Caleres Earnings 2019-02-02
CAL 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 2, 2019 | |
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 | 43-0197190 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
8300 Maryland Avenue | 63105 |
St. Louis, Missouri | (Zip Code) |
(Address of principal executive offices) | |
(314) 854-4000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock — par value $0.01 per share | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the stock held by non-affiliates of the registrant as of August 3, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,409.0 million.
As of March 1, 2019, 41,877,368 common shares were outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.
1
INTRODUCTION
This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission ("SEC") on an annual basis. Part II of the Form 10-K contains the business information and financial statements that many companies include in the financial sections of their annual reports. The other sections of this Form 10-K include further information about our business that we believe will be of interest to investors. We hope investors will find it useful to have all of this information in a single document.
The SEC allows us to report information in the Form 10-K by “incorporating by reference” from another part of the Form 10-K or from the proxy statement. You will see that information is “incorporated by reference” in various parts of our Form 10-K. The proxy statement will be available on our website after it is filed with the SEC in April 2019.
Unless the context otherwise requires, “we,” “us,” “our,” “the Company” or “Caleres” refers to Caleres, Inc. and its subsidiaries.
Information in this Form 10-K is current as of April 2, 2019, unless otherwise specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this report, and from time to time throughout the year, we share our expectations for the Company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval and public acceptance of our products; our expected financial performance, including sales performance and the anticipated effect of our strategic actions; the anticipated benefits of acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any statements we make that are not matters of current disclosures or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.
Our forward-looking statements represent our estimates and expectations at the time that we make them. However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so. In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Part I. Item 1A. Risk Factors explains some of the important reasons that actual results may be materially different from those that we anticipate.
y
2
INDEX | |
PART I | Page | |
Item 1 | ||
Item 1A | ||
Item 1B | ||
Item 2 | ||
Item 3 | ||
Item 4 | ||
PART II | ||
Item 5 | ||
Item 6 | ||
Item 7 | ||
Item 7A | ||
Item 8 | ||
Item 9 | ||
Item 9A | ||
Evaluation of Disclosure Controls and Procedures | ||
Item 9B | ||
PART III | ||
Item 10 | ||
Item 11 | ||
Item 12 | ||
Item 13 | ||
Item 14 | ||
PART IV | ||
Item 15 | ||
Item 16 | ||
3
PART I |
ITEM 1 | BUSINESS |
Caleres, Inc. (the "Company"), originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear company with annual net sales of $2.8 billion. Current activities include the operation of retail shoe stores and e-commerce websites as well as the design, development, sourcing, manufacturing and marketing of footwear for women, men and children. Our business is seasonal in nature due to consumer spending patterns, with higher back-to-school and holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of our earnings for the year.
Our net sales are comprised of four major categories: women's footwear, men's footwear, children's footwear and clothing and accessories. The percentage of net sales attributable to each category is as follows:
2018 | 2017 | 2016 | ||||
Women's footwear | 61 | % | 59 | % | 63 | % |
Men's footwear | 24 | % | 25 | % | 22 | % |
Children's footwear | 8 | % | 9 | % | 9 | % |
Clothing and accessories | 7 | % | 7 | % | 6 | % |
Employees
We had approximately 11,500 full-time and part-time employees as of February 2, 2019. In the United States, there are no employees subject to union contracts. In Canada, we employ approximately 25 warehouse employees under a union contract, which expires in October 2019.
Competition
With many companies operating retail shoe stores and shoe departments, we compete in a highly fragmented market. In addition, the continuing consumer shift to online and mobile shopping has increased price competition and requires retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms. Our competitors include local, regional and national shoe store chains, department stores, discount stores, mass merchandisers, numerous independent retail operators of various sizes and e-commerce businesses. Quality of products and services, store location, trend-right merchandise selection and availability of brands, pricing, advertising and consumer service are all factors that impact retail competition.
In addition, our wholesale customers sell shoes purchased from competing footwear suppliers. Those competing footwear suppliers own and license brands, many of which are well-known and marketed aggressively. Many retailers, who are our wholesale customers, source directly from factories or through agents. The wholesale footwear business has low barriers to entry, which further intensifies competition.
FAMOUS FOOTWEAR |
Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and FamousFootwear.ca. Famous Footwear is one of America’s leading family-branded footwear retailers with 992 stores at the end of 2018 and net sales of $1.6 billion in 2018. Our core consumers are women who seek leading national brands of athletic, casual and fashionable footwear at a value for themselves and their families.
Famous Footwear stores feature a wide selection of brand name athletic, casual and dress shoes for the entire family. Brands carried include, among others, Nike, Skechers, adidas, Vans, Converse, Under Armour, New Balance, Sperry, Asics, Bearpaw, Sof Sole and Puma, as well as company-owned and licensed brands including, among others, Dr. Scholl's Shoes, LifeStride, Naturalizer, Fergie Footwear, Blowfish Malibu, Carlos by Carlos Santana, Circus by Sam Edelman and Vionic. Our company-owned and licensed products are sold to our Famous Footwear segment by our Brand Portfolio segment at a profit and represent approximately 7% of the Famous Footwear segment's net sales. We work closely with our vendors to provide our consumers with fresh product and, in some cases, product exclusively designed for and available only in our stores. Famous Footwear’s retail price points typically range from $20 for shoes up to $230 for boots.
4
Famous Footwear stores are located in strip shopping centers as well as outlet and regional malls in all 50 states, Canada and Guam. The breakdown by venue at the end of each of the last three fiscal years is as follows:
2018 | 2017 | 2016 | |||||
Strip centers | 653 | 677 | 699 | ||||
Outlet malls | 183 | 189 | 190 | ||||
Regional malls | 156 | 160 | 166 | ||||
Total | 992 | 1,026 | 1,055 | ||||
We expect to open approximately 15 new stores and close approximately 45 stores in 2019, as we continue to align our real estate and e-commerce strategies. New stores typically experience an initial start-up period characterized by lower sales and operating earnings than what is generally achieved by more mature stores. While the duration of this start-up period may vary by type of store, economic environment and geographic location, new stores typically reach a normal level of profitability within approximately four years.
Famous Footwear relies on merchandise allocation systems and processes that use allocation criteria, consumer segmentation and inventory data in an effort to ensure stores are adequately stocked with product and to differentiate the needs of each store based on location, consumer segmentation and other factors. Famous Footwear’s distribution systems allow for merchandise to be delivered to each store weekly, or on a more frequent basis, as needed. Famous Footwear also uses regional third-party pooled distribution sites across the country.
Famous Footwear’s marketing programs include digital marketing and social media, e-commerce advertising, direct mail, local and national television, in-store advertisements and radio, all of which are designed to further develop and reinforce the Famous Footwear concept and strengthen our connection with consumers. We believe the success of our campaigns is attributable to highlighting key categories and tailoring the timing of such messaging to adapt to seasonal shopping patterns. In 2018, we spent approximately $50.1 million to advertise and market Famous Footwear to our target consumers, a portion of which was recovered from suppliers. Famous Footwear has an extensive loyalty program (“Rewards”), which informs and rewards frequent consumers with product previews, earned incentives based upon purchase continuity and other periodic promotional offers. In 2018, approximately 76% of our Famous Footwear net sales were generated by our Rewards members. In early 2019, we will be introducing a new Rewards program, "Famously You Rewards", that we believe will increase membership, improve the frequency of store and online visits and allow the consumer to move more seamlessly between the store and online shopping experience.
As part of our omni-channel approach to reach consumers, we also operate Famous.com and FamousFootwear.ca, which offer an expanded product assortment beyond what is sold in Famous Footwear stores. Accessible via desktop, tablet and mobile devices, Famous.com helps consumers explore product assortments, including items available in local stores, and make purchases. Famous.com also allows Rewards members to view their points status and purchase history, manage profile settings and engage further with the brand. Famous Footwear’s mobile app further serves as a hub for Rewards members to shop, find local stores, redeem Rewards certificates and learn about the newest products, latest trends and hottest deals. In 2017, we invested in a new content management system to evolve our personalization capabilities on Famous.com, and evolved our fulfillment logic to drive more efficient shipping with multiple pair purchases. In 2018, we launched FamousFootwear.ca, our e-commerce site in Canada, where we implemented the same omni-channel capabilities for the Canadian consumer that had been utilized in the United States, such as home delivery and buy online, pick up in store.
The expansion and modernization projects at our distribution centers in Lebanon, Tennessee and Lebec, California, which were completed in the second half of 2016, are providing additional shipping flexibility, operational efficiencies and an expansion of our logistics infrastructure capacity. We continue to meet the omni-channel demands of today with minor operational changes, including faster order processing and delivery to our consumers.
5
BRAND PORTFOLIO |
Our Brand Portfolio segment offers retailers and consumers a portfolio of leading brands by designing, developing, sourcing, manufacturing and marketing branded footwear for women and men at a variety of price points. Certain of our branded footwear products are sold under brand names that are owned by the Company and others are developed pursuant to licensing agreements. Our Brand Portfolio segment sells footwear on a wholesale basis to retailers. The segment also sells footwear on a direct-to-consumer basis through our branded retail stores and e-commerce businesses. We expanded our men's business in 2016 with our acquisition of Allen Edmonds and in 2018, we gained additional access to the casual footwear market with our acquisition of Blowfish Malibu and the contemporary comfort market with our acquisition of Vionic. See further discussion related to these acquisitions in the Portfolio of Brands section below and Note 2 to the consolidated financial statements.
Portfolio of Brands
The following is a listing of our principal brands and licensed products:
Naturalizer: Naturalizer was born in 1927 when we realized women deserved a shoe with a beautiful fit. Our Naturalizer brand is sold primarily at Naturalizer retail stores, national chains, online retailers, department stores and independent retailers. Naturalizer footwear is also distributed through approximately 52 retail and wholesale partners in 47 countries around the world. Suggested retail price points range from $69 for shoes to $220 for boots.
Sam Edelman: Designer Sam Edelman’s lifestyle brand is inspired by timeless American elegance that bridges the gap between aspiration and attainability to define modern luxury. Sam Edelman footwear is sold primarily through online retailers, national chains, department stores, Sam Edelman retail stores, catalogs and independent retailers at suggested retail price points from $45 for shoes to $240 for boots.
Vionic: In October 2018, we acquired Vionic to expand our access to the growing contemporary comfort footwear category. Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends. The brand is sold online, through independent retailers, television, department stores, national chains, specialty retailers and our Famous Footwear stores for suggested retail price points from $40 for shoes to $250 for boots.
Allen Edmonds: In December 2016, we acquired Allen Edmonds to increase our exposure in men’s footwear. Allen Edmonds, founded in 1922, is a U.S.-based direct-to-consumer and wholesaler of premium men’s footwear, apparel, leather goods and accessories with a strong manufacturing heritage. Allen Edmonds products are available at premier stores worldwide and select retailers, including our 76 stores in the United States and Italy, and online at AllenEdmonds.com at suggested retail price points from $295 to $495 for shoes and boots.
Dr. Scholl’s Shoes: Inspired by its founder Dr. William Scholl, Dr. Scholl’s Shoes remains forever passionate about creating iconic, effortless footwear for a healthy life. This footwear reaches consumers at a wide range of distribution channels including national chains, mass merchandisers, online, our Famous Footwear retail stores and independent retailers. Suggested price points range from $50 for shoes to $190 for boots. We have a long-term license agreement with Bayer HealthCare, LLC to sell Dr. Scholl’s Shoes, which is renewable through December 2026 for sales in the United States and Canada.
LifeStride: For more than 70 years, LifeStride has created quality footwear for women who value both style and all-day comfort. The brand is sold in national chains, our Famous Footwear retail stores, online and department stores at suggested retail price points ranging from $40 for shoes to $100 for boots.
Franco Sarto: The Franco Sarto brand embodies timeless, wearable style inspired by the craft and design of Italian footwear. The brand is sold in major national chains, online, department stores, specialty retailers, our Famous Footwear stores, catalogs and independent retailers at suggested retail price points from $89 for shoes to $300 for boots.
Vince: The Vince women's shoe collection launched in 2012 and was expanded in 2014 to include the Vince men's footwear collection. The brand is primarily sold in premier department stores, online, national chains and specialty retailers at suggested price points from $195 for shoes to $595 for boots. We have a license agreement with Vince, LLC to sell Vince footwear through December 2021.
Rykä: For over 25 years, Rykä has been innovating athletic footwear exclusively for women. The brand is distributed through national chains, online retailers, independent retailers, department stores, specialty retailers and our Famous Footwear retail stores at suggested retail price points from $50 to $90.
6
Bzees: Bzees is the brand of women’s sporty footwear that energizes the mind and body from the feet up. The brand is distributed through national chains, department stores, online retailers, independent retailers, specialty retailers and our retail stores at suggested retail price points from $59 for shoes to $179 for boots.
Fergie Footwear by Fergie: We have created a namesake footwear line in collaboration with Grammy Award-winning artist Fergie (Fergie Duhamel, formerly Stacy Ferguson). Fergie Footwear is currently being sold at national chains, our Famous Footwear retail stores, online and at department stores at suggested retail price points from $59 for shoes to $179 for boots. We have a license agreement with Krystal Ball Productions, Inc. to sell Fergie/Fergalicious footwear that expires in December 2020, with extension options through December 2026.
Carlos by Carlos Santana: The Carlos by Carlos Santana collection of women’s footwear is sold at national chains, online, major department stores and our Famous Footwear stores. Suggested retail price points range from $59 for shoes to $189 for boots. We have a license agreement with Santana Tesoro, LLC to sell Carlos by Carlos Santana footwear that expired in December 2018. In March 2019, we decided to exit the Carlos by Carlos Santana brand.
Via Spiga: Established in 1985, Via Spiga is named after the main street in one of the most famed shopping districts in Milan, Italy. The brand is primarily sold in national chains, online and premier department stores at suggested retail price points from $175 for shoes to $495 for boots.
Blowfish Malibu: In July 2018, we acquired a controlling interest in Blowfish Malibu. 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 acquisition provides additional exposure to the growing sneaker and casual lifestyle segment of the market. The brand is sold at national chains, our Famous Footwear stores and independent retailers. Suggested retail price points range from $20 for shoes to $90 for boots.
Diane von Furstenberg: The Diane von Furstenberg (DVF) brand is sold at suggested price points ranging from $198 for shoes to $598 for boots. We had a license agreement with DVF Studio, LLC to produce and distribute the DVF women's shoe collection. During the fourth quarter of 2018, we decided to exit the DVF brand, as further discussed in Note 5 to the consolidated financial statements.
Wholesale
Within our Brand Portfolio segment, our brands are distributed on a wholesale basis to over 3,900 retailers, including national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs throughout the United States and Canada, as well as approximately 70 other countries (including sales to our retail operations). Our most significant wholesale customers include Famous Footwear and many of the nation’s largest retailers, including national chains such as DSW, TJX Corporation (including TJ Maxx and Marshalls), Nordstrom Rack and Kohl's; online retailers such as Nordstrom.com, Zappos.com and Amazon.com; department stores such as Nordstrom, Macy’s, and Dillard's; mass merchandisers such as Walmart; and independent retailers such as Qurate Retail Group, which operates both QVC and Home Shopping Network. We also sell product to a variety of international retail customers and distributors. The loss of any one or more of our significant customers could have a material impact on our Brand Portfolio segment and the Company.
Our Brand Portfolio segment sold approximately 49 million pairs of shoes on a wholesale basis during 2018. We sell footwear to wholesale customers on both a landed and a first-cost basis. Landed sales are those in which we obtain title to the footwear from our overseas suppliers and maintain title until the footwear clears United States customs and is shipped to our wholesale customers. Landed sales generally carry a higher profit rate than first-cost sales as a result of the brand equity associated with the product along with the additional customs, warehousing and logistics services provided to customers and the risks associated with inventory ownership. To allow for the prompt shipment on reorders and satisfy our growing e-commerce demand, we carry inventories of certain styles. First-cost sales are those in which we obtain title to footwear from our overseas suppliers and typically relinquish title to customers at a designated overseas port. Many of these customers then import this product into the United States.
Products sold under license agreements accounted for approximately 20% of the sales of the Brand Portfolio segment in 2018, 23% of the segment's sales in 2017 and 26% of the segment's sales in 2016. Caleres also receives license revenue from third parties related to certain owned brands, for use in connection with other brand-enhancing non-footwear product categories.
7
Direct-to-Consumer
Our Brand Portfolio segment also includes retail stores for certain brands, including Naturalizer, Allen Edmonds and Sam Edelman. The number of our Brand Portfolio retail stores at the end of the last three fiscal years was as follows:
2018 | 2017 | 2016 | |||||||
Naturalizer | 140 | 145 | 153 | ||||||
Allen Edmonds | 76 | 78 | 69 | ||||||
Sam Edelman | 13 | 13 | 12 | ||||||
Total | 229 | 236 | 234 | ||||||
At the end of 2018, we operated 82 Naturalizer stores in Canada, 57 in the United States and one in Guam. Of the 140 Naturalizer stores, approximately 50% are located in regional malls and average approximately 1,200 square feet in size. The other 50% of stores are located in outlet malls and average approximately 2,300 square feet in size. Total Naturalizer store square footage at the end of 2018 was approximately 253,000, compared to 259,000 in 2017. During 2018, we operated 75 Allen Edmonds stores in the United States and one store in Italy, each averaging approximately 1,600 square feet. We operated 13 Sam Edelman stores in the United States at the end of 2018, each averaging approximately 2,400 square feet. During 2019, we expect to open three and close 12 Naturalizer stores, close one Allen Edmonds store and anticipate having no openings or closings of Sam Edelman stores.
In connection with our omni-channel approach to reach consumers, we also operate Naturalizer.com, Naturalizer.ca, SamEdelman.com, AllenEdmonds.com, DrSchollsShoes.com, LifeStride.com, FrancoSarto.com, Vionicshoes.com, Ryka.com, Bzees.com, and ViaSpiga.com, which offer substantially the same product selection to consumers as we sell to our wholesale customers. Vince.com, FergieShoes.com, CarlosShoes.com, Blowfishshoes.com, and DVF.com, complement our distribution of those brands.
References to our website addresses do not constitute incorporation by reference of the information contained on the websites and the information contained on the websites is not part of this report.
Marketing
We continue to build on the recognition of our portfolio of brands to create differentiation and consumer loyalty. Our marketing teams are responsible for the development and implementation of innovative marketing programs that serve the consumer facing needs of our portfolio of brands as well as that of our retail partners. In 2018, we spent approximately $39.5 million in advertising and marketing support for our Brand Portfolio segment, including digital marketing and social media, consumer media advertising, print, production, trade shows, in-store displays and fixtures and product placement. The marketing teams are also responsible for driving the development of branding and content for our brand websites. We continually focus on enhancing the effectiveness of these marketing efforts through market research, product development and marketing communications that collectively address the ever-changing lives and needs of our consumers. Our marketing teams are instrumental in continuing to drive growth in e-commerce sales, producing relevant and purpose-driven brand positioning and creating meaningful connections with consumers that have increased awareness and loyalty across our portfolio. We continue to leverage consumer insights and data to inform marketing initiatives to capture a greater share of our target consumers’ spend as well as reach new audiences with a high propensity to purchase our products.
Sourcing and Product Development Operations
Our sourcing and product development operations source and develop footwear for our Brand Portfolio segment and also a portion of the footwear sold by our Famous Footwear segment. We have sourcing and product development offices in Clayton, Missouri; Putian, China; San Rafael and Culver City, California; New York, New York; Port Washington, Wisconsin; Florence, Italy; Macau; Ho Chi Minh City, Vietnam; Hong Kong and Addis Ababa, Ethiopia.
Sourcing Operations
In 2018, the sourcing operations sourced approximately 51 million pairs of shoes through a global network of third-party independent footwear manufacturers. The majority of our footwear sourced is provided by approximately 48 manufacturers operating approximately 72 manufacturing facilities. In certain countries, we use agents to facilitate and manage the development, production and shipment of product. We attribute our ability to achieve consistent quality, competitive prices and on-time delivery to the breadth of these established relationships. While we generally do not have significant contractual commitments with our suppliers, we do enter into sourcing agreements with certain independent sourcing agents. Prior to production, we monitor the quality of all of our footwear components and also inspect the prototypes of each footwear style.
8
In 2018, approximately 66% of the footwear we sourced was from manufacturing facilities in China. The following table provides an overview of our sourcing by country in 2018:
Country | Millions of Pairs | |
China | 34.0 | |
Vietnam | 14.5 | |
Ethiopia | 2.1 | |
Other | 0.7 | |
Total | 51.3 | |
Product Development Operations
We maintain design and product development teams for our brands in Clayton, Missouri; Putian, China; San Rafael, California; New York, New York; Port Washington, Wisconsin and Culver City, California, as well as other select fashion locations, including Florence, Italy. These teams, which include independent designers, are responsible for the creation and development of new product styles. Our designers monitor trends in fashion footwear and apparel and work closely with retailers to identify consumer footwear preferences. Our design teams create collections of footwear, and our product development and sourcing offices convert those designs into new footwear styles. We operate a sample-making facility in Dongguan, China that allows us to have greater control over our product development in terms of accuracy, execution and speed-to-market. Our long-range plans include a distinct focus on speed and efficiency to drive excellence in product value and execution, while also continuing to diversify into new sourcing markets outside of China to ensure adequate flexibility in a dynamic economic environment.
Our new distribution center campus in Chino, California, which opened in 2018, is providing additional shipping flexibility, operational efficiencies and an expansion of our logistics infrastructure capacity. In 2019, we plan to automate both facilities, which will provide faster order processing and delivery to customers as we continue to meet omni-channel demands.
Backlog
At February 2, 2019, our Brand Portfolio segment had a backlog of unfilled wholesale orders of approximately $331.6 million, compared to $262.1 million on February 3, 2018. Most orders are for delivery within the next 90 to 120 days, and although orders are subject to cancellation, we have not experienced significant cancellations in the past. The increase in backlog from the prior year was driven by our 2018 acquisitions of Vionic and Blowfish Malibu. The backlog at any particular time is affected by a number of factors, including seasonality, the continuing trend among customers to reduce the lead time on their orders, capacity shifts at foreign manufacturers, and the volume of e-commerce drop ship orders that are received immediately rather than in advance. Accordingly, a comparison of backlog from period to period may not be indicative of eventual actual shipments or the growth rate of sales from one period to the next.
AVAILABLE INFORMATION |
Our Internet address is www.caleres.com. Our Internet address is included in this annual report on Form 10-K as an inactive textual reference only. The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report. We file annual, quarterly and current reports, proxy statements and other information with the SEC. We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished, as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, through our Internet website as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. You may access these SEC filings via the hyperlink to a third-party SEC filings website that we provide on our website.
9
EXECUTIVE OFFICERS OF THE REGISTRANT |
The following is a list of the names and ages of the executive officers of the Company and of the offices held by each person. There is no family relationship between any of the named persons. The terms of the following executive officers will expire in May 2019 or upon their respective successors being chosen and qualified.
Name | Age | Current Position |
Diane M. Sullivan | 63 | Chief Executive Officer, President and Chairman of the Board of Directors |
Molly P. Adams | 56 | Division President – Famous Footwear |
Daniel R. Friedman | 58 | Division President – Global Supply Chain |
Kenneth H. Hannah | 50 | Senior Vice President, Chief Financial Officer |
Todd E. Hasty | 46 | Vice President, Chief Accounting Officer |
Willis D. Hill | 47 | Senior Vice President, Chief Information Officer |
Douglas W. Koch | 67 | Senior Vice President, Chief Human Resources Officer |
Malcolm W. Robinson III | 58 | Division President – Men's and International |
John W. Schmidt | 58 | Division President – Brand Portfolio |
Mark A. Schmitt | 55 | Senior Vice President, Chief Logistics Officer |
The period of service of each officer in the positions listed and other business experience are set forth below.
Diane M. Sullivan, Chairman of the Board of Directors since February 2014. Chief Executive Officer and President since May 2011. President and Chief Operating Officer from March 2006 to May 2011. President from January 2004 to March 2006.
Molly P. Adams, Division President – Famous Footwear since May 2018. Executive Vice President of Global Merchandising and Product Development, Disney Consumer Products and Disney Parks and Resorts from November 2015 to May 2018. Executive Vice President of Global Product Development at Disney Consumer Products, Inc. from May 2012 to November 2015. Senior Vice President of Global Product Development and General Manager of The Disney Store North America from 2010 to 2012. Vice President and General Manager of The Disney Store North America from 2008 to 2010.
Daniel R. Friedman, Division President – Global Supply Chain since January 2010. Senior Vice President, Product Development and Sourcing from July 2006 to January 2010. Managing Director at Camuto Group, Inc. from 2002 to July 2006.
Kenneth H. Hannah, Senior Vice President, Chief Financial Officer since February 2015. Executive Vice President and Chief Financial Officer of JC Penney Company, Inc. from May 2012 to March 2014. Executive Vice President and President–Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President–Solar Materials from 2009 to 2012. Senior Vice President and Chief Financial Officer of MEMC Electronic Materials, Inc. from 2006 to 2009.
Todd E. Hasty, Vice President, Chief Accounting Officer since March 2019. Vice President, Controller from March 2016 to March 2019. Vice President, Assistant Controller from October 2007 to March 2016.
Willis D. Hill, Senior Vice President, Chief Information Officer since September 2018. Senior Vice President and Chief Technology Officer from August 2017 to September 2018. Senior Vice President, Information Technology from January 2017 to August 2017. Vice President, Retail Information Technology from July 2011 to January 2017. Director, Retail Information Technology from July 2008 to July 2011.
Douglas W. Koch, Senior Vice President, Chief Human Resources Officer since January 2016. Senior Vice President and Chief Talent and Strategy Officer from January 2011 to January 2016. Senior Vice President and Chief Talent Officer from May 2005 to January 2011. Senior Vice President, Human Resources from March 2002 to May 2005.
Malcolm W. Robinson III, Division President – Men's and International since July 2017. Executive Vice President, One Jeanswear Group– William Rast Division from November 2016 to February 2017. Chief Executive Officer and board member, Tommie Copper from July 2013 to August 2014. President, Maidenform Brands from November 2011 to February 2013. Group President of Wholesale Sportswear, Phillips-Van Heusen Corporation from 2002 to November 2011.
10
John W. Schmidt, Division President – Brand Portfolio since October 2015. Division President – Contemporary Fashion Brands from January 2011 to September 2015. Senior Vice President, Better and Image Brands from January 2010 to January 2011. Senior Vice President and General Manager, Better and Image Brands from March 2008 until January 2010. Various positions, including Vice President, President, Group President of Wholesale Footwear for Nine West Group from September 1998 to February 2008.
Mark A. Schmitt, Senior Vice President, Chief Logistics Officer since September 2018. Senior Vice President, Chief Information Officer and Logistics since February 2013. Senior Vice President and Chief Information Officer from January 2012 through February 2013. Senior Director of Management Information Systems for Express Scripts from 2010 through 2011. Various management information systems positions including Group Director with Anheuser-Busch InBev from 1996 to 2009.
ITEM 1A | RISK FACTORS |
Consumer demand for our products may be adversely impacted by economic conditions and other factors.
Worldwide economic conditions continue to be uncertain. Consumer confidence and spending are strongly influenced by general economic conditions and other factors, including fiscal policy, the changing tax and regulatory environment, interest rates, minimum wage rates and regulations, inflation, consumer debt levels, the availability of consumer credit, the liquidity of consumers’ assets, health care costs, currency exchange rates, taxation, energy costs, real estate values, foreclosure rates, unemployment trends, weather conditions and the economic consequences of military action or terrorist activities. Negative economic conditions generally decrease disposable income and, consequently, consumer purchases of discretionary items like our products. Negative trends in economic conditions could also drive up the cost of our products, which may require us to increase our product prices. These increases in our product costs, and possibly prices, may not be offset by comparable increases in consumer disposable income. As a result, our customers may choose to purchase fewer of our products or purchase the lower priced products of our competitors, and our business, results of operations, financial condition and cash flows could be adversely affected.
If we are unable to anticipate and respond to consumer preferences and fashion trends and successfully apply new technology, we may not be able to maintain or increase our net sales and earnings.
The footwear industry is subject to rapidly changing consumer shopping preferences and patterns and fashion trends. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. In addition, the continuing consumer shift to online and mobile shopping is requiring retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms. The trend toward online and mobile shopping increases the volume of smaller shipments, including single-pair shipments, from our warehouses. The increased volume of smaller shipments may result in higher average distribution costs, including both shipping and processing costs incurred at our distribution centers. The success of both our wholesale and retail operations depends largely on our ability to anticipate, understand and react to these changing consumer shopping patterns. If we fail to respond to changes in consumer shopping patterns, demands and fashion trends, develop new products and designs, and implement effective, responsive merchandising and distribution strategies and programs, we could experience lower sales, excess inventories and lower gross margins, any of which could have an adverse effect on our results of operations and financial condition.
We operate in a highly competitive industry.
Competition is intense in the footwear industry. There has also been consolidation of competitors in the industry, resulting in certain competitors that are larger and have greater financial, marketing and technological resources than we do. Other competitors are able to offer footwear on a lateral basis alongside their apparel products, or have successfully branded their trademarks as lifestyle brands, resulting in greater competitive advantages. Low barriers to entry into this industry further intensify competition by allowing new companies to easily enter the markets in which we compete. Some of our suppliers further compound these competitive pressures by allowing consumers to purchase their products directly through supplier-maintained Internet sites and retail stores. In addition, retailers aggressively compete on the basis of price, which puts competitive pressure on us to keep our prices low.
We believe that our ability to compete successfully in the footwear industry depends on a number of factors, including style, price, performance, quality, location and service, as well as the strength of our brand names. We remain competitive by increasing awareness of our brands, improving the efficiency of our supply chain and enhancing the style, comfort, fashion and perceived value of our products. However, our competitors may implement more effective marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, distribution partners and manufacturers, or respond more quickly to changes in consumer preferences than us. As a result, we may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced gross margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of our products, which could adversely impact our financial results.
We rely primarily on foreign sources of production, which subjects our business to risks associated with international trade.
11
We rely primarily on foreign sourcing for our footwear products through third-party manufacturing facilities located outside the United States. As is common in the industry, we do not have any long-term contracts with our third-party foreign manufacturers. Foreign sourcing is subject to numerous risks, including trade relations, work stoppages, transportation delays (including delays at foreign and domestic ports) and costs (including customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions), domestic and foreign political instability, foreign currency fluctuations, variable economic conditions, expropriation, nationalization, natural disasters, terrorist acts and military conflict, changes in governmental regulations (including the U.S. Foreign Corrupt Practices Act) and geo-political events (including the potential impact of the impending withdrawal of the United Kingdom from the European Union, or "Brexit"). At the same time, potential changes in manufacturing preferences, including, but not limited to the following, pose additional risk and uncertainty:
• | Manufacturing capacity may shift from footwear to other industries with manufacturing margins that are perceived to be higher. |
• | Some footwear manufacturers may face labor shortages as workers seek better wages and working conditions in other industries and locations. |
As a result of these risks, there can be no assurance that we will not experience reductions in available production capacity, increases in our product costs, late deliveries or terminations of our supplier relationships. Furthermore, these sourcing risks are compounded by the lack of diversification in the geographic location of our foreign sourcing and manufacturing. With the majority of our supply originating in China, a substantial portion of our supply could be at risk in the event of any significant negative development related to relations between United States and China.
Although we believe we could find alternative manufacturing sources for the products that we currently source from third-party manufacturing facilities in China or other countries, we may not be able to locate alternative manufacturers on terms as favorable as our current terms, including pricing, payment terms, manufacturing capacity, quality standards and lead times for delivery. In addition, there is substantial competition in the footwear industry for quality footwear manufacturers. Accordingly, our future results will partly depend on our ability to maintain positive working relationships with, and offer competitive terms to, our foreign manufacturers. If supply issues cause us to be unable to provide products consistent with our standards or manufacture our footwear in an efficient and cost-effective manner, our customers may cancel orders, refuse to accept deliveries or demand reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.
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 over 60% of our footwear sourced from manufacturing facilities in China. The imposition of tariffs on imported products may result in an increase in product prices, which may in turn adversely impact our gross margins if we are unable to pass along the higher costs to the consumer.
Our operating results depend on preparing accurate sales forecasts and properly managing our inventory levels.
Using sales forecasts, we place orders with manufacturers for some of our products prior to the time we receive all of our customers’ orders to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certain products that we anticipate will be in greater demand. At the retail level, we place orders for products many months in advance of our key selling seasons. Adverse economic conditions and rapidly changing consumer preferences can make it difficult for us and our retail customers to accurately forecast product trends in order to match production with demand. If we fail to accurately assess consumer fashion tastes and the impact of economic factors on consumer spending or to effectively differentiate our retail and wholesale offerings, our inventory levels may exceed customer demand, resulting in inventory write-downs, higher carrying costs, lower gross margins or the sale of excess inventory at discounted prices, which could significantly impact our financial results. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require in a timely manner, we may experience inventory shortages. Inventory shortages may delay shipments to customers (and possibly require us to offer discounts or costly expedited shipping), negatively impact retailer and distributor relationships, adversely impact our sales results and diminish brand awareness and loyalty.
We are reliant upon our information technology systems, and any major disruption of these systems could adversely impact our ability to effectively operate our business.
Our computer network and systems are essential to all aspects of our operations, including design, pricing, production, accounting, reporting, forecasting, ordering, manufacturing, transportation, sales and distribution. Our ability to manage and maintain our inventory and to deliver products in a timely manner depends on these systems. If any of these systems fails to operate as expected, we experience problems with transitioning to upgraded or replacement systems, a breach in security occurs or a natural disaster interrupts system
12
functions, we may experience delays in product fulfillment and reduced efficiency in our operations or be required to expend significant capital to correct the problem, which may have an adverse effect on our results of operations and financial condition.
A cybersecurity breach may adversely affect our sales and reputation.
We routinely possess sensitive consumer and associate information and periodically provide it to third parties for analysis, benefit distribution or compliance purposes. While we believe we have taken reasonable and appropriate steps to protect that information, hackers and data thieves operate sophisticated, large-scale attacks that could breach our information systems, despite ongoing security measures. In addition, we are required to comply with increasingly complex regulations designed to protect our business and personal data. Any breach of our network security, a third-party’s network security or failure to comply with applicable regulations may result in (a) the loss of valuable business data and/or our consumers’ or associates’ personal information, (b) increased costs associated with implementing additional protections and processes, (c) a disruption of our business and a loss of sales, (d) negative media attention, (e) damage to our consumer and associate relationships and reputation, and (f) fines or lawsuits.
Customer concentration and other trends in customer behavior may lead to a reduction in or loss of sales.
Our wholesale customers include national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs. Several of our customers operate multiple department store divisions. Furthermore, we often sell multiple types of branded, licensed and private-label footwear to these same customers. While we believe purchasing decisions in many cases are made independently by the buyers and merchandisers of each of the customers, a decision by a significant customer to decrease the amount of footwear products purchased from us could have a material adverse effect on our business, financial condition or results of operations.
In addition, with the growing trend toward retail trade consolidation, including store count reductions at major retail chains, and consumers' continued shift to online shopping, we and our wholesale customers increasingly depend upon a reduced number of key retailers whose bargaining strength is growing. This consolidation may result in the following adverse consequences:
• | Our wholesale customers may seek more favorable terms for their purchases of our products, which could limit our ability to raise prices, recoup cost increases or achieve our profit goals. |
• | The number of stores that carry our products could decline, thereby exposing us to a greater concentration of accounts receivable risk and negatively impacting our brand visibility. |
We also face the following risks with respect to our customers:
• | Our customers could develop in-house brands or use a higher mix of private-label footwear products, which would negatively impact our sales. |
• | As we sell our products to customers and extend credit based on an evaluation of each customer’s financial condition, the financial difficulties of a customer could cause us to stop doing business with that customer, reduce our business with that customer or be unable to collect from that customer. |
• | Since we transact primarily in United States dollars, our international customers could purchase from competitors who will transact business in their local currency. |
• | Certain of our major wholesale customers have experienced a significant downturn or disruption in their business. If our remaining customers fail to remain committed to our products or brands or also experience significant downturns or disruptions in their business, then these customers may reduce or discontinue purchases from us. |
• | Retailers are directly sourcing more of their products directly from foreign manufacturers and reducing their reliance on wholesalers, which could have a material adverse effect on our business and results of operations. |
Transitional challenges with acquisitions could result in unexpected expenditures of time and resources.
Periodically, we pursue acquisitions of other companies or businesses, such as our 2016 acquisition of Allen Edmonds and our 2018 acquisitions of Blowfish Malibu and Vionic, as further discussed in Note 2 to the consolidated financial statements. Although we review the records of acquisition candidates, the review may not reveal all existing or potential problems. As a result, we may not accurately assess the value of the business and may, accordingly, ultimately assume unknown adverse operating conditions and/or unanticipated liabilities. Acquisitions may also cause us to incur debt, write-offs of goodwill or intangible assets if the business does not perform as well as expected and substantial amortization expenses associated with other intangible assets. We face the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire or launch such businesses. We also face the risk that we will not be able to integrate acquisitions into our existing operations effectively without substantial expense, delay or other operational or financial problems. Integration may be hindered by, among other things, differing procedures, including internal controls, business practices and technology systems. We may need to allocate more management resources to integration than we planned, which may adversely affect our ability to pursue other profitable activities.
13
A disruption in the effective functioning of our distribution centers could adversely affect our ability to deliver inventory on a timely basis.
We currently use several distribution centers, which are leased or third-party managed. These distribution centers serve as the source of replenishment of inventory for our footwear stores and e-commerce websites operated by our Famous Footwear and Brand Portfolio segments and serve the wholesale operations of our Brand Portfolio segment. Our success depends on our ability to handle the rapid consumer shift to online shopping and single pair shipments, which requires significant capital to operate with a greater level of sophistication and automation, as well as higher processing and distribution costs. We may be unable to successfully manage, negotiate or renew our third-party distribution center agreements, or we may experience complications with respect to our distribution centers, such as substantial damage to, or destruction of, such facilities due to natural disasters or ineffective information technology systems. In such an event, our other distribution centers may not be able to support the resulting additional distribution demands and we may be unable to locate alternative persons or entities capable of fulfilling our distribution needs, resulting in an adverse effect on our ability to deliver inventory on a timely basis.
Foreign currency fluctuations may result in higher costs and decreased gross profits.
Although we purchase most of our products from foreign manufacturers in United States dollars and otherwise engage in foreign currency hedging transactions, we cannot ensure that we will not experience cost variations with respect to exchange rate changes. Currency exchange rate fluctuations may also adversely impact third parties who manufacture the Company’s products by making their purchases of raw materials or other production costs more expensive and more difficult to finance, resulting in higher prices and lower margins for the Company, its distributors and licensees.
Changes in tax laws may result in increased volatility in our effective tax rates.
Our financial results are significantly impacted by the effective tax rates of both our domestic and international operations. Our effective income tax rate could be adversely affected by certain provisions of Tax Cuts and Jobs Act (the "Act"), which was enacted in December 2017, that directly affect foreign earnings, such as the global intangible low-taxed income tax ("GILTI") and base-erosion and anti-abuse tax provisions ("BEAT"). Other factors, such as changes in the mix of earnings in countries with differing statutory tax rates, changes in permitted deductions, changes in tax laws, interpretations, policies and treaties and the outcome of income tax audits in various jurisdictions, may result in higher taxes, lower profitability and increased volatility in our financial results.
Our success depends on our ability to retain senior management and recruit and retain other key associates.
Our success depends on our ability to attract, retain and motivate qualified management, administrative, product development and sales personnel to support existing operations and future growth. In addition, our ability to successfully integrate acquired businesses often depends on our ability to retain incumbent personnel, many of whom possess valuable institutional knowledge and operating experience. Competition for qualified personnel in the footwear industry is intense and we compete for these individuals with other companies that in many cases have superior financial and other resources. The loss of the services of any member of our senior management or key associates, the inability to attract and retain other qualified personnel or the inability to effectively transition positions could adversely affect the sales, design and production of our products as well as the implementation of our strategic initiatives.
Our business, sales and brand value could be harmed by violations of labor, trade or other laws.
We focus on doing business with those suppliers who share our commitment to responsible business practices and the principles set forth in our Production Code of Conduct (the “PCOC”). By requiring our suppliers to comply with the PCOC, we encourage our suppliers to promote best practices and work toward continual improvement throughout their production operations. The PCOC sets forth standards for working conditions and other matters, including compliance with applicable labor practices, workplace environment and compliance with laws. Although we promote ethical business practices, we do not control our suppliers or their labor practices. A failure by any of our suppliers to adhere to these standards or laws could cause us to incur additional costs for our products or cause negative publicity and harm our business and reputation. We also require our suppliers to meet our standards for product safety, including compliance with applicable laws and standards with respect to safety issues, including lead content in paint. Failure by any of our suppliers to adhere to product safety standards could lead to a product recall, which may result in critical media coverage, harm our business and reputation, and cause us to incur additional costs.
In addition, if we, or our suppliers or foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.
14
Our retail business depends on our ability to secure affordable and desirable leased locations without creating a competitive concentration of stores.
The success of the retail business within our Famous Footwear and Brand Portfolio segments depends, in part, on our ability to secure affordable, long-term leases in desirable locations for our leased retail footwear stores and to secure renewals of such leases. As consumer shopping preferences have evolved, we continue to focus on opening stores in locations with a greater penetration of high-value consumers. No assurance can be given that we will be able to successfully negotiate lease renewals for existing stores or obtain acceptable terms for new stores in desirable locations. In addition, opening new stores in our existing markets may result in reduced net sales in existing stores as our stores become more concentrated in the markets we serve. As a result, the number of consumers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced. This may result in impairments that adversely impact our financial results. As further discussed in Note 1 to the consolidated financial statements, we will adopt Accounting Standards Codification ("ASC") Topic 842, Leases, during the first quarter of 2019. Impairment charges related to underperforming retail stores are expected to be greater under the new standard.
If we are unable to maintain working relationships with our major branded suppliers, our business, results of operations, financial condition and cash flows may be adversely impacted.
Our Famous Footwear segment purchases a substantial portion of its footwear products from major branded suppliers. Purchases from two major branded suppliers, Nike, Inc. and Skechers USA, Inc., comprise approximately 22% and 10%, respectively, of sales for the Famous Footwear segment. As is common in the industry, we do not have any long-term contracts with our suppliers. In addition, the success of our financial performance is dependent on the ability of our Famous Footwear segment to obtain products from our suppliers on a timely basis and on acceptable terms. While we believe our relationships with our current suppliers are good, the loss of any of our major suppliers or product developed exclusively for our Famous Footwear stores could have a material adverse effect on our business, financial condition and results of operations. In addition, negative trends in global economic conditions may adversely impact our suppliers. If these third parties do not perform their obligations or are unable to provide us with the materials and services we need at prices and terms that are acceptable to us, our ability to meet our consumers’ demand could be adversely affected.
Our reputation and competitive position are dependent on our ability to license well-recognized brands, license our own brands under successful licensing arrangements and protect our intellectual property rights.
Licenses - Company as Licensee
Although we own most of our wholesale brands, we also rely on our ability to attract, retain and maintain good relationships with licensors that have strong, well-recognized brands and trademarks. Our license agreements are generally for an initial term of two to four years, subject to renewal, and there can be no assurance that we will be able to renew these licenses. Even our longer-term or renewable licenses are typically dependent upon our ability to market and sell the licensed products at specified levels, and the failure to meet such levels may result in the termination or non-renewal of such licenses. Furthermore, many of our license agreements require minimum royalty payments, and if we are unable to generate sufficient sales and profitability to cover these minimum royalty requirements, we may be required to make additional payments to the licensors that could have a material adverse effect on our business and results of operations. In addition, because certain of our license agreements are non-exclusive, new or existing competitors may obtain licenses with overlapping product or geographic terms, resulting in increased competition for a particular market.
Licenses - Company as Licensor
We have entered into numerous license agreements with respect to the brands and trademarks that we own. While we have significant control over our licensees’ products and advertising, we generally cannot control their operational and financial issues. If our licensees are not able to meet annual sales and royalty goals, obtain financing, manage their supply chain, control quality and maintain positive relationships with their customers, our business, results of operations and financial position may be adversely affected. While we would likely have the ability to terminate an underperforming license, it may be difficult and costly to locate an acceptable substitute distributor or licensee, and we may experience a disruption in our sales and brand visibility. In addition, although many of our license agreements prohibit the licensees from entering into licensing arrangements with certain of our competitors, they are generally not prohibited from offering, under other brands, the types of products covered by their license agreements with us.
15
Trademarks
We believe that our trademarks and trade names are important to our success and competitive position because our distinctive marks create a market for our products and distinguish our products from other products. We cannot, however, guarantee that we will be able to secure protection for our intellectual property in the future or that such protection will be adequate for future operations. Furthermore, we face the risk of ineffective protection of intellectual property rights in jurisdictions where we source and distribute our products, some of which do not protect intellectual property rights to the same extent as the United States. If we are unsuccessful in challenging a party’s products on the basis of infringement of our intellectual property rights, continued sales of these products could adversely affect our sales, devalue our brands and result in a shift in consumer preference away from our products. We may face significant expenses and liability in connection with the protection of our intellectual property rights, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.
Our quarterly sales and earnings may fluctuate, which may result in volatility in, or a decline in, our stock price.
Our quarterly sales and earnings can vary due to a number of factors, many of which are beyond our control, including the following:
• | Our Famous Footwear retail business is seasonally weighted to the back-to-school season, which primarily falls in our third fiscal quarter. As a result, the success of our back-to-school offering, which is affected by our ability to anticipate consumer demand and fashion trends, could have a disproportionate impact on our full year results. |
• | In our wholesale business, sales of footwear are dependent on orders from our major customers, and they may change delivery schedules, change the mix of products they order or cancel orders without penalty. |
• | Our wholesale customers set the delivery schedule for shipments of our products, which could cause shifts of sales between quarters. |
• | Our estimated annual tax rate is based on projections of our domestic and international operating results for the year, which we review and revise as necessary each quarter. |
• | Our earnings are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, changes in product sales mix, geographic sales trends, weather conditions, consumer sentiment and currency exchange rate fluctuations. |
As a result of these specific and other general factors, our operating results will vary from quarter to quarter and the results for any particular quarter may not be indicative of results for the full year. Any shortfall in sales or earnings from the levels expected by investors could cause a decrease in the trading price of our common stock.
We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources.
We are a defendant from time to time in lawsuits and regulatory actions (including environmental matters) relating to our business and to our past operations. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and will require that we devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business. See Item 3, Legal Proceedings, for further discussion of pending matters.
A significant portion of our Famous Footwear sales are dependent on our Famous Footwear loyalty program, Rewards, and any decrease in sales from Rewards could have a material adverse impact on our sales.
Rewards is a customer loyalty program that drives sales and traffic for the Famous Footwear segment. Rewards members earn points toward savings certificates for qualifying purchases. Upon reaching specified point values, members are issued a savings certificate, which may be redeemed for purchases at Famous Footwear. Approximately 76% of our fiscal 2018 sales within the Famous Footwear segment were generated by our Rewards members. If our Rewards members do not continue to shop at Famous Footwear, our sales may be adversely affected.
Our business, results of operations, financial condition and cash flows could be adversely affected by the failure of financial institutions to fulfill their commitments under our Credit Agreement.
The Third Amendment to our Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on January 18, 2024, is provided by a syndicate of financial institutions, with each institution agreeing severally (and not jointly) to make revolving credit loans to us in an aggregate amount of up to $500.0 million in accordance with the terms of the Credit Agreement. In addition, the Credit Agreement provides for an increase at the Company's option by up to $250.0 million. If one or more of the financial institutions participating in the Credit Agreement were to default on its obligation to fund its commitment, the portion of the facility provided by such defaulting financial institution might not be available to us.
16
If we are unable to maintain our credit rating, our ability to access capital and interest rates may be negatively impacted.
The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Any negative ratings actions could constrain the capital available to us or our industry and could limit our access to long-term funding or cause such access to be available at a higher borrowing cost for our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest expense will likely increase, which could adversely affect our financial condition and results of operations. In addition, as of February 2, 2019, total borrowing availability under the Credit Agreement was $154.5 million. Failure to meet our debt covenants under the Credit Agreement may require the Company to seek waivers or amendments of the debt covenants, alternative or additional sources of financing or reduce expenditures.
ITEM 1B | UNRESOLVED STAFF COMMENTS |
There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.
ITEM 2 | PROPERTIES |
We own our principal executive, sales and administrative offices located in Clayton (“St. Louis”), Missouri.
Our retail operations, included in both our Famous Footwear and Brand Portfolio segments, are conducted throughout the United States, Canada, Guam and Italy and involve the operation of 1,221 shoe stores, including 103 in Canada. All store locations, excluding our Perth, Ontario outlet store, are leased, with approximately 43% of them having renewal options. The footwear sold through our domestic wholesale business is primarily processed through our leased distribution centers in Chino, California and Lebanon, Tennessee or our third-party facilities in Vacaville, California and Fontana, California. During 2018, the Company signed an operating lease for an additional building on the campus of our wholesale distribution center in California. The Company began operating this distribution center in late 2018 and ceased operations with our third-party facility in Chino, California.
17
The following table summarizes the location and general use of the Company's primary properties:
Location | Owned/Leased | Segment | Use | |||
Clayton, Missouri | Owned | Famous Footwear and Brand Portfolio | Principal corporate, executive, sales and administrative offices | |||
United States, Canada, Guam and Italy | Leased | Famous Footwear and Brand Portfolio | Retail operations | |||
Chino, California (1) | Leased | Brand Portfolio | Distribution centers | |||
Lebanon, Tennessee (2) | Leased | Famous Footwear and Brand Portfolio | Distribution center | |||
Lebec, California (3) | Leased | Famous Footwear | Distribution center | |||
New York, New York | Leased | Brand Portfolio | Office space and showrooms | |||
Bentonville, Arkansas | Leased | Brand Portfolio | Showrooms | |||
Dallas, Texas | Leased | Brand Portfolio | Showrooms | |||
Perth, Ontario (4) | Owned | Famous Footwear and Brand Portfolio | Distribution center and outlet center | |||
Putian, China; Minneapolis, Minnesota; Florence, Italy; Macau; Ho Chi Minh City, Vietnam; Hong Kong; Addis Ababa, Ethiopia; San Rafael and Culver City, California | Leased | Brand Portfolio | Office space | |||
Dongguan, China | Leased | Brand Portfolio | Office space and sample-making facility | |||
Santiago, Dominican Republic | Leased | Brand Portfolio | Manufacturing facility | |||
Port Washington, Wisconsin | Owned | Brand Portfolio | Manufacturing and recrafting facility and office space | |||
(1) | This campus includes two company-operated distribution centers with approximately 725,000 and 606,000 square feet at each respective location. |
(2) | This distribution center is approximately 540,000 square feet. |
(3) | This distribution center is approximately 350,000 square feet. |
(4) | This distribution center is approximately 150,000 square feet. |
We also own a building in Denver, Colorado, which is leased to a third party; and undeveloped land in Colorado and New York. See Item 3, Legal Proceedings, for further discussion of certain of these properties.
ITEM 3 | LEGAL PROCEEDINGS |
We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position.
Our prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future. We are involved in environmental remediation and ongoing compliance activities at several sites and have been notified that we are or may be a potentially responsible party at several other sites. We are remediating, under the oversight of Colorado authorities, contamination at and beneath our owned facility in Colorado (also known as the “Redfield” site) and groundwater and indoor air in residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and surrounding facilities.
Refer to Note 18 to the consolidated financial statements for additional information related to the Redfield matter and other legal proceedings.
18
ITEM 4 | MINE SAFETY DISCLOSURES |
Not applicable.
PART II |
ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “CAL.” As of February 2, 2019, we had 3,489 shareholders of record.
Issuer Purchases of Equity Securities
The following table provides information relating to our repurchases of common stock during the fourth quarter of 2018:
Total Number of Shares | Maximum Number of | |||||||||||
Total Number | Average | Purchased as Part | Shares that May Yet | |||||||||
of Shares | Price Paid | of Publicly Announced | Be Purchased Under | |||||||||
Fiscal Period | Purchased (1) | per Share (1) | Program (2) (3) | the Program (2) (3) | ||||||||
November 4, 2018 - December 1, 2018 | 374,900 | $ | 29.79 | 374,900 | 748,600 | |||||||
December 2, 2018 - January 5, 2019 | 992,583 | 29.59 | 990,749 | 2,257,851 | ||||||||
January 6, 2019 - February 2, 2019 | — | — | — | 2,257,851 | ||||||||
Total | 1,367,483 | $ | 29.64 | 1,365,649 | 2,257,851 | |||||||
(1) | Includes shares purchased as part of our publicly announced stock repurchase program and shares that are 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. |
(2) | 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. We can use the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. Under this plan, 1,223,500 shares were repurchased during 2018. In total, 2,500,000 shares have been repurchased under the program. Therefore, there were no remaining shares authorized to be repurchased under the 2011 Program as of February 2, 2019. |
(3) | On December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the purchase of up to 2,500,000 shares of our outstanding common stock either on the open market or in private transactions. Under this plan, 242,149 shares were repurchased during 2018. Therefore, there were 2,257,851 shares authorized to be repurchased under the 2018 Program as of February 2, 2019. Our repurchases of common stock are limited under our debt agreements. |
19
Stock Performance Graph
The following performance graph compares the cumulative total return on our common stock with the cumulative total return of the following indices: (i) the S&P© SmallCap 600 Stock Index and (ii) a peer group of companies believed to be engaged in similar businesses. Our peer group consists of DSW, Inc., Genesco, Inc., Shoe Carnival, Inc., Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc.
Our fiscal year ends on the Saturday nearest to each January 31. Accordingly, share prices are as of the last business day in each fiscal year. The graph assumes that the value of the investment in our common stock and each index was $100 at February 1, 2014. The graph also assumes that all dividends were reinvested and that investments were held through February 2, 2019. These indices are included for comparative purposes only and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved and are not intended to forecast or be indicative of possible future performance of the common stock.
*$100 invested on February 1, 2014 in stock or index, including reinvestment of dividends. Index calculated on daily basis.
2/1/2014 | 1/31/2015 | 1/30/2016 | 1/28/2017 | 2/3/2018 | 2/2/2019 | ||||||||||||||||||
Caleres, Inc. | $ | 100.00 | $ | 121.08 | $ | 115.69 | $ | 129.37 | $ | 126.40 | $ | 131.14 | |||||||||||
Peer Group | 100.00 | 113.71 | 104.48 | 104.41 | 135.00 | 130.48 | |||||||||||||||||
S&P© SmallCap 600 Stock Index | 100.00 | 106.15 | 101.18 | 136.59 | 155.82 | 156.37 | |||||||||||||||||
ITEM 6 | SELECTED FINANCIAL DATA |
The selected financial data set forth below should be read in conjunction with the consolidated financial statements and notes thereto and the other information contained elsewhere in this report. Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks, which can affect annual comparisons. Our 2017 fiscal year included 53 weeks, while our 2018, 2016, 2015 and 2014 fiscal years each included 52 weeks.
20
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
($ thousands, except per share amounts) | (52 Weeks) | (53 Weeks) | (52 Weeks) | (52 Weeks) | (52 Weeks) | |||||||||||||||
Operations: | ||||||||||||||||||||
Net sales | $ | 2,834,846 | $ | 2,785,584 | $ | 2,579,388 | $ | 2,577,430 | $ | 2,571,709 | ||||||||||
Cost of goods sold | 1,678,502 | 1,616,935 | 1,517,397 | 1,529,627 | 1,531,609 | |||||||||||||||
Gross profit | 1,156,344 | 1,168,649 | 1,061,991 | 1,047,803 | 1,040,100 | |||||||||||||||
Selling and administrative expenses | 1,041,765 | 1,036,051 | 942,595 | 931,707 | 921,364 | |||||||||||||||
Impairment of goodwill and intangible assets (1) | 98,044 | — | — | — | — | |||||||||||||||
Restructuring and other special charges, net | 16,134 | 4,915 | 23,404 | — | 3,484 | |||||||||||||||
Operating earnings | 401 | 127,683 | 95,992 | 116,096 | 115,252 | |||||||||||||||
Interest expense, net | (18,277 | ) | (17,325 | ) | (13,731 | ) | (15,690 | ) | (20,066 | ) | ||||||||||
Loss on early extinguishment of debt | (186 | ) | — | — | (10,651 | ) | (420 | ) | ||||||||||||
Other income, net | 12,308 | 12,348 | 14,993 | 19,011 | 10,682 | |||||||||||||||
Gain on sale of subsidiary | — | — | — | — | 4,679 | |||||||||||||||
(Loss) earnings before income taxes | (5,754 | ) | 122,706 | 97,254 | 108,766 | 110,127 | ||||||||||||||
Income tax benefit (provision) | 273 | (35,475 | ) | (31,168 | ) | (26,942 | ) | (27,184 | ) | |||||||||||
Net (loss) earnings | (5,481 | ) | 87,231 | 66,086 | 81,824 | 82,943 | ||||||||||||||
Net (loss) earnings attributable to noncontrolling interests | (40 | ) | 31 | 428 | 345 | 93 | ||||||||||||||
Net (loss) earnings attributable to Caleres, Inc. | $ | (5,441 | ) | $ | 87,200 | $ | 65,658 | $ | 81,479 | $ | 82,850 | |||||||||
Operations: | ||||||||||||||||||||
Return on net sales | (0.2 | )% | 3.1 | % | 2.5 | % | 3.2 | % | 3.2 | % | ||||||||||
Return on beginning Caleres, Inc. shareholders' equity | (0.8 | )% | 14.2 | % | 10.9 | % | 15.1 | % | 17.4 | % | ||||||||||
Dividends paid | $ | 11,983 | $ | 12,027 | $ | 12,104 | $ | 12,253 | $ | 12,237 | ||||||||||
Purchases of property and equipment | $ | 62,483 | $ | 44,720 | $ | 50,523 | $ | 73,479 | $ | 44,952 | ||||||||||
Capitalized software | $ | 4,416 | $ | 6,458 | $ | 9,039 | $ | 7,735 | $ | 5,086 | ||||||||||
Depreciation and amortization (2) | $ | 64,907 | $ | 65,831 | $ | 57,857 | $ | 52,606 | $ | 54,015 | ||||||||||
Per Common Share: | ||||||||||||||||||||
Basic (loss) earnings per common share attributable to Caleres, Inc. shareholders | $ | (0.13 | ) | $ | 2.03 | $ | 1.52 | $ | 1.86 | $ | 1.90 | |||||||||
Diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders | (0.13 | ) | 2.02 | 1.52 | 1.85 | 1.89 | ||||||||||||||
Dividends paid | 0.28 | 0.28 | 0.28 | 0.28 | 0.28 | |||||||||||||||
Ending Caleres, Inc. shareholders’ equity (3) | 15.14 | 16.67 | 14.27 | 13.78 | 12.36 | |||||||||||||||
Financial Position: | ||||||||||||||||||||
Receivables, net | $ | 191,722 | $ | 152,613 | $ | 153,121 | $ | 153,664 | $ | 136,646 | ||||||||||
Inventories, net | 683,171 | 569,379 | 585,764 | 546,745 | 543,103 | |||||||||||||||
Working capital | 123,111 | 416,630 | 316,150 | 484,766 | 420,609 | |||||||||||||||
Property and equipment, net | 230,784 | 212,799 | 219,196 | 179,010 | 149,743 | |||||||||||||||
Total assets | 1,838,568 | 1,489,415 | 1,475,273 | 1,303,323 | 1,214,327 | |||||||||||||||
Borrowings under revolving credit agreement | 335,000 | — | 110,000 | — | — | |||||||||||||||
Long-term debt | 197,932 | 197,472 | 197,003 | 196,544 | 196,712 | |||||||||||||||
Caleres, Inc. shareholders’ equity | 634,053 | 717,489 | 613,117 | 601,484 | 540,910 | |||||||||||||||
Average common shares outstanding – basic | 41,756 | 41,801 | 42,026 | 42,455 | 42,071 | |||||||||||||||
Average common shares outstanding – diluted | 41,756 | 41,980 | 42,181 | 42,656 | 42,274 | |||||||||||||||
(1) | During 2018, we recognized $98.0 million of impairment charges associated with the goodwill and intangible assets of our Allen Edmonds business. Refer to Note 11 to the consolidated financial statements for further discussion. |
(2) | Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software, intangibles and debt issuance costs and debt discount. The amortization of debt issuance costs and debt discount is reflected within interest expense, net in our consolidated statements of earnings and totaled $2.2 million in 2018, $1.8 million in 2017, $1.7 million in 2016, $1.2 million in 2015 and $2.4 million in 2014. |
(3) | Ending Caleres, Inc. shareholders' equity is calculated by dividing Caleres, Inc. shareholders' equity by common shares outstanding at the end of the respective periods. |
21
All data presented reflects the fiscal year ended on the Saturday nearest to January 31. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to the selected financial data above. As further discussed in Note 1 and Note 6 to the consolidated financial statements, as a result of the adoption of Accounting Standards Update ("ASU") 2017-07 in the first quarter of 2018, certain prior period information has been restated to conform to the current period presentation.
ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW |
Business Overview
We are a global footwear company with annual net sales of $2.8 billion. Our shoes are worn by people of all ages and our mission is to inspire people to feel great...feet first. We offer the consumer a powerful portfolio of footwear brands. As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points. We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels. A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands. Our business strategy is focused on continued market share gains, growing our e-commerce business and leveraging our recent investments, while remaining focused on changing consumer demand.
Famous Footwear
Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and FamousFootwear.ca in Canada. Famous Footwear is one of America’s leading family–branded footwear retailers with 992 stores at the end of 2018 and net sales of $1.6 billion in 2018. Our focus for the Famous Footwear segment is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion and athletic footwear at a great price, coupled with exclusive products.
Brand Portfolio
Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns. The segment is comprised of the Naturalizer, Sam Edelman, Allen Edmonds, Dr. Scholl's Shoes, LifeStride, Franco Sarto, Vince, Vionic, Rykä, Bzees, Fergie, Carlos, Via Spiga, Blowfish Malibu, and Diane von Furstenberg brands. Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products. Our Brand Portfolio segment operates 229 retail stores in the United States, Canada, Guam and Italy for our Naturalizer, Allen Edmonds and Sam Edelman brands. This segment also includes our e-commerce businesses that sell our branded footwear.
Financial Highlights
The following is a summary of the financial highlights for 2018:
• | Consolidated net sales increased $49.2 million, or 1.8%, to $2,834.8 million in 2018, compared to $2,785.6 million last year, driven by our 2018 acquisitions of Vionic and Blowfish Malibu, partially offset by lower sales at Famous Footwear, as our 2017 fiscal year included 53 weeks compared to 52 weeks in 2018. |
• | Consolidated operating earnings decreased $127.3 million, or 99.7%, to $0.4 million in 2018, compared to $127.7 million last year, primarily driven by an impairment charge of $98.0 million related to goodwill and intangible assets for our Allen Edmonds business, the acquisition and integration-related costs for Vionic and Blowfish Malibu in 2018 and incremental expenses associated with the transition to our new Brand Portfolio warehouse facilities in California. |
• | Consolidated net loss attributable to Caleres, Inc. was $5.4 million, or $0.13 per diluted share, in 2018, compared to net earnings of $87.2 million, or $2.02 per diluted share, last year. |
The following items should be considered in evaluating the comparability of our 2018 and 2017 results:
• | Impairment of goodwill and intangible assets - We incurred impairment charges of $98.0 million ($83.0 million on an after-tax basis, or $1.93 per diluted share) during 2018 for the impairment of goodwill and intangible assets for our Allen Edmonds business. The impairment charges were driven by several factors, including the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results in 2018 contributed to the need for the impairment charges. There were no corresponding impairment |
22
charges last year. See Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.
• | Acquisition of Vionic - On October 18, 2018, we acquired the Vionic business for $360.7 million, which was funded with borrowings under our revolving credit agreement. Vionic contributed $45.3 million in net sales during the period from acquisition through February 2, 2019. In aggregate, we incurred charges of $13.4 million ($9.9 million on an after-tax basis, or $0.23 per diluted share) during 2018. These charges included $8.9 million of incremental cost of goods sold related to the amortization of the inventory adjustment required for purchase accounting and $4.5 million of acquisition and integration-related costs, which are presented as restructuring and other special charges, net. Refer to Note 2 and Note 5 to the consolidated financial statements for further discussion. |
• | Acquisition of Blowfish Malibu – On July 6, 2018, we acquired a controlling interest in Blowfish Malibu. Blowfish Malibu contributed $15.2 million in net sales during the period from acquisition through February 2, 2019 and did not have a material impact on earnings. We incurred charges of $2.0 million ($1.6 million on an after-tax basis, or $0.04 per diluted share) during 2018, including $1.7 million of incremental cost of goods sold related to the amortization of the inventory adjustment required for purchase accounting, and $0.3 million of acquisition and integration-related costs, which are presented as restructuring and other special charges, net. Refer to Note 2 and Note 5 to the consolidated financial statements for further discussion. |
• | Logistics transition – During the fourth quarter of 2018, we incurred costs of $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) associated with the transition from our third-party operated warehouse in Chino, California to our new company-operated Brand Portfolio warehouse facilities in California, as well as the transition from our Allen Edmonds distribution center in Port Washington, Wisconsin to our existing retail distribution center in Lebanon, Tennessee. In addition to the fourth quarter transition costs, we also incurred approximately $7 million of initial start-up and duplicate expenses earlier in 2018 associated with the distribution center transitions. Refer to Note 5 to the consolidated financial statements for further discussion. |
• | Acquisition, integration and reorganization of men's brands – We incurred costs of $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share) during 2018 related to the integration and reorganization of our men's brands, primarily to consolidate and relocate certain business functions into our St. Louis headquarters and to reduce and optimize manufacturing capacity in our Port Washington, Wisconsin facility. These charges were recorded as restructuring and other special charges, net on the consolidated statements of earnings (loss). During 2017, we incurred costs of $8.9 million ($5.6 million on an after-tax basis, or $0.13 per diluted share) related to the acquisition, integration and reorganization of our men's brands. Approximately $4.9 million related to the amortization of the inventory adjustment required for purchase accounting was included in cost of goods sold, while the remaining $4.0 million was recorded in restructuring and other special charges. Refer to Note 2 and Note 5 to the consolidated financial statements for additional information. |
• | Brand exits – We recently decided to exit two of our Brand Portfolio brands, Diane von Furstenberg ("DVF") and George Brown Bilt ("GBB"). In connection with that decision, we incurred costs of $2.4 million ($1.8 million on an after-tax basis, or $0.04 per diluted share). Of these charges, $1.8 million 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 (loss) and the remaining $0.6 million for severance and other related costs is presented in restructuring and other special charges. Refer to Note 5 to the consolidated financial statements for further discussion. |
• | In December 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S. Internal Revenue Code. Changes included, but were not limited to, a corporate tax rate decrease from 35% to 21% effective January 1, 2018, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial tax system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Certain states and other international jurisdictions also enacted changes to their tax statutes. The components of income tax reform, in aggregate across all jurisdictions, resulted in significant adjustments to both our income tax provision and the income tax balances. Refer to Note 7 to the consolidated financial statements for further discussion. |
• | We adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, during the first quarter of 2018 on a retrospective basis and reclassified $12.3 million of non-service cost components of net periodic benefit income in 2017 to other income, net in the consolidated statements of earnings (loss). For 2018, $12.3 million of non-service costs components is reflected in other income, net. Refer to Note 1 and Note 6 to the consolidated financial statements for additional information on the adoption of this ASU. |
• | Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks. Our 2017 fiscal year included 53 weeks, while our 2018 fiscal year had only 52 weeks. The difference in the number of weeks included in our fiscal years can affect annual comparisons. The inclusion of |
23
the 53rd week in 2017 resulted in an increase to our consolidated net sales of $23.4 million and had an immaterial impact on net earnings.
Outlook for 2019
During 2018, we maintained our financial flexibility and invested in infrastructure to enhance our long-term performance. In 2019, we will drive investment in our digital capabilities to gain even more insight into our consumers and deliver sales growth. At our Brand Portfolio segment, we plan to continue to expand our market share gains by intensifying our focus on consumers, maximizing our speed-to-market and rapidly responding to emerging trends in-season. At our Famous Footwear segment, we will be focused on elevating our product assortment and our marketing, while delivering profitable growth. Our Brand Portfolio net sales are expected to increase in the low to mid-teens percentage range in 2019. In addition, we expect same-store sales at Famous Footwear will grow in the low to mid single-digit percentage range.
Following are the consolidated results and results by segment for 2018, 2017 and 2016:
CONSOLIDATED RESULTS | ||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||
% of | % of | % of | ||||||||||||||||
($ millions) | Net Sales | Net Sales | Net Sales | |||||||||||||||
Net sales | $ | 2,834.8 | 100.0 | % | $ | 2,785.6 | 100.0 | % | $ | 2,579.4 | 100.0 | % | ||||||
Cost of goods sold | 1,678.5 | 59.2 | % | 1,617.0 | 58.0 | % | 1,517.4 | 58.8 | % | |||||||||
Gross profit | 1,156.3 | 40.8 | % | 1,168.6 | 42.0 | % | 1,062.0 | 41.2 | % | |||||||||
Selling and administrative expenses | 1,041.8 | 36.7 | % | 1,036.0 | 37.2 | % | 942.6 | 36.6 | % | |||||||||
Impairment of goodwill and intangible assets | 98.0 | 3.5 | % | — | — | % | — | — | % | |||||||||
Restructuring and other special charges, net | 16.1 | 0.6 | % | 4.9 | 0.2 | % | 23.4 | 0.9 | % | |||||||||
Operating earnings | 0.4 | 0.0 | % | 127.7 | 4.6 | % | 96.0 | 3.7 | % | |||||||||
Interest expense, net | (18.3 | ) | (0.6 | )% | (17.3 | ) | (0.6) | % | (13.7 | ) | (0.5) | % | ||||||
Loss on early extinguishment of debt | (0.2 | ) | (0.0 | )% | — | — | % | — | — | % | ||||||||
Other income, net | 12.3 | 0.4 | % | 12.3 | 0.4 | % | 15.0 | 0.6 | % | |||||||||
(Loss) earnings before income taxes | (5.8 | ) | (0.2 | )% | 122.7 | 4.4 | % | 97.3 | 3.8 | % | ||||||||
Income tax benefit (provision) | 0.3 | 0.0 | % | (35.5 | ) | (1.3) | % | (31.2 | ) | (1.2) | % | |||||||
Net (loss) earnings | (5.5 | ) | (0.2 | )% | 87.2 | 3.1 | % | 66.1 | 2.6 | % | ||||||||
Net (loss) earnings attributable to noncontrolling interests | (0.1 | ) | (0.0 | )% | 0.0 | 0.0 | % | 0.4 | 0.0 | % | ||||||||
Net (loss) earnings attributable to Caleres, Inc. | $ | (5.4 | ) | (0.2 | )% | $ | 87.2 | 3.1 | % | $ | 65.7 | 2.6 | % | |||||
Net Sales
Net sales increased $49.2 million, or 1.8%, to $2,834.8 million in 2018, compared to $2,785.6 million last year. Our Brand Portfolio segment reported an $80.0 million, or 7.0%, increase in net sales, driven by sales from our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $45.3 million and $15.2 million in net sales, respectively, for 2018. The Brand Portfolio increase also reflects higher net sales of our Sam Edelman, Franco Sarto and LifeStride brands, partially offset by lower sales from Allen Edmonds. Net sales of our Famous Footwear segment decreased $30.8 million, or 1.9%, driven by the impact of having a 53-week fiscal year in 2017, which increased net sales by $19.7 million last year.
Net sales increased $206.2 million, or 8.0%, to $2,785.6 million in 2017, compared to $2,579.4 million in 2016. Our Brand Portfolio segment reported a $158.7 million, or 16.0%, increase in net sales, reflecting a $154.3 million increase in sales from the Allen Edmonds business we acquired in December 2016 and sales growth from our Sam Edelman, LifeStride, Vince and Naturalizer brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Carlos brands. Net sales of our Famous Footwear segment increased $47.5 million, or 3.0%, primarily driven by a 1.4% increase in same-store sales (on a 52-week basis) and the impact of the 53rd week in 2017, which increased our consolidated net sales by $19.7 million.
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 thereby excluded from the same-store sales calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation.
24
Gross Profit
Gross profit decreased $12.3 million, or 1.1%, to $1,156.3 million in 2018, compared to $1,168.6 million in 2017, driven by the competitive and highly promotional environment. As a percentage of net sales, our gross profit rate decreased to 40.8% in 2018, compared to 42.0% in 2017, reflecting the promotional retail environment and a higher mix of e-commerce business. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses. Cost of goods sold in 2018 also includes special charges of $10.6 million related to the amortization of the inventory adjustments required by purchase accounting from our recent Vionic and Blowfish Malibu acquisitions and $1.8 million of incremental cost of goods sold associated with the decision to exit our DVF and GBB brands, compared to special charges of $4.9 million in 2017 related to the amortization of the inventory adjustment from our Allen Edmonds acquisition. We also experienced a higher mix of our wholesale versus retail sales. Retail and wholesale net sales were 65% and 35%, respectively, in 2018 compared to 69% and 31% in 2017.
Gross profit increased $106.6 million, or 10.0%, to $1,168.6 million in 2017, compared to $1,062.0 million in 2016 reflecting higher sales volume, primarily driven by the inclusion of a full year of sales from our Allen Edmonds business, and the impact of the 53rd week in 2017. As a percentage of net sales, our gross profit rate increased to 42.0% in 2017, compared to 41.2% in 2016, primarily resulting from an improved mix of our retail versus wholesale sales and a better mix of higher margin brands within our Brand Portfolio segment. In aggregate, retail and wholesale net sales were 69% and 31%, respectively, in 2017 compared to 67% and 33% in 2016. These improvements were partially offset by $4.9 million of incremental cost of goods sold in 2017 related to the amortization of the inventory adjustment required for purchase accounting from our Allen Edmonds acquisition in December 2016, compared to $1.2 million in 2016.
We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased $5.8 million, or 0.6%, to $1,041.8 million in 2018, compared to $1,036.0 million last year, reflecting additional expenses associated with our acquired Vionic and Blowfish Malibu brands, including $3.0 million of incremental amortization of intangible assets, and start-up and duplicate expenses associated with the transition to a new company-operated Brand Portfolio distribution center, partially offset by lower rent and facilities expenses attributable to our smaller store base and the impact of the 53rd week in 2017. As a percentage of net sales, selling and administrative expenses decreased to 36.7% in 2018 from 37.2% last year.
Selling and administrative expenses increased $93.4 million, or 9.9%, to $1,036.0 million in 2017, compared to $942.6 million in 2016 primarily driven by higher costs associated with our expanded store base, reflecting the impact of our Allen Edmonds business, incremental expenses associated with the 53rd week and higher cash and stock-based incentive compensation. As a percentage of net sales, selling and administrative expenses were 37.2% in 2017 and 36.6% in 2016.
Impairment of Goodwill and Intangible Assets
We recognized impairment charges of $98.0 million ($83.0 million on an after-tax basis, or $1.93 per diluted share) during 2018 for the impairment of goodwill and the tradename associated with our Allen Edmonds business. The impairment charges were primarily driven by the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results in 2018 contributed to the need for the impairment charges. There were no corresponding impairment charges in 2017 or 2016. Refer to Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.
Restructuring and Other Special Charges, Net
Restructuring and other special charges were $16.1 million in 2018, compared to $4.9 million in 2017 as follows:
• | $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share) for integration and reorganization costs related to our men's business, compared to $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) in 2017; |
• | Acquisition and integration-related costs of $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) for Vionic and $0.3 million ($0.3 million on an after-tax basis, or $0.01 per diluted share) for Blowfish Malibu; |
• | Transition costs related to our distribution centers of $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share); |
• | Brand Portfolio brand exit costs of $0.6 million ($0.5 million on an after-tax basis, or $0.01 per diluted share); and |
• | Costs associated with the restructuring of our retail operations of $0.4 million ($0.3 million on an after-tax basis, or $0.01 per diluted share), compared to $0.9 million ($0.6 million on after-tax basis, or $0.02 per diluted share) in 2017. |
25
The nature of the above charges are more fully described in the Financial Highlights section above as well as Note 5 to the consolidated financial statements.
During 2016, we incurred restructuring and other special charges of $23.4 million related to the impairment of the Shoes.com note receivable, the impairment of our investment in a nonconsolidated affiliate, the acquisition and integration of Allen Edmonds, the planned exit of our China e-commerce business and other organizational changes within our Brand Portfolio segment. Refer to Note 5 to the consolidated financial statements for additional information related to these charges.
Operating Earnings
Operating earnings decreased $127.3 million, or 99.7%, to $0.4 million in 2018, compared to $127.7 million last year, primarily reflecting the $98.0 million impairment charge related to goodwill and intangible assets in 2018 and the higher restructuring and other special charges noted above.
Operating earnings increased $31.7 million, or 33.0%, to $127.7 million in 2017, compared to $96.0 million in 2016, primarily reflecting the full year impact of the Allen Edmonds business in 2017, as well as improved operating results at Famous Footwear.
Interest Expense, Net
Interest expense, net increased $1.0 million, or 5.5%, to $18.3 million in 2018, compared to $17.3 million last year, reflecting higher interest expense on our revolving credit agreement. We used our revolving credit agreement to fund the acquisition of Vionic in the third quarter of 2018. In 2017, our interest expense related primarily to the borrowings for the Allen Edmonds acquisition which was fully paid off in the fourth quarter of 2017. We anticipate higher interest expense going forward until we pay down the revolving credit agreement.
Interest expense, net increased $3.6 million, or 26.2%, to $17.3 million in 2017, compared to $13.7 million in 2016, reflecting higher interest expense on our revolving credit agreement, which was used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016 and fully paid off in 2017. In addition, we capitalized interest of $1.4 million in 2016 associated with the expansion and modernization of our Lebanon, Tennessee distribution center, with no interest capitalized in 2017.
Loss on Early Extinguishment of Debt
In the fourth quarter of 2018, the Company incurred a loss on early extinguishment of debt of $0.2 million related to the Fourth Amended and Restated Credit Agreement ("Former Credit Agreement") prior to maturity. There were no corresponding losses in 2017 or 2016. Refer to Note 12 to the consolidated financial statements for additional information related to this charge.
Other Income, Net
During the first quarter of 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the non-service cost components of pension and other postretirement benefit income to be included in non-operating income, as further discussed in Note 1 to the consolidated financial statements. As a result of the retrospective adoption of the ASU, we reclassified $12.3 million and $15.0 million of non-service cost components of net periodic benefit income in 2017 and 2016, respectively, to other income, net in the consolidated statements of earnings. Refer to Note 6 to the consolidated financial statements for additional information related to our retirement plans.
Income Tax Benefit (Provision)
Our consolidated effective tax rate was 4.7% in 2018, compared to 28.9% in 2017 and 32.0% in 2016. In 2018, our effective tax rate was impacted by several factors, including the non-deductibility of our goodwill impairment charge of $38.0 million, as further discussed in Note 11 to the consolidated financial statements. In addition, discrete tax benefits totaling $5.9 million were recognized in 2018, primarily reflecting adjustments associated with the Tax Cuts and Jobs Act (the "Act") and related actions for state and other international jurisdictions (in aggregate, "income tax reform"). Refer to further discussion in Note 7 to the consolidated financial statements. In addition, our foreign earnings are generally subject to lower tax rates and therefore a higher mix of foreign earnings also results in a lower consolidated effective tax rate. If the discrete tax benefits and the impairment charges had not been recognized, the Company's 2018 effective tax rate would have been 22.3%, which is lower than prior periods due to the lower tax rates associated with income tax reform effective beginning in 2018.
Our discrete tax benefits last year included $1.3 million related to share-based compensation as a result of the adoption of ASU 2016-09 during 2017, which required prospective recognition of excess tax benefits and deficiencies in the statements of earnings (loss). If the discrete tax benefits had not been recognized, the Company's full fiscal year 2017 effective tax rate would have been 30.8%, which is lower than 2016, reflecting a higher mix of international earnings in the Company's lowest tax rate jurisdictions and the impact of income tax reform.
26
Refer to Note 7 to the consolidated financial statements for additional information regarding our tax rates.
Net (Loss) Earnings Attributable to Caleres, Inc.
Consolidated net loss attributable to Caleres, Inc. was $5.4 million in 2018, compared to net earnings of $87.2 million last year and $65.7 million in 2016.
Geographic Results
We have both domestic and foreign operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our e-commerce websites. Foreign operations primarily consist of wholesale operations in the Far East and Canada, retail operations in Canada and Italy and the operation of our international e-commerce websites. In addition, we license certain of our trademarks to third parties who distribute and/or operate retail locations internationally. The Far East operations include first-cost transactions, where footwear is sold at foreign ports to customers who then import the footwear into the United States and other countries. The breakdown of domestic and foreign net sales and earnings before income taxes is as follows:
2018 | 2017 | 2016 | |||||||||||||||||||||
Earnings (Loss) Before | Earnings Before | Earnings Before | |||||||||||||||||||||
($ millions) | Net Sales | Income Taxes | Net Sales | Income Taxes | Net Sales | Income Taxes | |||||||||||||||||
Domestic | $ | 2,656.9 | $ | 40.0 | $ | 2,611.5 | $ | 78.2 | $ | 2,385.1 | $ | 60.9 | |||||||||||
Foreign | 177.9 | (45.8 | ) | 174.1 | 44.5 | 194.3 | 36.4 | ||||||||||||||||
$ | 2,834.8 | $ | (5.8 | ) | $ | 2,785.6 | $ | 122.7 | $ | 2,579.4 | $ | 97.3 | |||||||||||
As a percentage of sales, the pre-tax profitability on foreign sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs in domestic earnings. In 2018, our foreign earnings were impacted by the goodwill and tradename impairment charges described earlier.
27
FAMOUS FOOTWEAR | ||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||
% of | % of | % of | ||||||||||||||||
($ millions) | Net Sales | Net Sales | Net Sales | |||||||||||||||
Net sales | $ | 1,606.8 | 100.0 | % | $ | 1,637.6 | 100.0 | % | $ | 1,590.1 | 100.0 | % | ||||||
Cost of goods sold | 916.0 | 57.0 | % | 913.2 | 55.8 | % | 887.5 | 55.8 | % | |||||||||
Gross profit | 690.8 | 43.0 | % | 724.4 | 44.2 | % | 702.6 | 44.2 | % | |||||||||
Selling and administrative expenses | 605.1 | 37.7 | % | 631.6 | 38.6 | % | 618.9 | 38.9 | % | |||||||||
Restructuring and other special charges, net | 0.4 | 0.0 | % | 0.6 | 0.0 | % | — | — | % | |||||||||
Operating earnings | $ | 85.3 | 5.3 | % | $ | 92.2 | 5.6 | % | $ | 83.7 | 5.3 | % | ||||||
Key Metrics | ||||||||||||||||||
Same-store sales % change (on a 52-week basis) | 1.5 | % | 1.4 | % | 0.6 | % | ||||||||||||
Same-store sales $ change (on a 52-week basis) | $ | 23.8 | $ | 21.7 | $ | 9.7 | ||||||||||||
Sales change from 53rd week | $ | (19.7 | ) | $ | 19.7 | $ | — | |||||||||||
Sales change from new and closed stores, net (on a 52-week basis) | $ | (34.5 | ) | $ | 5.5 | $ | 7.9 | |||||||||||
Impact of changes in Canadian exchange rate on sales | $ | (0.4 | ) | $ | 0.6 | $ | (0.2 | ) | ||||||||||
Sales per square foot, excluding e-commerce (on a 52-week basis) | $ | 220 | $ | 218 | $ | 216 | ||||||||||||
Square footage (thousands sq. ft.) | 6,552 | 6,972 | 6,986 | |||||||||||||||
Stores opened | 17 | 34 | 49 | |||||||||||||||
Stores closed | 51 | 63 | 40 | |||||||||||||||
Ending stores | 992 | 1,026 | 1,055 | |||||||||||||||
Net Sales
Net sales decreased $30.8 million, or 1.9%, to $1,606.8 million in 2018, compared to $1,637.6 million last year, primarily driven by a decrease in our store base, which resulted in a $34.5 million decrease in sales from new and closed stores, and a $19.7 million decrease due to the inclusion of the 53rd week in 2017. Since 2016, we have had net closures of 63 stores, or 6%, as we continue to focus on optimizing our store base and eliminating underperforming locations. These decreases were partially offset by growth in same-store sales, which uses comparable retail calendar weeks from the prior year, of 1.5% and continued growth in e-commerce sales. Famous Footwear experienced strong growth in sales of lifestyle athletic product and positive trends in sandals and boots, partially offset by weakness in some of our core athletic brands. Sales per square foot, excluding e-commerce, increased 1.1% to $220, compared to $218 last year. Members of Rewards, our customer loyalty program, continue to account for a majority of the segment's sales, with approximately 76% of our net sales to Rewards members in 2018 and 75% in 2017 and 2016. In early 2019, we introduced a new Rewards program, "Famously You Rewards", that we believe will increase membership, improve the frequency of store and online visits and allow the consumer to move more seamlessly between the store and online shopping experience.
Net sales increased $47.5 million, or 3.0%, to $1,637.6 million in 2017, compared to $1,590.1 million in 2016. The increase was primarily driven by a 1.4% increase in same-store sales and the impact of the 53rd week in 2017. Famous Footwear experienced growth in e-commerce sales and reported improvement in the online conversion rate, due in part to the successful implementation of our buy online, pick up in store initiative in early 2017. Strong e-commerce sales were partially offset by a decline in customer traffic at our retail store locations. The segment experienced sales growth in lifestyle athletic and sport-influenced product. Sales per square foot, excluding e-commerce, increased 1.1% to $218, compared to $216 in 2016.
28
Gross Profit
Gross profit decreased $33.6 million, or 4.6%, to $690.8 million in 2018, compared to $724.4 million in 2017, reflecting lower net sales and a lower gross profit rate, driven by a more competitive and promotional retail environment. As a percentage of net sales, our gross profit rate decreased to 43.0% in 2018, compared to 44.2% in 2017, reflecting a shift in product mix from higher margin performance athletics to lower margin lifestyle athletics. In addition, we experienced a significant increase in our e-commerce business. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses. We expect the trend toward a higher mix of e-commerce sales to continue.
Gross profit increased $21.8 million, or 3.1%, to $724.4 million in 2017, compared to $702.6 million in 2016 due to higher net sales. As a percentage of net sales, our gross profit rate remained consistent at 44.2%. During 2017, our gross profit rate was positively impacted by higher product margins, offset by higher promotional point redemptions by our Rewards members, due to the growth of that program.
Selling and Administrative Expenses
Selling and administrative expenses decreased $26.5 million, or 4.2%, to $605.1 million during 2018, compared to $631.6 million last year. The decrease was driven by lower rent and facilities expense attributable to our smaller store base and the impact of the incremental week of expenses associated with the 53rd week in 2017. As a percentage of net sales, selling and administrative expenses decreased to 37.7% in 2018 from 38.6% last year.
Selling and administrative expenses increased $12.7 million, or 2.1%, to $631.6 million during 2017, compared to $618.9 million in 2016. The increase was primarily driven by an incremental week of expenses associated with the 53rd week in 2017 and higher expenses related to cash-based incentive compensation, partially offset by lower marketing costs. As a percentage of net sales, selling and administrative expenses decreased to 38.6% in 2017 from 38.9% in 2016.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $0.4 million and $0.6 million in 2018 and 2017, respectively, related to the restructuring of our retail operations, as further discussed in Note 5 to the consolidated financial statements. There were no corresponding costs in 2016.
Operating Earnings
Operating earnings decreased $6.9 million, or 7.5%, to $85.3 million for 2018, compared to $92.2 million last year, reflecting lower net sales and the other factors described above. As a percentage of net sales, our operating earnings decreased slightly to 5.3% for 2018 from 5.6% for 2017.
Operating earnings increased $8.5 million, or 10.1%, to $92.2 million for 2017, compared to $83.7 million in 2016. As a percentage of net sales, our operating earnings increased to 5.6% for 2017, compared to 5.3% for 2016.
29
BRAND PORTFOLIO | ||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||
% of | % of | % of | ||||||||||||||||
($ millions) | Net Sales | Net Sales | Net Sales | |||||||||||||||
Net sales | $ | 1,228.0 | 100.0 | % | $ | 1,148.0 | 100.0 | % | $ | 989.3 | 100.0 | % | ||||||
Cost of goods sold | 762.5 | 62.1 | % | 703.8 | 61.3 | % | 629.9 | 63.7 | % | |||||||||
Gross profit | 465.5 | 37.9 | % | 444.2 | 38.7 | % | 359.4 | 36.3 | % | |||||||||
Selling and administrative expenses | 399.1 | 32.5 | % | 362.4 | 31.6 | % | 279.3 | 28.2 | % | |||||||||
Impairment of goodwill and intangible assets | 98.0 | 8.0 | % | — | — | % | — | — | % | |||||||||
Restructuring and other special charges, net | 10.6 | 0.8 | % | 1.6 | 0.1 | % | 3.9 | 0.4 | % | |||||||||
Operating (loss) earnings | $ | (42.2 | ) | (3.4 | )% | $ | 80.2 | 7.0 | % | $ | 76.2 | 7.7 | % | |||||
Key Metrics | ||||||||||||||||||
Direct-to-consumer (% of net sales) (1) | 29 | % | 26 | % | 19 | % | ||||||||||||
Wholesale/retail sales mix (%) | 80%/20% | 74%/26% | 85%/15% | |||||||||||||||
Change in wholesale net sales ($) (2) | $ | 85.7 | $ | (1.7 | ) | $ | (38.4 | ) | ||||||||||
Unfilled order position at year-end | $ | 331.6 | $ | 262.1 | $ | 263.1 | ||||||||||||
Same-store sales % change (on a 52-week basis) (3) | (0.1 | )% | 6.4 | % | (2.9 | )% | ||||||||||||
Same-store sales $ change (on a 52-week basis) (3) | $ | (0.1 | ) | $ | 7.5 | $ | (3.4 | ) | ||||||||||
Sales change from 53rd week | $ | (3.7 | ) | $ | 3.7 | $ | — | |||||||||||
Sales change from new and closed stores, net (on a 52-week basis) | $ | (1.3 | ) | $ | 22.2 | $ | 7.8 | |||||||||||
Sales change from acquired Allen Edmonds retail stores (on a 52-week basis) (4) | N/A | $ | 126.0 | $ | 19.3 | |||||||||||||
Impact of changes in Canadian exchange rate on retail sales | $ | (0.6 | ) | $ | 1.0 | $ | (0.8 | ) | ||||||||||
Sales per square foot, excluding e-commerce (on a 52-week basis) (3) | $ | 417 | $ | 327 | $ | 314 | ||||||||||||
Square footage, end of year (thousands sq. ft.) | 394 | 405 | 409 | |||||||||||||||
Stores opened | 7 | 15 | 77 | |||||||||||||||
Stores closed | 14 | 13 | 8 | |||||||||||||||
Ending stores | 229 | 236 | 234 | |||||||||||||||
(1) 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.
(2) | The 2018 wholesale net sales change includes sales from our acquired Vionic and Blowfish Malibu brands of $45.3 million and $15.2 million, respectively. |
(3) Because these metrics require stores to be included in our results for 13 continuous months, the calculations for 2017 and 2016 exclude our Allen Edmonds business, which was acquired in December 2016.
(4) | This metric represents net sales from our 69 acquired Allen Edmonds retail stores for 2017 and 2016. The sales change from these retail stores for 2018 is included in the same-store sales metric. |
Net Sales
Net sales increased $80.0 million, or 7.0%, to $1,228.0 million in 2018, compared to $1,148.0 million last year. The increase primarily reflects our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $45.3 million and $15.2 million in net sales, respectively, for 2018. We also experienced higher net sales of our Sam Edelman, Franco Sarto and LifeStride brands, partially offset by lower sales from Allen Edmonds and the impact of the 53rd week in 2017. We opened seven stores and closed 14 stores during 2018, resulting in a total of 229 stores at the end of 2018. Sales per square foot, excluding e-commerce, increased 27.8% to $417, compared
30
to $327 last year, primarily driven by the inclusion of the Allen Edmonds retail stores in this metric for 2018. Our unfilled order position for our wholesale business increased $69.5 million, or 26.5%, to $331.6 million at the end of 2018, compared to $262.1 million at the end of last year, primarily due to the inclusion of $94.5 million from our recently acquired brands, Vionic and Blowfish Malibu.
Net sales increased $158.7 million, or 16.0%, to $1,148.0 million in 2017, compared to $989.3 million in 2016. The increase was driven by higher net sales of $154.3 million from our Allen Edmonds business, which was acquired in the fourth quarter of 2016, and higher net sales of our Sam Edelman, LifeStride, Vince and Naturalizer brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Carlos brands. Our retail net sales benefited from our acquired Allen Edmonds retail stores, a net increase in new and closed stores, an increase in same-store sales of 6.4% and the impact of the 53rd week in 2017. We opened 15 stores and closed 13 stores during 2017, resulting in a total of 236 stores at the end of 2017. Sales per square foot, excluding e-commerce, increased 3.9% to $327, compared to $314 in 2016. Our unfilled order position for our wholesale sales decreased $1.0 million, or 0.4%, to $262.1 million at the end of 2017, compared to $263.1 million at the end of 2016.
Gross Profit
Gross profit increased $21.3 million, or 4.8%, to $465.5 million in 2018, compared to $444.2 million last year, primarily reflecting net sales growth, partially offset by the incremental cost of goods sold related to purchase accounting inventory adjustments and incremental markdowns related to the brands we decided to exit. In 2018, the Brand Portfolio segment recognized $10.6 million ($7.9 million on an after-tax basis, or $0.18 per diluted share) of incremental cost of goods sold related to purchase accounting inventory adjustments, as further discussed in the Overview section above, compared to $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) in 2017. The segment also recognized $1.8 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) of incremental cost of goods sold associated with the decision to exit our DVF and GBB brands. As a percentage of sales, our gross profit rate decreased to 37.9% in 2018, compared to 38.7% last year, reflecting higher markdowns and allowances as a result of a more promotional retail environment, incremental cost of goods sold and a higher mix of wholesale versus retail sales. Traditionally, our wholesale operations have a lower gross profit rate than our retail business. In addition, our growing mix of e-commerce business results in lower margins due to the incremental freight expenses.
Gross profit increased $84.8 million, or 23.6%, to $444.2 million in 2017, compared to $359.4 million in 2016, primarily as a result of the Allen Edmonds business we acquired in 2016. As a percentage of sales, our gross profit rate increased to 38.7% in 2017, compared to 36.3% in 2016 primarily resulting from a higher mix of retail versus wholesale sales in 2017. The Brand Portfolio segment recognized $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) in cost of goods sold during 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting, compared to $1.2 million in 2016.
Selling and Administrative Expenses
Selling and administrative expenses increased $36.7 million, or 10.1%, to $399.1 million during 2018, compared to $362.4 million last year, driven by expenses related to our recently acquired Vionic and Blowfish Malibu businesses, including $3.0 million of incremental amortization of intangible assets, and approximately $7 million of initial start-up and duplicate expenses associated with our transition in early 2018 to a new company-operated distribution center. Strong growth in e-commerce sales has also driven freight and warehouse expenses higher and we expect this trend to continue. These increases were partially offset by the impact of incremental expenses in 2017 associated with the 53-week fiscal year. As a percentage of net sales, selling and administrative expenses increased to 32.5% in 2018 from 31.6% last year, reflecting the above named factors.
Selling and administrative expenses increased $83.1 million, or 29.8%, to $362.4 million during 2017, compared to $279.3 million in 2016, primarily driven by higher costs associated with our expanded store base, reflecting the impact of our Allen Edmonds business, higher anticipated payments under our cash-based incentive plans and incremental expenses associated with the 53rd week. As a percentage of net sales, selling and administrative expenses increased to 31.6% in 2017 from 28.2% in 2016, reflecting the above named factors.
Impairment of Goodwill and Intangible Assets
We incurred impairment charges of $98.0 million during 2018 for the impairment of goodwill and the tradename for our Allen Edmonds business. The impairment charges were driven by several factors, including the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results in 2018 contributed to the need for the impairment charges. There were no corresponding impairment charges in 2017 or 2016. See Note 1 and Note 11 to the consolidated financial statements for additional information related to the impairment.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $10.6 million in 2018 were comprised of $5.4 million for the integration and reorganization of our men's brands, $4.5 million of expenses related to the transition of two of our distribution centers and $0.6 million of costs associated
31
with the decision to exit the DVF and GBB brands. In 2017, restructuring and other special charges of $1.6 million were attributable to the integration and reorganization of our men's business and restructuring of our retail operations. In 2016, restructuring and other special charges of $3.9 million were attributable to business exit and restructuring charges, certain Allen Edmonds acquisition and integration costs and other charges. Refer to Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.
Operating (Loss) Earnings
Operating loss was $42.2 million in 2018, compared to earnings of $80.2 million last year, reflecting the $98.0 million impairment of goodwill and intangible assets and other factors described above. As a percentage of net sales, our operating loss was 3.4% in 2018, compared to operating earnings of 7.0% last year.
Operating earnings increased $4.0 million, or 5.2%, to $80.2 million in 2017, compared to $76.2 million in 2016, primarily reflecting the full year impact of our Allen Edmonds business, net of the incremental cost of goods sold adjustment of $4.9 million related to purchase accounting and other factors described above. As a percentage of net sales, operating earnings increased to 7.0% in 2017, compared to 7.7% in 2016.
OTHER |
The Other category includes unallocated corporate administrative and other costs and recoveries. Costs of $42.7 million, $44.8 million, and $64.0 million were incurred in 2018, 2017 and 2016, respectively.
The $2.1 million decrease in costs in 2018 compared to last year was primarily a result of the following factors:
• | An improvement in our medical claims expense, for which we are self-insured, and |
• | Lower professional fees; partially offset by |
• | Acquisition and integration-related costs for Vionic and Blowfish Malibu of $4.8 million, compared to costs of $2.5 million for the integration and reorganization of our men's brands in 2017. Refer to Note 2 and Note 5 to the consolidated financial statements for further discussion. |
The $19.2 million decrease in costs in 2017 compared to 2016 was primarily a result of the following factors:
• | The non-recurrence of the $7.3 million impairment of the Shoes.com note receivable in 2016, as further discussed in Note 5 to the consolidated financial statements; |
• | The non-recurrence of the $7.0 million impairment of the investment in a nonconsolidated affiliate in 2016, as further discussed in Note 5 to the consolidated financial statements; and |
• | Lower costs associated with our acquisition and integration of Allen Edmonds in 2016, as further discussed in Note 2 and Note 5 to the consolidated financial statements. |
RESTRUCTURING AND OTHER INITIATIVES |
During 2018, we incurred restructuring and other special charges of $16.1 million, including $5.8 million related to the integration and reorganization of our men's business, $4.5 million associated with the transition of two of our distribution centers, $4.5 million of acquisition and integration-related costs for Vionic, $0.6 million related to the decision to exit our DVF and GBB brands, $0.4 million related to the restructuring of our retail operations, and $0.3 million of acquisition and integration-related costs for Blowfish Malibu.
During 2017, we incurred restructuring and other special charges of $4.9 million, including $4.0 million related to the integration and reorganization of our men's business and $0.9 million associated with the restructuring of our retail operations.
During 2016, we incurred restructuring and other special charges of $23.4 million, including $8.0 million primarily related to the impairment of the Shoes.com note receivable, $7.0 million related to the impairment of our investment in a nonconsolidated affiliate, $5.8 million of costs associated with the acquisition and integration of Allen Edmonds, and $2.6 million of costs associated with the planned exit of our international e-commerce business and other restructuring.
Refer to the Financial Highlights section above and Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.
32
IMPACT OF INFLATION AND CHANGING PRICES |
While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact over the last three years. Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates. For example, our products are manufactured in other countries, and a decline in the value of the U.S. dollar and the impact of labor shortages in China or other countries may result in higher manufacturing costs. Similarly, any potential significant shortage of quantities or increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations. In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease. Moreover, increases in inflation may not be matched by increases in wages, which also could have a negative impact on consumer spending. If we incur increased costs that are unable to be recovered through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of the cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs. Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors.
LIQUIDITY AND CAPITAL RESOURCES |
Borrowings
($ millions) | February 2, 2019 | February 3, 2018 | Increase | ||||||||
Borrowings under revolving credit agreement | $ | 335.0 | $ | — | $ | 335.0 | |||||
Long-term debt | 197.9 | 197.5 | 0.4 | ||||||||
Total debt | $ | 532.9 | $ | 197.5 | $ | 335.4 | |||||
Total debt obligations increased $335.4 million to $532.9 million at the end of 2018, compared to $197.5 million at the end of last year, reflecting higher borrowings under our revolving credit agreement, which was used to fund the acquisition of Vionic in October 2018. Net interest expense in 2018 was $18.3 million, compared to $17.3 million in 2017 and $13.7 million in 2016. The increase in net interest expense in 2018 was attributable to higher average borrowings under our revolving credit agreement due to $360 million in borrowings used to fund the acquisition of Vionic. The increase in net interest expense in 2017 was attributable to higher average borrowings under our revolving credit agreement due to the acquisition of Allen Edmonds in December 2016. The balance on the revolving credit agreement at the end of 2016 was paid down throughout 2017.
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 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 Agreement 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.
33
We were in compliance with all covenants and restrictions under the Credit Agreement as of February 2, 2019. Refer to further discussion regarding the Credit Agreement in Note 12 to the consolidated financial statements.
At February 2, 2019, we had $335.0 million borrowings and $10.5 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $154.5 million at February 2, 2019.
$200 Million Senior Notes
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 2023 (the "Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bear interest at 6.25%, which is payable on February 15 and August 15 of each year. The Senior Notes mature on August 15, 2023. We may redeem some or all of the Senior Notes at various redemption prices.
The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of February 2, 2019, we were in compliance with all covenants and restrictions relating to the Senior Notes.
Working Capital and Cash Flow
February 2, 2019 | February 3, 2018 | |||||||
Working capital ($ millions) (1) | $ | 123.1 | $ | 416.6 | ||||
Current ratio (2) | 1.14:1 | 1.97:1 | ||||||
Debt-to-capital ratio (3) | 45.6 | % | 21.5 | % | ||||
(1) | Working capital has been computed as total current assets less total current liabilities. |
(2) | The current ratio has been computed by dividing total current assets by total current liabilities. |
(3) | Debt-to-capital has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity. |
Working capital at February 2, 2019, was $123.1 million, which was $293.5 million lower than at February 3, 2018. Our current ratio was 1.14 to 1 at February 2, 2019, compared to 1.97 to 1 at February 3, 2018. The decrease in working capital and the current ratio reflects the impact of the Vionic acquisition in 2018, which was funded with borrowings under our revolving credit agreement. A significant portion of the purchase price of Vionic was allocated to noncurrent assets, such as goodwill and other intangible assets that are excluded from working capital, while the entire purchase price was funded using current liabilities. We plan to pay down the remaining borrowings under our revolving credit agreement over the next two years. Our debt-to-capital ratio was 45.6% as of February 2, 2019, compared to 21.5% at February 3, 2018, primarily reflecting the higher borrowings under our revolving credit agreement described above.
2018 | 2017 | (Decrease) Increase in Cash and Cash Equivalents | |||||||||
Net cash provided by operating activities | $ | 129.6 | $ | 191.4 | $ | (61.8 | ) | ||||
Net cash used for investing activities | (436.4 | ) | (51.2 | ) | (385.2 | ) | |||||
Net cash provided by (used for) financing activities | 273.2 | (131.8 | ) | 405.0 | |||||||
Effect of exchange rate changes on cash and cash equivalents | (0.2 | ) | 0.3 | (0.5 | ) | ||||||
(Decrease) increase in cash and cash equivalents | $ | (33.8 | ) | $ | 8.7 | $ | (42.5 | ) | |||
At February 2, 2019, we had $30.2 million of cash and cash equivalents, approximately half of which represents the accumulated unremitted earnings of our foreign subsidiaries.
Cash provided by operating activities was $61.8 million lower in 2018 than last year, reflecting the following factors:
• | An increase in our inventories due to earlier receipt of spring product from our Brand Portfolio factory partners, due to an earlier holiday shutdown period for Chinese New Year, compared to a decrease in inventory in 2017 and |
• | A decrease in net income taxes due in part to the impact of tax reform, partially offset by |
• | A larger increase in accrued expenses and other liabilities compared to 2017 and |
• | A larger increase in trade accounts payable reflecting the higher level of inventory. |
34
Cash used for investing activities was $385.2 million higher in 2018 than last year, primarily reflecting the acquisition costs of Blowfish Malibu in July 2018 and Vionic in October 2018, as further discussed in Note 2 to the consolidated financial statements. In addition, we had higher purchases of property and equipment in 2018 as a result of our investments in our new leased Brand Portfolio warehouses in California. In 2019, we expect purchases of property and equipment and capitalized software of approximately $60 million.
Cash provided by financing activities was $405.0 million higher in 2018 than last year, primarily due to the $360.0 million of borrowings under our revolving credit agreement for the acquisition of Vionic, of which $25.0 million was repaid during 2018, partially offset by higher repurchases of shares under our stock repurchase programs during 2018. During 2017, we had net repayments on our revolving credit agreement for the December 2016 Allen Edmonds acquisition.
We paid dividends of $0.28 per share in each of 2018, 2017 and 2016. The 2018 dividends marked the 96th year of consecutive quarterly dividends. On March 14, 2019, the Board of Directors declared a quarterly dividend of $0.07 per share, payable April 9, 2019, to shareholders of record on March 26, 2019, marking the 384th consecutive quarterly dividend to be paid by the Company. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are listed below.
Inventories
Inventories are our most significant asset, representing approximately 37% of total assets at the end of 2018. We value inventories at the lower of cost and net realizable value with 88% of consolidated inventories using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.
We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current selling prices. At our Famous Footwear segment and certain retail operations within our Brand Portfolio segment, we recognize markdowns when it becomes evident that inventory items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes the gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment to be lower than the initial markup during periods when permanent price reductions are taken to clear product. Within our Brand Portfolio segment, we generally provide markdown reserves to reduce the carrying values of inventories to a level where, upon sale of the product, we will realize our normal gross profit rate. We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment. Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.
We perform physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of goods sold.
Income Taxes
We record deferred taxes for the effects of timing differences between financial and tax reporting. These differences relate principally to employee benefit plans, accrued expenses, bad debt reserves, goodwill and intangible assets, depreciation and amortization and inventory.
On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") was signed into law, making significant changes to the U.S. Internal Revenue Code. In response to the Act, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We have accounted for the Act in accordance with the provisions of SAB 118. The Act includes the Global Intangibles Low-taxed Income ("GILTI") provision, a new minimum tax on global intangible low-taxed income, the Base Erosion Anti-Avoidance ("BEAT"), a new tax for certain payments to foreign related parties and the Foreign-Derived Intangible Income ("FDII") provision, a tax incentive to earn income from the sale, lease or license of goods and services abroad. The Company has elected to account for the GILTI provision as a period cost in the year the taxes are incurred
35
and therefore, deferred tax assets and liabilities of our foreign subsidiaries have not been adjusted for these provisions. Refer to Note 7 to the consolidated financial statements for additional information regarding the impact of the Act and SAB 118.
We evaluate our foreign investment opportunities and plans, as well as our foreign working capital needs, to determine the level of investment required and, accordingly, determine the level of foreign earnings that we consider indefinitely reinvested. Based upon that evaluation, earnings of our foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Act. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.
As of February 2, 2019, we have net operating losses and other carryforwards at certain of our subsidiaries. We evaluate these carryforwards for realization based upon their expiration dates and our expectations of future taxable income. As deemed appropriate, valuation reserves are recorded to adjust the recorded value of these carryforwards to the expected realizable value.
We are audited periodically by domestic and foreign tax authorities and tax assessments may arise several years after tax returns have been filed. Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more-likely-than-not threshold for recognition. For tax positions that meet the more-likely-than-not threshold, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled. In evaluating issues raised in such audits and other uncertain tax positions, we provide reserves for exposures as appropriate.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. In accordance with ASC 350, Intangibles-Goodwill and Other, a company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment screen or discounted cash flow analysis, goodwill impairment is recognized for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We perform impairment tests during the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present.
We elected to perform the optional qualitative assessment in 2018 for all reporting units except our Allen Edmonds reporting unit. The Company performed a quantitative assessment for the Allen Edmonds reporting unit. The quantitative test is a fair value-based test applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compared the fair value of our Allen Edmonds reporting unit to the carrying value of that reporting unit. This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of the reporting unit is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expenses, capital expenditures, depreciation, amortization and working capital requirements are based on the past performance of the reporting units as well as our internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. We also considered assumptions that market participants may use. The estimate of the fair value of our Allen Edmonds reporting unit was based on the best information available to us as of the date of the assessment. In our quantitative assessment of goodwill, our net sales and earnings projections, growth rates and discount rates require significant management judgment and are the assumptions to which the fair value calculation is the most sensitive. Changes in any of these assumptions, including the impact of external factors such as interest rates, could result in the calculated fair value falling below the carrying value in future assessments. During 2018, we recorded a non-cash impairment charge of $38.0 million for the impairment of goodwill of our Allen Edmonds reporting unit. Refer to Note 11 to the consolidated financial statements for further discussion.
We tested our indefinite-lived intangible assets utilizing the relief-from-royalty method to determine the estimated fair value of each indefinite-lived intangible asset. The relief-from-royalty method estimates the theoretical royalty savings from ownership of the intangible asset. Key assumptions used in our assessments include net sales projections, discount rates and royalty rates. Royalty rates are established by management based on comparable trademark licensing agreements in the market. The net sales projections, discount rates and royalty rates utilized in our quantitative assessments of indefinite-lived intangible assets require significant management judgment and are the assumptions to which the fair value calculation is most sensitive. Changes in any of these assumptions could negatively impact the fair value calculation, potentially resulting in an impairment charge in future assessments. During 2018, we recorded a non-cash impairment charge of $60.0 million for the impairment of the Allen Edmonds indefinite-lived tradename. The impairment charge was primarily driven by the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected
36
revenue, as well as rising interest rates. Refer to Note 11 to the consolidated financial statements for further discussion. In addition, as a result of impairment indicators for the Allen Edmonds business, we tested for impairment the definite-lived customer relationship intangible asset associated with the Allen Edmonds business as of the first day of our fourth fiscal quarter. The fair value of the customer relationship intangible asset was determined using the excess earnings method. The fair value exceeded the carrying value and therefore, no impairment charge was recorded.
The goodwill impairment testing and other indefinite-lived intangible asset impairment reviews were performed as of the first day of our fourth fiscal quarter and, other than the Allen Edmonds tradename and goodwill impairment described above, there were no impairment charges. The fair values of our other reporting units and indefinite-lived intangible assets were substantially in excess of the carrying values as of our most recent impairment testing date, except for the reporting units associated with Blowfish Malibu and Vionic, which were acquired in July 2018 and October 2018, respectively. The relationship between the fair value and carrying value of a reporting unit is influenced by many factors, including the length of time that has passed since the reporting unit was initially acquired. Upon acquisition, the carrying value of the reporting unit typically approximates its fair value. Therefore, the fair value of a recently acquired reporting unit typically approximates its carrying value. Refer to Note 11 to the consolidated financial statements for additional information related to goodwill and intangible assets.
Business Combination Accounting
We allocate the purchase price of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date. We also identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. We have historically relied in part upon the use of reports from third-party valuation specialists to assist in the estimation of fair values for intangible assets other than goodwill, inventory and fixed assets. The carrying values of acquired receivables and trade accounts payable have historically approximated their fair values at the business combination date. With respect to other acquired assets and liabilities, we use all available information to make our best estimates of their fair values at the business combination date.
Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
During 2018, we acquired two businesses, Blowfish Malibu and Vionic. Refer to further discussion in Note 2 to the consolidated financial statements.
Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS |
The Company has no off-balance sheet arrangements as of February 2, 2019.
37
CONTRACTUAL OBLIGATIONS |
The table below sets forth our significant future obligations by time period. Further information on certain of these commitments is provided in the notes to our consolidated financial statements, which are cross-referenced in this table. Our obligations outstanding as of February 2, 2019 include the following:
Payments Due by Period | |||||||||||||||
Less Than | 1-3 | 3-5 | More Than | ||||||||||||
($ millions) | Total | 1 Year | Years | Years | 5 Years | ||||||||||
Borrowings under Credit Agreement | $ | 335.0 | $ | 335.0 | $ | — | $ | — | $ | — | |||||
Long-term debt (1) | 200.0 | — | — | — | 200.0 | ||||||||||
Interest on long-term debt (1) | 62.5 | 12.5 | 25.0 | 25.0 | — | ||||||||||
Financial instruments (2) | 0.6 | 0.6 | — | — | — | ||||||||||