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

FORM 10-Q 
 
(Mark One)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the quarterly period ended  July 29, 2017
 
 
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from  _____________  to  _____________
 
Commission file number: 1-2191 
 
CALERES, INC.
( Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   þ  No ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes   ¨     No þ  
 
As of August 25, 2017 , 42,965,855 common shares were outstanding.

1


INDEX
 




2


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

($ thousands)
July 29, 2017

 
July 30, 2016

 
January 28, 2017

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
52,942


$
165,729


$
55,332

Receivables, net
143,616


144,309


153,121

Inventories, net
722,005


648,881


585,764

Prepaid expenses and other current assets
36,972


30,190


49,528

Total current assets
955,535

 
989,109

 
843,745

 
 
 
 
 
 
Other assets
69,589


115,448


68,574

Goodwill
127,081

 
13,954

 
127,098

Intangible assets, net
214,114

 
115,106

 
216,660

Property and equipment
539,732

 
489,638

 
531,104

Allowance for depreciation
(321,894
)
 
(302,862
)
 
(311,908
)
Property and equipment, net
217,838


186,776


219,196

Total assets
$
1,584,157

 
$
1,420,393

 
$
1,475,273

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
35,000

 
$
—

 
$
110,000

Trade accounts payable
402,812


358,751


266,370

Other accrued expenses
170,499


142,085


151,225

Total current liabilities
608,311

 
500,836

 
527,595

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,233


196,774


197,003

Deferred rent
52,227


47,452


51,124

Other liabilities
85,212


60,566


85,065

Total other liabilities
334,672

 
304,792

 
333,192

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
430

 
429

 
430

Additional paid-in capital
124,851

 
119,241

 
121,537

Accumulated other comprehensive loss
(28,051
)
 
(5,375
)
 
(30,434
)
Retained earnings
542,499

 
499,492

 
521,584

Total Caleres, Inc. shareholders’ equity
639,729


613,787


613,117

Noncontrolling interests
1,445


978


1,369

Total equity
641,174

 
614,765

 
614,486

Total liabilities and equity
$
1,584,157

 
$
1,420,393

 
$
1,475,273

See notes to condensed consolidated financial statements.

3


CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands, except per share amounts)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Net sales
$
676,954

$
622,937

$
1,308,463

$
1,207,670

Cost of goods sold
389,493

363,382

750,094

700,322

Gross profit
287,461

259,555

558,369

507,348

Selling and administrative expenses
253,500

227,297

497,575

446,347

Restructuring and other special charges, net
2,865

—

3,973

—

Operating earnings
31,096

32,258

56,821

61,001

Interest expense
(4,637
)
(3,479
)
(9,681
)
(7,089
)
Interest income
262

310

497

557

Earnings before income taxes
26,721

29,089

47,637

54,469

Income tax provision
(9,047
)
(9,410
)
(15,079
)
(16,912
)
Net earnings
17,674

19,679

32,558

37,557

Net earnings (loss) attributable to noncontrolling interests
79

(89
)
61

6

Net earnings attributable to Caleres, Inc.
$
17,595

$
19,768

$
32,497

$
37,551

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.46

$
0.76

$
0.87

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.46

$
0.75

$
0.86

 
 
 
 
 
Dividends per common share
$
0.07

$
0.07

$
0.14

$
0.14

See notes to condensed consolidated financial statements.

4



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Net earnings
$
17,674

$
19,679

$
32,558

$
37,557

Other comprehensive income (loss), net of tax:
 

 

 

 

Foreign currency translation adjustment
1,820

(804
)
1,280

1,506

Pension and other postretirement benefits adjustments
309

(288
)
727

(576
)
Derivative financial instruments
(402
)
(229
)
376

(441
)
Other comprehensive income (loss), net of tax
1,727

(1,321
)
2,383

489

Comprehensive income
19,401

18,358

34,941

38,046

Comprehensive income (loss) attributable to noncontrolling interests
99

(120
)
76

(10
)
Comprehensive income attributable to Caleres, Inc.
$
19,302

$
18,478

$
34,865

$
38,056

See notes to condensed consolidated financial statements.


5


CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Twenty-six Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

Operating Activities
 
 

Net earnings
$
32,558

$
37,557

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

 

Depreciation
22,874

18,325

Amortization of capitalized software
7,243

6,366

Amortization of intangible assets
2,046

1,839

Amortization of debt issuance costs and debt discount
864

864

Share-based compensation expense
5,804

4,329

Excess tax benefit related to share-based plans
—

(3,248
)
Loss on disposal of property and equipment
471

519

Impairment charges for property and equipment
2,119

536

Deferred rent
1,103

946

Provision for doubtful accounts
294

105

Changes in operating assets and liabilities:
 

 

Receivables
9,211

9,301

Inventories
(134,465
)
(101,032
)
Prepaid expenses and other current and noncurrent assets
8,158

24,799

Trade accounts payable
136,108

120,949

Accrued expenses and other liabilities
19,399

(14,353
)
Other, net
493

762

Net cash provided by operating activities
114,280

108,564

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(24,251
)
(27,443
)
Capitalized software
(3,152
)
(3,778
)
Net cash used for investing activities
(27,403
)
(31,221
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
400,000

103,000

Repayments under revolving credit agreement
(475,000
)
(103,000
)
Dividends paid
(6,030
)
(6,089
)
Acquisition of treasury stock
(5,993
)
(23,139
)
Issuance of common stock under share-based plans, net
(2,490
)
(4,086
)
Excess tax benefit related to share-based plans
—

3,248

Net cash used for financing activities
(89,513
)
(30,066
)
Effect of exchange rate changes on cash and cash equivalents
246

301

(Decrease) increase in cash and cash equivalents
(2,390
)
47,578

Cash and cash equivalents at beginning of period
55,332

118,151

Cash and cash equivalents at end of period
$
52,942

$
165,729

See notes to condensed consolidated financial statements.

6


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

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Caleres, Inc. 
 
For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 28, 2017 .

Note 2
Impact of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued ASU 2015-14 to defer the effective date. Several ASUs to clarify the implementation guidance in ASU 2014-09 have also been issued .  Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted beginning after December 15, 2016.  Although the ASUs will impact revenue recognition for both of the Company's reportable segments, the impact will be more significant on the Famous Footwear segment, primarily due to the ASUs' required treatment for loyalty programs. The new standard will require a deferral of revenue associated with loyalty points issued under the Company's loyalty program using a relative stand-alone selling price method.

The Company has established an implementation team to develop and execute the plan to adopt the ASUs. The implementation plan, which continues to be executed and refined, includes changes to the Company's accounting policies and practices, systems and controls to support the new revenue recognition and disclosure requirements. The implementation team is currently assessing the impact of the new standard on each of its revenue streams. The Company plans to adopt the ASUs in the first quarter of 2018 using the modified retrospective method. Although the implementation may result in a significant initial adjustment to certain liabilities, including deferred revenue, the adoption of the standard is not anticipated to significantly impact the Company's condensed consolidated statements of earnings on an ongoing basis.
 
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330), which requires entities to measure inventory at "the lower of cost and net realizable value", simplifying the current guidance under which entities must measure inventory at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using the last-in, first-out (LIFO) method. The Company adopted the ASU during the first quarter of 2017, which did not have a material impact on the condensed consolidated financial statements.


7


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company has formed an implementation team and is in the process of evaluating its leases and upgrading its accounting systems to comply with the ASU. Due to the large number of retail operating leases to which the Company is a party, the Company anticipates that the impact to its condensed consolidated financial statements upon adoption in the first quarter of 2019 will be material. However, the adoption of the ASU is not expected to trigger non-compliance with any covenant or other restrictions under the provisions of any of the Company’s debt obligations. 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) , which simplifies accounting for certain aspects of share-based payments to employees, including income taxes, forfeitures and statutory income tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the ASU during the first quarter of 2017, which had the following impact to the condensed consolidated financial statements:

•
The Company recognized excess tax benefits of $1.1 million related to share-based plans during the twenty-six weeks ended July 29, 2017 , which are required to be recognized in the statements of earnings on a prospective basis. Prior to the adoption of the ASU, the excess tax benefit related to share-based plans was recorded in additional paid-in-capital.
•
The Company elected to adopt the provision of the ASU to account for forfeitures as they occur. This election was applied on a modified retrospective basis, resulting in a net increase to Caleres, Inc. shareholders' equity of $0.4 million .
•
The ASU requires cash flows from excess tax benefits related to share-based payments to be reported as operating activities in the condensed consolidated statements of cash flows. The Company elected to adopt this provision on a prospective basis and as a result, the excess tax benefit related to share-based plans for the twenty-six weeks ended July 30, 2016 is presented as a financing activity, while the benefit for the twenty-six weeks ended July 29, 2017 is presented as an operating activity.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory,  which requires the recognition of the income tax effects of intercompany sales and intra-entity transfers of assets, other than inventory, when the transfer occurs. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The ASU will be adopted during the first quarter of 2018 using a modified retrospective approach. While the Company is finalizing its assessment of the impact of this ASU on its condensed consolidated financial statements, the adoption of the ASU is expected to result in a cumulative adjustment to deferred taxes and retained earnings related to intra-entity transfers of intangible assets that occurred prior to adoption.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits , to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Upon adoption of the ASU during the first quarter of 2018, the Company will separately present the components of net periodic benefit cost or income, excluding the service cost component, in non-operating expenses on a retrospective basis. Net periodic benefit income, excluding the service cost component, was  $2.7 million  and  $5.1 million  for the thirteen and twenty-six weeks ended July 29, 2017 , respectively.

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718), Scope of Modification Accounting. The ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply modification accounting if the value, vesting conditions or classification of the award changes. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The guidance will be applied prospectively to awards modified after the Company adopts the ASU in the first quarter of 2018.


8


Note 3
Acquisition

On December 13, 2016 , the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with Apollo Investors, LLC (the "Seller") and Apollo Buyer Holding Company, Inc. (the "Holding Company"), pursuant to which the Company acquired all outstanding capital stock of Allen Edmonds ("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was $259.9 million , net of cash received of $0.7 million . The purchase was funded with cash and funds available under the Company's revolving credit agreement. The operating results of Allen Edmonds have been included in the Company’s condensed consolidated financial statements within the Brand Portfolio segment since December 13, 2016 . The assets and liabilities of Allen Edmonds were recorded at their estimated fair values and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill during the fourth quarter of 2016.

The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies. As of July 29, 2017 , the purchase price allocation is substantially complete.

During the thirteen weeks ended July 29, 2017 , the Company recognized $1.9 million in cost of goods sold ( $1.2 million on an after-tax basis, or $0.03 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The Company recognized $4.9 million in cost of goods sold ( $3.0 million on an after-tax basis, or $0.07 per diluted share) during the twenty-six weeks ended July 29, 2017 . As further discussed in Note 5 to the condensed consolidated financial statements, the Company also incurred integration costs during the thirteen and twenty-six weeks ended July 29, 2017 .

Note 4
Earnings Per Share
 
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the periods ended July 29, 2017 and July 30, 2016 :
 

9


 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands, except per share amounts)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

NUMERATOR
 

 

 

 

Net earnings
$
17,674

$
19,679

$
32,558

$
37,557

Net (earnings) loss attributable to noncontrolling interests
(79
)
89

(61
)
(6
)
Net earnings allocated to participating securities
(490
)
(523
)
(895
)
(1,014
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
17,105

$
19,245

$
31,602

$
36,537

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,783

42,043

41,807

42,238

Dilutive effect of share-based awards
171

142

172

151

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
41,954

42,185

41,979

42,389

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.46

$
0.76

$
0.87

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.41

$
0.46

$
0.75

$
0.86

 
Options to purchase 16,667 shares of common stock for the thirteen and twenty-six weeks ended July 29, 2017 and 66,165 shares of common stock for the thirteen and twenty-six weeks ended July 30, 2016 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive.

During the thirteen and twenty-six weeks ended July 29, 2017 , the Company repurchased zero and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. The Company repurchased 450,000 and 900,000 shares during the thirteen and twenty-six weeks ended July 30, 2016 , respectively. As of July 29, 2017 , the Company has repurchased a total of  1.3 million  shares under this program.

Note   5
Restructuring and Other Initiatives
 
During the thirteen and twenty-six weeks ended July 29, 2017 , the Company incurred integration and reorganization costs, primarily for professional fees and severance expense, totaling $2.9 million ( $1.9 million on an after-tax basis, or $0.04 per diluted share) and $4.0 million ( $2.6 million on an after-tax basis, or $0.06 per diluted share), respectively, related to the men's business. Of the $2.9 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirteen weeks ended July 29, 2017 , $2.2 million is reflected within the Other category and $0.7 million is reflected within the Brand Portfolio segment. Of the $4.0 million in restructuring and other special charges for the twenty-six weeks ended July 29, 2017 , $2.5 million is reflected within the Other category and $1.5 million is reflected within the Brand Portfolio segment. There were no restructuring charges incurred during the thirteen or twenty-six weeks ended July 30, 2016 .
 

10


Note 6
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended July 29, 2017 and July 30, 2016 :  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended July 29, 2017
External sales
$
404,930

$
272,024

$
—

$
676,954

Intersegment sales
—

29,850

—

29,850

Operating earnings (loss)
25,112

15,916

(9,932
)
31,096

Segment assets
636,399

839,674

108,084

1,584,157

 
 
 
 
 
Thirteen Weeks Ended July 30, 2016
External sales
$
390,123

$
232,814

$
—

$
622,937

Intersegment sales
—

30,589

—

30,589

Operating earnings (loss)
22,604

17,463

(7,809
)
32,258

Segment assets
644,446

518,636

257,311

1,420,393

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

$
537,039

$
—

$
1,308,463

Intersegment sales
—

44,550

—

44,550

Operating earnings (loss)
45,391

29,230

(17,800
)
56,821

 
 
 
 
 
Twenty-Six Weeks Ended July 30, 2016
External sales
$
754,719

$
452,951

$
—

$
1,207,670

Intersegment sales
—

46,152

—

46,152

Operating earnings (loss)
48,358

27,085

(14,442
)
61,001

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

Following is a reconciliation of operating earnings to earnings before income taxes:   
 
Thirteen Weeks Ended
Twenty-six Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Operating earnings
$
31,096

$
32,258

$
56,821

$
61,001

Interest expense
(4,637
)
(3,479
)
(9,681
)
(7,089
)
Interest income
262

310

497

557

Earnings before income taxes
$
26,721

$
29,089

$
47,637

$
54,469


Note   7
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
July 29, 2017

July 30, 2016

January 28, 2017

Raw materials
$
18,951

$
734

$
15,378

Work-in-process
840

—

1,093

Finished goods
702,214

648,147

569,293

Inventories, net
$
722,005

$
648,881

$
585,764



11


Note   8
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
July 29, 2017

July 30, 2016

January 28, 2017

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
285,988

183,068

286,488

Total intangible assets
288,788

185,868

289,288

Accumulated amortization
(74,674
)
(70,762
)
(72,628
)
Total intangible assets, net
214,114

115,106

216,660

Goodwill
 

 

 

Brand Portfolio
127,081

13,954

127,098

Total goodwill
127,081

13,954

127,098

Goodwill and intangible assets, net
$
341,195

$
129,060

$
343,758


As further described in Note 3 to the condensed consolidated financial statements, the Company acquired Allen Edmonds on December 13, 2016 . The allocation of the purchase price resulted in incremental intangible assets of $102.9 million , consisting of trademarks and customer relationships of $97.5 million and $5.4 million , respectively, and incremental goodwill of $113.1 million .

The Company's intangible assets as of July 29, 2017 , July 30, 2016 and January 28, 2017 were as follows:
($ thousands)
 
 
 
July 29, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
74,449

 
$
90,839

Trademarks
 
Indefinite
 
118,100

(1)  
—

 
118,100

Customer relationships
 
15 years
 
5,400

(1)  
225

 
5,175

 
 
 
 
$
288,788

 
$
74,674

 
$
214,114

 
 
 
 
July 30, 2016
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,068

 
$
70,762

 
$
94,306

Trademarks
 
Indefinite
 
20,800

 
—

 
20,800

 
 
 
 
$
185,868

 
$
70,762

 
$
115,106

 
 
 
 
January 28, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
72,604

 
$
92,684

Trademarks
 
Indefinite
 
117,900

(1)  
—

 
117,900

Customer relationships
 
15 years
 
6,100

(1)  
24

 
6,076

 
 
 
 
$
289,288

 
$
72,628

 
$
216,660

(1) The Allen Edmonds trademark and customer relationships intangible assets were acquired in the Allen Edmonds acquisition, as further discussed in Note 3 to the condensed consolidated financial statements. Immaterial adjustments attributable to the purchase price allocation were recorded during the thirteen weeks ended April 29, 2017, resulting in an adjustment to the original cost.

Amortization expense related to intangible assets was $1.0 million and $0.9 million for the thirteen weeks ended July 29, 2017 and July 30, 2016 , respectively, and $2.0 million and $1.8 million for the twenty-six weeks ended July 29, 2017 and July 30, 2016, respectively.

12


Note   9
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the twenty-six weeks ended July 29, 2017 and July 30, 2016 :

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings
32,497

61

32,558

Other comprehensive income
2,383

15

2,398

Dividends paid
(6,030
)
—

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

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

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

—

441

Share-based compensation expense
5,804

—

5,804

Equity at July 29, 2017
$
639,729

$
1,445

$
641,174

 
($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 30, 2016
$
601,484

$
988

$
602,472

Net earnings
37,551

6

37,557

Other comprehensive income (loss)
489

(16
)
473

Dividends paid
(6,089
)
—

(6,089
)
Acquisition of treasury stock
(23,139
)
—

(23,139
)
Issuance of common stock under share-based plans, net
(4,086
)
—

(4,086
)
Excess tax benefit related to share-based plans
3,248

—

3,248

Share-based compensation expense
4,329

—

4,329

Equity at July 30, 2016
$
613,787

$
978

$
614,765



13


Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended July 29, 2017 and July 30, 2016 :
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions  (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

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

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

—

(295
)
1,525

Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

500

(164
)
336

Tax (benefit) provision
—

(191
)
57

(134
)
Net reclassifications
—

309

(107
)
202

Other comprehensive income (loss)
1,820

309

(402
)
1,727

Balance July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
 
 
 
 
 
Balance April 30, 2016
$
1,410

$
(5,644
)
$
180

$
(4,054
)
Other comprehensive loss before reclassifications
(804
)
—

(351
)
(1,155
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss
—

(477
)
190

(287
)
Tax provision (benefit)
—

189

(68
)
121

Net reclassifications
—

(288
)
122

(166
)
Other comprehensive loss
(804
)
(288
)
(229
)
(1,321
)
Balance July 30, 2016
$
606

$
(5,932
)
$
(49
)
$
(5,375
)
 
 
 
 
 
Balance January 28, 2017
$
192

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

—

458

1,738

Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

1,179

(117
)
1,062

Tax (benefit) provision
—

(452
)
35

(417
)
Net reclassifications
—

727

(82
)
645

Other comprehensive income
1,280

727

376

2,383

Balance July 29, 2017
$
1,472

$
(29,357
)
$
(166
)
$
(28,051
)
 
 
 
 


Balance January 30, 2016
$
(900
)
$
(5,356
)
$
392

$
(5,864
)
Other comprehensive income (loss) before reclassifications
1,506

—

(639
)
867

Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

(954
)
313

(641
)
Tax provision (benefit)
—

378

(115
)
263

Net reclassifications
—

(576
)
198

(378
)
Other comprehensive income (loss)
1,506

(576
)
(441
)
489

Balance July 30, 2016
$
606

$
(5,932
)
$
(49
)
$
(5,375
)
(1)
Amounts reclassified are included in selling and administrative expenses. See Note 11 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense. See Notes 12 and 13 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

14



Note 10
Share-Based Compensation
 
The Company recognized share-based compensation expense of $3.1 million and $2.3 million during the thirteen weeks and $5.8 million and $4.3 million during the twenty-six weeks ended July 29, 2017 and July 30, 2016 , respectively. In addition to share-based compensation expense, the Company recognized cash-based expense related to performance share units and cash awards granted under the performance share plans of zero and $0.9 million during the thirteen weeks and $0.1 million and $1.5 million during the twenty-six weeks ended July 29, 2017 and July 30, 2016 , respectively.
 
The Company had net repurchases of 12,472 and 5,947 shares of common stock during the thirteen weeks ended July 29, 2017 and July 30, 2016 , respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to directors, net of forfeitures and shares withheld to satisfy the minimum tax withholding requirement. During the twenty-six weeks ended July 29, 2017 and July 30, 2016 , the Company issued 241,886 and 180,825 shares of common stock, respectively, related to these share-based plans.

Restricted Stock 
The following table summarizes restricted stock activity for the periods ended July 29, 2017 and July 30, 2016 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
July 29, 2017
 
 
July 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
April 29, 2017
1,217,334

 
$
27.96

 
April 30, 2016
1,150,749

 
$
25.38

Granted
4,492

 
27.83

 
Granted
13,800

 
24.85

Forfeited
(17,500
)
 
28.56

 
Forfeited
(19,250
)
 
26.59

Vested
(10,000
)
 
18.80

 
Vested
(6,000
)
 
11.72

July 29, 2017
1,194,326

 
$
28.03

 
July 30, 2016
1,139,299

 
$
25.42

 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
 
Twenty-Six Weeks Ended
 
July 29, 2017
 
 
July 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
January 28, 2017
1,128,049

 
$
25.85

 
January 30, 2016
1,262,449

 
$
19.55

Granted
356,312

 
26.91

 
Granted
350,600

 
26.57

Forfeited
(30,000
)
 
27.75

 
Forfeited
(48,500
)
 
22.94

Vested
(260,035
)
 
17.07

 
Vested
(425,250
)
 
9.22

July 29, 2017
1,194,326

 
$
28.03

 
July 30, 2016
1,139,299

 
$
25.42


All of the restricted shares granted during the thirteen weeks ended July 29, 2017 have a cliff-vesting term of one year. Of the 356,312 restricted shares granted during the twenty-six weeks ended July 29, 2017 , 4,492 shares have a cliff-vesting term of one year, 12,000 shares have a graded-vesting term of four years and 339,820 shares have a cliff-vesting term of four years . All of the restricted shares granted during the thirteen and twenty-six weeks ended July 30, 2016 have a cliff-vesting term of four years . Share-based compensation expense is recognized on a straight-line basis over the respective vesting periods.

Performance Share Awards
During the thirteen weeks ended July 29, 2017 and July 30, 2016 , the Company granted no performance share awards. During the twenty-six weeks ended July 29, 2017 and July 30, 2016 , the Company granted performance share awards for a targeted 169,500 and 159,000 shares, respectively with a weighted-average grant date fair value of $26.90 and $26.64 , respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three -year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for

15


the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the  three -year service period. The performance share units are settled in cash and their fair value is based on the unadjusted quoted market price for the Company’s common stock on each measurement date. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value. Refer to Note 13 to the condensed consolidated financial statements for further discussion regarding performance share units.

Stock Options
The following table summarizes stock option activity for the periods ended July 29, 2017 and July 30, 2016 :
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
July 29, 2017
 
 
July 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
April 29, 2017
97,292

 
$
6.39

 
April 30, 2016
229,105

 
$
8.99

Granted
—

 
—

 
Granted
—

 
—

Exercised
(5,250
)
 
5.93

 
Exercised
(6,315
)
 
9.28

Forfeited
—

 
—

 
Forfeited
—

 
—

Expired
—

 
—

 
Expired
—

 
—

July 29, 2017
92,042

 
$
6.42

 
July 30, 2016
222,790

 
$
8.98

 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
 
Twenty-Six Weeks Ended
 
July 29, 2017
 
 
July 30, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
January 28, 2017
150,540

 
$
9.36

 
January 30, 2016
301,295

 
$
8.95

Granted
—

 
—

 
Granted
—

 
—

Exercised
(11,250
)
 
5.74

 
Exercised
(56,381
)
 
7.41

Forfeited
—

 
—

 
Forfeited
(7,499
)
 
15.94

Expired
(47,248
)
 
15.94

 
Expired
(14,625
)
 
10.75

July 29, 2017
92,042

 
$
6.42

 
July 30, 2016
222,790

 
$
8.98


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of cash-equivalent restricted stock units ("RSUs"). The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 45,830 and 53,310 RSUs to non-employee directors, including 910 and 1,110 RSUs for dividend equivalents, during the thirteen weeks ended July 29, 2017 and July 30, 2016 , respectively, with weighted-average grant date fair values of $27.84 and $21.62 , respectively. The Company granted 46,712 and 54,163 RSUs, including 1,792 and 1,963 RSUs for dividend equivalents, during the twenty-six weeks ended July 29, 2017 and July 30, 2016 , respectively, with weighted-average grant date fair values of $27.81 and $21.72 , respectively.


16


Note   11
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Service cost
$
2,383

$
1,904

$
—

$
—

Interest cost
3,727

3,810

16

15

Expected return on assets
(6,913
)
(7,252
)
—

—

Amortization of:
 

 

 

 

Actuarial loss (gain)
996

39

(35
)
(55
)
Prior service income
(461
)
(461
)
—

—

Settlement cost
—

250

—

—

Total net periodic benefit income
$
(268
)
$
(1,710
)
$
(19
)
$
(40
)
 
 
 
 
 
 
Pension Benefits
Other Postretirement Benefits
 
Twenty-six Weeks Ended
Twenty-six Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Service cost
$
4,850

$
4,167

$
—

$
—

Interest cost
7,474

7,671

34

30

Expected return on assets
(13,793
)
(14,475
)
—

—

Amortization of:
 
 
 
 
Actuarial loss (gain)
2,148

77

(73
)
(110
)
Prior service income
(896
)
(921
)
—

—

Settlement cost
—

250

—

—

Total net periodic benefit income
$
(217
)
$
(3,231
)
$
(39
)
$
(80
)


17


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

Hedge ineffectiveness is evaluated using the hypothetical derivative method. The amount of hedge ineffectiveness for the thirteen and twenty-six weeks ended July 29, 2017 and July 30, 2016 was not material. 
 
As of July 29, 2017 , July 30, 2016 and January 28, 2017 , the Company had forward contracts maturing at various dates through August 2018 , July 2017 and February 2018 , respectively. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency. 
(U.S. $ equivalent in thousands)
July 29, 2017

July 30, 2016

January 28, 2017

Financial Instruments
 
 
 
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
$
18,110

$
17,404

$
18,826

Euro
14,725

13,544

13,297

Chinese yuan
11,887

12,477

7,723

New Taiwanese dollars
567

522

526

United Arab Emirates dirham
254

939

823

Japanese yen
176

1,026

769

Other currencies
14

174

124

Total financial instruments
$
45,733

$
46,086

$
42,088

 
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of July 29, 2017 , July 30, 2016 and January 28, 2017 are as follows:

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

 
Balance Sheet Location
Fair Value

 
 
 
 
 
 
Foreign exchange forward contracts:
 

 
 
 

July 29, 2017
Prepaid expenses and other current assets
$
918

 
Other accrued expenses
$
1,083

July 30, 2016
Prepaid expenses and other current assets
365

 
Other accrued expenses
565

January 28, 2017
Prepaid expenses and other current assets
234

 
Other accrued expenses
874

 

18


For the periods ended July 29, 2017 and July 30, 2016 , the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
July 29, 2017
July 30, 2016
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
Loss Recognized in OCL on Derivatives

Gain Reclassified from Accumulated OCL into Earnings

(Loss) Gain Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(8
)
$
6

$
(25
)
$
(36
)
Cost of goods sold
(55
)
158

(472
)
33

Selling and administrative expenses
(194
)
—

(75
)
(187
)
Interest expense
(14
)
—

14

—

 
Twenty-Six Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
July 29, 2017
July 30, 2016
Foreign exchange forward contracts:
Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

Loss Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(40
)
$
24

$
(189
)
$
(72
)
Cost of goods sold
737

161

(585
)
116

Selling and administrative expenses
117

(67
)
(24
)
(357
)
Interest expense
(10
)
(1
)
(24
)
—


All gains and losses currently included within accumulated other comprehensive loss associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 13 to the condensed consolidated financial statements. 
 
Note 13
Fair Value Measurements
 
Fair Value Hierarchy  
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows: 

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

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

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


19


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

Measurement of Fair Value  
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value. 
 
Money Market Funds  
The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan Assets and Liabilities 
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 
 
Deferred Compensation Plan for Non-Employee Directors  
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s condensed consolidated statements of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 
 
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to RSUs for non-employee directors is disclosed in Note 10 to the condensed consolidated financial statements.
 

20


Performance Share Units
Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three -year service period. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value.
 
Derivative Financial Instruments  
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 12 to the condensed consolidated financial statements. 

Secured Convertible Note
The Company received a secured convertible note as partial consideration for the 2014 disposition of Shoes.com, and the convertible note was measured at fair value using unobservable inputs (Level 3). During the fourth quarter of 2016, the convertible note was fully impaired.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at July 29, 2017 , July 30, 2016 and January 28, 2017 . The Company did not have any transfers between Level 1, Level 2 or Level 3 during the twenty-six weeks ended July 29, 2017 or July 30, 2016 .   
 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

July 29, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
16,163

 
$
16,163

$
—

$
—

Non-qualified deferred compensation plan assets
5,637

 
5,637

—

—

Non-qualified deferred compensation plan liabilities
(5,637
)
 
(5,637
)
—

—

Deferred compensation plan liabilities for non-employee directors
(2,154
)
 
(2,154
)
—

—

Restricted stock units for non-employee directors
(9,088
)
 
(9,088
)
—

—

Derivative financial instruments, net
(165
)
 
—

(165
)
—

July 30, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
132,320

 
$
132,320

$
—

$
—

Non-qualified deferred compensation plan assets
4,637

 
4,637

—

—

Non-qualified deferred compensation plan liabilities
(4,637
)
 
(4,637
)
—

—

Deferred compensation plan liabilities for non-employee directors
(1,705
)
 
(1,705
)
—

—

Restricted stock units for non-employee directors
(9,060
)
 
(9,060
)
—

—

Performance share units
(2,347
)
 
(2,347
)
—

—

Derivative financial instruments, net
(200
)
 
—

(200
)
—

Secured convertible note
7,190

 
—

—

7,190

January 28, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
27,530

 
$
27,530

$
—

$
—

Non-qualified deferred compensation plan assets
5,051

 
5,051

—

—

Non-qualified deferred compensation plan liabilities
(5,051
)
 
(5,051
)
—

—

Deferred compensation plan liabilities for non-employee directors
(1,909
)
 
(1,909
)
—

—

Restricted stock units for non-employee directors
(9,390
)
 
(9,390
)
—

—

Performance share units
(3,352
)
 
(3,352
)
—

—

Derivative financial instruments, net
(640
)
 
—

(640
)
—


21


 
Impairment Charges  
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurement . Long-lived assets held and used with a carrying amount of $114.6 million and $96.6 million at July 29, 2017 and July 30, 2016 , respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
Twenty-Six Weeks Ended
($ thousands)
July 29, 2017

July 30, 2016

July 29, 2017

July 30, 2016

Impairment Charges
 
 
 
 
Famous Footwear
$
150

$
—

$
300

$
134

Brand Portfolio
1,020

225

1,819

402

Total impairment charges
$
1,170

$
225

$
2,119

$
536


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

The carrying amounts and fair values of the Company's other financial instruments subject to fair value disclosures are as follows:
 
July 29, 2017
 
July 30, 2016
 
January 28, 2017
 
Carrying

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
35,000

 
$
35,000

 
$
—

 
$
—

 
$
110,000

 
$
110,000

Long-term debt
197,233

 
209,500

 
196,774

 
205,500

 
197,003

 
209,000

Total debt
$
232,233


$
244,500


$
196,774


$
205,500


$
307,003


$
319,000

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

Note 14
Income Taxes
 
The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors.  The Company’s consolidated effective tax rates were 33.9% and  32.3% , respectively, for the thirteen weeks ended July 29, 2017 and July 30, 2016. During the thirteen weeks ended July 30, 2016 , the Company recognized a discrete tax benefit of $0.2 million , reflecting the settlement of a federal tax audit issue. If the discrete tax benefit had not been recognized during the thirteen weeks ended July 30, 2016 , the Company's effective tax rate would have been 33.0% . Excluding the discrete tax item, the Company's tax rate is higher for the thirteen weeks ended July 29, 2017, reflecting a lower mix of international earnings in our lowest tax rate jurisdictions.

For the  twenty-six weeks ended July 29, 2017 and July 30, 2016 , the Company's consolidated effective tax rates were  31.7%  and  31.0% , respectively. As a result of the adoption of ASU 2016-09 during the first quarter of 2017, which requires prospective recognition of excess tax benefits and deficiencies in the statement of earnings, the Company recognized a discrete tax benefit of $1.1 million related to share-based compensation. Discrete tax benefits of  $0.9 million  were recognized during the  twenty-six weeks ended July 30, 2016 , reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the  twenty-six weeks ended July 29, 2017  and  July 30, 2016 , the Company's effective tax rates would

22


have been  33.9%  and  32.7% , respectively. Excluding the discrete tax items, the Company's tax rate is higher for the twenty-six weeks ended July 29, 2017 , reflecting a lower mix of international earnings in our lowest tax rate jurisdictions.

Note 15
Related Party Transactions
 
C. banner International Holdings Limited
The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49% . The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture arrangements. B&H Footwear sold Naturalizer footwear to a retail affiliate of CBI on a wholesale basis, which in turn sold the Naturalizer products through department store shops and free-standing stores in China.  The Company, through its consolidated subsidiary, B&H Footwear, sold Naturalizer footwear on a wholesale basis to CBI totaling $1.6 million and $3.8 million for the thirteen and twenty-six weeks ended July 30, 2016 , respectively, with no corresponding sales during 2017.

Note 16
Commitments and Contingencies
 
Environmental Remediation  
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
 
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In May 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.

As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified work plan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the work plan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. In 2014, the Company submitted a proposed expanded remedy work plan that was accepted by the oversight authorities during 2015. The Company continues to implement the expanded remedy work plan.

The cumulative expenditures for both on-site and off-site remediation through July 29, 2017 were $29.5 million . The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at July 29, 2017 is $9.5 million , of which $8.6 million is recorded within other liabilities and $0.9 million is recorded within other accrued expenses. Of the total $ 9.5 million reserve, $4.5 million is for on-site remediation and $5.0 million is for off-site remediation. The liability for the on-site remediation was discounted at 4.8% . On an undiscounted basis, the on-site remediation liability would be $14.5 million as of July 29, 2017 . The Company expects to spend approximately $ 0.5 million in the next fiscal year, $0.1 million in each of the following four years and $13.6 million in the aggregate thereafter related to the on-site remediation.
 
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 

23


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

Note 17
Financial Information for the Company and its Subsidiaries

The Company issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under our revolving credit facility ("Credit Agreement"). The following tables present the condensed consolidating financial information for each of Caleres, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. Guarantors are 100% owned by the Parent. On December 13, 2016 , Allen Edmonds was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC and Allen Edmonds are each co-borrowers and guarantors under the Credit Agreement.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups.

24


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JULY 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
12,712

$
20,638

$
19,592

$
—

$
52,942

Receivables, net
117,672

5,670

20,274

—

143,616

Inventories, net
174,839

516,704

30,462

—

722,005

Prepaid expenses and other current assets
23,944

14,463

7,466

(8,901
)
36,972

Intercompany receivable – current
845

134

25,056

(26,035
)
—

Total current assets
330,012

557,609

102,850

(34,936
)
955,535

Other assets
51,273

17,432

884

—

69,589

Goodwill and intangible assets, net
112,221

40,937

188,037

—

341,195

Property and equipment, net
32,428

172,802

12,608

—

217,838

Investment in subsidiaries
1,263,829

—

(22,724
)
(1,241,105
)
—

Intercompany receivable – noncurrent
745,812

519,304

669,176

(1,934,292
)
—

Total assets
$
2,535,575

$
1,308,084

$
950,831

$
(3,210,333
)
$
1,584,157

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
35,000

$
—

$
—

$
—

$
35,000

Trade accounts payable
124,675

247,169

30,968

—

402,812

Other accrued expenses
72,364

87,425

19,611

(8,901
)
170,499

Intercompany payable – current
14,523

—

11,512

(26,035
)
—

Total current liabilities
246,562

334,594

62,091

(34,936
)
608,311

Other liabilities
 

 

 

 

 

Long-term debt
197,233

—

—

—

197,233

Other liabilities
91,645

40,810

4,984

—

137,439

Intercompany payable – noncurrent
1,360,406

119,152

454,734

(1,934,292
)
—

Total other liabilities
1,649,284

159,962

459,718

(1,934,292
)
334,672

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
639,729

813,528

427,577

(1,241,105
)
639,729

Noncontrolling interests
—

—

1,445

—

1,445

Total equity
639,729

813,528

429,022

(1,241,105
)
641,174

Total liabilities and equity
$
2,535,575

$
1,308,084

$
950,831

$
(3,210,333
)
$
1,584,157



25


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

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
194,305

$
482,645

$
63,175

$
(63,171
)
$
676,954

Cost of goods sold
137,659

270,548

32,543

(51,257
)
389,493

Gross profit
56,646

212,097

30,632

(11,914
)
287,461

Selling and administrative expenses
60,363

190,444

14,607

(11,914
)
253,500

Restructuring and other special charges, net
2,661

37

167

—

2,865

Operating (loss) earnings
(6,378
)
21,616

15,858

—

31,096

Interest expense
(4,634
)
(3
)
—

—

(4,637
)
Interest income
85

—

177

—

262

Intercompany interest income (expense)
2,021

(2,189
)
168

—

—

(Loss) earnings before income taxes
(8,906
)
19,424

16,203

—

26,721

Income tax benefit (provision)
2,926

(8,053
)
(3,920
)
—

(9,047
)
Equity in earnings of subsidiaries, net of tax
23,575

—

271

(23,846
)
—

Net earnings
17,595

11,371

12,554

(23,846
)
17,674

Less: Net earnings attributable to noncontrolling interests
—

—

79

—

79

Net earnings attributable to Caleres, Inc.
$
17,595

$
11,371

$
12,475

$
(23,846
)
$
17,595

 
 
 
 
 
 
Comprehensive income
$
19,302

$
11,371

$
13,302

$
(24,574
)
$
19,401

Less: Comprehensive income attributable to noncontrolling interests
—

—

99

—

99

Comprehensive income attributable to Caleres, Inc.
$
19,302

$
11,371

$
13,203

$
(24,574
)
$
19,302



26


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
388,745

$
910,184

$
101,220

$
(91,686
)
$
1,308,463

Cost of goods sold
270,510

502,334

51,073

(73,823
)
750,094

Gross profit
118,235

407,850

50,147

(17,863
)
558,369

Selling and administrative expenses
112,787

372,791

29,860

(17,863
)
497,575

Restructuring and other special charges, net
3,769

37

167

—

3,973

Operating earnings
1,679

35,022

20,120

—

56,821

Interest expense
(9,669
)
(12
)
—

—

(9,681
)
Interest income
173

—

324

—

497

Intercompany interest income (expense)
4,104

(4,513
)
409

—

—

(Loss) earnings before income taxes
(3,713
)
30,497

20,853

—

47,637

Income tax benefit (provision)
1,839

(11,928
)
(4,990
)
—

(15,079
)
Equity in earnings (loss) of subsidiaries, net of tax
34,371

—

(777
)
(33,594
)
—

Net earnings
32,497

18,569

15,086

(33,594
)
32,558

Less: Net earnings attributable to noncontrolling interests
—

—

61

—

61

Net earnings attributable to Caleres, Inc.
$
32,497

$
18,569

$
15,025

$
(33,594
)
$
32,497

 
 
 
 
 
 
Comprehensive income
$
34,865

$
18,569

$
15,755

$
(34,248
)
$
34,941

Less: Comprehensive income attributable to noncontrolling interests
—

—

76

—

76

Comprehensive income attributable to Caleres, Inc.
$
34,865

$
18,569

$
15,679

$
(34,248
)
$
34,865


27


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash (used for) provided by operating activities
$
(15,328
)
$
95,828

$
33,780

$
—

$
114,280

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(3,722
)
(17,762
)
(2,767
)
—

(24,251
)
Capitalized software
(2,686
)
(466
)
—

—

(3,152
)
Intercompany investing
(19,894
)
197,599

(177,705
)
—

—

Net cash (used for) provided by investing activities
(26,302
)
179,371

(180,472
)
—

(27,403
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
400,000

—

—

—

400,000

Repayments under revolving credit agreement
(475,000
)
—

—

—

(475,000
)
Dividends paid
(6,030
)
—

—

—

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

—

—

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

—

—

(2,490
)
Intercompany financing
119,856

(263,590
)
143,734

—

—

Net cash provided by (used for) financing activities
30,343

(263,590
)
143,734

—

(89,513
)
Effect of exchange rate changes on cash and cash equivalents
—

—

246

—

246

(Decrease) increase in cash and cash equivalents
(11,287
)
11,609

(2,712
)
—

(2,390
)
Cash and cash equivalents at beginning of period
23,999

9,029

22,304

—

55,332

Cash and cash equivalents at end of period
$
12,712

$
20,638

$
19,592

$
—

$
52,942



28


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
44,348

$
15,673

$
105,708

$
—

$
165,729

Receivables, net
112,384

1,787

30,138

—

144,309

Inventories, net
159,285

467,691

21,905

—

648,881

Prepaid expenses and other current assets
13,641

11,479

5,070

—

30,190

Intercompany receivable – current
743

213

21,263

(22,219
)
—

Total current assets
330,401

496,843

184,084

(22,219
)
989,109

Other assets
93,839

13,728

7,881

—

115,448

Goodwill and intangible assets, net
114,446

2,800

11,814

—

129,060

Property and equipment, net
31,087

146,373

9,316

—

186,776

Investment in subsidiaries
1,055,300

—

(20,569
)
(1,034,731
)
—

Intercompany receivable  –  noncurrent
479,611

374,047

559,593

(1,413,251
)
—

Total assets
$
2,104,684

$
1,033,791

$
752,119

$
(2,470,201
)
$
1,420,393

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
111,166

$
216,850

$
30,735

$
—

$
358,751

Other accrued expenses
52,474

72,987

16,624

—

142,085

Intercompany payable – current
11,924

—

10,295

(22,219
)
—

Total current liabilities
175,564

289,837

57,654

(22,219
)
500,836

Other liabilities
 

 

 

 

 

Long-term debt
196,774

—

—

—

196,774

Other liabilities
37,253

67,119

3,646

—

108,018

Intercompany payable – noncurrent
1,081,306

41,537

290,408

(1,413,251
)
—

Total other liabilities
1,315,333

108,656

294,054

(1,413,251
)
304,792

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
613,787

635,298

399,433

(1,034,731
)
613,787

Noncontrolling interests
—

—

978

—

978

Total equity
613,787

635,298

400,411

(1,034,731
)
614,765

Total liabilities and equity
$
2,104,684

$
1,033,791

$
752,119

$
(2,470,201
)
$
1,420,393



29


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
194,896

$
408,476

$
69,798

$
(50,233
)
$
622,937

Cost of goods sold
142,295

221,031

39,125

(39,069
)
363,382

Gross profit
52,601

187,445

30,673

(11,164
)
259,555

Selling and administrative expenses
52,841

170,463

15,157

(11,164
)
227,297

Operating (loss) earnings
(240
)
16,982

15,516

—

32,258

Interest expense
(3,481
)
2

—

—

(3,479
)
Interest income
174

—

136

—

310

Intercompany interest income (expense)
2,253

(2,276
)
23

—

—

(Loss) earnings before income taxes
(1,294
)
14,708

15,675

—

29,089

Income tax provision
(309
)
(6,436
)
(2,665
)
—

(9,410
)
Equity in earnings (loss) of subsidiaries, net of tax
21,371

—

(508
)
(20,863
)
—

Net earnings
19,768

8,272

12,502

(20,863
)
19,679

Less: Net loss attributable to noncontrolling interests
—

—

(89
)
—

(89
)
Net earnings attributable to Caleres, Inc.
$
19,768

$
8,272

$
12,591

$
(20,863
)
$
19,768

 
 
 
 
 
 
Comprehensive income
$
18,478

$
8,272

$
11,802

$
(20,194
)
$
18,358

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(120
)
—

(120
)
Comprehensive income attributable to Caleres, Inc.
$
18,478

$
8,272

$
11,922

$
(20,194
)
$
18,478


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
382,083

$
791,522

$
108,594

$
(74,529
)
$
1,207,670

Cost of goods sold
272,204

425,658

62,019

(59,559
)
700,322

Gross profit
109,879

365,864

46,575

(14,970
)
507,348

Selling and administrative expenses
102,383

327,566

31,368

(14,970
)
446,347

Operating earnings
7,496

38,298

15,207

—

61,001

Interest expense
(7,089
)
—

—

—

(7,089
)
Interest income
331

—

226

—

557

Intercompany interest income (expense)
4,507

(4,578
)
71

—

—

Earnings before income taxes
5,245

33,720

15,504

—

54,469

Income tax provision
(1,175
)
(12,740
)
(2,997
)
—

(16,912
)
Equity in earnings (loss) of subsidiaries, net of tax
33,481

—

(1,045
)
(32,436
)
—

Net earnings
37,551

20,980

11,462

(32,436
)
37,557

Less: Net earnings attributable to noncontrolling interests
—

—

6

—

6

Net earnings attributable to Caleres, Inc.
$
37,551

$
20,980

$
11,456

$
(32,436
)
$
37,551

 
 
 
 
 
 
Comprehensive income
$
38,056

$
20,980

$
12,031

$
(33,021
)
$
38,046

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(10
)
—

(10
)
Comprehensive income attributable to Caleres, Inc.
$
38,056

$
20,980

$
12,041

$
(33,021
)
$
38,056



30



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
20,198

$
68,129

$
20,237

$
—

$
108,564

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(1,525
)
(25,237
)
(681
)
—

(27,443
)
Capitalized software
(2,448
)
(1,300
)
(30
)
—

(3,778
)
Intercompany investing
(2,973
)
2,973

—

—

—

Net cash used for investing activities
(6,946
)
(23,564
)
(711
)
—

(31,221
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
103,000

—

—

—

103,000

Repayments under revolving credit agreement
(103,000
)
—

—

—

(103,000
)
Dividends paid
(6,089
)
—

—

—

(6,089
)
Acquisition of treasury stock
(23,139
)
—

—

—

(23,139
)
Issuance of common stock under share-based plans, net
(4,086
)
—

—

—

(4,086
)
Excess tax benefit related to share-based plans
3,248

—

—

—

3,248

Intercompany financing
30,162

(28,892
)
(1,270
)
—

—

Net cash provided by (used for) financing activities
96

(28,892
)
(1,270
)
—

(30,066
)
Effect of exchange rate changes on cash and cash equivalents
—

—

301

—

301

Increase in cash and cash equivalents
13,348

15,673

18,557

—

47,578

Cash and cash equivalents at beginning of period
31,000

—

87,151

—

118,151

Cash and cash equivalents at end of period
$
44,348

$
15,673

$
105,708

$
—

$
165,729



31


CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
23,999

$
9,029

$
22,304

$
—

$
55,332

Receivables, net
118,746

5,414

28,961

—

153,121

Inventories, net
150,098

410,867

24,799

—

585,764

Prepaid expenses and other current assets
24,293

23,040

8,058

(5,863
)
49,528

Intercompany receivable  – current
695

263

22,091

(23,049
)
—

Total current assets
317,831

448,613

106,213

(28,912
)
843,745

Other assets
51,181

16,567

826

—

68,574

Goodwill and intangible assets, net
113,333

219,337

11,088

—

343,758

Property and equipment, net
31,424

176,358

11,414

—

219,196

Investment in subsidiaries
1,343,954

—

(21,946
)
(1,322,008
)
—

Intercompany receivable  – noncurrent
568,541

366,902

581,624

(1,517,067
)
—

Total assets
$
2,426,264

$
1,227,777

$
689,219

$
(2,867,987
)
$
1,475,273

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
110,000

$
—

$
—

$
—

$
110,000

Trade accounts payable
116,783

112,434

37,153

—

266,370

Other accrued expenses
74,941

65,228

16,919

(5,863
)
151,225

Intercompany payable – current
12,794

—

10,255

(23,049
)
—

Total current liabilities
314,518

177,662

64,327

(28,912
)
527,595

Other liabilities
 

 

 

 

 

Long-term debt
197,003

—

—

—

197,003

Other liabilities
91,683

40,507

3,999

—

136,189

Intercompany payable – noncurrent
1,209,943

98,982

208,142

(1,517,067
)
—

Total other liabilities
1,498,629

139,489

212,141

(1,517,067
)
333,192

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
613,117

910,626

411,382

(1,322,008
)
613,117

Noncontrolling interests
—

—

1,369

—

1,369

Total equity
613,117

910,626

412,751

(1,322,008
)
614,486

Total liabilities and equity
$
2,426,264

$
1,227,777

$
689,219

$
(2,867,987
)
$
1,475,273



32


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
Financial Highlights
We are pleased with our second quarter financial results. Our recently acquired Allen Edmonds business helped us report solid growth in net sales and gross profit. We have experienced a successful start to the back-to-school season at Famous Footwear despite the challenging retail environment. We also continue to benefit from improved gross margins in our Brand Portfolio segment.
 
The following is a summary of the financial highlights for the second quarter of 2017 :   
 
•
Consolidated net sales increased $54.1 million , or 8.7% , to $677.0 million for the second quarter of 2017 , with solid contribution from both of our segments. Our Brand Portfolio segment reported a $39.2 million , or 16.8% , increase in net sales. Our Allen Edmonds business, which we acquired on December 13, 2016, contributed $41.8 million in net sales during the second quarter of 2017 . Our Famous Footwear segment reported a $14.8 million , or 3.8% , increase in net sales and a 2.8% increase in same-store sales.

•
Gross profit increased $27.9 million , or 10.8% , to $287.5 million for the second quarter of 2017 , primarily reflecting our Allen Edmonds division.  As a percentage of net sales, gross profit increased to  42.5% for the second quarter of 2017 , compared to 41.7% for the second quarter of 2016 , primarily reflecting a higher consolidated mix of retail versus wholesale sales and continued margin expansion in our Brand Portfolio segment.
 
•
Consolidated operating earnings decreased $1.2 million , or 3.6% , to $31.1 million in the second quarter of 2017 . Despite higher sales and gross profit rate for the second quarter of 2017 , our selling and administrative expenses and restructuring and other special charges were also higher, resulting in a slight decline in operating earnings. As a percentage of net sales, operating earnings decreased to 4.6% for the second quarter of 2017 , compared to 5.2% for the second quarter of 2016 .
 
•
Consolidated net earnings attributable to Caleres, Inc. were $17.6 million , or $0.41 per diluted share, in the second quarter of 2017 , compared to $19.8 million , or $0.46 per diluted share, in the second quarter of 2016 .

The following items should be considered in evaluating the comparability of our second quarter results in 2017 and 2016:

•
Acquisition, integration and reorganization of men's brands – We incurred costs of $2.9 million ( $1.9 million on an after-tax basis, or $0.04 per diluted share) during the second quarter of 2017 reflecting integration and reorganization charges related to our men's business, with no corresponding costs during the second quarter of 2016 . Refer to Note 5 to the condensed consolidated financial statements for further discussion.

•
Acquisition-related cost of goods sold adjustment – We incurred costs of $1.9 million ( $1.2 million on an after-tax basis, or $0.03 per diluted share) during the second quarter of 2017 associated with the amortization of the inventory fair value adjustment in connection with the acquisition of Allen Edmonds during the fourth quarter of 2016, with no corresponding costs during the second quarter of 2016 . Refer to Note 3 to the condensed consolidated financial statements for additional information related to these costs.

Our debt-to-capital ratio was 26.6% as of July 29, 2017 , compared to 24.2% as of July 30, 2016 and 33.3% as of January 28, 2017 . The increase in our debt-to-capital ratio from July 30, 2016 primarily reflects higher borrowings under our revolving credit agreement which was utilized to fund the acquisition of Allen Edmonds in December 2016. The decrease in our debt-to-capital ratio from January 28, 2017 primarily reflects lower borrowings under our revolving credit agreement as we continue to reduce our borrowings subsequent to the Allen Edmonds acquisition. Our current ratio decreased to 1.57 to 1 as of July 29, 2017 , compared to 1.97 to 1 at July 30, 2016 and 1.60 to 1 at  January 28, 2017 .

Subsequent Event
Subsequent to the second quarter of 2017 , Hurricane Harvey made landfall in Houston, Texas and surrounding areas. This is a major market for us with a total of approximately 40 Famous Footwear, Naturalizer, Allen Edmonds and Sam Edelman stores. We are still assessing the extent of the damage to determine the impact on our 2017 financial results.


33


Outlook for the Remainder of 2017  
During the second quarter, we saw consistent margin expansion, generated steady cash flow and continued to pay down our revolving credit facility following the Allen Edmonds acquisition. We are pleased with the progress we've made in diversifying our business to achieve more balanced earnings from both our Famous Footwear and Brand Portfolio segments. Throughout the remainder of 2017, we will continue to focus on our speed-to-market and consumer acquisition initiatives to deliver shareholder value.

Following are the consolidated results and the results by segment: 
CONSOLIDATED RESULTS
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended

Twenty-six Weeks Ended
 
July 29, 2017
 
July 30, 2016

July 29, 2017
 
July 30, 2016
 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

($ millions)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
677.0

 
100.0
 %
 
$
622.9

 
100.0
 %
 
$
1,308.5

 
100.0
 %
 
$
1,207.7

 
100.0
 %
Cost of goods sold
389.5

 
57.5
 %
 
363.3

 
58.3
 %
 
750.1

 
57.3
 %
 
700.4

 
58.0
 %
Gross profit
287.5

 
42.5
 %
 
259.6

 
41.7
 %
 
558.4

 
42.7
 %
 
507.3

 
42.0
 %
Selling and administrative expenses
253.5

 
37.5
 %
 
227.3

 
36.5
 %
 
497.6

 
38.0
 %
 
446.3

 
36.9
 %
Restructuring and other special charges, net
2.9

 
0.4
 %
 
—

 
—
 %
 
4.0

 
0.4
 %
 
—

 
—
 %
Operating earnings
31.1

 
4.6
 %
 
32.3

 
5.2
 %
 
56.8

 
4.3
 %
 
61.0

 
5.1
 %
Interest expense
(4.7
)
 
(0.7
)%
 
(3.5
)
 
(0.5
)%
 
(9.7
)
 
(0.7
)%
 
(7.1
)
 
(0.6
)%
Interest income
0.3

 
0.0
 %
 
0.3

 
0.0
 %
 
0.5

 
0.0
 %
 
0.6

 
0.0
 %
Earnings before income taxes
26.7

 
3.9
 %
 
29.1

 
4.7
 %
 
47.6

 
3.6
 %
 
54.5

 
4.5
 %
Income tax provision
(9.0
)
 
(1.3
)%
 
(9.4
)
 
(1.5
)%
 
(15.0
)
 
1.1
 %
 
(16.9
)
 
(1.4
)%
Net earnings
17.7

 
2.6
 %
 
19.7

 
3.2
 %
 
32.6

 
2.5
 %
 
37.6

 
3.1
 %
Net earnings (loss) attributable to noncontrolling interests
0.1

 
0.0
 %
 
(0.1
)
 
(0.0
 )%
 
0.1

 
0.0
 %
 
0.0

 
0.0
 %
Net earnings attributable to Caleres, Inc.
$
17.6

 
2.6
 %
 
$
19.8

 
3.2
 %
 
$
32.5

 
2.5
 %
 
$
37.6

 
3.1
 %
 
Net Sales 
Net sales increased $54.1 million , or 8.7% , to $677.0 million for the second quarter of 2017 , compared to $622.9 million for the second quarter of 2016 , with solid contribution from both of our segments. Our Brand Portfolio segment reported a $39.2 million , or 16.8% , increase in net sales, reflecting $41.8 million of sales from our recently acquired Allen Edmonds business and higher net sales of our Sam Edelman and Vince brands, partially offset by lower sales from our Via Spiga and Franco Sarto brands. Our Famous Footwear segment reported a $14.8 million , or 3.8% , increase in net sales, driven by a 2.8% increase in same-store sales and a higher store count.

Net sales increased  $100.8 million , or  8.3% , to  $1,308.5 million  for the  six months ended July 29, 2017 , compared to  $1,207.7 million  for the  six months ended July 30, 2016 . Our Brand Portfolio segment reported an  $84.0 million , or 18.6% , increase in net sales, reflecting $84.3 million of sales from our recently acquired Allen Edmonds business and higher net sales of our Sam Edelman and Vince brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Naturalizer brands.  Net sales of our Famous Footwear segment increased  $16.7 million , or  2.2% , driven by our expanded store base and a 1.1% increase in same-store sales.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net reflects the change in net sales due to stores that have been opened or closed during the period and are therefore excluded from the same-store sales calculation. E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation.
 

34


Gross Profit 
Gross profit increased $27.9 million , or 10.8% , to $287.5 million for the second quarter of 2017 , compared to $259.6 million for the second quarter of 2016 , reflecting higher sales volume, as described above, and an improved gross profit rate.   As a percentage of net sales, gross profit increased to  42.5% for the second quarter of 2017 , compared to 41.7% for the second quarter of 2016 , primarily reflecting a higher consolidated mix of retail versus wholesale sales and an improved mix of higher margin brands, partially offset by amortization of the inventory fair value adjustment in conjunction with the acquisition of Allen Edmonds of $1.9 million. Retail and wholesale net sales were 70% and 30%, respectively, in the second quarter of 2017 , compared to 68% and 32% in the second quarter of 2016 .  

Gross profit increased  $51.1 million , or  10.1% , to  $558.4 million  for the  six months ended July 29, 2017 , compared to  $507.3 million  for the  six months ended July 30, 2016 , reflecting the above named factors.  As a percentage of net sales, gross profit increased to  42.7%  for the  six months ended July 29, 2017 , compared to  42.0%  for the  six months ended July 30, 2016 , reflecting the factors described above. Retail and wholesale net sales were 70% and 30%, respectively, in the  six months ended July 29, 2017 , compared to 68% and 32% in the six months ended six months ended July 30, 2016 .

We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies. 
 
Selling and Administrative Expenses 
Selling and administrative expenses increased $26.2 million , or 11.5% , to $253.5 million for the second quarter of 2017 , compared to $227.3 million for the second quarter of 2016 , primarily driven by the recently acquired Allen Edmonds business and higher anticipated payments under our cash-based incentive compensation plans. As a percentage of net sales, selling and administrative expenses increased to 37.5% for the second quarter of 2017 from 36.5% for the second quarter of 2016 .

Selling and administrative expenses increased  $51.3 million , or  11.5% , to  $497.6 million  for the  six months ended July 29, 2017 , compared to  $446.3 million  in the  six months ended July 30, 2016 , primarily driven by the recently acquired Allen Edmonds business and higher cash-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to  38.0%  for the  six months ended July 29, 2017  from  36.9% for the  six months ended July 30, 2016 .

Restructuring and Other Special Charges, Net
Restructuring and other special charges of $2.9 million ($1.9 million on an after-tax basis, or $0.04 per diluted share) and $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share), primarily for professional fees and severance expense, were incurred in the second quarter and six months ended July 29, 2017 , respectively, related to the men's business. There were no restructuring charges in the second quarter or six months ended July 30, 2016 . Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $1.2 million , or 3.6% , to $31.1 million for the second quarter of 2017 , compared to $32.3 million for the second quarter of 2016 . Although sales and gross profit were higher in the second quarter, selling and administrative expenses and restructuring and other special charges were also higher, resulting in the slight decline in operating earnings. As a percentage of net sales, operating earnings decreased to 4.6% for the second quarter of 2017 , compared to 5.2% for the second quarter of 2016 .

Operating earnings decreased  $4.2 million , or  6.9%  to  $56.8 million  for the  six months ended July 29, 2017 , compared to  $61.0 million  for the  six months ended July 30, 2016 , reflecting the above factors.  As a percentage of net sales, operating earnings decreased to  4.3%  for the  six months ended July 29, 2017 , compared to  5.1%  for the six months ended July 30, 2016 .

Interest Expense 
Interest expense increased $1.2 million , or 33.3% , to $4.7 million for the second quarter of 2017 , compared to $3.5 million for the second quarter of 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. In addition, during the second quarter of 2016 , we capitalized interest of $0.4 million associated with the expansion and modernization of our Lebanon, Tennessee distribution center, which was completed in the fourth quarter of 2016.

Interest expense increased  $2.6 million , or  36.6% , to  $9.7 million  for the  six months ended July 29, 2017 , compared to  $7.1 million  for the  six months ended July 30, 2016 , reflecting the above named factor. In addition, during the  six months ended July 30, 2016 , we capitalized interest of $0.8 million associated with the expansion and modernization of our Lebanon, Tennessee distribution center.

35



Income Tax Provision 
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 33.9% for the second quarter of 2017 , compared to 32.3% for the second quarter of 2016 . During the second quarter of 2016 , we recognized a discrete tax benefit of $0.2 million reflecting the settlement of a federal tax audit issue. If the discrete tax benefit had not been recognized during the second quarter of 2016 , our effective tax rate would have been 33.0% . Excluding the discrete tax item, our tax rate is higher in the current period, reflecting a lower mix of international earnings in our lowest tax rate jurisdictions.

For the  six months ended July 29, 2017 , our consolidated effective tax rate was  31.7%  compared to  31.0%  for the  six months ended July 30, 2016 . As a result of the adoption of ASU 2016-09 during the first quarter of 2017, which requires prospective recognition of excess tax benefits and deficiencies in the statement of earnings, we recognized a discrete tax benefit of $1.1 million related to share-based compensation. We recognized a discrete tax benefit of  $0.9 million  during the six months ended July 30, 2016, reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the  six months ended July 29, 2017  and  July 30, 2016 , our effective tax rates would have been  33.9%  and  32.7% , respectively. Excluding the discrete tax items, our tax rate is higher for the six months ended July 29, 2017 , reflecting a lower mix of international earnings in our lowest tax rate jurisdictions.

Net Earnings Attributable to Caleres, Inc. 
Net earnings attributable to Caleres, Inc. were  $17.6 million  and  $32.5 million  for the second quarter and  six months ended July 29, 2017 , compared to net earnings of  $19.8 million  and  $37.6 million  for the second quarter and  six months ended July 30, 2016 , as a result of the factors described above.


36


FAMOUS FOOTWEAR
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

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

 

 
 

 

 
 

 

 
 

 

Net sales
$
404.9

100.0
%
 
$
390.1

100.0
%
 
$
771.4

100.0
%
 
$
754.7

100.0
%
Cost of goods sold
221.6

54.7
%
 
212.7

54.5
%
 
420.4

54.5
%
 
408.6

54.1
%
Gross profit
183.3

45.3
%
 
177.4

45.5
%
 
351.0

45.5
%
 
346.1

45.9
%
Selling and administrative expenses
158.2

39.1
%
 
154.8

39.7
%
 
305.6

39.6
%
 
297.7

39.5
%
Operating earnings
$
25.1

6.2
%
 
$
22.6

5.8
%
 
$
45.4

5.9
%
 
$
48.4

6.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 
 
 

 
 
 
 
 
 
 
Same-store sales % change
2.8
%
 

 
(1.1
)%
 

 
1.1
%
 

 
(0.1
)%
 

Same-store sales $ change
$
10.4

 

 
$
(4.1
)
 

 
$
8.3

 

 
$
(0.6
)
 

Sales change from new and closed stores, net
$
4.5

 
 
$
(1.5
)
 
 
$
8.6

 
 
$
(0.3
)
 
Impact of changes in Canadian exchange rate on sales
$
(0.1
)
 
 
$
(0.2
)
 
 
$
(0.2
)
 
 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)
$
55

 
 
$
54

 
 
$
105

 
 
$
104

 
Sales per square foot, excluding e-commerce (trailing twelve months)
$
216

 

 
$
216

 

 
$
216

 

 
$
216

 

Square footage (thousand sq. ft.)
6,967

 

 
6,922

 

 
6,967

 

 
6,922

 

 
 
 
 
 
 
 
 
 
 
 
 
Stores opened
12

 

 
11

 

 
21

 

 
21

 

Stores closed
9

 

 
10

 

 
21

 

 
23

 

Ending stores
1,055

 

 
1,044

 

 
1,055

 

 
1,044

 

 
Net Sales 
Net sales increased $14.8 million , or 3.8% , to $404.9 million for the second quarter of 2017 , compared to $390.1 million for the second quarter of 2016 . The increase was driven by a 2.8% increase in same-store sales and a higher store count.  Famous Footwear experienced solid growth in e-commerce sales and reported improvement in the online conversion rate, due in part to the successful implementation of the buy online, pick up in store initiative. The segment experienced sales growth in lifestyle athletic and sport-influenced product and sandals. During the second quarter of 2017 , we opened 12 new stores and closed nine stores, resulting in 1,055 stores and total square footage of 7.0 million at the end of the second quarter of 2017 , compared to 1,044 stores and total square footage of 6.9 million at the end of the second quarter of 2016 . On a trailing twelve-month basis, sales per square foot, excluding e-commerce, remained consistent at $216 for the twelve months ended July 29, 2017 and July 30, 2016 . Members of Rewards, our customer loyalty program, continue to account for a majority of the segment’s sales, with approximately 76% of our net sales made to Rewards program members in the second quarter of 2017 , compared to 75% in the second quarter of 2016. 

Net sales increased  $16.7 million , or  2.2% , to  $771.4 million  for the  six months ended July 29, 2017 , compared to  $754.7 million  for the  six months ended July 30, 2016 . The increase was primarily driven by our expanded store base and a 1.1%  increase in same-store sales. Famous Footwear experienced growth in e-commerce sales, and reported improvement in both conversion rate and online customer traffic. However, the strong e-commerce sales were offset by a decline in customer traffic at our retail store locations.

37



Gross Profit 
Gross profit increased $5.9 million , or 3.3% , to $183.3 million for the second quarter of 2017 , compared to $177.4 million for the second quarter of 2016 reflecting higher net sales, partially offset by a slight drop in gross profit rate. As a percentage of net sales, our gross profit was 45.3% for the second quarter of 2017 , compared to 45.5% for the second quarter of 2016 .
 
Gross profit increased  $4.9 million , or  1.4% , to  $351.0 million  for the  six months ended July 29, 2017 , compared to  $346.1 million  for the  six months ended July 30, 2016 , reflecting the above named factors. As a percentage of net sales, our gross profit was  45.5%  for the  six months ended July 29, 2017 , compared to  45.9%  for the  six months ended July 30, 2016 .

Selling and Administrative Expenses 
Selling and administrative expenses increased $3.4 million , or 2.2% , to $158.2 million for the second quarter of 2017 , compared to $154.8 million for the second quarter of 2016 .  The increase was primarily driven by higher store rent and facilities costs attributable to our expanded store base 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 39.1% for the second quarter of 2017 , compared to 39.7% for the second quarter of 2016 , reflecting better leveraging of our expense base over higher net sales.

Selling and administrative expenses increased  $7.9 million , or  2.6% , to  $305.6 million  for the  six months ended July 29, 2017 , compared to  $297.7 million  for the  six months ended July 30, 2016 . The increase was primarily attributable to higher store rent and facilities cost attributable to our expanded store base and higher expenses related to cash-based incentive compensation during the  six months ended July 29, 2017 . As a percentage of net sales, selling and administrative expenses increased to  39.6%  for the  six months ended July 29, 2017 , compared to  39.5%  for the  six months ended July 30, 2016 .

Operating Earnings  
Operating earnings increased $2.5 million , or 11.1% , to $25.1 million for the second quarter of 2017 , compared to $22.6 million for the second quarter of 2016 . The increase reflects our net sales growth, partially offset by higher selling and administrative expenses and a slight decline in our gross profit rate. As a percentage of net sales, operating earnings increased to 6.2% for the second quarter of 2017 , compared to 5.8% for the second quarter of 2016 .

Operating earnings decreased  $3.0 million , or  6.1% , to  $45.4 million  for the  six months ended July 29, 2017 , compared to  $48.4 million  for the  six months ended July 30, 2016 . The decrease reflects higher selling and administrative expenses and a lower gross profit rate, partially offset by higher net sales. As a percentage of net sales, operating earnings decreased to  5.9%  for the  six months ended July 29, 2017 , compared to  6.4%  for the  six months ended July 30, 2016 .


38


BRAND PORTFOLIO
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Twenty-six Weeks Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 

% of 
Net Sales

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

 

 
 

 

 
 

 

 
 

 

Net sales
$
272.0

100.0
%
 
$
232.8

100.0
%
 
$
537.0

100.0
%
 
$
453.0

100.0
%
Cost of goods sold
167.8

61.7
%
 
150.7

64.7
%
 
329.6

61.4
%
 
291.8

64.4
%
Gross profit
104.2

38.3
%
 
82.1

35.3
%
 
207.4

38.6
%
 
161.2

35.6
%
Selling and administrative expenses
87.6

32.2
%
 
64.6

27.8
%
 
176.7

32.9
%
 
134.1

29.6
%
Restructuring and other special charges, net
0.7

0.2
%
 
—

—

 
1.5

0.3
%
 
—

—

Operating earnings
$
15.9

5.9
%
 
$
17.5

7.5
%
 
$
29.2

5.4
%
 
$
27.1

6.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 

 
 

 

 
 

 

 
 

 
Wholesale/retail sales mix (%) (1)
75%/25%

 

 
86%/14%

 

 
74%/26%

 

 
86%/14%

 
Change in wholesale net sales ($) (1)
$
2.7

 
 
$
(8.2
)
 
 
$
8.2

 
 
$
(30.4
)
 
Unfilled order position at end of period (1)
$
275.0

 
 
$
260.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store sales % change (2)
15.8
%
 
 
(8.2
)%
 
 
9.2
%
 
 
(5.1
)%
 
Same-store sales $ change (2)
$
4.4

 
 
$
(2.4
)
 
 
$
5.0

 
 
$
(2.9
)
 
Sales change from new and closed stores, net (3)
$
32.3

 
 
$
1.9

 
 
$
71.1

 
 
$
3.1

 
Impact of changes in Canadian exchange rate on retail sales
$
(0.2
)
 
 
$
(0.5
)
 
 
$
(0.3
)
 
 
$
(1.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended) (2)
$
88

 
 
$
82

 
 
$
158

 
 
$
152

 
Sales per square foot, excluding e-commerce (trailing twelve months) (2)
$
320

 
 
$
323

 
 
$
320

 
 
$
323

 
Square footage (thousands sq. ft.) (3)
409

 
 
305

 
 
409

 
 
305

 
 
 
 
 
 
 
 
 
 
 
 
 
Stores opened (3)
5

 
 
1

 
 
8

 
 
5

 
Stores closed (3)
—

 
 
2

 
 
4

 
 
3

 
Ending stores  (3)
238

 
 
167

 
 
238

 
 
167

 

(1)
The wholesale/retail sales mix and change in wholesale net sales in the second quarter and six months ended July 29, 2017 and unfilled order position as of July 29, 2017 include our recently acquired Allen Edmonds business. Refer to Note 3 to the condensed consolidated financial statements for additional information.
(2)
These metrics exclude our recently acquired Allen Edmonds business since the business was not included in our operations in the prior year comparative period.
(3)
These metrics for the second quarter and six months ended July 29, 2017 include our recently acquired Allen Edmonds retail stores, which total approximately 116,000 square feet.


39


Net Sales  
Net sales increased $39.2 million , or 16.8% , to $272.0 million for the second quarter of 2017 , compared to $232.8 million for the second quarter of 2016 , driven by $41.8 million in sales from our recently acquired Allen Edmonds business. In addition, we experienced higher net sales of our Sam Edelman and Vince brands, partially offset by lower sales from our Via Spiga and Franco Sarto brands. Our same-store sales, which exclude the impact of Allen Edmonds stores because they have not been part of the Company for 13 months, increased 15.8% during the quarter. The increase in same-store sales was primarily driven by growth in Sam Edelman e-commerce and retail store sales. During the second quarter of 2017 , we opened five stores, resulting in a total of 238 stores (of which 76 are Allen Edmonds) and total square footage of 0.4 million at the end of the second quarter of 2017 , compared to 167 stores and total square footage of 0.3 million at the end of the second quarter of 2016 . On a trailing twelve-month basis, sales per square foot, excluding e-commerce and sales from our Allen Edmonds stores, decreased 0.9% to $320 for the twelve months ended July 29, 2017 , compared to $323 for the twelve months ended July 30, 2016 . Our unfilled order position increased $14.8 million , or 5.7% , to $275.0 million as of July 29, 2017 , from $260.2 million as of July 30, 2016 .

Net sales increased  $84.0 million , or  18.6% , to  $537.0 million  for the  six months ended July 29, 2017 , compared to  $453.0 million  for the  six months ended July 30, 2016 , driven by $84.3 million in sales from our recently acquired Allen Edmonds business and sales growth from our Sam Edelman and Vince brands, partially offset by lower sales from our Via Spiga, Franco Sarto and Naturalizer brands. Our retail sales benefited from a net increase in sales from new and closed stores driven by our acquisition of Allen Edmonds and an increase in same-store sales of  9.2% . During the  six months ended July 29, 2017 , we opened  eight  stores and closed  four  stores.

Gross Profit 
Gross profit increased $22.1 million , or 26.8% , to $104.2 million for the second quarter of 2017 , compared to $82.1 million for the second quarter of 2016 , primarily as a result of the recently acquired Allen Edmonds business. The Brand Portfolio segment recognized $1.9 million ($1.2 million on an after-tax basis, or $0.03 per diluted share) in incremental cost of goods sold in the second quarter of 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting. As a percentage of net sales, our gross profit increased to 38.3% for the second quarter of 2017 , compared to  35.3% for the second quarter of 2016 .  Our gross profit rate for the second quarter of 2017 benefited from the higher mix of retail versus wholesale sales and growth in our higher margin brands.

Gross profit increased  $46.2 million , or  28.6% , to  $207.4 million  for the  six months ended July 29, 2017 , compared to  $161.2 million  for the  six months ended July 30, 2016 , primarily as a result of the recently acquired Allen Edmonds business. 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 for the  six months ended July 29, 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting. As a percentage of net sales, our gross profit increased to  38.6%  for the  six months ended July 29, 2017 , compared to  35.6%  for the  six months ended July 30, 2016 , reflecting the higher mix of retail versus wholesale sales.

Selling and Administrative Expenses 
Selling and administrative expenses increased $23.0 million , or 35.5% , to $87.6 million for the second quarter of 2017 , compared to $64.6 million for the second quarter of 2016 , primarily due to costs associated with the recently acquired Allen Edmonds business and an increase in anticipated payments under our cash-based incentive compensation plans. As a percentage of net sales, selling and administrative expenses increased to 32.2% for the second quarter of 2017 , compared to 27.8% for the second quarter of 2016 . 

Selling and administrative expenses increased  $42.6 million , or  31.7% , to  $176.7 million  for the  six months ended July 29, 2017 , compared to  $134.1 million  for the  six months ended July 30, 2016 , driven by the above named factors. As a percentage of net sales, selling and administrative expenses increased to  32.9%  for the  six months ended July 29, 2017 , compared to  29.6%  for the  six months ended July 30, 2016 .

Restructuring and Other Special Charges, Net
Restructuring and other special charges were $0.7 million and $1.5 million in the second quarter and six months ended July 29, 2017 , respectively, related to the integration and reorganization of our men's business. There were no restructuring charges incurred in the second quarter or six months ended July 30, 2016 . Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $1.6 million , or 8.9% , to $15.9 million for the second quarter of 2017 , compared to $17.5 million for the second quarter of 2016 . Despite net sales growth and expansion in our gross profit rate, higher selling and administrative expenses and restructuring charges led to a slight decline in operating earnings. As a percentage of net sales, operating earnings decreased to 5.9% for the second quarter of 2017 , compared to 7.5% in the second quarter of 2016 . 


40


Operating earnings increased $2.1 million , or 7.9% , to $29.2 million  for the  six months ended July 29, 2017 , compared to $27.1 million for six months ended July 30, 2016 . The increase reflects higher net sales and an improved gross profit rate, partially offset by higher selling and administrative expenses. As a percentage of net sales, operating earnings decreased to  5.4%  for the  six months ended July 29, 2017 , compared to  6.0%  for the  six months ended July 30, 2016 .
    
OTHER
 
The Other category includes unallocated corporate administrative expenses and other costs and recoveries. Costs of $9.9 million were incurred for the second quarter of 2017 , compared to $7.8 million for the second quarter of 2016. The increase primarily reflects $2.2 million of restructuring costs for the integration and reorganization of our men's brands, as further discussed in Note 5 to the condensed consolidated financial statements, and an increase in anticipated payments under our cash-based incentive plans during the second quarter of 2017 .

Unallocated corporate administrative expenses and other costs and recoveries were $17.8 million for the  six months ended July 29, 2017 , compared to $14.4 million for the  six months ended July 30, 2016 . The $3.4 million increase reflects the above named factors.

LIQUIDITY AND CAPITAL RESOURCES
Borrowings 
($ millions)
July 29, 2017

July 30, 2016

January 28, 2017

Borrowings under revolving credit agreement
$
35.0

$
—

$
110.0

Long-term debt
197.2

196.8

197.0

Total debt
$
232.2

$
196.8

$
307.0

 
Total debt obligations of $232.2 million at July 29, 2017 increased $35.4 million , compared to $196.8 million at July 30, 2016 , primarily due to higher borrowings under our revolving credit agreement, which we used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016. Total debt obligations decreased $74.8 million , compared to $307.0 million at January 28, 2017 , as we paid down $75.0 million of our borrowings during the six months ended July 29, 2017 . Interest expense for the second quarter of 2017 increased $1.2 million to $4.7 million , compared to $3.5 million for the second quarter of 2016 , and increased $2.6 million to $9.7 million for the six months ended July 29, 2017 , compared to $7.1 million  for the  six months ended July 30, 2016 . The increases were attributable to higher average borrowings under our revolving credit agreement. In addition, during the second quarter and six months ended July 30, 2016 , we capitalized interest of  $0.4 million  and $0.8 million , respectively, associated with the expansion and modernization of our Lebanon, Tennessee distribution center that was completed in the fourth quarter of 2016.

Credit Agreement 
The Company maintains a revolving credit facility for working capital needs in an aggregate amount of up to $600.0 million , with the option to increase by up to $150.0 million . On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement, which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC (as so amended, the “Credit Agreement”). On December 13, 2016, Allen Edmonds was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC and Allen Edmonds are each co-borrowers and guarantors under the Credit Agreement. The Credit Agreement matures on December 18, 2019 .

Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.


41


At July 29, 2017 , we had $35.0 million in borrowings and $7.3 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $557.7 million at July 29, 2017 . We were in compliance with all covenants and restrictions under the Credit Agreement as of July 29, 2017 . 

$200 Million Senior Notes 
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 2023 (the "2023 Senior Notes") in a private placement.  On October 22, 2015, we commenced an offer to exchange our 2023 Senior Notes outstanding for substantially identical debt securities registered under the Securities Act of 1933. The exchange offer was completed on November 23, 2015 and did not affect the amount of our indebtedness outstanding.

The 2023 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 beginning on February 15, 2016. The 2023 Senior Notes mature on August 15, 2023. Prior to August 15, 2018, we may redeem some or all of the 2023 Senior Notes at various redemption prices.

The 2023 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 July 29, 2017 , we were in compliance with all covenants and restrictions relating to the 2023 Senior Notes.

Working Capital and Cash Flow
 
Twenty-six Weeks Ended
 

($ millions)
July 29, 2017

July 30, 2016

Change

Net cash provided by operating activities
$
114.3

$
108.6

$
5.7

Net cash used for investing activities
(27.4
)
(31.2
)
3.8

Net cash used for financing activities
(89.5
)
(30.1
)
(59.4
)
Effect of exchange rate changes on cash and cash equivalents
0.2

0.3

(0.1
)
(Decrease) increase in cash and cash equivalents
$
(2.4
)
$
47.6

$
(50.0
)
 
Reasons for the major variances in cash provided (used) in the table above are as follows: 
 
Cash provided by operating activities was $5.7 million higher in the six months ended July 29, 2017 as compared to the six months ended July 30, 2016 , reflecting the following factors:  
•
An increase in accrued expenses and other liabilities in the six months ended July 29, 2017 compared to a decrease in the comparable period in 2016 , reflecting higher anticipated payments of our cash-based incentive compensation plans for 2017;
•
A larger increase in accounts payable in the six months ended July 29, 2017 , compared to the comparable period in 2016 driven by higher purchases of inventory; and
•
Higher earnings (after consideration of depreciation, amortization and other non-cash items); partially offset by
•
A larger increase in inventory in the six months ended July 29, 2017 , compared to the comparable period in 2016 , and
•
A smaller decrease in prepaid expenses and other current assets in the six months ended July 29, 2017 , compared to the comparable period in 2016 , reflecting lower prepaid rent as of July 30, 2016 due to the timing of payments.

Cash used for investing activities was $3.8 million lower in the six months ended July 29, 2017 as compared to the six months ended July 30, 2016 , primarily due to lower purchases of property and equipment during the six months ended July 29, 2017 . During 2016, our capital expenditures included the expansion and modernization of our Lebanon, Tennessee distribution center, which was completed in the fourth quarter of 2016. For fiscal 2017, we expect purchases of property and equipment and capitalized software of approximately $55 million. 

Cash used for financing activities was $59.4 million higher for the six months ended July 29, 2017 as compared to the six months ended July 30, 2016 , as we continue to reduce the borrowings under our revolving credit agreement, which funded our Allen Edmonds acquisition. In addition, we repurchased fewer shares under our stock repurchase program during the six months ended July 29, 2017 .


42


A summary of key financial data and ratios at the dates indicated is as follows: 
 
July 29, 2017

July 30, 2016

January 28, 2017

Working capital ($ millions ) (1)
$
347.2

$
488.3

$
316.2

Current ratio (2)
1.57:1

1.97:1

1.60:1

Debt-to-capital ratio (3)
26.6
%
24.2
%
33.3
%
(1)
Working capital has been computed as total current assets less total current liabilities.
(2)
The current ratio has been computed by dividing total current assets by total current liabilities.
(3)
The debt-to-capital ratio has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity.
   
Working capital at July 29, 2017 was $347.2 million , which was $141.1 million lower and $31.0 million higher than at July 30, 2016 and January 28, 2017 , respectively. Our current ratio decreased to 1.57 to 1 as of July 29, 2017 , compared to 1.97 to 1 at July 30, 2016 and 1.60 to 1 at  January 28, 2017 . The decrease in working capital and the current ratio from July 30, 2016 primarily reflects the impact of the Allen Edmonds acquisition in the fourth quarter of 2016, which was funded with borrowings under our revolving credit agreement. A significant portion of the Allen Edmonds purchase price was allocated to intangible assets, which are noncurrent, while the entire purchase price was funded using current liabilities. The increase in working capital and the current ratio from January 28, 2017 was primarily due to an increase in inventory levels and lower borrowings under our revolving credit agreement, partially offset by higher payables. The decrease in the current ratio from January 28, 2017 primarily reflects an increase in accounts payable and other accrued expenses, partially offset by an increase in inventory levels. Our debt-to-capital ratio was 26.6% as of July 29, 2017 , compared to 24.2% as of July 30, 2016 and 33.3% at January 28, 2017 . The increase in our debt-to-capital ratio from July 30, 2016 primarily reflects higher borrowings under our revolving credit agreement. The decrease in our debt-to-capital ratio from January 28, 2017 primarily reflects lower borrowings under our revolving credit agreement.
 
At  July 29, 2017 , we had  $52.9 million  of cash and cash equivalents. Approximately 40% of this balance represents the accumulated unremitted earnings of our foreign subsidiaries, which are considered indefinitely reinvested. 

We declared and paid dividends of $0.07 per share in both the second quarter of 2017 and 2016. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid. 

CONTRACTUAL OBLIGATIONS
 
Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt, interest on long-term debt, minimum license commitments, financial instruments, borrowings under our revolving credit agreement, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations.

Except for changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, borrowings under and repayments of our revolving credit agreement and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to our contractual obligations identified in our Annual Report on Form 10-K for the year ended January 28, 2017 .

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. For further information, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 28, 2017 . 

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


43


FORWARD-LOOKING STATEMENTS
 
This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially.  These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) rapidly changing fashion trends and purchasing patterns; (iii) intense competition within the footwear industry; (iv) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China and other countries, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (v) the ability to accurately forecast sales and manage inventory levels; (vi) cybersecurity threats or other major disruption to the Company’s information technology systems; (vii) transitional challenges with acquisitions; (viii) customer concentration and increased consolidation in the retail industry; (ix) a disruption in the Company’s distribution centers; (x) the ability to recruit and retain senior management and other key associates; (xi) foreign currency fluctuations; (xii) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xiii) the ability to secure/exit leases on favorable terms; (xiv) the ability to maintain relationships with current suppliers; (xv) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights; and (xvi) changes to tax laws, policies and treaties.  The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 28, 2017 , which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended January 28, 2017 .  

ITEM 4
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures  
It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and internal control reviews by our internal auditors. 
 
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of July 29, 2017 , management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level. There were no significant changes to internal control over financial

44


reporting during the quarter ended July 29, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.   
 
On December 13, 2016, we acquired Allen Edmonds. As a result of the acquisition, we are in the process of reviewing the internal control structure of Allen Edmonds and, if necessary, will make appropriate changes as we incorporate our internal controls into the acquired business.

PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
 
We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred. 
 
Information regarding Legal Proceedings is set forth within Note 16 to the condensed consolidated financial statements and incorporated by reference herein. 

ITEM 1A
RISK FACTORS

There have been no material changes that have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 28, 2017 .  

ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table provides information relating to our repurchases of common stock during the second quarter of 2017 :
 
 
 
 
 
 
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
 
 
 
 
 
Total Number Purchased as Part of Publicly Announced Program (2)
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (1)
 
 
 
 
Fiscal Period
 
 
 
 
 
 
 
 
 
April 30, 2017 – May 27, 2017
2,213

 
$
27.63

 
—

1,223,500

 
 
 
 
 
 
 
May 28, 2017 – July 1, 2017
2,501

 
26.39

 
—

1,223,500

 
 
 
 
 
 
 
July 2, 2017 – July 29, 2017
—

 
—

 
—

1,223,500

 
 
 
 
 
 
 
Total
4,714

 
$
26.97

 
—

1,223,500

 
(1)
Reflects shares that were tendered by employees related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy minimum tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

(2)
On August 25, 2011, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock. We can use the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, zero and 225,000 shares were repurchased during the thirteen and twenty-six weeks ended July 29, 2017 , respectively. The Company repurchased 450,000 and 900,000 shares during the thirteen and twenty-six weeks ended July 30, 2016, respectively. There were 1,223,500 shares authorized to be repurchased under the program as of July 29, 2017 . Our repurchases of common stock are limited under our debt agreements. 
 

45


ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
None. 

ITEM 4
MINE SAFETY DISCLOSURES
 
Not applicable. 

ITEM 5
OTHER INFORMATION
 
None. 


46


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

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

47


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
 
CALERES, INC.
 
 
 
Date: September 6, 2017
 
/s/ Kenneth H. Hannah
 
 
Kenneth H. Hannah
Senior Vice President and Chief Financial Officer  
on behalf of the Registrant and as the
Principal Financial Officer and Principal Accounting Officer


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