the second quarter of 2019. We incurred integration-related charges of $0.6 million during the second quarter of 2019, which are presented as restructuring and other special charges, net. Refer to Note 3 and Note 6 to the condensed consolidated financial statements for additional information related to these costs.
Acquisition of Blowfish Malibu – In July 2018, we acquired a controlling interest in Blowfish Malibu, which gives us additional access to the growing sneaker and casual lifestyle segment of the market. Blowfish contributed $15.7 million to our Brand Portfolio net sales ($14.2 million on a consolidated basis, net of eliminations) for the second quarter of 2019, compared to $3.1 million ($2.5 million on a consolidated basis, net of eliminations) for the second quarter of 2018.
Lease Accounting – We adopted ASU 2016-02, Leases (Topic 842), during the first quarter of 2019 using the modified retrospective transition method. Therefore, prior period financial information in the condensed consolidated financial statements has not been adjusted and is presented under the guidance in ASC 840. As a result of the adoption of the ASU, we recorded an operating lease right-of-use asset of $729.2 million and lease liabilities of $791.7 million as of February 3, 2019. Refer to Note 10 to the condensed consolidated financial statements for additional information on the adoption of this ASU.
Segment Presentation – During the first quarter of 2019, we changed our segment presentation to present net sales of the Brand Portfolio segment inclusive of both external and intersegment sales, with the elimination of intersegment sales and profit from Brand Portfolio to Famous Footwear reflected within the Eliminations and Other category. This presentation reflects the independent business models of both Brand Portfolio and Famous Footwear, as well as growth in intersegment activity driven by the acquisitions of Vionic and Blowfish Malibu. Prior period information has been recast to conform to the current presentation.
Incentive and Share-Based Compensation Plans – During the second quarter of 2019, our selling and administrative expenses decreased approximately $8.0 million compared to the second quarter of 2018, due to lower anticipated payments associated with our cash and share-based incentive compensation plans and lower expenses for our cash-equivalent restricted stock units granted to directors, reflecting the Company's lower stock price.
Recent Developments
In August 2019, the U.S. Administration announced plans to implement a tariff of 15% on approximately $300 billion of products imported into the U.S. from China. On August 13, 2019, the list of goods subject to the tariff, referred to as List 4, was divided into two parts. The tariffs for products on List 4a became effective as of September 1, 2019, while the tariffs for imported goods on List 4b are subject to a delay until December 15, 2019. Approximately 60% of our branded products within our Brand Portfolio segment are sourced from China, the majority of which are product categories included on List 4a. We continue to seek to mitigate the impacts of the tariffs in a number of ways, including diversifying production away from China. We now source approximately 40% of our branded products outside of China. We are also working with our factory partners to reduce cost, while selectively exploring price increases where they will be least disruptive to our customers. Through these actions, we believe we have mitigated the majority of the impact of the increased tariffs on our fiscal 2019 financial results. However, as more fully described in Risk Factors in Part II, Item 1A, a prolonged trade war and further escalation of tariffs may result in lower gross margins in the future on products that we source from China.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
($ millions)
% of
Net Sales
Net sales increased $45.9 million, or 6.5% to $752.5 million for the second quarter of 2019, compared to $706.6 million for the second quarter of 2018. Our Brand Portfolio segment reported a $54.6 million, or 17.9%, increase in net sales, driven by net sales of our Vionic and Blowfish Malibu brands, which were acquired in October and July 2018, respectively. The sales growth from acquisitions was partially offset by a 9.3% decrease in same-store sales. Our Famous Footwear segment reported a $9.7 million, or 2.2% decrease in net sales, driven by a decrease in our store base, which resulted in a $15.8 million decrease in sales from new and closed stores. The Company experienced weakness in sandal styles, particularly early in the quarter with the late start to spring weather, with business strengthening later in the quarter. In addition, demand increased for novelty and newness in our assortments and products, and our investments in product design, development and merchandising allowed us to capitalize on these trends. Our mix of e-commerce business continues to strengthen across segments and channels.
Net sales increased $91.4 million, or 6.8% to $1,430.2 million for the six months ended August 3, 2019 compared to $1,338.8 million for the six months ended August 4, 2018. Our Brand Portfolio segment reported a $112.1 million, or 19.0%, increase in net sales driven by our recent acquisitions. Our Famous Footwear segment reported a $20.9 million, or 2.6%, decrease in net sales, driven by a decrease in our store base, which resulted in a $23.3 million decrease in sales from new and closed stores.
Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months to the comparable retail calendar weeks in the prior year. 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 $12.8 million, or 4.4%, to $305.9 million for the second quarter of 2019, compared to $293.1 million for the second quarter of 2018, driven by sales growth from our recent acquisitions. As a percentage of net sales, gross profit decreased to 40.7% for the second quarter of 2019, compared to 41.5% for the second quarter of 2018, reflecting the difficult retail environment, particularly for warm-weather sandal styles, and a higher mix of e-commerce sales. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental shipping and handling required. In addition, the mix of retail and wholesale sales during the period can affect margins, as gross profit rates on retail sales are generally higher than on wholesale sales. The mix of retail versus wholesale net sales declined to 61% and 39% in the second quarter of 2019, compared to 70% and 30%, respectively, in the second quarter of 2018, driven by our recent acquisitions.
Gross profit increased $17.8 million, or 3.1%, to $585.8 million for the six months ended August 3, 2019, compared to $568.0 million for the six months ended August 4, 2018, reflecting sales growth from our recent acquisitions, partially offset by a lower gross profit rate. As a percentage of net sales, gross profit decreased to 41.0% for the six months ended August 3, 2019, compared to 42.4% for the six months ended August 4, 2018, reflecting the same factors impacting the quarter. In addition, cost of goods sold for the six months ended August 3, 2019 includes $7.2 million related to the amortization of the inventory adjustment required by purchase accounting and incremental markdowns related to the Carlos brand exit. Cost of goods sold for the six months ended August 4, 2018 included $0.5 million related to the amortization of the inventory adjustment required by purchase accounting. Retail and wholesale net sales were 60% and 40%, respectively, in the six months ended August 3, 2019, compared to 70% and 30%, respectively, in the six months ended August 3, 2019 and August 4, 2018.
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 $8.6 million, or 3.4%, to $267.5 million for the second quarter of 2019, compared to $258.9 million for the second quarter of 2018. The increase was driven by additional costs associated with our recently acquired Vionic and Blowfish Malibu brands, including higher amortization expense on the intangible assets, partially offset by lower expenses associated with cash and stock-based incentive compensation plans and lower store rent and facilities expenses associated with a smaller store base. As a percentage of net sales, selling and administrative expenses decreased to 35.6% for the second quarter of 2019, from 36.6% for the second quarter of 2018.
Selling and administrative expenses increased $20.6 million, or 4.0%, to $529.6 million for the six months ended August 3, 2019, compared to $509.0 million for the six months ended August 4, 2018, reflecting the same factors impacting the current quarter. As a percentage of net sales, selling and administrative expenses decreased to 37.0% for the six months ended August 3, 2019, from 38.0% for the six months ended August 4, 2018.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $0.6 million ($0.5 million on an after-tax basis, or $0.01 per diluted share) and $1.5 million ($1.1 million on an after-tax basis, or $0.03 per diluted share) were incurred in the second quarter and six months ended August 3, 2019, respectively, for integration-related costs for Vionic and costs associated with the exit of our Carlos brand. Restructuring and other special charges of $2.1 million ($1.6 million on an after-tax basis, or $0.03 per diluted share) and $3.9 million ($2.9 million on an after-tax basis, or $0.06 per diluted share) were incurred in the second quarter and six months ended August 4, 2018, respectively, for the integration and reorganization of our men's business and the acquisition of Blowfish Malibu in the second quarter of 2018.
Operating Earnings
Operating earnings increased $5.7 million, or 17.6%, to $37.8 million for the second quarter of 2019, compared to $32.1 million for the second quarter of 2018, reflecting earnings contribution from our recently acquired brands, better leveraging of expenses over higher sales volume and lower restructuring charges. As a percentage of net sales, operating earnings increased to 5.0% for the second quarter of 2019, compared to 4.6% for the second quarter of 2018.
Operating earnings decreased $0.4 million, or 0.8% to $54.7 million for the six months ended August 3, 2019, compared to $55.1 million for the six months ended August 4, 2018, primarily reflecting lower sales and gross margins at Famous Footwear and higher selling and administrative expenses, partially offset by the earnings contribution from our newly acquired brands. As a percentage of net sales, operating earnings decreased to 3.8% for the six months ended August 3, 2019, compared to 4.1% for the six months ended August 4, 2018.
Interest Expense, Net
Interest expense, net increased $3.8 million, or 105.1%, to $7.4 million for the second quarter of 2019, compared to $3.6 million for the second quarter of 2018, primarily due to higher average borrowings under our revolving credit agreement, which was used to fund the acquisition of Vionic in October 2018. As further discussed in Note 16 to the condensed consolidated financial statements, we recorded accretion and fair value adjustments of $0.4 million during the second quarter of 2019 for the mandatory purchase obligation associated with the Blowfish Malibu acquisition.
Interest expense, net increased $7.4 million, or 102.2%, to $14.7 million for the six months ended August 3, 2019, compared to $7.3 million for the six months ended August 4, 2018, reflecting the same factor driving the second quarter increase. We recorded $0.5 million in accretion and fair value adjustments during the six months ended August 3, 2019 for the mandatory purchase obligation associated with the Blowfish Malibu acquisition.
Other Income, Net
Other income, net decreased $0.4 million, or 13.9%, to $2.7 million for the second quarter of 2019, compared to $3.1 million for the second quarter of 2018, driven by lower expected return on assets for our domestic pension plan.
Other income, net decreased $1.0 million, or 14.6%, to $5.2 million for the six months ended August 3, 2019, compared to $6.2 million for the six months ended August 4, 2018. Refer to Note 14 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 23.7% for the second quarter of 2019, compared to 25.3% for the second quarter of 2018. There were no discrete tax benefits recognized during the second quarter of 2019. During the second quarter of 2018, we recognized discrete tax benefits of $0.2 million related to share-based compensation. If these discrete tax benefits had not been recognized during the second quarter of 2018, our effective tax rate would have been 26.0%.
For the six months ended August 3, 2019, our consolidated effective tax rate was 24.1%, compared to 24.4% for the six months ended August 4, 2018. We recognized a discrete tax provision of $0.1 million and discrete tax benefits of $0.7 million during the six months ended August 3, 2019 and August 4, 2018, respectively, primarily related to share-based compensation. If these discrete taxes had not been recognized, our effective tax rates would have been 23.9% and 25.7% for the six months ended August 3, 2019 and August 4, 2018, respectively.
Net Earnings Attributable to Caleres, Inc.
Net earnings attributable to Caleres, Inc. were $25.3 million and $34.4 million for the second quarter and six months ended August 3, 2019, compared to net earnings of $23.6 million and $40.9 million for the second quarter and six months ended August 4, 2018 as a result of the factors described above.
FAMOUS FOOTWEAR
($ millions, except sales per square foot)
Operating Results
Key Metrics
Same-store sales % change
Same-store sales $ change
Sales change from new and closed stores, net
Impact of changes in Canadian exchange rate on sales
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
Sales per square foot, excluding e-commerce (trailing twelve months)
Square footage (thousand sq. ft.)
Stores opened
Stores closed
Ending stores
Net sales decreased $9.7 million, or 2.2%, to $419.8 million for the second quarter of 2019, compared to $429.5 million for the second quarter of 2018. The sales decrease was driven by a decrease in our store base, which resulted in a $15.8 million decrease in sales from new and closed stores, partially offset by a 1.5% increase in same-store sales. Famous Footwear continues to experience strong growth in e-commerce sales. During the second quarter of 2019, we experienced weakness in our sandals styles and certain athletic styles, particularly early in the quarter with the late start to spring weather, with business strengthening later in the quarter. We made excellent progress injecting more freshness into the assortment, contributing to the same-store sales increase. We opened three stores and closed 15 stores during the second quarter of 2019, resulting in 973 stores and total square footage of 6.4 million at the end of the second quarter of 2019, compared to 1,008 stores and total square footage of 6.7 million at the end of the second quarter of 2018. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment's sales, with approximately 77% of our net sales made to program members in the second quarter of 2019, consistent with the second quarter of 2018. The relaunch of Rewards during the first quarter of 2019 has driven increased consumer engagement among existing members and continued growth in our new and reactivated membership base.
Net sales decreased $20.9 million, or 2.6% to $772.0 million for the six months ended August 3, 2019, compared to $792.9 million for the six months ended August 4, 2018. The sales decrease was driven by a decrease in our store base, which resulted in a $23.3 million decrease in sales from new and closed stores, partially offset by a 0.4% increase in same-store sales in the six months ended August 3, 2019. On a trailing twelve-month basis, sales per square foot, excluding e-commerce, decreased 3.2% to $219 for the twelve months ended August 3, 2019, compared to $227 for the twelve months ended August 4, 2018.
Gross profit decreased $4.8 million, or 2.6%, to $182.3 million for the second quarter of 2019, compared to $187.1 million for the second quarter of 2018 reflecting lower net sales and a lower gross profit rate. As a percentage of net sales, our gross profit decreased slightly to 43.4% for the second quarter of 2019, compared to 43.6% for the second quarter of 2018, reflecting the competitive selling environment and a higher mix of lower margin product.
Gross profit decreased $17.3 million, or 4.9%, to $335.0 million for the six months ended August 3, 2019, compared to $352.3 million for the six months ended August 4, 2018. As a percentage of net sales, our gross profit decreased to 43.4% for the six months ended August 3, 2019, compared to 44.4% for the six months ended August 4, 2018, reflecting the promotional retail environment and higher freight expenses due to strong growth in e-commerce sales in the six months ended August 3, 2019. We expect the trend toward a higher mix of e-commerce sales to continue.
Selling and administrative expenses decreased $3.1 million, or 2.0%, to $150.8 million for the second quarter of 2019, compared to $153.9 million for the second quarter of 2018. The decrease was primarily driven by lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses. We saw a strong response to our new television advertising, contributing to our same-store sales improvement in the quarter. As a percentage of net sales, selling and administrative expenses were 35.9% for the second quarter of 2019, consistent with the second quarter of 2018.
Selling and administrative expenses decreased $4.6 million, or 1.5%, to $292.6 million for the six months ended August 3, 2019, compared to $297.2 million for the six months ended August 4, 2018, reflecting lower rent and facilities expense attributable to our smaller store base, partially offset by higher marketing expenses, due in part to the launch of our new Rewards program in the first quarter of 2019. As a percentage of net sales, selling and administrative expenses increased to 37.9% for the six months ended August 3, 2019, compared to 37.5% for the six months ended August 4, 2018.
Operating earnings decreased $1.7 million, or 5.1%, to $31.5 million for the second quarter of 2019, compared to $33.2 million for the second quarter of 2018, reflecting the factors described above. As a percentage of net sales, operating earnings decreased to 7.5% for the second quarter of 2019, compared to 7.7% for the second quarter of 2018.
Operating earnings decreased $12.7 million, or 23.1%, to $42.4 million for the six months ended August 3, 2019, compared to $55.1 million for the six months ended August 4, 2018, reflecting the factors described above. As a percentage of net sales, operating earnings decreased to 5.5% for the six months ended August 3, 2019, compared to 6.9% for the six months ended August 4, 2018.
BRAND PORTFOLIO
Wholesale/retail sales mix (%)
Change in wholesale net sales ($) (2)
Unfilled order position at end of period
Impact of changes in Canadian exchange rate on retail sales
Square footage (thousands sq. ft.)
Direct-to-consumer includes sales of our retail stores and e-commerce sites, sales to online-only retailers and sales through customers' websites that we fulfill on a drop-ship basis. The increase for the second quarter and first half of 2019 is due, in part, to direct-to-consumer sales of Vionic and Blowfish Malibu.
Includes sales from our acquired Vionic and Blowfish Malibu brands, which contributed net sales growth of $47.0 million and $12.6 million, respectively, for the second quarter of 2019, and $101.8 million and $32.0 million, respectively, for the first half of 2019.
Net sales increased $54.6 million, or 17.9%, to $359.6 million for the second quarter of 2019, compared to $305.0 million for the second quarter of 2018 driven by net sales from our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $47.0 million and $12.6 million, respectively, to our net sales growth in the second quarter of 2019. We experienced lower net sales of our Allen Edmonds brand, as planned, as well as lower Naturalizer sales, partially offset by higher net sales of our Franco Sarto brand. Sales were negatively impacted by a difficult and highly promotional retail environment and same-store-sales declined 9.3% in our retail stores. However, e-commerce sales continue to grow as a percentage of the business. During the second quarter of 2019, we experienced weakness in the sandals product category, while casual and sport styles have trended well. We opened one store during the second quarter of 2019, resulting in a total of 231 stores and total square footage of 0.4 million at the end of the second quarter of 2019, compared to 233 stores and total square footage of 0.4 million at the end of the second quarter of 2018. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, decreased to $398 for the twelve months ended August 3, 2019, compared to $437 for the twelve months ended August 4, 2018.
Net sales increased $112.1 million, or 19.0%, to $700.6 million for the six months ended August 3, 2019, compared to $588.5 million for the six months ended August 4, 2018, driven by net sales from acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $101.8 million and $32.0 million, respectively, to our net sales growth in the first half of 2019. The sales growth from acquisitions was partially offset by the planned reduction in Allen Edmonds sales and an 8.9% decline in same-store sales in our retail stores. During the six months ended August 3, 2019, we opened three stores and closed one store.
Our unfilled order position for our wholesale sales increased $26.8 million, or 10.2%, to $290.1 million at August 3, 2019, compared to $263.3 million at August 4, 2018. The increase in our backlog order levels was driven by the acquisitions of Blowfish Malibu and Vionic in 2018.
During the second quarter of 2019, we announced the addition of two new brands to our portfolio, enhancing the relevance and diversity of our product offerings. Our exclusive partnership with Veronica Beard will allow us to further expand our portfolio into the attainable luxury space, while the relaunch of Zodiac will target a more casual segment through its offerings rooted in Bohemian and western design trends. We also announced a joint venture with Brand Investment Holding, a member of the Gemkell Group. The inaugural brands to be distributed in greater China, including Hong Kong, Macau and Taiwan, will be Naturalizer and Sam Edelman. Both will be marketed and sold across multiple channels, including branded retail stores and e-commerce sites, beginning in the third quarter of 2019.
Gross profit increased $16.5 million, or 15.3%, to $124.8 million for the second quarter of 2019, compared to $108.3 million for the second quarter of 2018, primarily reflecting net sales growth from the Vionic acquisition. As a percentage of net sales, our gross profit decreased to 34.7% for the second quarter of 2019, compared to 35.5% for the second quarter of 2018, reflecting the promotional retail environment.
Gross profit increased $34.6 million, or 15.9%, to $251.7 million for the six months ended August 3, 2019, compared to $217.1 million for the six months ended August 4, 2018, reflecting our net sales growth, partially offset by the incremental cost of goods sold in the six months ended August 3, 2019 related to purchase accounting inventory adjustments and incremental markdowns related to the Carlos brand exit. As a percentage of net sales, our gross profit decreased to 35.9% for the six months ended August 3, 2019, compared to 36.9% for the six months ended August 4, 2018.
As discussed in the Overview section, the U.S. Administration has announced plans to implement a tariff on many consumer products imported into the U.S. from China. Although we have increased the sourcing of our branded footwear within our Brand Portfolio segment from other countries in recent years to approximately 40%, the majority of our footwear is sourced from China. We believe we have mitigated the majority of the impact of the increased tariffs on our fiscal 2019 financial results. However, a prolonged trade war and further escalation of tariffs may result in lower gross margins in the future on products that we source from China.
Selling and administrative expenses increased $20.3 million, or 22.5%, to $110.9 million for the second quarter of 2019, compared to $90.6 million for the second quarter of 2018, reflecting higher expenses from our Vionic and Blowfish Malibu acquisitions. As a percentage of net sales, selling and administrative expenses increased to 30.8% for the second quarter of 2019, compared to 29.7% for the second quarter of 2018.
Selling and administrative expenses increased $38.1 million, or 20.5%, to $224.3 million for the six months ended August 3, 2019, compared to $186.2 million for the six months ended August 4, 2018, driven by the same reason listed above. As a percentage of net sales, selling and administrative expenses increased to 32.0% for the six months ended August 3, 2019, compared to 31.6% for the six months ended August 4, 2018.
Restructuring and other special charges were $1.8 million in the second quarter of 2018 related to the integration and reorganization of our men's business, with no corresponding charges in the second quarter of 2019. Restructuring and other special charges were $0.6 million, primarily related to the acquisition of Vionic, in the six months ended August 3, 2019, and $3.4 million, related to the integration and reorganization of men's business, in the six months ended August 4, 2018. Refer to Note 6 to the condensed consolidated financial statements for additional information related to these charges.
Operating earnings decreased $2.0 million, or 12.6%, to $13.9 million for the second quarter of 2019, compared to $15.9 million for the second quarter of 2018 as a result of the factors described above. As a percentage of net sales, operating earnings decreased to 3.9% for the second quarter of 2019, compared to 5.2% in the second quarter of 2018.
Operating earnings decreased $0.7 million, or 2.6%, to $26.8 million for the six months ended August 3, 2019, compared to $27.5 million for the six months ended August 4, 2018. As a percentage of net sales, operating earnings decreased to 3.8% for the six months ended August 3, 2019, compared to 4.7% in the six months ended August 4, 2018.
ELIMINATIONS AND OTHER
Operating loss
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries. The net sales increase of $1.0 million and $0.2 for the second quarter and six months ended August 3, 2019, respectively, reflects a lower sales elimination for sales from Brand Portfolio to Famous Footwear. Selling and administrative expenses of $5.8 million and $12.8 million were incurred in the second quarter and first half of 2019, respectively, compared to $14.4 million and $25.6 million for the second quarter and first half of 2018. The decrease for the respective periods was driven by lower expenses for our cash and share-based incentive compensation plans, including lower expenses for our cash-equivalent restricted stock units granted to directors, reflecting a lower stock price.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
Total debt obligations of $498.2 million at August 3, 2019 increased $300.5 million, from $197.7 million at August 4, 2018, and decreased $34.7 million, from $532.9 million at February 2, 2019. The increase from August 4, 2018 reflects higher borrowings under our revolving credit agreement to fund the acquisition of Vionic in October 2018. The decrease from February 2, 2019 includes $35.0 million in repayments under our revolving credit agreement. Net interest expense for the second quarter of 2019 increased $3.8 million to $7.4 million, compared to $3.6 million for the second quarter of 2019, and increased $7.4 million to $14.7 million, compared to $7.3 million in the first half of 2019, as a result of higher average borrowings under our revolving credit agreement.
As further discussed in Note 11, the Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to $500.0 million, with the option to increase by up to $250.0 million. At August 3, 2019, we had $300.0 million in borrowings and $10.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $189.5 million at August 3, 2019. We were in compliance with all covenants and restrictions under the Credit Agreement as of August 3, 2019. We anticipate incremental interest expense going forward until the borrowings to fund the acquisition of Vionic have been paid off. Refer to further discussion regarding the Credit Agreement in Note 11 to the consolidated financial statements.
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 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. The Senior Notes bear interest at 6.25%, which is payable on February 15 and August 15 of each year. 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 August 3, 2019, we were in compliance with all covenants and restrictions relating to the Senior Notes.
Working Capital and Cash Flow
Change
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $25.6 million higher in the six months ended August 3, 2019 as compared to the six months ended August 4, 2018, primarily reflecting the following factors:
A smaller increase in inventory in the six months ended August 3, 2019 compared to the comparable period in 2018; and
A larger decrease in receivables in the six months ended August 3, 2019, compared to the six months ended August 4, 2018; partially offset by,
Cash used for investing activities was $8.1 million lower in the six months ended August 3, 2019 as compared to the six months ended August 4, 2018, reflecting the acquisition of Blowfish Malibu in the six months ended August 4, 2018, partially offset by higher purchases of property and equipment in the six months ended August 3, 2019, as we invest in automation at our new distribution center in Chino, California.
Cash used for financing activities was $60.3 million higher for the six months ended August 3, 2019 as compared to the six months ended August 4, 2018, reflecting more shares repurchased under our stock repurchase programs during the six months ended August 3, 2019 and $35.0 million of net repayments under our revolving credit agreement.
A summary of key financial data and ratios at the dates indicated is as follows:
Working capital (deficit) surplus ($ millions) (1)
Current ratio (2)
0.97:1
1.73:1
1.14:1
Debt-to-capital ratio (3)
Working capital has been computed as total current assets less total current liabilities. The deficit as of August 3, 2019 includes $143.2 million of operating lease obligations as a result of the adoption of ASC 842, as further discussed in Note 2 and Note 10 to the condensed consolidated financial statements.
The current ratio has been computed by dividing total current assets by total current liabilities. The current ratio as of August 3, 2019 includes $143.2 million of operating lease obligations.
(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 August 3, 2019 was a deficit of $28.3 million, which was $466.1 million and $151.4 million lower than at August 4, 2018 and February 2, 2019, respectively. Our current ratio was 0.97 to 1 as of August 3, 2019, compared to 1.73 to 1 at August 4, 2018 and 1.14:1 at February 2, 2019. The decrease in both working capital and the current ratio from August 4, 2018 and February 2, 2019 primarily reflects the impact of the adoption of ASC 842 on the balance sheet as further discussed in Note 2 to the condensed consolidated financial statements, including the addition of current operating lease obligations of $143.2 million, and higher average borrowings under our revolving credit agreement to fund the acquisition of Vionic in October 2018. In addition, our recent acquisitions impact these metrics. A significant portion of the purchase price of Vionic is attributed to noncurrent assets, such as tradenames, goodwill, and other intangibles that are excluded from working capital. Our debt-to-capital ratio was 44.4% as of August 3, 2019, compared to 21.1% as of August 4, 2018 and 45.6% at February 2, 2019. The increase in our debt-to-capital ratio from August 4, 2018 primarily reflects higher average borrowings under our revolving credit agreement.
At August 3, 2019, we had $42.6 million of cash and cash equivalents. Approximately 25% 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 second quarter of 2019 and 2018. 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 and finance lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, 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.
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, changes in borrowings under our revolving credit agreement 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 2, 2019.
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 other than the adoption of ASC 842, as further described in Note 10 to the condensed consolidated financial statements. For further information on the Company's critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 2, 2019.
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) imposition of tariffs; (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) foreign currency fluctuations; (xii) changes to tax laws, policies and treaties; (xiii) the ability to recruit and retain senior management and other key associates; (xiv) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xv) the ability to secure/exit leases on favorable terms; (xvi) the ability to maintain relationships with current suppliers; and (xvii) 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 2, 2019, 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 2, 2019.
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 ongoing monitoring by our internal auditors.
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 August 3, 2019, 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.
On July 6, 2018, we acquired Blowfish Malibu. In addition, on October 18, 2018, we acquired Vionic. As a result of these acquisitions, we are in the process of reviewing the internal control structure of Blowfish Malibu and Vionic and, if necessary, will make appropriate internal control enhancements as we integrate the acquired businesses. Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting during the quarter ended August 3, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
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 18 to the condensed consolidated financial statements and incorporated by reference herein.
ITEM 1A
RISK FACTORS
Except as disclosed below, 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 2, 2019.
The imposition of tariffs on our products may result in higher costs and decreased gross profits.
Recent international events have introduced greater uncertainty with respect to trade wars and tariffs, which may affect trade between the United States and other countries, particularly with China. We rely primarily on foreign sourcing for our footwear through third-party manufacturing facilities located outside the United States, with approximately 60% of our footwear sourced from manufacturing facilities in China. On August 28, 2019, the U.S. Administration announced plans to implement a tariff of 15% on approximately $300 billion of products imported into the U.S. from China, effective as of September 1, 2019. While the majority of our footwear sourced from China is subject to the tariff that became effective September 1, 2019, certain types of footwear are subject to a delay until December 15, 2019. While we continue to focus on mitigating the impact of the increasing tariffs, if we are unable to mitigate the impact of the enacted tariffs or if there is a prolonged trade war involving the further escalation of tariffs, our product costs may increase on a significant portion of our branded footwear that we source internationally. Higher product costs may in turn result in lower gross margins in the future for products that we source from China. In addition, while it is too early to predict how the trade wars may impact our business, our net sales may also be impacted by consumers’ fear of an economic slowdown or lower discretionary spending.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information relating to our repurchases of common stock during the second quarter of 2019:
Fiscal Period
Total Number of Shares Purchased (1)
Average Price Paid
per Share (1)
Total Number Purchased as Part of Publicly Announced Program (2)
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
May 5, 2019 - June 1, 2019
June 2, 2019 - July 6, 2019
July 7, 2019 - August 3, 2019
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 of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards.
On August 25, 2011, the Board of Directors approved a stock repurchase program ("2011 Program") authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock and on December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the repurchase of an additional 2,500,000 shares of our outstanding common stock. We can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase programs do not have an expiration date. Under these plans, the Company repurchased 1,530,478 shares during the thirteen and twenty-six weeks ended August 3, 2019. During the twenty-six weeks ended August 4, 2018, the Company repurchased 100,000 shares under the 2011 Program. As of August 3, 2019, there were 727,373 shares authorized to be repurchased under the repurchase programs. Our repurchases of common stock are limited under our debt agreements. Subsequent to quarter-end, the Board of Directors approved a stock repurchase program authorizing the repurchase of an additional 5,000,000 shares of our outstanding common stock.
DEFAULTS UPON SENIOR SECURITIES
None.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5
ITEM 6
EXHIBITS
Exhibit
No.
3.1
Restated Certificate of Incorporation of Caleres, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed June 1, 2015.
3.2
Bylaws of the Company as amended through March 14, 2019, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 20, 2019.
31.1
†
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
iXBRL Instance Document
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
iXBRL Taxonomy Extension Schema Document
iXBRL Taxonomy Extension Calculation Linkbase Document
iXBRL Taxonomy Extension Label Linkbase Document
iXBRL Taxonomy Presentation Linkbase Document
iXBRL Taxonomy Definition Linkbase Document
† Denotes exhibit is filed with this Form 10-Q.
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.
Date: September 11, 2019
/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