CALERES INC - FORM 10-Q - December 6, 2017

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EX-32.1 - EXHIBIT 32.1 - CALERES INCexhibit321certificationsq3.htm
EX-31.2 - EXHIBIT 31.2 - CALERES INCexhibit312certificationsq3.htm
EX-31.1 - EXHIBIT 31.1 - CALERES INCexhibit311certificationsq3.htm


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

FORM 10-Q 
 
(Mark One)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the quarterly period ended October 28, 2017
 
 
[  ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 
For the transition period from  _____________  to  _____________
 
Commission file number: 1-2191 
 
CALERES, INC.
(Exact name of registrant as specified in its charter)
 
 
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
 
 
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes  ¨     No þ 
 
As of November 24, 2017, 42,979,137 common shares were outstanding.

1


INDEX
 




2


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

($ thousands)
October 28, 2017

 
October 29, 2016

 
January 28, 2017

Assets
 
 
 
 
 

Current assets:
 
 
 
 
 
Cash and cash equivalents
$
31,379


$
173,435


$
55,332

Receivables, net
132,942


139,475


153,121

Inventories, net
598,365


524,823


585,764

Prepaid expenses and other current assets
40,982


31,716


49,528

Total current assets
803,668

 
869,449

 
843,745

 
 
 
 
 
 
Other assets
68,316


114,851


68,574

Goodwill
127,081

 
13,954

 
127,098

Intangible assets, net
213,101

 
114,187

 
216,660

Property and equipment
535,149

 
497,486

 
531,104

Allowance for depreciation
(320,167
)
 
(305,732
)
 
(311,908
)
Property and equipment, net
214,982


191,754


219,196

Total assets
$
1,427,148

 
$
1,304,195

 
$
1,475,273

 
 
 
 
 
 
Liabilities and Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Borrowings under revolving credit agreement
$
20,000

 
$
—

 
$
110,000

Trade accounts payable
223,832


212,088


266,370

Other accrued expenses
173,487


141,886


151,225

Total current liabilities
417,319

 
353,974

 
527,595

 
 
 
 
 
 
Other liabilities:
 

 
 

 
 

Long-term debt
197,348


196,888


197,003

Deferred rent
50,814


48,696


51,124

Other liabilities
86,580


57,574


85,065

Total other liabilities
334,742

 
303,158

 
333,192

 
 
 
 
 
 
Equity:
 

 
 

 
 

Common stock
430

 
429

 
430

Additional paid-in capital
127,454

 
120,775

 
121,537

Accumulated other comprehensive loss
(28,122
)
 
(6,310
)
 
(30,434
)
Retained earnings
573,883

 
531,216

 
521,584

Total Caleres, Inc. shareholders’ equity
673,645


646,110


613,117

Noncontrolling interests
1,442


953


1,369

Total equity
675,087

 
647,063

 
614,486

Total liabilities and equity
$
1,427,148

 
$
1,304,195

 
$
1,475,273

See notes to condensed consolidated financial statements.

3


CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
 
 
 
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Net sales
$
774,656

$
732,230

$
2,083,119

$
1,939,900

Cost of goods sold
457,771

438,459

1,207,865

1,138,781

Gross profit
316,885

293,771

875,254

801,119

Selling and administrative expenses
264,015

238,319

761,590

684,666

Restructuring and other special charges, net
—

—

3,973

—

Operating earnings
52,870

55,452

109,691

116,453

Interest expense
(4,141
)
(3,475
)
(13,822
)
(10,564
)
Interest income
95

350

592

907

Earnings before income taxes
48,824

52,327

96,461

106,796

Income tax provision
(14,451
)
(17,601
)
(29,530
)
(34,514
)
Net earnings
34,373

34,726

66,931

72,282

Net (loss) earnings attributable to noncontrolling interests
(14
)
(4
)
47

2

Net earnings attributable to Caleres, Inc.
$
34,387

$
34,730

$
66,884

$
72,280

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.80

$
0.81

$
1.56

$
1.67

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.80

$
0.81

$
1.55

$
1.67

 
 
 
 
 
Dividends per common share
$
0.07

$
0.07

$
0.21

$
0.21

See notes to condensed consolidated financial statements.

4



CALERES, INC.
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
(Unaudited)
 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Net earnings
$
34,373

$
34,726

$
66,931

$
72,282

Other comprehensive (loss) income, net of tax:
 

 

 

 

Foreign currency translation adjustment
(633
)
(545
)
647

961

Pension and other postretirement benefits adjustments
379

(289
)
1,106

(865
)
Derivative financial instruments
183

(101
)
559

(542
)
Other comprehensive (loss) income, net of tax
(71
)
(935
)
2,312

(446
)
Comprehensive income
34,302

33,791

69,243

71,836

Comprehensive (loss) income attributable to noncontrolling interests
(3
)
(25
)
73

(35
)
Comprehensive income attributable to Caleres, Inc.
$
34,305

$
33,816

$
69,170

$
71,871

See notes to condensed consolidated financial statements.


5


CALERES, INC.
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
(Unaudited)
 
Thirty-nine Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

Operating Activities
 
 

Net earnings
$
66,931

$
72,282

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

 

Depreciation
34,354

28,131

Amortization of capitalized software
10,786

9,589

Amortization of intangible assets
3,059

2,758

Amortization of debt issuance costs and debt discount
1,296

1,295

Share-based compensation expense
8,394

5,966

Excess tax benefit related to share-based plans
—

(3,264
)
Loss on disposal of property and equipment
1,004

872

Impairment charges for property and equipment
2,995

913

Deferred rent
(310
)
2,190

Provision for doubtful accounts
352

564

Changes in operating assets and liabilities:
 

 

Receivables
19,826

13,626

Inventories
(11,541
)
22,587

Prepaid expenses and other current and noncurrent assets
890

22,119

Trade accounts payable
(42,702
)
(25,870
)
Accrued expenses and other liabilities
26,588

(17,419
)
Other, net
339

664

Net cash provided by operating activities
122,261

137,003

 
 
 
Investing Activities
 

 

Purchases of property and equipment
(34,364
)
(43,019
)
Capitalized software
(4,531
)
(5,672
)
Net cash used for investing activities
(38,895
)
(48,691
)
 
 
 
Financing Activities
 

 

Borrowings under revolving credit agreement
450,000

103,000

Repayments under revolving credit agreement
(540,000
)
(103,000
)
Dividends paid
(9,033
)
(9,094
)
Acquisition of treasury stock
(5,993
)
(23,139
)
Issuance of common stock under share-based plans, net
(2,477
)
(4,205
)
Excess tax benefit related to share-based plans
—

3,264

Net cash used for financing activities
(107,503
)
(33,174
)
Effect of exchange rate changes on cash and cash equivalents
184

146

(Decrease) increase in cash and cash equivalents
(23,953
)
55,284

Cash and cash equivalents at beginning of period
55,332

118,151

Cash and cash equivalents at end of period
$
31,379

$
173,435

See notes to condensed consolidated financial statements.

6


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

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

Note 2
Impact of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued ASU 2015-14 to defer the effective date. Several ASUs to clarify the implementation guidance in ASU 2014-09 have also been issued.  Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  The Company plans to adopt the ASUs in the first quarter of 2018 using the modified retrospective method.

The Company has completed its assessment of the policy changes required for each of the revenue streams and is finalizing its assessment of the financial statement impacts of the ASUs, as well as drafting the financial statement disclosures. The area most significantly impacted by the ASUs will be the value assigned to loyalty points issued under the Company's loyalty program for the Famous Footwear segment. The new standards will require a deferral of revenue associated with loyalty points using a relative stand-alone selling price method rather than the incremental cost approach the Company uses under the current standard. The standards allow entities to elect various practical expedients. The Company expects to elect the practical expedient to disregard the effect of the time value of money in a significant financing component when its payment terms are less than one year. The Company will also elect the practical expedient to exclude sales and similar taxes collected from consumers from the measurement of the transaction price for its retail sales. Although adoption of the ASUs will result in a significant initial adjustment to deferred revenue related to loyalty points and require certain changes in presentation to the Company's consolidated balance sheets, it is not anticipated to significantly impact the Company's condensed consolidated statements of earnings on an ongoing basis.  

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330), which requires entities to measure inventory at "the lower of cost and net realizable value", simplifying the current guidance under which entities must measure inventory at the lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using the last-in, first-out (LIFO) method. The Company adopted the ASU during the first quarter of 2017, which did not have a material impact on the condensed consolidated financial statements.


7


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

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

•
The Company recognized excess tax benefits of $1.2 million related to share-based plans during the thirty-nine weeks ended October 28, 2017, which are required to be recognized in the statements of earnings on a prospective basis. Prior to the adoption of the ASU, the excess tax benefit related to share-based plans was recorded in additional paid-in-capital.
•
The Company elected to adopt the provision of the ASU to account for forfeitures as they occur. This election was applied on a modified retrospective basis, resulting in a net increase to Caleres, Inc. shareholders' equity of $0.4 million.
•
The ASU requires cash flows from excess tax benefits related to share-based payments to be reported as operating activities in the condensed consolidated statements of cash flows. The Company elected to adopt this provision on a prospective basis and as a result, the excess tax benefit related to share-based plans for the thirty-nine weeks ended October 29, 2016 is presented as a financing activity, while the benefit for the thirty-nine weeks ended October 28, 2017 is presented as an operating activity.

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

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill. Under the ASU, goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. The ASU is effective prospectively for annual and interim impairment tests beginning after December 15, 2019, with early adoption permitted. The Company adopted the ASU during the third quarter of 2017, which had no impact on the condensed consolidated financial statements, as the Company performs its goodwill impairment test during the fourth quarter.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Upon adoption of the ASU during the first quarter of 2018, the Company will separately present the components of net periodic benefit cost or income, excluding the service cost component, in non-operating expenses on a retrospective basis. Net periodic benefit income, excluding the service cost component, was $2.5 million and $7.6 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.

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

8


permitted. The guidance will be applied prospectively to awards modified after the Company adopts the ASU in the first quarter of 2018.

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

Note 3
Acquisition

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

The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies. As of October 28, 2017, the purchase price allocation is complete.

During the thirty-nine weeks ended October 28, 2017, the Company recognized $4.9 million in cost of goods sold ($3.0 million on an after-tax basis, or $0.07 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017. As further discussed in Note 5 to the condensed consolidated financial statements, the Company also incurred integration costs during the thirty-nine weeks ended October 28, 2017.

Note 4
Earnings Per Share
 
The Company uses the two-class method to compute basic and diluted earnings per common share attributable to Caleres, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings per common share attributable to Caleres, Inc. shareholders for the periods ended October 28, 2017 and October 29, 2016:
 

9


 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands, except per share amounts)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

NUMERATOR
 

 

 

 

Net earnings
$
34,373

$
34,726

$
66,931

$
72,282

Net loss (earnings) attributable to noncontrolling interests
14

4

(47
)
(2
)
Net earnings allocated to participating securities
(949
)
(910
)
(1,841
)
(1,933
)
Net earnings attributable to Caleres, Inc. after allocation of earnings to participating securities
$
33,438

$
33,820

$
65,043

$
70,347

 
 
 
 
 
DENOMINATOR
 

 

 

 

Denominator for basic earnings per common share attributable to Caleres, Inc. shareholders
41,788

41,802

41,801

42,093

Dilutive effect of share-based awards
182

137

173

144

Denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders
41,970

41,939

41,974

42,237

 
 
 
 
 
Basic earnings per common share attributable to Caleres, Inc. shareholders
$
0.80

$
0.81

$
1.56

$
1.67

 
 
 
 
 
Diluted earnings per common share attributable to Caleres, Inc. shareholders
$
0.80

$
0.81

$
1.55

$
1.67

 
Options to purchase 16,667 shares of common stock for the thirteen and thirty-nine weeks ended October 28, 2017 and 63,915 shares of common stock for the thirteen and thirty-nine weeks ended October 29, 2016 were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive.

During the thirteen and thirty-nine weeks ended October 28, 2017, the Company repurchased zero and 225,000 shares, respectively, under the publicly announced share repurchase program, which permits repurchases of up to 2.5 million shares. The Company repurchased zero and 900,000 shares during the thirteen and thirty-nine weeks ended October 29, 2016, respectively. As of October 28, 2017, the Company has repurchased a total of 1.3 million shares under this program.

Note 5
Restructuring and Other Initiatives
 
During the thirty-nine weeks ended October 28, 2017, the Company incurred integration and reorganization costs, primarily for professional fees and severance expense, totaling $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share), related to the men's business. Of the $4.0 million in costs presented as restructuring and other special charges, net in the condensed consolidated statements of earnings for the thirty-nine weeks ended October 28, 2017, $2.5 million is reflected within the Other category and $1.5 million is reflected within the Brand Portfolio segment. There were no restructuring charges incurred during the thirteen weeks ended October 28, 2017 or the thirty-nine weeks ended October 29, 2016.
 

10


Note 6
Business Segment Information
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended October 28, 2017 and October 29, 2016:  
 
Famous Footwear
Brand Portfolio
 
 
($ thousands)
Other
Total
Thirteen Weeks Ended October 28, 2017
External sales
$
473,118

$
301,538

$
—

$
774,656

Intersegment sales
—

15,218

—

15,218

Operating earnings (loss)
33,747

24,281

(5,158
)
52,870

Segment assets
544,280

781,421

101,447

1,427,148

 
 
 
 
 
Thirteen Weeks Ended October 29, 2016
External sales
$
467,816

$
264,414

$
—

$
732,230

Intersegment sales
—

20,234

—

20,234

Operating earnings (loss)
32,709

30,454

(7,711
)
55,452

Segment assets
555,934

471,329

276,932

1,304,195

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

$
838,577

$
—

$
2,083,119

Intersegment sales
—

59,768

—

59,768

Operating earnings (loss)
79,137

53,511

(22,957
)
109,691

 
 
 
 
 
Thirty-Nine Weeks Ended October 29, 2016
External sales
$
1,222,535

$
717,365

$
—

$
1,939,900

Intersegment sales
—

66,386

—

66,386

Operating earnings (loss)
81,067

57,539

(22,153
)
116,453

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

Following is a reconciliation of operating earnings to earnings before income taxes:   
 
Thirteen Weeks Ended
Thirty-nine Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Operating earnings
$
52,870

$
55,452

$
109,691

$
116,453

Interest expense
(4,141
)
(3,475
)
(13,822
)
(10,564
)
Interest income
95

350

592

907

Earnings before income taxes
$
48,824

$
52,327

$
96,461

$
106,796


Note 7
Inventories
The Company's net inventory balance was comprised of the following:
($ thousands)
October 28, 2017

October 29, 2016

January 28, 2017

Raw materials
$
19,091

$
942

$
15,378

Work-in-process
897

—

1,093

Finished goods
578,377

523,881

569,293

Inventories, net
$
598,365

$
524,823

$
585,764



11


Note 8
Goodwill and Intangible Assets
 
Goodwill and intangible assets were as follows:
($ thousands)
October 28, 2017

October 29, 2016

January 28, 2017

Intangible Assets
 

 

 

Famous Footwear
$
2,800

$
2,800

$
2,800

Brand Portfolio
285,988

183,068

286,488

Total intangible assets
288,788

185,868

289,288

Accumulated amortization
(75,687
)
(71,681
)
(72,628
)
Total intangible assets, net
213,101

114,187

216,660

Goodwill
 

 

 

Brand Portfolio
127,081

13,954

127,098

Total goodwill
127,081

13,954

127,098

Goodwill and intangible assets, net
$
340,182

$
128,141

$
343,758


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

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

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
75,372

 
$
89,916

Trademarks
 
Indefinite
 
118,100

(1) 
—

 
118,100

Customer relationships
 
15 years
 
5,400

(1) 
315

 
5,085

 
 
 
 
$
288,788

 
$
75,687

 
$
213,101

 
 
 
 
October 29, 2016
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,068

 
$
71,681

 
$
93,387

Trademarks
 
Indefinite
 
20,800

 
—

 
20,800

 
 
 
 
$
185,868

 
$
71,681

 
$
114,187

 
 
 
 
January 28, 2017
 
 
Estimated Useful Lives
 
Original Cost

 
Accumulated Amortization

 
Net Carrying Value

Trademarks
 
15-40 years
 
$
165,288

 
$
72,604

 
$
92,684

Trademarks
 
Indefinite
 
117,900

(1) 
—

 
117,900

Customer relationships
 
15 years
 
6,100

(1) 
24

 
6,076

 
 
 
 
$
289,288

 
$
72,628

 
$
216,660

(1) The Allen Edmonds trademark and customer relationships intangible assets were acquired in the Allen Edmonds acquisition, as further discussed in Note 3 to the condensed consolidated financial statements. Immaterial adjustments attributable to the purchase price allocation were recorded during the thirty-nine weeks ended October 28, 2017, resulting in an adjustment to the original cost.

Amortization expense related to intangible assets was $1.0 million and $0.9 million for the thirteen weeks ended October 28, 2017 and October 29, 2016, respectively, and $3.1 million and $2.8 million for the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.

12


Note 9
Shareholders’ Equity
 
The following tables set forth the changes in Caleres, Inc. shareholders’ equity and noncontrolling interests for the thirty-nine weeks ended October 28, 2017 and October 29, 2016:

($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 28, 2017
$
613,117

$
1,369

$
614,486

Net earnings
66,884

47

66,931

Other comprehensive income
2,312

26

2,338

Dividends paid
(9,033
)
—

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

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

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

—

441

Share-based compensation expense
8,394

—

8,394

Equity at October 28, 2017
$
673,645

$
1,442

$
675,087

 
($ thousands)
Caleres, Inc. Shareholders’ Equity

Noncontrolling Interests

Total Equity

Equity at January 30, 2016
$
601,484

$
988

$
602,472

Net earnings
72,280

2

72,282

Other comprehensive income (loss)
(446
)
(37
)
(483
)
Dividends paid
(9,094
)
—

(9,094
)
Acquisition of treasury stock
(23,139
)
—

(23,139
)
Issuance of common stock under share-based plans, net
(4,205
)
—

(4,205
)
Excess tax benefit related to share-based plans
3,264

—

3,264

Share-based compensation expense
5,966

—

5,966

Equity at October 29, 2016
$
646,110

$
953

$
647,063



13


Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended October 28, 2017 and October 29, 2016:
($ thousands)
Foreign Currency Translation

Pension and Other Postretirement Transactions (1)

Derivative Financial Instrument Transactions (2)

Accumulated Other Comprehensive (Loss) Income

Balance July 29, 2017
$
1,472

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

258

(375
)
Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

615

(118
)
497

Tax (benefit) provision
—

(236
)
43

(193
)
Net reclassifications
—

379

(75
)
304

Other comprehensive (loss) income
(633
)
379

183

(71
)
Balance October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
 
 
 
 
 
Balance July 30, 2016
$
606

$
(5,932
)
$
(49
)
$
(5,375
)
Other comprehensive loss before reclassifications
(545
)
—

(150
)
(695
)
Reclassifications:
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss
—

(478
)
79

(399
)
Tax provision (benefit)
—

189

(30
)
159

Net reclassifications
—

(289
)
49

(240
)
Other comprehensive loss
(545
)
(289
)
(101
)
(935
)
Balance October 29, 2016
$
61

$
(6,221
)
$
(150
)
$
(6,310
)
 
 
 
 
 
Balance January 28, 2017
$
192

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

—

716

1,363

Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

1,794

(235
)
1,559

Tax (benefit) provision
—

(688
)
78

(610
)
Net reclassifications
—

1,106

(157
)
949

Other comprehensive income
647

1,106

559

2,312

Balance October 28, 2017
$
839

$
(28,978
)
$
17

$
(28,122
)
 
 
 
 


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

$
(5,864
)
Other comprehensive income (loss) before reclassifications
961

—

(789
)
172

Reclassifications:
 
 
 


Amounts reclassified from accumulated other comprehensive loss
—

(1,432
)
392

(1,040
)
Tax provision (benefit)
—

567

(145
)
422

Net reclassifications
—

(865
)
247

(618
)
Other comprehensive income (loss)
961

(865
)
(542
)
(446
)
Balance October 29, 2016
$
61

$
(6,221
)
$
(150
)
$
(6,310
)
(1)
Amounts reclassified are included in selling and administrative expenses. See Note 11 to the condensed consolidated financial statements for additional information related to pension and other postretirement benefits.
(2)
Amounts reclassified are included in net sales, costs of goods sold, selling and administrative expenses and interest expense. See Notes 12 and 13 to the condensed consolidated financial statements for additional information related to derivative financial instruments.

14



Note 10
Share-Based Compensation
 
The Company recognized share-based compensation expense of $2.6 million and $1.6 million during the thirteen weeks and $8.4 million and $6.0 million during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively. In addition to share-based compensation expense, the Company recognized cash-based expense related to performance share units and cash awards granted under the performance share plans of zero and $0.4 million during the thirteen weeks and $0.1 million and $1.9 million during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.
 
The Company had net issuances (repurchases) of 9,832 and (22,233) shares of common stock during the thirteen weeks ended October 28, 2017 and October 29, 2016, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to directors, net of forfeitures and shares withheld to satisfy the minimum tax withholding requirement. During the thirty-nine weeks ended October 28, 2017 and October 29, 2016, the Company issued 251,718 and 158,592 shares of common stock, respectively, related to these share-based plans.

Restricted Stock 
The following table summarizes restricted stock activity for the periods ended October 28, 2017 and October 29, 2016:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
October 28, 2017
 
 
October 29, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
July 29, 2017
1,194,326

 
$
28.03

 
July 30, 2016
1,139,299

 
$
25.42

Granted
25,000

 
27.13

 
Granted
6,500

 
25.18

Forfeited
(19,050
)
 
31.86

 
Forfeited
(29,500
)
 
24.87

Vested
(800
)
 
22.90

 
Vested
—

 
—

October 28, 2017
1,199,476

 
$
27.95

 
October 29, 2016
1,116,299

 
$
25.43

 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
October 28, 2017
 
 
October 29, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Restricted Shares
 
 
 
Total Number of Restricted Shares
 
 
 
 
 
 
January 28, 2017
1,128,049

 
$
25.85

 
January 30, 2016
1,262,449

 
$
19.55

Granted
381,312

 
26.92

 
Granted
357,100

 
26.54

Forfeited
(49,050
)
 
29.35

 
Forfeited
(78,000
)
 
23.67

Vested
(260,835
)
 
17.09

 
Vested
(425,250
)
 
9.22

October 28, 2017
1,199,476

 
$
27.95

 
October 29, 2016
1,116,299

 
$
25.43


All of the restricted shares granted during the thirteen weeks ended October 28, 2017 have a cliff-vesting term of four years. Of the 381,312 restricted shares granted during the thirty-nine weeks ended October 28, 2017, 4,492 shares have a cliff-vesting term of one year, 12,000 shares have a graded-vesting term of four years and 364,820 shares have a cliff-vesting term of four years. All of the restricted shares granted during the thirteen and thirty-nine weeks ended October 29, 2016 have a cliff-vesting term of four years. Share-based compensation expense for cliff-vesting grants is recognized on a straight-line basis over the respective vesting periods and expense for graded-vesting grants is recognized ratably over the vesting period.

Performance Share Awards
During the thirteen weeks ended October 28, 2017 and October 29, 2016, the Company granted no performance share awards. During the thirty-nine weeks ended October 28, 2017 and October 29, 2016, the Company granted performance share awards for a targeted 169,500 and 159,000 shares, respectively, with a weighted-average grant date fair value of $26.90 and $26.64, respectively. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will

15


have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of the specified financial goals for the service period. Compensation expense is recognized based on the fair value of the award and the anticipated number of shares or units to be awarded for each tranche in accordance with the vesting schedule of the units over the three-year service period. During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value. Refer to Note 13 to the condensed consolidated financial statements for further discussion regarding performance share units.

Stock Options
The following table summarizes stock option activity for the periods ended October 28, 2017 and October 29, 2016:
 
Thirteen Weeks Ended
 
 
Thirteen Weeks Ended
 
October 28, 2017
 
 
October 29, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
July 29, 2017
92,042

 
$
6.42

 
July 30, 2016
222,790

 
$
8.98

Granted
—

 
—

 
Granted
—

 
—

Exercised
(6,000
)
 
6.41

 
Exercised
—

 
—

Forfeited
—

 
—

 
Forfeited
(2,250
)
 
15.94

Expired
(1,000
)
 
8.33

 
Expired
(15,000
)
 
9.82

October 28, 2017
85,042

 
$
6.39

 
October 29, 2016
205,540

 
$
8.85

 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
October 28, 2017
 
 
October 29, 2016
 
 
 
Weighted- Average Grant Date Fair Value
 
 
 
 
Weighted- Average Grant Date Fair Value
 
Total Number of Stock Options
 
 
 
Total Number of Stock Options
 
 
 
 
 
 
January 28, 2017
150,540

 
$
9.36

 
January 30, 2016
301,295

 
$
8.95

Granted
—

 
—

 
Granted
—

 
—

Exercised
(17,250
)
 
5.97

 
Exercised
(56,381
)
 
7.41

Forfeited
—

 
—

 
Forfeited
(9,749
)
 
15.94

Expired
(48,248
)
 
15.79

 
Expired
(29,625
)
 
10.27

October 28, 2017
85,042

 
$
6.39

 
October 29, 2016
205,540

 
$
8.85


Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of cash-equivalent restricted stock units ("RSUs"). The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense is recognized at fair value when the dividend equivalents are granted. The Company granted 838 and 1,086 RSUs to non-employee directors for dividend equivalents during the thirteen weeks ended October 28, 2017 and October 29, 2016, respectively, with weighted-average grant date fair values of $30.68 and $24.98, respectively. The Company granted 47,550 and 55,250 RSUs, including 2,630 and 3,050 RSUs for dividend equivalents, during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively, with weighted-average grant date fair values of $27.86 and $21.78, respectively.


16


Note 11
Retirement and Other Benefit Plans
 
The following table sets forth the components of net periodic benefit income for the Company, including domestic and Canadian plans:
 
Pension Benefits
Other Postretirement Benefits
 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Service cost
$
2,426

$
2,084

$
—

$
—

Interest cost
3,736

3,835

17

15

Expected return on assets
(6,896
)
(7,237
)
—

—

Amortization of:
 

 

 

 

Actuarial loss (gain)
1,090

38

(36
)
(55
)
Prior service income
(439
)
(461
)
—

—

Curtailment cost
36

—

—

—

Total net periodic benefit income
$
(47
)
$
(1,741
)
$
(19
)
$
(40
)
 
 
 
 
 
 
Pension Benefits
Other Postretirement Benefits
 
Thirty-nine Weeks Ended
Thirty-nine Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Service cost
$
7,276

$
6,251

$
—

$
—

Interest cost
11,210

11,506

51

45

Expected return on assets
(20,689
)
(21,712
)
—

—

Amortization of:
 
 
 
 
Actuarial loss (gain)
3,238

115

(109
)
(165
)
Prior service income
(1,335
)
(1,382
)
—

—

Settlement cost
—

250

—

—

Curtailment cost
36

—

—

—

Total net periodic benefit income
$
(264
)
$
(4,972
)
$
(58
)
$
(120
)


17


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

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

October 29, 2016

January 28, 2017

Financial Instruments
 
 
 
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)
$
18,242

$
17,229

$
18,826

Euro
18,815

10,854

13,297

Chinese yuan
12,613

13,038

7,723

New Taiwanese dollars
580

538

526

United Arab Emirates dirham
—

1,143

823

Japanese yen
—

1,145

769

Other currencies
—

206

124

Total financial instruments
$
50,250

$
44,153

$
42,088

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

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

 
Balance Sheet Location
Fair Value

Foreign Exchange Forward Contracts
 

 
 
 

October 28, 2017
Prepaid expenses and other current assets
$
760

 
Other accrued expenses
$
564

October 29, 2016
Prepaid expenses and other current assets
362

 
Other accrued expenses
570

January 28, 2017
Prepaid expenses and other current assets
234

 
Other accrued expenses
874

 

18


For the periods ended October 28, 2017 and October 29, 2016, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 
Thirteen Weeks Ended
Thirteen Weeks Ended
($ thousands)
October 28, 2017
October 29, 2016
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
 (Loss) Gain Recognized in OCL on Derivatives

Gain Reclassified from Accumulated OCL into Earnings

Gain (Loss) Recognized in OCL on Derivatives

Loss Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(4
)
$
6

$
16

$
(55
)
Cost of goods sold
(42
)
3

(181
)
(8
)
Selling and administrative expenses
364

109

(97
)
(15
)
Interest expense
6

—

5

(1
)
 
Thirty-Nine Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
October 28, 2017
October 29, 2016
Foreign Exchange Forward Contracts:
Income Statement Classification (Losses) Gains - Realized
(Loss) Gain Recognized in OCL on Derivatives

Gain (Loss) Reclassified from Accumulated OCL into Earnings

Loss Recognized in OCL on Derivatives

(Loss) Gain Reclassified from Accumulated OCL into Earnings

 
 
 
 
 
Net sales
$
(44
)
$
30

$
(173
)
$
(127
)
Cost of goods sold
695

164

(766
)
109

Selling and administrative expenses
480

42

(121
)
(373
)
Interest expense
(4
)
(1
)
(19
)
(1
)

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

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

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

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


19


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

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

20


Performance Share Units
Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three-year service period. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  During the first quarter of 2017, the Company's remaining performance share awards granted in units vested and were settled in cash at fair value. Additional information related to the Company's performance share awards is disclosed in Note 10 to the condensed consolidated financial statements.
 
Derivative Financial Instruments 
The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments is disclosed in Note 12 to the condensed consolidated financial statements. 

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

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

21


 
 

 
Fair Value Measurements
($ thousands)
Total

 
Level 1

Level 2

Level 3

Asset (Liability)
 

 
 

 

 

October 28, 2017:
 
 
 
 
 
Cash equivalents – money market funds
$
14,967

 
$
14,967

$
—

$
—

Non-qualified deferred compensation plan assets
6,000

 
6,000

—

—

Non-qualified deferred compensation plan liabilities
(6,000
)
 
(6,000
)
—

—

Deferred compensation plan liabilities for non-employee directors
(2,350
)
 
(2,350
)
—

—

Restricted stock units for non-employee directors
(10,118
)
 
(10,118
)
—

—

Derivative financial instruments, net
196

 
—

196

—

October 29, 2016:
 
 
 
 
 
Cash equivalents – money market funds
$
152,700

 
$
152,700

$
—

$
—

Non-qualified deferred compensation plan assets
4,747

 
4,747

—

—

Non-qualified deferred compensation plan liabilities
(4,747
)
 
(4,747
)
—

—

Deferred compensation plan liabilities for non-employee directors
(1,596
)
 
(1,596
)
—

—

Restricted stock units for non-employee directors
(8,726
)
 
(8,726
)
—

—

Performance share units
(2,446
)
 
(2,446
)
—

—

Derivative financial instruments, net
(208
)
 
—

(208
)
—

Secured convertible note
7,227

 
—

—

7,227

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

 
$
27,530

$
—

$
—

Non-qualified deferred compensation plan assets
5,051

 
5,051

—

—

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

—

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

—

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

—

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

—

Derivative financial instruments, net
(640
)
 
—

(640
)
—

 
Impairment Charges 
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $115.8 million and $100.4 million at October 28, 2017 and October 29, 2016, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for leasehold improvements and furniture and fixtures in the Company's retail stores, which were included in selling and administrative expenses for the respective periods.

 
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
($ thousands)
October 28, 2017

October 29, 2016

October 28, 2017

October 29, 2016

Impairment Charges
 
 
 
 
Famous Footwear
$
150

$
128

$
450

$
262

Brand Portfolio
726

248

2,545

651

Total impairment charges
$
876

$
376

$
2,995

$
913


22



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

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

 
Fair

 
Carrying

 
Fair

 
Carrying

 
Fair

($ thousands)
Value

 
Value

 
Value

 
Value

 
Value

 
Value

Borrowings under revolving credit agreement
$
20,000

 
$
20,000

 
$
—

 
$
—

 
$
110,000

 
$
110,000

Long-term debt
197,348

 
209,000

 
196,888

 
209,000

 
197,003

 
209,000

Total debt
$
217,348


$
229,000


$
196,888


$
209,000


$
307,003


$
319,000

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

Note 14
Income Taxes
 
The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors.  The Company’s consolidated effective tax rates were 29.6% and 33.6% for the thirteen weeks ended October 28, 2017 and October 29, 2016, respectively. During the thirteen weeks ended October 28, 2017, the Company recognized discrete tax benefits of $0.9 million, reflecting greater deductibility of certain 2016 expenses than originally estimated. During the thirteen weeks ended October 29, 2016, the Company recognized a discrete tax benefit of $0.3 million, reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the thirteen weeks ended October 28, 2017 and October 29, 2016, the Company's effective tax rates would have been 31.5% and 34.1%, respectively. Excluding the discrete tax items, the Company's tax rate is lower for the thirteen weeks ended October 28, 2017, reflecting a higher mix of international earnings in the Company's lowest tax rate jurisdictions.

For the thirty-nine weeks ended October 28, 2017 and October 29, 2016, the Company's consolidated effective tax rates were 30.6% and 32.3%, respectively. Discrete tax benefits of $2.0 million were recognized during the thirty-nine weeks ended October 28, 2017, including a discrete tax benefit of $1.2 million related to share-based compensation as a result of the adoption of ASU 2016-09 during the first quarter of 2017, which requires prospective recognition of excess tax benefits and deficiencies in the statement of earnings. Discrete tax benefits of $1.1 million were recognized during the thirty-nine weeks ended October 29, 2016, reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the thirty-nine weeks ended October 28, 2017 and October 29, 2016, the Company's effective tax rates would have been 32.7% and 33.4%, respectively. Excluding the discrete tax items, the Company's tax rate is lower for the thirty-nine weeks ended October 28, 2017, reflecting a higher mix of international earnings in the Company's lowest tax rate jurisdictions.

Note 15
Related Party Transactions
 
C. banner International Holdings Limited
The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture arrangements. B&H Footwear sold Naturalizer footwear to a retail affiliate of CBI on a wholesale basis, which in turn sold the Naturalizer products through department store shops and free-standing stores in China.  The Company, through its consolidated subsidiary, B&H Footwear, sold Naturalizer footwear on a wholesale basis to CBI totaling $1.3 million and $5.1 million for the thirteen and thirty-nine weeks ended October 29, 2016, respectively, with no corresponding sales during 2017.


23


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

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

The cumulative expenditures for both on-site and off-site remediation through October 28, 2017 were $29.7 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at October 28, 2017 is $9.6 million, of which $8.7 million is recorded within other liabilities and $0.9 million is recorded within other accrued expenses. Of the total $9.6 million reserve, $4.6 million is for on-site remediation and $5.0 million is for off-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $14.1 million as of October 28, 2017. The Company expects to spend approximately $0.1 million in each of the following four years, $0.2 million in the fifth year and $13.5 million in the aggregate thereafter related to the on-site remediation.
 
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
 
The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
 
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.


24


Note 17
Financial Information for the Company and its Subsidiaries

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

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

25


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
8,155

$
7,947

$
15,277

$
—

$
31,379

Receivables, net
116,974

3,987

11,981

—

132,942

Inventories, net
127,142

441,683

29,540

—

598,365

Prepaid expenses and other current assets
20,642

17,872

7,263

(4,795
)
40,982

Intercompany receivable – current
1,597

123

20,677

(22,397
)
—

Total current assets
274,510

471,612

84,738

(27,192
)
803,668

Other assets
50,565

16,877

874

—

68,316

Goodwill and intangible assets, net
111,665

40,937

187,580

—

340,182

Property and equipment, net
32,684

169,604

12,694

—

214,982

Investment in subsidiaries
1,288,128

—

(23,180
)
(1,264,948
)
—

Intercompany receivable – noncurrent
744,127

527,670

677,419

(1,949,216
)
—

Total assets
$
2,501,679

$
1,226,700

$
940,125

$
(3,241,356
)
$
1,427,148

 
 
 
 
 
 
Liabilities and Equity
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
20,000

$
—

$
—

$
—

$
20,000

Trade accounts payable
65,604

139,219

19,009

—

223,832

Other accrued expenses
64,525

95,817

17,940

(4,795
)
173,487

Intercompany payable – current
12,833

—

9,564

(22,397
)
—

Total current liabilities
162,962

235,036

46,513

(27,192
)
417,319

Other liabilities
 

 

 

 

 

Long-term debt
197,348

—

—

—

197,348

Other liabilities
93,029

39,150

5,215

—

137,394

Intercompany payable – noncurrent
1,374,695

121,683

452,838

(1,949,216
)
—

Total other liabilities
1,665,072

160,833

458,053

(1,949,216
)
334,742

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
673,645

830,831

434,117

(1,264,948
)
673,645

Noncontrolling interests
—

—

1,442

—

1,442

Total equity
673,645

830,831

435,559

(1,264,948
)
675,087

Total liabilities and equity
$
2,501,679

$
1,226,700

$
940,125

$
(3,241,356
)
$
1,427,148



26


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
226,019

$
541,007

$
47,765

$
(40,135
)
$
774,656

Cost of goods sold
152,714

313,646

23,351

(31,940
)
457,771

Gross profit
73,305

227,361

24,414

(8,195
)
316,885

Selling and administrative expenses
59,335

197,481

15,394

(8,195
)
264,015

Operating earnings
13,970

29,880

9,020

—

52,870

Interest expense
(4,140
)
(1
)
—

—

(4,141
)
Interest income
47

—

48

—

95

Intercompany interest income (expense)
1,981

(2,003
)
22

—

—

Earnings before income taxes
11,858

27,876

9,090

—

48,824

Income tax provision
(3,963
)
(9,479
)
(1,009
)
—

(14,451
)
Equity in earnings (loss) of subsidiaries, net of tax
26,492

—

(457
)
(26,035
)
—

Net earnings
34,387

18,397

7,624

(26,035
)
34,373

Less: Net loss attributable to noncontrolling interests
—

—

(14
)
—

(14
)
Net earnings attributable to Caleres, Inc.
$
34,387

$
18,397

$
7,638

$
(26,035
)
$
34,387

 
 
 
 
 
 
Comprehensive income
$
34,305

$
18,397

$
7,457

$
(25,857
)
$
34,302

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(3
)
—

(3
)
Comprehensive income attributable to Caleres, Inc.
$
34,305

$
18,397

$
7,460

$
(25,857
)
$
34,305


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
614,764

$
1,451,191

$
148,985

$
(131,821
)
$
2,083,119

Cost of goods sold
423,224

815,980

74,424

(105,763
)
1,207,865

Gross profit
191,540

635,211

74,561

(26,058
)
875,254

Selling and administrative expenses
172,122

570,272

45,254

(26,058
)
761,590

Restructuring and other special charges, net
3,769

37

167

—

3,973

Operating earnings
15,649

64,902

29,140

—

109,691

Interest expense
(13,809
)
(13
)
—

—

(13,822
)
Interest income
220

—

372

—

592

Intercompany interest income (expense)
6,085

(6,516
)
431

—

—

Earnings before income taxes
8,145

58,373

29,943

—

96,461

Income tax provision
(2,124
)
(21,407
)
(5,999
)
—

(29,530
)
Equity in earnings (loss) of subsidiaries, net of tax
60,863

—

(1,234
)
(59,629
)
—

Net earnings
66,884

36,966

22,710

(59,629
)
66,931

Less: Net earnings attributable to noncontrolling interests
—

—

47

—

47

Net earnings attributable to Caleres, Inc.
$
66,884

$
36,966

$
22,663

$
(59,629
)
$
66,884

 
 
 
 
 
 
Comprehensive income
$
69,170

$
36,966

$
23,212

$
(60,105
)
$
69,243

Less: Comprehensive income attributable to noncontrolling interests
—

—

73

—

73

Comprehensive income attributable to Caleres, Inc.
$
69,170

$
36,966

$
23,139

$
(60,105
)
$
69,170


27


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash (used for) provided by operating activities
$
(13,179
)
$
97,443

$
37,997

$
—

$
122,261

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(5,340
)
(25,377
)
(3,647
)
—

(34,364
)
Capitalized software
(4,079
)
(452
)
—

—

(4,531
)
Intercompany investing
(20,058
)
197,763

(177,705
)
—

—

Net cash (used for) provided by investing activities
(29,477
)
171,934

(181,352
)
—

(38,895
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
450,000

—

—

—

450,000

Repayments under revolving credit agreement
(540,000
)
—

—

—

(540,000
)
Dividends paid
(9,033
)
—

—

—

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

—

—

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

—

—

(2,477
)
Intercompany financing
134,315

(270,459
)
136,144

—

—

Net cash provided by (used for) financing activities
26,812

(270,459
)
136,144

—

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

—

184

—

184

Decrease in cash and cash equivalents
(15,844
)
(1,082
)
(7,027
)
—

(23,953
)
Cash and cash equivalents at beginning of period
23,999

9,029

22,304

—

55,332

Cash and cash equivalents at end of period
$
8,155

$
7,947

$
15,277

$
—

$
31,379



28


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 29, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
50,463

$
5,897

$
117,075

$
—

$
173,435

Receivables, net
123,345

856

15,274

—

139,475

Inventories, net
114,180

387,688

22,955

—

524,823

Prepaid expenses and other current assets
12,766

13,649

5,301

—

31,716

Intercompany receivable – current
823

327

15,766

(16,916
)
—

Total current assets
301,577

408,417

176,371

(16,916
)
869,449

Other assets
92,895

14,106

7,850

—

114,851

Goodwill and intangible assets, net
113,889

2,800

11,452

—

128,141

Property and equipment, net
30,902

149,680

11,172

—

191,754

Investment in subsidiaries
1,076,592

—

(21,068
)
(1,055,524
)
—

Intercompany receivable  –  noncurrent
485,403

384,452

573,308

(1,443,163
)
—

Total assets
$
2,101,258

$
959,455

$
759,085

$
(2,515,603
)
$
1,304,195

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Trade accounts payable
$
70,501

$
123,003

$
18,584

$
—

$
212,088

Other accrued expenses
48,614

75,797

17,475

—

141,886

Intercompany payable – current
5,145

—

11,771

(16,916
)
—

Total current liabilities
124,260

198,800

47,830

(16,916
)
353,974

Other liabilities
 

 

 

 

 

Long-term debt
196,888

—

—

—

196,888

Other liabilities
34,463

68,146

3,661

—

106,270

Intercompany payable – noncurrent
1,099,537

41,933

301,693

(1,443,163
)
—

Total other liabilities
1,330,888

110,079

305,354

(1,443,163
)
303,158

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
646,110

650,576

404,948

(1,055,524
)
646,110

Noncontrolling interests
—

—

953

—

953

Total equity
646,110

650,576

405,901

(1,055,524
)
647,063

Total liabilities and equity
$
2,101,258

$
959,455

$
759,085

$
(2,515,603
)
$
1,304,195



29


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED OCTOBER 29, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
235,094

$
487,558

$
48,055

$
(38,477
)
$
732,230

Cost of goods sold
162,629

281,926

25,669

(31,765
)
438,459

Gross profit
72,465

205,632

22,386

(6,712
)
293,771

Selling and administrative expenses
53,225

177,466

14,340

(6,712
)
238,319

Operating earnings
19,240

28,166

8,046

—

55,452

Interest expense
(3,472
)
(3
)
—

—

(3,475
)
Interest income
200

—

150

—

350

Intercompany interest income (expense)
2,083

(2,107
)
24

—

—

Earnings before income taxes
18,051

26,056

8,220

—

52,327

Income tax provision
(6,193
)
(9,743
)
(1,665
)
—

(17,601
)
Equity in earnings (loss) of subsidiaries, net of tax
22,872

—

(499
)
(22,373
)
—

Net earnings
34,730

16,313

6,056

(22,373
)
34,726

Less: Net loss attributable to noncontrolling interests
—

—

(4
)
—

(4
)
Net earnings attributable to Caleres, Inc.
$
34,730

$
16,313

$
6,060

$
(22,373
)
$
34,730

 
 
 
 
 
 
Comprehensive income
$
33,816

$
16,313

$
5,661

$
(21,999
)
$
33,791

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(25
)
—

(25
)
Comprehensive income attributable to Caleres, Inc.
$
33,816

$
16,313

$
5,686

$
(21,999
)
$
33,816


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 29, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net sales
$
617,177

$
1,279,080

$
156,649

$
(113,006
)
$
1,939,900

Cost of goods sold
434,833

707,584

87,688

(91,324
)
1,138,781

Gross profit
182,344

571,496

68,961

(21,682
)
801,119

Selling and administrative expenses
155,608

505,032

45,708

(21,682
)
684,666

Operating earnings
26,736

66,464

23,253

—

116,453

Interest expense
(10,561
)
(3
)
—

—

(10,564
)
Interest income
531

—

376

—

907

Intercompany interest income (expense)
6,590

(6,685
)
95

—

—

Earnings before income taxes
23,296

59,776

23,724

—

106,796

Income tax provision
(7,369
)
(22,483
)
(4,662
)
—

(34,514
)
Equity in earnings (loss) of subsidiaries, net of tax
56,353

—

(1,545
)
(54,808
)
—

Net earnings
72,280

37,293

17,517

(54,808
)
72,282

Less: Net earnings attributable to noncontrolling interests
—

—

2

—

2

Net earnings attributable to Caleres, Inc.
$
72,280

$
37,293

$
17,515

$
(54,808
)
$
72,280

 
 
 
 
 
 
Comprehensive income
$
71,871

$
37,293

$
17,692

$
(55,020
)
$
71,836

Less: Comprehensive loss attributable to noncontrolling interests
—

—

(35
)
—

(35
)
Comprehensive income attributable to Caleres, Inc.
$
71,871

$
37,293

$
17,727

$
(55,020
)
$
71,871



30



UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 29, 2016
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Net cash provided by operating activities
$
23,770

$
83,584

$
29,649

$
—

$
137,003

 
 
 
 
 
 
Investing activities
 

 

 

 

 

Purchases of property and equipment
(2,748
)
(37,154
)
(3,117
)
—

(43,019
)
Capitalized software
(3,859
)
(1,783
)
(30
)
—

(5,672
)
Intercompany investing
(3,129
)
3,129

—

—

—

Net cash used for investing activities
(9,736
)
(35,808
)
(3,147
)
—

(48,691
)
 
 
 
 
 
 
Financing activities
 

 

 

 

 

Borrowings under revolving credit agreement
103,000

—

—

—

103,000

Repayments under revolving credit agreement
(103,000
)
—

—

—

(103,000
)
Dividends paid
(9,094
)
—

—

—

(9,094
)
Acquisition of treasury stock
(23,139
)
—

—

—

(23,139
)
Issuance of common stock under share-based plans, net
(4,205
)
—

—

—

(4,205
)
Excess tax benefit related to share-based plans
3,264

—

—

—

3,264

Intercompany financing
38,603

(41,879
)
3,276

—

—

Net cash provided by (used for) financing activities
5,429

(41,879
)
3,276

—

(33,174
)
Effect of exchange rate changes on cash and cash equivalents
—

—

146

—

146

Increase in cash and cash equivalents
19,463

5,897

29,924

—

55,284

Cash and cash equivalents at beginning of period
31,000

—

87,151

—

118,151

Cash and cash equivalents at end of period
$
50,463

$
5,897

$
117,075

$
—

$
173,435



31


CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 28, 2017
 
 
 
Non-

 
 
($ thousands)
Parent

Guarantors

Guarantors

Eliminations

Total

Assets
 

 

 

 

 

Current assets
 

 

 

 

 

Cash and cash equivalents
$
23,999

$
9,029

$
22,304

$
—

$
55,332

Receivables, net
118,746

5,414

28,961

—

153,121

Inventories, net
150,098

410,867

24,799

—

585,764

Prepaid expenses and other current assets
24,293

23,040

8,058

(5,863
)
49,528

Intercompany receivable  – current
695

263

22,091

(23,049
)
—

Total current assets
317,831

448,613

106,213

(28,912
)
843,745

Other assets
51,181

16,567

826

—

68,574

Goodwill and intangible assets, net
113,333

219,337

11,088

—

343,758

Property and equipment, net
31,424

176,358

11,414

—

219,196

Investment in subsidiaries
1,343,954

—

(21,946
)
(1,322,008
)
—

Intercompany receivable  – noncurrent
568,541

366,902

581,624

(1,517,067
)
—

Total assets
$
2,426,264

$
1,227,777

$
689,219

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

 
 
 
 
 
 
Liabilities and Equity
 
 

 

 

 

Current liabilities
 

 

 

 

 

Borrowings under revolving credit agreement
$
110,000

$
—

$
—

$
—

$
110,000

Trade accounts payable
116,783

112,434

37,153

—

266,370

Other accrued expenses
74,941

65,228

16,919

(5,863
)
151,225

Intercompany payable – current
12,794

—

10,255

(23,049
)
—

Total current liabilities
314,518

177,662

64,327

(28,912
)
527,595

Other liabilities
 

 

 

 

 

Long-term debt
197,003

—

—

—

197,003

Other liabilities
91,683

40,507

3,999

—

136,189

Intercompany payable – noncurrent
1,209,943

98,982

208,142

(1,517,067
)
—

Total other liabilities
1,498,629

139,489

212,141

(1,517,067
)
333,192

Equity
 

 

 

 

 

Caleres, Inc. shareholders’ equity
613,117

910,626

411,382

(1,322,008
)
613,117

Noncontrolling interests
—

—

1,369

—

1,369

Total equity
613,117

910,626

412,751

(1,322,008
)
614,486

Total liabilities and equity
$
2,426,264

$
1,227,777

$
689,219

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



32


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
Financial Highlights
The following is a summary of the financial highlights for the third quarter of 2017:   
 
•
Consolidated net sales increased $42.5 million in the third quarter of 2017, driven by our Allen Edmonds business, which we acquired late last year. Same-store sales at our Famous Footwear segment were up 0.9% for the third quarter of 2017 and 2.6% for the back-to-school season. Boot sales in both our Brand Portfolio and Famous Footwear segments were lower as a result of unseasonably warm weather across the United States.

•
During the third quarter of 2017, Hurricanes Harvey and Irma caused extensive damage in Texas and Florida. These are major markets for us and several of our stores were closed for a period of time. We estimate that the hurricanes negatively impacted our net sales for the third quarter of 2017 by approximately $4 million, with approximately a $3 million impact at our Famous Footwear segment and $1 million at our Brand Portfolio segment.

•
We continued to experience strong gross margins in the third quarter of 2017 across both segments, primarily reflecting a higher consolidated mix of retail versus wholesale sales and an improved mix of higher margin brands. In addition, we continue to benefit from our sourcing initiatives, which have lowered our cost of merchandise.

•
Consolidated net earnings attributable to Caleres, Inc. were $34.4 million, or $0.80 per diluted share, in the third quarter of 2017, compared to $34.7 million, or $0.81 per diluted share, in the third quarter of 2016.

•
We continue to improve our balance sheet. In late 2016, we used approximately $260.0 million of proceeds from our revolving credit agreement to fund the Allen Edmonds acquisition. Since that time, we have paid down all but $20.0 million of our revolving credit agreement, driven by our strong operating cash flows. We expect to pay down the remaining $20.0 million during the fourth quarter of 2017. Our debt-to-capital ratio was 24.4% as of October 28, 2017, compared to 23.3% as of October 29, 2016 and 33.3% at January 28, 2017.

Outlook for the Remainder of 2017
Although boot sales were lower in the third quarter, we saw improvements in boot sales in November as more seasonal weather arrived. We also continue to benefit from our speed-to-market initiative, which has allowed us to react more rapidly to shifting trends and respond to consumer demand. We remain focused on day-to-day execution and managing the factors under our control, despite the challenges the retail industry is facing. We remain confident in our ability to drive results and believe we have the right strategy, plan and people in place to consistently deliver.


33


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

Thirty-nine Weeks Ended
 
October 28, 2017
 
October 29, 2016

October 28, 2017
 
October 29, 2016
 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

 
 
 
% of 
Net Sales

($ millions)
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
774.7

 
100.0
 %
 
$
732.2

 
100.0
 %
 
$
2,083.1

 
100.0
 %
 
$
1,939.9

 
100.0
 %
Cost of goods sold
457.8

 
59.1
 %
 
438.4

 
59.9
 %
 
1,207.8

 
58.0
 %
 
1,138.8

 
58.7
 %
Gross profit
316.9

 
40.9
 %
 
293.8

 
40.1
 %
 
875.3

 
42.0
 %
 
801.1

 
41.3
 %
Selling and administrative expenses
264.0

 
34.1
 %
 
238.3

 
32.5
 %
 
761.6

 
36.5
 %
 
684.6

 
35.3
 %
Restructuring and other special charges, net
—

 
—
 %
 
—

 
—
 %
 
4.0

 
0.2
 %
 
—

 
—
 %
Operating earnings
52.9

 
6.8
 %
 
55.5

 
7.6
 %
 
109.7

 
5.3
 %
 
116.5

 
6.0
 %
Interest expense
(4.2
)
 
(0.5
)%
 
(3.5
)
 
(0.5
)%
 
(13.8
)
 
(0.7
)%
 
(10.6
)
 
(0.5
)%
Interest income
0.1

 
0.0
 %
 
0.3

 
0.0
 %
 
0.6

 
0.0
 %
 
0.9

 
0.0
 %
Earnings before income taxes
48.8

 
6.3
 %
 
52.3

 
7.1
 %
 
96.5

 
4.6
 %
 
106.8

 
5.5
 %
Income tax provision
(14.4
)
 
(1.9
)%
 
(17.6
)
 
(2.4
)%
 
(29.6
)
 
(1.4
)%
 
(34.5
)
 
(1.8
)%
Net earnings
34.4

 
4.4
 %
 
34.7

 
4.7
 %
 
66.9

 
3.2
 %
 
72.3

 
3.7
 %
Net (loss) earnings attributable to noncontrolling interests
(0.0)
 
(0.0
 %)
 
(0.0)
 
(0.0
 %)
 
0.0

 
0.0
 %
 
0.0

 
0.0
 %
Net earnings attributable to Caleres, Inc.
$
34.4

 
4.4
 %
 
$
34.7

 
4.7
 %
 
$
66.9

 
3.2
 %
 
$
72.3

 
3.7
 %
 
Net Sales 
Net sales increased $42.5 million, or 5.8%, to $774.7 million for the third quarter of 2017, compared to $732.2 million for the third quarter of 2016. Our Brand Portfolio segment reported a $37.1 million, or 14.0%, increase in net sales, reflecting $44.1 million of sales from our recently acquired Allen Edmonds business and higher net sales of our Sam Edelman and Naturalizer brands, partially offset by lower sales from our Franco Sarto and Via Spiga brands. Our Famous Footwear segment reported a $5.3 million, or 1.1%, increase in net sales, primarily driven by a 0.9% increase in same-store sales and a strong back-to-school selling season. As discussed in the Overview section, we estimate that our net sales were lower by approximately $4 million for the third quarter of 2017 related to the impacts of Hurricanes Harvey and Irma. In addition, unseasonably warm weather resulted in a delayed start to the fall boot season, impacting boot sales in both our Famous Footwear and Brand Portfolio segments.

Net sales increased $143.2 million, or 7.4%, to $2,083.1 million for the nine months ended October 28, 2017, compared to $1,939.9 million for the nine months ended October 29, 2016. Our Brand Portfolio segment reported a $121.2 million, or 16.9%, increase in net sales, reflecting $128.3 million of sales from our recently acquired Allen Edmonds business and sales growth from our Sam Edelman and Vince brands, partially offset by lower sales from our Franco Sarto, Via Spiga and Dr. Scholl's brands.  Net sales of our Famous Footwear segment increased $22.0 million, or 1.8%, driven by a 1.0% increase in same-store sales and a net increase in sales from new and closed stores.

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

34


Gross Profit 
Gross profit increased $23.1 million, or 7.9%, to $316.9 million for the third quarter of 2017, compared to $293.8 million for the third quarter of 2016, reflecting higher sales volume, as described above, and an improved gross profit rate.  As a percentage of net sales, gross profit increased to 40.9% for the third quarter of 2017, compared to 40.1% for the third quarter of 2016, primarily reflecting a higher consolidated mix of retail versus wholesale sales and an improved mix of our higher margin brands. Retail and wholesale net sales were 71% and 29%, respectively, in the third quarter of 2017, compared to 69% and 31% in the third quarter of 2016.  

Gross profit increased $74.2 million, or 9.3%, to $875.3 million for the nine months ended October 28, 2017, compared to $801.1 million for the nine months ended October 29, 2016, reflecting the above named factors.  As a percentage of net sales, gross profit increased to 42.0% for the nine months ended October 28, 2017, compared to 41.3% for the nine months ended October 29, 2016, reflecting a higher consolidated mix of retail versus wholesale sales and growth in our higher margin brands, partially offset by amortization of the inventory fair value adjustment in conjunction with the acquisition of Allen Edmonds of $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share). Retail and wholesale net sales were 70% and 30%, respectively, in the nine months ended October 28, 2017, compared to 68% and 32% in the nine months ended October 29, 2016.

We classify certain warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies. 
 
Selling and Administrative Expenses 
Selling and administrative expenses increased $25.7 million, or 10.8%, to $264.0 million for the third quarter of 2017, compared to $238.3 million for the third quarter of 2016, primarily driven by the recently acquired Allen Edmonds business and higher anticipated payments under our cash-based incentive compensation plans. As a percentage of net sales, selling and administrative expenses increased to 34.1% for the third quarter of 2017 from 32.5% for the third quarter of 2016.

Selling and administrative expenses increased $77.0 million, or 11.2%, to $761.6 million for the nine months ended October 28, 2017, compared to $684.6 million for the nine months ended October 29, 2016, driven by the above named factors. As a percentage of net sales, selling and administrative expenses increased to 36.5% for the nine months ended October 28, 2017 from 35.3% for the nine months ended October 29, 2016.

Restructuring and Other Special Charges, Net
Restructuring and other special charges of $4.0 million ($2.6 million on an after-tax basis, or $0.06 per diluted share), primarily for professional fees and severance expense, were incurred in the nine months ended October 28, 2017 related to the men's business. No restructuring charges were incurred in the third quarter of 2017 or during the nine months ended October 29, 2016. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $2.6 million, or 4.7%, to $52.9 million for the third quarter of 2017, compared to $55.5 million for the third quarter of 2016. Although sales and gross profit were higher in the third quarter, higher selling and administrative expenses resulted in lower operating earnings. As a percentage of net sales, operating earnings decreased to 6.8% for the third quarter of 2017, compared to 7.6% for the third quarter of 2016.

Operating earnings decreased $6.8 million, or 5.8% to $109.7 million for the nine months ended October 28, 2017, compared to $116.5 million for the nine months ended October 29, 2016, reflecting the factors described above for the third quarter, as well as restructuring and other special charges incurred earlier in 2017.  As a percentage of net sales, operating earnings decreased to 5.3% for the nine months ended October 28, 2017, compared to 6.0% for the nine months ended October 29, 2016.

Interest Expense 
Interest expense increased $0.7 million, or 19.2%, to $4.2 million for the third quarter of 2017, compared to $3.5 million for the third quarter of 2016, reflecting higher interest expense on our revolving credit agreement, which was used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016. In addition, during the third quarter of 2016, we capitalized interest of $0.4 million associated with the expansion and modernization of our Lebanon, Tennessee distribution center, which was completed in the fourth quarter of 2016.

Interest expense increased $3.2 million, or 30.8%, to $13.8 million for the nine months ended October 28, 2017, compared to $10.6 million for the nine months ended October 29, 2016, reflecting the acquisition of Allen Edmonds. In addition, during the nine months ended October 29, 2016, we capitalized interest of $1.3 million associated with the expansion and modernization of our Lebanon, Tennessee distribution center.

35



Income Tax Provision 
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 29.6% for the third quarter of 2017, compared to 33.6% for the third quarter of 2016. During the third quarter of 2017, we recognized discrete tax benefits of $0.9 million, reflecting greater deductibility of certain 2016 expenses than originally estimated. During the third quarter of 2016, we recognized a discrete tax benefit of $0.3 million reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the third quarter of 2017 and 2016, our effective tax rates would have been 31.5% and 34.1%, respectively. Excluding the discrete tax items, our tax rate is lower in the current period, reflecting a higher mix of international earnings in our lowest tax rate jurisdictions.

For the nine months ended October 28, 2017, our consolidated effective tax rate was 30.6%, compared to 32.3% for the nine months ended October 29, 2016. Discrete tax benefits of $2.0 million were recognized during the thirty-nine weeks ended October 28, 2017, including a discrete tax benefit of $1.2 million related to share-based compensation as a result of the adoption of ASU 2016-09 during the first quarter of 2017, which requires prospective recognition of excess tax benefits and deficiencies in the statement of earnings. We recognized a discrete tax benefit of $1.1 million during the nine months ended October 29, 2016, reflecting the settlement of a federal tax audit issue. If these discrete tax benefits had not been recognized during the nine months ended October 28, 2017 and October 29, 2016, our effective tax rates would have been 32.7% and 33.4%, respectively. Excluding the discrete tax items, our tax rate is lower for the nine months ended October 28, 2017, reflecting a higher mix of international earnings in our lowest tax rate jurisdictions.

Both the U.S. House of Representatives and the Senate have proposed tax reform legislation that could significantly alter the tax landscape in the United States. We cannot predict the tax reform legislation that will ultimately be enacted. Therefore, the impact on our future effective tax rate and income tax provision is uncertain.

Net Earnings Attributable to Caleres, Inc. 
Net earnings attributable to Caleres, Inc. were $34.4 million and $66.9 million for the third quarter and nine months ended October 28, 2017, compared to net earnings of $34.7 million and $72.3 million for the third quarter and nine months ended October 29, 2016, as a result of the factors described above.


36


FAMOUS FOOTWEAR
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

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

 

 
 

 

 
 

 

 
 

 

Net sales
$
473.1

100.0
%
 
$
467.8

100.0
%
 
$
1,244.5

100.0
%
 
$
1,222.5

100.0
%
Cost of goods sold
275.0

58.1
%
 
273.1

58.4
%
 
695.4

55.9
%
 
681.7

55.8
%
Gross profit
198.1

41.9
%
 
194.7

41.6
%
 
549.1

44.1
%
 
540.8

44.2
%
Selling and administrative expenses
164.4

34.8
%
 
162.0

34.6
%
 
470.0

37.7
%
 
459.7

37.6
%
Operating earnings
$
33.7

7.1
%
 
$
32.7

7.0
%
 
$
79.1

6.4
%
 
$
81.1

6.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 
 
 

 
 
 
 
 
 
 
Same-store sales % change
0.9
%
 

 
2.1
%
 

 
1.0
%
 

 
0.7
%
 

Same-store sales $ change
$
3.8

 

 
$
9.3

 

 
$
12.2

 

 
$
8.7

 

Sales change from new and closed stores, net
$
1.0

 
 
$
2.3

 
 
$
9.6

 
 
$
2.0

 
Impact of changes in Canadian exchange rate on sales
$
0.5

 
 
$
0.0

 
 
$
0.2

 
 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended)
$
64

 
 
$
63

 
 
$
169

 
 
$
167

 
Sales per square foot, excluding e-commerce (trailing twelve months)
$
217

 

 
$
216

 

 
$
217

 

 
$
216

 

Square footage (thousand sq. ft.)
6,894

 

 
6,960

 

 
6,894

 

 
6,960

 

 
 
 
 
 
 
 
 
 
 
 
 
Stores opened
12

 

 
16

 

 
33

 

 
37

 

Stores closed
(25
)
 

 
9

 

 
(46
)
 

 
32

 

Ending stores
1,042

 

 
1,051

 

 
1,042

 

 
1,051

 

 
Net Sales 
Net sales increased $5.3 million, or 1.1%, to $473.1 million for the third quarter of 2017, compared to $467.8 million for the third quarter of 2016. The increase was primarily driven by a 0.9% increase in same-store sales and a strong back-to-school selling season.  Famous Footwear experienced growth in e-commerce sales and reported improvement in the online conversion rate, due in part to the successful implementation of our buy online, pick up in store initiative. The strong e-commerce sales were partially offset by a decline in customer traffic at our retail store locations, due in part to the impact of Hurricanes Harvey and Irma. As discussed in the Overview section, we estimate that these hurricanes negatively impacted our net sales for the third quarter of 2017 by approximately $3 million. The segment experienced sales growth in lifestyle athletic and sport-influenced product. Sales of boots were lower in the third quarter of 2017, which we believe is due in part to unseasonably warm weather. During the third quarter of 2017, we opened 12 new stores and closed 25 stores, resulting in 1,042 stores and total square footage of 6.9 million at the end of the third quarter of 2017, compared to 1,051 stores and total square footage of 7.0 million at the end of the third quarter of 2016. On a trailing twelve-month basis, sales per square foot, excluding e-commerce, increased 0.4% to $217 for the twelve months ended October 28, 2017, compared to $216 for the twelve months ended October 29, 2016. Members of Rewards, our customer loyalty program, continue to account for a majority of the segment’s sales, with approximately 76% of our net sales made to Rewards program members in the third quarter of 2017, consistent with the third quarter of 2016. In addition, we continue to experience growth in the number of our Rewards members.


37


Net sales increased $22.0 million, or 1.8%, to $1,244.5 million for the nine months ended October 28, 2017, compared to $1,222.5 million for the nine months ended October 29, 2016. The increase was primarily driven by a 1.0% increase in same-store sales and a net increase in sales from new and closed stores. Famous Footwear experienced solid growth in e-commerce sales, and reported improvement in both conversion rate and online customer traffic. However, the strong e-commerce sales were offset by a decline in customer traffic at our retail store locations.

Gross Profit 
Gross profit increased $3.4 million, or 1.8%, to $198.1 million for the third quarter of 2017, compared to $194.7 million for the third quarter of 2016, reflecting both higher net sales and gross profit rate. As a percentage of net sales, our gross profit increased to 41.9% for the third quarter of 2017, compared to 41.6% for the third quarter of 2016.
 
Gross profit increased $8.3 million, or 1.5%, to $549.1 million for the nine months ended October 28, 2017, compared to $540.8 million for the nine months ended October 29, 2016 primarily driven by higher net sales. As a percentage of net sales, our gross profit was 44.1% for the nine months ended October 28, 2017, compared to 44.2% for the nine months ended October 29, 2016.

Selling and Administrative Expenses 
Selling and administrative expenses increased $2.4 million, or 1.5%, to $164.4 million for the third quarter of 2017, compared to $162.0 million for the third quarter of 2016.  The increase was primarily driven by higher expenses related to cash-based incentive compensation and higher facilities costs. As a percentage of net sales, selling and administrative expenses increased to 34.8% for the third quarter of 2017, compared to 34.6% for the third quarter of 2016.

Selling and administrative expenses increased $10.3 million, or 2.2%, to $470.0 million for the nine months ended October 28, 2017, compared to $459.7 million for the nine months ended October 29, 2016. The increase was primarily attributable to higher store rent and facilities costs and higher expenses related to cash-based incentive compensation. As a percentage of net sales, selling and administrative expenses increased to 37.7% for the nine months ended October 28, 2017, compared to 37.6% for the nine months ended October 29, 2016.

Operating Earnings  
Operating earnings increased $1.0 million, or 3.2%, to $33.7 million for the third quarter of 2017, compared to $32.7 million for the third quarter of 2016. The increase reflects our net sales growth and a higher gross profit rate, partially offset by higher selling and administrative expenses. As a percentage of net sales, operating earnings increased to 7.1% for the third quarter of 2017, compared to 7.0% for the third quarter of 2016.

Operating earnings decreased $2.0 million, or 2.4%, to $79.1 million for the nine months ended October 28, 2017, compared to $81.1 million for the nine months ended October 29, 2016. The decrease reflects higher selling and administrative expenses and a slight decline in gross profit rate, partially offset by higher net sales. As a percentage of net sales, operating earnings decreased to 6.4% for the nine months ended October 28, 2017, compared to 6.6% for the nine months ended October 29, 2016.


38


BRAND PORTFOLIO
 
 
 
 
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 
% of 
Net Sales

 
 

% of 
Net Sales

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

 

 
 

 

 
 

 

 
 

 

Net sales
$
301.5

100.0
%
 
$
264.4

100.0
%
 
$
838.6

100.0
%
 
$
717.4

100.0
%
Cost of goods sold
182.7

60.6
%
 
165.3

62.5
%
 
512.4

61.1
%
 
457.1

63.7
%
Gross profit
118.8

39.4
%
 
99.1

37.5
%
 
326.2

38.9
%
 
260.3

36.3
%
Selling and administrative expenses
94.5

31.3
%
 
68.6

26.0
%
 
271.2

32.3
%
 
202.8

28.3
%
Restructuring and other special charges, net
—

—
%
 
—

—
%
 
1.5

0.2
%
 
—

—
%
Operating earnings
$
24.3

8.1
%
 
$
30.5

11.5
%
 
$
53.5

6.4
%
 
$
57.5

8.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 

 

 
 

 

 
 

 

 
 

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

 

 
86%/14%

 

 
75%/25%

 

 
86%/14%

 
Change in wholesale net sales ($) (1)
$
(0.6
)
 
 
$
(8.9
)
 
 
$
7.7

 
 
$
(39.3
)
 
Unfilled order position at end of period (1)
$
302.4

 
 
$
315.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store sales % change (2)
2.4
%
 
 
(5.4
)%
 
 
6.7
%
 
 
(5.2
)%
 
Same-store sales $ change (2)
$
0.8

 
 
$
(1.8
)
 
 
$
5.8

 
 
$
(4.6
)
 
Sales change from new and closed stores, net (3)
$
36.3

 
 
$
2.6

 
 
$
107.4

 
 
$
5.6

 
Impact of changes in Canadian exchange rate on retail sales
$
0.6

 
 
$
0.0

 
 
$
0.3

 
 
$
(1.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales per square foot, excluding e-commerce (thirteen and thirty-nine weeks ended) (2)
$
87

 
 
$
84

 
 
$
245

 
 
$
236

 
Sales per square foot, excluding e-commerce (trailing twelve months) (2)
$
323

 
 
$
316

 
 
$
323

 
 
$
316

 
Square footage (thousands sq. ft.) (3)
403

 
 
306

 
 
403

 
 
306

 
 
 
 
 
 
 
 
 
 
 
 
 
Stores opened (3)
3

 
 
2

 
 
11

 
 
7

 
Stores closed (3)
(6
)
 
 
2

 
 
(12
)
 
 
5

 
Ending stores (3)
235

 
 
167

 
 
235

 
 
167

 

(1)
These metrics include our recently acquired Allen Edmonds business. Refer to Note 3 to the condensed consolidated financial statements for additional information.
(2)
These metrics exclude our recently acquired Allen Edmonds business since the business was not included in our operations in the prior year comparative period.
(3)
These metrics for the third quarter and nine months ended October 28, 2017 include our recently acquired Allen Edmonds retail stores, which total approximately 121,000 square feet.


39


Net Sales 
Net sales increased $37.1 million, or 14.0%, to $301.5 million for the third quarter of 2017, compared to $264.4 million for the third quarter of 2016, driven by $44.1 million in sales from our recently acquired Allen Edmonds business. In addition, we experienced higher net sales of our Sam Edelman and Naturalizer brands, partially offset by lower sales from our Franco Sarto and Via Spiga brands. Our sales were negatively impacted by unseasonably warm weather, which resulted in lower sales of boots during the third quarter of 2017. Our same-store sales, which exclude the impact of Allen Edmonds stores because they have not been part of the Company for 13 months, increased 2.4% during the quarter. During the third quarter of 2017, we opened three stores and closed six stores, resulting in a total of 235 stores (of which 77 are Allen Edmonds) and total square footage of 0.4 million at the end of the third quarter of 2017, compared to 167 stores and total square footage of 0.3 million at the end of the third quarter of 2016. On a trailing twelve-month basis, sales per square foot, excluding e-commerce and sales from our Allen Edmonds stores, increased 2.1% to $323 for the twelve months ended October 28, 2017, compared to $316 for the twelve months ended October 29, 2016.

Net sales increased $121.2 million, or 16.9%, to $838.6 million for the nine months ended October 28, 2017, compared to $717.4 million for the nine months ended October 29, 2016, driven by $128.3 million in sales from our Allen Edmonds business and sales growth from our Sam Edelman and Vince brands, partially offset by lower sales from our Franco Sarto, Via Spiga and Dr. Scholl's brands. Our retail sales benefited from a net increase in sales from our acquisition of Allen Edmonds and an increase in same-store sales of 6.7%. During the nine months ended October 28, 2017, we opened 11 stores and closed 12 stores.

Gross Profit 
Gross profit increased $19.7 million, or 19.9%, to $118.8 million for the third quarter of 2017, compared to $99.1 million for the third quarter of 2016, primarily as a result of the recently acquired Allen Edmonds business. As a percentage of net sales, our gross profit increased to 39.4% for the third quarter of 2017, compared to 37.5% for the third quarter of 2016.  Our gross profit rate for the third quarter of 2017 benefited from the higher mix of retail versus wholesale sales and growth in our higher margin brands.

Gross profit increased $65.9 million, or 25.3%, to $326.2 million for the nine months ended October 28, 2017, compared to $260.3 million for the nine months ended October 29, 2016, primarily as a result of the recently acquired Allen Edmonds business. The Brand Portfolio segment recognized $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) in cost of goods sold for the nine months ended October 28, 2017 related to the amortization of the Allen Edmonds inventory fair value adjustment required for purchase accounting. As a percentage of net sales, our gross profit rate increased to 38.9% for the nine months ended October 28, 2017, compared to 36.3% for the nine months ended October 29, 2016, reflecting the above named factors.

Selling and Administrative Expenses 
Selling and administrative expenses increased $25.9 million, or 37.7%, to $94.5 million for the third quarter of 2017, compared to $68.6 million for the third quarter of 2016, primarily due to costs associated with the recently acquired Allen Edmonds business and additional costs associated with investments in our fulfillment program and distribution centers. As a percentage of net sales, selling and administrative expenses increased to 31.3% for the third quarter of 2017, compared to 26.0% for the third quarter of 2016. 

Selling and administrative expenses increased $68.4 million, or 33.7%, to $271.2 million for the nine months ended October 28, 2017, compared to $202.8 million for the nine months ended October 29, 2016, driven by costs associated with the recently acquired Allen Edmonds business, an increase in anticipated payments under our cash-based incentive compensation plans and additional costs associated with investments in our fulfillment program and distribution centers. As a percentage of net sales, selling and administrative expenses increased to 32.3% for the nine months ended October 28, 2017, compared to 28.3% for the nine months ended October 29, 2016.

Restructuring and Other Special Charges, Net
Restructuring and other special charges were $1.5 million in the nine months ended October 28, 2017 related to the integration and reorganization of our men's business. No restructuring and other special charges were incurred in the third quarter of 2017 or during the nine months ended October 29, 2016. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.

Operating Earnings 
Operating earnings decreased $6.2 million, or 20.3%, to $24.3 million for the third quarter of 2017, compared to $30.5 million for the third quarter of 2016. Despite net sales growth and expansion in our gross profit rate, higher selling and administrative expenses resulted in lower operating earnings. As a percentage of net sales, operating earnings decreased to 8.1% for the third quarter of 2017, compared to 11.5% in the third quarter of 2016. 


40


Operating earnings decreased $4.0 million, or 7.0%, to $53.5 million for the nine months ended October 28, 2017, compared to $57.5 million for nine months ended October 29, 2016, driven by the above named factors. As a percentage of net sales, operating earnings decreased to 6.4% for the nine months ended October 28, 2017, compared to 8.0% for the nine months ended October 29, 2016.
    
OTHER
 
The Other category includes unallocated corporate administrative expenses and other costs and recoveries. Costs of $5.2 million were incurred for the third quarter of 2017, compared to $7.7 million for the third quarter of 2016, primarily reflecting lower expenses related to our cash-based incentive plans.

Unallocated corporate administrative expenses and other costs and recoveries were $23.0 million for the nine months ended October 28, 2017, compared to $22.1 million for the nine months ended October 29, 2016. The increase primarily reflects $2.5 million of restructuring costs for the integration and reorganization of our men's brands, as further discussed in Note 5 to the condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES
Borrowings 
($ millions)
October 28, 2017

October 29, 2016

January 28, 2017

Borrowings under revolving credit agreement
$
20.0

$
—

$
110.0

Long-term debt
197.3

196.9

197.0

Total debt
$
217.3

$
196.9

$
307.0

 
Total debt obligations of $217.3 million at October 28, 2017 increased $20.4 million, compared to $196.9 million at October 29, 2016, primarily due to higher borrowings under our revolving credit agreement, which we used to fund the acquisition of Allen Edmonds in the fourth quarter of 2016. Total debt obligations decreased $89.7 million, compared to $307.0 million at January 28, 2017, as we paid down an incremental $90.0 million of our borrowings during the nine months ended October 28, 2017. Interest expense for the third quarter of 2017 increased $0.7 million to $4.2 million, compared to $3.5 million for the third quarter of 2016, and increased $3.2 million to $13.8 million for the nine months ended October 28, 2017, compared to $10.6 million for the nine months ended October 29, 2016. The increases were attributable to higher average borrowings under our revolving credit agreement due to the acquisition of Allen Edmonds in the fourth quarter of 2016. In addition, during the third quarter and nine months ended October 29, 2016, we capitalized interest of $0.4 million and $1.3 million, respectively, associated with the expansion and modernization of our Lebanon, Tennessee distribution center that was completed in the fourth quarter of 2016.

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

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

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


41


At October 28, 2017, we had $20.0 million in borrowings and $8.9 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $514.0 million at October 28, 2017. We were in compliance with all covenants and restrictions under the Credit Agreement as of October 28, 2017. 

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

The 2023 Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bear interest at 6.25%, which is payable on February 15 and August 15 of each year beginning on February 15, 2016. The 2023 Senior Notes mature on August 15, 2023. Prior to August 15, 2018, we may redeem some or all of the 2023 Senior Notes at various redemption prices.

The 2023 Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of October 28, 2017, we were in compliance with all covenants and restrictions relating to the 2023 Senior Notes.

Working Capital and Cash Flow
 
Thirty-nine Weeks Ended
 

($ millions)
October 28, 2017

October 29, 2016

Change

Net cash provided by operating activities
$
122.2

$
137.0

$
(14.8
)
Net cash used for investing activities
(38.9
)
(48.7
)
9.8

Net cash used for financing activities
(107.5
)
(33.2
)
(74.3
)
Effect of exchange rate changes on cash and cash equivalents
0.2

0.2

—

(Decrease) increase in cash and cash equivalents
$
(24.0
)
$
55.3

$
(79.3
)
 
Reasons for the major variances in cash provided (used) in the table above are as follows: 
 
Cash provided by operating activities was $14.8 million lower in the nine months ended October 28, 2017 as compared to the nine months ended October 29, 2016, reflecting the following factors:  
•
An increase in inventory in the nine months ended October 28, 2017 compared to a decrease in the comparable period in 2016;
•
A smaller decrease in prepaid expenses and other current assets in the nine months ended October 28, 2017, compared to the comparable period in 2016, reflecting lower current assets as of October 29, 2016 due to the timing of our rent payments; and
•
A larger decrease in accounts payable in the nine months ended October 28, 2017, compared to the comparable period in 2016; partially offset by
•
An increase in accrued expenses and other liabilities in the nine months ended October 28, 2017 as compared to a decrease in the comparable period in 2016, driven by higher anticipated payments under our cash-based incentive compensation plans in 2017.

Cash used for investing activities was $9.8 million lower in the nine months ended October 28, 2017 as compared to the nine months ended October 29, 2016, primarily due to lower purchases of property and equipment during the nine months ended October 28, 2017. During 2016, our capital expenditures included the expansion and modernization of our Lebanon, Tennessee distribution center, which was completed in the fourth quarter of 2016. For fiscal 2017, we expect purchases of property and equipment and capitalized software of approximately $55 million. 

Cash used for financing activities was $74.3 million higher for the nine months ended October 28, 2017 as compared to the nine months ended October 29, 2016, as we continue to reduce the borrowings under our revolving credit agreement, which funded our Allen Edmonds acquisition. In addition, we repurchased fewer shares under our stock repurchase program during the nine months ended October 28, 2017.

42



A summary of key financial data and ratios at the dates indicated is as follows: 
 
October 28, 2017

October 29, 2016

January 28, 2017

Working capital ($ millions) (1)
$
386.3

$
515.5

$
316.2

Current ratio (2)
1.93:1

2.46:1

1.60:1

Debt-to-capital ratio (3)
24.4
%
23.3
%
33.3
%
(1)
Working capital has been computed as total current assets less total current liabilities.
(2)
The current ratio has been computed by dividing total current assets by total current liabilities.
(3)
The debt-to-capital ratio has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity.
  
Working capital at October 28, 2017 was $386.3 million, which was $129.2 million lower and $70.1 million higher than at October 29, 2016 and January 28, 2017, respectively. Our current ratio was 1.93 to 1 as of October 28, 2017, compared to 2.46 to 1 at October 29, 2016 and 1.60 to 1 at January 28, 2017. The decrease in working capital and the current ratio from October 29, 2016 primarily reflects the impact of the Allen Edmonds acquisition in the fourth quarter of 2016, which was funded with borrowings under our revolving credit agreement. A significant portion of the Allen Edmonds purchase price was allocated to intangible assets, which are noncurrent, while the entire purchase price was funded using current liabilities. The increase in working capital and the current ratio from January 28, 2017 was primarily due to lower borrowings under our revolving credit agreement and lower payables, partially offset by lower cash and cash equivalents. Our debt-to-capital ratio was 24.4% as of October 28, 2017, compared to 23.3% as of October 29, 2016 and 33.3% at January 28, 2017. The increase in our debt-to-capital ratio from October 29, 2016 primarily reflects higher borrowings under our revolving credit agreement. The decrease in our debt-to-capital ratio from January 28, 2017 primarily reflects lower borrowings under our revolving credit agreement.
 
At October 28, 2017, we had $31.4 million of cash and cash equivalents. Approximately half of this balance represents the accumulated unremitted earnings of our foreign subsidiaries, which are considered indefinitely reinvested. 

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

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

During the third quarter of 2017, the Company signed a lease for a new wholesale distribution center in California. The lease term is 10 years and requires aggregate minimum lease payments of approximately $3.4 million in 2018, $10.2 million in 2019-2020, $10.7 million in 2021-2022 and $28.6 million thereafter.

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

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


43


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

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

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

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

44


designed to provide a reasonable level of assurance that their objectives are achieved.  As of October 28, 2017, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level. There were no significant changes to internal control over financial reporting during the quarter ended October 28, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.   
 
On December 13, 2016, we acquired Allen Edmonds. As a result of the acquisition, we are in the process of incorporating the internal control structure of Allen Edmonds.

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

ITEM 1A
RISK FACTORS

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

ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table provides information relating to our repurchases of common stock during the third quarter of 2017:
 
 
 
 
 
 
Maximum Number of Shares that May Yet be Purchased Under the Program (2)
 
 
 
 
 
Total Number Purchased as Part of Publicly Announced Program (2)
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (1)
 
 
 
 
Fiscal Period
 
 
 
 
 
 
 
 
 
July 30, 2017 – August 26, 2017
—

 
$
—

 
—

1,223,500

 
 
 
 
 
 
 
August 27, 2017 – September 30, 2017
2,118

 
30.65

 
—

1,223,500

 
 
 
 
 
 
 
October 1, 2017 – October 28, 2017
—

 
—

 
—

1,223,500

 
 
 
 
 
 
 
Total
2,118

 
$
30.65

 
—

1,223,500

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

(2)
On August 25, 2011, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2,500,000 shares of our outstanding common stock. We can use the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 225,000 and 900,000 shares were repurchased during the nine months ended

45


October 28, 2017 and October 29, 2016, respectively. There were 1,223,500 shares authorized to be repurchased under the program as of October 28, 2017. Our repurchases of common stock are limited under our debt agreements. 
 
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
 
None. 

ITEM 4
MINE SAFETY DISCLOSURES
 
Not applicable. 

ITEM 5
OTHER INFORMATION
 
None. 


46


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

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

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


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CALERES INC Reports