CALERES, INC. OVERVIEW Recent Developments InDecember 2019 , COVID-19, a contagious respiratory illness, was first identified inWuhan, China . The worldwide spread of COVID-19 has caused travel and business disruption, as well as stock market volatility. There have been government mandates to stay at home or avoid large gatherings of people and consumer fear of becoming ill continues to grow. As a result, we have temporarily closed all of our Famous Footwear and Brand Portfolio stores inNorth America , effectiveMarch 19, 2020 , for a minimum period of two weeks. While we continue to operate our e-commerce businesses, we have experienced a loss in sales and earnings as a result of the significant decline in customer traffic, both at our own retail stores and at those of our wholesale customers. Although the store closures are expected to be temporary, we cannot estimate the duration of the store closures and the impact to consumer sentiment, or the impact to the Company's financial operations and cash flows in 2020. In addition, we rely upon the facilities of our third-party manufacturers and offices inChina and other countries to support our international business, as well as to export our products throughout the world. While we did experience some temporary disruption in our supply chain, the majority of our factory partners are now operational. We are closely monitoring the changing landscape with respect to COVID-19 and taking actions to effectively manage our business and support our consumers, while ensuring the health and safety of our associates. Nearly all associates have been empowered to work from home. We are taking steps to manage the Company's resources conservatively by reducing and/or deferring capital expenditures, inventory purchases and operating expenses to mitigate the adverse impact of the pandemic. These steps include, but are not limited to, associate furloughs for a significant portion of our workforce and salary reductions for all remaining associates during the temporary store closures, including associates at our distribution centers and corporate offices; minimizing costs associated with our closed retail facilities; reducing marketing expenses and reducing variable expenses during the store closure period. We also plan to reduce capital expenditures and defer Famous Footwear store remodels and planned store openings. In addition, as a precautionary measure to increase its cash position and preserve financial flexibility given the uncertainty inthe United States and global markets resulting from COVID-19, the Company has increased the borrowings on its revolving credit facility from$275.0 million atFebruary 1, 2020 to$440.0 million at the date of this filing. Borrowings under the revolving credit facility will bear interest at LIBOR plus a spread of between 1.25% and 1.5%. Proceeds from the revolving credit facility may be used for working capital needs or general business purposes.
Business Overview
We are a global footwear company with annual net sales of$2.9 billion . Our shoes are worn by people of all ages and our mission is to inspire people to feel great...feet first. We offer the consumer a powerful portfolio of footwear brands built on deep consumer insights generating unwavering consumer loyalty and trust. As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points. We believe our diversified business model provides us with synergies by spanning consumer segments, categories and distribution channels. A combination of thoughtful planning and rigorous execution is key to our success in optimizing our business and portfolio of brands. Our business strategy is focused on continued market share gains, growing our e-commerce business and leveraging our recent investments, while remaining focused on changing consumer demand.
Famous Footwear
Our Famous Footwear segment includes our Famous Footwear stores, Famous.com and FamousFootwear.ca inCanada . Famous Footwear is one of America's leading family-branded footwear retailers with 949 stores at the end of 2019 and net sales of$1.6 billion in 2019. Our focus for the Famous Footwear segment is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion and athletic footwear at a great price, coupled with exclusive products. Brand Portfolio Our Brand Portfolio segment is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers' preference for our brands by offering compelling style, quality, differentiated brand promises and innovative marketing campaigns. The segment is comprised of the Naturalizer, Sam Edelman, Vionic,Allen Edmonds ,Dr. Scholl's Shoes,Franco Sarto , LifeStride, BlowfishMalibu , Vince, Rykä, Bzees, Fergie, Carlos, Via Spiga,Veronica Beard and Zodiac brands. Through these brands, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products. Our Brand Portfolio segment operates 228 retail stores inthe United States ,Canada ,China andGuam for our Naturalizer,Allen Edmonds and Sam Edelman brands. This segment also includes our e-commerce businesses that sell our branded footwear. In addition, during 2019, we announced a joint venture withBrand Investment Holding , a member of theGemkell Group . The joint venture expands our international presence by distributing our Naturalizer and Sam Edelman brands in greaterChina , includingHong Kong ,Macau andTaiwan .
Financial Highlights
The following is a summary of the financial highlights for 2019:
• Consolidated net sales increased
in 2019, compared to
acquisitions of Vionic and Blowfish Malibu, which contributed net sales growth
of
million and
Sales growth from acquisitions was partially offset by lower sales of certain
brands in our Brand Portfolio segment, including Sam Edelman and Allen
Edmonds. Our Famous Footwear segment experienced an
decrease in net sales attributable to the decline in the number of our retail
stores, while same-store sales improved by 2.0%.
• Consolidated operating earnings increased to
to
million impairment charge in 2018 related to goodwill and intangible assets
for our
our 2018 acquisitions of Vionic and Blowfish Malibu, as described below.
• Consolidated net income attributable to
$0.13 per diluted share, last year. 18
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The following items should be considered in evaluating the comparability of our 2019 and 2018 results:
• Acquisition of Vionic - On
for
credit agreement. Vionic contributed net sales of
aggregate, we incurred charges related to the acquisition and integration of
Vionic of
diluted share) during 2019 and
basis, or
million and
amortization of the inventory fair value adjustment required for purchase
accounting in 2019 and 2018, respectively, and
of acquisition and integration-related costs in 2019 and 2018,
respectively, which are presented as restructuring and other special charges,
net. Refer to Note 2 and Note 5 to the consolidated financial statements for
further discussion.
• Acquisition of Blowfish Malibu - On
interest in Blowfish Malibu. Blowfish
million in 2019 and
during 2018, including
to the amortization of the inventory fair value adjustment required for
purchase accounting, and
integration-related costs, which are presented as restructuring and other
special charges, net. There were no corresponding charges in 2019. Refer to
Note 2 and Note 5 to the consolidated financial statements for further
discussion. In addition, as discussed further in Note 2 and Note 15 to the
consolidated financial statements, the noncontrolling interest is subject to a
mandatory purchase obligation after a three-year period, based upon an
earnings multiple formula. During 2019, we recorded fair value adjustments of
which is recorded as interest expense, net in the consolidated statement of
earnings.
• Incentive and share-based compensation plans - During 2019, our incentive and
share-based compensation expenses decreased by approximately
compared to 2018, due to lower anticipated payments associated with these
plans and lower expenses for our cash-equivalent restricted stock units
granted to directors, reflecting the Company's lower stock price.
• Expense containment initiatives - We incurred charges of
million on an after-tax basis, or
related to our expense containment initiatives, with no corresponding charges
last year. These costs included employee-related costs for severance,
including health care benefits and enhanced pension benefits, primarily
associated with the Voluntary Early Retirement Program ("VERP") in the fourth
quarter of 2019. We anticipate annualized savings of between
• Lease Accounting - We adopted Accounting Standards Codification ("ASC") Topic
842, Leases ("ASC 842"), during the first quarter of 2019 using the modified
retrospective transition method. Prior period financial information in the
consolidated financial statements has not been adjusted and is presented under
the guidance in ASC 840, Leases ("ASC 840"). As a result of the adoption of
ASC 842, we recorded operating lease right-of-use assets of
lease liabilities of
adoption of the standard has resulted in higher asset impairment charges for
under-performing retail stores as a direct result of including the related
right-of-use asset in the asset group that is evaluated for impairment.
We
recognized
during 2019 with no corresponding impairment charges in 2018.
• Brand exits - In connection with the decision in 2019 to exit our Carlos brand
and reposition our Via Spiga brand, we incurred incremental costs of
share). Of these charges,
inventory markdowns required to reduce the value of inventory to net
realizable value and is presented in cost of goods sold on the statements of
earnings (loss). The remaining
related costs and is presented in restructuring and other special charges. In
2018, we decided to exit two of our Brand Portfolio brands,
Furstenberg ("DVF") and
decision, we incurred costs of
basis, or
represents incremental inventory markdowns required to reduce the value of
inventory to net realizable value and is presented in cost of goods sold on
the statements of earnings (loss) and the remaining
and other related costs is presented in restructuring and other special
charges. Refer to Note 5 to the consolidated financial statements for further
discussion.
• Impairment of goodwill and intangible assets - During 2018, we recorded
impairment charges of
for our
factors, including the decision to change the brand's pricing structure to be
less promotional in the future, which resulted in a decline in projected
revenue. In addition, rising interest rates and less favorable operating
results in 2018 contributed to the need for the impairment charges. There
were no corresponding impairment charges in 2019. See Note 1 and Note 11 to
the consolidated financial statements for additional information related to
these charges.
• Logistics transition - During the fourth quarter of 2018, we incurred costs of
associated with the transition from our third-party operated warehouse in
facilities in
distribution center in
center in
costs, we also incurred approximately
duplicate expenses earlier in 2018 associated with the distribution center
transitions. Refer to Note 5 to the consolidated financial statements for
further discussion.
• Acquisition, integration and reorganization of men's brands - During 2018, we
incurred costs of
per diluted share) related to the integration and reorganization of our men's
brands, primarily to consolidate and relocate certain business functions into
our
in our
restructuring and other special charges, net on the consolidated statements of
earnings (loss). There were no corresponding costs incurred in 2019. Refer
to Note 2 and Note 5 to the consolidated financial statements for additional
information.
• Segment Presentation - During the first quarter of 2019, we changed our
segment presentation to present net sales of the Brand Portfolio segment
inclusive of both external and intersegment sales, with the elimination of
intersegment sales and profit from Brand Portfolio to Famous Footwear
reflected within the Eliminations and Other category. This presentation
reflects the independent business models of both Brand Portfolio and Famous
Footwear, as well as growth in intersegment activity driven by the
acquisitions of Vionic and Blowfish Malibu. Prior period information has been
recast to conform to the current presentation
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Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year. Management uses the same-store sales metric as a measure of an individual store's success to determine whether it is performing in line with expectations. Our same-store sales metric is calculated by comparing the sales in stores that have been open at least 13 months to the comparable retail calendar weeks in the prior year. Relocated stores are treated as new stores and closed stores are excluded from the calculation. The sales change from new and closed stores, net metric reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in determining the portion of our net sales derived from growth in existing locations compared to the portion derived by the opening of new stores.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry
to calculate the efficiency of sales based upon the square footage in a store.
Management uses the sales per square foot metric as a measure of an individual
store's success to determine whether it is performing in line with
expectations. The sales per square foot metric presented below is calculated by
dividing total retail store sales, excluding e-commerce sales, by the total
square footage of the retail store base at the end of each month of the
respective period.
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Table of Contents
Comparison of Financial Results
The following sections discuss the consolidated and segment results of our operations for the year endedFebruary 1, 2020 compared to the year endedFebruary 2, 2019 . For a discussion of the year endedFebruary 2, 2019 compared to the year endedFebruary 3, 2018 , refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedFebruary 2, 2019 . CONSOLIDATED RESULTS 2019 2018 2017 % of % of % of ($ millions) Net Sales Net Sales Net Sales Net sales$ 2,921.6 100.0 %$ 2,834.8 100.0 %$ 2,785.6 100.0 % Cost of goods sold 1,737.2 59.5 % 1,678.5 59.2 % 1,617.0 58.0 % Gross profit 1,184.4 40.5 % 1,156.3 40.8 % 1,168.6 42.0 % Selling and administrative expenses 1,065.8 36.5 % 1,041.8 36.7 % 1,036.0 37.2 % Impairment of goodwill and intangible assets - - % 98.0 3.5 % - - % Restructuring and other special charges, net 14.8 0.4 % 16.1 0.6 % 4.9 0.2 % Operating earnings 103.8 3.6 % 0.4 0.0 % 127.7 4.6 % Interest expense, net (33.1 ) (1.2 )% (18.3 ) (0.6 )% (17.3 ) (0.6 )% Loss on early extinguishment of debt - - % (0.2 ) (0.0 )% - - % Other income, net 7.9 0.3 % 12.3 0.4 % 12.3 0.4 % Earnings (loss) before income taxes 78.6 2.7 % (5.8 ) (0.2 )% 122.7 4.4 % Income tax (provision) benefit (16.5 ) (0.6 )% 0.3 0.0 % (35.5 ) (1.3 )% Net earnings (loss) 62.1 2.1 % (5.5 ) (0.2 )% 87.2 3.1 % Net (loss) earnings attributable to noncontrolling interests (0.7 ) 0.0 % (0.1 ) (0.0 )% 0.0 0.0 % Net earnings (loss) attributable to Caleres, Inc.$ 62.8 2.1 %$ (5.4 ) (0.2 )%$ 87.2 3.1 % Net Sales Net sales increased$86.8 million , or 3.1%, to$2,921.6 million in 2019, compared to$2,834.8 million last year, primarily reflecting the impact of our acquisitions in 2018. However, we experienced weakness in the fashion footwear market during the second half of 2019, in particular with lower sales to the value channel and lower demand for closeout products. Our Brand Portfolio segment reported a$92.9 million , or 7.1%, increase in net sales, driven by sales from our acquisitions of Vionic inOctober 2018 and Blowfish Malibu inJuly 2018 . On a consolidated basis, Vionic and Blowfish Malibu contributed$132.1 million and$40.7 million in net sales growth, respectively, for 2019 ($132.6 million and$46.5 million , respectively, to the Brand Portfolio segment). The increase in sales from acquisitions was partially offset by lower sales from our Sam Edelman,Allen Edmonds ,Dr. Scholl's and Naturalizer brands. Net sales of our Famous Footwear segment decreased$18.7 million , or 1.2%, primarily driven by a decrease in our store base (43 fewer stores at the end of 2019 as compared to the end of 2018).
Gross Profit
Gross profit increased$28.1 million , or 2.4%, to$1,184.4 million in 2019, compared to$1,156.3 million in 2018 driven by our net sales growth. As a percentage of net sales, our gross profit rate decreased to 40.5% in 2019, compared to 40.8% in 2018, reflecting the promotional retail environment and a higher mix of e-commerce business. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses. Cost of goods sold in 2019 includes$5.8 million related to the amortization of the inventory fair value adjustment required by purchase accounting from our Vionic acquisition and$3.0 million of incremental cost of goods sold associated with the decision to exit our Carlos brand and reposition our Via Spiga brand. Cost of goods sold in 2018 included special charges of$10.6 million related to the amortization of the inventory adjustments required by purchase accounting from our Vionic and Blowfish Malibu acquisitions and$1.8 million of incremental cost of goods sold associated with the decision to exit our DVF and GBB brands. During 2019, we also experienced a higher mix of wholesale versus retail sales. Wholesale sales typically carry lower gross profit rates than retail sales. Retail and wholesale net sales were 61% and 39%, respectively, in 2019 compared to 65% and 35%, respectively, in 2018. We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expenses, as a percentage of net sales, may not be comparable to other companies.
Selling and Administrative Expenses
Selling and administrative expenses increased$24.0 million , or 2.3%, to$1,065.8 million in 2019, compared to$1,041.8 million last year, driven by additional expenses associated with the full year impact of our acquired Vionic and Blowfish Malibu brands in 2018, including higher amortization expense on intangible assets, partially offset by lower expenses associated with cash and stock-based incentive compensation plans and lower store rent and facilities costs due to a smaller store base. As a percentage of net sales, selling and administrative expenses decreased to 36.5% in 2019 from 36.7% last year. 21
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Impairment of
During 2018, we recognized impairment charges of$98.0 million ($83.0 million on an after-tax basis, or$1.93 per diluted share) for the impairment of goodwill and the tradename associated with ourAllen Edmonds business. The impairment charges were primarily driven by the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results contributed to the need for the 2018 impairment charges. There were no corresponding impairment charges in 2019. Refer to Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.
Restructuring and Other Special Charges, Net
Restructuring and other special charges were
• Expense containment initiatives of
basis, or
for severance, health care and enhanced pension benefit, primarily associated
with the VERP;
• Acquisition and integration-related costs for Vionic of
million on an after-tax basis, or
to
share) in 2018;
• Brand Portfolio brand exit costs of
basis, or
brand and repositioning of our Via Spiga brand, compared to
million on an after-tax basis, or
the exit of our DVF and GBB brands;
• Integration and reorganization costs related to our men's business in 2018 of
• Transition costs related to our distribution centers of
million on an after-tax basis, or
• Costs associated with the restructuring of our retail operations of
million (
2018;
• Acquisition and integration-related costs for Blowfish Malibu of
(
The nature of the above charges are more fully described in the Financial Highlights section above and Note 5 to the consolidated financial statements.
Operating Earnings Operating earnings increased$103.4 million to$103.8 million in 2019, compared to$0.4 million last year, primarily reflecting the non-recurrence of the$98.0 million impairment charge related to goodwill and intangible assets in 2018 and a full year of earnings contribution from our 2018 acquisitions of Vionic and Blowfish Malibu, partially offset by the impacts of a more competitive and promotional retail environment.
Interest Expense, Net
Interest expense, net increased$14.8 million , or 80.9%, to$33.1 million in 2019, compared to$18.3 million last year, reflecting the full year impact of higher interest expense on our revolving credit agreement, which was used to fund the acquisition of Vionic in the third quarter of 2018, and accretion and fair value adjustment to the mandatory purchase obligation associated with the Blowfish Malibu acquisition of$6.0 million . We anticipate interest expense to remain higher than historical levels as we pay down the revolving credit agreement and as we continue to remeasure the Blowfish Malibu mandatory purchase obligation each quarter until mid-2021. Refer to Note 15 to the consolidated financial statements for additional information related to the mandatory purchase obligation. Other Income, Net Other income, net decreased$4.4 million , or 35.8%, to$7.9 million in 2019, compared to$12.3 million in 2018, driven by the settlement charge associated with the VERP and lower return on assets for our domestic pension plans. Refer to Note 6 to the consolidated financial statements for additional information related to our retirement plans.
Income Tax (Provision) Benefit
Our consolidated effective tax rate was 21.0% in 2019, compared to 4.7% in 2018. In 2019, our effective tax rate was impacted by discrete tax benefits totaling$1.4 million , primarily reflecting adjustments to tax rates in state and other international jurisdictions. In 2018, our effective tax rate was impacted by several factors, including the non-deductibility of our goodwill impairment charge of$38.0 million , as further discussed in Note 11 to the consolidated financial statements. In addition, discrete tax benefits totaling$5.9 million were recognized in 2018, primarily reflecting adjustments associated with the Tax Cuts and Jobs Act (the "Act") and related actions for state and other international jurisdictions (in aggregate, "income tax reform"). Refer to further discussion in Note 7 to the consolidated financial statements. The effective tax rate in 2019 was also impacted by a higher mix of foreign earnings, as our foreign earnings are generally subject to lower tax rates. If the impairment charges had not been recognized in 2018 and the discrete tax benefits had not been recognized in 2019 and 2018, the Company's effective tax rates would have been 22.7% and 22.3%, respectively. Refer to Note 7 to the consolidated financial statements for additional information regarding our tax rates.
Net Earnings (Loss) Attributable to
Consolidated net earnings attributable toCaleres, Inc. was$62.8 million in 2019, compared to a net loss of$5.4 million last year, reflecting the factors described above. Geographic Results We have both domestic and foreign operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our e-commerce websites. Foreign operations primarily consist of wholesale operations in the Far East andCanada , retail operations inCanada andChina and the operation of our international e-commerce websites. In addition, we license certain of our trademarks to third parties who distribute and/or operate retail locations internationally. The Far East operations include first-cost transactions, where footwear is sold at foreign ports to customers who then import the footwear intothe United States and other countries. The breakdown of domestic and foreign net sales and earnings before income taxes is as follows: 2019 2018 2017 Earnings (Loss) Earnings Earnings Before Before Before Income ($ millions) Net Sales Income Taxes Net Sales Income Taxes Net Sales Taxes Domestic$ 2,727.1 $ 37.3$ 2,656.9 $ 40.0 $ 2,611.5 $ 78.2 Foreign 194.5 41.3 177.9 (45.8 ) 174.1 44.5$ 2,921.6 $ 78.6$ 2,834.8 $ (5.8 ) $ 2,785.6 $ 122.7 As a percentage of sales, the pre-tax profitability on foreign sales is higher than on domestic sales because of a lower cost structure and the inclusion of the unallocated corporate administrative and other costs in domestic earnings. In 2018, our foreign earnings were impacted by the goodwill and tradename impairment charges described earlier. 22
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FAMOUS FOOTWEAR
2019 2018 2017
% of % of % of
($ millions) Net Sales Net Sales Net Sales
Net sales $ 1,588.1 100.0 % $ 1,606.8 100.0 % $ 1,637.6 100.0 %
Cost of goods sold 912.7 57.5 % 916.0 57.0 % 913.2 55.8 %
Gross profit 675.4 42.5 % 690.8 43.0 % 724.4 44.2 %
Selling and administrative
expenses 595.0 37.5 % 605.1 37.7 % 631.6 38.6 %
Restructuring and other
special charges, net 3.5 0.2 % 0.4 0.0 % 0.6 0.0 %
Operating earnings $ 76.9 4.8 % $ 85.3 5.3 % $ 92.2 5.6 %
Key Metrics
Same-store sales % change (on
a 52-week basis) 2.0 % 1.5 % 1.4 %
Same-store sales $ change (on
a 52-week basis) $ 31.1 $ 23.8 $ 21.7
Sales change from 53rd week $ - $ (19.7 ) $ 19.7
Sales change from new and
closed stores, net (on a
52-week basis) $ (49.3 ) $ (34.5 ) $ 5.5
Impact of changes in Canadian
exchange rate on sales $ (0.5 ) $ (0.4 ) $ 0.6
Sales per square foot,
excluding e-commerce (on a
52-week basis) $ 223 $ 220 $ 218
Square footage (thousands sq.
ft.) 6,281 6,552 6,972
Stores opened 12 17 34
Stores closed 55 51 63
Ending stores 949 992 1,026
Net Sales
Net sales decreased $18.7 million , or 1.2%, to $1,588.1 million in 2019,
compared to $1,606.8 million last year, primarily driven by a decrease in our
store base, which resulted in a $49.3 million decrease in sales from new and
closed stores. Since 2017, we have had net closures of 77 stores, or 8%, as we
continue to focus on optimizing our store base and eliminating underperforming
locations. This decrease was partially offset by a 2.0% increase in same-store
sales and continued growth in e-commerce sales. Famous Footwear experienced
strong growth in sales of lifestyle athletic product and a positive trend in
boots, partially offset by weakness in dress shoes. Sales per square foot,
excluding e-commerce, increased 1.0% to $223 , compared to $220 last year.
During the first quarter of 2019, we introduced a new customer loyalty program,
Famously You Rewards ("Rewards"), which drove an increase in sales to members
and retention rate improvement. Members of our customer loyalty
program continue to account for a majority of the segment's sales, with
approximately 78% of our net sales to loyalty program members in 2019 and 76% in
2018. We plan to continue to evolve this program to strengthen the connections
with our consumers.
Gross Profit
Gross profit decreased $15.4 million , or 2.2%, to $675.4 million in 2019,
compared to $690.8 million in 2018, reflecting lower net sales and a lower gross
profit rate, driven by a more competitive and promotional retail environment.
As a percentage of net sales, our gross profit rate decreased to 42.5% in 2019,
compared to 43.0% in 2018, reflecting the promotional retail environment and
higher freight expenses due to strong growth in e-commerce sales in 2019. We
expect the trend toward a higher mix of e-commerce sales to continue as a result
of the investment we have made in our e-commerce platform, allowing us to offer
new capabilities, enhanced customer experiences and the ability to quickly adapt
to changing consumer dynamics.
Selling and Administrative Expenses
Selling and administrative expenses decreased$10.1 million , or 1.7%, to$595.0 million during 2019 compared to$605.1 million last year. The decrease was driven primarily by lower rent and facilities expense attributable to our smaller store base (43 fewer stores at the end of 2019 versus 2018), partially offset by higher marketing expenses, and an increase in impairment charges related to lease right-of-use assets subsequent to the adoption of ASC 842, as further discussed in Note 1 to the consolidated financial statements. The increase in marketing expense is attributable to additional marketing to support the new Rewards program that was launched in the first quarter of 2019, as well as additional television and radio advertising during the key back-to-school and holiday periods. As a percentage of net sales, selling and administrative expenses decreased slightly to 37.5% in 2019 from 37.7% last year.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of
Operating Earnings Operating earnings decreased$8.4 million , or 9.8%, to$76.9 million for 2019, compared to$85.3 million last year, reflecting lower net sales, a decline in gross profit rate and the other factors described above. As a percentage of net sales, our operating earnings decreased to 4.8% in 2019 from 5.3% in 2018. 23
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BRAND PORTFOLIO
2019 2018 2017
% of % of % of
($ millions) Net Sales Net Sales Net Sales
Net sales $ 1,406.5 100.0 % $ 1,313.6 100.0 % $ 1,233.1 100.0 %
Cost of goods sold 899.9 64.0 % 846.7 64.5 % 788.9 64.0 %
Gross profit $ 506.6 36.0 % $ 466.9 35.5 % $ 444.2 36.0 %
Selling and administrative
expenses 442.7 31.5 % 399.1 30.4 % 362.4 29.4 %
Impairment of goodwill and
intangible assets - - % 98.0 7.5 % - - %
Restructuring and other special
charges, net 5.7 0.4 % 10.6 0.8 % 1.6 0.1 %
Operating earnings (loss) $ 58.2 4.1 % $ (40.8 ) (3.1 )% $ 80.2 6.5 %
Key Metrics
Direct-to-consumer (% of net
sales) (1) 42 % 39 % 26 %
Wholesale/retail sales mix (%) 81%/19% 80%/20% 74%/26%
Change in wholesale net sales
($) (2) $ 107.6 $ 85.7 $ (1.7 )
Unfilled order position at
year-end $ 295.4 $ 331.6 $ 262.1
Same-store sales % change (on a
52-week basis) (3) (5.8 )% (0.1 )% 6.4 %
Same-store sales $ change (on a
52-week basis) (3) $ (15.5 ) $ (0.1 ) $ 7.5
Sales change from 53rd week $ - $ (3.7 ) $ 3.7
Sales change from new and closed
stores, net (on a 52-week basis)
(4) $ 1.5 $ (1.3 ) $ 148.2
Impact of changes in Canadian
exchange rate on retail sales $ (0.7 ) $ (0.6 ) $ 1.0
Sales per square foot, excluding
e-commerce (on a 52-week basis)
(3) $ 390 $ 417 $ 327
Square footage, end of year
(thousands sq. ft.) 387 394 405
Stores opened 11 7 15
Stores closed 12 14 13
Ending stores 228 229 236
(1) Direct-to-consumer includes sales of our retail stores and e-commerce sites,
sales to online-only retailers and sales through customers' websites that we
fulfill on a drop-ship basis.
(2) The wholesale net sales change includes sales from our acquired Vionic brand
of
sales from our acquired Blowfish Malibu brand of
million for 2019 and 2018, respectively.
(3) Because these metrics require stores to be included in our results for 13
continuous months, the calculations for 2017 exclude our
business, which was acquired in
(4) This metric for 2017 includes net sales from our 69 acquired
retail stores. The sales change from these retail stores for 2019 and 2018
is included in the same-store sales metric.
Net Sales
Net sales increased $92.9 million , or 7.1%, to $1,406.5 million in 2019,
compared to $1,313.6 million last year. The increase primarily reflects our
acquisitions of Vionic in October 2018 and Blowfish Malibu in July 2018 , which
contributed $132.6 million and $46.5 million in net sales growth, respectively,
for 2019. The increase in sales from our acquisitions was partially offset by
lower sales from our Sam Edelman, Allen Edmonds , Dr. Scholl's and Naturalizer
brands. The organic sales decline was driven by a decline in women's fashion
footwear and slowing of growth in sport-inspired footwear. We also experienced
challenging selling conditions in the value channel and a change in inventory
management practices by retailers, which in some instances limited orders. We
continue to strategically manage our portfolio of brands. During 2019, we
entered into a partnership with Veronica Beard and transformed and relaunched
the Zodiac brand, while making the decision to shift away from the Carlos
Santana brand and reposition the Via Spiga brand. We opened 11 stores and
closed 12 stores during 2019, resulting in a total of 228 stores at the end of
2019. Sales per square foot, excluding e-commerce, decreased 6.5% to $390 ,
compared to $417 last year. Our unfilled order position for our wholesale
business decreased $36.2 million , or 10.9%, to $295.4 million at the end of
2019, compared to $331.6 million at the end of last year. The decrease in our
backlog order levels reflects an industry shift to a more dynamic and on-demand
ordering pattern, with lower initial orders but higher replenishment later in
the season. Due to the impact of COVID-19, many of our wholesale customers have
sought to cancel orders due to the temporary closure of retail stores and the
uncertainty surrounding the duration of the pandemic and customer sentiment. The
impact on our unfilled wholesale order position is unknown at this time.
Gross Profit
Gross profit increased$39.7 million , or 8.5%, to$506.6 million in 2019, compared to$466.9 million last year, primarily reflecting net sales growth, which was fueled by recent acquisitions. This increase was partially offset by a more competitive and promotional retail environment, which yielded a lower volume of replenishment orders for our product, as well as a higher mix of e-commerce business. Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses. In addition, during 2019, the Brand Portfolio segment recognized a total of$8.8 million of incremental cost of goods sold, compared to$12.4 million in 2018. Cost of goods sold in 2019 includes$5.8 million ($4.3 million on an after-tax basis, or$0.10 per diluted share) of incremental cost of goods sold related to purchase accounting inventory adjustments and$3.0 million ($2.2 million on an after-tax basis, or$0.05 per diluted share) associated with the decision to exit our Carlos brand and reposition our Via Spiga brand, as further discussed in the Overview section above. In 2018, cost of goods sold includes$10.6 million ($7.9 million on an after-tax basis, or$0.18 per diluted share) associated with purchase accounting inventory adjustments and$1.8 million ($1.3 million on an after-tax basis, or$0.03 per diluted share) associated with the decision to exit our DVF and GBB brands. As a percentage of sales, our gross profit rate increased to 36.0% in 2019, compared to 35.5% last year.
Selling and Administrative Expenses
Selling and administrative expenses increased$43.6 million , or 10.9%, to$442.7 million during 2019, compared to$399.1 million last year, driven by higher expenses from our Vionic and Blowfish Malibu acquisitions, partially offset by lower expenses associated with cash and stock-based incentive compensation expenses. As a percentage of net sales, selling and administrative expenses increased to 31.5% in 2019 from 30.4% last year, reflecting the above named factors. 24
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Impairment of
We incurred impairment charges of$98.0 million during 2018 for the impairment of goodwill and the tradename for ourAllen Edmonds business. The impairment charges were driven by several factors, including the decision to change the brand's pricing structure to be less promotional in the future, which resulted in a decline in projected revenue. In addition, rising interest rates and less favorable operating results contributed to the need for the 2018 impairment charges. There were no corresponding impairment charges in 2019. See Note 1 and Note 11 to the consolidated financial statements for additional information related to the impairment.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of$5.7 million in 2019 were comprised of$5.1 million for expense containment initiatives and$0.6 million of costs associated with the decision to exit the Carlos brand. In 2018, restructuring and other special charges of$10.6 million were comprised of$5.4 million for the integration and reorganization of our men's brands,$4.5 million of expenses related to the transition of two of our distribution centers and$0.6 million of costs associated with the decision to exit the DVF and GBB brands. Refer to Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.
Operating Earnings (Loss)
Operating earnings were$58.2 million in 2019, compared to an operating loss of$40.8 million last year, primarily reflecting the$98.0 million impairment of goodwill and intangible assets in 2018 and other factors described above. As a percentage of net sales, operating earnings were 4.1% in 2019, compared to an operating loss of 3.1% last year. ELIMINATIONS AND OTHER 2019 2018 2017 % of % of % of ($ millions) Net Sales Net Sales Net Sales Net sales$ (73.0 ) 100.0 %$ (85.5 ) 100.0 %$ (85.1 ) 100.0 % Cost of goods sold (75.4 ) 103.3 % (84.1 ) 64.5 % (85.1 ) 100.0 % Gross profit$ 2.4 (3.3 )%$ (1.4 ) 1.6 % $ - - % Selling and administrative expenses 28.0 (38.4 )% 37.5 (43.9 )% 42.0 (49.3 )% Restructuring and other special charges, net 5.6 (7.7 )% 5.2 (6.1 )% 2.7 (3.2 )% Operating (loss) earnings$ (31.2 ) (42.7 )%$ (44.1 ) 51.5 %$ (44.7 ) 52.5 % The Eliminations and Other category includes the elimination of intersegment sales and profit, unallocated corporate administrative expenses, and other costs and recoveries.
The net sales elimination of
Selling and administrative expenses decreased$9.5 million , or 25.3%, to$28.0 million in 2019, compared to$37.5 million last year, primarily driven by lower expenses for our cash and share-based incentive compensation plans, partially offset by higher unallocated expenses related to our logistics facilities. Restructuring and other special charges of$5.6 million in 2019 were comprised of$3.8 million for expense containment initiatives and$1.8 million for Vionic integration-related costs. In 2018, restructuring and other special charges of$5.2 million included acquisition and integration-related costs for Vionic and Blowfish Malibu totaling$4.8 million and integration and reorganization of our men's brands of$0.4 million .
RESTRUCTURING AND OTHER INITIATIVES
During 2019, we incurred restructuring and other special charges of$14.8 million , including approximately$12.3 million related to our expense containment initiatives,$1.9 million of acquisition and integration-related costs for Vionic, and$0.5 million related to the decision to exit our Carlos brand and reposition our Via Spiga brand. In addition to the severance and benefits presented as restructuring and other special charges, we also incurred$2.7 million in special charges for our pension associated with the VERP, which is included in other income, net in the consolidated statement of earnings, as further discussed in Note 6 to the consolidated financial statements. During 2018, we incurred restructuring and other special charges of$16.1 million , including$5.8 million related to the integration and reorganization of our men's business,$4.5 million associated with the transition of two of our distribution centers,$4.5 million of acquisition and integration-related costs for Vionic,$0.6 million related to the decision to exit our DVF and GBB brands,$0.4 million related to the restructuring of our retail operations, and$0.3 million of acquisition and integration-related costs for Blowfish Malibu. Refer to the Financial Highlights section above and Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.
IMPACT OF INFLATION AND CHANGING PRICES
Although inflation has slowed in recent years, it is still a factor in our economy. While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact over the last three years. Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates. For example, our products are manufactured in other countries, and a decline in the value of theU.S. dollar and the impact of labor shortages inChina or other countries, or the imposition of tariffs, may result in higher product costs. Similarly, any potential significant shortage of quantities or increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations. In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease. Moreover, increases in inflation may not be matched by increases in wages, which also could have a negative impact on consumer spending. If we incur increased costs that are unable to be recovered through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of the cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs. Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors. 25
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LIQUIDITY AND CAPITAL RESOURCES
Borrowings
(Decrease)
($ millions) February 1, 2020 February 2, 2019 Increase
Borrowings under revolving credit agreement $ 275.0 $ 335.0 $ (60.0 )
Long-term debt 198.4 197.9 0.5
Total debt $ 473.4 $ 532.9 $ (59.5 )
Total debt obligations decreased $59.5 million to $473.4 million at the end of
2019, compared to $532.9 million at the end of last year, reflecting the
repayment of borrowings under our revolving credit agreement, which was used to
fund the acquisition of Vionic in October 2018 . Net interest expense in 2019
was $33.1 million , compared to $18.3 million in 2018. The increase in net
interest expense in 2019 was attributable to higher average borrowings under our
revolving credit agreement and the fair value adjustment for the mandatory
purchase obligation associated with the Blowfish Malibu acquisition, as further
discussed in Note 2 and Note 15 to the consolidated financial statements.
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. OnDecember 18, 2014 , the Company and certain of its subsidiaries (the "Loan Parties") entered into the Former Credit Agreement, which was further amended onJuly 20, 2015 to release all of the Company's subsidiaries that were borrowers under or that guaranteed the Former Credit Agreement other thanSidney Rich Associates, Inc. andBG Retail, LLC .Allen Edmonds and Vionic were joined to the Agreement as guarantors onDecember 13, 2016 andOctober 31, 2018 , respectively. After giving effect to the joinders, the Company is the lead borrower, andSidney Rich Associates, Inc. ,BG Retail, LLC ,Allen Edmonds and Vionic are each co-borrowers and guarantors under the Former Credit Agreement. OnJanuary 18, 2019 , the Loan Parties entered into a Third Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") to extend the maturity date toJanuary 18, 2024 and change the borrowing capacity under the Former Credit Agreement from an aggregate amount of up to$600.0 million to an aggregate amount of up to$500.0 million , with the option to increase by up to$250.0 million . The Credit Agreement also reduces upfront and unused borrowing fees, provides for less restrictive covenants and offers more flexibility. Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties' obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral. Interest on borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit. Refer to further discussion regarding the Credit Agreement in Note 12 to the consolidated financial statements. AtFebruary 1, 2020 , we had$275.0 million borrowings and$10.9 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was$214.1 million atFebruary 1, 2020 . As discussed in the Overview section above, as a precautionary measure to increase liquidity during the uncertainty of COVID-19, the Company has increased the borrowings on its revolving credit facility from$275.0 million atFebruary 1, 2020 to$440.0 million at the date of this filing. Borrowings under the revolving credit facility, which will be used for working capital needs, will bear interest at LIBOR plus a spread of between 1.25% and 1.5%. The accordion feature of our revolving credit facility provides us with a maximum of$250 million in additional borrowing capacity subject to our compliance with covenants and restrictions under the Credit Agreement. Currently, based on our level of inventory and accounts receivable, the accordion feature would provide approximately$100.0 million of additional borrowing capacity. We were in compliance with all covenants and restrictions under the Credit Agreement as ofFebruary 1, 2020 . InMarch 2020 , Moody's and S&P downgraded our credit rating. Further deterioration in our credit ratings or non-compliance with any covenants or restrictions under the Credit Agreement may impact our ability to access borrowings or capital, as well as negatively impact interest rates and the cost of borrowings.
OnJuly 27, 2015 , we issued$200.0 million aggregate principal amount of Senior Notes due in 2023 (the "Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries ofCaleres, Inc. that is an obligor under the Credit Agreement, and bear interest at 6.25%, which is payable onFebruary 15 andAugust 15 of each year. The Senior Notes mature onAugust 15, 2023 . We may redeem some or all of the Senior Notes at various redemption prices, as further discussed in Note 12 to the consolidated financial statements. The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As ofFebruary 1, 2020 , we were in compliance with all covenants and restrictions relating to the Senior Notes. 26
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Working Capital and Cash Flow
February 1, 2020 February 2, 2019
Working capital ($ millions) (1) $ 31.3 $ 123.1
Current ratio (2) 1.04:1 1.14:1
Debt-to-capital ratio (3) 42.2 % 45.6 %
(1) Working capital has been computed as total current assets less total current
liabilities. The working capital as of
ASC 842, as further discussed in Note 1 to the consolidated financial
statements.
(2) The current ratio has been computed by dividing total current assets by
total current liabilities. The current ratio as of
$127.9 million of operating lease obligations. (3) Debt-to-capital has been computed by dividing total debt by total
capitalization. Total debt is defined as long-term debt and borrowings under
the Credit Agreement. Total capitalization is defined as total debt and
total equity.
Working capital at February 1, 2020 , was $31.3 million , which was $91.8 million
lower than at February 2, 2019 . Our current ratio was 1.04 to 1 at February 1,
2020 , compared to 1.14 to 1 at February 2, 2019 . The decrease in working
capital and the current ratio primarily reflects the impact of the 2019 adoption
of Accounting Standards Codification ("ASC") 842, Leases, on the balance sheet
as further discussed in Note 1 to the consolidated financial statements,
including the addition of current operating lease obligations of $127.9
million . The impact of the current operating lease obligations was partially
offset by an increase in cash and cash equivalents, despite the $60.0 million of
net repayments on borrowings under our revolving credit agreement. Our
debt-to-capital ratio was 42.2% as of February 1, 2020 , compared to 45.6% at
February 2, 2019 , primarily reflecting lower borrowings under our revolving
credit agreement.
Increase (Decrease) in
Cash and Cash
2019 2018 Equivalents
Net cash provided by operating
activities $ 170.8 $ 129.6 $ 41.2
Net cash used for investing activities (49.5 ) (436.4 )
386.9
Net cash (used for) provided by
financing activities (106.3 ) 273.2 (379.5 )
Effect of exchange rate changes on cash
and cash equivalents 0.0 (0.2 ) 0.2
Increase (decrease) in cash and cash
equivalents $ 15.0 $ (33.8 ) $ 48.8
Cash provided by operating activities was
• A decrease in inventories in 2019, compared to an increase in 2018 reflecting
the earlier receipt of spring product from our Brand Portfolio factory
partners in 2018 due to an earlier holiday shutdown period for Chinese New
Year, and
• A decrease in receivables in 2019 driven by lower wholesale sales in the
fourth quarter, compared to an increase in 2018, partially offset by
• A decrease in trade accounts payable in 2019, reflecting the lower level of
inventory, compared to an increase in 2018, and
• A decrease in accrued expenses and other liabilities in 2019, compared to an
increase in 2018.
Cash used for investing activities was $386.9 million lower in 2019 than last
year, primarily reflecting the acquisition costs of Blowfish Malibu in July 2018
and Vionic in October 2018 , as further discussed in Note 2 to the consolidated
financial statements. In addition, we had lower purchases of property and
equipment in 2019. In 2020, we expect to reduce our purchases of property and
equipment and capitalized software to between $25 million and $35 million .
However, we may consider further reductions in capital expenditures for 2020,
depending on the duration and severity of the impact of the COVID-19 pandemic on
our business and financial results.
Cash used for financing activities was $379.5 million higher in 2019 than last
year, primarily due to the net repayments on our revolving credit agreement of
$60.0 million in 2019 compared to net borrowings of $335 million under our
revolving credit agreement in 2018 primarily for the acquisition of Vionic.
We paid dividends of $0.28 per share in each of 2019, 2018 and 2017. The 2019
dividends marked the 97th year of consecutive quarterly dividends. On March 5,
2020 , the Board of Directors declared a quarterly dividend of $0.07 per share,
payable April 2, 2020 , to shareholders of record on March 18, 2020 , marking the
388th consecutive quarterly dividend to be paid by the Company. The declaration
and payment of any future dividend is at the discretion of the Board of
Directors and will depend on our results of operations, financial condition,
business conditions and other factors deemed relevant by our Board of
Directors. However, we presently expect that dividends will continue to be
paid.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are listed below.
Inventories
Inventories are one of our most significant assets, representing approximately
25% of total assets at the end of 2019. We value inventories at the lower of
cost and net realizable value with 87% of consolidated inventories using the
last-in, first-out ("LIFO") method. An actual valuation of inventory under the
LIFO method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations are based
on management's estimates of expected year-end inventory levels and costs and
are subject to the final year-end LIFO inventory valuation.
We apply judgment in valuing our inventories by assessing the net realizable
value of our inventories based on current selling prices. At our Famous
Footwear segment and certain operations within our Brand Portfolio segment, we
recognize markdowns when it becomes evident that inventory items will be sold at
prices less than cost, plus the cost to sell the product. This policy causes
the gross profit rates at our Famous Footwear segment and, to a lesser extent,
our Brand Portfolio segment to be lower than the initial markup during periods
when permanent price reductions are taken to clear product. For the majority
of our Brand Portfolio segment, we provide markdown reserves to reduce the
carrying values of inventories to a level where, upon sale of the product, we
will realize our normal gross profit rate. We believe these policies reflect
the difference in operating models between our Famous Footwear segment and our
Brand Portfolio segment. Famous Footwear periodically runs promotional events
to drive sales to clear seasonal inventories. The Brand Portfolio segment
generally relies on permanent price reductions to clear slower-moving inventory.
We perform physical inventory counts or cycle counts on all merchandise
inventory on hand throughout the year and adjust the recorded balance to reflect
the results. We record estimated shrinkage between physical inventory counts
based on historical results. Inventory shrinkage is included as a component of
cost of goods sold.
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Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. In accordance with ASC 350, Intangibles-Goodwill and Other, a company is permitted, but not required, to qualitatively assess indicators of a reporting unit's fair value when it is unlikely that a reporting unit is impaired. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment screen or discounted cash flow analysis, goodwill impairment is recognized for the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We perform impairment tests as of the beginning of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present. In 2019, we elected to perform the quantitative assessment for all reporting units. The quantitative test is a fair value-based test applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compared the fair value of each reporting unit to the carrying value of that reporting unit. This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of the reporting unit is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expenses, capital expenditures and working capital requirements are based on the past performance of the reporting units as well as our internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. We also considered assumptions that market participants may use. The estimates of the fair values of our reporting units were based on the best information available to us as of the date of the assessment. In our quantitative assessments of goodwill, our projected net sales growth rates, gross profit, selling and administrative expenses and discount rates require significant management judgment and are the assumptions to which the fair value calculation is the most sensitive. Changes in any of these assumptions, including the impact of external factors such as interest rates, or the impact of the coronavirus outbreak and the resulting impact on our retail stores and stock price, could result in the calculated fair value falling below the carrying value in future assessments. We tested our indefinite-lived intangible assets utilizing the relief-from-royalty method to determine the estimated fair value of each indefinite-lived intangible asset. The relief-from-royalty method estimates the theoretical royalty savings from ownership of the intangible asset. Key assumptions used in our assessments include net sales projections, discount rates and royalty rates. Royalty rates are established by management based on comparable trademark licensing agreements in the market. The net sales projections, discount rates and royalty rates utilized in our quantitative assessments of indefinite-lived intangible assets require significant management judgment and are the assumptions to which the fair value calculation is most sensitive. Changes in any of these assumptions could negatively impact the fair value calculation, potentially resulting in an impairment charge in future assessments. The goodwill impairment testing and other indefinite-lived intangible asset impairment reviews were performed as of the first day of our fourth fiscal quarter and there were no impairment charges recorded during 2019. In 2018, we recorded non-cash impairment charges of$38.0 million for the impairment of goodwill of ourAllen Edmonds reporting unit and$60.0 million for the impairment of the Allen Edmonds indefinite-lived tradename. The fair values of our reporting units and indefinite-lived intangible assets were sufficiently in excess of the carrying values as of our most recent impairment testing date, except for the Vionic reporting unit, which was acquired inOctober 2018 . The relationship between the fair value and carrying value of a reporting unit is influenced by many factors, including the length of time that has passed since the reporting unit was initially acquired. Refer to Note 11 to the consolidated financial statements for additional information related to goodwill and intangible assets.
Adoption of New Lease Accounting Standard
In the first quarter of 2019, we changed our method of accounting for leases due
to the adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases ("ASC
842"), and the related amendments. The adoption of ASC 842 resulted in the
recognition of right-of-use operating lease assets and operating lease
liabilities of approximately $729.2 million and $791.7 million , respectively, as
of February 3, 2019 . The cumulative effect of adopting the standard resulted in
an adjustment to retained earnings of $13.4 million upon adoption, which
represented a reduction of the initial right-of-use asset for certain stores
where the initial right-of-use asset was determined to exceed fair value. Fair
value of the right-of-use asset was determined using a discounted cash flow
analysis, considering sublease discounts, market rent per square foot, marketing
time and market discount rates. Lease right-of-use assets and lease liabilities
are recognized based on the present value of the future minimum lease payments
over the lease term. The majority of our leases do not provide an implicit rate
and therefore, we used an incremental borrowing rate based on information
available, including implied traded debt yield and seniority adjustments, at the
adoption date to determine the present value of future payments. The Company is
a party to a significant number of lease contracts and certain aspects of
adopting ASC 842, including the estimates of the incremental borrowing rate and
impairment of the right-of-use asset upon adoption, required significant
management judgment. Refer to Note 13 to the consolidated financial statements
for additional information regarding ASC 842.
Business Combination Accounting
We allocate the purchase price of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date. We also identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. We have historically relied in part upon the use of reports from third-party valuation specialists to assist in the estimation of fair values for intangible assets other than goodwill, inventory and fixed assets. The carrying values of acquired receivables and trade accounts payable have historically approximated their fair values at the business combination date. With respect to other acquired assets and liabilities, we use all available information to make our best estimates of their fair values at the business combination date. Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur that could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
During 2018, we acquired two businesses, Blowfish Malibu and Vionic. Refer to further discussion in Note 2 to the consolidated financial statements.
Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as of
CONTRACTUAL OBLIGATIONS The table below sets forth our significant future obligations by time period. Further information on certain of these commitments is provided in the notes to our consolidated financial statements, which are cross-referenced in this table. Our obligations outstanding as ofFebruary 1, 2020 include the following: Payments Due by Period Less Than 1-3 3-5 More Than ($ millions) Total 1 Year Years Years 5 Years Borrowings under Credit Agreement (1)$ 275.0 $ - $ -$ 275.0 $ - Long-term debt (2) 200.0 - - 200.0 - Interest on long-term debt (2) 50.0 12.5 25.0 12.5 - Operating lease commitments, including imputed interest (3) 892.7 156.9 275.6 189.8 270.4 Minimum license commitments 12.0 9.4 2.6 - - Purchase obligations (4) 529.8 512.5 11.2 1.4 4.7 Mandatory purchase obligation (5) 15.2 - 15.2 - - Other (6) 19.3 2.6 3.8 10.5 2.4 Total (7)$ 1,994.0 $ 693.9 $ 333.4 $ 689.2 $ 277.5
(1) Interest on borrowings is at variable rates based on LIBOR or the prime rate,
as defined in the Credit Agreement, plus a spread. The interest rate and
fees for letters of credit varies based upon the level of excess availability
under the Credit Agreement. There is an unused line fee payable on the
excess availability under the facility and a letter of credit fee payable on
the outstanding exposure under letters of credit. Interest obligations,
which are variable in nature, are not included in the table above. The
borrowings under the Credit Agreement mature in
12 to the consolidated financial statements.
(2) Interest obligations have been presented based on our $200.0 million principal value of Senior Notes at a fixed interest rate of 6.25% as of
fiscal year ended
financial statements. (3) The majority of our retail operating leases contain provisions that allow us
to modify amounts payable under the lease or terminate the lease in certain
circumstances, such as experiencing actual sales volume below a defined
threshold and/or co-tenancy provisions associated with the facility. The
contractual obligations presented in the table above reflect the minimum rent
obligations, irrespective of our ability to reduce or terminate rental
payments in the future. Refer to Note 13 to the consolidated financial
statements.
(4) Purchase obligations include agreements to purchase assets, goods or services
that specify all significant terms, including quantity and price provisions.
As a result of the temporary closure of our retail stores and those of our
wholesale customers, as well as the overall impact of COVID-19 on the global
economy, we have sought to cancel or reduce certain purchase obligations. (5) Refer to Note 2 and Note 15 to the consolidated financial statements for
further discussion regarding the mandatory purchase obligation associated
with the Blowfish Malibu acquisition. (6) Includes obligations for our supplemental executive retirement plan and other
postretirement benefits, as discussed in Note 6 to the consolidated financial
statements, one-time transition tax for the mandatory deemed repatriation of
cumulative foreign earnings related to income tax reform, as discussed in
Note 7 to the consolidated financial statements, and other contractual
obligations.
(7) Excludes liabilities of
non-qualified deferred compensation plan, deferred compensation plan for
non-employee directors and restricted stock units for non-employee directors,
respectively, due to the uncertain nature in timing of payments. Refer to
Note 6, Note 15 and Note 17 to the consolidated financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected as they are subject to various risks and uncertainties. These risks and uncertainties include, without limitation, the risks detailed in Item 1A, Risk Factors, and those described in other documents and reports filed from time to time with theSEC , press releases and other communications. We do not undertake any obligation or plan to update these forward-looking statements, even though our situation may change. 30
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