0000014707 CALERES INC false --02-01 FY 2019 0 4 4 1 July 6, 2018 Blowfish Malibu October 18, 2018 Vionic 16,667 35 5 10 30 5 10 0 0.2 0.2 21 6 1 1 0 0 0 0 9.6 0 0 0 0 0 1 3 1 3 4 1 4 4 0 4 10 0 0 0.1 0.1 0.1 Long-lived assets includes $695,594 of lease right-of-use assets in 2019, with no corresponding amounts in 2018 or 2017, as those periods precede the adoption of ASC 842. Includes breakage revenue from unredeemed gift cards The federal statutory tax rate was 21.0% in 2019 and 2018, and 33.7% in 2017. Total number of RSUs as of February 1, 2020 includes 272,836 RSUs payable in shares and 219,148 RSUs payable in cash. Accounts written off, net of recoveries. Amounts reclassified are included in other income, net. Refer to Note 6 to the consolidated financial statements for additional information related to pension and other postretirement benefits. The fourth quarter of 2019 reflects expense containment initiatives of $11.2 million on an after-tax basis and costs associated with the repositioning of the Via Spiga brand of $1.2 million on an after-tax basis, both of which are further described in Note 5 to the consolidated financial statements, as well as the fair value adjustment to the Blowfish purchase obligation of $1.1 million on an after-tax basis, as further described in Note 2 and Note 15 to the consolidated financial statements. Granted RSUs include 5,475 RSUs resulting from dividend equivalents paid on outstanding RSUs, of which 4,687 related to outstanding vested RSUs and 788 to outstanding nonvested RSUs. Accrued RSUs include all fully vested awards and a pro-rata portion of nonvested awards based on the elapsed portion of the vesting period. Excludes unamortized debt issuance costs and debt discount EPS for the quarters may not sum to the annual amount as each period is computed on a discrete period basis. Minimum operating lease payments have not been reduced by minimum sublease rental income of $0.2 million due in the future under sublease agreements. Amounts reclassified are included in net sales, costs of goods sold and selling and administrative expenses. Refer to Note 14 and Note 15 to the consolidated financial statements for additional information related to derivative financial instruments. Discounts and allowances granted to wholesale customers of the Brand Portfolio segment. Adjustment upon disposal of related inventories. Collectively referred to as "e-commerce" below Includes dividend equivalents granted on outstanding RSUs, which vest immediately Established through purchase accounting related to the Vionic acquisition. Minimum operating lease payments have not been reduced by minimum sublease rental income of $0.5 million due in the future under sublease agreements. Reductions to the valuation allowances for the net operating loss carryforwards for certain states based on the Company’s expectations for utilization of net operating loss carryforwards. 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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   

 

For the fiscal year ended February 1, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   

 

For the transition period from ____________ to ______________

 

Commission file number 1-2191

 

 

CALERES, INC.

(Exact name of registrant as specified in its charter)

 

 

New York

43-0197190

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

8300 Maryland Avenue

63105

St. Louis, Missouri

(Zip Code)

(Address of principal executive offices)

 

(314) 854-4000

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

     

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock — par value of $0.01 per share

CAL

New York Stock Exchange

 

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☑    No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐    No ☑

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑     No ☐

 

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

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐  

Smaller reporting company ☐  

Emerging growth company ☐ 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No ☑            

 

The aggregate market value of the stock held by non-affiliates of the registrant as of August 3, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $611.2 million.

 

As of February 29, 2020, 40,031,400 common shares were outstanding.

 

Documents Incorporated by Reference

 

Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

 

 

INTRODUCTION

This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission ("SEC") on an annual basis. Part II of the Form 10-K contains the business information and financial statements that many companies include in the financial sections of their annual reports.  The other sections of this Form 10-K include further information about our business that we believe will be of interest to investors.  We hope investors will find it useful to have all of this information in a single document.

 

The SEC allows us to report information in the Form 10-K by “incorporating by reference” from another part of the Form 10-K or from the proxy statement.  You will see that information is “incorporated by reference” in various parts of our Form 10-K.  The proxy statement will be available on our website after it is filed with the SEC in April 2020.

 

Unless the context otherwise requires, “we,” “us,” “our,” “the Company” or “Caleres” refers to Caleres, Inc. and its subsidiaries.

 

Information in this Form 10-K is current as of March 31, 2020, unless otherwise specified.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS 

In this report, and from time to time throughout the year, we share our expectations for the Company’s future performance.  These forward-looking statements include statements about our business plans; the potential development, regulatory approval and public acceptance of our products; our expected financial performance, including sales performance and the anticipated effect of our strategic actions; the anticipated benefits of acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Any statements we make that are not matters of current disclosures or historical fact should be considered forward-looking.  Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will” and similar expressions.  By their nature, these types of statements are uncertain and are not guarantees of our future performance.

 

Our forward-looking statements represent our estimates and expectations at the time that we make them.  However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements.  Many events beyond our control will determine whether our expectations will be realized.  For example, the novel strain of coronavirus that was first identified in China has become a global pandemic and has resulted in significant uncertainty.  We have experienced a deterioration in our financial results as a result of the temporary closure of our retail stores in late March 2020, as well as store closures for many of our wholesale customers, and may experience further deterioration depending on the duration or severity of the pandemic.  We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so.  In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Part I. Item 1A. Risk Factors explains some of the important reasons that actual results may be materially different from those that we anticipate.

 

 

 

 

 

INDEX

 

 

 

 

 

PART I

 

Page

Item 1

Business

4

Item 1A

Risk Factors

9

Item 1B

Unresolved Staff Comments

14

Item 2

Properties

14

Item 3

Legal Proceedings

15

Item 4

Mine Safety Disclosures

15

 

 

 

PART II

 

   

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6

Selected Financial Data

16

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8

Financial Statements and Supplementary Data

31

 

   Management’s Report on Internal Control Over Financial Reporting

31

 

   Report of Independent Registered Public Accounting Firm

32

 

   Report of Independent Registered Public Accounting Firm

33

 

   Consolidated Balance Sheets

35

 

   Consolidated Statements of Earnings (Loss)

36

 

   Consolidated Statements of Comprehensive Income (Loss)

37

 

   Consolidated Statements of Cash Flows

38

 

   Consolidated Statements of Shareholders’ Equity

39

 

   Notes to Consolidated Financial Statements

40

 

   Schedule II – Valuation and Qualifying Accounts

82

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

82

Item 9A

Controls and Procedures

82

 

   Evaluation of Disclosure Controls and Procedures

82

 

   Internal Control Over Financial Reporting

83

Item 9B

Other Information

83

 

 

 

PART III

 

   

Item 10

Directors, Executive Officers and Corporate Governance

83

Item 11

Executive Compensation

83

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

83

Item 13

Certain Relationships and Related Transactions, and Director Independence

84

Item 14

Principal Accounting Fees and Services

84

 

 

 

PART IV

 

   

Item 15

Exhibits and Financial Statement Schedules

84

Item 16

Form 10-K Summary

87

 

 

 

 

PART I

 

 

ITEM 1

BUSINESS

Caleres, Inc. (the "Company"), originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear company with annual net sales of $2.9 billion.  Current activities include the operation of retail shoe stores and e-commerce websites, as well as the design, development, sourcing, manufacturing, marketing and wholesale distribution of footwear for women, men and children.  Our business is seasonal in nature due to consumer spending patterns, with higher back-to-school and holiday season sales.  Traditionally, the third fiscal quarter accounts for a substantial portion of our earnings for the year.

 

Our net sales are comprised of four major categories: women's footwear, men's footwear, children's footwear and clothing and accessories.  The percentage of net sales attributable to each category is as follows:

 

   

2019

   

2018

   

2017

 

Women's footwear

    63 %     61 %     59 %

Men's footwear

    22 %     24 %     25 %

Children's footwear

    9 %     8 %     9 %

Clothing and accessories

    6 %     7 %     7 %

 

Employees

We had approximately 11,400 full-time and part-time employees as of February 1, 2020.  In the United States, there are no employees subject to union contracts.  In Canada, we employ approximately 25 warehouse employees under a union contract, which expires in October 2022.

 

Competition

With many companies operating retail shoe stores and shoe departments, we compete in a highly fragmented market.  In addition, the continuing consumer shift to online and mobile shopping has increased price competition and requires retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms.  Our competitors include local, regional and national shoe store chains, department stores, discount stores, mass merchandisers, numerous independent retail operators of various sizes and e-commerce businesses.  Quality of products and services, store location, trend-right merchandise selection and availability of brands, pricing, advertising and consumer service are all factors that impact retail competition.

 

In addition, our wholesale customers sell shoes purchased from competing footwear suppliers.  Those competing footwear suppliers own and license brands, many of which are well-known and marketed aggressively.  Many retailers, who are our wholesale customers, source directly from factories or through agents.  The wholesale footwear business has low barriers to entry, which further intensifies competition.

 

FAMOUS FOOTWEAR

Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and FamousFootwear.ca. Famous Footwear is one of America’s leading family-branded footwear retailers with 949 stores at the end of 2019 and net sales of $1.6 billion in 2019.  Our core consumers are women who seek leading national brands of athletic, casual and fashionable footwear at a value for themselves and their families.

 

Famous Footwear stores feature a wide selection of brand name athletic, casual and dress shoes for the entire family.  Brands carried include, among others, Nike, Skechers, adidas, Vans, Converse, Under Armour, New Balance, Puma, Sperry, Asics, Bearpaw, Birkenstock, Sof Sole and Timberland, as well as company-owned and licensed brands including, among others, Dr. Scholl's Shoes, LifeStride, Naturalizer, Blowfish Malibu, Fergie Footwear and Circus by Sam Edelman.  Our company-owned and licensed products are sold to our Famous Footwear segment by our Brand Portfolio segment at a profit and represent approximately 8% of the Famous Footwear segment's net sales.  We work closely with our vendors to provide our consumers with fresh product and, in some cases, product exclusively designed for and available only in our stores.  Famous Footwear’s retail price points typically range from $20 for shoes up to $230 for boots.

 

Famous Footwear stores are located in strip shopping centers as well as outlet and regional malls in all 50 states, Canada and Guam.  The breakdown by venue at the end of each of the last three fiscal years is as follows:

 

   

2019

   

2018

   

2017

 

Strip centers

    624       653       677  

Outlet malls

    177       183       189  

Regional malls

    148       156       160  
Total     949       992       1,026  

 

While we expect net store closures in 2020 as we continue to align our real estate and e-commerce strategies, the number of store openings and closings is uncertain, as we reassess 2020 plans in light of the impacts of the coronavirus pandemic on our business, as further discussed in Item 1A, Risk Factors.  New stores typically experience an initial start-up period characterized by lower sales and operating earnings than what is generally achieved by more mature stores.  While the duration of this start-up period may vary by type of store, economic environment and geographic location, new stores typically reach a normal level of profitability within approximately four years.

 

Famous Footwear relies on merchandise allocation systems and processes that use allocation criteria, consumer segmentation and inventory data in an effort to ensure stores are adequately stocked with product and to differentiate the needs of each store based on location, consumer segmentation and other factors.  Famous Footwear’s distribution systems allow for merchandise to be delivered to each store weekly, or on a more frequent basis, as needed.  Famous Footwear also uses regional third-party pooled distribution sites across the country.

 

Famous Footwear’s marketing programs include digital marketing and social media, local and national television, e-commerce advertising, direct mail, in-store advertisements and radio, all of which are designed to further develop and reinforce the Famous Footwear concept and strengthen our connection with consumers.  We believe the success of our campaigns is attributable to highlighting key categories and tailoring the timing of such messaging to adapt to seasonal shopping patterns.  In 2019, we spent approximately $56.3 million to advertise and market Famous Footwear to our target consumers, a portion of which was recovered from suppliers.  Famous Footwear has an extensive customer loyalty program, which informs and rewards frequent consumers with product previews, earned incentives based upon purchase continuity and other periodic promotional offers.  In the first quarter of 2019, we introduced a new customer loyalty program, Famously You Rewards ("Rewards"), which drove an increase in sales to members.  Two new benefits of the Rewards program are free shipping for online orders and bonus points for online purchases.  In 2019, approximately 78% of our Famous Footwear sales were generated by loyalty program members.


 

 

As part of our omni-channel approach to reach consumers, we also operate Famous.com and FamousFootwear.ca, which offer an expanded product assortment beyond what is sold in Famous Footwear stores.  Accessible via desktop, tablet and mobile devices, Famous.com helps consumers explore product assortments, including items available in local stores, and make purchases.  Famous.com also allows Rewards members to view their points status and purchase history, manage profile settings and engage further with the brand.  Famous Footwear’s mobile app also serves as a hub for Rewards members to shop, find local stores, redeem Rewards certificates and learn about the newest products, latest trends and hottest deals.  

 

 

BRAND PORTFOLIO

Our Brand Portfolio segment offers retailers and consumers a portfolio of leading brands by designing, developing, sourcing, manufacturing, marketing and distributing branded footwear for women and men at a variety of price points.  Certain of our branded footwear products are sold under brand names that are owned by the Company and others are developed pursuant to licensing agreements.  Our Brand Portfolio segment sells footwear on a wholesale basis to retailers.  The segment also sells footwear on a direct-to-consumer basis through our branded retail stores and e-commerce businesses.  In 2018, we gained additional access to the casual footwear market with our acquisition of Blowfish Malibu and the contemporary comfort market with our acquisition of Vionic.  See further discussion related to these acquisitions in the Portfolio of Brands section below and Note 2 to the consolidated financial statements.

 

Portfolio of Brands

The following is a listing of our principal brands and licensed products:

 

Naturalizer:  Naturalizer was born in 1927 when we realized women deserved a shoe with a beautiful fit.  Our Naturalizer brand is sold primarily at Naturalizer retail stores, national chains, online retailers, department stores and independent retailers.  Naturalizer footwear is also distributed through approximately 46 retail and wholesale partners in 40 countries around the world.  Suggested retail price points range from $69 for shoes to $250 for boots.

 

Sam Edelman: Designer Sam Edelman’s lifestyle brand is inspired by timeless American elegance that bridges the gap between aspiration and attainability to define modern luxury.  Sam Edelman footwear is sold primarily through online retailers, national chains, department stores, Sam Edelman retail stores, catalogs and independent retailers at suggested retail price points from $50 for shoes to $300 for boots.

 

Vionic: In October 2018, we acquired Vionic to expand our access to the growing contemporary comfort footwear category.  Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends.  The brand is sold online, through independent retailers, television, department stores, national chains, specialty retailers and our Famous Footwear stores for suggested retail price points from $40 for shoes to $250 for boots.

 

Allen Edmonds: In December 2016, we acquired Allen Edmonds to increase our exposure in men’s footwear.  Allen Edmonds, founded in 1922, is a U.S.-based direct-to-consumer and wholesaler of premium men’s footwear, apparel, leather goods and accessories with a strong manufacturing heritage.  Allen Edmonds products are available at premier stores worldwide and select retailers, including our 74 stores in the United States and Italy, and online at AllenEdmonds.com at suggested retail price points from $225 for shoes to $495 for boots.

 

Dr. Scholl’s Shoes:  Inspired by its founder Dr. William Scholl, Dr. Scholl’s Shoes remains forever passionate about creating iconic, effortless footwear for a healthy life.  This footwear reaches consumers at a wide range of distribution channels including national chains, department stores, mass merchandisers, online, our Famous Footwear retail stores and independent retailers.  Suggested price points range from $50 for shoes to $190 for boots.  We have a long-term license agreement to sell Dr. Scholl’s Shoes, which is renewable through December 2026 for sales in the United States, Canada and Latin America.

 

LifeStride:  For more than 70 years, LifeStride has created quality footwear for women who value both style and all-day comfort.  The brand is sold in national chains, our Famous Footwear retail stores, online and department stores at suggested retail price points ranging from $50 for shoes to $100 for boots.

 

Franco Sarto:  The Franco Sarto brand embodies timeless, wearable style inspired by the craft and design of Italian footwear.  The brand is sold in major national chains, online, department stores, specialty retailers, our Famous Footwear stores, catalogs and independent retailers at suggested retail price points from $89 for shoes to $300 for boots.

 

Vince: The Vince women's shoe collection launched in 2012 and was expanded in 2014 to include the Vince men's footwear collection.  The brand is primarily sold in premier department stores, online, national chains and specialty retailers at suggested price points from $195 for shoes to $595 for boots.  We have a license agreement with Vince, LLC to sell Vince footwear through December 2021.

 

Rykä: For over 25 years, Rykä has been innovating athletic footwear exclusively for women.  The brand is distributed through national chains, online retailers, independent retailers, department stores, specialty retailers and our Famous Footwear retail stores at suggested retail price points from $60 to $100.

 

Bzees: Bzees is the brand of women’s sporty footwear that energizes the mind and body from the feet up.  The brand is distributed through national chains, department stores, online retailers, independent retailers, specialty retailers and our retail stores at suggested retail price points from $59 for shoes to $179 for boots.

 

Fergie Footwear by Fergie: We have created a namesake footwear line in collaboration with Grammy Award-winning artist Fergie (Fergie Duhamel, formerly Stacy Ferguson). Fergie Footwear is currently being sold at national chains, our Famous Footwear retail stores, online and at department stores at suggested retail price points from $59 for shoes to $99 for boots.  We have a license agreement with Krystal Ball Productions, Inc. to sell Fergie/Fergalicious footwear that expires in December 2020, with extension options through December 2026.

 

Carlos by Carlos Santana: The Carlos by Carlos Santana collection of women’s footwear is sold at national chains, online, major department stores and our Famous Footwear stores.  Suggested retail price points range from $59 for shoes to $139 for boots.  We have a license agreement with Santana Tesoro, LLC to sell Carlos by Carlos Santana footwear that expired in December 2018.  In March 2019, we decided to exit the Carlos by Carlos Santana brand.

 

Via Spiga:  Established in 1985, Via Spiga is named after the main street in one of the most famed shopping districts in Milan, Italy.  The brand is primarily sold in national chains, online and premier department stores at suggested retail price points from $175 for shoes to $495 for boots.  In the fourth quarter of 2019, we decided to reposition the footwear division of our Via Spiga brand.  We will operate the footwear division through the third quarter of 2020 and then pause new development for a short period of time while we explore options to bring the brand to a new consumer.

 

 

 

Blowfish Malibu: In July 2018, we acquired a controlling interest in Blowfish Malibu. Blowfish Malibu, which was founded in 2005, designs and sells women's and children's footwear that captures the fresh youthful spirit and casual living that is distinctively Southern California.  The acquisition provides additional exposure to the growing sneaker and casual lifestyle segment of the market.  The brand is sold at national chains, our Famous Footwear stores and independent retailers.  Suggested retail price points range from $20 for shoes to $90 for boots.

 

Veronica Beard: In July 2019, we announced an exclusive partnership with the American ready-to-wear brand, Veronica Beard, to produce their women's footwear collection, beginning with the spring 2020 season.  The Veronica Beard collection will include styles that strike the balance between cool and classic, taking the consumer from day to night and work to weekend.  We will initially target distribution to domestic and international wholesale partners carrying Veronica Beard ready-to-wear.

Zodiac: The Zodiac brand was launched in the late 1970s and acquired by us in 2005.  In July 2019, we relaunched the brand by blending the past with the present to result in authentic, quality footwear that is supremely relevant for today's modern and expressive consumer lifestyles.  Zodiac is available at retail stores, online and at ZodiacShoes.com at suggested retail price points ranging from $69 for sandals to $129 for boots.

Wholesale

Within our Brand Portfolio segment, our brands are distributed on a wholesale basis to over 3,900 retailers, including national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs throughout the United States and Canada, as well as approximately 64 other countries (including sales to our retail operations).  Our most significant wholesale customers include Famous Footwear and many of the nation’s largest retailers, including online retailers such as Nordstrom.com, Amazon.com, Macys.com and Zappos.com; national chains such as DSW, TJX Corporation (including TJ Maxx and Marshalls), Nordstrom Rack, Ross Stores and Kohl's; department stores such as Nordstrom, Macy’s, and Dillard's; mass merchandisers such as Walmart; and independent retailers such as Qurate Retail Group, which operates both QVC and Home Shopping Network.  We also sell product to a variety of international retail customers and distributors.  The loss of any one or more of our significant customers could have a material impact on our Brand Portfolio segment and the Company.

Our Brand Portfolio segment sold approximately 51 million pairs of shoes on a wholesale basis during 2019.  We sell footwear to wholesale customers on both a landed and a first-cost basis.  Landed sales are those in which we obtain title to the footwear from our overseas suppliers and maintain title until the footwear clears United States customs and is shipped to our wholesale customers.  Landed sales generally carry a higher profit rate than first-cost sales as a result of the brand equity associated with the product along with the additional customs, warehousing and logistics services provided to customers and the risks associated with inventory ownership.  To allow for the prompt shipment on reorders and satisfy our growing e-commerce demand, we carry inventories of certain styles.  First-cost sales are those in which we obtain title to footwear from our overseas suppliers and typically relinquish title to customers at a designated overseas port. Many of these customers then import this product into the United States.

Products sold under license agreements accounted for approximately 16% of the sales of the Brand Portfolio segment in 2019, 20% of the segment's sales in 2018 and 23% of the segment's sales in 2017.  Caleres also receives license revenue from third parties related to certain owned brands, for use in connection with other brand-enhancing non-footwear product categories.

 

Direct-to-Consumer

Our Brand Portfolio segment also includes retail stores for certain brands, including Naturalizer, Allen Edmonds and Sam Edelman.  The number of our Brand Portfolio retail stores at the end of the last three fiscal years was as follows:

 

   

2019

   

2018

   

2017

 

Naturalizer

    139       140       145  

Allen Edmonds

    74       76       78  

Sam Edelman

    15       13       13  

Total

    228       229       236  

 

At the end of 2019, we operated 79 Naturalizer stores in Canada, 55 in the United States, four in China and one in Guam.  Of the 139 Naturalizer stores, approximately 50% are located in regional malls and average approximately 1,300 square feet in size, 49% of stores are located in outlet malls and average approximately 2,300 square feet in size and 1% of stores are located in strip centers and average approximately 2,000 square feet in size.  Total Naturalizer store square footage at the end of 2019 was approximately 243,000, compared to 253,000 in 2018.  During 2019, we operated 73 Allen Edmonds stores in the United States and one store in Italy, each averaging approximately 1,600 square feet. We operated 13 Sam Edelman stores in the United States and two in China at the end of 2019, each averaging approximately 2,400 square feet. 

 

In connection with our omni-channel approach to reach consumers, we also operate Naturalizer.com, Naturalizer.ca, SamEdelman.com, AllenEdmonds.com, DrSchollsShoes.com, LifeStride.com, FrancoSarto.com, Vionicshoes.com, Ryka.com, Bzees.com, ViaSpiga.com, and ZodiacShoes.com, which offer substantially the same product selection to consumers as we sell to our wholesale customers.  Vince.com, FergieShoes.com, Blowfishshoes.com, and VeronicaBeard.com complement our distribution of those brands.

 

References to our website addresses do not constitute incorporation by reference of the information contained on the websites and the information contained on the websites is not part of this report.

 

 

 

 

Marketing

We continue to build on the recognition of our portfolio of brands to create differentiation and consumer loyalty.  Our marketing teams are responsible for the development and implementation of innovative marketing programs that serve the consumer facing needs of our portfolio of brands as well as that of our retail partners.  In 2019, we spent approximately $42.1 million in advertising and marketing support for our Brand Portfolio segment, including digital marketing and social media, production, product placement, consumer media advertising, print, trade shows and in-store displays.  The marketing teams are also responsible for driving the development of branding and content for our brand websites.  We continually focus on enhancing the effectiveness of these marketing efforts through market research, product development and marketing communications that collectively address the ever-changing lives and needs of our consumers.  Our marketing teams are instrumental in continuing to drive growth in e-commerce sales, producing relevant and purpose-driven brand positioning and creating meaningful connections with consumers that have increased awareness and loyalty across our portfolio.  We continue to leverage consumer insights and data to inform marketing initiatives to capture a greater share of our target consumers’ spend as well as reach new audiences with a high propensity to purchase our products.

 

Sourcing and Product Development Operations

Our sourcing and product development operations source and develop footwear for our Brand Portfolio segment and also a portion of the footwear sold by our Famous Footwear segment.  We have sourcing and product development offices in Clayton, Missouri; Putian, China; San Rafael and Culver City, California; New York, New York; Port Washington, Wisconsin; Florence, Italy; Macau; Ho Chi Minh City, Vietnam; Hong Kong and Addis Ababa, Ethiopia.

 

Sourcing Operations

In 2019, the sourcing operations sourced approximately 48 million pairs of shoes through a global network of third-party independent footwear manufacturers.  The majority of our footwear sourced is provided by approximately 46 manufacturers operating approximately 69 manufacturing facilities.  In certain countries, we use agents to facilitate and manage the development, production and shipment of product.  We attribute our ability to achieve consistent quality, competitive prices and on-time delivery to the breadth of these established relationships.  While we generally do not have significant contractual commitments with our suppliers, we do enter into sourcing agreements with certain independent sourcing agents.  Prior to production, we monitor the quality of all of our footwear components and also inspect the prototypes of each footwear style.

 

The following table provides an overview of our sourcing by country in 2019:

 

Country

 

Millions of Pairs

 

China

    31.2  

Vietnam

    13.2  

Ethiopia

    1.6  

Other

    1.7  

Total

    47.7  

 

Product Development Operations

We maintain design and product development teams for our brands in Clayton, Missouri; Putian, China; San Rafael, California; New York, New York; Port Washington, Wisconsin and Culver City, California, as well as other select fashion locations, including Florence, Italy.  These teams, which include independent designers, are responsible for the creation and development of new product styles.  Our designers monitor trends in fashion footwear and apparel and work closely with retailers to identify consumer footwear preferences.  Our design teams create collections of footwear, and our product development and sourcing offices convert those designs into new footwear styles.  We operate a sample-making facility in Dongguan, China that allows us to have greater control over our product development in terms of accuracy, execution and speed-to-market.  Our long-range plans include a distinct focus on speed and efficiency to drive excellence in product value and execution, while also continuing to diversify into new sourcing markets outside of China to ensure adequate flexibility in a dynamic economic environment.  Our new distribution center campus in Chino, California, which opened in 2018, is providing additional shipping flexibility, operational efficiencies and an expansion of our logistics infrastructure capacity.  

 

Backlog

At February 1, 2020, our Brand Portfolio segment had a backlog of unfilled wholesale orders of approximately $295.4 million, compared to $331.6 million on February 2, 2019.  Most orders are for delivery within the next 90 to 120 days, and although orders are subject to cancellation, we have not experienced significant cancellations in the past.  The backlog at any particular time is affected by a number of factors, including seasonality, the continuing trend among customers to reduce the lead time on their orders, capacity shifts at foreign manufacturers, and the volume of retail replenishment and e-commerce drop ship orders that are received immediately rather than in advance.  Accordingly, a comparison of backlog from period to period may not be indicative of eventual actual shipments or the growth rate of sales from one period to the next.  As further discussed in Item 1A, Risk Factors, the novel strain of the coronavirus that was detected in Wuhan, China in late 2019 and further developed into a global pandemic will result in fewer orders for a period of time or order cancellations and lower net sales.  Many of our wholesale customers have sought to cancel orders due to the temporary closure of retail stores and the uncertainty surrounding the duration of the pandemic and consumer sentiment.  The impact on our unfilled wholesale order position is unknown at this time.

 

 

AVAILABLE INFORMATION

Our Internet address is www.caleres.com.  Our Internet address is included in this annual report on Form 10-K as an inactive textual reference only.  The information contained on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report.  We file annual, quarterly and current reports, proxy statements and other information with the SEC.  We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished, as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, through our Internet website as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC.  You may access these SEC filings via the hyperlink to a third-party SEC filings website that we provide on our website.

 

 

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The following is a list of the names and ages of the executive officers of the Company and of the offices held by each person.  There is no family relationship between any of the named persons.  The terms of the following executive officers will expire in May 2020 or upon their respective successors being chosen and qualified.

 

Name

 

Age

 

Current Position

Diane M. Sullivan

  64  

Chief Executive Officer, President and Chairman of the Board of Directors

Molly P. Adams

  57  

Division President – Famous Footwear

Angela A. Bass

  62  

Senior Vice President, Chief Human Resources Officer

Daniel R. Friedman

  59  

Division President – Global Supply Chain

Kenneth H. Hannah

  51  

Senior Vice President, Chief Financial Officer

Todd E. Hasty

  47  

Senior Vice President, Chief Accounting Officer

Willis D. Hill

  48  

Senior Vice President, Chief Information Officer

Douglas W. Koch

  68  

Senior Vice President, Strategic Projects

John W. Schmidt

  59  

Division President – Brand Portfolio

Mark A. Schmitt

  56  

Senior Vice President, Chief Logistics Officer

 

 

The period of service of each officer in the positions listed and other business experience are set forth below.

 

Diane M. Sullivan, Chairman of the Board of Directors since February 2014.  Chief Executive Officer and President since May 2011.  President and Chief Operating Officer from March 2006 to May 2011.  President from January 2004 to March 2006.

 

Molly P. Adams, Division President – Famous Footwear since May 2018.  Executive Vice President of Global Merchandising and Product Development, Disney Consumer Products and Disney Parks and Resorts from November 2015 to May 2018.  Executive Vice President of Global Product Development at Disney Consumer Products, Inc. from May 2012 to November 2015.  Senior Vice President of Global Product Development and General Manager of The Disney Store North America from 2010 to 2012.  Vice President and General Manager of The Disney Store North America from 2008 to 2010.

 

Angela A. Bass, Senior Vice President, Chief Human Resources Officer since September 2019.  Owner and Principal Consultant, Angela A. Bass Consulting, LLC from August 2017 to August 2019.  Executive Vice President of Global Human Resources, Performance Sports Group Ltd from January 2012 to July 2017.  

 

Daniel R. Friedman, Division President – Global Supply Chain since January 2010.  Senior Vice President, Product Development and Sourcing from July 2006 to January 2010.  Managing Director at Camuto Group, Inc. from 2002 to July 2006.

 

Kenneth H. Hannah, Senior Vice President, Chief Financial Officer since February 2015.  Executive Vice President and Chief Financial Officer of JC Penney Company, Inc. from May 2012 to March 2014.  Executive Vice President and President–Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President–Solar Materials from 2009 to 2012.  Senior Vice President and Chief Financial Officer of MEMC Electronic Materials, Inc. from 2006 to 2009.

 

Todd E. Hasty, Senior Vice President, Chief Accounting Officer since January 2020.  Vice President, Chief Accounting Officer from March 2019 to January 2020.  Vice President, Controller from March 2016 to March 2019.  Vice President, Assistant Controller from October 2007 to March 2016.

  

Willis D. Hill, Senior Vice President, Chief Information Officer since September 2018.  Senior Vice President and Chief Technology Officer from August 2017 to September 2018.  Senior Vice President, Information Technology from January 2017 to August 2017.  Vice President, Retail Information Technology from July 2011 to January 2017.  Director, Retail Information Technology from July 2008 to July 2011.

 

Douglas W. Koch, Senior Vice President, Strategic Projects since September 2019.  Senior Vice President and Chief Human Resources Officer from January 2016 to September 2019.  Senior Vice President and Chief Talent and Strategy Officer from January 2011 to January 2016.  Senior Vice President and Chief Talent Officer from May 2005 to January 2011.  Senior Vice President, Human Resources from March 2002 to May 2005. 

 

John W. Schmidt, Division President – Brand Portfolio since October 2015. Division President – Contemporary Fashion Brands from January 2011 to September 2015.  Senior Vice President, Better and Image Brands from January 2010 to January 2011.  Senior Vice President and General Manager, Better and Image Brands from March 2008 until January 2010.  Various positions, including Vice President, President, Group President of Wholesale Footwear for Nine West Group from September 1998 to February 2008.

 

Mark A. Schmitt, Senior Vice President, Chief Logistics Officer since September 2018.  Senior Vice President, Chief Information Officer and Logistics from February 2013 to September 2018.  Senior Vice President and Chief Information Officer from January 2012 through February 2013.  Senior Director of Management Information Systems for Express Scripts from 2010 through 2011.  Various management information systems positions including Group Director with Anheuser-Busch InBev from 1996 to 2009.

 

 

 

 

ITEM 1A

RISK FACTORS

The recent cororavirus outbreak had adversely affected and continues to impact our business operations, store traffic and financial condition.

The outbreak of the coronavirus pandemic (“COVID-19”) both in the U.S. and globally, and related government and private sector responsive actions, has adversely affected and continues to impact our business operations.  It is impossible to predict the effect and ultimate impact of COVID-19 and the impact on the economy, the retail industry and the Company.  The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, which has impacted retail store traffic and consumer sentiment.  Effective March 19, 2020, we announced the temporary closure of all retail stores throughout the United States and Canada.  While the store closures are expected to be temporary, we cannot reasonably estimate the duration of the store closures, the impact on consumer demand and the impact to our wholesale customers that may also have been impacted by store closures, nor the impact to our 2020 financial results or cash flows.  The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.  A prolonged health crisis may have a material impact on the retail sector, consumer demand, and the Company's results of operations and liquidity. 

 

Consumer demand for our products may be adversely impacted by economic conditions and other factors.

Worldwide economic conditions continue to be uncertain.  Consumer confidence and spending are strongly influenced by general economic conditions and other factors, including COVID-19, fiscal policy, the changing tax and regulatory environment, interest rates, minimum wage rates and regulations, inflation, consumer debt levels, the availability of consumer credit, the liquidity of consumers’ assets, health care costs, currency exchange rates, taxation, energy costs, real estate values, foreclosure rates, unemployment trends, weather conditions and the economic consequences of military action or terrorist activities.  Negative economic conditions generally decrease disposable income and, consequently, consumer purchases of discretionary items like our products.  Negative trends in economic conditions could also drive up the cost of our products, which may require us to increase our product prices.  These increases in our product costs, and possibly prices, may not be offset by comparable increases in consumer disposable income.  As a result, our customers may choose to purchase fewer of our products or purchase the lower priced products of our competitors, and our business, results of operations, financial condition and cash flows could be adversely affected.  The COVID-19 outbreak and resulting global economic decline is expected to have an adverse impact on consumer demand for our products during 2020 and the long-term impact cannot be reasonably predicted.

 

A long-term decline in our stock price may result in impairment charges.

As a result of COVID-19 and the resulting impact to the economy, global stock prices have dropped considerably, including the Company's stock price.  If there is an extended period of lower stock market valuations or an extended closure timeframe for our retail stores and for those of our wholesale customers, the Company may be required to perform additional impairment tests for its goodwill and intangible assets and long-lived assets, which may result in material impairment charges during 2020.

 

If we are unable to anticipate and respond to consumer preferences and fashion trends and successfully apply new technology, we may not be able to maintain or increase our net sales and earnings.

The footwear industry is subject to rapidly changing consumer shopping preferences and patterns and fashion trends.  Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change.  In addition, the continuing consumer shift to online and mobile shopping is requiring retailers to lower shipping costs, improve shipping speeds and optimize mobile platforms.  The trend toward online and mobile shopping increases the volume of smaller shipments, including single-pair shipments, from our warehouses.  The increased volume of smaller shipments may result in higher average distribution costs, including both shipping and processing costs incurred at our distribution centers.  The success of both our wholesale and retail operations depends largely on our ability to anticipate, understand and react to these changing consumer shopping patterns.  If we fail to respond to changes in consumer shopping patterns, demands and fashion trends, develop new products and designs, and implement effective, responsive merchandising and distribution strategies and programs, we could experience lower sales, excess inventories and lower gross margins, any of which could have an adverse effect on our results of operations and financial condition.

 

We operate in a highly competitive industry.

Competition is intense in the footwear industry.  There has also been consolidation of competitors in the industry, resulting in certain competitors that are larger and have greater financial, marketing and technological resources than we do.  In addition, a move toward vertical integration by our competitors could create additional competitive pressures that may decrease our market share.  Other competitors are able to offer footwear on a lateral basis alongside their apparel products, or have successfully branded their trademarks as lifestyle brands, resulting in greater competitive advantages.  Low barriers to entry into this industry further intensify competition by allowing new companies to easily enter the markets in which we compete.  Some of our suppliers further compound these competitive pressures by allowing consumers to purchase their products directly through supplier-maintained Internet sites and retail stores.  The Internet facilitates price transparency and comparison shopping, which increases the level of competition we face and puts competitive pressure on us to keep our prices low.

 

We believe that our ability to compete successfully in the footwear industry depends on a number of factors, including style, price, performance, quality, location and service, as well as the strength of our brand names.  We remain competitive by increasing awareness of our brands, improving the efficiency of our supply chain and enhancing the style, comfort, fashion and perceived value of our products.  However, our competitors may implement more effective marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, distribution partners and manufacturers, or respond more quickly to changes in consumer preferences than us.  As a result, we may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced gross margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of our products, which could adversely impact our financial results.

 

We rely primarily on foreign sources of production, which subjects our business to risks associated with international trade.

We rely primarily on foreign sourcing for our footwear products through third-party manufacturing facilities located outside the United States.  As is common in the industry, we do not have any long-term contracts with our third-party foreign manufacturers.  Foreign sourcing is subject to numerous risks, including trade relations, work stoppages, transportation delays (including delays at foreign and domestic ports) and costs (including customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions), domestic and foreign political instability, foreign currency fluctuations, variable economic conditions, expropriation, nationalization, natural disasters, terrorist acts and military conflict, changes in governmental regulations (including the U.S. Foreign Corrupt Practices Act) and geo-political events (including the potential impact of the withdrawal of the United Kingdom from the European Union, or "Brexit" that occurred on January 31, 2020).  In addition, China and other countries are experiencing a public health emergency due to COVID-19.  While we have experienced some disruption to our supply chain, we cannot accurately predict the full impact that the coronavirus epidemic will have on the ability of manufacturers either in China or in other countries to produce our products.  However, the majority of our factory partners are now operational.  There is also uncertainty surrounding U.S. presidential and congressional elections in 2020 and the impact of any changes to trade legislation.  At the same time, potential changes in manufacturing preferences, including, but not limited to the following, pose additional risk and uncertainty:

 

 

Manufacturing capacity may shift from footwear to other industries with manufacturing margins that are perceived to be higher.

 

Some footwear manufacturers may face labor shortages as workers seek better wages and working conditions in other industries and locations.

 

 

As a result of these risks, there can be no assurance that we will not experience reductions in available production capacity, increases in our product costs, late deliveries or terminations of our supplier relationships.  Furthermore, these sourcing risks are compounded by the lack of diversification in the geographic location of our foreign sourcing and manufacturing.  With the majority of our supply originating in China, a substantial portion of our supply could be at risk in the event of any significant negative development related to relations between United States and China.

 

Although we believe we could find alternative manufacturing sources for the products that we currently source from third-party manufacturing facilities in China or other countries, we may not be able to locate alternative manufacturers on terms as favorable as our current terms, including pricing, payment terms, manufacturing capacity, quality standards and lead times for delivery.  In addition, there is substantial competition in the footwear industry for quality footwear manufacturers.  Accordingly, our future results will partly depend on our ability to maintain positive working relationships with, and offer competitive terms to, our foreign manufacturers.  If supply issues cause us to be unable to provide products consistent with our standards or manufacture our footwear in an efficient and cost-effective manner, our customers may cancel orders, refuse to accept deliveries or demand reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.

 
The imposition of tariffs on our products may result in higher costs and decreased gross profits.
Recent international events have introduced greater uncertainty with respect to trade wars and tariffs, which may affect trade between the United States and other countries, particularly with China.  We rely primarily on foreign sourcing for our footwear through third-party manufacturing facilities located outside the United States, with the majority of our footwear sourced from manufacturing facilities in China that  is subject to a 15% tariff that became effective as of September 1, 2019.  Certain types of footwear were subject to a tariff that was to go into effect on December 15, 2019 but was later reversed.  While we continue to focus on mitigating the impact of the enacted tariffs, if we are unable to mitigate the impact or if there is a prolonged trade war involving the further escalation of tariffs, our product costs may increase on a significant portion of our branded footwear that we source internationally. Higher product costs may in turn result in lower gross margins in the future for products that we source from China.
 

Our operating results depend on preparing accurate sales forecasts and properly managing our inventory levels.

Using sales forecasts, we place orders with manufacturers for some of our products prior to the time we receive all of our customers’ orders to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery.  We also maintain an inventory of certain products that we anticipate will be in greater demand.  At the retail level, we place orders for products many months in advance of our key selling seasons.  Adverse economic conditions and rapidly changing consumer preferences can make it difficult for us and our retail customers to accurately forecast product trends in order to match production with demand.  If we fail to accurately assess consumer fashion tastes and the impact of economic factors on consumer spending or to effectively differentiate our retail and wholesale offerings, our inventory levels may exceed customer demand, resulting in inventory write-downs, higher carrying costs, lower gross margins or the sale of excess inventory at discounted prices, which could significantly impact our financial results.  Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require in a timely manner, we may experience inventory shortages.  Inventory shortages may delay shipments to customers (and possibly require us to offer discounts or costly expedited shipping), negatively impact retailer and distributor relationships, adversely impact our sales results and diminish brand awareness and loyalty.  The COVID-19 outbreak has resulted in lower sales, and lower sales projections, particularly in the first half of 2020.  The full impact of the pandemic and its impact on consumer sentiment is difficult to estimate.  In addition, the impact of the pandemic on our third-party independent manufacturers in China or other countries did cause temporary disruptions in our supply chain; however, the majority of our factory partners are now operational.

 

We are reliant upon our information technology systems, and any major disruption of these systems could adversely impact our ability to effectively operate our business.

Our computer network and systems are essential to all aspects of our operations, including design, pricing, production, accounting, reporting, forecasting, ordering, manufacturing, transportation, sales and distribution.  Our ability to manage and maintain our inventory and to deliver products in a timely manner depends on these systems.  If any of these systems fails to operate as expected, we experience problems with transitioning to upgraded or replacement systems, a breach in security occurs or a natural disaster interrupts system functions, we may experience delays in product fulfillment and reduced efficiency in our operations or be required to expend significant capital to correct the problem, which may have an adverse effect on our results of operations and financial condition.

 

A cybersecurity breach may adversely affect our sales and reputation.

We routinely possess sensitive consumer and associate information and periodically provide it to third parties for analysis, benefit distribution or compliance purposes.  While we believe we have taken reasonable and appropriate steps to protect that information, hackers and data thieves operate sophisticated, large-scale attacks that could breach our information systems, despite ongoing security measures. In addition, we are required to comply with increasingly complex regulations designed to protect our business and personal data.  Any breach of our network security, a third-party’s network security or failure to comply with applicable regulations may result in (a) the loss of valuable business data and/or our consumers’ or associates’ personal information, (b) increased costs associated with implementing additional protections and processes, (c) a disruption of our business and a loss of sales, (d) negative media attention, (e) damage to our consumer and associate relationships and reputation, and (f) fines or lawsuits.

 

Customer concentration and other trends in customer behavior may lead to a reduction in or loss of sales.

Our wholesale customers include national chains, online retailers, department stores, mass merchandisers, independent retailers and catalogs.  Several of our customers operate multiple department store divisions.  Furthermore, we often sell multiple types of branded, licensed and private-label footwear to these same customers.  While we believe purchasing decisions in many cases are made independently by the buyers and merchandisers of each of the customers, a decision by a significant customer to decrease the amount of footwear products purchased from us could have a material adverse effect on our business, financial condition or results of operations.

 

In addition, with the growing trend toward retail trade consolidation, including store count reductions at major retail chains, and consumers' continued shift to online shopping, we and our wholesale customers increasingly depend upon a reduced number of key retailers whose bargaining strength is growing.  This consolidation may result in the following adverse consequences:

 

 

Our wholesale customers may seek more favorable terms for their purchases of our products, which could limit our ability to raise prices, recoup cost increases or achieve our profit goals.

 

The number of stores that carry our products could decline, thereby exposing us to a greater concentration of accounts receivable risk and negatively impacting our brand visibility.


 

 

 

We also face the following risks with respect to our customers:

     
 

Our customers could develop in-house brands or use a higher mix of private-label footwear products, which would negatively impact our sales.

 

As we sell our products to customers and extend credit based on an evaluation of each customer’s financial condition, the financial difficulties of a customer could cause us to stop doing business with that customer, reduce our business with that customer or be unable to collect from that customer.

 

Since we transact primarily in United States dollars, our international customers could purchase from competitors who will transact business in their local currency.

 

Certain of our major wholesale customers have experienced a significant downturn or disruption in their business, including the impact of COVID-19. Many of our wholesale customers are having temporary store closures and have sought to cancel orders.  If our customers continue to experience significant downturns or disruptions in their business, we expect these customers will reduce their purchases of our products.

 

Retailers are directly sourcing more of their products directly from foreign manufacturers and reducing their reliance on wholesalers, which could have a material adverse effect on our business and results of operations.

 

Transitional challenges with acquisitions could result in unexpected expenditures of time and resources.

Periodically, we pursue acquisitions of other companies or businesses, such as our 2018 acquisitions of Blowfish Malibu and Vionic, as further discussed in Note 2 to the consolidated financial statements.  Although we review the records of acquisition candidates, the review may not reveal all existing or potential problems.  As a result, we may not accurately assess the value of the business and may, accordingly, ultimately assume unknown adverse operating conditions and/or unanticipated expenses and liabilities related to the acquisition.  Acquisitions may also cause us to incur debt, write-offs of goodwill or intangible assets if the business does not perform as well as expected and substantial amortization expenses associated with other intangible assets.  We face the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire or launch such businesses.  We also face the risk that we will not be able to integrate acquisitions into our existing operations effectively without substantial expense, delay or other operational or financial problems. Integration may be hindered by, among other things, differing procedures, including internal controls, business practices and technology systems.  We may need to allocate more management resources to integration than we planned, which may adversely affect our ability to pursue other profitable activities.

 

A disruption in the effective functioning of our distribution centers could adversely affect our ability to deliver inventory on a timely basis.

We currently use several distribution centers, which are leased or third-party managed.  These distribution centers serve as the source of replenishment of inventory for our footwear stores and e-commerce websites operated by our Famous Footwear and Brand Portfolio segments and serve the wholesale operations of our Brand Portfolio segment.  Our success depends on our ability to handle the rapid consumer shift to online shopping and single pair shipments, which requires significant capital to operate with a greater level of sophistication and automation, as well as higher processing and distribution costs.  We may be unable to successfully manage, negotiate or renew our third-party distribution center agreements, or we may experience complications with respect to our distribution centers, such as substantial damage to, or destruction of, such facilities due to natural disasters or ineffective information technology systems.  In such an event, our other distribution centers may not be able to support the resulting additional distribution demands and we may be unable to locate alternative persons or entities capable of fulfilling our distribution needs, resulting in an adverse effect on our ability to deliver inventory on a timely basis.  The COVID-19 outbreak may also adversely impact the effective operation of our distribution centers as a result of temporary retail store closures, labor shortages as a result of government mandates to stop the spread of the virus, or disruptions to the supply chain. Some of our distribution centers are located in California, which is a state that has been more severely impacted by COVID-19.   

 

Foreign currency fluctuations may result in higher costs and decreased gross profits.

Although we purchase most of our products from foreign manufacturers in United States dollars and otherwise engage in foreign currency hedging transactions, we cannot ensure that we will not experience cost variations with respect to exchange rate changes.  Currency exchange rate fluctuations may also adversely impact third parties who manufacture the Company’s products by making their purchases of raw materials or other production costs more expensive and more difficult to finance, resulting in higher prices and lower margins for the Company, its distributors and licensees.

 

Changes in tax laws may result in increased volatility in our effective tax rates.

Our financial results are significantly impacted by the effective tax rates of both our domestic and international operations.  Our effective income tax rate could be adversely affected by certain provisions of Tax Cuts and Jobs Act (the "Act"), which was enacted in December 2017, that directly affect foreign earnings, such as the global intangible low-taxed income tax ("GILTI") and base-erosion and anti-abuse tax provisions ("BEAT").  Other factors, such as changes in the mix of earnings in countries with differing statutory tax rates, changes in permitted deductions, changes in tax laws, interpretations, policies and treaties and the outcome of income tax audits in various jurisdictions, may result in higher taxes, lower profitability and increased volatility in our financial results.

 

Our success depends on our ability to retain senior management and recruit and retain other key associates.

Our success depends on our ability to attract, retain and motivate qualified management, administrative, product development and sales personnel to support existing operations and future growth. In addition, our ability to successfully integrate acquired businesses often depends on our ability to retain incumbent personnel, many of whom possess valuable institutional knowledge and operating experience.  Competition for qualified personnel in the footwear industry is intense and we compete for these individuals with other companies that in many cases have superior financial and other resources.  The loss of the services of any member of our senior management or key associates, the inability to attract and retain other qualified personnel or the inability to effectively transition positions could adversely affect the sales, design and production of our products as well as the implementation of our strategic initiatives.

 

 

 

Our business, sales and brand value could be harmed by violations of labor, trade or other laws.

We focus on doing business with those suppliers who share our commitment to responsible business practices and the principles set forth in our Production Code of Conduct (the “PCOC”).  By requiring our suppliers to comply with the PCOC, we encourage our suppliers to promote best practices and work toward continual improvement throughout their production operations.  The PCOC sets forth standards for working conditions and other matters, including compliance with applicable labor practices, workplace environment and compliance with laws.  Although we promote ethical business practices, we do not control our suppliers or their labor practices.  A failure by any of our suppliers to adhere to these standards or laws could cause us to incur additional costs for our products or cause negative publicity and harm our business and reputation.  We also require our suppliers to meet our standards for product safety, including compliance with applicable laws and standards with respect to safety issues, including lead content in paint. Failure by any of our suppliers to adhere to product safety standards could lead to a product recall, which may result in critical media coverage, harm our business and reputation, and cause us to incur additional costs.

 

In addition, if we, or our suppliers or foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import or the loss of our import privileges.  Possible violations of United States or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, classification, marketing or valuation of our imported products, fraudulent visas or labor violations.  The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.

 

If we are unable to maintain working relationships with our major branded suppliers, our business, results of operations, financial condition and cash flows may be adversely impacted.

Our Famous Footwear segment purchases a substantial portion of its footwear products from major branded suppliers.  Purchases from one major branded supplier, Nike, Inc., comprises approximately 23% of sales for the Famous Footwear segment.  As is common in the industry, we do not have any long-term contracts with our suppliers.  In addition, the success of our financial performance is dependent on the ability of our Famous Footwear segment to obtain products from our suppliers on a timely basis and on acceptable terms.  While we believe our relationships with our current suppliers are good, the loss of any of our major suppliers or product developed exclusively for our Famous Footwear stores could have a material adverse effect on our business, financial condition and results of operations.  In addition, negative trends in global economic conditions may adversely impact our suppliers.  If these third parties do not perform their obligations or are unable to provide us with the materials and services we need at prices and terms that are acceptable to us, our ability to meet our consumers’ demand could be adversely affected.

 

Our reputation and competitive position are dependent on our ability to license well-recognized brands, license our own brands under successful licensing arrangements and protect our intellectual property rights.

Licenses - Company as Licensee

Although we own most of our wholesale brands, we also rely on our ability to attract, retain and maintain good relationships with licensors that have strong, well-recognized brands and trademarks.  Our license agreements are generally for an initial term of two to four years, subject to renewal, and there can be no assurance that we will be able to renew these licenses.  Even our longer-term or renewable licenses are typically dependent upon our ability to market and sell the licensed products at specified levels, and the failure to meet such levels may result in the termination or non-renewal of such licenses.  Furthermore, many of our license agreements require minimum royalty payments, and if we are unable to generate sufficient sales and profitability to cover these minimum royalty requirements, we may be required to make additional payments to the licensors that could have a material adverse effect on our business and results of operations.  In addition, because certain of our license agreements are non-exclusive, new or existing competitors may obtain licenses with overlapping product or geographic terms, resulting in increased competition for a particular market.

 

Licenses - Company as Licensor

We have entered into numerous license agreements with respect to the brands and trademarks that we own.  While we have significant control over our licensees’ products and advertising, we generally cannot control their operational and financial issues.  If our licensees are not able to meet annual sales and royalty goals, obtain financing, manage their supply chain, control quality and maintain positive relationships with their customers, our business, results of operations and financial position may be adversely affected.  While we would likely have the ability to terminate an underperforming license, it may be difficult and costly to locate an acceptable substitute distributor or licensee, and we may experience a disruption in our sales and brand visibility.  In addition, although many of our license agreements prohibit the licensees from entering into licensing arrangements with certain of our competitors, they are generally not prohibited from offering, under other brands, the types of products covered by their license agreements with us.

 

Trademarks

We believe that our trademarks and trade names are important to our success and competitive position because our distinctive marks create a market for our products and distinguish our products from other products.  We cannot, however, guarantee that we will be able to secure protection for our intellectual property in the future or that such protection will be adequate for future operations.  Furthermore, we face the risk of ineffective protection of intellectual property rights in jurisdictions where we source and distribute our products, some of which do not protect intellectual property rights to the same extent as the United States.  If we are unsuccessful in challenging a party’s products on the basis of infringement of our intellectual property rights, continued sales of these products could adversely affect our sales, devalue our brands and result in a shift in consumer preference away from our products.  We may face significant expenses and liability in connection with the protection of our intellectual property rights, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.

 

Our retail business depends on our ability to secure affordable and desirable leased locations without creating a competitive concentration of stores.

The success of the retail business within our Famous Footwear and Brand Portfolio segments depends, in part, on our ability to secure affordable, long-term leases in desirable locations for our leased retail footwear stores and to secure renewals of such leases.  As consumer shopping preferences have evolved, we continue to focus on opening stores in locations with a greater penetration of high-value consumers.  No assurance can be given that we will be able to successfully negotiate lease renewals for existing stores or obtain acceptable terms for new stores in desirable locations. In addition, opening new stores in our existing markets may result in reduced net sales in existing stores as our stores become more concentrated in the markets we serve.  As a result, the number of consumers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced.  This may result in impairments that adversely impact our financial results.

 

 

 

Our quarterly sales and earnings may fluctuate, which may result in volatility in, or a decline in, our stock price.

Our quarterly sales and earnings can vary due to a number of factors, many of which are beyond our control, including the following:

 

  The recent COVID-19 pandemic has impacted the global economy.  Sales and earnings in the first quarter of 2020 have been adversely impacted by the pandemic, and may continue to be impacted during 2020.
 

Our Famous Footwear retail business is seasonally weighted to the back-to-school season, which primarily falls in our third fiscal quarter. As a result, the success of our back-to-school offering, which is affected by our ability to anticipate consumer demand and fashion trends, could have a disproportionate impact on our full year results.

 

In our wholesale business, sales of footwear are dependent on orders from our major customers, and they may change delivery schedules, change the mix of products they order or cancel orders without penalty.

 

Our wholesale customers have been moving toward lower initial orders and more replenishment orders, which may result in shifts of sales between quarters.

 

Our estimated annual tax rate is based on projections of our domestic and international operating results for the year, which we review and revise as necessary each quarter.

 

Our earnings are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, changes in product sales mix, geographic sales trends, weather conditions, consumer sentiment and currency exchange rate fluctuations.

 

As a result of these specific and other general factors, our operating results will vary from quarter to quarter and the results for any particular quarter may not be indicative of results for the full year.  Any shortfall in sales or earnings from the levels expected by investors could cause a decrease in the trading price of our common stock.

 

We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources.

We are a defendant from time to time in lawsuits and regulatory actions (including environmental matters) relating to our business and to our past operations.  Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings.  An unfavorable outcome could have a material adverse impact on our business, financial condition and results of operations.  In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are expensive and will require that we devote substantial resources and executive time to defend, thereby diverting management’s attention and resources that are needed to successfully run our business.  See Item 3, Legal Proceedings, for further discussion of pending matters.

 

A significant portion of our Famous Footwear sales are dependent on our Famous Footwear loyalty program, Famously You Rewards ("Rewards"), and any decrease in sales from Rewards could have a material adverse impact on our sales.

Rewards is a customer loyalty program that drives sales and traffic for the Famous Footwear segment.  Rewards members earn points toward savings certificates for qualifying purchases.  Upon reaching specified point values, members are issued a savings certificate, which may be redeemed for purchases at Famous Footwear.  Approximately 78% of our fiscal 2019 sales within the Famous Footwear segment were generated by our Rewards members.  If our Rewards members do not continue to shop at Famous Footwear, our sales may be adversely affected.

 

Our business, results of operations, financial condition and cash flows could be adversely affected by the failure of financial institutions to fulfill their commitments under our Credit Agreement.

The Third Amendment to our Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on January 18, 2024, is provided by a syndicate of financial institutions, with each institution agreeing severally (and not jointly) to make revolving credit loans to us in an aggregate amount of up to $500.0 million in accordance with the terms of the Credit Agreement.  In addition, the Credit Agreement provides for an increase at the Company's option by up to $250.0 million.  As a result of COVID-19, many companies are relying on bank funding for working capital needs.  If one or more of the financial institutions participating in the Credit Agreement were to default on its obligation to fund its commitment, the portion of the facility provided by such defaulting financial institution may not be available to us.  

 

If we are unable to maintain our credit rating, our ability to access capital and interest rates may be negatively impacted.

The credit rating agencies periodically review our capital structure and the quality and stability of our earnings.  Any negative ratings actions, such as the March 2020 downgrades of our credit rating by Moody's and S&P, could constrain the capital available to us or our industry and could limit our access to long-term funding or cause such access to be available at a higher borrowing cost for our operations.  We are dependent upon our ability to access capital at rates and on terms we determine to be attractive.  If our ability to access capital becomes constrained, our interest expense will likely increase, which could adversely affect our financial condition and results of operations.  In addition, as of February 1, 2020, total borrowing availability under the Credit Agreement was $214.1 million.  Failure to meet our debt covenants under the Credit Agreement may require the Company to seek waivers or amendments of the debt covenants, alternative or additional sources of financing or reduce expenditures.

 

 

 

 

ITEM 1B

UNRESOLVED STAFF COMMENTS

There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.

 

 

 

ITEM 2

PROPERTIES

We own our principal executive, sales and administrative offices located in Clayton (“St. Louis”), Missouri.

 

Our retail operations, included in both our Famous Footwear and Brand Portfolio segments, are conducted throughout the United States, Canada, China, Guam and Italy and involve the operation of 1,177 shoe stores, including 101 in Canada.  All store locations, excluding our Perth, Ontario outlet store, are leased, with approximately 42% of them having renewal options.  The footwear sold through our domestic wholesale business is primarily processed through our leased distribution centers in Chino, California and Lebanon, Tennessee or our third-party facilities in Vacaville, California and Fontana, California. 

 

The following table summarizes the location and general use of the Company's primary properties:

 

Location

 

Owned/Leased

 

Segment

 

Use

             

Clayton, Missouri

 

Owned

 

Famous Footwear and Brand Portfolio

 

Principal corporate, executive, sales and administrative offices

United States, Canada, Guam and Italy

 

Leased

 

Famous Footwear and Brand Portfolio

 

Retail operations

Chino, California (1)

 

Leased

 

Brand Portfolio

 

Distribution centers

Lebanon, Tennessee (2)

 

Leased

 

Famous Footwear and Brand Portfolio

 

Distribution center

Lebec, California (3)

 

Leased

 

Famous Footwear

 

Distribution center

New York, New York

 

Leased

 

Brand Portfolio

 

Office space and showrooms

Perth, Ontario (4)

 

Owned

 

Famous Footwear and Brand Portfolio

 

Distribution center and outlet center

San Rafael and Culver City, California

 

Leased

 

Brand Portfolio

 

Office space

Dongguan, China

 

Leased

 

Brand Portfolio

 

Office space and sample-making facility

Santiago, Dominican Republic

 

Leased

 

Brand Portfolio

 

Manufacturing facility

Port Washington, Wisconsin

 

Owned

 

Brand Portfolio

 

Manufacturing and recrafting facility and office space

 

 

(1)

This campus includes two company-operated distribution centers with approximately 725,000 and 606,000 square feet at each respective location.

 

(2)

This distribution center is approximately 540,000 square feet.

 

(3)

This distribution center is approximately 350,000 square feet.

 

(4)

This distribution center is approximately 150,000 square feet.

 

We also own a building in Denver, Colorado, which is leased to a third party; and undeveloped land in Colorado and New York.  See Item 3, Legal Proceedings, for further discussion of certain of these properties.

 

 

 

 

ITEM 3

LEGAL PROCEEDINGS

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position.

 

Our prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future.  We are involved in environmental remediation and ongoing compliance activities at several sites and have been notified that we are or may be a potentially responsible party at several other sites.  We are remediating, under the oversight of Colorado authorities, contamination at and beneath our owned facility in Colorado (also known as the “Redfield” site) and groundwater and indoor air in residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and surrounding facilities.

 

Refer to Note 18 to the consolidated financial statements for additional information related to the Redfield matter and other legal proceedings.

 

 

 

ITEM 4

MINE SAFETY DISCLOSURES

Not applicable.

 

 

PART II

 

 

 

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “CAL.”  As of February 1, 2020, we had 3,281 shareholders of record.

 

Issuer Purchases of Equity Securities

The following table provides information relating to our repurchases of common stock during the fourth quarter of 2019:

 

Fiscal Period

  Total Number of Shares Purchased (1)    

Average Price Paid per Share(1)

   

Total Number of Shares Purchased as Part of Publicly Announced Program(2)

   

Maximum Number of Shares that May Yet Be Purchased Under the Program (2)

 

November 3, 2019 - November 30, 2019

        $             5,669,110  

December 1, 2019 - January 4, 2020

    1,238       22.33             5,669,110  

January 5, 2020 - February 1, 2020

    116,617       19.57       115,499       5,553,611  

Total

    117,855     $ 19.60       115,499       5,553,611  

 

 

(1)

Includes shares purchased as part of our publicly announced stock repurchase program and shares that are tendered by employees related to certain share-based awards.  The employee shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards.

   

(2)

On December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the purchase of up to 2,500,000 shares of our outstanding common stock either on the open market or in private transactions.  Under this plan, 1,704,240 shares were repurchased during 2019.  Therefore, there were 553,611 shares authorized to be repurchased under the 2018 Program as of February 1, 2020.  In addition, on September 2, 2019, the Board of Directors approved a stock repurchase program ("2019 Program") authorizing the purchase of up to 5,000,000 shares of our outstanding common stock either on the open market or in private transactions.  There were no shares repurchased under this plan during 2019.  Therefore, there were 5,000,000 shares authorized to be repurchased under the 2019 Program as of February 1, 2020.  Our repurchases of common stock are limited under our debt agreements.

   

 

 

 

Stock Performance Graph

The following performance graph compares the cumulative total return on our common stock with the cumulative total return of the following indices: (i) the S&P© SmallCap 600 Stock Index and (ii) a peer group of companies believed to be engaged in similar businesses.  Our peer group consists of Designer Brands, Inc., Genesco, Inc., Shoe Carnival, Inc., Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc.

 

Our fiscal year ends on the Saturday nearest to each January 31.  Accordingly, share prices are as of the last business day in each fiscal year.  The graph assumes that the value of the investment in our common stock and each index was $100 at January 31, 2015.  The graph also assumes that all dividends were reinvested and that investments were held through February 1, 2020.  These indices are included for comparative purposes only and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved and are not intended to forecast or be indicative of possible future performance of the common stock.

 

 

*$100 invested on January 31, 2015 in stock or index, including reinvestment of dividends. Index calculated on daily basis.

 

   

1/31/2015

   

1/30/2016

   

1/28/2017

   

2/3/2018

   

2/2/2019

   

2/1/2020

 

Caleres, Inc.

  $ 100.00     $ 95.55     $ 106.84     $ 104.39     $ 108.31     $ 65.00  

Peer Group

    100.00       91.88       91.82       118.72       114.75       122.32  

S&P© SmallCap 600 Stock Index

    100.00       95.31       128.67       146.79       147.31       157.07  

 

 

 

ITEM 6

SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction with the consolidated financial statements and notes thereto and the other information contained elsewhere in this report.  Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31.  Periodically, this results in a fiscal year that includes 53 weeks, which can affect annual comparisons.  Our 2017 fiscal year included 53 weeks, while our 2019, 2018, 2016 and 2015 fiscal years each included 52 weeks.

 

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

($ thousands, except per share amounts)

 

(52 Weeks)

   

(52 Weeks)

   

(53 Weeks)

   

(52 Weeks)

   

(52 Weeks)

 

Operations:

                                       

Net sales

  $ 2,921,562     $ 2,834,846     $ 2,785,584     $ 2,579,388     $ 2,577,430  

Cost of goods sold

    1,737,202       1,678,502       1,616,935       1,517,397       1,529,627  

Gross profit

    1,184,360       1,156,344       1,168,649       1,061,991       1,047,803  

Selling and administrative expenses

    1,065,760       1,041,765       1,036,051       942,595       931,707  

Impairment of goodwill and intangible assets (1)

          98,044                    

Restructuring and other special charges, net

    14,787       16,134       4,915       23,404        

Operating earnings

    103,813       401       127,683       95,992       116,096  

Interest expense, net (2)

    (33,123 )     (18,277 )     (17,325 )     (13,731 )     (15,690 )

Loss on early extinguishment of debt

          (186 )                 (10,651 )

Other income, net

    7,903       12,308       12,348       14,993       19,011  

Earnings (loss) before income taxes

    78,593       (5,754 )     122,706       97,254       108,766  

Income tax (provision) benefit

    (16,511 )     273       (35,475 )     (31,168 )     (26,942 )

Net earnings (loss)

    62,082       (5,481 )     87,231       66,086       81,824  

Net (loss) earnings attributable to noncontrolling interests

    (737 )     (40 )     31       428       345  

Net earnings (loss) attributable to Caleres, Inc.

  $ 62,819     $ (5,441 )   $ 87,200     $ 65,658     $ 81,479  

Operations:

                                       

Return on net sales

    2.2 %     (0.2 )%     3.1 %     2.5 %     3.2 %

Return on beginning Caleres, Inc. shareholders' equity

    9.9 %     (0.8 )%     14.2 %     10.9 %     15.1 %

Dividends paid

  $ 11,422     $ 11,983     $ 12,027     $ 12,104     $ 12,253  

Purchases of property and equipment

  $ 44,533     $ 62,483     $ 44,720     $ 50,523     $ 73,479  

Capitalized software

  $ 5,619     $ 4,416     $ 6,458     $ 9,039     $ 7,735  

Depreciation and amortization (3)

  $ 72,816     $ 64,907     $ 65,831     $ 57,857     $ 52,606  

Per Common Share:

                                       

Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders

  $ 1.53     $ (0.13 )   $ 2.03     $ 1.52     $ 1.86  

Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders

    1.53       (0.13 )     2.02       1.52       1.85  

Dividends paid

    0.28       0.28       0.28       0.28       0.28  

Ending Caleres, Inc. shareholders’ equity (4)

    15.99       15.14       16.67       14.27       13.78  

Financial Position:

                                       

Receivables, net

  $ 162,181     $ 191,722     $ 152,613     $ 153,121     $ 153,664  

Inventories, net

    618,406       683,171       569,379       585,764       546,745  

Working capital

    31,349       123,111       416,630       316,150       484,766  

Property and equipment, net

    224,846       230,784       212,799       219,196       179,010  

Total assets

    2,431,707       1,838,568       1,489,415       1,475,273       1,303,323  

Borrowings under revolving credit agreement

    275,000       335,000             110,000        

Long-term debt

    198,391       197,932       197,472       197,003       196,544  

Caleres, Inc. shareholders’ equity

    645,950       634,053       717,489       613,117       601,484  

Average common shares outstanding – basic

    39,796       41,756       41,801       42,026       42,455  

Average common shares outstanding – diluted

    39,853       41,756       41,980       42,181       42,656  

 

(1)

During 2018, we recognized $98.0 million of impairment charges associated with the goodwill and intangible assets of our Allen Edmonds business.  Refer to Note 11 to the consolidated financial statements for further discussion.

(2) Interest expense, net in 2019 includes $6.0 million of accretion and fair value adjustments for the mandatory purchase obligation associated with the acquisition of Blowfish Malibu in July 2018.  Refer to Note 2 and Note 15 to the consolidated financial statements for further discussion.
(3)

Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software, intangibles and debt issuance costs, and debt discount.  The amortization of debt issuance costs and debt discount is reflected within interest expense, net in our consolidated statements of earnings (loss) and totaled $7.2 million in 2019, $2.2 million in 2018, $1.8 million in 2017, $1.7 million in 2016 and $1.2 million in 2015.  

(4)

Ending Caleres, Inc. shareholders' equity is calculated by dividing Caleres, Inc. shareholders' equity by common shares outstanding at the end of the respective periods.

 

 

All data presented reflects the fiscal year ended on the Saturday nearest to January 31.  Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to the selected financial data above.  Certain prior period information has been restated to conform to the current period presentation.

 

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

OVERVIEW

 

Recent Developments

In December 2019, COVID-19, a contagious respiratory illness, was first identified in Wuhan, China.  The worldwide spread of COVID-19 has caused travel and business disruption, as well as stock market volatility.  There have been government mandates to stay at home or avoid large gatherings of people and consumer fear of becoming ill continues to grow.  As a result, we have temporarily closed all of our Famous Footwear and Brand Portfolio stores in North America, effective March 19, 2020, for a minimum period of two weeks.  While we continue to operate our e-commerce businesses, we have experienced a loss in sales and earnings as a result of the significant decline in customer traffic, both at our own retail stores and at those of our wholesale customers.  Although the store closures are expected to be temporary, we cannot estimate the duration of the store closures and the impact to consumer sentiment, or the impact to the Company's financial operations and cash flows in 2020.  In addition, we rely upon the facilities of our third-party manufacturers and offices in China and other countries to support our international business, as well as to export our products throughout the world.  While we did experience some temporary disruption in our supply chain, the majority of our factory partners are now operational.

 

We are closely monitoring the changing landscape with respect to COVID-19 and taking actions to effectively manage our business and support our consumers, while ensuring the health and safety of our associates.  Nearly all associates have been empowered to work from home. We are taking steps to manage the Company's resources conservatively by reducing and/or deferring capital expenditures, inventory purchases and operating expenses to mitigate the adverse impact of the pandemic.  These steps include, but are not limited to, associate furloughs for a significant portion of our workforce and salary reductions for all remaining associates during the temporary store closures, including associates at our distribution centers and corporate offices; minimizing costs associated with our closed retail facilities; reducing marketing expenses and reducing variable expenses during the store closure period.  We also plan to reduce capital expenditures and defer Famous Footwear store remodels and planned store openings.  In addition, as a precautionary measure to increase its cash position and preserve financial flexibility given the uncertainty in the United States and global markets resulting from COVID-19, the Company has increased the borrowings on its revolving credit facility from $275.0 million at February 1, 2020 to $440.0 million at the date of this filing.  Borrowings under the revolving credit facility will bear interest at LIBOR plus a spread of between 1.25% and 1.5%.  Proceeds from the revolving credit facility may be used for working capital needs or general business purposes.

 

Business Overview

We are a global footwear company with annual net sales of $2.9 billion.  Our shoes are worn by people of all ages and our mission is to inspire people to feel great...feet first.  We offer the consumer a powerful portfolio of footwear brands built on deep consumer insights generating unwavering consumer loyalty and trust.  As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points.  We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels.  A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands.  Our business strategy is focused on continued market share gains, growing our e-commerce business and leveraging our recent investments, while remaining focused on changing consumer demand.

 

Famous Footwear

Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and FamousFootwear.ca in Canada.  Famous Footwear is one of America’s leading familybranded footwear retailers with 949 stores at the end of 2019 and net sales of $1.6 billion in 2019.  Our focus for the Famous Footwear segment is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion and athletic footwear at a great price, coupled with exclusive products.

 

Brand Portfolio

Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns.  The segment is comprised of the Naturalizer, Sam Edelman, Vionic, Allen Edmonds, Dr. Scholl's Shoes, Franco Sarto, LifeStride, Blowfish Malibu, Vince, Rykä, Bzees, Fergie, Carlos, Via Spiga, Veronica Beard and Zodiac brands.  Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace.  We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products.  Our Brand Portfolio segment operates 228 retail stores in the United States, Canada, China and Guam for our Naturalizer, Allen Edmonds and Sam Edelman brands.  This segment also includes our e-commerce businesses that sell our branded footwear.  In addition, during 2019, we announced a joint venture with Brand Investment Holding, a member of the Gemkell Group.  The joint venture expands our international presence by distributing our Naturalizer and Sam Edelman brands in greater China, including Hong Kong, Macau and Taiwan. 

 

Financial Highlights

The following is a summary of the financial highlights for 2019:

 

 

Consolidated net sales increased $86.8 million, or 3.1%, to $2,921.6 million in 2019, compared to $2,834.8 million last year, driven by our 2018 acquisitions of Vionic and Blowfish Malibu, which contributed net sales growth of $132.1 million and $40.7 million, respectively, net of eliminations ($132.6 million and $46.5 million, respectively, to the Brand Portfolio segment).  Sales growth from acquisitions was partially offset by lower sales of certain brands in our Brand Portfolio segment, including Sam Edelman and Allen Edmonds.  Our Famous Footwear segment experienced an $18.7 million, or 1.2%, decrease in net sales attributable to the decline in the number of our retail stores, while same-store sales improved by 2.0%.

 

 

Consolidated operating earnings increased to $103.8 million in 2019, compared to $0.4 million last year.  The increase was primarily driven by the $98.0 million impairment charge in 2018 related to goodwill and intangible assets for our Allen Edmonds business, and a full year of earnings contribution from our 2018 acquisitions of Vionic and Blowfish Malibu, as described below.

 

 

Consolidated net income attributable to Caleres, Inc. was $62.8 million, or $1.53 per diluted share, in 2019, compared to a net loss of $5.4 million, or $0.13 per diluted share, last year.

 

 

18

 

The following items should be considered in evaluating the comparability of our 2019 and 2018 results:
 

 

Acquisition of Vionic – On October 18, 2018, we acquired the Vionic business for $360.7 million, which was funded with borrowings under our revolving credit agreement.  Vionic contributed net sales of $177.4 million in 2019 and $45.3 million during the period from acquisition through February 2, 2019.  In aggregate, we incurred charges related to the acquisition and integration of Vionic of $7.7 million ($5.7 million on an after-tax basis, or $0.14 per diluted share) during 2019 and $13.4 million ($9.9 million on an after-tax basis, or $0.23 per diluted share) during 2018.  These charges included $5.8 million and $8.9 million of incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting in 2019 and 2018, respectively, and $1.9 million and $4.5 million of acquisition and integration-related costs in 2019 and 2018, respectively, which are presented as restructuring and other special charges, net. Refer to Note 2 and Note 5 to the consolidated financial statements for further discussion.
     
  Acquisition of Blowfish Malibu – On July 6, 2018, we acquired a controlling interest in Blowfish Malibu. Blowfish Malibu contributed net sales of $55.8 million in 2019 and $15.2 million during the period from acquisition through February 2, 2019.  We incurred acquisition and integration-related charges of $2.0 million ($1.6 million on an after-tax basis, or $0.04 per diluted share) during 2018, including $1.7 million of incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting, and $0.3 million of other acquisition and integration-related costs, which are presented as restructuring and other special charges, net.  There were no corresponding charges in 2019.  Refer to Note 2 and Note 5 to the consolidated financial statements for further discussion.  In addition, as discussed further in Note 2 and Note 15 to the consolidated financial statements, the noncontrolling interest is subject to a mandatory purchase obligation after a three-year period, based upon an earnings multiple formula.  During 2019, we recorded fair value adjustments of $5.4 million ($4.0 million on an after-tax basis, or $0.10 per diluted share), which is recorded as interest expense, net in the consolidated statement of earnings.

 

  Incentive and share-based compensation plans – During 2019, our incentive and share-based compensation expenses decreased by approximately $18.3 million compared to 2018, due to lower anticipated payments associated with these plans and lower expenses for our cash-equivalent restricted stock units granted to directors, reflecting the Company's lower stock price.
     
  Expense containment initiatives – We incurred charges of $15.0 million ($11.2 million on an after-tax basis, or $0.27 per diluted share) during 2019, related to our expense containment initiatives, with no corresponding charges last year.  These costs included employee-related costs for severance, including health care benefits and enhanced pension benefits, primarily associated with the Voluntary Early Retirement Program ("VERP") in the fourth quarter of 2019.  We anticipate annualized savings of between $8 million and $10 million as a result of these initiatives.  
     
  Lease Accounting – We adopted Accounting Standards Codification ("ASC") Topic 842, Leases ("ASC 842"), during the first quarter of 2019 using the modified retrospective transition method.  Prior period financial information in the consolidated financial statements has not been adjusted and is presented under the guidance in ASC 840, Leases ("ASC 840").  As a result of the adoption of ASC 842, we recorded operating lease right-of-use assets of $729.2 million and lease liabilities of $791.7 million as of February 2, 2019.  In addition, adoption of the standard has resulted in higher asset impairment charges for under-performing retail stores as a direct result of including the related right-of-use asset in the asset group that is evaluated for impairment.  We recognized $4.9 million of impairment charges on lease right-of-use assets during 2019 with no corresponding impairment charges in 2018.  
     
  Brand exits – In connection with the decision in 2019 to exit our Carlos brand and reposition our Via Spiga brand, we incurred incremental costs of $3.5 million ($2.6 million on an after-tax basis, or $0.06 per diluted share).  Of these charges, $3.0 million primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the statements of earnings (loss).  The remaining $0.5 million represents severance and other related costs and is presented in restructuring and other special charges.  In 2018, we decided to exit two of our Brand Portfolio brands, Diane von Furstenberg ("DVF") and George Brown Bilt ("GBB").  In connection with that decision, we incurred costs of $2.4 million ($1.8 million on an after-tax basis, or $0.04 per diluted share). Of these charges, $1.8 million primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the statements of earnings (loss) and the remaining $0.6 million for severance and other related costs is presented in restructuring and other special charges. Refer to Note 5 to the consolidated financial statements for further discussion.
     
  Impairment of goodwill and intangible assets – During 2018, we recorded impairment charges of $98.0 million ($83.0 million on an after-tax basis, or $1.93 per diluted share) for the impairment of goodwill and intangible assets for our Allen Edmonds business.  The impairment charges were driven by several factors, including the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results in 2018 contributed to the need for the impairment charges.  There were no corresponding impairment charges in 2019.  See Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.
     
 

Logistics transition – During the fourth quarter of 2018, we incurred costs of $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) associated with the transition from our third-party operated warehouse in Chino, California to our new company-operated Brand Portfolio warehouse facilities in California, as well as the transition from our Allen Edmonds distribution center in Port Washington, Wisconsin to our retail distribution center in Lebanon, Tennessee.  In addition to the fourth quarter transition costs, we also incurred approximately $7 million of initial start-up and duplicate expenses earlier in 2018 associated with the distribution center transitions.  Refer to Note 5 to the consolidated financial statements for further discussion.

     
 

Acquisition, integration and reorganization of men's brands – During 2018, we incurred costs of $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share) related to the integration and reorganization of our men's brands, primarily to consolidate and relocate certain business functions into our St. Louis headquarters and to reduce and optimize manufacturing capacity in our Port Washington, Wisconsin facility.  These charges were recorded as restructuring and other special charges, net on the consolidated statements of earnings (loss).  There were no corresponding costs incurred in 2019.  Refer to Note 2 and Note 5 to the consolidated financial statements for additional information.

     
 

Segment Presentation – During the first quarter of 2019, we changed our segment presentation to present net sales of the Brand Portfolio segment inclusive of both external and intersegment sales, with the elimination of intersegment sales and profit from Brand Portfolio to Famous Footwear reflected within the Eliminations and Other category.  This presentation reflects the independent business models of both Brand Portfolio and Famous Footwear, as well as growth in intersegment activity driven by the acquisitions of Vionic and Blowfish Malibu.  Prior period information has been recast to conform to the current presentation

 

19

 

Metrics Used in the Evaluation of Our Business

The following are a couple of key metrics by which we evaluate our business and make strategic decisions:  

 

Same-store sales

The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year.  Management uses the same-store sales metric as a measure of an individual store's success to determine whether it is performing in line with expectations.  Our same-store sales metric is calculated by comparing the sales in stores that have been open at least 13 months to the comparable retail calendar weeks in the prior year.  Relocated stores are treated as new stores and closed stores are excluded from the calculation.  The sales change from new and closed stores, net metric reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.  E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation.  We believe the same-store sales metric is useful to shareholders and investors in determining the portion of our net sales derived from growth in existing locations compared to the portion derived by the opening of new stores. 

 

Sales per square foot

The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store.  Management uses the sales per square foot metric as a measure of an individual store's success to determine whether it is performing in line with expectations.  The sales per square foot metric presented below is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period. 

 

 

Comparison of Financial Results

The following sections discuss the consolidated and segment results of our operations for the year ended February 1, 2020 compared to the year ended February 2, 2019.  For  a discussion of the year ended February 2, 2019 compared to the year ended February 3, 2018, refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended February 2, 2019.

 

 

CONSOLIDATED RESULTS

 
   

2019

   

2018

   

2017

 
           

% of

           

% of

           

% of

 

($ millions)

         

Net Sales

           

Net Sales

           

Net Sales

 

Net sales

  $ 2,921.6       100.0 %   $ 2,834.8       100.0 %   $ 2,785.6       100.0 %

Cost of goods sold

    1,737.2       59.5 %     1,678.5       59.2 %     1,617.0       58.0 %

Gross profit

    1,184.4       40.5 %     1,156.3       40.8 %     1,168.6       42.0 %

Selling and administrative expenses

    1,065.8       36.5 %     1,041.8       36.7 %     1,036.0       37.2 %

Impairment of goodwill and intangible assets

          %     98.0       3.5 %           %

Restructuring and other special charges, net

    14.8       0.4 %     16.1       0.6 %     4.9       0.2 %

Operating earnings

    103.8       3.6 %     0.4       0.0 %     127.7       4.6 %

Interest expense, net

    (33.1 )     (1.2 )%     (18.3 )     (0.6 )%     (17.3 )     (0.6 )%

Loss on early extinguishment of debt

          %     (0.2 )     (0.0 )%           %

Other income, net

    7.9       0.3 %     12.3       0.4 %     12.3       0.4 %

Earnings (loss) before income taxes

    78.6       2.7 %     (5.8 )     (0.2 )%     122.7       4.4 %

Income tax (provision) benefit

    (16.5 )     (0.6 )%     0.3       0.0 %     (35.5 )     (1.3 )%

Net earnings (loss)

    62.1       2.1 %     (5.5 )     (0.2 )%     87.2       3.1 %

Net (loss) earnings attributable to noncontrolling interests

    (0.7 )     0.0 %     (0.1 )     (0.0 )%     0.0       0.0 %

Net earnings (loss) attributable to Caleres, Inc.

  $ 62.8       2.1 %   $ (5.4 )     (0.2 )%   $ 87.2       3.1 %

 

Net Sales

Net sales increased $86.8 million, or 3.1%, to $2,921.6 million in 2019, compared to $2,834.8 million last year, primarily reflecting the impact of our acquisitions in 2018.  However, we experienced weakness in the fashion footwear market during the second half of 2019, in particular with lower sales to the value channel and lower demand for closeout products.  Our Brand Portfolio segment reported a $92.9 million, or 7.1%, increase in net sales, driven by sales from our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018.  On a consolidated basis, Vionic and Blowfish Malibu contributed $132.1 million and $40.7 million in net sales growth, respectively, for 2019 ($132.6 million and $46.5 million, respectively, to the Brand Portfolio segment).  The increase in sales from acquisitions was partially offset by lower sales from our Sam Edelman, Allen Edmonds, Dr. Scholl's and Naturalizer brands.  Net sales of our Famous Footwear segment decreased $18.7 million, or 1.2%, primarily driven by a decrease in our store base (43 fewer stores at the end of 2019 as compared to the end of 2018).

 

Gross Profit

Gross profit increased $28.1 million, or 2.4%, to $1,184.4 million in 2019, compared to $1,156.3 million in 2018 driven by our net sales growth.  As a percentage of net sales, our gross profit rate decreased to 40.5% in 2019, compared to 40.8% in 2018, reflecting the promotional retail environment and a higher mix of e-commerce business.  Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses.  Cost of goods sold in 2019 includes $5.8 million related to the amortization of the inventory fair value adjustment required by purchase accounting from our Vionic acquisition and $3.0 million of incremental cost of goods sold associated with the decision to exit our Carlos brand and reposition our Via Spiga brand.  Cost of goods sold in 2018 included special charges of $10.6 million related to the amortization of the inventory adjustments required by purchase accounting from our Vionic and Blowfish Malibu acquisitions and $1.8 million of incremental cost of goods sold associated with the decision to exit our DVF and GBB brands.  During 2019, we also experienced a higher mix of wholesale versus retail sales.  Wholesale sales typically carry lower gross profit rates than retail sales.  Retail and wholesale net sales were 61% and 39%, respectively, in 2019 compared to 65% and 35%, respectively, in 2018.

We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses.  Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.

Selling and Administrative Expenses

Selling and administrative expenses increased $24.0 million, or 2.3%, to $1,065.8 million in 2019, compared to $1,041.8 million last year, driven by additional expenses associated with the full year impact of our acquired Vionic and Blowfish Malibu brands in 2018, including higher amortization expense on intangible assets, partially offset by lower expenses associated with cash and stock-based incentive compensation plans and lower store rent and facilities costs due to a smaller store base.  As a percentage of net sales, selling and administrative expenses decreased to 36.5% in 2019 from 36.7% last year.

 

 

 

 

Impairment of Goodwill and Intangible Assets

During 2018, we recognized impairment charges of $98.0 million ($83.0 million on an after-tax basis, or $1.93 per diluted share) for the impairment of goodwill and the tradename associated with our Allen Edmonds business.  The impairment charges were primarily driven by the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue.  In addition, rising interest rates and less favorable operating results contributed to the need for the 2018 impairment charges.  There were no corresponding impairment charges in 2019.  Refer to Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.

 

Restructuring and Other Special Charges, Net

Restructuring and other special charges were $14.8 million in 2019, compared to $16.1 million in 2018 as follows:

 

  Expense containment initiatives of $12.4 million ($9.2 million on an after-tax basis, or $0.22 per diluted share) in 2019, including employee-related costs for severance, health care and enhanced pension benefit, primarily associated with the VERP; 
 

Acquisition and integration-related costs for Vionic of $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) in 2019, compared to $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) in 2018;

  Brand Portfolio brand exit costs of $0.5 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) in 2019 related to the exit of our Carlos brand and repositioning of our Via Spiga brand, compared to $0.6 million ($0.5 million on an after-tax basis, or $0.01 per diluted share) in 2018 related to the exit of our DVF and GBB brands;
  Integration and reorganization costs related to our men's business in 2018 of $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share);
 

Transition costs related to our distribution centers of $4.5 million ($3.3 million on an after-tax basis, or $0.08 per diluted share) in 2018;

 

Costs associated with the restructuring of our retail operations of $0.4 million ($0.3 million on an after-tax basis, or $0.01 per diluted share) in 2018;

  Acquisition and integration-related costs for Blowfish Malibu of $0.3 million ($0.3 million on an after-tax basis, or $0.01 per diluted share) in 2018.

 

The nature of the above charges are more fully described in the Financial Highlights section above and Note 5 to the consolidated financial statements.

 

Operating Earnings

Operating earnings increased $103.4 million to $103.8 million in 2019, compared to $0.4 million last year, primarily reflecting the non-recurrence of the $98.0 million impairment charge related to goodwill and intangible assets in 2018 and a full year of earnings contribution from our 2018 acquisitions of Vionic and Blowfish Malibu, partially offset by the impacts of a more competitive and promotional retail environment.

 

Interest Expense, Net

Interest expense, net increased $14.8 million, or 80.9%, to $33.1 million in 2019, compared to $18.3 million last year, reflecting the full year impact of higher interest expense on our revolving credit agreement, which was used to fund the acquisition of Vionic in the third quarter of 2018, and accretion and fair value adjustment to the mandatory purchase obligation associated with the Blowfish Malibu acquisition of $6.0 million.  We anticipate interest expense to remain higher than historical levels as we pay down the revolving credit agreement and as we continue to remeasure the Blowfish Malibu mandatory purchase obligation each quarter until mid-2021.  Refer to Note 15 to the consolidated financial statements for additional information related to the mandatory purchase obligation. 

 

Other Income, Net

Other income, net decreased $4.4 million, or 35.8%, to $7.9 million in 2019, compared to $12.3 million in 2018, driven by the settlement charge associated with the VERP and lower return on assets for our domestic pension plans.  Refer to Note 6 to the consolidated financial statements for additional information related to our retirement plans.

 

Income Tax (Provision) Benefit 

Our consolidated effective tax rate was 21.0% in 2019, compared to 4.7% in 2018.  In 2019, our effective tax rate was impacted by discrete tax benefits totaling $1.4 million, primarily reflecting adjustments to tax rates in state and other international jurisdictions.  In 2018, our effective tax rate was impacted by several factors, including the non-deductibility of our goodwill impairment charge of $38.0 million, as further discussed in Note 11 to the consolidated financial statements.  In addition, discrete tax benefits totaling $5.9 million were recognized in 2018, primarily reflecting adjustments associated with the Tax Cuts and Jobs Act (the "Act") and related actions for state and other international jurisdictions (in aggregate, "income tax reform").  Refer to further discussion in Note 7 to the consolidated financial statements.  The effective tax rate in 2019 was also impacted by a higher mix of foreign earnings, as our foreign earnings are generally subject to lower tax rates.  If the impairment charges had not been recognized in 2018 and the discrete tax benefits had not been recognized in 2019 and 2018, the Company's effective tax rates would have been 22.7% and 22.3%, respectively.  Refer to Note 7 to the consolidated financial statements for additional information regarding our tax rates. 

 

Net Earnings (Loss) Attributable to Caleres, Inc.

Consolidated net earnings attributable to Caleres, Inc. was $62.8 million in 2019, compared to a net loss of $5.4 million last year, reflecting the factors described above.

 

Geographic Results

We have both domestic and foreign operations.  Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our e-commerce websites.  Foreign operations primarily consist of wholesale operations in the Far East and Canada, retail operations in Canada and China and the operation of our international e-commerce websites.  In addition, we license certain of our trademarks to third parties who distribute and/or operate retail locations internationally.  The Far East operations include first-cost transactions, where footwear is sold at foreign ports to customers who then import the footwear into the United States and other countries.  The breakdown of domestic and foreign net sales and earnings before income taxes is as follows:

 

   

2019

   

2018

   

2017

 
           

Earnings Before

           

Earnings (Loss) Before

           

Earnings Before

 

($ millions)

 

Net Sales

   

Income Taxes

   

Net Sales

   

Income Taxes

   

Net Sales

   

Income Taxes

 

Domestic

  $ 2,727.1     $ 37.3     $ 2,656.9     $ 40.0     $ 2,611.5     $ 78.2  

Foreign

    194.5       41.3       177.9       (45.8 )     174.1       44.5  
    $ 2,921.6     $ 78.6     $ 2,834.8     $ (5.8 )   $ 2,785.6     $ 122.7  

 

As a percentage of sales, the pre-tax profitability on foreign sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs in domestic earnings.  In 2018, our foreign earnings were impacted by the goodwill and tradename impairment charges described earlier.

 

 

 

FAMOUS FOOTWEAR

 
   

2019

   

2018

   

2017

 
           

% of

           

% of

           

% of

 

($ millions)

         

Net Sales

           

Net Sales

           

Net Sales

 

Net sales

  $ 1,588.1       100.0 %   $ 1,606.8       100.0 %   $ 1,637.6       100.0 %

Cost of goods sold

    912.7       57.5 %     916.0       57.0 %     913.2       55.8 %

Gross profit

    675.4       42.5 %     690.8       43.0 %     724.4       44.2 %

Selling and administrative expenses

    595.0       37.5 %     605.1       37.7 %     631.6       38.6 %

Restructuring and other special charges, net

    3.5       0.2 %     0.4       0.0 %     0.6       0.0 %

Operating earnings

  $ 76.9       4.8 %   $ 85.3       5.3 %   $ 92.2       5.6 %
                                                 

Key Metrics

                                               

Same-store sales % change (on a 52-week basis)

    2.0 %             1.5 %             1.4 %        

Same-store sales $ change (on a 52-week basis)

  $ 31.1             $ 23.8             $ 21.7          

Sales change from 53rd week

  $ -             $ (19.7 )           $ 19.7          

Sales change from new and closed stores, net (on a 52-week basis)

  $ (49.3 )           $ (34.5 )           $ 5.5          

Impact of changes in Canadian exchange rate on sales

  $ (0.5 )           $ (0.4 )           $ 0.6          
                                                 

Sales per square foot, excluding e-commerce (on a 52-week basis)

  $ 223             $ 220             $ 218          

Square footage (thousands sq. ft.)

    6,281               6,552               6,972          
                                                 

Stores opened

    12               17               34          

Stores closed

    55               51               63          

Ending stores

    949               992               1,026          

 

Net Sales

Net sales decreased $18.7 million, or 1.2%, to $1,588.1 million in 2019, compared to $1,606.8 million last year, primarily driven by a decrease in our store base, which resulted in a $49.3 million decrease in sales from new and closed stores.  Since 2017, we have had net closures of 77 stores, or 8%, as we continue to focus on optimizing our store base and eliminating underperforming locations.  This decrease was partially offset by a 2.0% increase in same-store sales and continued growth in e-commerce sales.  Famous Footwear experienced strong growth in sales of lifestyle athletic product and a positive trend in boots, partially offset by weakness in dress shoes. Sales per square foot, excluding e-commerce, increased 1.0% to $223, compared to $220 last year.  During the first quarter of 2019, we introduced a new customer loyalty program, Famously You Rewards ("Rewards"), which drove an increase in sales to members and retention rate improvement.  Members of our customer loyalty program continue to account for a majority of the segment's sales, with approximately 78% of our net sales to loyalty program members in 2019 and 76% in 2018.  We plan to continue to evolve this program to strengthen the connections with our consumers. 

 

Gross Profit

Gross profit decreased $15.4 million, or 2.2%, to $675.4 million in 2019, compared to $690.8 million in 2018, reflecting lower net sales and a lower gross profit rate, driven by a more competitive and promotional retail environment.  As a percentage of net sales, our gross profit rate decreased to 42.5% in 2019, compared to 43.0% in 2018, reflecting the promotional retail environment and higher freight expenses due to strong growth in e-commerce sales in 2019.  We expect the trend toward a higher mix of e-commerce sales to continue as a result of the investment we have made in our e-commerce platform, allowing us to offer new capabilities, enhanced customer experiences and the ability to quickly adapt to changing consumer dynamics.

 

Selling and Administrative Expenses

Selling and administrative expenses decreased $10.1 million, or 1.7%, to $595.0 million during 2019 compared to $605.1 million last year.  The decrease was driven primarily by lower rent and facilities expense attributable to our smaller store base (43 fewer stores at the end of 2019 versus 2018), partially offset by higher marketing expenses, and an increase in impairment charges related to lease right-of-use assets subsequent to the adoption of ASC 842, as further discussed in Note 1 to the consolidated financial statements.  The increase in marketing expense is attributable to additional marketing to support the new Rewards program that was launched in the first quarter of 2019, as well as additional television and radio advertising during the key back-to-school and holiday periods.  As a percentage of net sales, selling and administrative expenses decreased slightly to 37.5% in 2019 from 37.7% last year.

 

Restructuring and Other Special Charges, Net

We incurred restructuring and other special charges of $3.5 million and $0.4 million in 2019 and 2018, respectively, related to the expense containment initiatives, as further discussed in Note 5 to the consolidated financial statements. 

 

Operating Earnings

Operating earnings decreased $8.4 million, or 9.8%, to $76.9 million for 2019, compared to $85.3 million last year, reflecting lower net sales, a decline in gross profit rate and the other factors described above. As a percentage of net sales, our operating earnings decreased to 4.8% in 2019 from 5.3% in 2018.

 

 

 

BRAND PORTFOLIO

 
   

2019

   

2018

   

2017

 
           

% of

           

% of

           

% of

 

($ millions)

         

Net Sales

           

Net Sales

           

Net Sales

 

Net sales

  $ 1,406.5       100.0 %   $ 1,313.6       100.0 %   $ 1,233.1       100.0 %

Cost of goods sold

    899.9       64.0 %     846.7       64.5 %     788.9       64.0 %

Gross profit

  $ 506.6       36.0 %   $ 466.9       35.5 %   $ 444.2       36.0 %

Selling and administrative expenses

    442.7       31.5 %     399.1       30.4 %     362.4       29.4 %

Impairment of goodwill and intangible assets

          %     98.0       7.5 %           %

Restructuring and other special charges, net

    5.7       0.4 %     10.6       0.8 %     1.6       0.1 %

Operating earnings (loss)

  $ 58.2       4.1 %   $ (40.8 )     (3.1 )%   $ 80.2       6.5 %
                                                 

Key Metrics

                                               

Direct-to-consumer (% of net sales) (1)

    42 %             39 %             26 %        

Wholesale/retail sales mix (%)

 

81%/19%

           

80%/20%

           

74%/26%

         

Change in wholesale net sales ($) (2)

  $ 107.6             $ 85.7             $ (1.7 )        

Unfilled order position at year-end

  $ 295.4             $ 331.6             $ 262.1          
                                                 

Same-store sales % change (on a 52-week basis) (3)

    (5.8 )%             (0.1 )%             6.4 %        

Same-store sales $ change (on a 52-week basis) (3)

  $ (15.5 )           $ (0.1 )           $ 7.5          

Sales change from 53rd week

  $ -             $ (3.7 )           $ 3.7          

Sales change from new and closed stores, net (on a 52-week basis) (4)

  $ 1.5             $ (1.3 )           $ 148.2          

Impact of changes in Canadian exchange rate on retail sales

  $ (0.7 )           $ (0.6 )           $ 1.0          
                                                 

Sales per square foot, excluding e-commerce (on a 52-week basis) (3)

  $ 390             $ 417             $ 327          

Square footage, end of year (thousands sq. ft.)

    387               394               405          
                                                 

Stores opened

    11               7               15          

Stores closed

    12               14               13          

Ending stores

    228               229               236          

 

  (1) Direct-to-consumer includes sales of our retail stores and e-commerce sites, sales to online-only retailers and sales through customers’ websites that we fulfill on a drop-ship basis.
 

(2)

The wholesale net sales change includes sales from our acquired Vionic brand of $178.4 million and $45.8 million for 2019 and 2018, respectively, and sales from our acquired Blowfish Malibu brand of $64.6 million and $18.0 million for 2019 and 2018, respectively.

  (3) Because these metrics require stores to be included in our results for 13 continuous months, the calculations for 2017 exclude our Allen Edmonds business, which was acquired in December 2016.
  (4)

This metric for 2017 includes net sales from our 69 acquired Allen Edmonds retail stores.  The sales change from these retail stores for 2019 and 2018 is included in the same-store sales metric.

 

Net Sales

Net sales increased $92.9 million, or 7.1%, to $1,406.5 million in 2019, compared to $1,313.6 million last year.  The increase primarily reflects our acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018, which contributed $132.6 million and $46.5 million in net sales growth, respectively, for 2019.  The increase in sales from our acquisitions was partially offset by lower sales from our Sam Edelman, Allen Edmonds, Dr. Scholl's and Naturalizer brands.  The organic sales decline was driven by a decline in women's fashion footwear and slowing of growth in sport-inspired footwear.  We also experienced challenging selling conditions in the value channel and a change in inventory management practices by retailers, which in some instances limited orders.  We continue to strategically manage our portfolio of brands.  During 2019, we entered into a partnership with Veronica Beard and transformed and relaunched the Zodiac brand, while making the decision to shift away from the Carlos Santana brand and reposition the Via Spiga brand.  We opened 11 stores and closed 12 stores during 2019, resulting in a total of 228 stores at the end of 2019.  Sales per square foot, excluding e-commerce, decreased 6.5% to $390, compared to $417 last year.  Our unfilled order position for our wholesale business decreased $36.2 million, or 10.9%, to $295.4 million at the end of 2019, compared to $331.6 million at the end of last year.  The decrease in our backlog order levels reflects an industry shift to a more dynamic and on-demand ordering pattern, with lower initial orders but higher replenishment later in the season. Due to the impact of COVID-19, many of our wholesale customers have sought to cancel orders due to the temporary closure of retail stores and the uncertainty surrounding the duration of the pandemic and customer sentiment. The impact on our unfilled wholesale order position is unknown at this time.

 

Gross Profit

Gross profit increased $39.7 million, or 8.5%, to $506.6 million in 2019, compared to $466.9 million last year, primarily reflecting net sales growth, which was fueled by recent acquisitions.  This increase was partially offset by a more competitive and promotional retail environment, which yielded a lower volume of replenishment orders for our product, as well as a higher mix of e-commerce business.  Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses.  In addition, during 2019, the Brand Portfolio segment recognized a total of $8.8 million of incremental cost of goods sold, compared to $12.4 million in 2018.  Cost of goods sold in 2019 includes $5.8 million ($4.3 million on an after-tax basis, or $0.10 per diluted share) of incremental cost of goods sold related to purchase accounting inventory adjustments and $3.0 million ($2.2 million on an after-tax basis, or $0.05 per diluted share) associated with the decision to exit our Carlos brand and reposition our Via Spiga brand, as further discussed in the Overview section above.  In 2018, cost of goods sold includes $10.6 million ($7.9 million on an after-tax basis, or $0.18 per diluted share) associated with purchase accounting inventory adjustments and $1.8 million ($1.3 million on an after-tax basis, or $0.03 per diluted share) associated with the decision to exit our DVF and GBB brands.  As a percentage of sales, our gross profit rate increased to 36.0% in 2019, compared to 35.5% last year.

 

Selling and Administrative Expenses

Selling and administrative expenses increased $43.6 million, or 10.9%, to $442.7 million during 2019, compared to $399.1 million last year, driven by higher expenses from our Vionic and Blowfish Malibu acquisitions, partially offset by lower expenses associated with cash and stock-based incentive compensation expenses.  As a percentage of net sales, selling and administrative expenses increased to 31.5% in 2019 from 30.4% last year, reflecting the above named factors.

 

 

 

 

 

Impairment of Goodwill and Intangible Assets

We incurred impairment charges of $98.0 million during 2018 for the impairment of goodwill and the tradename for our Allen Edmonds business.  The impairment charges were driven by several factors, including the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue.  In addition, rising interest rates and less favorable operating results contributed to the need for the 2018 impairment charges.  There were no corresponding impairment charges in 2019.  See Note 1 and Note 11 to the consolidated financial statements for additional information related to the impairment.

 

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $5.7 million in 2019 were comprised of $5.1 million for expense containment initiatives and $0.6 million of costs associated with the decision to exit the Carlos brand.  In 2018, restructuring and other special charges of $10.6 million were comprised of $5.4 million for the integration and reorganization of our men's brands, $4.5 million of expenses related to the transition of two of our distribution centers and $0.6 million of costs associated with the decision to exit the DVF and GBB brands.  Refer to Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.

 

Operating Earnings (Loss)

Operating earnings were $58.2 million in 2019, compared to an operating loss of $40.8 million last year, primarily reflecting the $98.0 million impairment of goodwill and intangible assets in 2018 and other factors described above.  As a percentage of net sales, operating earnings were 4.1% in 2019, compared to an operating loss of 3.1% last year.

 

 

ELIMINATIONS AND OTHER

   

2019

   

2018

   

2017

 
           

% of

           

% of

           

% of

 

($ millions)

         

Net Sales

           

Net Sales

           

Net Sales

 

Net sales

  $ (73.0 )     100.0 %   $ (85.5 )     100.0 %   $ (85.1 )     100.0 %

Cost of goods sold

    (75.4 )     103.3 %     (84.1 )     64.5 %     (85.1 )     100.0 %

Gross profit

  $ 2.4       (3.3 )%   $ (1.4 )     1.6 %   $ -       %

Selling and administrative expenses

    28.0       (38.4 )%     37.5       (43.9 )%     42.0       (49.3 )%

Restructuring and other special charges, net

    5.6       (7.7 )%     5.2       (6.1 )%     2.7       (3.2 )%

Operating (loss) earnings

  $ (31.2 )     (42.7 )%   $ (44.1 )     51.5 %   $ (44.7 )     52.5 %

 

The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries. 

 

The net sales elimination of $73.0 million for 2019 is $12.5 million, or 14.6%, lower than in 2018, reflecting lower product sold from our Brand Portfolio segment to Famous Footwear. 

 

Selling and administrative expenses decreased $9.5 million, or 25.3%, to $28.0 million in 2019, compared to $37.5 million last year, primarily driven by lower expenses for our cash and share-based incentive compensation plans, partially offset by higher unallocated expenses related to our logistics facilities.

 

Restructuring and other special charges of $5.6 million in 2019 were comprised of $3.8 million for expense containment initiatives and $1.8 million for Vionic integration-related costs.  In 2018, restructuring and other special charges of $5.2 million included acquisition and integration-related costs for Vionic and Blowfish Malibu totaling $4.8 million and integration and reorganization of our men's brands of $0.4 million.

 

RESTRUCTURING AND OTHER INITIATIVES

During 2019, we incurred restructuring and other special charges of $14.8 million, including approximately $12.3 million related to our expense containment initiatives, $1.9 million of acquisition and integration-related costs for Vionic, and $0.5 million related to the decision to exit our Carlos brand and reposition our Via Spiga brand.  In addition to the severance and benefits presented as restructuring and other special charges, we also incurred $2.7 million in special charges for our pension associated with the VERP, which is included in other income, net in the consolidated statement of earnings, as further discussed in Note 6 to the consolidated financial statements.

 

During 2018, we incurred restructuring and other special charges of $16.1 million, including $5.8 million related to the integration and reorganization of our men's business, $4.5 million associated with the transition of two of our distribution centers, $4.5 million of acquisition and integration-related costs for Vionic, $0.6 million related to the decision to exit our DVF and GBB brands, $0.4 million related to the restructuring of our retail operations, and $0.3 million of acquisition and integration-related costs for Blowfish Malibu.

 

Refer to the Financial Highlights section above and Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.

 

IMPACT OF INFLATION AND CHANGING PRICES

Although inflation has slowed in recent years, it is still a factor in our economy.  While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact over the last three years.  Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates.  For example, our products are manufactured in other countries, and a decline in the value of the U.S. dollar and the impact of labor shortages in China or other countries, or the imposition of tariffs, may result in higher product costs.  Similarly, any potential significant shortage of quantities or increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations.  In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease.  Moreover, increases in inflation may not be matched by increases in wages, which also could have a negative impact on consumer spending.  If we incur increased costs that are unable to be recovered through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected.  In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of the cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs.  Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors.

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

 

($ millions)

 

February 1, 2020

   

February 2, 2019

   

(Decrease) Increase

 

Borrowings under revolving credit agreement

  $ 275.0     $ 335.0     $ (60.0 )

Long-term debt

    198.4       197.9       0.5  

Total debt

  $ 473.4     $ 532.9     $ (59.5 )

 

 

 

Total debt obligations decreased $59.5 million to $473.4 million at the end of 2019, compared to $532.9 million at the end of last year, reflecting the repayment of borrowings under our revolving credit agreement, which was used to fund the acquisition of Vionic in October 2018.  Net interest expense in 2019 was $33.1 million, compared to $18.3 million in 2018.  The increase in net interest expense in 2019 was attributable to higher average borrowings under our revolving credit agreement and the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 2 and Note 15 to the consolidated financial statements.

 

Credit Agreement

The Company maintains a revolving credit facility for working capital needs.  On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into the Former Credit Agreement, which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Former Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC.  Allen Edmonds and Vionic were joined to the Agreement as guarantors on December 13, 2016 and October 31, 2018, respectively.  After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement.  On January 18, 2019, the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") to extend the maturity date to January 18, 2024 and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to $600.0 million to an aggregate amount of up to $500.0 million, with the option to increase by up to $250.0 million.  The Credit Agreement also reduces upfront and unused borrowing fees, provides for less restrictive covenants and offers more flexibility.

 

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

 

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread.  The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement.  There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.  Refer to further discussion regarding the Credit Agreement in Note 12 to the consolidated financial statements.

 

At February 1, 2020, we had $275.0 million borrowings and $10.9 million in letters of credit outstanding under the Credit Agreement.  Total borrowing availability was $214.1 million at February 1, 2020.  As discussed in the Overview section above, as a precautionary measure to increase liquidity during the uncertainty of COVID-19, the Company has increased the borrowings on its revolving credit facility from $275.0 million at February 1, 2020 to $440.0 million at the date of this filing.  Borrowings under the revolving credit facility, which will be used for working capital needs, will bear interest at LIBOR plus a spread of between 1.25% and 1.5%. 

 
The accordion feature of our revolving credit facility provides us with a maximum of $250 million in additional borrowing capacity subject to our compliance with covenants and restrictions under the Credit Agreement.  Currently, based on our level of inventory and accounts receivable, the accordion feature would provide approximately $100.0 million of additional borrowing capacity.  We were in compliance with all covenants and restrictions under the Credit Agreement as of February 1, 2020.  In March 2020, Moody's and S&P downgraded our credit rating.  Further deterioration in our credit ratings or non-compliance with any covenants or restrictions under the Credit Agreement may impact our ability to access borrowings or capital, as well as negatively impact interest rates and the cost of borrowings.

$200 Million Senior Notes 

On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 2023 (the "Senior Notes").  The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bear interest at 6.25%, which is payable on February 15 and August 15 of each year.  The Senior Notes mature on August 15, 2023.  We may redeem some or all of the Senior Notes at various redemption prices, as further discussed in Note 12 to the consolidated financial statements.

 

The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets.  As of February 1, 2020, we were in compliance with all covenants and restrictions relating to the Senior Notes.

 

 

 

Working Capital and Cash Flow

 

   

February 1, 2020

   

February 2, 2019

 

Working capital ($ millions) (1)

  $ 31.3     $ 123.1  

Current ratio (2)

 

1.04:1

   

1.14:1

 

Debt-to-capital ratio (3)

    42.2 %     45.6 %

 

 

(1)

Working capital has been computed as total current assets less total current liabilities.  The working capital as of February 1, 2020 includes $127.9 million of operating lease obligations as a result of the adoption of ASC 842, as further discussed in Note 1 to the consolidated financial statements.

 

(2)

The current ratio has been computed by dividing total current assets by total current liabilities.  The current ratio as of February 1, 2020 includes $127.9 million of operating lease obligations.

 

(3)

Debt-to-capital has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity.

 

Working capital at February 1, 2020, was $31.3 million, which was $91.8 million lower than at February 2, 2019.  Our current ratio was 1.04 to 1 at February 1, 2020, compared to 1.14 to 1 at February 2, 2019.  The decrease in working capital and the current ratio primarily reflects the impact of the 2019 adoption of Accounting Standards Codification ("ASC") 842, Leases, on the balance sheet as further discussed in Note 1 to the consolidated financial statements, including the addition of current operating lease obligations of $127.9 million.  The impact of the current operating lease obligations was partially offset by an increase in cash and cash equivalents, despite the $60.0 million of net repayments on borrowings under our revolving credit agreement.  Our debt-to-capital ratio was 42.2% as of February 1, 2020, compared to 45.6% at February 2, 2019, primarily reflecting lower borrowings under our revolving credit agreement.

 

   

2019

   

2018

    Increase (Decrease) in Cash and Cash Equivalents  

Net cash provided by operating activities

  $ 170.8     $ 129.6     $ 41.2  

Net cash used for investing activities

    (49.5 )     (436.4 )     386.9  

Net cash (used for) provided by financing activities

    (106.3 )     273.2       (379.5 )

Effect of exchange rate changes on cash and cash equivalents

    0.0       (0.2 )     0.2  

Increase (decrease) in cash and cash equivalents

  $ 15.0     $ (33.8 )   $ 48.8  

 

 

Cash provided by operating activities was $41.2 million higher in 2019 than last year, reflecting the following factors:

 

 

A decrease in inventories in 2019, compared to an increase in 2018 reflecting the earlier receipt of spring product from our Brand Portfolio factory partners in 2018 due to an earlier holiday shutdown period for Chinese New Year, and

 

A decrease in receivables in 2019 driven by lower wholesale sales in the fourth quarter, compared to an increase in 2018, partially offset by

 

A decrease in trade accounts payable in 2019, reflecting the lower level of inventory, compared to an increase in 2018, and

 

A decrease in accrued expenses and other liabilities in 2019, compared to an increase in 2018.

 

Cash used for investing activities was $386.9 million lower in 2019 than last year, primarily reflecting the acquisition costs of Blowfish Malibu in July 2018 and Vionic in October 2018, as further discussed in Note 2 to the consolidated financial statements.  In addition, we had lower purchases of property and equipment in 2019.  In 2020, we expect to reduce our purchases of property and equipment and capitalized software to between $25 million and $35 million.  However, we may consider further reductions in capital expenditures for 2020, depending on the duration and severity of the impact of the COVID-19 pandemic on our business and financial results.

Cash used for financing activities was $379.5 million higher in 2019 than last year, primarily due to the net repayments on our revolving credit agreement of $60.0 million in 2019 compared to net borrowings of $335 million under our revolving credit agreement in 2018 primarily for the acquisition of Vionic.

We paid dividends of $0.28 per share in each of 2019, 2018 and 2017.  The 2019 dividends marked the 97th year of consecutive quarterly dividends.  On March 5, 2020, the Board of Directors declared a quarterly dividend of $0.07 per share, payable April 2, 2020, to shareholders of record on March 18, 2020, marking the 388th consecutive quarterly dividend to be paid by the Company.  The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors.  However, we presently expect that dividends will continue to be paid.

 

 

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Certain accounting issues require management estimates and judgments for the preparation of financial statements.  Our most significant policies requiring the use of estimates and judgments are listed below.

 

Inventories

Inventories are one of our most significant assets, representing approximately 25% of total assets at the end of 2019.  We value inventories at the lower of cost and net realizable value with 87% of consolidated inventories using the last-in, first-out (“LIFO”) method.  An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time.  Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

 

We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current selling prices.  At our Famous Footwear segment and certain operations within our Brand Portfolio segment, we recognize markdowns when it becomes evident that inventory items will be sold at prices less than cost, plus the cost to sell the product.  This policy causes the gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment to be lower than the initial markup during periods when permanent price reductions are taken to clear product.  For the majority of our Brand Portfolio segment, we provide markdown reserves to reduce the carrying values of inventories to a level where, upon sale of the product, we will realize our normal gross profit rate.  We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment.  Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories.  The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.

 

We perform physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results.  We record estimated shrinkage between physical inventory counts based on historical results.  Inventory shrinkage is included as a component of cost of goods sold.

 

 

 

Goodwill and Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests.  In accordance with ASC 350, Intangibles-Goodwill and Other, a company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired.  If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.  If the recorded values of these assets are not recoverable, based on either the assessment screen or discounted cash flow analysis, goodwill impairment is recognized for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.  We perform impairment tests as of the beginning of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required.  Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present.

 

In 2019, we elected to perform the quantitative assessment for all reporting units.  The quantitative test is a fair value-based test applied at the reporting unit level, which is generally at or one level below the operating segment level.  The test compared the fair value of each reporting unit to the carrying value of that reporting unit.  This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity.  The fair value of the reporting unit is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows.  Projected net sales, gross profit, selling and administrative expenses, capital expenditures and working capital requirements are based on the past performance of the reporting units as well as our internal projections.  Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations.  We also considered assumptions that market participants may use.  The estimates of the fair values of our reporting units were based on the best information available to us as of the date of the assessment.  In our quantitative assessments of goodwill, our projected net sales growth rates, gross profit, selling and administrative expenses and discount rates require significant management judgment and are the assumptions to which the fair value calculation is the most sensitive.  Changes in any of these assumptions, including the impact of external factors such as interest rates, or the impact of the coronavirus outbreak and the resulting impact on our retail stores and stock price, could result in the calculated fair value falling below the carrying value in future assessments.  

 

We tested our indefinite-lived intangible assets utilizing the relief-from-royalty method to determine the estimated fair value of each indefinite-lived intangible asset.  The relief-from-royalty method estimates the theoretical royalty savings from ownership of the intangible asset.  Key assumptions used in our assessments include net sales projections, discount rates and royalty rates.  Royalty rates are established by management based on comparable trademark licensing agreements in the market.  The net sales projections, discount rates and royalty rates utilized in our quantitative assessments of indefinite-lived intangible assets require significant management judgment and are the assumptions to which the fair value calculation is most sensitive.  Changes in any of these assumptions could negatively impact the fair value calculation, potentially resulting in an impairment charge in future assessments.  

 

The goodwill impairment testing and other indefinite-lived intangible asset impairment reviews were performed as of the first day of our fourth fiscal quarter and there were no impairment charges recorded during 2019.  In 2018, we recorded non-cash impairment charges of $38.0 million for the impairment of goodwill of our Allen Edmonds reporting unit and $60.0 million for the impairment of the Allen Edmonds indefinite-lived tradename.  The fair values of our reporting units and indefinite-lived intangible assets were sufficiently in excess of the carrying values as of our most recent impairment testing date, except for the Vionic reporting unit, which was acquired in October 2018.  The relationship between the fair value and carrying value of a reporting unit is influenced by many factors, including the length of time that has passed since the reporting unit was initially acquired.  Refer to Note 11 to the consolidated financial statements for additional information related to goodwill and intangible assets.

 

Adoption of New Lease Accounting Standard

In the first quarter of 2019, we changed our method of accounting for leases due to the adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases ("ASC 842"), and the related amendments.  The adoption of ASC 842 resulted in the recognition of right-of-use operating lease assets and operating lease liabilities of approximately $729.2 million and $791.7 million, respectively, as of February 3, 2019.  The cumulative effect of adopting the standard resulted in an adjustment to retained earnings of $13.4 million upon adoption, which represented a reduction of the initial right-of-use asset for certain stores where the initial right-of-use asset was determined to exceed fair value.  Fair value of the right-of-use asset was determined using a discounted cash flow analysis, considering sublease discounts, market rent per square foot, marketing time and market discount rates.  Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term.  The majority of our leases do not provide an implicit rate and therefore, we used an incremental borrowing rate based on information available, including implied traded debt yield and seniority adjustments, at the adoption date to determine the present value of future payments.  The Company is a party to a significant number of lease contracts and certain aspects of adopting ASC 842, including the estimates of the incremental borrowing rate and impairment of the right-of-use asset upon adoption, required significant management judgment. Refer to Note 13 to the consolidated financial statements for additional information regarding ASC 842. 

 

Business Combination Accounting

We allocate the purchase price of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date.  We also identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill.  A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions.  We have historically relied in part upon the use of reports from third-party valuation specialists to assist in the estimation of fair values for intangible assets other than goodwill, inventory and fixed assets.  The carrying values of acquired receivables and trade accounts payable have historically approximated their fair values at the business combination date.  With respect to other acquired assets and liabilities, we use all available information to make our best estimates of their fair values at the business combination date.

 

Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities.  Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows.  Unanticipated events or circumstances may occur that could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.

 

During 2018, we acquired two businesses, Blowfish Malibu and Vionic.  Refer to further discussion in Note 2 to the consolidated financial statements.

 

Impact of Prospective Accounting Pronouncements

Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements as of February 1, 2020.

 

 

CONTRACTUAL OBLIGATIONS

The table below sets forth our significant future obligations by time period.  Further information on certain of these commitments is provided in the notes to our consolidated financial statements, which are cross-referenced in this table.  Our obligations outstanding as of February 1, 2020 include the following:

 

   

Payments Due by Period

 
           

Less Than

      1-3       3-5    

More Than

 

($ millions)

 

Total

   

1 Year

   

Years

   

Years

   

5 Years

 

Borrowings under Credit Agreement (1)

  $ 275.0     $     $     $ 275.0     $  

Long-term debt (2)

    200.0                   200.0        

Interest on long-term debt (2)

    50.0       12.5       25.0       12.5        

Operating lease commitments, including imputed interest (3)

    892.7       156.9       275.6       189.8       270.4  

Minimum license commitments

    12.0       9.4       2.6              

Purchase obligations (4)

    529.8       512.5       11.2       1.4       4.7  

Mandatory purchase obligation (5)

    15.2             15.2              

Other (6)

    19.3       2.6       3.8       10.5       2.4  

Total (7)

  $ 1,994.0     $ 693.9     $ 333.4     $ 689.2     $ 277.5  

 

 

(1)

Interest on borrowings is at variable rates based on LIBOR or the prime rate, as defined in the Credit Agreement, plus a spread.  The interest rate and fees for letters of credit varies based upon the level of excess availability under the Credit Agreement.  There is an unused line fee payable on the excess availability under the facility and a letter of credit fee payable on the outstanding exposure under letters of credit.  Interest obligations, which are variable in nature, are not included in the table above.  The borrowings under the Credit Agreement mature in January 2024.  Refer to Note 12 to the consolidated financial statements.  

(2)

Interest obligations have been presented based on our $200.0 million principal value of Senior Notes at a fixed interest rate of 6.25% as of fiscal year ended February 1, 2020.  Refer to Note 12 to the consolidated financial statements.

(3)

The majority of our retail operating leases contain provisions that allow us to modify amounts payable under the lease or terminate the lease in certain circumstances, such as experiencing actual sales volume below a defined threshold and/or co-tenancy provisions associated with the facility.  The contractual obligations presented in the table above reflect the minimum rent obligations, irrespective of our ability to reduce or terminate rental payments in the future.  Refer to Note 13 to the consolidated financial statements.

(4)

Purchase obligations include agreements to purchase assets, goods or services that specify all significant terms, including quantity and price provisions.  As a result of the temporary closure of our retail stores and those of our wholesale customers, as well as the overall impact of COVID-19 on the global economy, we have sought to cancel or reduce certain purchase obligations.

(5)

Refer to Note 2 and Note 15 to the consolidated financial statements for further discussion regarding the mandatory purchase obligation associated with the Blowfish Malibu acquisition.

(6)

Includes obligations for our supplemental executive retirement plan and other postretirement benefits, as discussed in Note 6 to the consolidated financial statements, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings related to income tax reform, as discussed in Note 7 to the consolidated financial statements, and other contractual obligations.

(7)

Excludes liabilities of $8.0 million, $1.5 million and $2.6 million for our non-qualified deferred compensation plan, deferred compensation plan for non-employee directors and restricted stock units for non-employee directors, respectively, due to the uncertain nature in timing of payments.  Refer to Note 6, Note 15 and Note 17 to the consolidated financial statements.

 

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Actual results could differ materially from those projected as they are subject to various risks and uncertainties.  These risks and uncertainties include, without limitation, the risks detailed in Item 1A, Risk Factors, and those described in other documents and reports filed from time to time with the SEC, press releases and other communications.  We do not undertake any obligation or plan to update these forward-looking statements, even though our situation may change.

 

 

 

 

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

FOREIGN CURRENCY EXCHANGE RATES

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in foreign currency exchange rates and interest rates.  To address these risks, we enter into various hedging transactions.  All decisions on hedging transactions are authorized and executed pursuant to our policies and procedures, which do not allow the use of financial instruments for trading purposes.  We also are exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments.  Counterparties to these agreements, however, are major international financial institutions, and we believe the risk of loss due to nonperformance is minimal.

 

A description of our accounting policies for derivative financial instruments is included in Notes 1 and 14 to the consolidated financial statements.

 

In addition, we are exposed to translation risk because certain of our foreign operations use the local currency as their functional currency and those financial results must be translated into United States dollars.  As currency exchange rates fluctuate, translation of our financial statements of foreign businesses into United States dollars affects the comparability of financial results between years.

 

 

INTEREST RATES

Our financing arrangements include outstanding variable rate debt under the Credit Agreement and $200.0 million in principal value of 2023 Senior Notes, which bear interest at a fixed rate of 6.25%.  Changes in interest rates impact fixed and variable rate debt differently.  For fixed-rate debt, a change in interest rates will only impact the fair value of the debt, whereas a change in the interest rates on variable- rate debt will impact interest expense and cash flows.

 

At February 1, 2020, the fair value of our long-term debt is estimated at approximately $205.0 million based upon the pricing of our 2023 Senior Notes at that time.  Market risk is viewed as the potential change in fair value of our debt resulting from a hypothetical 10% adverse change in interest rates and would be $3.5 million for our long-term debt at February 1, 2020.

 

Information appearing under the caption Risk Management and Derivatives in Note 14 and Fair Value Measurements in Note 15 to the consolidated financial statements is incorporated herein by reference.

 

 

 

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework).  Based on our evaluation, our principal executive officer and principal financial officer have concluded that the Company’s internal control over financial reporting was effective as of February 1, 2020.  The effectiveness of our internal control over financial reporting as of February 1, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included herein.

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of Caleres, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited Caleres, Inc.’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Caleres, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on the COSO criteria. 

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Caleres, Inc. as of February 1, 2020 and February 2, 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), cash flows and shareholders’ equity for each of the three years in the period ended February 1, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated March 31, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ Ernst & Young LLP

 

St. Louis, Missouri

March 31, 2020

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of Caleres, Inc.

 

Opinion on the Financial Statements

 

 

We have audited the accompanying consolidated balance sheets of Caleres, Inc. (the Company) as of February 1, 2020 and February 2, 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), cash flows, and shareholders’ equity for each of the three years in the period ended February 1, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with U.S. generally accepted accounting principles. 

 

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 31, 2020 expressed an unqualified opinion thereon.

 

Adoption of New Accounting Standard

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for leases in the year ended February 1, 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842). See below for discussion of our related critical audit matter.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

  Valuation of Goodwill of the Vionic Reporting Unit
Description of the Matter At February 1, 2020, the Company's goodwill related to the Vionic reporting unit was $151.3 million. As explained in Note 1 to the consolidated financial statements, goodwill is assessed for impairment at least annually or when events or circumstances indicate an interim test is required.
   
  Auditing the Company's impairment test for goodwill for the Vionic reporting unit was complex and involved subjective auditor judgment due to the significant estimates required to determine the fair value of the Vionic reporting unit. In particular, the fair value estimate for the Vionic reporting unit was sensitive to significant assumptions, such as projected net sales growth rates, gross profit, selling and administrative expenses, and the discount rate, which are affected by expectations about future market or economic conditions, particularly those in the retail industry.
   
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's goodwill impairment testing process. This included testing controls over the Company’s budgeting and forecasting process used to develop the estimated future net sales and cash flows projections used in estimating the fair value of the Vionic reporting unit. We also tested controls over the Company’s review of the valuation model and significant assumptions described above.
   
  To test the estimated fair value of the Vionic reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. For example, wee compared the significant assumptions to, the Company's historical results and other guideline companies within the same industry. In addition, we assessed the accuracy of the Company's historical projections by comparing them to actual operating results and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the Vionic reporting unit that would result from changes in the underlying assumptions. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company.


 

 

 

 

 

   
  Adoption of New Lease Accounting Standard
Description of the Matter As described in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), and the related amendments.  The adoption of ASC 842 resulted in the recognition of right-of-use operating lease assets and operating lease liabilities of approximately $729.2 million and $791.7 million, respectively, as of February 3, 2019. The cumulative effect of adopting the standard resulted in an adjustment to retained earnings of $13.4 million at the same date, which represented a reduction of the initial right-of-use asset for certain stores where the initial right-of-use asset was determined to exceed fair value. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term discounted using the incremental borrowing rate.
   
  Auditing the Company’s adoption of ASC 842 was complex and involved subjective auditor judgment because the Company is a party to a significant number of lease contracts and certain aspects of adopting ASC 842 required management to exercise judgment in applying the new standard to its portfolio of lease contracts. In particular, the estimates of the incremental borrowing rate and reduction of the right-of use-asset upon adoption when the right-of-use asset exceeded fair value were complex due to the significant management estimates required to determine the appropriate incremental borrowing rate and fair value amounts.
   
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for the adoption of ASC 842. This included testing controls over management’s review of the incremental borrowing rate, including the implied traded debt yield and seniority adjustments, and models used to estimate the fair value of the right-of-use asset, including the related data and assumptions of the discount rate, sublease discount, market rent per square foot, and marketing time.
   
  To test the adoption of ASC 842, we performed audit procedures that included, among others, selecting a sample of lease contracts from the overall population to evaluate the completeness, accuracy, and proper application of the accounting standard, testing the accuracy of lease terms within the lease IT system by comparison of the data for a sample of leases to the underlying lease contract, and testing the accuracy of the Company’s system calculations of initial operating lease right-of use-assets and operating lease liabilities. Additionally, we evaluated management’s methodology and model for developing the incremental borrowing rate and tested significant assumptions, including the implied traded debt yield and seniority adjustments, by performing comparative independent calculations. In addition, we tested management’s methodology and model used to adjust the right-of-use asset to fair value as of date of adoption, and tested significant assumptions, including the discount rate, sublease discount, market rent per square foot, and marketing time, by developing comparative independent calculations using external data sources.

 

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 1917.

 

St. Louis, Missouri

March 31, 2020

 

 

 

 

 

Consolidated Balance Sheets

 

($ thousands, except number of shares and per share amounts)

 

February 1, 2020

   

February 2, 2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 45,218     $ 30,200  

Receivables, net of allowances of $28,827 in 2019 and $28,998 in 2018

    162,181       191,722  

Inventories, net of adjustment to last-in, first-out cost of $3,826 in 2019 and $3,310 in 2018

    618,406       683,171  

Income taxes

    6,189       4,875  

Prepaid expenses and other current assets

    50,305       66,479  

Total current assets

    882,299       976,447  

Prepaid pension costs

    50,660       47,826  
Lease right-of-use assets     695,594        

Property and equipment, net

    224,846       230,784  

Deferred income taxes

    9,735       9,833  

Goodwill

    245,275       242,531  

Intangible assets, net

    294,304       307,366