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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

     

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended May 2, 2020

 

 

 

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from  _____________  to  _____________

 

 

Commission file number: 1-2191

 

CALERES, INC.

(Exact name of registrant as specified in its charter)

 

 

New York

(State or other jurisdiction

of incorporation or organization)

43-0197190

(IRS Employer Identification Number)

 

 

8300 Maryland Avenue

St. Louis, Missouri

(Address of principal executive offices)

63105

(Zip Code)

(314) 854-4000

(Registrant's telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - par value of $0.01 per share

CAL

New York Stock Exchange

 

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

 

Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Yes       No ☑ 

 

As of May 29, 2020, 38,772,219 common shares were outstanding.

 

 

 

 

INDEX

 

 

PART I

 

Page

Item 1

Financial Statements

3

Item 2

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

30

Item 3

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4

Controls and Procedures

41

 

 

 

PART II

 

 

Item 1

Legal Proceedings

42

Item 1A

Risk Factors

42

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3

Defaults Upon Senior Securities

42

Item 4

Mine Safety Disclosures

42

Item 5

Other Information

42

Item 6

Exhibits

43

 

Signature

44

 

2

 

PART I

FINANCIAL INFORMATION

   

ITEM 1

FINANCIAL STATEMENTS

 

 

CALERES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

   

(Unaudited)

         

($ thousands)

 

May 2, 2020

   

May 4, 2019

   

February 1, 2020

 

Assets

                       

Current assets:

                       
Cash and cash equivalents   $ 187,717     $ 35,778     $ 45,218  
Receivables, net     145,333       148,487       162,181  
Inventories, net     585,307       648,145       618,406  
Income taxes     46,870       3,734       6,189  
Prepaid expenses and other current assets     44,563       51,168       50,305  

Total current assets

    1,009,790       887,312       882,299  
                         
Other assets     81,457       75,614       79,654  
Deferred income taxes     9,456       10,097       9,735  
Goodwill     4,956       244,407       245,275  
Intangible assets, net     268,692       304,101       294,304  
Lease right-of-use assets     648,534       735,282       695,594  
Property and equipment     549,389       592,670       593,979  
Allowance for depreciation     (348,589 )     (356,413 )     (369,133 )

Property and equipment, net

    200,800       236,257       224,846  

Total assets

  $ 2,223,685     $ 2,493,070     $ 2,431,707  
                         

Liabilities and Equity

                       

Current liabilities:

                       
Borrowings under revolving credit agreement   $ 438,500     $ 318,000     $ 275,000  
Trade accounts payable     297,557       289,071       267,018  
Income taxes     7,592       7,124       7,186  
Lease obligations     160,138       136,005       127,869  
Other accrued expenses     173,752       161,100       173,877  

Total current liabilities

    1,077,539       911,300       850,950  
                         

Other liabilities:

                       
Noncurrent lease obligations     601,133       662,750       629,032  
Long-term debt     198,506       198,046       198,391  
Income taxes     7,786       7,786       7,786  
Deferred income taxes     11,780       46,442       55,013  
Other liabilities     41,818       38,114       41,405  

Total other liabilities

    861,023       953,138       931,627  
                         

Equity:

                       
Common stock     393       422       404  
Additional paid-in capital     154,930       146,641       153,489  
Accumulated other comprehensive loss     (33,216 )     (31,873 )     (31,843 )
Retained earnings     160,189       512,046       523,900  

Total Caleres, Inc. shareholders’ equity

    282,296       627,236       645,950  
Noncontrolling interests     2,827       1,396       3,180  

Total equity

    285,123       628,632       649,130  

Total liabilities and equity

  $ 2,223,685     $ 2,493,070     $ 2,431,707  

 

See notes to condensed consolidated financial statements.

 

3

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

 

   

(Unaudited)

 
   

Thirteen Weeks Ended

 

($ thousands, except per share amounts)

 

May 2, 2020

   

May 4, 2019

 

Net sales

  $ 397,184     $ 677,754  

Cost of goods sold

    275,286       397,918  

Gross profit

    121,898       279,836  

Selling and administrative expenses

    225,194       262,111  
Impairment of goodwill and intangible assets     262,719        

Restructuring and other special charges, net

    60,196       856  

Operating (loss) earnings

    (426,211 )     16,869  

Interest expense, net

    (9,478 )     (7,340 )

Other income, net

    3,585       2,619  

(Loss) earnings before income taxes

    (432,104 )     12,148  

Income tax benefit (provision)

    85,932       (3,063 )

Net (loss) earnings

    (346,172 )     9,085  

Net (loss) earnings attributable to noncontrolling interests

    (334 )     2  

Net (loss) earnings attributable to Caleres, Inc.

  $ (345,838 )   $ 9,083  
                 

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

  $ (8.95 )   $ 0.22  
                 

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

  $ (8.95 )   $ 0.22  

 

See notes to condensed consolidated financial statements.

 

4

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

   

(Unaudited)

 
   

Thirteen Weeks Ended

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

 

Net (loss) earnings

  $ (346,172 )   $ 9,085  

Other comprehensive (loss) income, net of tax:

               

Foreign currency translation adjustment

    (1,550 )     (958 )

Pension and other postretirement benefits adjustments

    66       395  

Derivative financial instruments

    92       303  

Other comprehensive loss, net of tax

    (1,392 )     (260 )

Comprehensive (loss) income

    (347,564 )     8,825  

Comprehensive (loss) income attributable to noncontrolling interests

    (353 )     14  

Comprehensive (loss) income attributable to Caleres, Inc.

  $ (347,211 )   $ 8,811  

 

See notes to condensed consolidated financial statements.

 

5

 

 

CALERES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

(Unaudited)

 
   

Thirteen Weeks Ended

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

 

Operating Activities

               

Net (loss) earnings

  $ (346,172 )   $ 9,085  

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

               
Depreciation     12,119       11,434  
Amortization of capitalized software     1,493       1,733  
Amortization of intangible assets     3,212       3,265  
Amortization of debt issuance costs and debt discount     3,563       684  
Fair value adjustments to Blowfish mandatory purchase obligation     3,233       107  
Share-based compensation expense     2,351       3,314  
Loss on disposal of property and equipment     113       136  
Impairment charges for property, equipment, and lease right-of-use assets     35,222       1,194  
Impairment of goodwill and intangible assets     262,719        
Provision for expected credit losses     8,704       117  

Changes in operating assets and liabilities, net of acquired amounts:

               
Receivables     5,999       43,117  
Inventories     31,979       38,492  
Prepaid expenses and other current and noncurrent assets     (83,129 )     (6,935 )
Trade accounts payable     30,969       (27,315 )
Accrued expenses and other liabilities     28,605       (27,836 )
Other, net     (252 )     (682 )

Net cash provided by operating activities

    728       49,910  
                 

Investing Activities

               
Purchases of property and equipment     (3,523 )     (18,443 )
Capitalized software     (977 )     (2,917 )

Net cash used for investing activities

    (4,500 )     (21,360 )
                 

Financing Activities

               
Borrowings under revolving credit agreement     168,500       84,000  
Repayments under revolving credit agreement     (5,000 )     (101,000 )
Dividends paid     (2,810 )     (2,947 )
Acquisition of treasury stock     (12,932 )      
Issuance of common stock under share-based plans, net     (906 )     (2,559 )
Other     (323 )     (394 )

Net cash provided by (used for) financing activities

    146,529       (22,900 )
Effect of exchange rate changes on cash and cash equivalents     (258 )     (72 )

Increase in cash and cash equivalents

    142,499       5,578  

Cash and cash equivalents at beginning of period

    45,218       30,200  

Cash and cash equivalents at end of period

  $ 187,717     $ 35,778  
 

 

See notes to condensed consolidated financial statements.

 

6

 

 

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 FEBRUARY 1, 2020

    40,396,757     $ 404     $ 153,489     $ (31,843 )   $ 523,900     $ 645,950     $ 3,180     $ 649,130  
Net earnings (loss)                                     (345,838 )     (345,838 )     (334 )     (346,172 )
Foreign currency translation adjustment                             (1,531 )             (1,531 )     (19 )     (1,550 )
Unrealized gain on derivative financial instruments, net of tax of $31                             92               92               92  
Pension and other postretirement benefits adjustments, net of tax of $628                             66               66               66  
Comprehensive income (loss)                             (1,373 )     (345,838 )     (347,211 )     (353 )     (347,564 )
Dividends ($0.07 per share)                                     (2,810 )     (2,810 )             (2,810 )
Acquisition of treasury stock     (1,510,888 )     (15 )                     (12,917 )     (12,932 )             (12,932 )
Issuance of common stock under share-based plans, net     414,121       4       (910 )                     (906 )             (906 )
Cumulative-effect adjustment from adoption of ASC 326                                     (2,146 )     (2,146 )             (2,146 )
Share-based compensation expense                     2,351                       2,351               2,351  

BALANCE MAY 2, 2020

    39,299,990     $ 393     $ 154,930     $ (33,216 )   $ 160,189     $ 282,296     $ 2,827     $ 285,123  
                                                                 

BALANCE FEBRUARY 2, 2019

    41,886,562     $ 419     $ 145,889     $ (31,601 )   $ 519,346     $ 634,053     $ 1,382     $ 635,435  
Net earnings                                     9,083       9,083       2       9,085  
Foreign currency translation adjustment                             (970 )             (970 )     12       (958 )
Unrealized gain on derivative financial instruments, net of tax of $96                             303               303               303  
Pension and other postretirement benefits adjustments, net of tax of $138                             395               395               395  
Comprehensive (loss) income                             (272 )     9,083       8,811       14       8,825  
Dividends ($0.07 per share)                                     (2,947 )     (2,947 )             (2,947 )
Issuance of common stock under share-based plans, net     347,283       3       (2,562 )                     (2,559 )             (2,559 )
Cumulative-effect adjustment from adoption of ASC 842                                     (13,436 )     (13,436 )             (13,436 )
Share-based compensation expense                     3,314                       3,314               3,314  

BALANCE MAY 4, 2019

    42,233,845     $ 422     $ 146,641     $ (31,873 )   $ 512,046     $ 627,236     $ 1,396     $ 628,632  

 

 

7

 

CALERES, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Caleres, Inc. ("the Company").  These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States.  The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions.

 

The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and 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 weeks ended May 2, 2020, as further discussed below. 

 

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.  On  March 19, 2020, the Company announced the temporary closure of all retail stores throughout the United States and Canada.  While the Company's e-commerce business continued to serve customers during the retail store closures, the Company experienced a significant loss in sales and earnings.  In addition, many of the Company's wholesale partners also closed their retail stores and canceled orders.  On May 13, 2020, the Company announced it had begun a phased reopening of its Famous Footwear and Brand Portfolio retail stores.  As of the date of this filing, approximately 60% of the Company's retail stores are open and the Company anticipates the vast majority of its stores to begin in-store service by the end of June.  During the store closures, the Company leveraged the strength in its brands and the investments made in its e-commerce platform to quickly shift to a digital-only business.  At the end of April, the Company implemented a contactless curbside pickup option at several retail locations throughout the country and has continued to expand this service during the beginning of the second quarter.

 

The Company took 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, salary reductions for most remaining associates, and a reduction in the cash retainers for the Board of Directors; 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 $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.

 

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 May 2, 2020, the Company has deferred $0.2 million of employer social security payroll taxes, which are recorded in other liabilities on the condensed consolidated balance sheets.   

 

 

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 will 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 $2.1 million, net of $0.4 million in deferred taxes.  The Company recorded a provision for expected credit losses of $8.7 million during the first quarter of 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 thirteen weeks ended May 2, 2020:

 

($ thousands)

       
         

Balance at February 1, 2020

  $ 1,813  

Adjustment upon adoption of ASU 2016-13

    2,521  

Provision for expected credit losses

    8,704  

Uncollectible accounts written off, net of recoveries

    356  

Balance at May 2, 2020

  $ 13,394  

 

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.

 

 

 

 

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.

 

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 currently requires 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 each issuer and guarantor 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 is currently evaluating the impact of the rule on its condensed consolidated financial statements.

 

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 first quarter of 2020, the Company did not modify any leases as a result of the COVID-19 pandemic and as a result, the Company has not yet made a policy election with respect to lease modifications.  Refer to Note 9 to the condensed consolidated financial statements for further discussion regarding the Company's leases. 

 

 

 

Note 3

Revenues

 

Disaggregation of Revenues

The following table disaggregates revenue by segment and major source for the periods ended May 2, 2020 and May 4, 2019:

 

   

Thirteen Weeks Ended May 2, 2020

   

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

   
                                   

Retail stores

  $ 137,117     $ 11,822     $     $ 148,939    
Landed wholesale-e-commerce/drop ship (1)           45,473             45,473    

Landed wholesale - other

          112,568       (11,306 )     101,262    

First-cost wholesale

          11,921             11,921    
First-cost wholesale - e-commerce (1)           246             246    

E-commerce - Company websites (1)

    54,178       32,989             87,167    

Licensing and royalty

          2,186             2,186    

Other (2)

    (43 )     33             (10)    

Net sales

  $ 191,252     $ 217,238     $ (11,306 )   $ 397,184    

 

   

Thirteen Weeks Ended May 4, 2019

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 
                                 
Retail stores   $ 320,242     $ 36,650     $     $ 356,892  
Landed wholesale-e-commerce/drop ship (1)           63,377             63,377  
Landed wholesale - other           187,214       (15,461 )     171,753  
First-cost wholesale           14,771             14,771  
First-cost wholesale - e-commerce (1)           129             129  
E-commerce - Company websites (1)     31,781       35,696             67,477  
Licensing and royalty           3,132             3,132  

Other (2)

    142       81             223  

Net sales

  $ 352,165     $ 341,050     $ (15,461 )   $ 677,754  

 

(1) Collectively referred to as "e-commerce" below

(2Includes 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 carries 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:

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

   

February 1, 2020

 
Customer allowances and discounts   $ 24,768     $ 20,063     $ 26,200  
Loyalty programs liability     17,326       15,700       16,405  
Returns reserve     15,427       16,621       14,033  
Gift card liability     5,528       4,944       5,742  

 

Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented.  In addition, during the thirteen weeks ended May 2, 2020, the loyalty programs liability increased $5.9 million due to points and material rights accrued for purchases and decreased $5.0 million due to expirations and redemptions.  During the thirteen weeks ended May 4, 2019, the loyalty programs liability increased $5.2 million due to purchases and decreased $4.1 million due to expirations and redemptions. 

 

 

 

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 earnings per common share attributable to Caleres, Inc. shareholders for the periods ended May 2, 2020 and May 4, 2019:

 

   

Thirteen Weeks Ended

 

($ thousands, except per share amounts)

 

May 2, 2020

   

May 4, 2019

 

NUMERATOR

               

Net (loss) earnings

  $ (346,172 )   $ 9,085  

Net loss (earnings) attributable to noncontrolling interests

    334       (2 )

Net earnings allocated to participating securities

          (283 )

Net (loss) earnings attributable to Caleres, Inc. after allocation of earnings to participating securities

  $ (345,838 )   $ 8,800  
                 

DENOMINATOR

               

Denominator for basic (loss) earnings per common share attributable to Caleres, Inc. shareholders

    38,649       40,741  

Dilutive effect of share-based awards

          60  

Denominator for diluted (loss) earnings per common share attributable to Caleres, Inc. shareholders

    38,649       40,801  
                 

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

  $ (8.95 )   $ 0.22  
                 

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

  $ (8.95 )   $ 0.22  

 

Options to purchase 22,667 and 16,667 shares of common stock for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively, were not included in the denominator for diluted earnings per common share attributable to Caleres, Inc. shareholders because the effect would be anti-dilutive. 

 

During the thirteen weeks ended May 2, 2020 and May 4, 2019, the Company repurchased 1,510,888 and zero shares, respectively, under the 2018 and 2019 publicly announced share repurchase programs, which permits repurchases of up to 2.5 million and 5.0 million shares, respectively, as further discussed in Item 2, Unregistered Sales of Equity Securities and Use of Proceeds

 

 

Note 5

Restructuring and Other Special Charges

 

Impairment of Goodwill and Intangible Assets

During the thirteen weeks ended May 2, 2020, the Company recorded non-cash impairment charges totaling $262.7 million ($218.5 million on an after-tax basis, or $5.66 per diluted share), including $240.3 million of impairment associated with the Company's goodwill and $22.4 million associated with indefinite-lived trademarks.  All of the charges are reflected in the Brand Portfolio segment.  Refer to further discussion in Note 8 to the condensed consolidated financial statements.

 

COVID-19-Related Expenses

During the thirteen weeks ended May 2, 2020, the Company incurred costs associated with the COVID-19 pandemic and related impacts on the Company's business, totaling $93.6 million ($73.3 million on an after-tax basis, or $1.90 per diluted share).  These costs included non-cash impairment of property and equipment and lease right-of-use assets, inventory markdowns, employee severance and other identified expenses that were specific to the impact of COVID-19 on the Company's operations.  Of the $93.6 million in charges, $60.2 million is presented as restructuring and other special charges, net and $33.4 million is reflected as cost of goods sold in the condensed consolidated statements of earnings (loss).   Of the $60.2 million reflected as restructuring and other special charges, $43.8 million is reflected in the Brand Portfolio segment, $16.0 million is reflected in the Famous Footwear segment and $0.4 million is reflected within the Eliminations and Other category.  The $33.4 million reflected as cost of goods sold represents inventory markdowns, of which $27.4 million is reflected in the Brand Portfolio segment and $6.0 million is reflected in the Famous Footwear segment.  As of May 2, 2020, restructuring reserves of $1.3 million were included in other accrued expenses on the condensed consolidated balance sheets.  Refer to Note 9 to the condensed consolidated financial statements for additional information regarding the Company's leases.  

 

Blowfish Mandatory Purchase Obligation

In 2018, the Company acquired a controlling interest in Blowfish Malibu.  The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula as specified in the purchase agreement.  Approximately $9.0 million was initially assigned to the mandatory purchase obligation, which will be paid upon settlement in July 2021.  Accretion and remeasurement adjustments on the mandatory purchase obligation are being recorded as interest expense.  The fair value adjustments on the mandatory purchase obligation totaled $3.2 million ($2.4 million on an after-tax basis, or $0.06 per diluted share) and zero for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively.  Refer to further discussion regarding the mandatory purchase obligation in Note 15 to the condensed consolidated financial statements.

 

Brand Exits
The Company incurred costs of $1.6 million ( $1.2 million on an after-tax basis, or $0.03 per diluted share) related to the decision during the thirteen weeks ended May 2, 2020 to exit the Fergie brand.  These charges represent inventory markdowns required to reduce the value of inventory to net realizable value and are presented in cost of goods sold on the condensed consolidated statements of earnings (loss) within the Brand Portfolio segment. 
 
The Company's license agreement to sell Carlos by Carlos Santana footwear expired in December 2018.  In connection with the decision to exit the Carlos brand, the Company incurred restructuring-related costs of $1.9 million ( $1.4 million on an after-tax basis, or $0.03 per diluted share) during the thirteen weeks ended May 4, 2019.  Of these charges included in the Brand Portfolio segment, $1.3 million ( $1.0 million on an after-tax basis or $0.02 per diluted share) primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the condensed consolidated statements of earnings (loss) and the remaining $0.6 million ( $0.4 million on an after-tax basis, or $0.01 per diluted share) for severance and other related costs is presented in restructuring and other special charges.  There were no corresponding costs in the thirteen weeks ended May 2, 2020.
 

Vionic Integration-Related Costs

During the thirteen weeks ended May 4, 2019, the Company incurred integration-related costs associated with the acquisition of Vionic in October 2018, primarily for severance, totaling $0.3 million ($0.2 million on an after-tax basis, or $0.01 per diluted share).  Of the $0.3 million in costs, which are presented as restructuring and other special charges, net in the condensed consolidated statements of earnings (loss), $0.2 million are reflected within the Eliminations and Other category and $0.1 million are included in the Brand Portfolio segment.  There were no corresponding costs in the thirteen weeks ended May 2, 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 May 2, 2020 and May 4, 2019:

 

($ thousands)

 

Famous Footwear

   

Brand Portfolio

   

Eliminations and Other

   

Total

 

Thirteen Weeks Ended May 2, 2020

                               

Net sales

  $ 191,252     $ 217,238     $ (11,306 )   $ 397,184  

Intersegment sales (1)

          11,306             11,306  

Operating loss

    (67,540 )     (345,748 )     (12,923 )     (426,211 )

Segment assets

    897,046       995,760       330,879       2,223,685  
                                 

Thirteen Weeks Ended May 4, 2019

                               

Net sales

  $ 352,165     $ 341,050     $ (15,461 )   $ 677,754  

Intersegment sales (1)

          15,461             15,461  

Operating earnings (loss)

    10,813       12,929       (6,873 )     16,869  

Segment assets

    998,606       1,355,842       138,622       2,493,070  

 

(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:

 

   

Thirteen Weeks Ended

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

 

Operating (loss) earnings

  $ (426,211 )   $ 16,869  

Interest expense, net

    (9,478 )     (7,340 )

Other income, net

    3,585       2,619  

(Loss) earnings before income taxes

  $ (432,104 )   $ 12,148  

 

 

 

Note 7

Inventories

 

The Company's net inventory balance was comprised of the following:

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

   

February 1, 2020

 
Raw materials   $ 16,848     $ 18,618     $ 18,455  
Work-in-process     357       478       454  
Finished goods     568,102       629,049       599,497  

Inventories, net

  $ 585,307     $ 648,145     $ 618,406  

 

 

 

Note 8

Goodwill and Intangible Assets

 

Goodwill and intangible assets were as follows:

 

($ thousands)

 

May 2, 2020

   

May 4, 2019

   

February 1, 2020

 

Intangible Assets

                       

Famous Footwear

  $ 2,800     $ 2,800     $ 2,800  
Brand Portfolio     365,888       388,288       388,288  

Total intangible assets

    368,688       391,088       391,088  
Accumulated amortization     (99,996 )     (86,987 )     (96,784 )

Total intangible assets, net

    268,692       304,101       294,304  

Goodwill

                       
Brand Portfolio     4,956       244,407       245,275  

Total goodwill

    4,956       244,407       245,275  

Goodwill and intangible assets, net

  $ 273,648     $ 548,508     $ 539,579  

 

The Company's intangible assets as of May 2, 2020, May 4, 2019 and February 1, 2020 were as follows:

 

($ thousands)

   

May 2, 2020

 
 

Estimated Useful Lives (In Years)

 

Cost Basis

   

Accumulated Amortization

   

Impairment

   

Net Carrying Value

 

Trademarks

15 - 40

  $ 288,788     $ 94,294     $     $ 194,494  

Trademarks

Indefinite

    58,100 (1 )         22,400       35,700  

Customer relationships

15 - 16

    44,200       5,702             38,498  
      $ 391,088     $ 99,996     $ 22,400     $ 268,692  

 

13

 
     

May 4, 2019

 
 

Estimated Useful Lives (In Years)

 

Cost Basis

   

Accumulated Amortization

   

Impairment

   

Net Carrying Value

 

Trademarks

15 - 40

  $ 288,788     $ 84,427           $ 204,361  

Trademarks

Indefinite

    58,100 (1 )               58,100  

Customer relationships

15 - 16

    44,200       2,560             41,640  
      $ 391,088     $ 86,987           $ 304,101  

 

     

February 1, 2020

 
 

Estimated Useful Lives (In Years)

 

Cost Basis

   

Accumulated Amortization

   

Impairment

   

Net Carrying Value

 

Trademarks

15 - 40

  $ 288,788     $ 91,827           $ 196,961  

Trademarks

Indefinite

    58,100 (1 )               58,100  

Customer relationships

15 - 16

    44,200       4,957             39,243  
      $ 391,088     $ 96,784           $ 294,304  

 

(1) Cost basis for indefinite-lived trademarks has been reduced by $60.0 million in impairment charges recognized in 2018 related to the Allen Edmonds tradename.

 

Amortization expense related to intangible assets was $3.2 million and $3.3 million for the thirteen weeks ended May 2, 2020 and May 4, 2019, respectively.  The Company estimates that amortization expense related to intangible assets will be approximately $13.1 million in 2020, $12.9 million in 2021, $12.5 million in 2022, $12.2 million in 2023 and $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 $240.3 million.  The Company recorded no goodwill impairment charges during the thirteen weeks ended May 4, 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 $22.4 million for the thirteen weeks ended May 2, 2020, including $12.2 million associated with the indefinite-lived Allen Edmonds trademark and $10.2 million of impairment associated with the indefinite-lived Via Spiga trademark.  The carrying value of the Via Spiga trademark of $0.5 million will be amortized over approximately two years.  The Company recorded no impairment charges during the thirteen weeks ended May 4, 2019.