Company Quick10K Filing
Quick10K
Caleres
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2019-01-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-20 Earnings, Exhibits
8-K 2018-10-18 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-09-04 Earnings, Exhibits
8-K 2018-05-31 Officers, Shareholder Vote
8-K 2018-03-13 Earnings, Exhibits
8-K 2018-01-24 Officers, Exhibits
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CANN General Cannabis 0
INNO Innocap 0
ISNS Image Sensing Systems 0
MDLY Medley Management 0
CCS Century Communities 0
LIQT Liqtech International 0
CANF Can-Fite BioPharma 0
CAL 2018-11-03
Part I Financial Information
Item 1 Financial Statements
Note 1 Basis of Presentation
Note 2 Impact of New Accounting Pronouncements
Note 3 Acquisitions
Note 4 Revenues
Note 5 Earnings per Share
Note 6 Restructuring and Other Initiatives
Note 7 Business Segment Information
Note 8 Inventories
Note 9 Goodwill and Intangible Assets
Note 10 Shareholders' Equity
Note 11 Share-Based Compensation
Note 12 Retirement and Other Benefit Plans
Note 13 Risk Management and Derivatives
Note 14 Fair Value Measurements
Note 15 Income Taxes
Note 16 Commitments and Contingencies
Note 17 Financial Information for The Company and Its Subsidiaries
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
Part II Other Information
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits
EX-31.1 exhibit311certificationsq3.htm
EX-31.2 exhibit312certificationsq3.htm
EX-32.1 exhibit321certificationsq3.htm

Caleres Earnings 2018-11-03

CAL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cal20181103.htm 10-Q Document


 
UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
 
FORM 10-Q 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 3, 2018
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the transition period from  _____________  to  _____________
Commission File Number: 1-2191 

CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(I.R.S. Employer Identification No.)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No ¨

Indicate by check mark whether the registrant has submitted electronically 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  þ   No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨     No þ 
 
As of November 30, 2018, 42,877,545 common shares were outstanding.

1



INDEX
 




2



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

($ thousands)
November 3, 2018

 
October 28, 2017

 
February 3, 2018

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
90,491


$
31,379


$
64,047

Receivables, net
192,246


132,942


152,613

Inventories, net
698,265


598,365


569,379

Prepaid expenses and other current assets
63,166


40,982


60,750

Total current assets
1,044,168

 
803,668

 
846,789

 
 
 
 
 
 
Other assets
92,279


68,316


90,659

Goodwill
283,345

 
127,081

 
127,081

Intangible assets, net
370,507

 
213,101

 
212,087

Property and equipment
556,967

 
535,149

 
542,812

Allowance for depreciation
(338,864
)
 
(320,167
)
 
(330,013
)
Property and equipment, net
218,103


214,982


212,799

Total assets
$
2,008,402

 
$
1,427,148

 
$
1,489,415

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
350,000

 
$
20,000

 
$

Trade accounts payable
317,499


223,832


272,962

Other accrued expenses
209,479


173,487


157,197

Total current liabilities
876,978

 
417,319

 
430,159

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,817


197,348


197,472

Deferred rent
51,930


50,814


53,071

Other liabilities
114,592


86,580


89,751

Total other liabilities
364,339

 
334,742

 
340,294

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
432

 
430

 
430

Additional paid-in capital
143,754

 
127,454

 
136,460

Accumulated other comprehensive loss
(16,624
)
 
(28,122
)
 
(15,170
)
Retained earnings
638,191

 
573,883

 
595,769

Total Caleres, Inc. shareholders’ equity
765,753


673,645


717,489

Noncontrolling interests
1,332


1,442


1,473

Total equity
767,085

 
675,087

 
718,962

Total liabilities and equity
$
2,008,402

 
$
1,427,148

 
$
1,489,415

See notes to condensed consolidated financial statements.

3



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net sales
$
775,829

$
774,656

$
2,114,583

$
2,083,119

Cost of goods sold
465,219

457,771

1,235,950

1,207,865

Gross profit
310,610

316,885

878,633

875,254

Selling and administrative expenses
265,522

266,507

774,555

769,188

Restructuring and other special charges, net
5,340


9,240

3,973

Operating earnings
39,748

50,378

94,838

102,093

Interest expense, net
(4,210
)
(4,046
)
(11,495
)
(13,230
)
Other income, net
3,085

2,492

9,254

7,598

Earnings before income taxes
38,623

48,824

92,597

96,461

Income tax provision
(9,468
)
(14,451
)
(22,651
)
(29,530
)
Net earnings
29,155

34,373

69,946

66,931

Net earnings (loss) attributable to noncontrolling interests
2

(14
)
(65
)
47

Net earnings attributable to Caleres, Inc.
$
29,153

$
34,387

$
70,011

$
66,884

 




 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.68

$
0.80

$
1.62

$
1.56

 




 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.67

$
0.80

$
1.62

$
1.55

 




 
 
Dividends per common share
$
0.07

$
0.07

$
0.21

$
0.21

See notes to condensed consolidated financial statements.

4




CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net earnings
$
29,155

$
34,373

$
69,946

$
66,931

Other comprehensive income (loss), net of tax:
 

 

 

 

Foreign currency translation adjustment
14

(633
)
(1,045
)
647

Pension and other postretirement benefits adjustments
451

379

1,353

1,106

Derivative financial instruments
(320
)
183

(1,762
)
559

Other comprehensive income (loss), net of tax
145

(71
)
(1,454
)
2,312

Comprehensive income
29,300

34,302

68,492

69,243

Comprehensive (loss) income attributable to noncontrolling interests
(9
)
(3
)
(141
)
73

Comprehensive income attributable to Caleres, Inc.
$
29,309

$
34,305

$
68,633

$
69,170

See notes to condensed consolidated financial statements.


5



CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

Operating Activities
 
 

Net earnings
$
69,946

$
66,931

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

 

Depreciation
33,189

34,354

Amortization of capitalized software
8,282

10,786

Amortization of intangible assets
3,880

3,059

Amortization of debt issuance costs and debt discount
1,610

1,296

Share-based compensation expense
11,615

8,394

Loss on disposal of property and equipment
1,772

1,004

Impairment charges for property and equipment
2,040

2,995

Deferred rent
(1,141
)
(310
)
Provision for doubtful accounts
426

352

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

 

Receivables
(6,457
)
19,826

Inventories
(57,138
)
(11,541
)
Prepaid expenses and other current and noncurrent assets
(9,788
)
890

Trade accounts payable
17,113

(42,702
)
Accrued expenses and other liabilities
21,135

26,588

Other, net
(2,074
)
339

Net cash provided by operating activities
94,410

122,261

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(35,244
)
(34,364
)
Capitalized software
(3,505
)
(4,531
)
Acquisition of Blowfish Malibu, net of cash received
(17,284
)

Acquisition of Vionic, net of cash received
(344,942
)

Net cash used for investing activities
(400,975
)
(38,895
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
360,000

450,000

Repayments under revolving credit agreement
(10,000
)
(540,000
)
Repayments of capital lease obligation
(114
)

Dividends paid
(9,059
)
(9,033
)
Acquisition of treasury stock
(3,288
)
(5,993
)
Issuance of common stock under share-based plans, net
(4,318
)
(2,477
)
Net cash provided by (used for) financing activities
333,221

(107,503
)
Effect of exchange rate changes on cash and cash equivalents
(212
)
184

Increase (decrease) in cash and cash equivalents
26,444

(23,953
)
Cash and cash equivalents at beginning of period
64,047

55,332

Cash and cash equivalents at end of period
$
90,491

$
31,379

See notes to condensed consolidated financial statements.

6



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

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

Note 2
Impact of New Accounting Pronouncements

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

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

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

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amended Accounting Standards Codification ("ASC") 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service

7



cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net periodic benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU was effective for the Company at the beginning of the 2018 fiscal year. The Company adopted the ASU during the first quarter of 2018 on a retrospective basis using the practical expedient permitted by the ASU and reclassified $2.5 million and $7.6 million of non-service cost components of net periodic benefit income for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, to other income, net in the condensed consolidated statements of earnings. For the thirteen and thirty-nine weeks ended November 3, 2018, $3.1 million and $9.3 million, respectively, of non-service cost components of net periodic benefit income is presented as other income. Refer to Note 12 to the condensed consolidated financial statements for additional information.

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

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

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted the ASU in the third quarter of 2018 on a prospective basis, which did not have a material impact on the Company's condensed consolidated financial statements.

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

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


8



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. 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 $28.1 million, including approximately $9.1 million preliminarily assigned to the mandatory purchase obligation, which will be paid upon settlement in 2021. The remaining $19.0 million (or $16.8 million, net of $2.2 million of cash received) was funded with cash. The preliminary estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheet, is presented on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments will be recorded as interest expense. The operating results of Blowfish since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment.

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

The Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) and $1.5 million ($1.1 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition-related costs of $0.1 million ($0.1 million on an after-tax basis) and $0.3 million ($0.2 million on an after-tax basis, or $0.01 per diluted share) in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs.

9




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

($ thousands)
 
July 6, 2018

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

Receivables
 
4,612

Inventories
 
6,400

Prepaid expense and other current assets
 
317

Total current assets
 
13,536

Other assets
 
539

Goodwill
 
5,701

Intangible assets
 
17,600

Property and equipment
 
112

Total assets
 
$
37,488

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

Other accrued expenses
 
5,739

Total current liabilities
 
8,654

Deferred income taxes
 
617

Other liabilities
 
77

Total liabilities
 
9,348

Net assets
 
$
28,140


The assets and liabilities of Blowfish Malibu were recorded at their estimated fair values and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill during the second quarter of 2018. The allocation of the purchase price was based on certain preliminary valuations and analyses. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. During the thirteen weeks ended November 3, 2018, the Company recorded a purchase price allocation adjustment of $1.8 million to intangible assets, with a corresponding adjustment to goodwill.

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.

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 condensed consolidated financial statements for additional information regarding goodwill and intangible assets.


10



During the thirteen and thirty-nine weeks ended November 3, 2018, Blowfish Malibu contributed $6.4 million and $8.9 million of net sales, respectively. Blowfish Malibu experienced a net loss of approximately $0.5 million and $0.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively. The loss primarily reflects incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting, which was $0.9 million and $1.5 million for the thirteen and thirty-nine weeks ended November 3, 2018. The net loss excludes the acquisition costs and incremental interest expense associated with the transaction.

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 is estimated to be $360.7 million (or $352.2 million, net of $8.5 million of cash received). Of the $352.2 million, $344.9 million was funded during the thirteen weeks ended November 3, 2018 and $7.3 million was funded early in the fourth quarter. 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.

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 Company incurred acquisition-related costs of $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share) in the thirteen weeks ended November 3, 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs. In addition, the Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen weeks ended November 3, 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting.


11



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 preliminarily allocated the purchase price as of the acquisition date, October 18, 2018, as follows: 

($ thousands)
 
October 18, 2018

ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
 
$
8,502

Receivables
 
28,930

Inventories
 
65,700

Prepaid expense and other current assets
 
1,489

Total current assets
 
104,621

Goodwill
 
148,763

Intangible assets
 
144,700

Property and equipment
 
6,864

Total assets
 
$
404,948

 
 
 
LIABILITIES AND EQUITY
 
 
Current liabilities:
 
 
Trade accounts payable
 
$
24,085

Other accrued expenses
 
16,632

Total current liabilities
 
40,717

Other liabilities - capital lease obligation
 
3,541

Total liabilities
 
44,258

Net assets
 
$
360,690


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

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 condensed consolidated financial statements for additional information regarding goodwill and intangible assets.

Pro Forma Information

The table below illustrates the unaudited pro forma impact on operating results as if the acquisition had been completed as of the beginning of 2017. Prior to the acquisition, Vionic’s fiscal calendar ended on December 31 of each year. For purposes of the financial information presented, the Company has combined the operating results of the relevant fiscal quarters for Vionic with the Company’s actual fiscal quarters. For example, the information presented in the thirteen weeks ended columns includes

12



Vionic’s operations for the fiscal months of July through September of each respective period. The information presented in the thirty-nine weeks ended columns includes Vionic’s operations for the fiscal months of January through September for each respective period.
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Net sales
$
814,700

$
816,429

$
2,252,727

$
2,205,046

Net earnings attributable to Caleres, Inc.
31,181

33,408

74,680

65,603

Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.72

$
0.78

$
1.73

$
1.53

Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.72

$
0.77

$
1.73

$
1.52


For purposes of the pro forma disclosures, the pro forma adjustments primarily include the following:

The elimination of material costs from thirteen and thirty-nine weeks ended November 3, 2018 that were directly attributable to the acquisition and have no continuing impact on operating results, including:
the non-cash cost of goods sold impact of $0.9 million related to the fair value adjustment to the acquired inventory, and related tax effects; and
transaction costs of $4.1 million, and related tax effects.
Amortization of acquired intangibles of $2.0 million and $5.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $2.0 million and $6.0 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.
Estimated interest expense on additional borrowings under the Company's revolving credit agreement at the Company's current interest rate of 3.75%. Assumes no paydown of the revolving credit agreement during the thirty-nine weeks ended October 28, 2017 and gradual paydown to $285.0 million from October 29, 2017 to November 3, 2018.
Tax impact of the change in tax status of Vionic and the tax impact of the pro forma adjustments based on the estimated statutory tax rate in effect during the respective periods. The tax effect of the pro forma interest expense adjustments for
borrowings under the Company's revolving credit agreement was calculated at 25.74% for the thirteen and thirty-nine weeks ended November 3, 2018 and at 38.9% for the thirteen and thirty-nine weeks ended October 28, 2017, reflecting the Company's effective tax rates. The tax effect of the other pro forma adjustments for the thirty-nine weeks ended November 3, 2018 and October 28, 2017 was calculated utilizing an estimated effective tax rate of 28.0% and 40.0%, respectively.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the Company completed the acquisition on the date assumed, nor is it necessarily indicative of the results of operations that may be expected in future periods.

During the period from the acquisition date through November 3, 2018, Vionic contributed $5.8 million of net sales and reported a net loss of approximately $1.2 million, primarily associated with the incremental cost of goods sold of $0.9 million related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the Company's acquisition costs and any incremental interest expense associated with the transaction.

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

Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. During the thirty-nine weeks ended October 28, 2017, the Company recognized $4.9 million in cost of goods sold ($3.0 million on an after-tax basis, or $0.07 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017. As further discussed in Note 6 to the consolidated financial statements, the Company also incurred acquisition and integration costs during the thirty-nine weeks ended November 3, 2018 and October 28, 2017.

13



Note 4
Revenues

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

The impact of the adoption of Topic 606 on the condensed balance sheet as of November 3, 2018 was as follows:
 
 
November 3, 2018
($ thousands)
 
As reported
 
Balances without adoption of Topic 606
 
Effect of change
Higher/(Lower)
 
 
 
 
 
 
 
Balance sheet
 
 
 
 
 
 
Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
 
Receivables, net
 
$
192,246

 
$
183,542

 
$
8,704

Inventories, net
 
698,265

 
704,655

 
(6,390
)
Prepaid expenses and other current assets
 
63,166

 
55,018

 
8,148

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 

Other accrued expenses
 
209,479

 
193,606

 
15,873

 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Retained earnings
 
638,191

 
643,602

 
(5,411
)


14



Adoption of the standard also required various changes that impacted the statement of earnings. These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the statement of earnings for the thirteen and thirty-nine weeks ended November 3, 2018 was as follows:

 
 
For the Thirteen Weeks Ended November 3, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
775,829

 
$
777,254

 
$
(1,425
)
Cost of goods sold
 
465,219

 
465,126

 
93

Gross profit
 
310,610


312,128

 
(1,518
)
Selling and administrative expenses
 
265,522

 
266,225

 
(703
)
Restructuring and other special charges, net
 
5,340

 
5,340

 

Operating earnings
 
$
39,748


$
40,563

 
$
(815
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Thirty-Nine Weeks Ended November 3, 2018
($ thousands)
 
As reported
 
Balances without the adoption of Topic 606
 
Effect of change
(Lower)/Higher
 
 
 
 
 
 
 
Statement of Earnings
 
 
 
 
 
 
Net sales
 
$
2,114,583

 
$
2,117,437

 
$
(2,854
)
Cost of goods sold
 
1,235,950

 
1,235,932

 
18

Gross profit
 
878,633

 
881,505

 
(2,872
)
Selling and administrative expenses
 
774,555

 
776,475

 
(1,920
)
Restructuring and other special charges, net
 
9,240

 
9,240

 

Operating earnings
 
$
94,838

 
$
95,790

 
$
(952
)

The adoption of Topic 606 had an immaterial impact on net earnings and earnings per share for the thirteen and thirty-nine weeks ended November 3, 2018.

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

15




Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the periods ended November 3, 2018:
 
 
For the Thirteen Weeks Ended November 3, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
Retail stores
 
$
408,248

 
$
43,186

 
$
451,434

Landed wholesale
 

 
207,581

 
207,581

First-cost wholesale
 

 
21,345

 
21,345

E-commerce
 
40,383

 
51,080

 
91,463

Licensing and royalty
 

 
3,810

 
3,810

Other (1)
 
134

 
62

 
196

Net sales
 
$
448,765


$
327,064


$
775,829

 
 
 
 
 
 
 
 
 
For the Thirty-Nine Weeks Ended November 3, 2018
($ thousands)
 
Famous Footwear
 
Brand Portfolio
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail stores
 
$
1,147,512

 
$
129,557

 
$
1,277,069

Landed wholesale
 

 
539,845

 
539,845

First-cost wholesale
 

 
61,910

 
61,910

E-commerce
 
93,729

 
129,303

 
223,032

Licensing and royalty
 

 
12,104

 
12,104

Other (1)
 
407

 
216

 
623

Net sales
 
$
1,241,648

 
$
872,935

 
$
2,114,583

(1) Includes breakage revenue from unredeemed gift cards.

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

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

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


16



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 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.

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

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

Information about significant contract balances from contracts with customers is as follows:
($ thousands)
November 3, 2018

 
February 3, 2018

Customer allowances and discounts
$
23,835

 
$
20,259

Rewards program liability
16,299

 
8,130

Returns reserve
15,373

 
8,332

Gift card liability
4,169

 
5,509


Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during the thirty-nine weeks ended November 3, 2018, the Rewards program liability increased $13.8 million due to purchases and $6.4 million due to the adoption of Topic 606 and decreased $12.0 million due to expirations and redemptions. The change in the balance of the returns reserve is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018.


17



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 November 3, 2018 and October 28, 2017:
 
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

NUMERATOR
 

 

 

 

Net earnings
$
29,155

$
34,373

$
69,946

$
66,931

Net (earnings) loss attributable to noncontrolling interests
(2
)
14

65

(47
)
Net earnings allocated to participating securities
(800
)
(949
)
(1,950
)
(1,841
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
28,353

$
33,438

$
68,061

$
65,043

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,999

41,788

41,958

41,801

Dilutive effect of share-based awards
107

182

116

173

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
42,106

41,970

42,074

41,974

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.68

$
0.80

$
1.62

$
1.56

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.67

$
0.80

$
1.62

$
1.55

 
Options to purchase 16,667 shares of common stock for the thirteen and thirty-nine weeks ended October 28, 2017 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. There were no options to purchase shares excluded from the denominator for the thirteen and thirty-nine weeks ended November 3, 2018.

During the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company repurchased 100,000 and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. The Company did not purchase any shares during the thirteen weeks ended November 3, 2018 or October 28, 2017. As of November 3, 2018, the Company has repurchased a total of 1.4 million shares under this program.

Note 6
Restructuring and Other Initiatives
 
Vionic Acquisition-Related Costs
During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred acquisition-related costs associated with the acquisition of Vionic, primarily for professional fees, totaling $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share), which are reflected within the Other category and are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings. As of November 3, 2018, restructuring reserves of $1.8 million were included in other accrued expenses on the condensed consolidated balance sheet. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.


18




Acquisition, Integration and Reorganization of Men's Brands
During the thirteen and thirty-nine weeks ended November 3, 2018, the Company incurred integration and reorganization costs, primarily for severance and professional fees, related to the men's business totaling $1.2 million ($0.9 million on an after-tax basis, or $0.02 per diluted share) and $4.8 million ($3.6 million on an after-tax basis, or $0.08 per diluted share), respectively. Of the $1.2 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended November 3, 2018, $1.1 million was reflected within the Brand Portfolio segment and $0.1 million was reflected within the Other category. Of the $4.8 million in costs for the thirty-nine weeks ended November 3, 2018, $4.4 million was reflected within the Brand Portfolio segment and $0.4 million was reflected within the Other category. As of November 3, 2018, restructuring reserves of $0.8 million were included in other accrued expenses on the condensed consolidated balance sheets, with no corresponding liability as of October 28, 2017. The Company expects all integration and reorganization costs related to the men's business to be settled by the end of fiscal 2018.

Blowfish Malibu Acquisition and Integration-Related Costs
The Company incurred acquisition and integration-related costs associated with the acquisition of Blowfish Malibu of $0.1 million ($0.1 million on an after-tax basis) and $0.3 million ($0.2 million on an after-tax basis, or $0.01 per diluted share) during the thirteen and thirty-nine weeks ended November 3, 2018, respectively, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings and reflected within the Other category. As of November 3, 2018, restructuring reserves of $1.1 million were included in other accrued expenses on the condensed consolidated balance sheet. Refer to further discussion of the acquisition in Note 3 to the condensed consolidated financial statements.

Note 7
Business Segment Information

Following is a summary of certain key financial measures for the Company’s business segments for the periods ended November 3, 2018 and October 28, 2017:  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended November 3, 2018
External sales
$
448,765

$
327,064

$

$
775,829

Intersegment sales

15,968


15,968

Operating earnings (loss)
24,414

26,679

(11,345
)
39,748

Segment assets
548,609

1,272,576

187,217

2,008,402

 
 
 
 
 
Thirteen Weeks Ended October 28, 2017
External sales
$
473,118

$
301,538

$

$
774,656

Intersegment sales

15,218


15,218

Operating earnings (loss)
33,747

24,281

(7,650
)
50,378

Segment assets
544,280

781,421

101,447

1,427,148

 
Thirty-Nine Weeks Ended November 3, 2018
External sales
$
1,241,648

$
872,935

$

$
2,114,583

Intersegment sales

58,624


58,624

Operating earnings (loss)
79,511

52,773

(37,446
)
94,838

 
 
 
 
 
Thirty-Nine Weeks Ended October 28, 2017
External sales
$
1,244,542

$
838,577

$

$
2,083,119

Intersegment sales

59,768


59,768

Operating earnings (loss)
79,137

53,511

(30,555
)
102,093

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


19



Following is a reconciliation of operating earnings to earnings before income taxes:
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Operating earnings
$
39,748

$
50,378

$
94,838

$
102,093

Interest expense, net
(4,210
)
(4,046
)
(11,495
)
(13,230
)
Other income, net
3,085

2,492

9,254

7,598

Earnings before income taxes
$
38,623

$
48,824

$
92,597

$
96,461


Note 8
Inventories

The Company's net inventory balance was comprised of the following:
($ thousands)
November 3, 2018

October 28, 2017

February 3, 2018

Raw materials
$
18,002

$
19,091

$
17,531

Work-in-process
496

897

689

Finished goods
679,767

578,377

551,159

Inventories, net
$
698,265

$
598,365

$
569,379


Note 9
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
November 3, 2018

October 28, 2017

February 3, 2018

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
448,288

285,988

285,988

Total intangible assets
451,088

288,788

288,788

Accumulated amortization
(80,581
)
(75,687
)
(76,701
)
Total intangible assets, net
370,507

213,101

212,087

Goodwill
 

 

 

Brand Portfolio
283,345

127,081

127,081

Total goodwill
283,345

127,081

127,081

Goodwill and intangible assets, net
$
653,852

$
340,182

$
339,168


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Vionic on October 18, 2018. The preliminary allocation of the purchase price resulted in estimated 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 $148.8 million. In addition, the Company acquired Blowfish Malibu on July 6, 2018. The preliminary 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 $5.7 million.

20




The Company's intangible assets as of November 3, 2018, October 28, 2017 and February 3, 2018 were as follows:
($ thousands)
 
 
 
November 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
288,788

 
$
79,686

 
$
209,102

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15-20 years
 
44,200

 
895

 
43,305

 
 
 
 
$
451,088

 
$
80,581

 
$
370,507

 
 
 
 
October 28, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
75,372

 
$
89,916

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
315

 
5,085

 
 
 
 
$
288,788

 
$
75,687

 
$
213,101

 
 
 
 
February 3, 2018
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
76,296

 
$
88,992

Trademarks
 
Indefinite
 
118,100

 

 
118,100

Customer relationships
 
15 years
 
5,400

 
405

 
4,995

 
 
 
 
$
288,788

 
$
76,701

 
$
212,087


Amortization expense related to intangible assets was $1.8 million and $1.0 million for the thirteen weeks ended November 3, 2018 and October 28, 2017, respectively, and $3.9 million and $3.1 million for the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively. Based upon the Company's preliminary allocation of the purchase price, 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.
 

21



Note 10
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirty-nine weeks ended November 3, 2018 and October 28, 2017:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at February 3, 2018
$
717,489

$
1,473

$
718,962

Net earnings (loss)
70,011

(65
)
69,946

Other comprehensive loss
(1,454
)
(76
)
(1,530
)
Dividends paid
(9,059
)

(9,059
)
Acquisition of treasury stock
(3,288
)

(3,288
)
Issuance of common stock under share-based plans, net
(4,318
)

(4,318
)
Cumulative-effect adjustment from adoption of ASU 2016-16
(10,468
)

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

(4,775
)
Share-based compensation expense
11,615


11,615

Equity at November 3, 2018
$
765,753

$
1,332

$
767,085

 
($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings
66,884

47

66,931

Other comprehensive income
2,312

26

2,338

Dividends paid
(9,033
)

(9,033
)
Acquisition of treasury stock
(5,993
)

(5,993
)
Issuance of common stock under share-based plans, net
(2,477
)

(2,477
)
Cumulative-effect adjustment from adoption of ASU 2016-09
441


441

Share-based compensation expense
8,394


8,394

Equity at October 28, 2017
$
673,645

$
1,442

$
675,087



22



Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended November 3, 2018 and October 28, 2017:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance at August 4, 2018
$
176

$
(16,270
)
$
(675
)
$
(16,769
)
Other comprehensive income (loss) before reclassifications
14


(415
)
(401
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss

607

120

727

Tax benefit

(156
)
(25
)
(181
)
Net reclassifications

451

95

546

Other comprehensive income (loss)
14

451

(320
)
145

Balance at November 3, 2018
$
190

$
(15,819
)
$
(995
)
$
(16,624
)
 
 
 
 
 
Balance at July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
Other comprehensive (loss) income before reclassifications
(633
)

258

(375
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

615

(118
)
497

Tax (benefit) provision

(236
)
43

(193
)
Net reclassifications

379

(75
)
304

Other comprehensive (loss) income
(633
)
379

183

(71
)
Balance at October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
 
 
 
 
 
Balance February 3, 2018
$
1,235

$
(17,172
)
$
767

$
(15,170
)
Other comprehensive loss before reclassifications
(1,045
)

(1,648
)
(2,693
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

1,823

(147
)
1,676

Tax (benefit) provision

(470
)
33

(437
)
Net reclassifications

1,353

(114
)
1,239

Other comprehensive (loss) income
(1,045
)
1,353

(1,762
)
(1,454
)
Balance November 3, 2018
$
190

$
(15,819
)
$
(995
)
$
(16,624
)
 
 
 
 
 
Balance January 28, 2017
$
192

$
(30,084
)
$
(542
)
$
(30,434
)
Other comprehensive income before reclassifications
647


716

1,363

Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss

1,794

(235
)
1,559

Tax (benefit) provision

(688
)
78

(610
)
Net reclassifications

1,106

(157
)
949

Other comprehensive income
647

1,106

559

2,312

Balance October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
(1)
Amounts reclassified are included in other income, net. See Note 12 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense, net. See Notes 13 and 14 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

23




Note 11
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.6 million and $2.6 million during the thirteen weeks and $11.6 million and $8.4 million during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively.

The Company issued 17,225 and 9,832 shares of common stock during the thirteen weeks ended November 3, 2018 and October 28, 2017, 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 thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company issued 290,756 and 251,718 shares of common stock, respectively, related to these share-based plans.

Restricted Stock 
The following table summarizes restricted stock activity for the periods ended November 3, 2018 and October 28, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
August 4, 2018
1,205,898

 
$
29.04

 
July 29, 2017
1,194,326

 
$
28.03

Granted
45,000

 
33.52

 
Granted
25,000

 
27.13

Forfeited
(27,650
)
 
29.24

 
Forfeited
(19,050
)
 
31.86

Vested

 

 
Vested
(800
)
 
22.90

November 3, 2018
1,223,248

 
$
29.20

 
October 28, 2017
1,199,476

 
$
27.95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
February 3, 2018
1,174,801

 
$
27.92

 
January 28, 2017
1,128,049

 
$
25.85

Granted
378,833

 
32.24

 
Granted
381,312

 
26.92

Forfeited
(44,950
)
 
28.69

 
Forfeited
(49,050
)
 
29.35

Vested
(285,436
)
 
28.06

 
Vested
(260,835
)
 
17.09

November 3, 2018
1,223,248

 
$
29.20

 
October 28, 2017
1,199,476

 
$
27.95


All of the restricted shares granted during the thirteen weeks ended November 3, 2018, have a graded-vesting term of three years. Of the 378,833 restricted shares granted during the thirty-nine weeks ended November 3, 2018, 3,642 shares have a cliff-vesting term of one year, 9,500 shares have a cliff-vesting term of four years, and 365,691 shares have a graded-vesting term of three years. All of the restricted shares granted during the thirteen weeks ended October 28, 2017 have a cliff-vesting term of four years. Of the 381,312 restricted shares granted during the thirty-nine weeks ended October 28, 2017, 4,492 shares have a cliff-vesting term of one year, 12,000 shares have a graded-vesting term of four years and 364,820 shares have a cliff-vesting term of four years. Share-based compensation expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period and expense for graded-vesting grants is recognized ratably over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended November 3, 2018 and October 28, 2017, the Company granted no performance share awards. During the thirty-nine weeks ended November 3, 2018 and October 28, 2017, the Company granted performance share awards for a targeted 155,000 and 169,500 shares, respectively, with a weighted-average grant date fair value of $31.84 and $26.90, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the

24



specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the three-year service period. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.

Stock Options
The following table summarizes stock option activity for the periods ended November 3, 2018 and October 28, 2017:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
August 4, 2018
44,667

 
$
8.32

 
July 29, 2017
92,042

 
$
6.42

Granted

 

 
Granted

 

Exercised

 

 
Exercised
(6,000
)
 
6.41

Forfeited

 

 
Forfeited

 

Expired

 

 
Expired
(1,000
)
 
8.33

November 3, 2018
44,667

 
$
8.32

 
October 28, 2017
85,042

 
$
6.39

 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
November 3, 2018
 
 
October 28, 2017
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
February 3, 2018
81,042

 
$
6.28

 
January 28, 2017
150,540

 
$
9.36

Granted

 

 
Granted

 

Exercised
(32,375
)
 
3.52

 
Exercised
(17,250
)
 
5.97

Forfeited

 

 
Forfeited

 

Expired
(4,000
)
 
5.80

 
Expired
(48,248
)
 
15.79

November 3, 2018
44,667

 
$
8.32

 
October 28, 2017
85,042

 
$
6.39


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 780 and 838 RSUs for dividend equivalents, during the thirteen weeks ended November 3, 2018 and October 28, 2017, respectively, with weighted-average grant date fair values of $35.66 and $30.68, respectively. The Company granted 38,728 and 47,550 RSUs to non-employee directors, including 2,308 and 2,630 RSUs for dividend equivalents, during the thirty-nine weeks ended November 3, 2018 and October 28, 2017, respectively, with weighted-average grant date fair values of $34.33 and $27.86, respectively.


25



Note 12
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
November 3, 2018

October 28, 2017

November 3, 2018

October 28, 2017

Service cost
$
2,240

$
2,426

$

$

Interest cost
3,546

3,736

15

17

Expected return on assets
(7,253
)
(6,896
)


Amortization of:
 

 

 

 

Actuarial loss (gain)
1,030

1,090

(31
)
(36
)
Prior service income
(392
)
(439
)


Curtailment cost

36



Total net periodic benefit income
$
(829
)
$
(47
)
$
(16
)
$
(19
)