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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 9/09/20 Caleres Inc. 10-Q 8/01/20 84:10M RDG Filings/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.34M
2: EX-22 Published Report re: Matters Submitted to a Vote HTML 27K
of Security Holders
3: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
12: R1 Document And Entity Information HTML 77K
13: R2 Condensed Consolidated Balance Sheets (Current HTML 139K
Period Unaudited)
14: R3 Condensed Consolidated Statements of Earnings HTML 88K
(Loss) (Unaudited)
15: R4 Condensed Consolidated Statements of Comprehensive HTML 57K
Income (Loss) (Unaudited)
16: R5 Condensed Consolidated Statements of Cash Flows HTML 111K
(Unaudited)
17: R6 Condensed Consolidated Statements of Shareholders' HTML 109K
Equity (Unaudited)
18: R7 Condensed Consolidated Statements of Shareholders' HTML 30K
Equity (Unaudited) (Parentheticals)
19: R8 Note 1 - Basis of Presentation HTML 34K
20: R9 Note 2 - Impact of New Accounting Pronouncements HTML 47K
21: R10 Note 3 - Revenues HTML 159K
22: R11 Note 4 - Earnings (Loss) Per Share HTML 60K
23: R12 Note 5 - Restructuring and Other Special Charges HTML 36K
24: R13 Note 6 - Business Segment Information HTML 91K
25: R14 Note 7 - Inventories HTML 38K
26: R15 Note 8 - Goodwill and Intangible Assets HTML 117K
27: R16 Note 9 - Leases HTML 55K
28: R17 Note 10 - Long-term and Short-term Financing HTML 36K
Arrangements
29: R18 Note 11 - Shareholders' Equity HTML 108K
30: R19 Note 12 - Share-based Compensation HTML 65K
31: R20 Note 13 - Retirement and Other Benefit Plans HTML 86K
32: R21 Note 14 - Risk Management and Derivatives HTML 84K
33: R22 Note 15 - Fair Value Measurements HTML 135K
34: R23 Note 16 - Income Taxes HTML 32K
35: R24 Note 17 - Commitments and Contingencies HTML 34K
36: R25 Note 2 - Impact of New Accounting Pronouncements HTML 30K
(Tables)
37: R26 Note 3 - Revenues (Tables) HTML 148K
38: R27 Note 4 - Earnings (Loss) Per Share (Tables) HTML 56K
39: R28 Note 6 - Business Segment Information (Tables) HTML 88K
40: R29 Note 7 - Inventories (Tables) HTML 38K
41: R30 Note 8 - Goodwill and Intangible Assets (Tables) HTML 113K
42: R31 Note 9 - Leases (Tables) HTML 49K
43: R32 Note 11 - Shareholders' Equity (Tables) HTML 104K
44: R33 Note 12 - Share-based Compensation (Tables) HTML 57K
45: R34 Note 13 - Retirement and Other Benefit Plans HTML 81K
(Tables)
46: R35 Note 14 - Risk Management and Derivatives (Tables) HTML 83K
47: R36 Note 15 - Fair Value Measurements (Tables) HTML 121K
48: R37 Note 1 - Basis of Presentation (Details Textual) HTML 36K
49: R38 Note 2 - Impact of New Accounting Pronouncements HTML 37K
(Details Textual)
50: R39 Note 2 - Impact of New Accounting Pronouncements - HTML 31K
Allowance for Expected Credit Losses (Details)
51: R40 Note 3 - Revenues (Details Textual) HTML 27K
52: R41 Note 3 - Revenues - Disaggregation of Revenue HTML 78K
(Details)
53: R42 Note 3 - Revenues - Contract Balances (Details) HTML 30K
54: R43 Note 4 - Earnings (Loss) Per Share (Details HTML 35K
Textual)
55: R44 Note 4 - Earnings (Loss) Per Share - Schedule of HTML 56K
Basic and Diluted Earnings Per Common Share
(Details)
56: R45 Note 5 - Restructuring and Other Special Charges HTML 106K
(Details Textual)
57: R46 Note 6 - Business Segment Information - Key HTML 49K
Financial Measures (Details)
58: R47 Note 6 - Business Segment Information - HTML 33K
Reconciliation of Operating Earnings Before Income
Taxes (Details)
59: R48 Note 7 - Inventories - Schedule of Inventories HTML 32K
(Details)
60: R49 Note 8 - Goodwill and Intangible Assets (Details HTML 52K
Textual)
61: R50 Note 8 - Goodwill and Intangible Assets - Schedule HTML 37K
of Goodwill and Intangible Assets (Details)
62: R51 Note 8 - Goodwill and Intangible Assets - Finite HTML 58K
and Infinite-Lived Intangible Assets (Details)
63: R52 Note 9 - Leases (Details Textual) HTML 46K
64: R53 Note 9 - Leases - Components of Lease Expense HTML 34K
(Details)
65: R54 Note 9 - Leases - Supplemental Cash Flow HTML 27K
Information (Details)
66: R55 Note 10 - Long-term and Short-term Financing HTML 63K
Arrangements (Details Textual)
67: R56 Note 11 - Shareholders' Equity (Details Textual) HTML 25K
68: R57 Note 11 - Shareholders' Equity - Accumulated Other HTML 70K
Comprehensive Loss (Details)
69: R58 Note 12 - Share-based Compensation (Details HTML 68K
Textual)
70: R59 Note 12 - Share-Based Compensation - Restricted HTML 45K
Stock Activity (Details)
71: R60 Note 13 - Retirement and Other Benefit Plans - HTML 54K
Components of Net Periodic Benefit Income
(Details)
72: R61 Note 14 - Risk Management and Derivatives - Net HTML 35K
Notional Amount of All Purchase and Sale Contracts
of a Foreign Currency (Details)
73: R62 Note 14 - Risk Management and Derivatives - HTML 31K
Schedule of Fair Values of Derivative Instruments
Designated as Hedging Instruments (Details)
74: R63 Note 14 - Risk Management and Derivatives - Effect HTML 36K
of Derivative Instruments in Cash Flow Hedging
Relationships (Details)
75: R64 Note 15 - Fair Value Measurements (Details HTML 30K
Textual)
76: R65 Note 15 - Fair Value Measurements - Assets and HTML 52K
Liabilities Measured on a Recurring Basis
(Details)
77: R66 Note 15 - Fair Value Measurements - Impairment HTML 29K
Charges (Details)
78: R67 Note 15 - Fair Value Measurements - Fair Value of HTML 34K
Financial Instruments (Details)
79: R68 Note 16 - Income Taxes (Details Textual) HTML 33K
80: R69 Note 17 - Commitments and Contingencies (Details HTML 54K
Textual)
82: XML IDEA XML File -- Filing Summary XML 157K
11: XML XBRL Instance -- cal20200801_10q_htm XML 3.34M
81: EXCEL IDEA Workbook of Financial Reports XLSX 94K
7: EX-101.CAL XBRL Calculations -- cal-20200801_cal XML 147K
8: EX-101.DEF XBRL Definitions -- cal-20200801_def XML 1.30M
9: EX-101.LAB XBRL Labels -- cal-20200801_lab XML 1.03M
10: EX-101.PRE XBRL Presentations -- cal-20200801_pre XML 1.32M
6: EX-101.SCH XBRL Schema -- cal-20200801 XSD 205K
83: JSON XBRL Instance as JSON Data -- MetaLinks 393± 612K
84: ZIP XBRL Zipped Folder -- 0001437749-20-019511-xbrl Zip 231K
| cal20190722_10q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
(Mark One)
| i ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended i August 1, 2020 | |
|
|
| |
| i ☐ | 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: i 1-2191
| CALERES, INC. (Exact name of registrant as specified in its charter) | |
|
|
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| i New York (State or other jurisdiction of incorporation or organization) | i 43-0197190 (IRS Employer Identification Number) |
|
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| i 8300 Maryland Avenue i St. Louis, i Missouri (Address of principal executive offices) | i 63105 (Zip Code) |
| ( i 314) i 854-4000 (Registrant's telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| i Common Stock - par value of $0.01 per share | i CAL | i New York Stock Exchange |
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. i Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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:
| i Large accelerated filer ☑ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company i ☐ |
|
| Emerging growth company i ☐ |
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 i ☐ No ☑
As of August 28, 2020, i 37,912,156 common shares were outstanding.
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Page |
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| Item 1 |
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| Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3 |
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| Item 4 |
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| Item 1 |
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| Item 1A |
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| Item 2 |
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| Item 3 |
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| Item 4 |
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| Item 5 |
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| Item 6 |
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| FINANCIAL INFORMATION |
|
| FINANCIAL STATEMENTS |
| CALERES, INC. |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (Unaudited) | ||||||||||||
| ($ thousands) | ||||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | $ | i 148,544 | $ | i 42,601 | $ | i 45,218 | ||||||
| Receivables, net | i 110,249 | i 167,727 | i 162,181 | |||||||||
| Inventories, net | i 574,830 | i 792,064 | i 618,406 | |||||||||
| Income taxes | i 52,658 | i 2,896 | i 6,189 | |||||||||
| Prepaid expenses and other current assets | i 43,768 | i 48,498 | i 50,305 | |||||||||
| Total current assets | i 930,049 | i 1,053,786 | i 882,299 | |||||||||
| Other assets | i 84,054 | i 78,861 | i 79,654 | |||||||||
| Deferred income taxes | i 9,456 | i 10,176 | i 9,735 | |||||||||
| Goodwill | i 4,956 | i 245,275 | i 245,275 | |||||||||
| Intangible assets, net | i 265,405 | i 300,835 | i 294,304 | |||||||||
| Lease right-of-use assets | i 624,881 | i 723,415 | i 695,594 | |||||||||
| Property and equipment | i 558,567 | i 589,885 | i 593,979 | |||||||||
| Allowance for depreciation | ( i 364,974 | ) | ( i 357,840 | ) | ( i 369,133 | ) | ||||||
| Property and equipment, net | i 193,593 | i 232,045 | i 224,846 | |||||||||
| Total assets | $ | i 2,112,394 | $ | i 2,644,393 | $ | i 2,431,707 | ||||||
| Liabilities and Equity | ||||||||||||
| Current liabilities: | ||||||||||||
| Borrowings under revolving credit agreement | $ | i 350,000 | $ | i 300,000 | $ | i 275,000 | ||||||
| Trade accounts payable | i 280,319 | i 448,596 | i 267,018 | |||||||||
| Income taxes | i 8,310 | i 11,110 | i 7,186 | |||||||||
| Lease obligations | i 171,247 | i 143,202 | i 127,869 | |||||||||
| Other accrued expenses | i 208,024 | i 179,221 | i 173,877 | |||||||||
| Total current liabilities | i 1,017,900 | i 1,082,129 | i 850,950 | |||||||||
| Other liabilities: | ||||||||||||
| Noncurrent lease obligations | i 579,399 | i 649,100 | i 629,032 | |||||||||
| Long-term debt | i 198,621 | i 198,161 | i 198,391 | |||||||||
| Income taxes | i 7,786 | i 7,786 | i 7,786 | |||||||||
| Deferred income taxes | i 13,051 | i 46,573 | i 55,013 | |||||||||
| Other liabilities | i 50,503 | i 35,966 | i 41,405 | |||||||||
| Total other liabilities | i 849,360 | i 937,586 | i 931,627 | |||||||||
| Equity: | ||||||||||||
| Common stock | i 379 | i 407 | i 404 | |||||||||
| Additional paid-in capital | i 156,913 | i 149,881 | i 153,489 | |||||||||
| Accumulated other comprehensive loss | ( i 31,437 | ) | ( i 31,405 | ) | ( i 31,843 | ) | ||||||
| Retained earnings | i 116,385 | i 504,546 | i 523,900 | |||||||||
| Total Caleres, Inc. shareholders’ equity | i 242,240 | i 623,429 | i 645,950 | |||||||||
| Noncontrolling interests | i 2,894 | i 1,249 | i 3,180 | |||||||||
| Total equity | i 245,134 | i 624,678 | i 649,130 | |||||||||
| Total liabilities and equity | $ | i 2,112,394 | $ | i 2,644,393 | $ | i 2,431,707 | ||||||
See notes to condensed consolidated financial statements.
| CALERES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) |
| (Unaudited) |
||||||||||||||||
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||
| ($ thousands, except per share amounts) |
||||||||||||||||
| Net sales | $ | i 501,448 | $ | i 752,485 | $ | i 898,632 | $ | i 1,430,239 | ||||||||
| Cost of goods sold | i 318,828 | i 446,541 | i 594,114 | i 844,459 | ||||||||||||
| Gross profit |
i 182,620 | i 305,944 | i 304,518 | i 585,780 | ||||||||||||
| Selling and administrative expenses | i 201,331 | i 267,531 | i 426,524 | i 529,642 | ||||||||||||
| Impairment of goodwill and intangible assets | i — | i — | i 262,719 | i — | ||||||||||||
| Restructuring and other special charges, net | i 5,429 | i 609 | i 65,625 | i 1,465 | ||||||||||||
| Operating (loss) earnings |
( i 24,140 | ) | i 37,804 | ( i 450,350 | ) | i 54,673 | ||||||||||
| Interest expense, net | ( i 13,387 | ) | ( i 7,389 | ) | ( i 22,866 | ) | ( i 14,729 | ) | ||||||||
| Other income, net | i 3,672 | i 2,650 | i 7,257 | i 5,269 | ||||||||||||
| (Loss) earnings before income taxes |
( i 33,855 | ) | i 33,065 | ( i 465,959 | ) | i 45,213 | ||||||||||
| Income tax benefit (provision) | i 3,186 | ( i 7,838 | ) | i 89,118 | ( i 10,901 | ) | ||||||||||
| Net (loss) earnings |
( i 30,669 | ) | i 25,227 | ( i 376,841 | ) | i 34,312 | ||||||||||
| Net earnings (loss) attributable to noncontrolling interests | i 48 | ( i 114 | ) | ( i 286 | ) | ( i 112 | ) | |||||||||
| Net (loss) earnings attributable to Caleres, Inc. |
$ | ( i 30,717 | ) | $ | i 25,341 | $ | ( i 376,555 | ) | $ | i 34,424 | ||||||
| Basic (loss) earnings per common share attributable to Caleres, Inc. shareholders | $ | ( i 0.83 | ) | $ | i 0.61 | $ | ( i 9.94 | ) | $ | i 0.83 | ||||||
| Diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders | $ | ( i 0.83 | ) | $ | i 0.61 | $ | ( i 9.94 | ) | $ | i 0.82 | ||||||
See notes to condensed consolidated financial statements.
| CALERES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| (Unaudited) |
||||||||||||||||
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||
| ($ thousands) |
||||||||||||||||
| Net (loss) earnings |
$ | ( i 30,669 | ) | $ | i 25,227 | $ | ( i 376,841 | ) | $ | i 34,312 | ||||||
| Other comprehensive income (loss), net of tax: |
||||||||||||||||
| Foreign currency translation adjustment |
i 740 | ( i 21 | ) | ( i 810 | ) | ( i 979 | ) | |||||||||
| Pension and other postretirement benefits adjustments |
i 1,058 | i 461 | i 1,124 | i 856 | ||||||||||||
| Derivative financial instruments |
i — | ( i 5 | ) | i 92 | i 298 | |||||||||||
| Other comprehensive income, net of tax |
i 1,798 | i 435 | i 406 | i 175 | ||||||||||||
| Comprehensive (loss) income |
( i 28,871 | ) | i 25,662 | ( i 376,435 | ) | i 34,487 | ||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests |
i 67 | ( i 147 | ) | ( i 286 | ) | ( i 133 | ) | |||||||||
| Comprehensive (loss) income attributable to Caleres, Inc. |
$ | ( i 28,938 | ) | $ | i 25,809 | $ | ( i 376,149 | ) | $ | i 34,620 | ||||||
See notes to condensed consolidated financial statements.
| CALERES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
||||||||
| Twenty-Six Weeks Ended |
||||||||
| ($ thousands) |
||||||||
| Operating Activities |
||||||||
| Net (loss) earnings |
$ | ( i 376,841 | ) | $ | i 34,312 | |||
| Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |
||||||||
| Depreciation | i 21,875 | i 22,957 | ||||||
| Amortization of capitalized software | i 2,939 | i 3,293 | ||||||
| Amortization of intangible assets | i 6,499 | i 6,524 | ||||||
| Amortization of debt issuance costs and debt discount | i 673 | i 1,180 | ||||||
| Fair value adjustments to Blowfish mandatory purchase obligation | i 9,822 | i 527 | ||||||
| Share-based compensation expense | i 4,401 | i 6,542 | ||||||
| Loss on disposal of property and equipment | i 684 | i 549 | ||||||
| Impairment charges for property, equipment, and lease right-of-use assets | i 35,222 | i 2,954 | ||||||
| Impairment of goodwill and intangible assets | i 262,719 | i — | ||||||
| Provision for expected credit losses | i 8,525 | i 840 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Receivables | i 41,275 | i 23,155 | ||||||
| Inventories | i 43,372 | ( i 109,850 | ) | |||||
| Prepaid expenses and other current and noncurrent assets | ( i 94,670 | ) | ( i 3,036 | ) | ||||
| Trade accounts payable | i 13,399 | i 135,321 | ||||||
| Accrued expenses and other liabilities | i 88,218 | ( i 8,134 | ) | |||||
| Other, net | ( i 592 | ) | ( i 556 | ) | ||||
| Net cash provided by operating activities |
i 67,520 | i 116,578 | ||||||
| Investing Activities |
||||||||
| Purchases of property and equipment | ( i 6,394 | ) | ( i 26,741 | ) | ||||
| Disposals of property and equipment | i — | i 636 | ||||||
| Capitalized software | ( i 2,220 | ) | ( i 4,084 | ) | ||||
| Net cash used for investing activities |
( i 8,614 | ) | ( i 30,189 | ) | ||||
| Financing Activities |
||||||||
| Borrowings under revolving credit agreement | i 250,500 | i 149,000 | ||||||
| Repayments under revolving credit agreement | ( i 175,500 | ) | ( i 184,000 | ) | ||||
| Dividends paid | ( i 5,495 | ) | ( i 5,808 | ) | ||||
| Acquisition of treasury stock | ( i 23,348 | ) | ( i 29,995 | ) | ||||
| Issuance of common stock under share-based plans, net | ( i 973 | ) | ( i 2,547 | ) | ||||
| Other | ( i 649 | ) | ( i 694 | ) | ||||
| Net cash provided by (used for) financing activities |
i 44,535 | ( i 74,044 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | ( i 115 | ) | i 56 | |||||
| Increase in cash and cash equivalents |
i 103,326 | i 12,401 | ||||||
| Cash and cash equivalents at beginning of period |
i 45,218 | i 30,200 | ||||||
| Cash and cash equivalents at end of period |
$ | i 148,544 | $ | i 42,601 | ||||
See notes to condensed consolidated financial statements.
| CALERES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | Total Caleres, Inc. | Non- | ||||||||||||||||||||||||||||||
| (Unaudited) | Common Stock | Additional | Comprehensive | Retained | Shareholders’ | controlling | ||||||||||||||||||||||||||
| ($ thousands, except number of shares and per share amounts) | Shares | Dollars | Paid-In Capital | (Loss) Income | Earnings | Equity | Interests |
Total Equity | ||||||||||||||||||||||||
| BALANCE MAY 2, 2020 | i 39,299,990 | $ | i 393 | $ | i 154,930 | $ | ( i 33,216 | ) | $ | i 160,189 | $ | i 282,296 | $ | i 2,827 | $ | i 285,123 | ||||||||||||||||
| Net (loss) earnings | ( i 30,717 | ) | ( i 30,717 | ) | i 48 | ( i 30,669 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | i 721 | i 721 | i 19 | i 740 | ||||||||||||||||||||||||||||
| Pension and other postretirement benefits adjustments, net of tax of $248 | i 1,058 | i 1,058 | i 1,058 | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | i 1,779 | ( i 30,717 | ) | ( i 28,938 | ) | i 67 | ( i 28,871 | ) | ||||||||||||||||||||||||
| Dividends ($0.07 per share) | ( i 2,685 | ) | ( i 2,685 | ) | ( i 2,685 | ) | ||||||||||||||||||||||||||
| Acquisition of treasury stock | ( i 1,391,234 | ) | ( i 14 | ) | ( i 10,402 | ) | ( i 10,416 | ) | ( i 10,416 | ) | ||||||||||||||||||||||
| Issuance of common stock under share-based plans, net | i 3,400 | - | ( i 67 | ) | ( i 67 | ) | ( i 67 | ) | ||||||||||||||||||||||||
| Share-based compensation expense | i 2,050 | i 2,050 | i 2,050 | |||||||||||||||||||||||||||||
| BALANCE AUGUST 1, 2020 | i 37,912,156 | $ | i 379 | $ | i 156,913 | $ | ( i 31,437 | ) | $ | i 116,385 | $ | i 242,240 | $ | i 2,894 | $ | i 245,134 | ||||||||||||||||
| BALANCE MAY 4, 2019 | i 42,233,845 | $ | i 422 | $ | i 146,641 | $ | ( i 31,873 | ) | $ | i 512,046 | $ | i 627,236 | $ | i 1,396 | $ | i 628,632 | ||||||||||||||||
| Net earnings (loss) | i 25,341 | i 25,341 | ( i 114 | ) | i 25,227 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | i 12 | i 12 | ( i 33 | ) | ( i 21 | ) | ||||||||||||||||||||||||||
| Unrealized gain on derivative financial instruments, net of tax of $17 | ( i 5 | ) | ( i 5 | ) | ( i 5 | ) | ||||||||||||||||||||||||||
| Pension and other postretirement benefits adjustments, net of tax of $161 | i 461 | i 461 | i 461 | |||||||||||||||||||||||||||||
| Comprehensive (loss) income | i 468 | i 25,341 | i 25,809 | ( i 147 | ) | i 25,662 | ||||||||||||||||||||||||||
| Dividends ($0.07 per share) | ( i 2,861 | ) | ( i 2,861 | ) | ( i 2,861 | ) | ||||||||||||||||||||||||||
| Acquisition of treasury stock | ( i 1,530,478 | ) | ( i 15 | ) | ( i 29,980 | ) | ( i 29,995 | ) | ( i 29,995 | ) | ||||||||||||||||||||||
| Issuance of common stock under share-based plans, net | i 17,560 | i 12 | i 12 | i 12 | ||||||||||||||||||||||||||||
| Share-based compensation expense | i 3,228 | i 3,228 | i 3,228 | |||||||||||||||||||||||||||||
| BALANCE AUGUST 3, 2019 | i 40,720,927 | $ | i 407 | $ | i 149,881 | $ | ( i 31,405 | ) | $ | i 504,546 | $ | i 623,429 | $ | i 1,249 | $ | i 624,678 | ||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | Total Caleres, Inc. | Non- | ||||||||||||||||||||||||||||||
| (Unaudited) | Common Stock | Additional | Comprehensive | Retained | Shareholders’ | controlling | ||||||||||||||||||||||||||
| ($ thousands, except number of shares and per share amounts) | Shares | Dollars | Paid-In Capital | (Loss) Income | Earnings | Equity | Interests |
Total Equity | ||||||||||||||||||||||||
| BALANCE AS OF FEBRUARY 1, 2020 | i 40,396,757 | $ | i 404 | $ | i 153,489 | $ | ( i 31,843 | ) | $ | i 523,900 | $ | i 645,950 | $ | i 3,180 | $ | i 649,130 | ||||||||||||||||
| Net loss | ( i 376,555 | ) | ( i 376,555 | ) | ( i 286 | ) | ( i 376,841 | ) | ||||||||||||||||||||||||
| Foreign currency translation adjustment | ( i 810 | ) | ( i 810 | ) | — | ( i 810 | ) | |||||||||||||||||||||||||
| Unrealized gain on derivative financial instruments, net of tax of $31 | i 92 | i 92 | i 92 | |||||||||||||||||||||||||||||
| Pension and other postretirement benefits adjustments, net of tax of $380 | i 1,124 | i 1,124 | i 1,124 | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | i 406 | ( i 376,555 | ) | ( i 376,149 | ) | ( i 286 | ) | ( i 376,435 | ) | |||||||||||||||||||||||
| Dividends ($0.14 per share) | ( i 5,495 | ) | ( i 5,495 | ) | ( i 5,495 | ) | ||||||||||||||||||||||||||
| Acquisition of treasury stock | ( i 2,902,122 | ) | ( i 29 | ) | ( i 23,319 | ) | ( i 23,348 | ) | ( i 23,348 | ) | ||||||||||||||||||||||
| Issuance of common stock under share-based plans, net | i 417,521 | i 4 | ( i 977 | ) | ( i 973 | ) | ( i 973 | ) | ||||||||||||||||||||||||
| Cumulative-effect adjustment from adoption of ASC 326 | ( i 2,146 | ) | ( i 2,146 | ) | ( i 2,146 | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | i 4,401 | i 4,401 | i 4,401 | |||||||||||||||||||||||||||||
| BALANCE AUGUST 1, 2020 | i 37,912,156 | $ | i 379 | $ | i 156,913 | $ | ( i 31,437 | ) | $ | i 116,385 | $ | i 242,240 | $ | i 2,894 | $ | i 245,134 | ||||||||||||||||
| BALANCE FEBRUARY 2, 2019 | i 41,886,562 | $ | i 419 | $ | i 145,889 | $ | ( i 31,601 | ) | $ | i 519,346 | $ | i 634,053 | $ | i 1,382 | $ | i 635,435 | ||||||||||||||||
| Net earnings (loss) | i 34,424 | i 34,424 | ( i 112 | ) | i 34,312 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( i 958 | ) | ( i 958 | ) | ( i 21 | ) | ( i 979 | ) | ||||||||||||||||||||||||
| Unrealized loss on derivative financial instruments, net of tax of $79 | i 298 | i 298 | i 298 | |||||||||||||||||||||||||||||
| Pension and other postretirement benefits adjustments, net of tax of $299 | i 856 | i 856 | i 856 | |||||||||||||||||||||||||||||
| Comprehensive income (loss) | i 196 | i 34,424 | i 34,620 | ( i 133 | ) | i 34,487 | ||||||||||||||||||||||||||
| Dividends ($0.14 per share) | ( i 5,808 | ) | ( i 5,808 | ) | ( i 5,808 | ) | ||||||||||||||||||||||||||
| Acquisition of treasury stock | ( i 1,530,478 | ) | ( i 15 | ) | ( i 29,980 | ) | ( i 29,995 | ) | ( i 29,995 | ) | ||||||||||||||||||||||
| Issuance of common stock under share-based plans, net | i 364,843 | i 3 | ( i 2,550 | ) | ( i 2,547 | ) | ( i 2,547 | ) | ||||||||||||||||||||||||
| Cumulative-effect adjustment from adoption of ASC 842 | ( i 13,436 | ) | ( i 13,436 | ) | ( i 13,436 | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | i 6,542 | i 6,542 | i 6,542 | |||||||||||||||||||||||||||||
| BALANCE AUGUST 3, 2019 | i 40,720,927 | $ | i 407 | $ | i 149,881 | $ | ( i 31,405 | ) | $ | i 504,546 | $ | i 623,429 | $ | i 1,249 | $ | i 624,678 | ||||||||||||||||
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| Note 1 | Basis of Presentation |
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Caleres, Inc. ("the Company"). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.
The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole, particularly given the impact of the coronavirus pandemic on the results of operations for the thirteen and twenty-six weeks ended August 1, 2020, as further discussed below. In addition, many schools across the United States are beginning the fall semester in a virtual learning environment. Accordingly, the Company has experienced a slower start to the back-to-school selling season. The back-to-school demand in 2020 is expected to extend longer than a typical year, where demand is more concentrated over a few weeks.
Certain prior period amounts in the condensed consolidated financial statements and footnotes have been reclassified to conform to the current period presentation. These reclassifications did not affect net (loss) earnings attributable to Caleres, Inc.
The accompanying condensed consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended February 1, 2020.
COVID-19 Pandemic
In March 2020, the World Health Organization declared that the outbreak of the coronavirus ("COVID-19") was a global pandemic. The Company has experienced a significant loss in sales and earnings as a result of COVID-19. After the temporary closure of all retail stores in mid- March, the Company has safely resumed in-store operations at substantially all of its retail stores, opening with reduced operating hours, enhanced health and safety procedures and contactless shopping options.
The Company has taken decisive actions to manage its resources conservatively to mitigate the adverse impact of the pandemic. These actions included reductions in the workforce, associate furloughs for a significant portion of the workforce, and reductions in salary for most remaining associates through the end of the second quarter, as well as a reduction in the cash retainers for the Board of Directors through the end of the fiscal year; reducing inventory purchases; reducing marketing expenses; and minimizing costs associated with the closed retail facilities. In addition, as a precautionary measure to increase its cash position and preserve financial flexibility given the uncertainty in the United States and global markets resulting from COVID-19, the Company increased the borrowings on its revolving credit facility in March 2020 to $ i 440.0 million. In April, the Company entered into an amendment to its Fourth Amended and Restated Credit Agreement to increase its borrowing capacity, as further discussed in Note 10 to the condensed consolidated financial statements. During the second quarter of 2020, the Company continued to repay the incremental borrowings from March, with net repayments of $ i 88.5 million.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted. The CARES Act includes a provision that allows the Company to defer the employer portion of social security payroll tax payments that would have been paid between the enactment date and December 31, 2020, with 50% payable by December 31, 2021 and 50% payable by December 31, 2022. As of August 1, 2020, the Company has deferred approximately $ i 2.9 million of employer social security payroll taxes, which are recorded in other liabilities on the condensed consolidated balance sheets. In addition, the CARES Act permits the carryback of certain current operating losses to prior years. As discussed in Note 16 to the condensed consolidated financial statements, this carryback provision resulted in approximately $ i 5.2 million of incremental tax benefit, as current year losses are expected to be carried back to years with a higher federal corporate tax rate.
/
| Note 2 | Impact of New Accounting Pronouncements |
Impact of Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The Company adopted the ASU in the first quarter of 2020 on a modified retrospective basis. Upon adoption, the Company recorded a cumulative-effect adjustment to retained earnings of $ i 2.1 million, net of $ i 0.4 million in deferred taxes. The Company recorded a provision for expected credit losses of $ i 8.5 million during the twenty-six weeks ended August 1, 2020, primarily as a result of the COVID-19 pandemic and deteriorating financial conditions at several of the Company's wholesale customers.
The following table summarizes the activity in the Company's allowance for expected credit losses during the twenty-six weeks ended August 1, 2020:
i
| ($ thousands) | ||||
| Balance at February 1, 2020 | $ | i 1,813 | ||
| Adjustment upon adoption of ASU 2016-13 | i 2,521 | |||
| Provision for expected credit losses | i 8,525 | |||
| Uncollectible accounts written off, net of recoveries | i 215 | |||
| Balance at August 1, 2020 | $ | i 13,074 |
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies disclosure requirements on fair value measurements, removing and modifying certain disclosures, while adding other disclosures. The Company adopted the ASU during the first quarter of 2020, which did not have a material impact on the Company's financial statement disclosures. Refer to Note 15 to the condensed consolidated financial statements for detail regarding the Company's fair value measurements.
In March 2020, the SEC issued SEC Release No. 33-10762 and Release No. 34-88307, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities. The final rule amends the disclosure requirements in SEC Regulation S-X, Rule 3-10, which required entities to separately present financial statements for subsidiary issuers and guarantors of registered debt securities unless certain exceptions are met. The rule permits entities to provide summarized financial information of the parent company and its issuers and guarantors on a combined basis in either a note to the financial statements or in management's discussion and analysis. The final rule is effective for filings on or after January 4, 2021, with early application permitted. The Company adopted the rule during the second quarter of 2020 and elected to provide the summarized financial information in Management's Discussion and Analysis of Financial Condition and Results of Operations.
In April 2020, the FASB issued interpretive guidance indicating that entities may elect not to evaluate whether a concession provided by lessors is a lease modification. Under existing lease guidance, an entity would be required to determine if a lease concession was the result of a new arrangement reached with the landlord, which would be accounted for under the lease modification framework, or if the concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The FASB guidance provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. During the second quarter of 2020, the Company elected to treat lease concessions as variable rent. Accordingly, $ i 2.0 million in lease concessions were recorded as a reduction of rent expense within selling and administrative expenses in the condensed consolidated statements of earnings (loss). Refer to Note 9 to the condensed consolidated financial statements for further discussion regarding the Company's leases.
Impact of Prospective Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20), Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-14 is not expected to have a material impact on the Company's financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to intraperiod tax allocation, simplifies certain elements of accounting for basis differences and deferred tax liabilities during a business combination, and standardizes the classification of franchise taxes. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2019-12 is not expected to have a material impact on the Company's condensed consolidated financial statements.
/
| Note 3 | Revenues |
Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for the periods ended August 1, 2020 and August 3, 2019:
i
| Thirteen Weeks Ended August 1, 2020 | |||||||||||||||||
| ($ thousands) | Famous Footwear | Brand Portfolio | Eliminations and Other | Total | |||||||||||||
| Retail stores | $ | i 250,143 | $ | i 7,060 | $ | i — | $ | i 257,203 | |||||||||
| Landed wholesale - e-commerce (1) | i — | i 23,234 | i — | i 23,234 | |||||||||||||
| Landed wholesale - e-commerce - drop ship (1) | i — | i 20,748 | i — | i 20,748 | |||||||||||||
| Landed wholesale - other | i — | i 78,127 | ( i 16,109 | ) | i 62,018 | ||||||||||||
| First-cost wholesale | i — | i 11,850 | i — | i 11,850 | |||||||||||||
| First-cost wholesale - e-commerce (1) | i — | i 256 | i — | i 256 | |||||||||||||
| E-commerce - Company websites (1) | i 83,652 | i 40,836 | i — | i 124,488 | |||||||||||||
| Licensing and royalty | i — | i 1,469 | i — | i 1,469 | |||||||||||||
| Other (2) | i 140 | i 42 | i — | i 182 | |||||||||||||
| Net sales | $ | i 333,935 | $ | i 183,622 | $ | ( i 16,109 | ) | $ | i 501,448 | ||||||||
| Thirteen Weeks Ended August 3, 2019 | ||||||||||||||||
| ($ thousands) | Famous Footwear | Brand Portfolio | Eliminations and Other | Total | ||||||||||||
| Retail stores | $ | i 386,014 | $ | i 38,548 | $ | i — | $ | i 424,562 | ||||||||
| Landed wholesale - e-commerce (1) | i — | i 46,926 | i — | i 46,926 | ||||||||||||
| Landed wholesale - e-commerce - drop ship (1) | i — | i 16,666 | i — | i 16,666 | ||||||||||||
| Landed wholesale - other | i — | i 184,962 | ( i 26,931 | ) | i 158,031 | |||||||||||
| First-cost wholesale | i — | i 35,931 | i — | i 35,931 | ||||||||||||
| First-cost wholesale - e-commerce (1) | i — | i 1,045 | i — | i 1,045 | ||||||||||||
| E-commerce - Company websites (1) | i 33,685 | i 30,248 | i — | i 63,933 | ||||||||||||
| Licensing and royalty | i — | i 5,194 | i — | i 5,194 | ||||||||||||
| Other (2) | i 142 | i 55 | i — | i 197 | ||||||||||||
| Net sales | $ | i 419,841 | $ | i 359,575 | $ | ( i 26,931 | ) | $ | i 752,485 | |||||||
| Twenty-Six Weeks Ended August 1, 2020 | ||||||||||||||||
| ($ thousands) | Famous Footwear | Brand Portfolio | Eliminations and Other | Total | ||||||||||||
| Retail stores | $ | i 387,260 | $ | i 18,881 | $ | i — | $ | i 406,141 | ||||||||
| Landed wholesale-e-commerce (1) | i — | i 49,476 | i — | i 49,476 | ||||||||||||
| Landed wholesale - e-commerce - drop ship (1) | i — | i 39,979 | i — | i 39,979 | ||||||||||||
| Landed wholesale - other | i — | i 190,695 | ( i 27,415 | ) | i 163,280 | |||||||||||
| First-cost wholesale | i — | i 23,771 | i — | i 23,771 | ||||||||||||
| First-cost wholesale - e-commerce (1) | i — | i 502 | i — | i 502 | ||||||||||||
| E-commerce - Company websites (1) | i 137,830 | i 73,826 | i — | i 211,656 | ||||||||||||
| Licensing and royalty | i — | i 3,655 | i — | i 3,655 | ||||||||||||
| Other (2) | i 97 | i 75 | i — | i 172 | ||||||||||||
| Net sales | $ | i 525,187 | $ | i 400,860 | $ | ( i 27,415 | ) | $ | i 898,632 | |||||||
| Twenty-Six Weeks Ended August 3, 2019 | ||||||||||||||||
| ($ thousands) | Famous Footwear | Brand Portfolio | Eliminations and Other | Total | ||||||||||||
| Retail stores | $ | i 706,256 | $ | i 75,198 | $ | i — | $ | i 781,454 | ||||||||
| Landed wholesale - e-commerce (1) | i — | i 90,091 | i — | i 90,091 | ||||||||||||
| Landed wholesale - e-commerce - drop ship (1) | i — | i 36,878 | i — | i 36,878 | ||||||||||||
| Landed wholesale - other | i — | i 372,176 | ( i 42,392 | ) | i 329,784 | |||||||||||
| First-cost wholesale | i — | i 50,702 | i — | i 50,702 | ||||||||||||
| First-cost wholesale - e-commerce (1) | i — | i 1,174 | i — | i 1,174 | ||||||||||||
| E-commerce - Company websites (1) | i 65,466 | i 65,944 | i — | i 131,410 | ||||||||||||
| Licensing and royalty | i — | i 8,326 | i — | i 8,326 | ||||||||||||
| Other (2) | i 284 | i 136 | i — | i 420 | ||||||||||||
| Net sales | $ | i 772,006 | $ | i 700,625 | $ | ( i 42,392 | ) | $ | i 1,430,239 | |||||||
(1) Collectively referred to as "e-commerce" below
(2) Includes breakage revenue from unredeemed gift cards
Retail stores
Traditionally, the majority of the Company's revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company records a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Company's loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired.
Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many landed customers arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.
First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product and subsequently sells to a customer at an overseas port. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.
E-commerce
The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores and e-commerce sales from the Company's wholesale customers' websites that are fulfilled on a drop-ship or first-cost basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.
Licensing and royalty
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company's symbolic intellectual property, and revenue is therefore recognized over the license term. For royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee's sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.
Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.
Information about significant contract balances from contracts with customers is as follows:
i
| ($ thousands) | ||||||||||||
| Customer allowances and discounts | $ | i 18,464 | $ | i 22,488 | $ | i 26,200 | ||||||
| Loyalty programs liability | i 16,450 | i 16,929 | i 16,405 | |||||||||
| Returns reserve | i 14,453 | i 13,417 | i 14,033 | |||||||||
| Gift card liability | i 5,332 | i 5,041 | i 5,742 | |||||||||
Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during the twenty-six weeks ended August 1, 2020, the loyalty programs liability increased $ i 14.1 million due to points and material rights accrued for purchases and decreased $ i 14.0 million due to expirations and redemptions. During the twenty-six weeks ended August 3, 2019, the loyalty programs liability increased $ i 16.7 million due to points and material rights accrued for purchases and decreased $ i 14.4 million due to expirations and redemptions. The returns reserve is higher as of August 1, 2020 due to a higher mix of e-commerce sales, which carry a higher return rate than retail store sales.
/
| Note 4 | Earnings (Loss) 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 (loss) earnings per common share attributable to Caleres, Inc. shareholders for the periods ended August 1, 2020 and August 3, 2019:
i
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| ($ thousands, except per share amounts) | ||||||||||||||||
| NUMERATOR | ||||||||||||||||
| Net (loss) earnings | $ | ( i 30,669 | ) | $ | i 25,227 | $ | ( i 376,841 | ) | $ | i 34,312 | ||||||
| Net (earnings) loss attributable to noncontrolling interests | ( i 48 | ) | i 114 | i 286 | i 112 | |||||||||||
| Net earnings allocated to participating securities | i — | ( i 857 | ) | i — | ( i 1,125 | ) | ||||||||||
| Net (loss) earnings attributable to Caleres, Inc. after allocation of earnings to participating securities | $ | ( i 30,717 | ) | $ | i 24,484 | $ | ( i 376,555 | ) | $ | i 33,299 | ||||||
| DENOMINATOR | ||||||||||||||||
| Denominator for basic (loss) earnings per common share attributable to Caleres, Inc. shareholders | i 37,113 | i 39,951 | i 37,881 | i 40,346 | ||||||||||||
| Dilutive effect of share-based awards | i — | i 55 | i — | i 58 | ||||||||||||
| Denominator for diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders | i 37,113 | i 40,006 | i 37,881 | i 40,404 | ||||||||||||
| Basic (loss) earnings per common share attributable to Caleres, Inc. shareholders | $ | ( i 0.83 | ) | $ | i 0.61 | $ | ( i 9.94 | ) | $ | i 0.83 | ||||||
| Diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders | $ | ( i 0.83 | ) | $ | i 0.61 | $ | ( i 9.94 | ) | $ | i 0.82 | ||||||
Options to purchase i 24,667 shares of common stock for both the thirteen and twenty-six weeks ended August 1, 2020, were not included in the denominator for diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. Options to purchase i 16,667 shares of common stock were excluded from the denominator for both the thirteen and twenty-six weeks ended August 3, 2019.
During the thirteen weeks ended August 1, 2020 and August 3, 2019, the Company repurchased i 1,391,234 and i 1,530,478 shares, respectively, under the 2018 and 2019 publicly announced share repurchase programs, which permits repurchases of up to i 2.5 million and i 5.0 million shares, respectively. The Company repurchased i 2,902,122 and i 1,530,478 shares during the twenty-six weeks ended August 1, 2020 and August 3, 2019, respectively. See further discussion in Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.
| Note 5 | Restructuring and Other Special Charges |
Vionic Integration-Related Costs
During the thirteen weeks ended August 3, 2019, the Company incurred integration-related costs associated with the acquisition of Vionic in October 2018, primarily for severance, totaling $ i 0.6 million ($ i 0.5 million on an after-tax basis, or $ i 0.01 per diluted share). Of the $ i 0.6 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings (loss), $ i 0.6 million are reflected within the Eliminations and Other category, with an immaterial amount reflected in the Brand Portfolio segment. During the twenty-six weeks ended August 3, 2019, the Company incurred integration-related costs, primarily for severance, totaling $ i 0.9 million ($ i 0.7 million on an after-tax basis, or $ i 0.02 per diluted share). Of the $ i 0.9 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings (loss), $ i 0.8 million are reflected within the Eliminations and Other category and $ i 0.1 million are included in the Brand Portfolio segment. There were i no corresponding costs in the twenty-six weeks ended August 1, 2020. The integration of Vionic is expected to be completed by the end of fiscal 2020. Accordingly, the Company anticipates additional integration-related costs for the second half of 2020.
/
| Note 6 | Business Segment Information |
Following is a summary of certain key financial measures for the Company’s business segments for the periods ended August 1, 2020 and August 3, 2019:
i
| ($ thousands) | Famous Footwear | Brand Portfolio | Eliminations and Other | Total | ||||||||||||
| Thirteen Weeks Ended August 1, 2020 | ||||||||||||||||
| Net sales | $ | i 333,935 | $ | i 183,622 | $ | ( i 16,109 | ) | $ | i 501,448 | |||||||
| Intersegment sales (1) | i — | i 16,109 | i — | i 16,109 | ||||||||||||
| Operating earnings (loss) | i 1,045 | ( i 14,111 | ) | ( i 11,074 | ) | ( i 24,140 | ) | |||||||||
| Segment assets | i 885,168 | i 952,028 | i 275,198 | i 2,112,394 | ||||||||||||
| Thirteen Weeks Ended August 3, 2019 | ||||||||||||||||
| Net sales | $ | i 419,841 | $ | i 359,575 | $ | ( i 26,931 | ) | $ | i 752,485 | |||||||
| Intersegment sales (1) | i — | i 26,931 | i — | i 26,931 | ||||||||||||
| Operating earnings (loss) | i 31,542 | i 13,898 | ( i 7,636 | ) | i 37,804 | |||||||||||
| Segment assets | i 1,095,457 | i 1,427,002 | i 121,934 | i 2,644,393 | ||||||||||||
| Twenty-Six Weeks Ended August 1, 2020 | ||||||||||||||||
| Net sales | $ | i 525,187 | $ | i 400,860 | $ | ( i 27,415 | ) | $ | i 898,632 | |||||||
| Intersegment sales (1) | i — | i 27,415 | i — | i 27,415 | ||||||||||||
| Operating loss | ( i 66,495 | ) | ( i 359,860 | ) | ( i 23,995 | ) | ( i 450,350 | ) | ||||||||
| Twenty-Six Weeks Ended August 3, 2019 | ||||||||||||||||
| Net sales | $ | i 772,006 | $ | i 700,625 | $ | ( i 42,392 | ) | $ | i 1,430,239 | |||||||
| Intersegment sales (1) | i — | i 42,392 | i — | i 42,392 | ||||||||||||
| Operating earnings (loss) | i 42,355 | i 26,827 | ( i 14,509 | ) | i 54,673 | |||||||||||
(1) Included in net sales in the Brand Portfolio segment and eliminated in the Eliminations and Other category
The Eliminations and Other category includes corporate assets, administrative expenses and other costs and recoveries, which are not allocated to the operating segments, as well as the elimination of intersegment sales and profit.
Following is a reconciliation of operating (loss) earnings to (loss) earnings before income taxes:
i
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| ($ thousands) | ||||||||||||||||
| Operating (loss) earnings | $ | ( i 24,140 | ) | $ | i 37,804 | $ | ( i 450,350 | ) | $ | i 54,673 | ||||||
| Interest expense, net | ( i 13,387 | ) | ( i 7,389 | ) | ( i 22,866 | ) | ( i 14,729 | ) | ||||||||
| Other income, net | i 3,672 | i 2,650 | i 7,257 | i 5,269 | ||||||||||||
| (Loss) earnings before income taxes | $ | ( i 33,855 | ) | $ | i 33,065 | $ | ( i 465,959 | ) | $ | i 45,213 | ||||||
/
| Note 7 | Inventories |
The Company's net inventory balance was comprised of the following:
i
| ($ thousands) | ||||||||||||
| Raw materials | $ | i 16,494 | $ | i 18,785 | $ | i 18,455 | ||||||
| Work-in-process | i 158 | i 446 | i 454 | |||||||||
| Finished goods | i 558,178 | i 772,833 | i 599,497 | |||||||||
| Inventories, net | $ | i 574,830 | $ | i 792,064 | $ | i 618,406 | ||||||
| Note 8 | Goodwill and Intangible Assets |
Goodwill and intangible assets were as follows:
i
| ($ thousands) | ||||||||||||
| Intangible Assets | ||||||||||||
| Famous Footwear | $ | i 2,800 | $ | i 2,800 | $ | i 2,800 | ||||||
| Brand Portfolio | i 365,888 | i 388,288 | i 388,288 | |||||||||
| Total intangible assets | i 368,688 | i 391,088 | i 391,088 | |||||||||
| Accumulated amortization | ( i 103,283 | ) | ( i 90,253 | ) | ( i 96,784 | ) | ||||||
| Total intangible assets, net | i 265,405 | i 300,835 | i 294,304 | |||||||||
| Goodwill | ||||||||||||
| Brand Portfolio | i 4,956 | i 245,275 | i 245,275 | |||||||||
| Total goodwill | i 4,956 | i 245,275 | i 245,275 | |||||||||
| Goodwill and intangible assets, net | $ | i 270,361 | $ | i 546,110 | $ | i 539,579 | ||||||
The Company's intangible assets as of August 1, 2020, August 3, 2019 and February 1, 2020 were as follows:
i
| ($ thousands) | ||||||||||||||||||||
| Estimated Useful Lives (In Years) | Cost Basis | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||
| Trademarks | i 15 - i 40 | $ | 288,788 | $ | 96,835 | $ | — | $ | 191,953 | |||||||||||
| Trademarks | Indefinite | i 58,100 | (1) | — | i 22,400 | i 35,700 | ||||||||||||||
| Customer relationships | i 15 - i 16 | i 44,200 | i 6,448 | — | i 37,752 | |||||||||||||||
| $ | 391,088 | $ | 103,283 | $ | 22,400 | $ | 265,405 | |||||||||||||
| Estimated Useful Lives (In Years) | Cost Basis | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||
| Trademarks | i 15 - i 40 | $ | 288,788 | $ | 86,894 | $ | — | $ | 201,894 | |||||||||||
| Trademarks | Indefinite | i 58,100 | (1) | — | i — | i 58,100 | ||||||||||||||
| Customer relationships | i 15 - i 16 | i 44,200 | i 3,359 | — | i 40,841 | |||||||||||||||
| $ | 391,088 | $ | 90,253 | $ | i — | $ | 300,835 | |||||||||||||
| Estimated Useful Lives (In Years) | Cost Basis | Accumulated Amortization | Impairment | Net Carrying Value | ||||||||||||||||
| Trademarks | i 15 - i 40 | $ | 288,788 | $ | 91,827 | $ | — | $ | 196,961 | |||||||||||
| Trademarks | Indefinite | i 58,100 | (1) | — | i — | i 58,100 | ||||||||||||||
| Customer relationships | i 15 - i 16 | i 44,200 | i 4,957 | — | i 39,243 | |||||||||||||||
| $ | 391,088 | $ | 96,784 | $ | i — | $ | 294,304 | |||||||||||||
(1) Cost basis for indefinite-lived trademarks has been reduced by $ i 60.0 million in impairment charges recognized in 2018 related to the Allen Edmonds tradename.
Amortization expense related to intangible assets was $ i 3.3 million and $ i 3.2 million for the thirteen weeks ended August 1, 2020 and August 3, 2019, respectively, and $ i 6.5 million for both the twenty-six weeks ended August 1, 2020 and August 3, 2019. The Company estimates that amortization expense related to intangible assets will be approximately $ i 13.1 million in 2020, $ i 12.9 million in 2021, $ i 12.5 million in 2022, $ i 12.2 million in 2023 and $ i 11.4 million in 2024.
Goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate it might be impaired, using either the qualitative assessment or a quantitative fair value-based test. During the first quarter of 2020, as a result of the significant decline in the Company's share price and market capitalization and the impact of COVID-19 on the Company's business operations, the Company determined that an interim assessment of goodwill was required. A quantitative assessment was performed for all reporting units as of May 2, 2020. The assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units was impaired, resulting in total goodwill impairment charges of $ i 240.3 million. The Company recorded i no goodwill impairment charges during the thirteen weeks ended August 1, 2020 or August 3, 2019.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. As a result of the triggering event from the economic impacts of COVID-19, an interim assessment was performed as of May 2, 2020. The indefinite-lived intangible asset impairment review resulted in total impairment charges of $ i 22.4 million for the thirteen weeks ended May 2, 2020, including $ i 12.2 million associated with the indefinite-lived Allen Edmonds trademark and $ i 10.2 million of impairment associated with the indefinite-lived Via Spiga trademark. The carrying value of the Via Spiga trademark of $ i 0.5 million will be amortized over approximately two years. The Company recorded i no impairment charges during the thirteen weeks ended August 1, 2020 or August 3, 2019.
| Note 9 | Leases |
The Company leases all of its retail locations and certain manufacturing facilities, office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future payments. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The Company recorded i no asset impairment charges during the thirteen weeks ended August 1, 2020, with $ i 1.8 million of charges recorded in the thirteen weeks ended August 3, 2019. The Company recorded asset impairment charges, primarily related to underperforming retail stores, of $ i 35.2 million and $ i 3.0 million in twenty-six weeks ended August 1, 2020 and August 3, 2019, respectively. The impairment charges recorded in the twenty-six weeks ended August 1, 2020, including $ i 20.4 million associated with operating lease right-of-use assets and $ i 14.8 million associated with property and equipment, reflect the impact of the COVID-19 pandemic on the Company's retail operations and estimates of remaining cash flows for each store. Refer to Note 5 and Note 15 to the condensed consolidated financial statements for further discussion on these impairment charges.
As a result of the temporary store closures associated with the COVID-19 pandemic, the Company is negotiating with landlords to modify payment terms for certain leases. Deferred payments for these leases are reflected in lease obligations on the condensed consolidated balance sheets. As further discussed in Note 2 to the condensed consolidated financial statements, under relief provided by the FASB, entities may make a policy election to account for the lease concessions as if the enforceable rights existed under the original contract, accounting for them as variable rent rather than lease modifications. During the second quarter of 2020, the Company made a policy election to account for rent abatements as variable rent and recorded $ i 2.0 million in lease concessions as a reduction of rent expense within selling and administrative expenses in the condensed consolidated statements of earnings (loss). Rent deferrals for leases that were extended in connection with the rent concession will continue to be recognized consistent with the original lease agreement.
During the twenty-six weeks ended August 1, 2020, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $ i 38.6 million on the condensed consolidated balance sheets. As of August 1, 2020, the Company has entered into lease commitments for two retail locations for which the leases have not yet commenced. The Company anticipates that the leases for all new retail locations will begin in the current fiscal year. Upon commencement, right-of-use assets and lease liabilities of approximately $ i 2.6 million will be recorded on the condensed consolidated balance sheets.
The components of lease expense for the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019 were as follows:
i
| Thirteen Weeks Ended | ||||||||
| ($ thousands) | ||||||||
| Operating lease expense | $ | i 41,088 | $ | i 45,851 | ||||
| Variable lease expense | i 12,007 | i 11,299 | ||||||
| Short-term lease expense | i 1,385 | i 962 | ||||||
| Sublease income | ( i 28 | ) | ( i 74 | ) | ||||
| Total lease expense | $ | i 54,452 | $ | i 58,038 | ||||
| Twenty-Six Weeks Ended | ||||||||
| ($ thousands) | ||||||||
| Operating lease expense | $ | i 86,338 | $ | i 92,312 | ||||
| Variable lease expense | i 23,331 | i 23,483 | ||||||
| Short-term lease expense | i 2,097 | i 2,077 | ||||||
| Sublease income | ( i 47 | ) | ( i 147 | ) | ||||
| Total lease expense | $ | i 111,719 | $ | i 117,725 | ||||
Supplemental cash flow information related to leases is as follows:
i
| Twenty-Six Weeks Ended | ||||||||
| ($ thousands) | ||||||||
| Cash paid for lease liabilities | $ | i 43,150 | $ | i 88,803 | ||||
| Cash received from sublease income | i 47 | i 147 | ||||||
| Note 10 | Long-term and Short-term Financing Arrangements |
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement ("the Former Credit Agreement"), which was further amended on July 20, 2015 to release all of the Company’s subsidiaries that were borrowers under or that guaranteed the Former Credit Agreement other than Sidney Rich Associates, Inc. and BG Retail, LLC. Allen Edmonds and Vionic were joined to the Agreement as guarantors on December 13, 2016 and October 31, 2018, respectively. After giving effect to the joinders, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement. On January 18, 2019, the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement to extend the maturity date to January 18, 2024 and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to $ i 600.0 million to an aggregate amount of up to $ i 500.0 million, with the option to increase by up to $ i 250.0 million. On April 14, 2020, the Company entered into a Fourth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, increased the amount available under the revolving credit facility by $ i 100.0 million to an aggregate amount of up to $ i 600.0 million, subject to borrowing base restrictions, and may be further increased by up to $ i 150.0 million. The Credit Agreement increased the spread applied to the LIBOR or prime rate by a total of i 75 basis points and increased the unused line fee by i 5 basis points.
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”) (with a floor of i 1.0% imposed by the Credit Agreement) 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.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, if excess availability falls below the greater of i 10.0% of the lesser of the Loan Cap and $ i 40.0 million for three consecutive business days, and the fixed charge coverage ratio is less than i 1.0 to 1.0, the Company would be in default under the Credit Agreement and certain additional covenants would be triggered.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. If an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of August 1, 2020.
At August 1, 2020, the Company had $ i 350.0 million borrowings outstanding and $ i 11.1 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $ i 166.6 million at August 1, 2020.
$200 Million Senior Notes
On July 27, 2015, the Company issued $ i 200.0 million aggregate principal amount of i 6.25% Senior Notes due 2023 (the "Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by each of the Company's subsidiaries that is a borrower or guarantor under the Credit Agreement. Interest on the Senior Notes is payable on February 15 and August 15 of each year. The Senior Notes will mature on August 15, 2023.
If the Company experiences specific kinds of changes of control, it would be required to offer to purchase the Senior Notes at a purchase price equal to i 101% of the principal amount, plus accrued and unpaid interest and Additional Interest, if any, to, but not including, the date of repurchase. The Senior Notes also contain certain other 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 August 1, 2020, the Company was in compliance with all covenants and restrictions relating to the Senior Notes.
| Note 11 | Shareholders’ Equity |
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss (OCL) by component for the periods ended August 1, 2020 and August 3, 2019:
i
| ($ thousands) | Foreign Currency Translation | Pension and Other Postretirement Transactions (1) | Derivative Financial Instrument Transactions (2) | Accumulated Other Comprehensive (Loss) Income | ||||||||||||
| Balance at May 2, 2020 | $ | ( i 2,111 | ) | $ | ( i 31,105 | ) | $ | i — | $ | ( i 33,216 | ) | |||||
| Other comprehensive income before reclassifications | i 721 | i — | i — | i 721 | ||||||||||||
| Reclassifications: | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | i — | i 810 | i — | i 810 | ||||||||||||
| Tax provision (3) | i — | i 248 | i — | i 248 | ||||||||||||
| Net reclassifications | i — | i 1,058 | i — | i 1,058 | ||||||||||||
| Other comprehensive income | i 721 | i 1,058 | i — | i 1,779 | ||||||||||||
| Balance at August 1, 2020 | $ | ( i 1,390 | ) | $ | ( i 30,047 | ) | $ | i — | $ | ( i 31,437 | ) | |||||
| Balance at May 4, 2019 | $ | ( i 908 | ) | $ | ( i 30,660 | ) | $ | ( i 305 | ) | $ | ( i 31,873 | ) | ||||
| Other comprehensive income (loss) before reclassifications | i 12 | i — | ( i 75 | ) | ( i 63 | ) | ||||||||||
| Reclassifications: | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | i — | i 622 | i 87 | i 709 | ||||||||||||
| Tax benefit | i — | ( i 161 | ) | ( i 17 | ) | ( i 178 | ) | |||||||||
| Net reclassifications | i — | i 461 | i 70 | i 531 | ||||||||||||
| Other comprehensive income (loss) | i 12 | i 461 | ( i 5 | ) | i 468 | |||||||||||
| Balance at August 3, 2019 | $ | ( i 896 | ) | $ | ( i 30,199 | ) | $ | ( i 310 | ) | $ | ( i 31,405 | ) | ||||
| Balance at February 1, 2020 | $ | ( i 580 | ) | $ | ( i 31,171 | ) | $ | ( i 92 | ) | $ | ( i 31,843 | ) | ||||
| Other comprehensive (loss) income before reclassifications | ( i 810 | ) | i — | i 87 | ( i 723 | ) | ||||||||||
| Reclassifications: | — | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | i — | i 1,504 | i 6 | i 1,510 | ||||||||||||
| Tax benefit (3) | i — | ( i 380 | ) | ( i 1 | ) | ( i 381 | ) | |||||||||
| Net reclassifications | i — | i 1,124 | i 5 | i 1,129 | ||||||||||||
| Other comprehensive (loss) income | ( i 810 | ) | i 1,124 | i 92 | i 406 | |||||||||||
| Balance at August 1, 2020 | $ | ( i 1,390 | ) | $ | ( i 30,047 | ) | $ | i — | $ | ( i 31,437 | ) | |||||
| Balance at February 2, 2019 | $ | i 62 | $ | ( i 31,055 | ) | $ | ( i 608 | ) | $ | ( i 31,601 | ) | |||||
| Other comprehensive (loss) income before reclassifications | ( i 958 | ) | i — | i 94 | ( i 864 | ) | ||||||||||
| Reclassifications: | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | i — | i 1,155 | i 258 | i 1,413 | ||||||||||||
| Tax benefit | i — | ( i 299 | ) | ( i 54 | ) | ( i 353 | ) | |||||||||
| Net reclassifications | i — | i 856 | i 204 | i 1,060 | ||||||||||||
| Other comprehensive (loss) income | ( i 958 | ) | i 856 | i 298 | i 196 | |||||||||||
| Balance at August 3, 2019 | $ | ( i 896 | ) | $ | ( i 30,199 | ) | $ | ( i 310 | ) | $ | ( i 31,405 | ) | ||||
| (1) | Amounts reclassified are included in other income, net. Refer to Note 13 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 and selling and administrative expenses. Refer to Note 14 and Note 15 to the condensed consolidated financial statements for additional information related to derivative financial instruments. | |
| (3) | Includes approximately $ i 0.5 million of expense related to a valuation allowance on net deferred taxes, including those related to other comprehensive income, for the Company's Canadian subsidiary. |
| Note 12 | Share-Based Compensation |
The Company recognized share-based compensation expense of $ i 2.1 million and $ i 3.2 million during the thirteen weeks and $ i 4.4 million and $ i 6.5 million during the twenty-six weeks ended August 1, 2020 and August 3, 2019, respectively.
The Company had net (repurchases) issuances of ( i 30,538) and i 17,560 shares of common stock during the thirteen weeks ended August 1, 2020 and August 3, 2019, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement. During the twenty-six weeks ended August 1, 2020 and August 3, 2019, the Company issued i 383,583 and i 364,843 shares of common stock, respectively, related to the share-based plans.
Restricted Stock
The following table summarizes restricted stock activity for the periods ended August 1, 2020 and August 3, 2019:
i
| Thirteen Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||
| Total Number of Restricted Shares | Weighted- Average Grant Date Fair Value | Total Number of Restricted Shares | Weighted- Average Grant Date Fair Value | ||||||||||||||
| May 2, 2020 | i 1,421,743 | $ | i 18.20 | May 4, 2019 | i 1,420,428 | $ | i 27.43 | ||||||||||
| Granted | i 12,748 | i 10.59 | Granted | i 52,684 | i 19.38 | ||||||||||||
| Forfeited | ( i 35,225 | ) | i 20.73 | Forfeited | ( i 36,000 | ) | i 28.33 | ||||||||||
| Vested | ( i 38,664 | ) | i 27.37 | Vested | ( i 3,642 | ) | i 34.33 | ||||||||||
| i 1,360,602 | $ | i 17.81 | i 1,433,470 | $ | i 27.09 | ||||||||||||
| Twenty-Six Weeks Ended | Twenty-Six Weeks Ended | ||||||||||||||||
| Total Number of Restricted Shares | Weighted- Average Grant Date Fair Value | Total Number of Restricted Shares | Weighted- Average Grant Date Fair Value | ||||||||||||||
| i 1,271,795 | $ | i 26.77 | i 1,249,223 | $ | i 29.17 | ||||||||||||
| Granted | i 563,431 | i 5.92 |
Granted | i 450,234 | i 22.95 | ||||||||||||
| Forfeited | ( i 67,912 | ) | i 23.21 |
Forfeited | ( i 57,425 | ) | i 28.77 | ||||||||||
| Vested | ( i 406,712 | ) | i 28.28 |
Vested | ( i 208,562 | ) | i 30.13 | ||||||||||
| i 1,360,602 | $ | i 17.81 | i 1,433,470 | $ | i 27.09 | ||||||||||||
All of the restricted shares granted during the thirteen weeks ended August 1, 2020 have a cliff-vesting term of one year. Of the i 563,431 restricted shares granted during the twenty-six weeks ended August 1, 2020, i 550,683 shares have a graded-vesting term of three years and i 12,748 shares have a cliff-vesting term of one year. Of the i 52,684 restricted shares granted during the thirteen weeks ended August 3, 2019, i 39,770 shares have a graded-vesting term of three years, with i 50% vesting after two years and i 50% vesting after three years, and i 12,914 shares have a cliff-vesting term of one year. Of the i 450,234 restricted shares granted during the twenty-six weeks ended August 3, 2019, i 437,320 shares have a graded-vesting term of three years, with i 50% vesting after two years and i 50% vesting after three years, and i 12,914 shares have a cliff-vesting term of one year. Share-based compensation expense for graded-vesting grants is recognized ratably over the respective vesting periods.
Performance Share Awards
During the twenty-six weeks ended August 1, 2020 and thirteen weeks ended August 3, 2019, the Company granted i no performance share awards. During the twenty-six weeks ended August 3, 2019, the Company granted performance share awards for a targeted i 180,000 shares, with a weighted-average grant date fair value of $ i 23.42. Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the three-year period following the grant. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and i 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. Subsequent to quarter-end, the Company granted performance share awards for a targeted i 87,750 shares. These performance share awards are based upon the attainment of certain financial goals for the second half of 2020.
Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units ("RSUs") payable in cash or common stock at no cost to the non-employee director. The RSUs earn dividend equivalents at the same rate as dividends on the Company's common stock. The dividend equivalents, which vest immediately, are automatically re-invested in additional RSUs. Expense related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value when the dividend equivalents are granted. The Company granted i 106,222 and i 53,215 RSUs to non-employee directors, including i 4,238 and i 1,559 for dividend equivalents, during the thirteen weeks ended August 1, 2020 and August 3, 2019, respectively, with weighted-average grant date fair values of $ i 10.50 and $ i 19.38, respectively. The Company granted i 114,531 and i 54,329 RSUs to non-employee directors, including i 12,548 and i 2,673 for dividend equivalents, during the twenty-six weeks ended August 1, 2020 and August 3, 2019, respectively, with weighted-average grant date fair values of $ i 10.02 and $ i 19.50, respectively.
| Note 13 | 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:
i
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
| ($ thousands) | ||||||||||||||||
| Service cost | $ | i 2,247 | $ | i 1,755 | $ | i — | $ | i — | ||||||||
| Interest cost | i 3,128 | i 3,680 | i 11 | i 15 | ||||||||||||
| Expected return on assets | ( i 7,432 | ) | ( i 6,967 | ) | i — | i — | ||||||||||
| Amortization of: | ||||||||||||||||
| Actuarial loss (gain) | i 1,183 | i 1,024 | ( i 16 | ) | ( i 24 | ) | ||||||||||
| Prior service income | ( i 357 | ) | ( i 378 | ) | i — | i — | ||||||||||
| Settlement cost | i 222 | i — | i — | i — | ||||||||||||
| Curtailment gain | ( i 189 | ) | i — | i — | i — | |||||||||||
| Total net periodic benefit income | $ | ( i 1,198 | ) | $ | ( i 886 | ) | $ | ( i 5 | ) | $ | ( i 9 | ) | ||||
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||
| Twenty-Six Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| ($ thousands) | ||||||||||||||||
| Service cost | $ | i 4,407 | $ | i 3,609 | $ | i — | $ | i — | ||||||||
| Interest cost | i 6,282 | i 7,405 | i 21 | i 30 | ||||||||||||
| Expected return on assets | ( i 14,875 | ) | ( i 13,859 | ) | i — | i — | ||||||||||
| Amortization of: | ||||||||||||||||
| Actuarial loss (gain) | i 2,266 | i 1,952 | ( i 55 | ) | ( i 54 | ) | ||||||||||
| Prior service income | ( i 707 | ) | ( i 743 | ) | i — | i — | ||||||||||
| Settlement cost | i 222 | i — | i — | i — | ||||||||||||
| Curtailment gain | ( i 189 | ) | i — | i — | i — | |||||||||||
| Total net periodic benefit income | $ | ( i 2,594 | ) | $ | ( i 1,636 | ) | $ | ( i 34 | ) | $ | ( i 24 | ) | ||||
The non-service cost components of net periodic benefit income are included in other income, net in the condensed consolidated statements of earnings (loss). Service cost is included in selling and administrative expenses.
| Note 14 | 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. Credit risk is managed through the continuous monitoring of exposures to such counterparties.
The Company’s hedging strategy allows for the use of 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.
The Company had no forward contracts as of August 1, 2020. As of August 3, 2019, and February 1, 2020, the Company had forward contracts maturing through May 2020. The contract amounts in the following table represent the net notional amount of all purchase and sale contracts of a foreign currency.
i
| (U.S. $ equivalent in thousands) | ||||||||||||
| Financial Instruments | ||||||||||||
| U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars) | $ | i — | $ | i 9,630 | $ | i 3,963 | ||||||
| Euro | i — | i 5,718 | i 1,251 | |||||||||
| Chinese yuan | i — | i 3,643 | i 2,355 | |||||||||
| New Taiwanese dollars | i — | i 329 | i — | |||||||||
| Other currencies | i — | i 250 | i 69 | |||||||||
| Total financial instruments | $ | i — | $ | i 19,570 | $ | i 7,638 | ||||||
The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of August 1, 2020, August 3, 2019 and February 1, 2020 are as follows:
i
| Asset Derivatives | Liability Derivatives | |||||||||
| ($ thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||
| Foreign Exchange Forward Contracts | ||||||||||
| August 1, 2020 | Prepaid expenses and other current assets | i — | Other accrued expenses | i — | ||||||
| August 3, 2019 | Prepaid expenses and other current assets | i 60 | Other accrued expenses | i 418 | ||||||
| Prepaid expenses and other current assets | i — | Other accrued expenses | i 103 | |||||||
For the thirteen and twenty-six weeks ended August 1, 2020 and August 3, 2019, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings (loss) was as follows:
i
| Thirteen Weeks Ended | ||||||||||||||||
| ($ thousands) | ||||||||||||||||
| Foreign Exchange Forward Contracts: Income Statement Classification Gains (Losses) - Realized | Gain (Loss) Recognized in OCL on Derivatives | Gain (Loss) Reclassified from Accumulated OCL into Earnings | (Loss) Gain Recognized in OCL on Derivatives | Loss Reclassified from Accumulated OCL into Earnings | ||||||||||||
| Net sales | $ | i — | $ | i — | $ | ( i 22 | ) | $ | ( i 5 | ) | ||||||
| Cost of goods sold | i — | i — | i 63 | ( i 16 | ) | |||||||||||
| Selling and administrative expenses | i — | i — | ( i 150 | ) | ( i 66 | ) | ||||||||||
| Twenty-Six Weeks Ended | ||||||||||||||||
| ($ thousands) | ||||||||||||||||
| Foreign Exchange Forward Contracts: Income Statement Classification Gains (Losses) - Realized | Gain Recognized in OCL on Derivatives | Loss Reclassified from Accumulated OCL into Earnings | (Loss) Gain Recognized in OCL on Derivatives | Loss Reclassified from Accumulated OCL into Earnings | ||||||||||||
| Net sales | $ | i 23 | $ | i — | $ | ( i 121 | ) | $ | ( i 5 | ) | ||||||
| Cost of goods sold | i 60 | i — | i 352 | ( i 38 | ) | |||||||||||
| Selling and administrative expenses | i 33 | ( i 6 | ) | ( i 115 | ) | ( i 215 | ) | |||||||||
Additional information related to the Company’s derivative financial instruments are disclosed within Note 15 to the condensed consolidated financial statements.
/
| Note 15 | 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. |
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. The Company also 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).
Non-Qualified 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 i 50% of base salary and i 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 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 (loss). 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 were previously granted at no cost to non-employee directors. These cash-equivalent 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 cash-equivalent 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 12 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 14 to the condensed consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July of 2018. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the purchase agreement (Level 3). Accretion of the mandatory purchase obligation and fair value adjustments are recorded as interest expense. During the thirteen and twenty-six weeks ended August 1, 2020, the Company recorded fair value adjustments of $ i 6.6 million and $ i 9.8 million, respectively. Accretion and remeasurement adjustments of $ i 0.4 million and $ i 0.5 million were recorded during the thirteen and twenty-six weeks ended August 3, 2019, respectively. The earnings projections and discount rate utilized in the estimate of the fair value of the mandatory purchase obligation require management judgment and are the assumptions to which the fair value calculation is the most sensitive. Refer to further discussion of the mandatory purchase obligation in Note 5 to the condensed consolidated financial statements.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at August 1, 2020, August 3, 2019 and February 1, 2020.
i
| Fair Value Measurements | ||||||||||||||||
| ($ thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Asset (Liability) | ||||||||||||||||
| Cash equivalents – money market funds | $ | i 99,001 | $ | i 99,001 | $ | i — | $ | i — | ||||||||
| Non-qualified deferred compensation plan assets | i 7,690 | i 7,690 | i — | i — | ||||||||||||
| Non-qualified deferred compensation plan liabilities | ( i 7,690 | ) | ( i 7,690 | ) | i — | i — | ||||||||||
| Deferred compensation plan liabilities for non-employee directors | ( i 780 | ) | ( i 780 | ) | i — | i — | ||||||||||
| Restricted stock units for non-employee directors | ( i 686 | ) | ( i 686 | ) | i — | i — | ||||||||||
| Mandatory purchase obligation - Blowfish Malibu | ( i 25,022 | ) | i — | i — | ( i 25,022 | ) | ||||||||||
| Non-qualified deferred compensation plan assets | $ | i 7,949 | $ | i 7,949 | $ | i — | $ | i — | ||||||||
| Non-qualified deferred compensation plan liabilities | ( i 7,949 | ) | ( i 7,949 | ) | i — | i — | ||||||||||
| Deferred compensation plan liabilities for non-employee directors | ( i 1,407 | ) | ( i 1,407 | ) | i — | i — | ||||||||||
| Restricted stock units for non-employee directors | ( i 2,309 | ) | ( i 2,309 | ) | i — | i — | ||||||||||
| Derivative financial instruments, net | ( i 358 | ) | i — | ( i 358 | ) | i — | ||||||||||
| Mandatory purchase obligation - Blowfish Malibu | ( i 9,772 | ) | i — | i — | ( i 9,772 | ) | ||||||||||
| Cash equivalents – money market funds | $ | i 18,001 | $ | i 18,001 | $ | i — | $ | i — | ||||||||
| Non-qualified deferred compensation plan assets | i 8,004 | i 8,004 | i — | i — | ||||||||||||
| Non-qualified deferred compensation plan liabilities | ( i 8,004 | ) | ( i 8,004 | ) | i — | i — | ||||||||||
| Deferred compensation plan liabilities for non-employee directors | ( i 1,536 | ) | ( i 1,536 | ) | i — | i — | ||||||||||
| Restricted stock units for non-employee directors | ( i 2,572 | ) | ( i 2,572 | ) | i — | i — | ||||||||||
| Derivative financial instruments, net | ( i 103 | ) | i — | ( i 103 | ) | i — | ||||||||||
| Mandatory purchase obligation - Blowfish Malibu | ( i 15,200 | ) | i — | i — | ( i 15,200 | ) | ||||||||||
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 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 Topic 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $ i 684.9 million and $ i 673.1 million at August 1, 2020 and August 3, 2019, respectively, were assessed for indicators of impairment and written down to their fair value. This assessment resulted in the following impairment charges, primarily for operating lease right-of-use assets, leasehold improvements and furniture and fixtures in the Company's retail stores. Higher impairment charges were recorded in the twenty-six weeks ended August 1, 2020, reflecting the deteriorating economic conditions driven in part by the COVID-19 pandemic, as further discussed in Note 5 and Note 9 to the condensed consolidated financial statements.
i
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
| ($ thousands) | ||||||||||||||||
| Impairment Charges | ||||||||||||||||
| Famous Footwear | $ | i — | $ | i 341 | $ | i 14,896 | $ | i 741 | ||||||||
| Brand Portfolio | i — | i 1,419 | i 20,326 | i 2,213 | ||||||||||||
| Total impairment charges | $ | i — | $ | i 1,760 | $ | i 35,222 | $ | i 2,954 | ||||||||
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:
i
| Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||
| ($ thousands) | Value(1) | Value | Value(1) | Value | Value(1) | Value | ||||||||||||||||||
| Borrowings under revolving credit agreement | $ | i 350,000 | $ | i 350,000 | $ | i 300,000 | $ | i 300,000 | $ | i 275,000 | $ | i 275,000 | ||||||||||||
| Long-term debt | i 200,000 | i 174,000 | i 200,000 | i 205,500 | i 200,000 | i 205,000 | ||||||||||||||||||
| Total debt | $ | i 550,000 | $ | i 524,000 | $ | i 500,000 | $ | i 505,500 | $ | i 475,000 | $ | i 480,000 | ||||||||||||
(1) Excludes unamortized debt issuance costs and debt discount
| Note 16 | Income Taxes |
The Company’s consolidated effective tax rates were i 9.4% and i 23.7% for the thirteen weeks ended August 1, 2020 and August 3, 2019, respectively. During the thirteen weeks ended August 1, 2020, the Company's effective tax rate was impacted by a tax benefit of approximately $ i 5.2 million associated with the provision in the CARES Act that permits entities to carryback net operating losses to tax years with a higher federal corporate tax rate. The effective tax rate was also impacted by a discrete tax provision of $ i 2.7 million, primarily for the provision of valuation allowances related to certain state and Canada deferred tax assets. If these discrete tax items had not been recognized, the Company's effective tax rate would have been i 17.3% for the thirteen weeks ended August 1, 2020. There were no discrete tax items recognized during the thirteen weeks ended August 3, 2019.
For the twenty-six weeks ended August 1, 2020, the Company's consolidated effective tax rate was i 19.1%, compared to i 24.1% for twenty-six weeks ended August 3, 2019. The Company's effective tax rate was impacted by several discrete tax items, including the non-deductibility of a portion of the Company's intangible asset impairment charges, the provision of a valuation allowance related to certain state and Canada deferred tax assets and the incremental tax provision related to share-based compensation during the six months ended August 1, 2020. During the six months ended August 3, 2019, the Company's effective tax rate was impacted by a discrete tax provision of $ i 0.1 million related to share-based compensation. If these discrete taxes had not been recognized during the first half of 2020 and 2019, the Company's effective tax rates would have been i 25.0% and i 23.9%, respectively.
As of August 1, 2020, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s foreign subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, as required by the Tax Cuts and Jobs Act. The Company periodically evaluates its foreign investment opportunities and plans, as well as its foreign working capital needs, to determine the level of investment required and, accordingly, determines the level of foreign earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s foreign subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.
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| Note 17 | 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 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. The Company continues to implement the expanded remedy work plan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company has submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one. During the fourth quarter of 2019, a final response was received from the oversight authorities, which will allow the Company to proceed with implementation of the revised plan.
The cumulative expenditures for both on-site and off-site remediation through August 1, 2020 were $ i 31.7 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 August 1, 2020 is $ i 9.5 million, of which $ i 8.7 million is recorded within other liabilities and $ i 0.8 million is recorded within other accrued expenses. Of the total $9.5 million reserve, $ i 5.0 million is for off-site remediation and $ i 4.5 million is for on-site remediation. The liability for the on-site remediation was discounted at i 4.8%. On an undiscounted basis, the on-site remediation liability would be $ i 13.8 million as of August 1, 2020. The Company expects to spend approximately $ i 0.5 million in 2020, $0.1 million in each of the following four years and $ i 12.9 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 remediation plans in conjunction with its environmental consultants and records its best estimate of remediation 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.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| OVERVIEW |
In March 2020, the World Health Organization declared the outbreak of the coronavirus ("COVID-19") a global pandemic. On March 19, 2020, we announced the temporary closure of all of our Famous Footwear and Brand Portfolio retail stores in North America, and they remained closed for an average of 10 weeks during the first half of 2020. While our e-commerce businesses continued to operate during the temporary store closures and contributed strong sales increases, we experienced a significant decline in sales and earnings during the first half of 2020. In addition, many of our wholesale partners also temporarily closed their retail stores and canceled orders during this time. In mid-May, we began a phased reopening of our Famous Footwear and Brand Portfolio retail stores and substantially all of our retail store locations were reopened by the end of June. Our stores opened with enhanced health and safety procedures, contactless shopping options and, in many cases, reduced operating hours. During the period of temporary store closures, we leveraged the strength of our brands and the investment in our e-commerce platform to quickly shift to a digital-only business, resulting in significant growth in our e-commerce business during the first half of 2020.
Despite the ongoing economic impacts of the pandemic, we have remained focused on managing expenses and working capital to strengthen our business. We have taken decisive actions to mitigate the adverse impact of COVID-19 during the first half of 2020, including the following:
| • |
Aligned our workforce related expenses to meet the needs of a lower demand environment, including associate furloughs for a significant portion of the workforce, salary reductions for most remaining associates through the end of the second quarter and reductions in the cash retainers for our Board of Directors, which will continue through the end of the fiscal year; |
|
| • | Reduced marketing expenses and variable expenses during the temporary store closure period; |
| • |
Managed inventory levels, continuously balancing supply and demand; |
|
| • | Leveraged strong partnerships to reduce product receipts and extend payment terms; | |
| • | Successfully negotiated lease modifications, including the deferral and abatement of certain lease payments; |
| • |
Eliminated or deferred non-essential capital projects, including Famous Footwear store remodels and planned store openings during the first half of 2020; |
|
| • | Expanded e-commerce sales by capitalizing on the significant enhancements in our omni-channel capabilities, resulting in strong growth in e-commerce sales for the first half of 2020; | |
| • | Utilized our expansive network of temporarily closed retail locations as distribution centers to support increased e-commerce business; | |
| • | Adapted our buy online, pick-up-in-store capability to include a contactless curbside pickup option at approximately 60% of our retail locations; and | |
| • | Implemented health and safety measures to ensure a comfortable work environment and shopping experience for returning associates and customers. |
In addition, as a precautionary measure to increase our cash position and preserve financial flexibility given the uncertainty in the United States and global markets resulting from COVID-19, we increased the borrowings on our revolving credit facility in March 2020 to $440.0 million. We also entered into an amendment to our Fourth Amended and Restated Credit Agreement in April to increase its borrowing capacity, as further discussed in Note 10 to the condensed consolidated financial statements. During the second quarter of 2020, we repaid $88.5 million of the borrowings under the revolving credit facility and have $350.0 million outstanding as of August 1, 2020.
The impact of COVID-19 on our business operations, including the depth and duration of the pandemic and its impact on overall consumer confidence and spending, as well as the need to cease or limit operations if subsequent outbreaks occur, cannot be reasonably estimated at this time. We continue to experience ongoing business disruption and there is uncertainty regarding the impact that COVID-19 will have on our business, results of operations, financial condition and cash flows for the fiscal year ending January 30, 2021.
Financial Highlights
We are pleased with the Company's performance in the second quarter of 2020 despite ongoing pressures from the global pandemic. We advanced a number of our strategic objectives during the quarter that are helping to drive our recovery, including growth in our e-commerce sales platform and prudent management of expenses and working capital. We continue to see strong demand for our sport and casual styles, aligning with the prevailing stay-at-home, work-from-home environment. Within both our Famous Footwear and Brand Portfolio segments, where we have substantial offerings of these product categories, we continue to expand our product selection to capitalize on the acceleration in these consumer trends. The following is a summary of the financial highlights for the second quarter of 2020:
| • |
Consolidated net sales decreased $251.1 million, or 33.4%, to $501.4 million in the second quarter of 2020, driven by the temporary closure of all of our retail stores in mid-March due to the outbreak of the COVID-19 pandemic. In mid-May, we began a phased reopening of retail stores in areas where restrictions had been relaxed or lifted and substantially all stores were re-opened in some capacity by the end of June. Our wholesale customers also temporarily closed their stores in response to the pandemic and many canceled orders that had been placed with the Company. However, we continued to experience significant growth in our e-commerce business, aided by enhancements in our omni-channel capabilities, as customers sought to fulfill their footwear needs through online channels. In particular, e-commerce sales within our Famous Footwear segment more than doubled in the first half of 2020 and have continued to remain strong at the start of the third quarter. |
| • |
Consolidated gross profit decreased $123.3 million, or 40.3%, to $182.6 million in the second quarter of 2020, compared to $305.9 million in the second quarter of 2019. Our gross profit margin decreased to 36.4% in the second quarter of 2020, compared to 40.7% in the second quarter of 2019. |
| • |
Consolidated operating (loss) earnings decreased $61.9 million to an operating loss of $24.1 million in the second quarter of 2020, compared to operating earnings of $37.8 million in the second quarter of 2019. |
| • |
Consolidated net loss attributable to Caleres, Inc. was $30.7 million, or $0.83 per diluted share, in the second quarter of 2020, compared to net earnings of $25.3 million, or $0.61 per diluted share, in the second quarter of 2019. |
The following items should be considered in evaluating the comparability of our second quarter results in 2020 and 2019:
| • |
Blowfish Malibu mandatory purchase obligation – As further discussed in Note 5 and Note 15 to the condensed consolidated financial statements, the Blowfish Malibu noncontrolling interest is subject to a mandatory purchase obligation after a three-year period, based on an earnings multiple formula. During the second quarter of 2020, we recorded a fair value adjustment of $6.6 million ($4.9 million on an after-tax basis, or $0.13 per diluted share), which is recorded as interest expense, net in the condensed consolidated statements of earnings (loss). Accretion of $0.4 million was recorded during the second quarter of 2019. |
| • |
COVID-19-related expenses – During the second quarter of 2020, we incurred $5.4 million ($4.7 million on an after-tax basis, or $0.13 per diluted share) in costs associated with the economic impacts of the COVID-19 pandemic, for severance and related costs, as well as the cost of supplies and deep cleaning our facilities. |
Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though other retailers may calculate the metric differently. Management uses the same-store sales metric as a measure of an individual store's success to determine whether it is performing in line with expectations. Our same-store sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open for at least 13 months. In addition, in order to be included in the same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores (whether temporary or permanent closures) are excluded from the same-store sales metric for each day of the closure. Relocated stores are treated as new stores and therefore excluded from the calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in assessing our retail sales performance of existing locations with comparable prior year sales, separate from the impact of store openings or store closures.
Beginning in mid-March 2020, all of our Famous Footwear and Brand Portfolio stores in North America were temporarily closed and we began a phased reopening of retail stores in mid-May. Our same-store sales calculation excludes the impact of these closed stores, both permanent and temporary closures. Accordingly, for both the thirteen and twenty-six weeks ended August 1, 2020, our same-store sales calculation weights our e-commerce sales more heavily than in prior periods, given the strong growth in that channel and the fact that our e-commerce sites continued to operate throughout the year.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to calculate the efficiency of sales based upon the square footage in a store. Management uses the sales per square foot metric as a measure of an individual store's success to determine whether it is performing in line with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period. This metric was adversely impacted by the temporary retail store closures during a portion of both the first and second quarters of 2020 and therefore, the metric is not comparable to the thirteen and twenty-six weeks ended August 3, 2019.
Outlook
While we expect the second half of 2020 to continue to be unpredictable, we are managing our business for the long-term, while maintaining the flexibility to adapt to challenges that may arise for the remainder of the year. Our back-to-school selling season has started off more slowly than in typical years given delayed starts to the school year and the shift to virtual learning across much of the United States. Rather than peak selling over a small number of weeks, we anticipate the back-to-school selling season to have fewer peak selling weeks, but to extend deeper into the fall. We believe our diverse portfolio of iconic brands that are well-aligned with consumer trends, advanced capabilities and improving capital structure will lead us through the recovery, and position the Company to embrace rapidly changing consumer behaviors and capitalize on the increasingly dynamic marketplace.
Following are the consolidated results and the results by segment:
CONSOLIDATED RESULTS
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
| ($ millions) |
% of Net Sales |
% of Net Sales |
% of Net Sales |
% of Net Sales |
||||||||||||||||||||||||||||
| Net sales |
$ | 501.4 | 100.0 | % | $ | 752.5 | 100.0 | % | $ | 898.6 | 100.0 | % | $ | 1,430.2 | 100.0 | % | ||||||||||||||||
| Cost of goods sold |
318.8 | 63.6 | % | 446.6 | 59.3 | % | 594.1 | 66.1 | % | 844.4 | 59.0 | % | ||||||||||||||||||||
| Gross profit |
182.6 | 36.4 | % | 305.9 | 40.7 | % | 304.5 | 33.9 | % | 585.8 | 41.0 | % | ||||||||||||||||||||
| Selling and administrative expenses |
201.3 | 40.1 | % | 267.5 | 35.6 | % | 426.6 | 47.5 | % | 529.6 | 37.0 | % | ||||||||||||||||||||
| Impairment of goodwill and intangible assets | — | — | — | — | 262.7 | 29.2 | % | — | — | |||||||||||||||||||||||
| Restructuring and other special charges, net |
5.4 | 1.1 | % | 0.6 | 0.1 | % | 65.6 | 7.3 | % | 1.5 | 0.1 | % | ||||||||||||||||||||
| Operating (loss) earnings |
(24.1 | ) | (4.8 | )% | 37.8 | 5.0 | % | (450.4 | ) | (50.1 | )% | 54.7 | 3.8 | % | ||||||||||||||||||
| Interest expense, net |
(13.5 | ) | (2.7 | )% | (7.4 | ) | (1.0 | )% | (22.9 | ) | (2.6 | )% | (14.7 | ) | (1.0 | )% | ||||||||||||||||
| Other income, net |
3.7 | 0.7 | % | 2.7 | 0.4 | % | 7.3 | 0.8 | % | 5.2 | 0.4 | % | ||||||||||||||||||||
| (Loss) earnings before income taxes |
(33.9 | ) | (6.8 | )% | 33.1 | 4.4 | % | (466.0 | ) | (51.9 | )% | 45.2 | 3.2 | % | ||||||||||||||||||
| Income tax benefit (provision) |
3.2 | 0.7 | % | (7.9 | ) | (1.0 | )% | 89.1 | 10.0 | % | (10.9 | ) | (0.8 | )% | ||||||||||||||||||
| Net (loss) earnings |
(30.7 | ) | (6.1 | )% | 25.2 | 3.4 | % | (376.9 | ) | (41.9 | )% | 34.3 | 2.4 | % | ||||||||||||||||||
| Net earnings (loss) attributable to noncontrolling interests |
0.0 | 0.0 | % | (0.1 | ) | (0.0 | )% | (0.3 | ) | (0.0 | )% | (0.1 | ) | (0.0 | )% | |||||||||||||||||
| Net (loss) earnings attributable to Caleres, Inc. |
$ | (30.7 | ) | (6.1 | )% | $ | 25.3 | 3.4 | % | $ | (376.6 | ) | (41.9 | )% | $ | 34.4 | 2.4 | % | ||||||||||||||
Net Sales
Net sales decreased $251.1 million, or 33.4%, to $501.4 million for the second quarter of 2020, compared to $752.5 million for the second quarter of 2019. The COVID-19 pandemic resulted in the temporary closure of all of our retail stores in mid-March, as well as the closure of stores operated by our wholesale customers. In mid-May, we began a phased reopening of retail stores in areas where restrictions had been relaxed or lifted. Substantially all retail store locations were open by the end of June with reduced operating hours, enhanced health and safety procedures and contactless shopping options. Our Brand Portfolio segment experienced a sales decline of $176.0 million, or 48.9%, during the second quarter of 2020, while sales at our Famous Footwear segment decreased $85.9 million, or 20.5%. However, the consumer's shift to online purchasing accelerated during the second quarter of 2020, driving strong growth in e-commerce net sales. Our prior investments in e-commerce and logistics capabilities has positioned us to capitalize on the accelerating shift to online purchasing, driving consolidated e-commerce-related sales to increase more than 30 percent during the second quarter of 2020, with consolidated e-commerce penetration rising to approximately 34 percent of net sales.
Net sales decreased $531.6 million, or 37.2%, to $898.6 million for the six months ended August 1, 2020, compared to $1,430.2 million for the six months ended August 3, 2019. The temporary closure of all of our retail stores on March 19, 2020 due to the COVID-19 pandemic, as well as the closure of stores operated by our wholesale customers, resulted in a $299.7 million, or 42.8%, decrease in net sales for our Brand Portfolio segment and a $246.8 million, or 32.0% decrease in net sales for our Famous Footwear segment. With the closure of our retail stores, our e-commerce business experienced a strong increase in net sales for the first half of 2020. As a result of the pandemic, many schools across the country are beginning the fall semester in a virtual learning environment. Accordingly, we have experienced a slower start to our back-to-school selling season. We anticipate the back-to-school demand in 2020 will extend longer than a typical year, where demand is more concentrated over a few weeks.
Gross Profit
Gross profit decreased $123.3 million, or 40.3%, to $182.6 million for the second quarter of 2020, compared to $305.9 million for the second quarter of 2019, primarily as a result of lower net sales reflecting the difficult retail environment driven by the COVID-19 pandemic. As a percentage of net sales, gross profit decreased to 36.4% for the second quarter of 2020, compared to 40.7% for the second quarter of 2019, primarily reflecting a margin decline at our Famous Footwear segment due to a higher mix of e-commerce sales and the promotional actions taken to drive sales volume and manage inventory levels in this uncertain environment. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental shipping and handling required. The mix of retail versus wholesale net sales increased to 70% and 30% in the second quarter of 2020, compared to 61% and 39%, respectively, in the second quarter of 2019.
Gross profit decreased $281.3 million, or 48.0%, to $304.5 million for the six months ended August 1, 2020, compared to $585.8 million for the six months ended August 3, 2019, primarily reflecting lower net sales and higher incremental cost of goods sold in the first half of 2020 driven by $33.4 million ($25.6 million on an after-tax basis, or $0.71 per diluted share) in inventory markdowns reflecting the difficult retail environment driven by the COVID-19 pandemic and $1.6 million in inventory markdowns related to the decision during the first quarter of 2020 to exit the Fergie brand. Cost of goods sold in the six months ended August 3, 2019 included $7.2 million related to the amortization of the inventory adjustment required by purchase accounting for our acquisition of Vionic and incremental markdowns related to the Carlos brand exit. As a percentage of net sales, gross profit decreased to 33.9% for the six months ended August 1, 2020, compared to 41.0% for the six months ended August 3, 2019. The gross profit rate primarily reflects a decline at the Famous Footwear segment due to the promotional environment and higher e-commerce sales. The mix of retail versus wholesale net sales increased to 63% and 37% in the six months ended August 1, 2020, compared to 60% and 40%, respectively, in the six months ended August 3, 2019.
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 decreased $66.2 million, or 24.7%, to $201.3 million for the second quarter of 2020, compared to $267.5 million for the second quarter of 2019. The decrease was primarily driven by lower salaries expense attributable to reductions in our workforce, associate furloughs for a significant portion of our workforce, and salary reductions for most remaining employees throughout the second quarter; lower variable expenses associated with the retail store closures; and lower marketing and logistics expenses. As a percentage of net sales, selling and administrative expenses increased to 40.1% for the second quarter of 2020, from 35.6% for the second quarter of 2019, reflecting the deleveraging of expenses over a smaller sales base.
Selling and administrative expenses decreased $103.0 million, or 19.5%, to $426.6 million for the six months ended August 1, 2020, compared to $529.6 million for the six months ended August 3, 2019. The decrease was primarily driven by lower salaries and benefits expense; lower variable expenses associated with the temporary retail store closures; and lower marketing, travel and logistics expenses. As a percentage of net sales, selling and administrative expenses increased to 47.5% for the six months ended August 1, 2020, from 37.0% for the six months ended August 3, 2019, reflecting the deleveraging of expenses over a smaller sales base.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $5.4 million ($4.7 million on an after-tax basis, or $0.13 per diluted share) in the second quarter of 2020, primarily for severance, as well as supplies and deep cleaning of our facilities, driven by the impact of the COVID-19 pandemic on our business operations. Restructuring and other special charges of $0.6 million ($0.5 million on an after-tax basis, or $0.01 per diluted share) were incurred in the second quarter of 2019 associated with integration-related costs for Vionic. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
We incurred restructuring and other special charges of $65.6 million ($52.5 million on an after-tax basis, or $1.46 per diluted share) for the six months ended August 1, 2020 related to the unfavorable business climate, driven by the impact of the COVID-19 pandemic on our business operations. These charges were primarily for impairment associated with lease right-of use assets and retail store furniture and fixtures, liabilities associated with factory order cancellations and severance. Restructuring and other special charges of $1.5 million ($1.1 million on an after-tax basis, or $0.03 per diluted share) were incurred for the six months ended August 3, 2019, associated with the exit of our Carlos brand and integration-related costs for Vionic. The integration of Vionic is ongoing and additional costs are anticipated during the second half of 2020. The integration is expected to be complete by the end of our fiscal 2020. Accordingly, we anticipate additional integration-related costs for the second half of 2020. Refer to Note 5 to the condensed consolidated financial statements for further discussion of these charges.
Operating (Loss) Earnings
Operating (loss) earnings decreased $61.9 million to an operating loss of $24.1 million for the second quarter of 2020, compared to operating earnings of $37.8 million for the second quarter of 2019, primarily reflecting lower net sales, partially offset by lower selling and administrative expenses as a result of the actions we took to mitigate the impact of COVID-19 on our financial results. As a percentage of net sales, the operating loss was 4.8% for the second quarter of 2020, compared to operating earnings of 5.0% for the second quarter of 2019.
Operating (loss) earnings decreased $505.1 million to an operating loss of $450.4 million for the six months ended August 1, 2020, compared to operating earnings of $54.7 million for the six months ended August 3, 2019, primarily reflecting lower net sales and higher impairment and restructuring charges described above. As a percentage of net sales, the operating loss was 50.1% for the six months ended August 1, 2020, compared to operating earnings of 3.8% for the six months ended August 3, 2019.
Interest Expense, Net
Interest expense, net increased $6.1 million, or 81.2%, to $13.5 million for the second quarter of 2020, compared to $7.4 million for the second quarter of 2019, reflecting the fair value adjustment to the Blowfish Malibu mandatory purchase obligation of $6.6 million in the second quarter of 2020, partially offset by lower average borrowings under our revolving credit agreement. We continued to repay the incremental borrowings from March 2020 that were used to preserve financial flexibility during the pandemic, with net repayments of $88.5 million during the second quarter of 2020. Refer to Note 15 to the condensed consolidated financial statements for further discussion regarding the mandatory purchase obligation.
Interest expense, net increased $8.2 million, or 55.2%, to $22.9 million for the six months ended August 1, 2020, compared to $14.7 million for the six months ended August 3, 2019, reflecting the fair value adjustment to the Blowfish Malibu mandatory purchase obligation of $9.8 million in the six months ended August 1, 2020, partially offset by lower average borrowings under our revolving credit agreement. Refer to Note 15 to the condensed consolidated financial statements for further discussion regarding the mandatory purchase obligation.
Other Income, Net
Other income, net increased $1.0 million, or 38.6%, to $3.7 million for the second quarter of 2020, compared to $2.7 million for the second quarter of 2019, driven by a lower discount rate and a higher expected return on assets for our domestic pension plan.
Other income, net increased $2.1 million, or 37.7%, to $7.3 million for the six months ended August 1, 2020, compared to $5.2 million for the six months ended August 3, 2019 reflecting a higher expected return on assets and lower discount rate on our domestic pension plan. Refer to Note 13 to the condensed consolidated financial statements for additional information related to our retirement plans.
Income Tax Benefit (Provision)
Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate was 9.4% for the second quarter of 2020, compared to 23.7% for the second quarter of 2019. Our effective tax rate was impacted by certain discrete tax expenses totaling $2.7 million, including valuation allowances related to certain state and Canada deferred tax assets. If these discrete tax items had not been recognized during the second quarter of 2020, our effective tax rate would have been 17.3%. Our tax benefit for the second quarter of 2020 also includes a benefit associated with the CARES Act, which permits the Company to carry back 2020 losses to years with a higher federal tax rate. There were no discrete tax items recognized during the second quarter of 2019.
For the six months ended August 1, 2020, our consolidated effective tax rate was 19.1%, compared to 24.1% for the six months ended August 3, 2019. Our effective tax rate was impacted by several discrete tax items, including the non-deductibility of a portion of our intangible asset impairment charges, the provision of a valuation allowance related to certain state and Canada deferred tax assets, and the incremental tax provision related to the vesting of stock awards during the six months ended August 1, 2020, compared to a discrete tax provision of $0.1 million in the six months ended August 3, 2019 related to share-based compensation. If these discrete tax items had not been recognized during the first half of 2020 and 2019, our effective tax rates would have been 25.0% and 23.9%, respectively.
Net (Loss) Earnings Attributable to Caleres, Inc.
Net losses attributable to Caleres, Inc. were $30.7 million and $376.6 million for the second quarter and six months ended August 1, 2020, respectively, compared to net earnings of $25.3 million and $34.4 million for the second quarter and six months ended August 3, 2019, respectively, as a result of the factors described above.
FAMOUS FOOTWEAR
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
| ($ millions, except sales per square foot) |
% of Net Sales |
% of Net Sales |
% of Net Sales |
% of Net Sales |
||||||||||||||||||||||||||||
| Operating Results |
||||||||||||||||||||||||||||||||
| Net sales |
$ | 333.9 | 100.0 | % | $ | 419.8 | 100.0 | % | $ | 525.2 | 100.0 | % | $ | 772.0 | 100.0 | % | ||||||||||||||||
| Cost of goods sold |
214.7 | 64.3 | % | 237.5 | 56.6 | % | 337.0 | 64.2 | % | 437.0 | 56.6 | % | ||||||||||||||||||||
| Gross profit |
119.2 | 35.7 | % | $ | 182.3 | 43.4 | % | 188.2 | 35.8 | % | $ | 335.0 | 43.4 | % | ||||||||||||||||||
| Selling and administrative expenses |
117.6 | 35.2 | % | 150.8 | 35.9 | % | 238.1 | 45.3 | % | 292.6 | 37.9 | % | ||||||||||||||||||||
| Restructuring and other special charges, net | 0.6 | 0.2 | % | — | — | 16.6 | 3.2 | % | — | — | ||||||||||||||||||||||
| Operating earnings (loss) |
$ | 1.0 | 0.3 | % | $ | 31.5 | 7.5 | % | $ | (66.5 | ) | (12.7 | )% | $ | 42.4 | 5.5 | % | |||||||||||||||
| Key Metrics |
||||||||||||||||||||||||||||||||
| Same-store sales % change |
14.7 | % | 1.5 | % | 13.9 | % | 0.4 | % | ||||||||||||||||||||||||
| Same-store sales $ change |
$ | 42.7 | $ | 6.3 | $ | 64.5 | $ | 2.9 | ||||||||||||||||||||||||
| Sales change from new and closed stores, net |
$ | (128.5 | ) | $ | (15.8 | ) | $ | (311.2 | ) | $ | (23.3 | ) | ||||||||||||||||||||
| Impact of changes in Canadian exchange rate on sales |
$ | (0.1 | ) | $ | (0.2 | ) | $ | (0.1 | ) | $ | (0.5 | ) | ||||||||||||||||||||
| Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended) |
$ | 40 | $ | 60 | $ | 62 | $ | 109 | ||||||||||||||||||||||||
| Sales per square foot, excluding e-commerce (trailing twelve months) |
$ | 176 | $ | 219 | $ | 176 | $ | 219 | ||||||||||||||||||||||||
| Square footage (thousand sq. ft.) |
6,210 | 6,427 | 6,210 | 6,427 | ||||||||||||||||||||||||||||
| Stores opened |
3 | 3 | 3 | 7 | ||||||||||||||||||||||||||||
| Stores closed |
1 | 15 | 16 | 26 | ||||||||||||||||||||||||||||
| Ending stores |
936 | 973 | 936 | 973 | ||||||||||||||||||||||||||||
Net Sales
Net sales decreased $85.9 million, or 20.5%, to $333.9 million for the second quarter of 2020, compared to $419.8 million for the second quarter of 2019. The sales decrease was driven by the temporary closure of all Famous Footwear stores due to the COVID-19 pandemic that continued from the first quarter of 2020. In mid-May, we began a phased reopening of retail stores in areas where restrictions were relaxed or lifted and by the end of June, substantially all stores were reopened. Despite the store closures, Famous Footwear continued to serve customers through its e-commerce business, which generated a 148% increase in e-commerce sales for the second quarter of 2020. We continued to experience strong sales of athletics and casual styles, particularly as the consumer adjusted to their work-from-home environment and limited social gatherings. As a result of the pandemic, many schools across the country have delayed the start of the school year or are beginning the fall semester in a virtual learning environment. Accordingly, we have experienced a slower start to our back-to-school selling season. We anticipate the back-to-school demand in 2020 will extend longer than a typical year, where demand is more concentrated over a few weeks. We opened three stores and permanently closed one store during the second quarter of 2020, resulting in 936 stores and total square footage of 6.2 million at the end of the second quarter of 2020, compared to 973 stores and total square footage of 6.4 million at the end of the second quarter of 2019. Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment's sales, with approximately 79% of our net sales made to program members in the second quarter of 2020, compared to 77% in the second quarter of 2019.
Net sales decreased $246.8 million, or 32.0%, to $525.2 million for the six months ended August 1, 2020, compared to $772.0 million for the six months ended August 3, 2019. The sales decrease was driven by the same factors described for the second quarter of 2020 above. We experienced strong growth in our e-commerce business, which increased 111% for the six months ended August 1, 2020. We opened three stores and permanently closed 16 stores during the six months ended August 1, 2020.
Gross Profit
Gross profit decreased $63.1 million, or 34.6%, to $119.2 million for the second quarter of 2020, compared to $182.3 million for the second quarter of 2019, reflecting the difficult retail environment driven by the COVID-19 pandemic. As a percentage of net sales, our gross profit decreased to 35.7% for the second quarter of 2020, compared to 43.4% for the second quarter of 2019, driven by increased promotional activity to drive sales volume and higher freight expenses associated with the strong growth in our e-commerce business.
Gross profit decreased $146.8 million, or 43.8%, to $188.2 million for the six months ended August 1, 2020, compared to $335.0 million for the six months ended August 3, 2019 reflecting lower net sales and an incremental $6.0 million in inventory markdowns in the first quarter as a result of the difficult retail environment driven by the COVID-19 pandemic. As a percentage of net sales, our gross profit decreased to 35.8% for the six months ended August 1, 2020, compared to 43.4% for the six months ended August 3, 2019, driven by the impact of increased promotional activity to drive sales volume, higher freight expenses associated with the growth in e-commerce business and the incremental inventory markdowns.
Selling and Administrative Expenses
Selling and administrative expenses decreased $33.2 million, or 22.0%, to $117.6 million for the second quarter of 2020, compared to $150.8 million for the second quarter of 2019. The decrease was primarily driven by lower salaries expense attributable to reductions in our workforce, associate furloughs for a significant portion of our retail store workforce during the period of temporary store closures, and salary reductions for most remaining employees throughout the second quarter of 2020. As a result of our strategic efforts to mitigate the impact of COVID-19, we also reduced expenses related to our retail facilities, as well as marketing and logistics expenses. As a percentage of net sales, selling and administrative expenses decreased to 35.2% for the second quarter of 2020, compared to 35.9% for the second quarter of 2019.
Selling and administrative expenses decreased $54.5 million, or 18.6%, to $238.1 million for the six months ended August 1, 2020, compared to $292.6 million for the six months ended August 3, 2019. The decrease was primarily driven by lower salaries expense attributable to the actions we took during the first and second quarters of 2020 to mitigate the impact of COVID-19 during the period of retail store closures, as well as lower variable expenses associated with the temporary retail store closures. As a percentage of net sales, selling and administrative expenses increased to 45.3% for the six months ended August 1, 2020, compared to 37.9% for the six months ended August 3, 2019.
Restructuring and Other Special Charges, Net
Restructuring and other special charges were $0.6 million in the second quarter of 2020, consisting primarily of severance expense. Restructuring and other special charges were $16.6 million for the six months ended August 1, 2020, consisting primarily of impairment charges on furniture and fixtures in our retail stores and lease right-of-use assets reflecting the impact of COVID-19 on our business operations. There were no corresponding charges for the three or six months ended August 3, 2019. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating Earnings (Loss)
Operating earnings decreased $30.5 million to $1.0 million for the second quarter of 2020, compared to $31.5 million for the second quarter of 2019, reflecting the factors described above. As a percentage of net sales, operating earnings decreased to 0.3% for the second quarter of 2020, compared to 7.5% for the second quarter of 2019.
Operating (loss) earnings decreased $108.9 million to an operating loss of $66.5 million for the six months ended August 1, 2020, compared to operating earnings of $42.4 million for the six months ended August 3, 2019, reflecting the factors described above. As a percentage of net sales, the operating loss was 12.7% for the six months ended August 3, 2019, compared to operating earnings of 5.5% for the six months ended August 3, 2019.
BRAND PORTFOLIO
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
| ($ millions, except sales per square foot) |
% of Net Sales |
% of Net Sales |
% of Net Sales |
% of Net Sales |
||||||||||||||||||||||||||||
| Operating Results |
||||||||||||||||||||||||||||||||
| Net sales |
$ | 183.6 | 100.0 | % | $ | 359.6 | 100.0 | % | $ | 400.9 | 100.0 | % | $ | 700.6 | 100.0 | % | ||||||||||||||||
| Cost of goods sold |
119.6 | 65.1 | % | 234.8 | 65.3 | % | 283.5 | 70.7 | % | 448.9 | 64.1 | % | ||||||||||||||||||||
| Gross profit |
64.0 | 34.9 | % | 124.8 | 34.7 | % | 117.4 | 29.3 | % | 251.7 | 35.9 | % | ||||||||||||||||||||
| Selling and administrative expenses |
73.5 | 40.1 | % | 110.9 | 30.8 | % | 166.2 | 41.5 | % | 224.3 | 32.0 | % | ||||||||||||||||||||
| Impairment of goodwill and intangible assets | — | — | — | — | 262.7 | 65.5 | % | — | — | |||||||||||||||||||||||
| Restructuring and other special charges, net |
4.6 | 2.5 | % | 0.0 | 0.0 | % | 48.4 | 12.1 | % | 0.6 | 0.1 | % | ||||||||||||||||||||
| Operating (loss) earnings |
$ | (14.1 | ) | (7.7 | )% | $ | 13.9 | 3.9 | % | $ | (359.9 | ) | (89.8 | )% | $ | 26.8 | 3.8 | % | ||||||||||||||
| Key Metrics |
||||||||||||||||||||||||||||||||
| Direct-to-consumer (% of net sales) (1) |
38 | % | 24 | % | 33 | % | 26 | % | ||||||||||||||||||||||||
| Wholesale/retail sales mix (%) |
82%/18% |
83%/17% |
84%/16% |
82%/18% |
||||||||||||||||||||||||||||
| Change in wholesale net sales ($) |
$ | (146.3 | ) | $ | 59.2 | $ | (237.3 | ) | $ | 123.5 | ||||||||||||||||||||||
| Unfilled order position at end of period |
$ | 195.2 | $ | 290.1 | ||||||||||||||||||||||||||||
| Same-store sales % change |
(24.7 | )% | (9.3 | )% | (24.7 | )% | (8.9 | )% | ||||||||||||||||||||||||
| Same-store sales $ change |
$ | (8.1 | ) | $ | (6.0 | ) | $ | (17.6 | ) | $ | (11.5 | ) | ||||||||||||||||||||
| Sales change from new and closed stores, net |
$ | (21.5 | ) | $ | 1.6 | $ | (44.6 | ) | $ | 0.7 | ||||||||||||||||||||||
| Impact of changes in Canadian exchange rate on retail sales |
$ | (0.1 | ) | $ | (0.2 | ) | $ | (0.2 | ) | $ | (0.6 | ) | ||||||||||||||||||||
| Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended) |
$ | 20 | $ | 97 | $ | 51 | $ | 190 | ||||||||||||||||||||||||
| Sales per square foot, excluding e-commerce (trailing twelve months) |
$ | 251 | $ | 398 | $ | 251 | $ | 398 | ||||||||||||||||||||||||
| Square footage (thousands sq. ft.) |
355 | 398 | 355 | 398 | ||||||||||||||||||||||||||||
| Stores opened |
— | 1 | — | 3 | ||||||||||||||||||||||||||||
| Stores closed |
1 | — | 20 | 1 | ||||||||||||||||||||||||||||
| Ending stores |
202 | 231 | 202 | 231 | ||||||||||||||||||||||||||||
| (1) |
Direct-to-consumer includes sales of our retail stores and e-commerce sites and sales through our customers' websites that we fulfill on a drop-ship basis. |
Net Sales
Net sales decreased $176.0 million, or 48.9%, to $183.6 million for the second quarter of 2020, compared to $359.6 million for the second quarter of 2019. The sales decrease was driven by a reduction in wholesale shipments as a result of the temporary store closures of the majority of our wholesale customers during the first half of the second quarter and a shift in timing of the shipments of new orders as customers worked to align their inventory levels to expected consumer demand. Our retail stores were also temporarily closed through the middle of the second quarter. E-commerce sales continued to grow as a percentage of the business during the second quarter, and we expect this trend to continue. Sport and casual footwear were our strongest categories for the second quarter, aligning with the consumer's stay-at-home, work-from-home environment, and we continued to expand our product offerings to capture the recent acceleration in these styles. We permanently closed one store during the second quarter of 2020, resulting in a total of 202 stores and total square footage of 0.4 million at the end of the second quarter of 2020, compared to 231 stores and total square footage of 0.4 million at the end of the second quarter of 2019. On a trailing twelve-month basis, sales per square foot, excluding e-commerce sales, decreased to $251 for the twelve months ended August 1, 2020, compared to $398 for the twelve months ended August 3, 2019.
Net sales decreased $299.7 million, or 42.8%, to $400.9 million for the six months ended August 1, 2020, compared to $700.6 million for the six months ended August 3, 2019. The sales decrease was driven by a reduction in wholesale shipments as many of our wholesale customers canceled orders and temporarily closed their stores for several weeks during the first half of 2020. Our retail stores were also temporarily closed beginning in mid-March, with a phased reopening beginning in mid-May. Substantially all of our stores reopened by the end of June, with the majority of the stores operating at reduced hours. E-commerce sales continue to grow as a percentage of the business, with strong growth in the first half of 2020 driven by the pandemic. During the six months ended August 1, 2020, we permanently closed 20 stores.
Our unfilled order position for our wholesale sales decreased $94.9 million, or 32.7%, to $195.2 million at August 1, 2020, compared to $290.1 million at August 3, 2019. The decrease in our backlog order levels reflects fewer orders from our wholesale customers driven by the economic impact of the COVID-19 pandemic, as well as the ongoing shift to e-commerce shipping directly from us to the consumer either via the retailers' websites or our own. In addition, many of our wholesale customers canceled orders during the first half of 2020 as a direct result of the pandemic on their business.
Gross Profit
Gross profit decreased $60.8 million, or 48.7%, to $64.0 million for the second quarter of 2020, compared to $124.8 million for the second quarter of 2019, primarily due to lower net sales reflecting the difficult retail environment driven by the COVID-19 pandemic. As a percentage of net sales, our gross profit increased to 34.9% for the second quarter of 2020, compared to 34.7% for the second quarter of 2019.
Gross profit decreased $134.3 million, or 53.4%, to $117.4 million for the six months ended August 1, 2020, compared to $251.7 million for the six months ended August 3, 2019, primarily reflecting lower net sales and higher incremental cost of goods sold in the six months ended August 1, 2020, driven by $27.5 million in inventory markdowns in the first quarter reflecting the difficult retail environment driven by the COVID-19 pandemic, as well as $1.6 million in inventory markdowns related to the decision during the first quarter of 2020 to exit our Fergie brand. As a percentage of net sales, our gross profit decreased to 29.3% for the six months ended August 1, 2020, compared to 35.9% for the six months ended August 3, 2019, primarily reflecting the incremental markdowns described above.
Selling and Administrative Expenses
Selling and administrative expenses decreased $37.4 million, or 33.7%, to $73.5 million for the second quarter of 2020, compared to $110.9 million for the second quarter of 2019. The decrease was primarily driven by lower salaries expense attributable to reductions in force, associate furloughs for a significant portion of our workforce and salary reductions for most remaining employees throughout the second quarter of 2020. The decrease also reflects lower marketing expense and a decrease in variable expenses as a result of the temporary store closures and declining store base. As a percentage of net sales, selling and administrative expenses increased to 40.1% for the second quarter of 2020, compared to 30.8% for the second quarter of 2019.
Selling and administrative expenses decreased $58.1 million, or 25.9%, to $166.2 million for the six months ended August 1, 2020, compared to $224.3 million for the six months ended August 3, 2019. The decrease was primarily driven by lower salaries expense reflecting the strategic actions taken during the first half of 2020 to mitigate the impact of COVID-19, and lower logistics and other variable expenses associated with the retail store closures, including marketing expense. As a percentage of net sales, selling and administrative expenses increased to 41.5% for the six months ended August 1, 2020, compared to 32.0% for the six months ended August 3, 2019.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $4.6 million were recorded during the second quarter of 2020, primarily for severance expense, with no corresponding charges for the second quarter of 2019. Restructuring and other special charges were $48.4 million for the six months ended August 1, 2020, reflecting expenses associated with the impact of COVID-19 on our business operations, primarily impairment charges on store furniture and fixtures and lease right-of-use assets, liabilities due to our factories for order cancellations and severance expense. Restructuring and other special charges were $0.6 million for the six months ended August 3, 2019, primarily related to the integration of Vionic. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
Operating (Loss) Earnings
Operating (loss) earnings decreased $28.0 million to an operating loss of $14.1 million for the second quarter of 2020, compared to operating earnings of $13.9 million for the second quarter of 2019 as a result of the factors described above. As a percentage of net sales, the operating loss was 7.7% for the second quarter of 2020, compared to operating earnings of 3.9% in the second quarter of 2019.
Operating (loss) earnings decreased $386.7 million to an operating loss of $359.9 million for the six months ended August 1, 2020, compared to operating earnings of $26.8 million for the six months ended August 3, 2019 as a result of the factors described above. As a percentage of net sales, the operating loss was 89.8% for the six months ended August 1, 2020, compared to operating earnings of 3.8% in the six months ended August 3, 2019.
| ELIMINATIONS AND OTHER |
| Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||||||||||||||||||
| ($ millions) |
% of Net Sales |
% of Net Sales |
% of Net Sales |
% of Net Sales |
||||||||||||||||||||||||||||
| Operating Results |
||||||||||||||||||||||||||||||||
| Net sales |
$ | (16.1 | ) | 100.0 | % | $ | (26.9 | ) | 100.0 | % | $ | (27.4 | ) | 100.0 | % | $ | (42.4 | ) | 100.0 | % | ||||||||||||
| Cost of goods sold |
(15.6 | ) | 96.7 | % | (25.7 | ) | 95.6 | % | (26.3 | ) | 95.9 | % | (41.5 | ) | 97.8 | % | ||||||||||||||||
| Gross profit |
(0.5 | ) | 3.3 | % | (1.2 | ) | 4.4 | % | (1.1 | ) | 4.1 | % | (0.9 | ) | 2.2 | % | ||||||||||||||||
| Selling and administrative expenses |
10.3 | (63.7 | )% | 5.8 | (21.8 | )% | 22.3 | (81.1 | )% | 12.8 | (30.0 | )% | ||||||||||||||||||||
| Restructuring and other special charges, net |
0.3 | (1.7 | )% | 0.6 | (2.2 | )% | 0.6 | (2.3 | )% | 0.8 | (2.0 | )% | ||||||||||||||||||||
| Operating loss |
$ | (11.1 | ) | 68.7 | % | $ | (7.6 | ) | 28.4 | % | $ | (24.0 | ) | 87.5 | % | $ | (14.5 | ) | 34.2 | % | ||||||||||||
The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
The net sales elimination of $16.1 million for the second quarter of 2020 is $10.8 million, or 40.2%, lower than the second quarter of 2019. The net sales elimination of $27.4 million for the six months ended August 1, 2020 is $15.0 million, or 35.3%, lower than the six months ended August 3, 2019. Both net sales elimination decreases reflect a decrease in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses increased $4.5 million, or 75.4%, to $10.3 million in the second quarter of 2020, compared to $5.8 million for the second quarter of 2019. The increase was primarily driven by lower income from our cash-equivalent restricted stock units granted to directors, reflecting a smaller decline in the stock price compared to the second quarter of 2019. Selling and administrative expenses increased $9.5 million, or 74.3%, to $22.3 million in the six months ended August 1, 2020, compared to $12.8 million for the six months ended August 3, 2019. The increase was primarily driven by higher consulting expenses.
Restructuring and other special charges of $0.3 million and $0.6 million for the three and six months ended August 1, 2020, respectively, were comprised primarily of expenses associated with employee reductions as we sought to minimize our expense structure during the COVID-19 pandemic combined with incremental expenses associated with deep cleaning our facilities and related supplies. During the three and six months ended August 3, 2019, restructuring and other special charges of $0.6 million and $0.8 million, respectively, were incurred for Vionic integration-related costs. Refer to Note 5 to the condensed consolidated financial statements for additional information related to these charges.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
| ($ millions) |
||||||||||||
| Borrowings under revolving credit agreement |
$ | 350.0 | $ | 300.0 | $ | 275.0 | ||||||
| Long-term debt |
198.6 | 198.2 | 198.4 | |||||||||
| Total debt |
$ | 548.6 | $ | 498.2 | $ | 473.4 | ||||||
Total debt obligations of $548.6 million at August 1, 2020 increased $50.4 million, from $498.2 million at August 3, 2019, and increased $75.2 million, from $473.4 million at February 1, 2020. The increases from both August 3, 2019 and February 1, 2020 reflect net borrowings under our Credit Agreement taken as a precautionary measure during the first quarter of 2020 to increase our cash position and preserve financial flexibility given the uncertainty of the impact of COVID-19 on our business and the timing of recovery of the retail environment once all of our retail stores are reopened. Net interest expense for the second quarter of 2020 increased $6.1 million to $13.5 million, compared to $7.4 million for the second quarter of 2020. The increase is primarily attributable to the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 15 to the condensed consolidated financial statements, partially offset by lower average borrowings under our revolving credit agreement.
Credit Agreement
As further discussed in Note 10, the Company maintains a revolving credit facility for working capital needs. On April 14, 2020, we entered into a Fourth Amendment to Fourth Amended and Restated Credit Agreement ("Amendment") which, among other modifications, increased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $600.0 million, subject to borrowing base restrictions, and may be further increased by up to $150.0 million. Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 1.0% imposed by the Amendment) or the prime rate, plus a spread. The Amendment increased the spread applied to the LIBOR or prime rate by a total of 75 basis points and increased the unused line fee by 5 basis points. At August 1, 2020, we had $350.0 million in borrowings and $11.1 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $166.6 million at August 1, 2020. We were in compliance with all covenants and restrictions under the Credit Agreement as of August 1, 2020.
$200 Million Senior Notes
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 2023 (the "Senior Notes"). The Senior Notes bear interest at 6.25%, which is payable on February 15 and August 15 of each year. We may redeem some or all of the Senior Notes at various redemption prices. The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of August 1, 2020, we were in compliance with all covenants and restrictions relating to the Senior Notes.
Supplemental Guarantor Financial Information
The Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by all of its existing and future subsidiaries that are guarantors under the Company's revolving credit facility ("Credit Agreement"). The guarantors are 100% owned by Caleres, Inc. ("Parent"). On October 31, 2018, Vionic was joined to the Credit Agreement as a guarantor. After giving effect to the joinder, the Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Credit Agreement. During the second quarter of 2020, we adopted SEC Release No. 33-10762 and Release No. 34-88307, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities, as further discussed in Note 2 to the condensed consolidated financial statements. The following tables present summarized financial information for the Parent and guarantors on a combined basis after elimination of intercompany transactions between entities and amounts related to investments in any subsidiary that is a non-guarantor:
| ($ millions) |
||||||||
| Current assets |
$ | 847.5 | $ | 783.6 | ||||
| Non-current assets |
1,092.3 | 1,402.4 | ||||||
| Current liabilities |
950.2 | 781.8 | ||||||
| Non-current liabilities |
823.4 | 901.8 | ||||||
| Twenty-Six Weeks Ended |
||||
| ($ millions) |
||||
| Net sales (1) |
$ | 825.3 | ||
| Gross profit |
278.0 | |||
| Operating loss |
(403.9 | ) | ||
| Net loss |
(336.3 | ) | ||
| Net loss attributable to Caleres, Inc. |
(336.3 | ) | ||
(1) Intercompany activity with the non-guarantor entities for the twenty-six weeks ended August 1, 2020 was not material.
Working Capital and Cash Flow
| Twenty-Six Weeks Ended |
||||||||||||
| ($ millions) |
Change |
|||||||||||
| Net cash provided by operating activities |
$ | 67.5 | $ | 116.6 | $ | (49.1 | ) | |||||
| Net cash used for investing activities |
(8.6 | ) | (30.2 | ) | 21.6 | |||||||
| Net cash provided by (used for) financing activities |
44.5 | (74.0 | ) | 118.5 | ||||||||
| Effect of exchange rate changes on cash and cash equivalents |
(0.1 | ) | 0.1 | (0.2 | ) | |||||||
| Increase in cash and cash equivalents |
$ | 103.3 | $ | 12.4 | $ | 90.9 | ||||||
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash provided by operating activities was $49.1 million lower in the six months ended August 1, 2020 as compared to the six months ended August 3, 2019, primarily reflecting the following factors:
| • |
A smaller increase in trade accounts payable in the six months ended August 1, 2020, compared to the six months ended August 3, 2019; and |
| • |
A decrease in net earnings, after consideration of non-cash items, in the six months ended August 1, 2020, compared to the comparable period in 2019; partially offset by | |
| • | A decrease in inventory for the six months ended August 1, 2020, compared to an increase in the six months ended August 3, 2019, due in part to our disciplined management of inventory during the pandemic. |
Cash used for investing activities was $21.6 million lower in the six months ended August 1, 2020 as compared to the six months ended August 3, 2019, reflecting lower capital expenditures in the six months ended August 1, 2020 as a result of the steps we took to reduce and/or defer capital expenditures to preserve financial flexibility during the pandemic. In 2020, we expect to reduce our purchases of property and equipment and capitalized software to between $15 million and $25 million, as compared to $50.2 million in 2019. However, we may consider further reductions in capital expenditures for 2020, depending on the duration and severity of the impact of the COVID-19 pandemic on our business and financial results.
Cash provided by financing activities was $118.5 million higher for the six months ended August 1, 2020 as compared to the six months ended August 3, 2019, primarily due to $75.0 million of net borrowings under our revolving credit agreement in the six months ended August 1, 2020, compared to net repayments of $35.0 million in the comparable period in 2019.
A summary of key financial data and ratios at the dates indicated is as follows:
| Working capital ($ millions) (1) |
$ | (87.9 | ) | $ | (28.3 | ) | $ | 31.3 | ||||
| Current ratio (2) | 0.91:1 | 0.97:1 | 1.04:1 | |||||||||
| Debt-to-capital ratio (3) |
69.1 | % | 44.4 | % | 42.2 | % | ||||||
| (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 August 1, 2020 was a deficit of $87.9 million, which was $59.6 million and $119.2 million lower than at August 3, 2019 and February 1, 2020, respectively. Our current ratio was 0.91 to 1 as of August 1, 2020, compared to 0.97 to 1 at August 3, 2019 and 1.04:1 at February 1, 2020. The decrease in both working capital and the current ratio from August 3, 2019 and February 1, 2020 primarily reflects lower inventories driven by disciplined inventory management during the first half of 2020, as well as higher current lease obligations. Our debt-to-capital ratio was 69.1% as of August 1, 2020, compared to 44.4% as of August 3, 2019 and 42.2% at February 1, 2020. The increase in our debt-to-capital ratio from August 3, 2019 and February 1, 2020 primarily reflects lower shareholders' equity due to the impact of the net loss in the first half of 2020 and higher borrowings on our revolving credit facility. Our liquidity ratios reflect higher borrowings under our revolving credit agreement, which we expect to continue to repay during the second half of 2020. However, the Credit Agreement provides liquidity through January 18, 2024. We believe our current cash flows from operations, as well as more than $166 million in borrowing availability under the Credit Agreement, provide ample liquidity to meet the Company's needs for the foreseeable future.
We declared and paid dividends of $0.07 per share in both the second quarter of 2020 and 2019. 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.
As discussed above, as a precautionary measure to increase our cash position and preserve financial flexibility given the uncertainty of the COVID-19 pandemic on our operations, we expanded the borrowing capacity on our Credit Agreement in April 2020. We have also focused on managing costs, reducing both capital expenditures and inventory levels. We anticipate that our solid financial position will allow us to make continued progress towards repaying our outstanding borrowings under our Credit Agreement.
| 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, mandatory purchase obligation associated with the acquisition of Blowfish Malibu, one-time transition tax for the mandatory deemed repatriation of cumulative foreign earnings, obligations for our supplemental executive retirement plan and other postretirement benefits and obligations.
During the first half of 2020, we deferred certain vendor and landlord payments, as discussed in Note 9 to the condensed consolidated financial statements, and as of August 1, 2020, we have accrued liabilities for factory order cancellations, as further described in Note 5 to the condensed consolidated financial statements. These obligations are expected to be settled within the next year. Except for these items and 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, changes in borrowings under our revolving credit agreement, changes in the mandatory purchase obligation associated with the acquisition of Blowfish Malibu and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to the contractual obligations identified in our Annual Report on Form 10-K for the year ended February 1, 2020.
| 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 other than the adoption of ASC 326, as further described in Note 2 to the condensed consolidated financial statements. For further information on the Company's critical accounting policies and estimates, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 1, 2020.
| 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) the recent coronavirus outbreak and its adverse impact on our business operations, store traffic and financial condition; (ii) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (iii) impairment charges resulting from a long-term decline in our stock price; (iv) rapidly changing fashion trends and purchasing patterns; (v) intense competition within the footwear industry; (vi) 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; (vii) imposition of tariffs; (viii) the ability to accurately forecast sales and manage inventory levels; (ix) cybersecurity threats or other major disruption to the Company’s information technology systems; (x) customer concentration and increased consolidation in the retail industry; (xi) transitional challenges with acquisitions; (xii) a disruption in the Company’s distribution centers; (xiii) foreign currency fluctuations; (xiv) changes to tax laws, policies and treaties; (xv) the ability to recruit and retain senior management and other key associates; (xvi) compliance with applicable laws and standards with respect to labor, trade and product safety issues; (xvii) the ability to maintain relationships with current suppliers; (xviii) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights; and (xix) the ability to secure/exit leases on favorable terms. 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 February 1, 2020, 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.
| 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 February 1, 2020.
| 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 ongoing monitoring by our internal auditors.
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved. As of August 1, 2020, 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.
Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting during the quarter ended August 1, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| OTHER INFORMATION |
| 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 17 to the condensed consolidated financial statements and incorporated by reference herein.
| 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 February 1, 2020.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides information relating to our repurchases of common stock during the second quarter of 2020:
| Fiscal Period |
Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number Purchased as Part of Publicly Announced Program (2) |
Maximum Number of Shares that May Yet be Purchased Under the Program (2) |
||||||||||||
| 561,709 | $ | 6.76 | 561,709 | 3,481,014 | ||||||||||||
| 537,586 | 8.27 | 529,525 | 2,951,489 | |||||||||||||
| 300,000 | 7.46 | 300,000 | 2,651,489 | |||||||||||||
| Total |
1,399,295 | $ | 7.49 | 1,391,234 | 2,651,489 | |||||||||||
| (1) |
Includes shares purchased as part of our publicly announced stock repurchase programs and shares that were tendered by employees related to certain share-based awards. The employee shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. |
| (2) |
On December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the repurchase of 2,500,000 shares of our outstanding common stock. In addition, on September 2, 2019, the Board of Directors approved a stock repurchase program ("2019 Program") authorizing the repurchase of an additional 5,000,000 shares of our outstanding common stock. We can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase programs do not have an expiration date. Under these plans, the Company repurchased 1,391,234 and 2,902,122 shares during the thirteen and twenty-six weeks ended August 1, 2020, respectively. During the thirteen and twenty-six weeks ended August 3, 2019, the Company repurchased 1,530,478 shares. As of August 1, 2020, there were 2,651,489 shares authorized to be repurchased under the repurchase programs. Our repurchases of common stock are limited under our debt agreements. |
| DEFAULTS UPON SENIOR SECURITIES |
None.
| MINE SAFETY DISCLOSURES |
Not applicable.
| OTHER INFORMATION |
None.
| EXHIBITS |
| Exhibit No. |
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| 3.1 |
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| 3.2 |
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| 22 | † | List of Guarantor Subsidiaries | |
| 31.1 |
† |
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| 31.2 |
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| 32.1 |
† |
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| 101.INS |
† |
iXBRL Instance Document |
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| 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF |
† † † † † |
iXBRL Taxonomy Extension Schema Document iXBRL Taxonomy Extension Calculation Linkbase Document iXBRL Taxonomy Extension Label Linkbase Document iXBRL Taxonomy Presentation Linkbase Document iXBRL Taxonomy Definition Linkbase Document |
|
| 104 | † | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. | |
† Denotes exhibit is filed with this Form 10-Q.
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.
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CALERES, INC. |
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| Date: September 9, 2020 |
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Senior Vice President and Chief Financial Officer on behalf of the Registrant and as the Principal Financial Officer |
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
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| 1/18/24 | ||||
| 8/15/23 | ||||
| 12/31/22 | ||||
| 12/31/21 | ||||
| 1/30/21 | 10-K | |||
| 1/4/21 | 4 | |||
| 12/31/20 | ||||
| 12/15/20 | 4 | |||
| Filed on: | 9/9/20 | |||
| 8/28/20 | ||||
| For Period end: | 8/1/20 | |||
| 7/5/20 | ||||
| 7/4/20 | ||||
| 5/31/20 | ||||
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| 5/3/20 | ||||
| 5/2/20 | 10-Q | |||
| 4/14/20 | 8-K | |||
| 3/27/20 | 4 | |||
| 3/19/20 | 4 | |||
| 2/1/20 | 10-K | |||
| 9/2/19 | ||||
| 8/3/19 | 10-Q | |||
| 5/4/19 | 10-Q | |||
| 2/2/19 | 10-K | |||
| 1/18/19 | ||||
| 12/14/18 | ||||
| 10/31/18 | ||||
| 12/13/16 | 8-K | |||
| 7/27/15 | 8-K | |||
| 7/20/15 | 8-K | |||
| 12/18/14 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 6/01/20 Caleres Inc. 8-K:5,9 5/28/20 13:309K RDG Filings/FA |