See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

 

 

On May 28, 2015, the shareholders of Brown Shoe Company, Inc. approved a rebranding initiative that changed the name of the company to Caleres, Inc. (the "Company"). The Company's stock trades on the New York Stock Exchange under the ticker symbol "CAL".

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. These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. 

 

The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. 

 

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Caleres, Inc. 

 

For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 31, 2015 .

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition.  The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption prohibited.  The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03,  Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented as a direct deduction from the associated debt liability in the balance sheet, consistent with the presentation of debt discounts. The amortization of debt issuance costs will continue to be reported as interest expense in the statement of earnings. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The ASU, which is to be applied on a retrospective basis and reported as a change in accounting principle, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 will not affect the Company’s results of operations or cash flows, but it will require the Company to reclassify its deferred financing costs from other assets to borrowings under revolving credit agreement and long-term debt on a retrospective basis.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent) . ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient provided by ASC 820, Fair Value Measurement . Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value practical expedient. The ASU is

effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with retrospective application to all periods presented. Early application is permitted. The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

On December 12, 2014, Caleres Investment Company, Inc. ("CIC") (formerly known as Brown Shoe Investment Company, Inc.), the sole shareholder of Shoes.com, Inc. ("Shoes.com"), simultaneously entered into and closed a Stock Purchase Agreement by and among CIC and an affiliate of ShoeMe Technologies Limited ("the Purchaser"), pursuant to which the Purchaser acquired all of the outstanding capital stock, inventory and other assets of Shoes.com from CIC and the Company agreed to provide certain transition services. The aggregate purchase price of the sale was $15.0 million , subject to working capital and other adjustments. The Company received $4.4 million in cash and a $7.5 million face value secured convertible note ("convertible note") at closing, from the sale of stock, the sale of inventory and other assets, and the provision of transitional services, less working capital adjustments. The convertible note requires installments over four years with the first payment of $1.25 million due on July 1, 2017 and quarterly installments of $0.6 million thereafter, plus accrued interest, until it matures on December 12, 2019. Interest accrues at an annual rate of 6% until December 11, 2016, 7% until December 11, 2017, 8% until December 11, 2018, and 9% until the maturity date. The principal and outstanding accrued interest is convertible into common stock of the Purchaser at a conversion price of CAD 21.50 per share, at the Company's option, or automatically upon a qualified initial public offering ("IPO") by the Purchaser at the IPO price. The fair value of the convertible note of $7.0 million at May 2, 2015 is included in other assets on the condensed consolidated balance sheets.

The operating results of Shoes.com were included in the Famous Footwear segment in continuing operations through December 12, 2014. The operations of Shoes.com were not significant to the Famous Footwear segment or the Company's financial results. In accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which the Company adopted during the third quarter of 2014, the financial position and operating results of Shoes.com have not been classified as a discontinued operation as the disposition did not represent a strategic shift resulting in a major impact on the Company's operations or financial results.

 

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, 2015 and May 3, 2014 :

 

 

Options to purchase 62,997 and 74,997 shares of common stock for the thirteen weeks ended May 2, 2015 and May 3, 2014 , 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.

 

Portfolio Realignment 

The Company's portfolio realignment efforts included the sale of American Sporting Goods Corporation; the sale of the AND 1 division; exiting certain women's specialty and private label brands; exiting the children's wholesale business; the sale and closure of sourcing and supply chain assets; closing or relocating numerous underperforming or poorly aligned retail stores; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang license in accordance with agreement terms; and other infrastructure changes. These portfolio realignment efforts began in 2011 and were completed in 2013.

 

Following is a summary of the settlements by category of costs.  The Company expects all portfolio realignment costs to be settled by the end of fiscal 2016.

 

 

During the fourth quarter of 2014, following the sale of Shoes.com, the Company revised its reportable segments. This change reflects the Company's omni-channel approach to managing its branded footwear business across all distribution channels.

Following is a summary of certain key financial measures for the Company’s business segments for the periods ended May 2, 2015 and May 3, 2014 .  

 

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

 

Following is a reconciliation of operating earnings to earnings before income taxes:  

 

 

Intangible assets consist primarily of owned and licensed trademarks, of which $20.8 million as of May 2, 2015 and January 31, 2015 and $21.0 million as of May 3, 2014 , are not subject to amortization. The remaining intangible assets are subject to amortization

and have useful lives ranging from 15 to 40 years as of May 2, 2015 . Amortization expense related to intangible assets was $0.9 million  and $1.0 million  for the thirteen weeks ended May 2, 2015 and May 3, 2014 , respectively. 

 

On February 3, 2014, the Company entered into and simultaneously closed an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company acquired the Franco Sarto trademarks.  As consideration, the Company paid a cash purchase price of $65.0 million at the time of closing.  As a result of entering into and closing the Asset Purchase Agreement, the Company’s license agreement, granting the Company the right to sell footwear and other products using the Franco Sarto trademarks through 2019, was terminated.  The purchase price of $65.0 million , as well as transaction costs of $0.1 million , are being amortized over its useful life of 40 years . 

In December 2014, in conjunction with the disposition of Shoes.com as further described in Note 3 to the condensed consolidated financial statements, the Company sold intangible assets with a carrying value of $0.2 million . The intangible assets were previously included in the Famous Footwear segment.

 

Accumulated Other Comprehensive Income

The following table sets forth the changes in accumulated other comprehensive income by component for the thirteen weeks ended May 2, 2015 and May 3, 2014 :

 

The Company recognized share-based compensation expense of $1.7 million and $1.6 million during the thirteen weeks ended May 2, 2015 and May 3, 2014 , respectively.

 

The Company issued 344,679 and 452,125 shares of common stock during the thirteen weeks ended May 2, 2015 and May 3, 2014 , respectively, for stock-based awards, stock options exercised and directors' fees.

 

During the thirteen weeks ended May 2, 2015 and May 3, 2014 , the Company granted 285,421 and 270,910 restricted shares, respectively, to certain employees with weighted-average grant date fair values of $30.06 and $28.18 , respectively. Of the 285,421 restricted shares granted during the thirteen weeks ended May 2, 2015 , 272,921 of the shares will vest in four years and 12,500 of the shares will vest in five years . Of the 270,910 restricted shares granted during the thirteen weeks ended May 3, 2014 , 269,110 of the shares vest in four years and the remaining  1,800  restricted shares vested in  one year . Share-based compensation expense is recognized on a straight-line basis over the respective vesting periods. During the thirteen weeks ended May 2, 2015 and May 3, 2014 , the Company canceled 34,850 and zero shares of restricted stock awards, respectively, as a result of forfeitures.

 

During the thirteen weeks ended May 2, 2015 , the Company granted performance share awards for a targeted 177,921 shares with a weighted-average grant date fair value of $ 30.12 .  During the thirteen weeks ended May 3, 2014 , the Company granted performance share awards for a targeted 88,185 units with a weighted-average grant date fair value of $28.18 . Vesting of performance-based awards is dependent upon the financial performance of the Company and the attainment of certain financial goals during the next  three years . At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period.

Compensation expense is being recognized based on the fair value of the award and the anticipated number of units to be awarded in accordance with the vesting schedule of the units over the three-year service period. The performance share units are settled in cash and their fair value is based on the unadjusted quoted market price for the Company’s common stock on each measurement date.

During the thirteen weeks ended May 2, 2015 , the Company granted  16,667 stock options with a weighted-average grant date fair value of $29.18 . Of the 16,667 stock options granted, 8,333 will vest in four years and 8,334 will vest in five years .

 

The Company also granted 704 and 910 restricted stock units to non-employee directors during the thirteen weeks ended May 2, 2015 and May 3, 2014 , respectively, with weighted-average grant date fair values of $32.30  and $26.63 , respectively. All restricted stock units for dividend equivalents vested immediately and compensation expense was fully recognized during the thirteen weeks ended May 2, 2015 and May 3, 2014 .

 

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 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 financial institutions and have varying maturities through April 2016 . Credit risk is managed through the continuous monitoring of exposures to such counterparties. 

 

The Company’s hedging strategy principally uses foreign currency forward contracts as cash flow hedges, which are recorded in the condensed consolidated balance sheet at fair value, to offset a portion of the effects of exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses, and intercompany charges, as well as collections and payments. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income and reclassified to earnings in the period that the hedged transaction is recognized in earnings.  The Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in the condensed consolidated statement of earnings.

Hedge ineffectiveness is evaluated using the hypothetical derivative method. The amount of hedge ineffectiveness for the thirteen weeks ended May 2, 2015 and May 3, 2014 was not material. 

 

As of May 2, 2015 , May 3, 2014 and January 31, 2015 , the Company had forward contracts maturing at various dates through April 2016 ,   May 2015 and January 2016 , respectively. The contract notional amount represents the net amount of all purchase and sale contracts of a foreign currency.

 

 

The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of May 2, 2015 , May 3, 2014 and January 31, 2015 are as follows:

 

For the thirteen weeks ended May 2, 2015 and May 3, 2014 , the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

All gains and losses currently included within accumulated other comprehensive income associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information

related to the Company’s derivative financial instruments are disclosed within Note 12 to the condensed consolidated financial statements. 

 

 

Fair Value Hierarchy  

FASB guidance on fair value measurements and disclosures specifies 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 hierarchy is broken down into three levels based on the reliability of the inputs as follows: 

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk. 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. The Company does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 

 

Deferred Compensation Plan Assets and Liabilities 

The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participant generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 

 

Deferred Compensation Plan for Non-Employee Directors  

Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs that is equal to the number of shares of the Company’s common stock which 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 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 statement of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 

 

Restricted Stock Units for Non-Employee Directors

Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to restricted stock units for non-employee directors is disclosed in Note 9 to the condensed consolidated financial statements.

 

Performance Share Units

Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three -year service period. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to performance share units is disclosed in Note 9 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 within Note 11 to the condensed consolidated financial statements. 

Secured Convertible Note

The Company received a secured convertible note as partial consideration for the disposition of Shoes.com, as further described in Note 3 to the condensed consolidated financial statements. The convertible note is measured at fair value using unobservable inputs (Level 3). The change in fair value during the thirteen weeks ended May 2, 2015 reflects an immaterial amount of interest income.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 2, 2015 , May 3, 2014 and January 31, 2015 . The Company did not have any transfers between Level 1 and Level 2 during 2014 or the thirteen weeks ended May 2, 2015 .