EDGAR 10-K Filing

Company CIK: 14707
Filing Year: 2022
Filename: 14707_10-K_2022_0000014707-22-000019.json

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ITEM 1. BUSINESS
Item 1
Business

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ITEM 1A. RISK FACTORS
Item 1A
Risk Factors

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B
Unresolved Staff Comments

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ITEM 2. PROPERTIES
ITEM 2 PROPERTIES
We own our principal executive, sales and administrative offices located in Clayton (“St. Louis”), Missouri.
Our retail operations, included in both our Famous Footwear and Brand Portfolio segments, are conducted throughout the United States, Canada, China and Guam and involve the operation of 980 retail stores, including 22 in Canada. All store locations, excluding our Perth, Ontario outlet center, are leased, with approximately 38% of them having renewal options. The footwear sold through our domestic wholesale business is primarily processed through our leased distribution centers in Chino, California and Lebanon, Tennessee.
The following table summarizes the location and general use of the Company’s primary properties:
Location
Owned/Leased
Segment
Use
Clayton, Missouri
Owned
Famous Footwear and Brand Portfolio
Principal corporate, executive, sales and administrative offices
United States, Canada, China and Guam
Leased
Famous Footwear and Brand Portfolio
Retail operations
Chino, California (1)
Leased
Brand Portfolio
Distribution centers
Lebanon, Tennessee (2)
Leased
Famous Footwear and Brand Portfolio
Distribution center
Lebec, California (3)
Leased
Famous Footwear
Distribution center
New York, New York
Leased
Brand Portfolio
Office space and showrooms
Perth, Ontario (4)
Owned
Famous Footwear and Brand Portfolio
Distribution center and outlet center
San Rafael and Culver City, California
Leased
Brand Portfolio
Office space
Dongguan, China
Leased
Brand Portfolio
Office space and sample-making facility
Santiago, Dominican Republic
Leased
Brand Portfolio
Manufacturing facility
Port Washington, Wisconsin
Owned
Brand Portfolio
Manufacturing and recrafting facility and office space
(1) This campus includes two company-operated distribution centers with approximately 725,000 and 606,000 square feet at each respective location.
(2) This distribution center is approximately 540,000 square feet.
(3) This distribution center is approximately 350,000 square feet.
(4) This distribution center is approximately 150,000 square feet.
We also own a building in Denver, Colorado, which is leased to a third party, and undeveloped land in Colorado and New York. See Item 3, Legal Proceedings, for further discussion of certain of these properties.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3 LEGAL PROCEEDINGS
We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position.
Our prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future. We are involved in environmental remediation and ongoing compliance activities at several sites and have been notified that we are or may be a potentially responsible party at several other sites. We are remediating, under the oversight of Colorado authorities, contamination at and beneath our owned facility in Colorado (also known as the “Redfield” site) and groundwater and indoor air in
residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and surrounding facilities.
Refer to Note 16 to the consolidated financial statements for additional information related to the Redfield matter and other legal proceedings.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “CAL.” As of January 29, 2022, we had 3,480 shareholders of record.
Issuer Purchases of Equity Securities
The following table provides information relating to our repurchases of common stock during the fourth quarter of 2021:
Total Number of
Maximum Number
Shares Purchased
of Shares that May
Total Number
Average Price
as Part of
Yet Be
Fiscal
of Shares
Paid per
Publicly Announced
Purchased Under
Period
Purchased (1)
Share (1)
Program (2)
the Program (2)
October 31, 2021 - November 27, 2021
216,724
$
27.61
215,043
2,436,446
November 28, 2021 - January 1, 2022
382,797
25.16
378,500
2,057,946
January 2, 2022 - January 29, 2022
67,722
22.05
67,722
1,990,224
Total
667,243
$
25.64
661,265
1,990,224
(1) Includes shares purchased as part of our publicly announced stock repurchase program and shares that are tendered by employees related to certain share-based awards. The employee shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards.
(2) On December 14, 2018, the Board of Directors approved a stock repurchase program ("2018 Program") authorizing the purchase of up to 2,500,000 shares of our outstanding common stock. In addition, on September 2, 2019, the Board of Directors approved a stock repurchase program ("2019 Program") authorizing the purchase of up to 5,000,000 shares of our outstanding common stock. We can use the repurchase programs to repurchase shares on the open market or in private transactions. Under these programs, the Company repurchased 661,265 shares during 2021 and 2,902,122 shares during 2020. As of January 29, 2022, there were 1,990,224 shares authorized to be repurchased under the repurchase programs. Subsequent to year-end, the Board of Directors authorized an additional 7,000,000 shares under our stock repurchase programs. With this increase, we have 8,990,224 shares authorized to be repurchased under the repurchase programs. Our repurchases of common stock are limited under our debt agreements.
Stock Performance Graph
The following performance graph compares the cumulative total return on our common stock with the cumulative total return of the following indices: (i) the S&P© SmallCap 600 Stock Index and (ii) a peer group of companies believed to be engaged in similar businesses. Our peer group consists of Designer Brands, Inc., Genesco, Inc., Shoe Carnival, Inc., Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc.
Our fiscal year ends on the Saturday nearest to each January 31. Accordingly, share prices are as of the last business day in each fiscal year. The graph assumes that the value of the investment in our common stock and each index was $100 at January 28, 2017. The graph also assumes that all dividends were reinvested and that investments were held through January 29, 2022. These indices are included for comparative purposes only and do not necessarily reflect management’s
opinion that such indices are an appropriate measure of the relative performance of the stock involved and are not intended to forecast or be indicative of possible future performance of the common stock.
*$100 invested on January 28, 2017 in stock or index, including reinvestment of dividends. Index calculated on daily basis.
1/28/2017
2/3/2018
2/2/2019
2/1/2020
1/30/2021
1/29/2022
Caleres, Inc.
$
100.00
$
97.71
$
101.37
$
60.84
$
54.70
$
84.63
Peer Group
100.00
129.29
124.97
133.21
123.34
144.93
S&P© SmallCap 600 Stock Index
100.00
114.08
114.48
122.07
150.36
162.87

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business Overview
We are a global footwear company that operates retail shoe stores and e-commerce websites, and designs, develops, sources, manufactures and distributes footwear for people of all ages. 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, investments in technology, and sustainability, while remaining focused on meeting changing consumer demand.
Famous Footwear
Our Famous Footwear segment includes our Famous Footwear stores, famousfootwear.com and famousfootwear.ca in Canada. Famous Footwear is one of America’s leading family-branded footwear retailers with 894 stores at the end of 2021 and net sales of $1.7 billion in 2021. 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, casual and athletic footwear at a great price. During 2021, we continued to execute on our three-pronged strategy, which concentrates on merchandising, marketing and consumer experience. We continue to focus on increasing the opportunity between Famous Footwear and the brands within our Brand Portfolio segment, such as LifeStride, Blowfish Malibu, Dr. Scholl’s and Vionic Beach. We also have focused on offering the consumer a balanced assortment of athletic, sport and seasonal styles from well-known brands. As we work to evolve our product offerings, we are testing and adding new and emerging brands across various categories to meet the shifting preferences and behaviors of the consumer, which we believe may attract new Famous Footwear consumers while providing the current consumer with additional options. We are also optimizing our media investment to acquire new consumers, reactivate previous consumers and retain existing Famous Footwear consumers.
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 Sam Edelman, Vionic, Naturalizer, Blowfish Malibu, Dr. Scholl’s Shoes, Allen Edmonds, LifeStride, Franco Sarto, Rykä, Vince, Bzees, Zodiac and Veronica Beard 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 70 retail stores in the United States for our Allen Edmonds, Sam Edelman and Naturalizer brands. This segment also includes our e-commerce businesses that sell our branded footwear. We also operate a joint venture, which expands our international presence by distributing our Sam Edelman and Naturalizer brands through 16 retail stores in China.
Supply Chain Disruptions and Inflationary Pressures
During 2021, our business operations continued to be impacted by the COVID-19 pandemic, including the delayed receipt of inventory attributable to temporary factory shutdowns, border closures, port congestion and shipping vessel and container availability. Our inventory levels at January 29, 2022 were $108.9 million higher than the prior year-end, inclusive of an $83.5 million increase in-transit inventory, reflecting the ongoing supply chain disruptions. While we have experienced an improvement in inventory receipts at the beginning of 2022, we expect supply chain disruptions to continue through the first half of 2022. Due to lower shipping vessel and container availability, we experienced higher transportation costs throughout 2021, with approximately $23 million of incremental transportation costs incurred during the second half of 2021. We expect to continue to experience inflationary pressures for freight and other product costs during 2022. If we are unable to recover the impact of these costs through price increases to our customers, or if consumer spending decreases as a result of inflation, our business, results of operations, financial condition and cash flows may be adversely affected. In addition, ongoing inflation in product costs may result in lower gross margins due to a higher inventory reserve requirement for the inventory valued using the last-in, first-out (“LIFO”) costing methodology, which is used to value approximately 89% of our consolidated inventories.
Financial Highlights
The following is a summary of the financial highlights for 2021:
● Consolidated net sales increased $660.5 million, or 31.2%, to $2,777.6 million in 2021, compared to $2,117.1 million last year, driven primarily by record-setting sales at our Famous Footwear segment which benefited from strong consumer demand as COVID-19 vaccines became widely available and government restrictions eased. Our Brand Portfolio segment’s net sales also rebounded compared to last year, despite being adversely impacted by the delayed receipt of inventory due to supply chain disruptions.
● Consolidated gross profit increased $440.3 million, or 55.9%, to $1,227.3 million in 2021, compared to $787.0 million last year. Our gross profit margin increased to 44.2% in 2021, compared to 37.2% in 2020, reflecting
a decline in promotional activity driven by strong consumer demand, partially offset by higher inbound freight costs.
● Consolidated operating earnings increased to $205.8 million in 2021, compared to an operating loss of $485.7 million last year.
● Consolidated net earnings attributable to Caleres, Inc. were $137.0 million, or $3.56 per diluted share, in 2021, compared to a net loss of $439.1 million, or $11.80 per diluted share, last year.
The following items should be considered in evaluating the comparability of our 2021 and 2020 results:
● COVID-19 pandemic impact - During 2020, our business results were negatively impacted by the COVID-19 pandemic. Our retail stores were temporarily closed for a portion of the year and many of our stores experienced reduced operating hours and additional closure days on a temporary basis as a result of local government mandates or illness. We also experienced declines in retail store traffic with stay-at-home orders and other government mandates, which resulted in lower sales in 2020, despite the significant growth in our e-commerce business. We incurred costs associated with the COVID-19 pandemic and related impacts on the Company’s business totaling $114.3 million ($115.5 million on an after-tax basis, or $3.10 per diluted share) in 2020. These costs included non-cash impairment charges associated with property and equipment and lease right-of-use assets, inventory markdowns, employee severance and other expenses. Of the $114.3 million in charges, $80.9 million is presented in restructuring and other special charges, net and $33.4 million, which represents inventory markdowns, is reflected as cost of goods sold. In 2021, as the impacts of the pandemic began to recede, we experienced strong consumer demand and robust growth in retail store traffic, contributing to our record-setting financial results.
● Blowfish Malibu mandatory purchase obligation - In July 2018, we acquired a controlling interest in Blowfish Malibu. As further discussed in Note 4 and 13 to the consolidated financial statements, the remaining interest in Blowfish Malibu was subject to a mandatory purchase obligation after a three-year period, based on an earnings multiple formula. During 2021, we recorded fair value adjustments of $15.4 million ($11.5 million on an after-tax basis, or $0.30 per diluted share), compared to $23.9 million ($17.8 million on an after-tax basis, or $0.48 per diluted share) in 2020. The fair value adjustments are presented as interest expense, net in the consolidated statements of earnings (loss). The mandatory purchase obligation of $54.6 million was settled during the fourth quarter of 2021.
● Brand Portfolio-business exits - In 2021, the Company incurred costs of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) related to the strategic realignment of the Naturalizer retail store operations, which had been announced in late 2020. These charges primarily represent lease termination and other store closure costs, including employee severance, for the Naturalizer stores closed in 2021 and are reflected as restructuring and other special charges. In 2020, the Company incurred costs totaling $16.4 million ($14.9 million on an after-tax basis, or $0.40 per diluted share), including $14.8 million related to the decision to close all but a limited number of our Naturalizer retail stores and $1.6 million associated with the decision to exit the Fergie brand. Refer to Note 4 to the consolidated financial statements for further discussion.
● Loss on early extinguishment of debt - During 2021, we incurred a loss of $1.0 million ($0.8 million on an after-tax basis, or $0.02 per diluted share) related to the redemption of our $200.0 million aggregate principal senior notes, prior to the maturity date, and the amendment to our revolving credit facility prior to its maturity. There were no corresponding charges in 2020. Refer to Note 11 to the consolidated financial statements for further discussion.
● Impairment of goodwill and intangible assets - During 2020, we recorded non-cash impairment charges totaling $286.5 million ($236.4 million on an after-tax basis, or $6.35 per diluted share). We recorded $240.3 million of impairment associated with goodwill as a result of the unfavorable business climate and our lower stock price and market capitalization. In addition, we recorded $46.2 million of impairment associated with
intangible assets, including the Allen Edmonds trade name and customer relationship intangible asset and Via Spiga trade name. There were no corresponding impairment charges in 2021. Refer to Note 1 and Note 10 to the consolidated financial statements for additional information related to these charges.
● Vionic integration-related costs - On October 18, 2018, we acquired the Vionic business for $360.7 million. We incurred integration-related charges totaling $3.4 million ($2.6 million on an after-tax basis, $0.07 per diluted share) during 2020, which are presented as restructuring and other special charges in the consolidated statements of earnings (loss). These costs primarily represents non-cash charges for impairment of assets, warehouse and logistics integration expenses and severance costs. There were no corresponding charges in 2021. Refer to Note 4 to the consolidated financial statements for further discussion.
Financial Outlook
We delivered record-setting financial results in 2021, which will provide us with significant momentum going into 2022. Our strong financial results demonstrate the strength of our portfolio of brands, the success of our advanced operating capabilities, the tremendous efforts and talents of our associates and the significant value-enhancing transformation of the organization. In 2022, we will be focused on unlocking growth opportunities across the Company, while taking additional steps to mitigate supply chain and inflationary pressures. We believe we are uniquely positioned to meet consumer needs and capture growth across trending footwear categories such as event, occasion and career, while continuing to capitalize on demand for the athletic and sport-inspired styles. We are confident that the investments we have made, the strategic priorities we have set in motion, and our strengthened financial position and potential for ongoing strong cash generation will enable us to continue to return capital to shareholders, better align supply with consumer demand and invest in our long-term strategic initiatives.
Metrics Used in the Evaluation of Our Business
The following are a couple of key metrics by which we evaluate our business and make strategic decisions:
Same-store sales
The same-store sales metric is a metric commonly used in the retail industry to evaluate the revenue generated for stores that have been open for more than a year, though many retailers may calculate the metric differently. Management uses the same-store sales metric as a measure of an individual store’s success to determine whether its sales performance is consistent with expectations. Our same-store sales metric is a daily-weighted calculation for the period, which includes sales for stores that have been open at least 13 months. In addition, in order to be included in the same-store sales metric, a store must be open in the current period as well as the corresponding day(s) of the comparable retail calendar in the prior year. Accordingly, closed stores (including temporary store closures related to the pandemic) are excluded from the same-store sales metric for each day of the closure. Relocated stores are treated as new stores and therefore excluded from the calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. We believe the same-store sales metric is useful to shareholders and investors in assessing the performance of our existing retail store locations with comparable prior year sales, separate from the impact of store openings or closures.
Sales per square foot
The sales per square foot metric is commonly used in the retail industry to measure the efficiency of a store’s 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 consistent with expectations. The sales per square foot metric is calculated by dividing total retail store sales, excluding e-commerce sales, by the total square footage of the retail store base at the end of each month of the respective period.
Comparison of Financial Results
The following sections discuss the consolidated and segment results of our operations for the year ended January 29, 2022 compared to the year ended January 30, 2021. For a discussion of the year ended January 30, 2021 compared to the year ended February 1, 2020, 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 ended January 30, 2021.
CONSOLIDATED RESULTS
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net sales
$
2,777.6
100.0
%
$
2,117.1
100.0
%
$
2,921.6
100.0
%
Cost of goods sold
1,550.3
55.8
%
1,330.1
62.8
%
1,737.2
59.5
%
Gross profit
1,227.3
44.2
%
787.0
37.2
%
1,184.4
40.5
%
Selling and administrative expenses
1,008.0
36.3
%
889.5
42.0
%
1,065.8
36.5
%
Impairment of goodwill and intangible assets
-
-
%
286.5
13.5
%
-
-
%
Restructuring and other special charges, net
13.5
0.5
%
96.7
4.6
%
14.8
0.4
%
Operating earnings (loss)
205.8
7.4
%
(485.7)
(22.9)
%
103.8
3.6
%
Interest expense, net
(30.9)
(1.1)
%
(48.2)
(2.3)
%
(33.1)
(1.2)
%
Loss on early extinguishment of debt
(1.0)
(0.1)
%
-
-
%
-
-
%
Other income, net
15.3
0.6
%
16.8
0.8
%
7.9
0.3
%
Earnings (loss) before income taxes
189.2
6.8
%
(517.1)
(24.4)
%
78.6
2.7
%
Income tax (provision) benefit
(51.1)
(1.8)
%
78.1
3.7
%
(16.5)
(0.6)
%
Net earnings (loss)
138.1
5.0
%
(439.0)
(20.7)
%
62.1
2.1
%
Net earnings (loss) attributable to noncontrolling interests
1.1
0.1
%
0.1
0.0
%
(0.7)
(0.0)
%
Net earnings (loss) attributable to Caleres, Inc.
$
137.0
4.9
%
$
(439.1)
(20.7)
%
$
62.8
2.1
%
Net Sales
Net sales increased $660.5 million, or 31.2%, to $2,777.6 million in 2021, compared to $2,117.1 million last year. In 2021, we experienced an increase in retail store traffic once the impacts of the pandemic began to recede and government restrictions eased. In addition, consumer demand for our on-trend assortment supported a reduction in promotional activity, resulting in significant full-price selling. These factors resulted in record-setting net sales for our Famous Footwear segment, which increased $484.7 million, or 38.4%, compared to last year. Net sales for our Brand Portfolio segment increased $178.5 million, or 19.8%, compared to last year. While Brand Portfolio net sales improved over last year, they remain below sales in 2019, due in part to the brand exits announced in late 2019 and early 2020 and the related closure of all but two Naturalizer retail stores in North America. On a consolidated basis, our direct-to-consumer sales represented approximately 75% of total net sales for 2021, compared to 73% last year. Our casual, athletic and sport footwear categories continued to perform well and our sandals category experienced strong growth. In addition, demand for the dress category continued to improve as more people are returning to the workplace and attending social gatherings.
Gross Profit
Gross profit increased $440.3 million, or 55.9%, to $1,227.3 million in 2021, compared to $787.0 million in 2020 driven by higher net sales, more full-price selling and a significant decrease in promotional activity at Famous Footwear due to our strong product assortment and inventory management, partially offset by higher inbound freight costs. In addition, during 2020 our gross profit was impacted by incremental inventory markdowns reflecting the difficult retail environment and our business exits described earlier. As a percentage of net sales, our gross profit rate increased to 44.2% in 2021, compared to 37.2% in 2020. The higher gross profit rate reflects more full-price selling and a decline in promotional activity driven by strong consumer demand, partially offset by higher inbound freight costs.
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 $118.5 million, or 13.3%, to $1,008.0 million in 2021, compared to $889.5 million last year. The increase reflects higher salary and benefits expenses, higher marketing expenses and an increase in stock and deferred compensation expense, partially offset by lower rent and facilities costs. During 2020, we managed controllable expenses in response to the difficult business environment and lower sales volume resulting from the pandemic. The strategic actions taken in 2020 resulted in lower salaries and benefits expense; lower variable expenses associated with the temporary store closures, including the impact of certain rent concessions received from landlords; and lower marketing, travel and logistics expenses. As a percentage of net sales, selling and administrative expenses decreased to 36.3% in 2021 from 42.0% last year, reflecting better leveraging of expenses over a higher sales base.
Impairment of Goodwill and Intangible Assets
During 2020, we recorded non-cash impairment charges totaling $286.5 million ($236.4 million on an after-tax basis, or $6.35 per diluted share). We recorded $240.3 million of impairment associated with goodwill as a result of the unfavorable business climate and our lower market capitalization. In addition, we recorded $46.2 million of impairment associated with intangible assets, including $36.0 million associated with the Allen Edmonds trade name and customer relationship intangible asset and $10.2 million associated with the Via Spiga trade name. There were no corresponding impairment charges in 2021. Refer to Note 10 to the consolidated financial statements for additional information related to these charges.
Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) during 2021, compared to $96.7 million in 2020 as follows:
● Brand Portfolio business exit costs of $13.5 million and $12.4 million in 2021 and 2020, respectively, reflecting expenses associated with the strategic realignment of the Naturalizer retail store operations;
● Costs associated with the economic impact of the COVID-19 pandemic of $80.9 million in 2020, primarily consisting of impairment charges associated with lease right-of-use assets and retail store furniture and fixtures, liabilities associated with wholesale factory order cancellations and severance; and
● Integration-related costs for Vionic of $3.4 million in 2020.
The nature of the above charges are more fully described in the Financial Highlights section above and Note 4 to the consolidated financial statements.
Operating Earnings (Loss)
Operating earnings increased $691.5 million to $205.8 million in 2021, compared to an operating loss of $485.7 million last year, reflecting the factors described above. As a percentage of net sales, operating earnings were 7.4% in 2021, compared to an operating loss of 22.9% in 2020.
Interest Expense, Net
Interest expense, net decreased $17.3 million, or 35.9%, to $30.9 million in 2021, compared to $48.2 million last year, which is attributable to various factors. The fair value adjustments on the mandatory purchase obligation associated with the Blowfish Malibu acquisition totaled $15.4 million in 2021, compared to $23.9 million in 2020. The mandatory purchase obligation was settled for $54.6 million on November 4, 2021. In addition, we continued to use our strong cash generation to reduce the borrowings under our revolving credit agreement from $440.0 million at March 2020 to $290.0 million at January 29, 2022. As a result, the average borrowings under our revolving credit agreement were lower in 2021, decreasing our interest expense. In addition, we redeemed our $200 million aggregate principal of senior notes during 2021, prior to maturity, shifting this higher interest rate debt to borrowings under our revolving credit agreement. We expect our net interest expense to be lower going forward as a result of the redemption of the senior notes. Refer to Note 11 to the consolidated financial statements for additional information related to our borrowings and Note 4 and Note 13 for further discussion regarding the mandatory purchase obligation.
Loss on Early Extinguishment of Debt
The loss on early extinguishment of debt was $1.0 million in 2021, reflecting the redemption of our $200.0 million aggregate principal senior notes prior to maturity, as well as the amendment of our revolving credit facility. Refer to Note 11 to the consolidated financial statements for further discussion.
Other Income, Net
Other income, net decreased $1.5 million, or 8.7%, to $15.3 million in 2021, compared to $16.8 million in 2020, reflecting a reduction in certain components of net periodic benefit income associated with our pension plans. Refer to Note 5 to the consolidated financial statements for additional information related to our retirement plans.
Income Tax (Provision) Benefit
Our consolidated effective tax rate was 27.0% in 2021, compared to 15.1% in 2020. Our higher tax rate for 2021 primarily reflects strong domestic earnings and incremental valuation allowances recorded for our deferred tax assets for certain
jurisdictions. The rate also reflects incremental valuation allowances related to operating losses at our Canadian business division, which were driven by exit-related costs associated with the Naturalizer retail stores during the first quarter of 2021. In 2020, our effective tax rate was impacted by several discrete tax items, including the non-deductibility of a portion of our goodwill impairment charges and the incremental tax provision related to the vesting of stock awards. Our tax benefit for 2020 also includes the favorable impact of approximately $8.2 million related to the CARES Act, which permits us to carry back a significant portion of our 2020 losses to years with a higher federal tax rate. In addition, due to the significance of our 2020 loss before income taxes, the Company entered into a three-year cumulative loss position for federal, state and certain international jurisdictions. We increased our valuation allowances on deferred tax assets to $50.0 million during 2020, reflecting the uncertainty regarding the utilization of our deferred tax assets in these jurisdictions. The requirement for valuation allowances on our deferred tax assets may result in ongoing volatility in our effective tax rate until the Company is no longer in a three-year cumulative loss position. Refer to Note 6 to the consolidated financial statements for additional information regarding income taxes.
Net Earnings (Loss) Attributable to Caleres, Inc.
Consolidated net income attributable to Caleres, Inc. was $137.0 million in 2021, compared to a net loss of $439.1 million last year, reflecting the factors described above.
Geographic Results
We have both domestic and international operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded retail footwear stores, the wholesale distribution of footwear to numerous retail consumers and the operation of our e-commerce websites. International operations primarily consist of wholesale operations in Eastern Asia, Canada and Europe, retail operations in Canada and China and the operation of our international e-commerce websites. In addition, we license certain of our trade names to third parties who distribute and/or operate retail locations internationally. The operations in Eastern Asia include first-cost transactions, where footwear is sold at international ports to customers who then import the footwear into the United States and other countries. The breakdown of domestic and international net sales and earnings (loss) before income taxes is as follows:
Earnings Before
Loss Before
Earnings Before
($ millions)
Net Sales
Income Taxes
Net Sales
Income Taxes
Net Sales
Income Taxes
Domestic
$
2,600.8
$
152.5
$
1,981.1
$
(441.5)
$
2,727.1
$
37.3
International
176.8
36.7
136.0
(75.6)
194.5
41.3
$
2,777.6
$
189.2
$
2,117.1
$
(517.1)
$
2,921.6
$
78.6
As a percentage of sales, the pre-tax profitability on international 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 2020, both our domestic and international earnings were impacted by the goodwill and intangible asset impairment charges described earlier.
FAMOUS FOOTWEAR
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net sales
$
1,748.3
100.0
%
$
1,263.6
100.0
%
$
1,588.1
100.0
%
Cost of goods sold
908.9
52.0
%
773.7
61.2
%
912.7
57.5
%
Gross profit
839.4
48.0
%
489.9
38.8
%
675.4
42.5
%
Selling and administrative expenses
563.0
32.2
%
497.1
39.4
%
595.0
37.5
%
Restructuring and other special charges, net
-
-
%
16.6
1.3
%
3.5
0.2
%
Operating earnings (loss)
$
276.4
15.8
%
$
(23.8)
(1.9)
%
$
76.9
4.8
%
Key Metrics
Same-store sales % change
12.5
%
1.6
%
2.0
%
Same-store sales $ change
$
153.6
$
20.0
$
31.1
Sales change from new and closed stores, net (1)
$
329.3
$
(344.4)
$
(49.3)
Impact of changes in Canadian exchange rate on sales
$
1.8
$
(0.1)
$
(0.5)
Sales per square foot, excluding e-commerce
$
$
$
Square footage (thousand sq. ft.)
5,912
6,074
6,281
Stores opened
Stores closed
Ending stores
(1) This metric includes the impact of temporary store closures. Fiscal 2020 was impacted significantly by store closure days during the pandemic, while 2021 reflects a significantly lower number of store closure days.
Net Sales
Net sales increased $484.7 million, or 38.4%, to $1,748.3 million in 2021, compared to $1,263.6 million last year. Our record-setting results in 2021 were attributable to a number of factors. As the effects of the pandemic began to recede, we experienced a significant increase in retail store traffic in 2021. The consumer demand for our on-trend assortment supported a reduction in promotional activity, resulting in more full-price selling. Our e-commerce penetration in 2021 was approximately 14% of net sales, compared to approximately 22% last year when our retail stores were temporarily closed beginning in mid-March at the onset of the pandemic, with a phased reopening beginning in May. While supply chain disruptions have resulted in shipping delays, our well-positioned inventory drove our strong performance. Seasonal product, particularly sandals, performed well, and we experienced robust growth in our casual and athletic categories. Our children’s business also continued to grow significantly, outpacing total company performance. During 2021, we had net closures of 22 stores as we continue to focus on optimizing our store base and eliminating underperforming locations.
Sales to members of our customer loyalty program, Famously You Rewards ("Rewards"), continue to account for a majority of the segment’s sales, with approximately 78% of net sales to loyalty program members in 2021, compared to 79% in 2020.
Gross Profit
Gross profit increased $349.5 million, or 71.3%, to $839.4 million in 2021, compared to $489.9 million last year, driven by the net sales increase and a higher gross profit rate. As a percentage of net sales, our gross profit rate increased to 48.0% in 2021, compared to 38.8% in 2020, reflecting a significant reduction in promotional activity driven by growth in consumer demand as well as our strong product assortment and inventory management. In addition, our gross profit margin in 2020 was adversely impacted by $6.0 million in incremental inventory markdowns, reflecting the difficult retail environment driven by the pandemic.
Selling and Administrative Expenses
Selling and administrative expenses increased $65.9 million, or 13.3%, to $563.0 million during 2021 compared to $497.1 million last year. The increase reflects higher variable expenses, including payroll associated with our retail store associates and logistics, associated with the increase in sales volume, as well as higher marketing expenses. Salary expenses were lower in 2020 driven by the temporary closure of all Famous Footwear stores for a portion of the first half
of 2020 due to the pandemic. As a percentage of net sales, selling and administrative expenses decreased to 32.2% in 2021 from 39.4% last year, reflecting better leveraging of expenses over a higher net sales base.
Restructuring and Other Special Charges, Net
Restructuring and other special charges were $16.6 million during 2020, consisting primarily of impairment charges on furniture and fixtures in our retail stores and lease right-of-use assets. Refer to Note 4 to the consolidated financial statements for additional information related to these charges. There were no corresponding charges during 2021.
Operating Earnings (Loss)
Operating earnings increased $300.2 million to $276.4 million for 2021, compared to an operating loss of $23.8 million last year, reflecting higher net sales, an increase in gross profit rate and the other factors described above. As a percentage of net sales, operating earnings were 15.8% for 2021, compared to an operating loss of 1.9% last year.
BRAND PORTFOLIO
% of
% of
% of
($ millions, except sales per square foot)
Net Sales
Net Sales
Net Sales
Net sales
$
1,081.0
100.0
%
$
902.5
100.0
%
$
1,406.5
100.0
%
Cost of goods sold
694.2
64.2
%
607.7
67.3
%
899.9
64.0
%
Gross profit
$
386.8
35.8
%
$
294.8
32.7
%
$
506.6
36.0
%
Selling and administrative expenses
337.4
31.2
%
337.4
37.4
%
442.7
31.5
%
Impairment of goodwill and intangible assets
-
-
%
286.5
31.8
%
-
-
%
Restructuring and other special charges, net
13.5
1.3
%
79.3
8.8
%
5.7
0.4
%
Operating earnings (loss)
$
35.9
3.3
%
$
(408.4)
(45.3)
%
$
58.2
4.1
%
Key Metrics
Direct-to-consumer (% of net sales) (1)
%
%
%
Change in wholesale net sales ($)
$
114.6
$
(396.4)
$
107.6
Unfilled order position at end of period
$
452.4
$
218.2
$
295.4
Same-store sales % change
30.6
%
(31.0)
%
(5.8)
%
Same-store sales $ change
$
32.9
$
(59.7)
$
(15.5)
Sales change from new and closed stores, net
$
30.4
$
(47.9)
$
1.5
Impact of changes in Canadian exchange rate on retail sales
$
0.6
$
0.0
$
(0.7)
Sales per square foot, excluding e-commerce (trailing twelve months)
$
$
$
Square footage (thousands sq. ft.)
Stores opened
Stores closed
Ending stores
(1) Direct-to-consumer includes sales of our retail stores and e-commerce sites, and sales through our customers’ websites that we fulfill on a drop-ship basis.
Net Sales
Net sales increased $178.5 million, or 19.8%, to $1,081.0 million in 2021, compared to $902.5 million last year, reflecting strong sales growth from our Sam Edelman, Vionic, Allen Edmonds and Blowfish Malibu brands. Both Sam Edelman and Allen Edmonds have experienced renewed interest and growth in the dress shoe category, as more people returned to the workplace and began to attend special occasion events. Our net sales in 2021 were adversely impacted by the delayed receipt of inventory due to supply chain disruptions, including factory shutdowns, border closures, port congestion and shipping vessel and container availability. In addition, sales were adversely impacted during 2020, as many of our wholesale customers canceled orders and those customers and the Company temporarily closed retail stores for several weeks during 2020.
In the first quarter of 2021, we permanently closed the remaining 73 Naturalizer stores in North America that were scheduled for closure as part of our strategic realignment of the Naturalizer retail store operations. While net sales
improved over last year, they remain below pre-pandemic levels, due in part to these retail store closures. We remain focused on growing the Naturalizer brand’s e-commerce business through naturalizer.com, our retail partners and their websites, and the two flagship stores in the United States. Including the Naturalizer closures, we closed 93 stores and opened nine stores during 2021, resulting in a total of 86 stores at the end of 2021. Sales per square foot, excluding e-commerce sales, increased to $906, compared to $179 last year. The sales per square foot metric in 2020 was adversely impacted by the temporary retail store closures and therefore, it is not comparable to 2021. In addition, with the closure of nearly all of our Naturalizer retail stores in 2021, the majority of our Brand Portfolio segment stores are for our Allen Edmonds brand, which have higher retail price points than the Naturalizer brand.
The unfilled order position for our wholesale business increased $234.2 million to $452.4 million at the end of 2021, compared to $218.2 million at the end of last year. The increase in our backlog order levels reflects the delayed receipt of inventory due to global supply chain disruptions and higher demand. We are actively working to diversify and leverage our sourcing model to help offset the impact of these supply chain challenges, but expect the disruptions to continue into 2022.
Gross Profit
Gross profit increased $92.0 million, or 31.2%, to $386.8 million in 2021, compared to $294.8 million last year, due to higher net sales and an improved gross profit rate. Our gross profit in 2020 was negatively impacted by higher incremental cost of goods sold primarily due to $27.5 million in inventory markdowns reflecting the difficult retail environment driven by the pandemic, as well as $4.0 million in inventory markdowns related to the decision to close all but a limited number of our Naturalizer retail stores and exit our Fergie brand. As a percentage of sales, our gross profit rate increased to 35.8% in 2021, compared to 32.7% last year. In connection with the supply chain disruptions described earlier, our freight costs have risen significantly. We anticipate inbound freight costs to remain high in 2022, which may continue to impact our gross profit if we are unable to mitigate or fully recover these additional costs through price increases.
Selling and Administrative Expenses
Selling and administrative expenses were $337.4 million in 2021, consistent with last year. Higher marketing and salaries expenses were offset by lower rent and facilities expenses, primarily due to the lower store count. As a percentage of net sales, selling and administrative expenses decreased to 31.2% in 2021 from 37.4% last year, reflecting better leveraging of expenses over a higher net sales base.
Impairment of Goodwill and Intangible Assets
We incurred impairment charges of $286.5 million during 2020, including $240.3 million associated with goodwill and $46.2 million associated with intangible assets, including $32.0 for the Allen Edmonds trade name, $10.2 million for the Via Spiga trade name and $4.0 million associated with other Allen Edmonds intangible assets. The goodwill impairment charges were a result of the unfavorable business climate and our lower market capitalization, due in part to the economic impacts of the pandemic. There were no corresponding impairment charges in 2021. Refer to Note 10 to the consolidated financial statements for additional information related to the impairments.
Restructuring and Other Special Charges, Net
Restructuring and other special charges of $13.5 million were recorded during 2021 for expenses associated with the strategic realignment of the Naturalizer retail store operations. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed during the first quarter of 2021. During 2020, $79.3 million of restructuring and other special charges were recorded, primarily comprised of $63.6 million for impairment charges on store furniture and fixtures and lease right-of-use assets, liabilities due to our factories for order cancellations and severance expense. In addition, our 2020 expenses included $12.4 million associated with the closure of our Naturalizer retail stores and $3.3 million in integration-related costs for Vionic. Refer to Note 4 to the consolidated financial statements for additional information related to these charges.
Operating Earnings (Loss)
Operating earnings increased $444.3 million to $35.9 million in 2021, compared to an operating loss of $408.4 million last year, as a result of the factors described above. As a percentage of net sales, operating earnings were 3.3% in 2021, compared to an operating loss of 45.3% last year.
ELIMINATIONS AND OTHER
% of
% of
% of
($ millions)
Net Sales
Net Sales
Net Sales
Net sales
$
(51.7)
100.0
%
$
(49.0)
100.0
%
$
(73.0)
100.0
%
Cost of goods sold
(52.8)
102.2
%
(51.3)
104.8
%
(75.4)
103.3
%
Gross profit
$
1.1
(2.2)
%
$
2.3
(4.8)
%
$
2.4
(3.3)
%
Selling and administrative expenses
107.6
(208.3)
%
54.9
(112.2)
%
28.0
(38.4)
%
Restructuring and other special charges, net
-
-
%
0.8
(1.6)
%
5.6
(7.7)
%
Operating loss
$
(106.5)
206.1
%
$
(53.4)
109.0
%
$
(31.2)
42.7
%
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 $51.7 million for 2021 is $2.7 million, or 5.6%, higher than in 2020, reflecting an increase in product sold from our Brand Portfolio segment to Famous Footwear.
Selling and administrative expenses increased $52.7 million, or 96.0%, to $107.6 million in 2021, compared to $54.9 million last year, primarily driven by higher anticipated payments under our cash and stock-based incentive compensation plans due to our strong financial performance, higher expenses associated with certain cash-based director compensation plans that are variable based on our stock price and an increase in salaries expense. Salaries expense was lower in 2020 as a result of the strategic actions we took to mitigate the impact of the pandemic, including salary reductions and associate furloughs for a portion of the year.
Restructuring and other special charges of $0.8 million in 2020 were comprised primarily of costs associated with workforce reductions as we sought to align our expense structure with the lower sales performance, combined with incremental expenses associated with deep cleaning our facilities and related supplies. There were no corresponding charges in 2021.
RESTRUCTURING AND OTHER INITIATIVES
During 2021, we incurred restructuring and other special charges of $13.5 million, reflecting expenses associated with the decision to close all Naturalizer retail stores in North America with the exception of two Naturalizer flagship retail stores in the United States. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed in 2021.
During 2020, we incurred restructuring and other special charges of $96.7 million, including approximately $80.9 million in costs primarily associated with the economic impact of the COVID-19 pandemic, including impairment charges associated with lease right-of-use assets and retail store furniture and fixtures, liabilities associated with factory order cancellations and severance. In addition, we incurred $12.4 million related to the decision to close all but a limited number of Naturalizer retail stores, as described above, and $3.4 million of integration-related costs for Vionic.
Refer to the Financial Highlights section above and Note 4 to the consolidated financial statements for additional information related to these charges.
LIQUIDITY AND CAPITAL RESOURCES
Borrowings
($ millions)
January 29, 2022
January 30, 2021
(1)
Increase (Decrease)
Borrowings under revolving credit agreement
$
290.0
$
250.0
$
40.0
Long-term debt
-
198.9
(198.9)
Total debt
$
290.0
$
448.9
$
(158.9)
(1) Total debt as of January 30, 2021 excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $39.1 million.
Total debt obligations decreased $158.9 million to $290.0 million at the end of 2021, compared to $448.9 million at the end of last year, as we continued to use our strong cash generation to reduce our debt levels. In August 2021, we redeemed $100.0 million of our senior notes and on January 3, 2022, we redeemed the remaining $100.0 million of senior notes. We shifted this higher interest rate debt to borrowings under our revolving credit facility, which is expected to result in net interest expense savings on an ongoing basis. Net interest expense in 2021 was $30.9 million, compared to $48.2 million in 2020. The decrease in net interest expense in 2021 was primarily attributable to a decrease in the fair value adjustments to the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 13 to the consolidated financial statements, and lower average borrowings under the revolving credit facility.
Credit Agreement
As further discussed in Note 11 to the consolidated financial statements, the Company maintains a revolving credit facility for working capital needs. The Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds LLC, Vionic Group LLC and Vionic International LLC are each co-borrowers and guarantors under the revolving credit facility. On October 5, 2021, we entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the “Credit Agreement”) which, among other modifications, extends the maturity date of the credit facility from January 18, 2024 to October 5, 2026, and decreases the borrowing availability under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, and may be further increased by up to $250.0 million.
Interest on the borrowings is at variable rates based on the London Interbank Offered Rate ("LIBOR") (with a floor of 0.0%), or the prime rate (as defined in the Credit Agreement), plus a spread. The Credit Agreement decreased the spread applied to the LIBOR or prime rate by a total of 75 basis points. 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.
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. Refer to further discussion regarding the Credit Agreement in Note 11 to the consolidated financial statements.
At January 29, 2022, we had $290.0 million borrowings and $10.8 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $155.2 million at January 29, 2022. We were in compliance with all covenants and restrictions under the Credit Agreement as of January 29, 2022.
$200 Million Senior Notes
On July 27, 2015, we issued $200.0 million aggregate principal amount of Senior Notes due in 2023 (the "Senior Notes"). The Senior Notes were guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc. that is an obligor under the Credit Agreement, and bore interest at 6.25%, which was payable on February 15 and August 15 of each year.
On August 16, 2021, we redeemed $100.0 million of Senior Notes at 100.0%. In addition, on January 3, 2022, we redeemed the remaining $100.0 million of Senior Notes at 100.0%. In conjunction with the redemption of the Senior Notes prior to maturity, we incurred a loss on early extinguishment of debt of $1.0 million. Refer to further discussion regarding the Senior Notes in Note 11 to the consolidated financial statements.
Working Capital and Cash Flow
January 29, 2022
January 30, 2021
Operating working capital ($ millions) (1)
$
193.8
$
191.8
Current ratio (2)
0.82:1
0.86:1
Debt-to-capital ratio (3)
47.3
%
68.8
%
(1) Operating working capital has been computed as total current assets, excluding cash and property and equipment, held for sale, less total current liabilities, excluding borrowings under revolving credit agreement and lease obligations.
(2) The current ratio has been computed by dividing total current assets by total current liabilities.
(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.
Operating working capital at January 29, 2022, was $193.8 million, which was $2.0 million higher than at January 30, 2021. Our current ratio was 0.82 to 1 at January 29, 2022, compared to 0.86 to 1 at January 30, 2021. Our debt-to-capital ratio was 47.3% as of January 29, 2022, compared to 68.8% at January 30, 2021, reflecting lower debt resulting from the redemption of our senior notes during 2021 as well as higher equity attributable to our strong financial results in 2021.
Increase (Decrease) in
($ millions)
Cash Equivalents
Net cash provided by operating activities
$
168.4
$
126.4
$
42.0
Net cash used for investing activities
(24.1)
(22.1)
(2.0)
Net cash used for provided by financing activities
(202.4)
(61.3)
(141.1)
Effect of exchange rate changes on cash and cash equivalents
(0.1)
0.1
(0.2)
(Decrease) increase in cash and cash equivalents
$
(58.2)
$
43.1
$
(101.3)
Cash provided by operating activities was $42.0 million higher in 2021 than last year, reflecting the following factors:
● Higher earnings in 2021 compared to 2020, primarily driven by strong consumer demand and strong financial results by our Famous Footwear segment;
● A decrease in net income tax receivables in 2021 compared to an increase last year; and
● A larger increase in accounts payable in 2021 compared to last year; partially offset by
● An increase in inventory in 2021, compared to a decrease in 2020 due in part to a significant increase in in-transit inventory attributable to supply chain disruptions and port congestion; and
● The settlement of the Blowfish mandatory purchase obligation.
Supply chain financing: Certain of our suppliers are given the opportunity to sell receivables from us related to products we’ve purchased to participating financial institutions at a rate that leverages our credit rating, which may be more beneficial to the suppliers than the rate they can obtain based upon their own credit rating. We negotiate payment and other terms with our suppliers, regardless of whether the supplier participates in the program, and our responsibility is limited to making payment based on the terms originally negotiated with the supplier. These liabilities continue to be presented as accounts payable in our consolidated balance sheets and reflected as cash flows from operating activities when settled. As of January 29, 2022 and January 30, 2021, we had $36.7 million and $28.5 million, respectively, of accounts payable subject to supply chain financing arrangements. We believe the impact of supply chain financing is not material to our overall liquidity position.
Cash used for investing activities was $2.0 million higher in 2021 than last year, reflecting slightly higher capital expenditures in 2021. In 2022, we expect our purchases of property and equipment and capitalized software to be between $35 million and $45 million.
Cash used for financing activities was $141.1 million higher in 2021 than last year, primarily due to the redemption of our $200.0 million aggregate principal Senior Notes and the settlement of the Blowfish Malibu mandatory purchase obligation, partially offset by net borrowings on our revolving credit agreement of $40.0 million in 2021 compared to net repayments
of $25.0 million in 2020. Our strong financial results allowed us to significantly reduce our total debt obligations in 2021 and improve our balance sheet.
We paid dividends of $0.28 per share in each of 2021, 2020 and 2019. The 2021 dividends marked the 99th year of consecutive quarterly dividends. On March 10, 2022, the Board of Directors declared a quarterly dividend of $0.07 per share, payable on April 8, 2022, to shareholders of record on March 24, 2022, marking the 396th 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.
We have various contractual or other obligations, including borrowings under our revolving credit facility, operating lease commitments and obligations for our supplemental executive retirement plan and other postretirement benefits. Additional information on these commitments is provided in the notes to our consolidated financial statements. We also have purchase obligations to purchase inventory, assets and other goods and services. As of January 29, 2022, we had purchase obligations totaling approximately $802.1 million, of which $786.6 million are due in the next 12 months. We believe our operating cash flows are sufficient to meet our material cash requirements for at least the next 12 months.
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 described below.
Inventories
Inventories are one of our most significant assets, representing approximately 32% of total assets at the end of 2021. We value our inventories at the lower of cost or market for approximately 89% of our consolidated inventories, which represents the divisions using the LIFO cost method. For the remaining portion, our inventories are valued at the lower of cost or net realizable value. For inventory valued at LIFO, we regularly review the inventory for excess, obsolete or impaired inventory and write it down to the lower of cost or market. We apply judgment in determining the market value of inventory, which requires an estimate of net realizable value, including current and expected selling prices, costs to sell and normal gross profit rates. The method used to determine market value varies by business division, based on the unique operating models. At our Famous Footwear segment and certain operations within our Brand Portfolio segment, market value is determined based on net realizable value less an estimate of expected costs to be incurred to sell the product. Accordingly, we record markdowns when it becomes evident that inventory items will be sold at prices below cost. As a result, gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment are 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 determine market value based upon the net realizable value of inventory less a 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.
The determination of markdown reserves for the Brand Portfolio segment requires significant assumptions, estimates and
judgments by management, and is subject to inherent uncertainties and subjectivity. In determining markdown reserves,
management considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory and quantities of various product styles contained in inventory, as well as demand, among other factors. The ultimate amount realized from the sale of certain products could differ from management estimates.
We perform physical inventory counts or cycle counts on 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.
Store Impairment Charges
We regularly analyze the results of all stores and assess the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The fair value of the lease right-of-use assets is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates. The projected cash flows of the stores (including net sales projections), discount rates and current market lease rates for the remaining lease term of the related stores used to determine fair value require significant management judgment and are the assumptions to which the fair value calculations are most sensitive.
Income Tax Valuation Allowances
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established if we believe that it is more-likely-than-not that some or all of our deferred tax assets will not be realized. The evaluation of the realizability of deferred tax assets requires significant assumptions, estimates and judgment by management, including estimates of future taxable income by jurisdiction. Such estimates are subject to inherent uncertainties and subjectivity.
As of January 29, 2022, we are in a three-year cumulative loss position for federal, state and certain international jurisdictions. We have valuation allowances totaling $59.0 million as of January 29, 2022, reflecting the uncertainty regarding the utilization of net operating loss carryforwards and other deferred tax assets.
Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 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 the SEC, 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.
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATES
The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. To address these risks, we may enter into various hedging transactions. All decisions on hedging transactions are authorized and executed pursuant to our policies and procedures, which do not allow the use of financial instruments for trading purposes. We also are exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments. Counterparties to these agreements, however, are major international financial institutions, and we believe the risk of loss due to nonperformance is minimal.
A description of our accounting policies for derivative financial instruments is included in Note 1 to the consolidated financial statements.
In addition, we are exposed to translation risk because certain of our international operations use the local currency as their functional currency and those financial results must be translated into United States dollars. As currency exchange rates fluctuate, translation of our financial statements of international businesses into United States dollars affects the comparability of financial results between years.
INTEREST RATES
Our financing arrangements as of January 29, 2022 include outstanding variable-rate debt under the Credit Agreement. Changes in interest rates impact fixed and variable rate debt differently. For fixed-rate debt, a change in interest rates will only impact the fair value of the debt, whereas a change in the interest rates on variable-rate debt will impact interest expense and cash flows.
Information appearing under the caption Fair Value Measurements in Note 13 to the consolidated financial statements is incorporated herein by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation, our principal executive officer and principal financial officer have concluded that the Company’s internal control over financial reporting was effective as of January 29, 2022. The effectiveness of our internal control over financial reporting as of January 29, 2022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included herein.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Caleres, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Caleres, Inc.’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Caleres, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Caleres, Inc. as of January 29, 2022 and January 30, 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated March 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 28, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Caleres, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Caleres, Inc. (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Inventory Markdown Reserve
Description of the Matter
As described in Note 1 and Note 8, the Company had inventories of $596.8 million as of January 29, 2022 which included finished goods of $579.4 million, net of related reserves of $30.5 million. The Company provides markdown reserves to reduce the carrying values of inventories. In determining markdown reserves, the Company considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory, quantities of various product styles contained in inventory as well as demand, among other factors.
Auditing the Company’s Brand Portfolio markdown reserves was complex and involved a high degree of subjectivity, as it included assessing the significant assumptions, including forecasted sales prices, gross profit rates and demand.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's markdown reserves determination process. This included controls over the Company’s review of the significant assumptions underlying the markdown reserves estimate, as outlined above.
We performed audit procedures which included, among other procedures, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions, including forecasted sales prices, gross profit rates and demand. For example, we compared recent sales and gross margins of inventory items on-hand at year-end, performed a retrospective review analysis comparing sales activity in the current year to the inventory markdown reserves estimated by the Company in the prior year to evaluate management’s ability to accurately estimate the markdown reserves, and developed an independent expectation of the markdown reserves using historical activity and compared our independent expectation to the markdown reserves recorded. In addition, we performed inquiries of the Company’s management to evaluate the Company’s estimate of the markdown reserves.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1917.
St. Louis, Missouri
March 28, 2022
Consolidated Balance Sheets
($ thousands)
January 29, 2022
January 30, 2021
Assets
Current assets:
Cash and cash equivalents
$
30,115
$
88,295
Receivables, net of allowances of $29,930 in 2021 and $31,971 in 2020
122,236
126,994
Inventories, net of adjustment to last-in, first-out cost of $1,255 in 2021 and $793 in 2020
596,807
487,955
Income taxes
33,073
33,925
Property and equipment, held for sale
5,455
-
Prepaid expenses and other current assets
48,790
45,387
Total current assets
836,476
782,556
Prepaid pension costs
99,139
88,833
Lease right-of-use assets
503,430
554,303
Property and equipment, net
150,238
172,437
Goodwill and intangible assets, net
227,503
240,071
Other assets
27,140
28,850
Total assets
$
1,843,926
$
1,867,050
Liabilities and Equity
Current liabilities:
Borrowings under revolving credit agreement
$
290,000
$
250,000
Mandatory purchase obligation - Blowfish Malibu
-
39,134
Trade accounts payable
331,470
280,501
Employee compensation and benefits
88,034
48,641
Income taxes
22,622
5,069
Lease obligations
128,495
153,060
Other accrued expenses
164,992
129,104
Total current liabilities
1,025,613
905,509
Other liabilities:
Noncurrent lease obligations
452,909
518,942
Long-term debt
-
198,851
Income taxes
2,464
5,038
Deferred income taxes
14,731
8,244
Other liabilities
24,822
26,612
Total other liabilities
494,926
757,687
Equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares outstanding
-
-
Common stock, $0.01 par value, 100,000,000 shares authorized; 37,635,145 and 37,966,204 shares outstanding, net of 8,451,650 and 8,120,591 treasury shares in 2021 and 2020, respectively
Additional paid-in capital
168,830
160,446
Accumulated other comprehensive loss
(8,606)
(9,136)
Retained earnings
157,970
48,557
Total Caleres, Inc. shareholders’ equity
318,570
200,247
Noncontrolling interests
4,817
3,607
Total equity
323,387
203,854
Total liabilities and equity
$
1,843,926
$
1,867,050
See notes to consolidated financial statements.
Consolidated Statements of Earnings (Loss)
($ thousands, except per share amounts)
Net sales
$
2,777,604
$
2,117,070
$
2,921,562
Cost of goods sold
1,550,287
1,330,021
1,737,202
Gross profit
1,227,317
787,049
1,184,360
Selling and administrative expenses
1,008,028
889,489
1,065,760
Impairment of goodwill and intangible assets
-
286,524
-
Restructuring and other special charges, net
13,482
96,694
14,787
Operating earnings (loss)
205,807
(485,658)
103,813
Interest expense, net
(30,930)
(48,287)
(33,123)
Loss on early extinguishment of debt
(1,011)
-
-
Other income, net
15,378
16,834
7,903
Earnings (loss) before income taxes
189,244
(517,111)
78,593
Income tax (provision) benefit
(51,081)
78,117
(16,511)
Net earnings (loss)
138,163
(438,994)
62,082
Net earnings (loss) attributable to noncontrolling interests
1,144
(737)
Net earnings (loss) attributable to Caleres, Inc.
137,019
(439,114)
62,819
Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.59
$
(11.80)
$
1.53
Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.56
$
(11.80)
$
1.53
See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
($ thousands)
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Other comprehensive income (loss) ("OCI"), net of tax:
Foreign currency translation adjustment
(611)
(607)
Pension and other postretirement benefits adjustments
1,207
22,146
(116)
Derivative financial instruments
-
Other comprehensive income (loss), net of tax
22,875
(207)
Comprehensive income (loss)
138,759
(416,119)
61,875
Comprehensive income (loss) attributable to noncontrolling interests
1,210
(702)
Comprehensive income (loss) attributable to Caleres, Inc.
$
137,549
$
(416,407)
$
62,577
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
($ thousands)
Operating Activities
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation
34,069
41,644
46,014
Amortization of capitalized software
5,693
5,911
6,486
Amortization of intangible assets
12,568
12,984
13,062
Amortization of debt issuance costs and debt discount
1,359
7,261
Fair value adjustments to Blowfish mandatory purchase obligation
15,424
23,934
5,955
Blowfish mandatory purchase obligation
(45,562)
-
-
Loss on early extinguishment of debt
1,011
-
-
Share-based compensation expense
12,297
8,097
10,246
Loss on disposal of property and equipment
2,890
1,469
Impairment charges for property, equipment, and lease right-of-use assets
4,135
56,343
5,867
Impairment of goodwill and intangible assets
-
286,524
-
Provision/adjustment for expected credit losses
(2,242)
10,575
Deferred income taxes
6,487
(37,034)
9,796
Changes in operating assets and liabilities:
Receivables
7,002
22,465
28,768
Inventories
(108,772)
130,796
63,430
Prepaid expenses and other current and noncurrent assets
(11,843)
(12,400)
(16,833)
Trade accounts payable
50,936
13,373
(46,106)
Accrued expenses and other liabilities
32,656
30,181
(27,304)
Income taxes, net
15,831
(32,600)
(517)
Other, net
(758)
Net cash provided by operating activities
168,441
126,353
170,786
Investing Activities
Purchases of property and equipment
(18,393)
(16,786)
(44,533)
Disposals of property and equipment
-
-
Capitalized software
(5,752)
(5,274)
(5,619)
Net cash used for investing activities
(24,145)
(22,060)
(49,516)
Financing Activities
Borrowings under revolving credit agreement
632,000
438,500
288,500
Repayments under revolving credit agreement
(592,000)
(463,500)
(348,500)
Redemption of senior notes
(200,000)
-
-
Dividends paid
(10,648)
(10,764)
(11,422)
Blowfish Malibu mandatory purchase obligation
(8,996)
-
-
Debt issuance costs
(1,190)
-
-
Acquisition of treasury stock
(16,965)
(23,348)
(33,424)
Issuance of common stock under share-based plans, net
(3,910)
(1,135)
(2,644)
Contributions by noncontrolling interests, net
-
2,500
Other
(676)
(1,198)
(1,342)
Net cash used for financing activities
(202,385)
(61,306)
(106,332)
Effect of exchange rate changes on cash and cash equivalents
(91)
(Decrease) increase in cash and cash equivalents
(58,180)
43,077
15,018
Cash and cash equivalents at beginning of period
88,295
45,218
30,200
Cash and cash equivalents at end of period
$
30,115
$
88,295
$
45,218
See notes to consolidated financial statements, including the supplemental disclosures on cash flows in Note 1.
Consolidated Statements of Shareholders’ Equity
Accumulated
Other
Total
Comprehensive
Caleres, Inc.
Non-
($ thousands, except number of shares
Common Stock
Additional
(Loss)
Retained
Shareholders’
controlling
and per share amounts)
Shares
Dollars
Paid-In Capital
Income
Earnings
Equity
Interests
Total Equity
BALANCE FEBRUARY 2, 2019
41,886,562
$
$
145,889
$
(31,601)
$
519,346
$
634,053
$
1,382
$
635,435
Net earnings (loss)
62,819
62,819
(737)
62,082
Foreign currency translation adjustment
(642)
(642)
(607)
Unrealized gain on derivative financial instruments, net of tax of $127
Pension and other postretirement benefits adjustments, net of tax of $42
(116)
(116)
(116)
Comprehensive (loss) income
(242)
62,819
62,577
(702)
61,875
Contributions by noncontrolling interests
2,500
2,500
Dividends ($0.28 per share)
(11,422)
(11,422)
(11,422)
Acquisition of treasury stock
(1,704,240)
(17)
(33,407)
(33,424)
(33,424)
Issuance of common stock under share-based plans, net
214,435
(2,646)
(2,644)
(2,644)
Cumulative-effect adjustment from adoption of ASC 842
(13,436)
(13,436)
(13,436)
Share-based compensation expense
10,246
10,246
10,246
BALANCE FEBRUARY 1, 2020
40,396,757
$
$
153,489
$
(31,843)
$
523,900
$
645,950
$
3,180
$
649,130
Net (loss) earnings
(439,114)
(439,114)
(438,994)
Foreign currency translation adjustment
Unrealized gain on derivative financial instruments, net of tax of $31
Pension and other postretirement benefits adjustments, net of tax of $7,671
22,146
22,146
22,146
Comprehensive income (loss)
22,707
(439,114)
(416,407)
(416,119)
Contributions by noncontrolling interests, net
Dividends ($0.28 per share)
(10,764)
(10,764)
(10,764)
Acquisition of treasury stock
(2,902,122)
(29)
(23,319)
(23,348)
(23,348)
Issuance of common stock under share-based plans, net
471,569
(1,140)
(1,135)
(1,135)
Cumulative-effect adjustment from adoption of ASC 326
(2,146)
(2,146)
(2,146)
Share-based compensation expense
8,097
8,097
8,097
BALANCE JANUARY 30, 2021
37,966,204
$
$
160,446
$
(9,136)
$
48,557
$
200,247
$
3,607
$
203,854
Net earnings
137,019
137,019
1,144
138,163
Foreign currency translation adjustment
(677)
(677)
(611)
Pension and other postretirement benefits adjustments, net of tax of $444
1,207
1,207
1,207
Comprehensive income
137,019
137,549
1,210
138,759
Dividends ($0.28 per share)
(10,648)
(10,648)
(10,648)
Acquisition of treasury stock
(661,265)
(7)
(16,958)
(16,965)
(16,965)
Issuance of common stock under share-based plans, net
330,206
(3,913)
(3,910)
(3,910)
Share-based compensation expense
12,297
12,297
12,297
BALANCE JANUARY 29, 2022
37,635,145
$
$
168,830
$
(8,606)
$
157,970
$
318,570
$
4,817
$
323,387
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Caleres, Inc., originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear company. The Company’s shares are traded under the “CAL” symbol on the New York Stock Exchange.
The Company provides a broad offering of licensed, branded and private-label athletic, casual and dress footwear products to women, men and children. The footwear is sold at a variety of price points through multiple distribution channels both domestically and internationally. The Company currently operates 980 retail shoe stores in the United States, Canada, China and Guam under the Famous Footwear, Sam Edelman, Naturalizer and Allen Edmonds names. In addition, through its Brand Portfolio segment, the Company designs, sources, manufactures and markets footwear to retail stores domestically and internationally, including online retailers, national chains, department stores, mass merchandisers and independent retailers. Refer to Note 2 to the consolidated financial statements for additional information regarding the Company’s revenue by category and Note 7 for discussion of the Company’s business segments.
The Company’s business is seasonal in nature due to consumer spending patterns with higher back-to-school and holiday season sales. Although the third fiscal quarter has historically accounted for a substantial portion of the Company’s earnings for the year, the Company is beginning to experience more equal distribution among the quarters.
Certain prior period amounts in the notes to the consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings (loss) attributable to Caleres, Inc.
Consolidation
The 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.
Noncontrolling Interests
Noncontrolling interests in the Company’s consolidated financial statements result from the accounting for noncontrolling interests in partially-owned consolidated subsidiaries or affiliates. During 2019, the Company entered into a joint venture with Brand Investment Holding Limited ("Brand Investment Holding"), a member of the Gemkell Group, to sell branded footwear in China, including Sam Edelman, Naturalizer and other brands. The Company and Brand Investment Holding are each 50% owners of the joint venture, which is named CLT Brand Solutions ("CLT"). During 2020, CLT was funded with $3.0 million in capital contributions, including $1.5 million from the Company and $1.5 million from Brand Investment Holding. In 2019, CLT was funded with $5.0 million in capital contributions, including $2.5 million from the Company and $2.5 million from Brand Investment Holding. Net sales and operating earnings of CLT were $17.5 million and $1.2 million, respectively, in 2021. Net sales and operating earnings were immaterial in both 2020 and 2019.
The Company had a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company was a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture arrangements.
The Company consolidates CLT and B&H Footwear into its consolidated financial statements. Net earnings (loss) attributable to noncontrolling interests represents the share of net earnings or losses that are attributable to Brand Investment Holding and CBI. Transactions between the Company and the joint ventures have been eliminated in the consolidated financial statements.
Accounting Period
The Company’s fiscal year is the 52- or 53-week period ending the Saturday nearest to January 31. Fiscal years 2021, 2020 and 2019, all of which included 52 weeks, ended on January 29, 2022, January 30, 2021 and February 1, 2020, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
COVID-19 Pandemic
The United States and global economies continue to be adversely affected by the coronavirus (“COVID-19”) pandemic. Variants of the virus have emerged, resulting in additional shutdowns and supply chain disruptions. During 2020, the Company’s financial results were adversely impacted by COVID-19, driven by the temporary closure of all retail store locations for a portion of the first half of 2020. The Company took actions to manage its resources conservatively to mitigate the adverse impact of the pandemic, including reductions in the workforce, associate furloughs for a significant portion of the workforce during the first half of 2020, and reductions in salary for most remaining associates, as well as a reduction in the cash retainers for the Board of Directors through the end of the second quarter; reducing inventory purchases; reducing marketing expenses; and minimizing costs associated with the temporarily closed retail facilities.
In 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted. The CARES Act includes a provision that allowed the Company to defer the employer portion of social security payroll tax payments that would have been paid between the enactment date and December 31, 2020, with 50% payable by December 31, 2021 and 50% payable by December 31, 2022. As of January 29, 2022, the Company has deferred $5.0 million of employer social security payroll taxes, which are payable by December 31, 2022 and presented in other accrued expenses on the consolidated balance sheet. As of January 30, 2021, the Company had deferred $9.4 million of employer social security payroll taxes, of which $4.7 million are presented in other accrued expenses and $4.7 million are presented in other liabilities on the consolidated balance sheet. In addition, as further discussed below and in Note 6 to the consolidated financial statements, the CARES Act permits the carryback of certain current operating losses to prior years, which resulted in an incremental tax benefit of $8.2 million in 2020.
Refer to further discussion of the impact of the pandemic on the Company’s business throughout this document, including Note 4, Note 6, Note 10 and Note 12 to the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had an immaterial amount of restricted cash as of January 29, 2022 and January 30, 2021.
Receivables
In accordance with Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments - Credit Losses, the Company estimates and records an expected lifetime credit loss on accounts receivable by utilizing credit ratings and other customer-related information, as well as historical loss experience. The allowance for expected credit losses is adjusted for current conditions and reasonable and supportable forecasts. The Company recognized an adjustment to the provision for expected credit losses of $2.2 million in 2021 and a provision for expected credit losses of $10.6 million and $0.8 million in 2020 and 2019, respectively. As a result of the COVID-19 pandemic, the financial results of many of the Company’s wholesale customers were adversely impacted due to store closures during the first half of 2020. Many of those customers also experienced deterioration in their credit ratings, which resulted in higher expected credit losses for the Company and an increase in expense in 2020, as well as a corresponding increase in uncollectible accounts written off in 2021.
Customer allowances represent reserves against the Company’s wholesale customers’ accounts receivable for margin assistance, product returns, customer deductions and co-op advertising allowances. The Company estimates the reserves needed for margin assistance by reviewing inventory levels on the retail floors, sell-through rates, historical dilution, current gross margin levels and other performance indicators of our major retail customers. Product returns and customer deductions are estimated using historical experience and anticipated future trends. Co-op advertising allowances are estimated based on customer agreements. The Company recognized a provision for customer allowances of $26.1 million in 2020, $20.4 million in 2020 and $62.7 million in 2019.
Customer discounts represent reserves against the Company’s accounts receivable for discounts that wholesale customers may take based on meeting certain order, payment or return guidelines. The Company estimates the reserves needed for customer discounts based upon customer net sales and respective agreement terms. The Company recognized a provision for customer discounts of $7.5 million in 2021, $11.7 million in 2020 and $12.0 million in 2019.
Inventories
The Company values inventories at the lower of cost or market for approximately 89% of consolidated inventories, which represents divisions using the last-in, first-out (“LIFO”) method. For the remaining portion, the Company’s inventories are valued at the lower of cost or net realizable value. For inventory valued at LIFO, the Company regularly reviews the inventory for excess, obsolete or impaired inventory, and writes it down to the lower of cost or market. 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. If the first-in, first-out (“FIFO”) method had been used, consolidated inventories would have been $1.3 million and $0.8 million higher at January 29, 2022 and January 30, 2021, respectively. In the fourth quarter of 2020, a reduction in inventory quantities associated with the ongoing exit of the Naturalizer retail business resulted in a liquidation of LIFO layers and reduction of the LIFO reserve of $2.9 million, with a corresponding reduction of cost of goods sold. Refer to Note 8 to the consolidated financial statements for additional information related to inventories.
The Company applies judgment in determining the market value of inventory, which requires an estimate of net realizable value, including current and expected selling prices, costs to sell and normal gross profit rates. The method used to determine market value varies by business division, based on the unique operating models. At the Famous Footwear segment and certain operations within the Brand Portfolio segment, market value is determined based on net realizable value less an estimate of expected costs to be incurred to sell the product. Accordingly, the Company records markdowns when it becomes evident that inventory items will be sold at prices below cost. As a result, gross profit rates at the Famous Footwear segment and, to a lesser extent, the Brand Portfolio segment are lower than the initial markup during periods when permanent price reductions are taken to clear product. For the majority of the Brand Portfolio segment, the Company determines market value based upon the net realizable value of inventory less a normal gross profit rate. The Company believes these policies reflect the difference in operating models between the Famous Footwear and Brand Portfolio segments. 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.
The determination of markdown reserves for the Brand Portfolio segment requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. In determining markdown reserves, management considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory and quantities of various product styles contained in inventory, as well as demand, among other factors. The ultimate amount realized from the sale of certain products could differ from management estimates.
The costs of inventory, inbound freight and duties, markdowns, shrinkage and royalty expense are classified in cost of goods sold. Costs of warehousing and distribution are classified in selling and administrative expenses and are expensed as incurred. Such warehousing and distribution costs totaled $99.5 million, $84.0 million and $106.0 million in 2021, 2020 and 2019, respectively. Costs of overseas sourcing offices and other inventory procurement costs are reflected in selling and administrative expenses and are expensed as incurred. Such sourcing and procurement costs totaled $22.2 million, $18.6 million and $23.1 million in 2021, 2020 and 2019, respectively.
The Company performs physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjusts the recorded balance to reflect the results. The Company records estimated shrinkage between physical inventory counts based on historical results.
Computer Software Costs
The Company capitalizes certain costs in other assets, including internal payroll costs incurred in connection with the development or acquisition of software for internal use. Other assets on the consolidated balance sheets include $14.1 million and $15.5 million of computer software costs as of January 29, 2022 and January 30, 2021, respectively, which are net of accumulated amortization of $130.3 million and $131.1 million as of the end of the respective periods. In addition, other assets on the consolidated balance sheets include $7.7 million and $9.6 million of implementation costs for
software as a service as of January 29, 2022 and January 30, 2021, respectively, which are net of accumulated amortization of $2.7 million and $0.6 million as of the end of the respective periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided over the estimated useful lives of the assets or the remaining lease terms, where applicable, using the straight-line method.
Interest Expense
Capitalized Interest
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. There was no interest capitalized in 2021 or 2020. The Company capitalized interest of $0.6 million in 2019 related to the new company-operated Brand Portfolio warehouse facilities in California.
Interest Expense
Interest expense includes interest for borrowings under both the Company’s short-term and long-term debt, net of amounts capitalized, as well as fair value adjustments on the mandatory purchase obligation from the acquisition of Blowfish Malibu, as further described in Note 4 to the consolidated financial statements. Interest expense also includes fees paid under the short-term revolving credit agreement for the unused portion of its line of credit, and the amortization of deferred debt issuance costs and debt discount.
Goodwill and Intangible Assets
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, the 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. A fair value-based test is applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the fair value of the Company’s reporting units to the carrying value of those reporting units. 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 both a market approach and discounted cash flow analysis. The market approach method includes the use of multiples of comparable publicly-traded companies. The discounted cash flow approach estimates the fair value of the reporting unit using projected 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 expense, capital expenditures and working capital requirements are based on the Company’s internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting units directly resulting from the use of its assets in its operations. Assumptions that market participants may use are also considered. The estimate of the fair values of the Company’s reporting units is based on the best information available to the Company’s management as of the date of the assessment. Goodwill impairment is recorded if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit, not to exceed the carrying value of goodwill.
The Company performs its goodwill impairment assessment as of the first day of the fourth quarter of each fiscal year unless events indicate an interim test is required. In 2021, the Company elected to perform the qualitative assessment for the goodwill associated with the Blowfish Malibu reporting unit, resulting in no impairment. During the first quarter of 2020, as a result of the significant decline in the Company’s share price and market capitalization, and the impact of COVID-19 on business operations, the Company determined that an interim assessment of goodwill was required and performed the quantitative assessment for all reporting units as of May 2, 2020. The interim assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units exceeded the carrying value, resulting in non-cash goodwill impairment charges totaling $240.3 million in the first quarter of 2020. In addition to the interim assessment, an impairment review of the goodwill associated with the Blowfish Malibu reporting unit was performed as of the first day of the fourth fiscal quarter, which indicated no impairment. In 2019, the Company elected to perform the quantitative assessment for all reporting units and determined that the fair values of the reporting units exceeded the carrying values, resulting in no impairment. Refer to Note 10 to the consolidated financial statements for further discussion of goodwill and intangible assets.
The Company performs impairment tests on its indefinite-lived intangible assets as of the first day of the fourth quarter of each fiscal year unless events indicate an interim test is required. Definite-lived intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present. The indefinite-lived intangible asset impairment reviews performed as of the first day of the Company’s fourth fiscal quarter in 2021 and 2019 resulted in no impairment charges. During the first quarter of 2020, as a result of the triggering event from the economic impacts of COVID-19, an interim assessment of the Company’s indefinite-lived intangible assets was performed as of May 2, 2020. The impairment review resulted in total impairment charges of $22.4 million in the first quarter of 2020, including $12.2 million associated with the indefinite-lived Allen Edmonds trade name and $10.2 million of impairment associated with the indefinite-lived Via Spiga trade name. In addition to the interim assessment, the Company evaluated the indefinite-lived intangible assets and the definite-lived Allen Edmonds customer relationship intangible asset as of the first day of the fourth fiscal quarter. These impairment reviews resulted in additional impairment totaling $23.8 million, consisting of $19.8 million associated with the Allen Edmonds tradename and $4.0 million associated with the Allen Edmonds customer relationships intangible asset. Refer to Note 10 to the consolidated financial statements for further discussion.
Self-Insurance Reserves
The Company is self-insured and/or retains high deductibles for a significant portion of its workers’ compensation, health, disability, cyber risk, general liability, automobile and property programs, among others. Liabilities associated with the risks that are retained by the Company are estimated by considering historical claims experience, trends of the Company and the industry and other actuarial assumptions. The estimated accruals for these liabilities could be affected if development of costs on claims differ from these assumptions and historical trends. Based on available information as of January 29, 2022, the Company believes it has provided adequate reserves for its self-insurance exposure. As of January 29, 2022 and January 30, 2021, self-insurance reserves were $11.4 million and $10.4 million, respectively.
Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales are recorded, net of returns, allowances and discounts, when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company’s right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. Reserves for projected merchandise returns, discounts and allowances are determined based on historical experience and current expectations. Revenue is recognized on license fees related to Company-owned brand names, where the Company is the licensor, when the related sales of the licensee are made. The Company applies the guidance using the portfolio approach in ASC 606, Revenue from Contracts with Customers, because this methodology would not differ materially from applying the guidance to the individual contracts within the portfolio. The Company excludes sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.
Gift Cards
The Company sells gift cards to its customers in its retail stores, through its e-commerce sites and at other retailers. The Company’s gift cards do not have expiration dates or inactivity fees. The Company recognizes revenue from gift cards when (i) the gift card is redeemed by the consumer or (ii) the likelihood of the gift card being redeemed by the consumer is remote (“gift card breakage”) and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The gift card breakage rate is determined based upon historical redemption patterns. Gift card breakage is recognized during the 24-month period following the sale of the gift card, according to the Company’s historical redemption pattern. Gift card breakage income is included in net sales in the consolidated statements of earnings (loss) and the liability established upon the sale of a gift card is included in other accrued expenses within the consolidated balance sheets. The Company recognized gift card breakage of $1.0 million, $0.7 million and $1.1 million in 2021, 2020 and 2019, respectively.
Loyalty Program
The Company maintains a loyalty program at Famous Footwear, through which consumers earn points toward savings certificates for qualifying purchases. Upon reaching specified point values, consumers are issued a savings certificate that may be redeemed for purchases at Famous Footwear. Savings certificates earned must be redeemed within stated
expiration dates. In addition to the savings certificates, the Company also offers exclusive member discounts. The value of points and rewards earned by Famous Footwear’s loyalty program members are recorded as a reduction of net sales and a liability is established within other accrued expenses at the time the points are earned based on historical conversion and redemption rates. Approximately 78% of net sales in the Famous Footwear segment were made to its loyalty program members in 2021, compared to 79% in 2020. As of January 29, 2022 and January 30, 2021, the Company had a loyalty program liability of $18.8 million and $14.0 million, respectively, which is included in other accrued expenses on the consolidated balance sheets.
Store Impairment Charges
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores and the lease right-of-use asset, indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The Company recorded asset impairment charges, primarily for operating lease right-of-use assets, leasehold improvements, and furniture and fixtures in the Company’s retail stores, of $4.1 million, $56.3 million and $5.9 million in 2021, 2020 and 2019, respectively. Impairment charges were higher in 2020 as a result of the adverse economic conditions driven by the COVID-19 pandemic.
Advertising and Marketing Expense
Advertising and marketing costs are expensed as incurred, except for the costs of direct response advertising that relate primarily to the production and distribution of the Company’s catalogs and coupon mailers. Direct response advertising costs are capitalized and amortized over the expected future revenue stream, which is generally one to three months from the date the materials are mailed. External production costs of advertising are expensed when the advertising first appears in the media or in the store.
In addition, the Company participates in co-op advertising programs with certain of its wholesale customers. For those co-op advertising programs where the Company has validated the fair value of the advertising received, co-op advertising costs are reflected as advertising expense within selling and administrative expenses. Otherwise, co-op advertising costs are reflected as a reduction of net sales.
Total advertising and marketing expense was $118.1 million, $77.9 million and $100.9 million in 2021, 2020 and 2019, respectively. These costs were offset by co-op advertising allowances recovered by the Company’s retail business of $5.4 million, $3.4 million and $7.8 million in 2021, 2020 and 2019, respectively. Total co-op advertising costs reflected as a reduction of net sales were $10.8 million in 2021, $7.2 million in 2020 and $13.3 million in 2019. Total advertising costs attributable to future periods that are deferred and recognized as a component of prepaid expenses and other current assets were $4.4 million and $4.6 million at January 29, 2022 and January 30, 2021, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of its assets and liabilities. The Company establishes valuation allowances if it believes that it is more-likely-than-not that some or all of its deferred tax assets will not be realized. The Company does not recognize a tax benefit unless it concludes that it is more-likely-than-not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in its judgment, is greater than 50% likely to be realized. The Company records interest and penalties related to unrecognized tax positions within the income tax (provision) benefit on the consolidated statements of earnings (loss).
Operating Leases
The Company leases all of its retail locations, a manufacturing facility and certain office locations, distribution centers and equipment under operating leases. Approximately 38% of the leases entered into by the Company include options that allow the Company to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Some leases also include early termination options that can be exercised under specific conditions. In accordance with ASC Topic 842, Leases (“ASC 842”), lease right-of-use assets and lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on the information available at the commencement date, including implied traded debt yield and seniority adjustments, to determine the present value of future payments. Lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred. During 2020, the Company elected to account for COVID-19-related lease concessions as though the enforceable rights and obligations existed in the original lease and accordingly, treated those lease concessions as variable rent.
Contingent Rentals
Many of the leases covering retail stores require contingent rental payments in addition to the minimum monthly rental charge based on retail sales volume. The Company excludes from lease payments any variable payments that are not based on an index or market. If payment for a lease is fully contingent on sales, such as a percentage of sales gross rent lease, none of the lease payments are included in the lease right-of-use asset or the lease liability.
Construction Allowances Received From Landlords
At the time its retail facilities are initially leased, the Company often receives consideration from landlords to be applied against the cost of leasehold improvements necessary to open the store. The Company treats these construction allowances as a lease incentive. In accordance with ASC 842, the allowances are recorded within the lease right-of-use asset and amortized to income over the lease term as a reduction of rent expense.
Straight-Line Rents and Rent Holidays
The Company records rent expense on a straight-line basis over the lease term for all of its leased facilities. For leases that have predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as the lease right-of-use asset. At the time its retail facilities are leased, the Company is frequently not charged rent for a specified period of time, typically 30 to 60 days, while the store is being prepared for opening. This rent-free period is referred to as a rent holiday. The Company recognizes rent expense over the lease term, including any rent holiday, within selling and administrative expenses on the consolidated statements of earnings (loss).
Pre-opening Costs
Pre-opening costs associated with opening retail stores, including payroll, supplies and facility costs, are expensed as incurred.
Earnings (Loss) Per Common Share Attributable to Caleres, Inc. Shareholders
The Company uses the two-class method to calculate basic and diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders. Unvested restricted stock awards are considered participating units because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. Under the two-class method, basic earnings (loss) per common share attributable to Caleres, Inc. shareholders is computed by dividing the net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders is computed by dividing the net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares and potential dilutive securities outstanding during the year. Potential dilutive securities consist of outstanding stock options and contingently issuable shares for the Company’s performance share awards. Refer to Note 3 to the consolidated financial statements for additional information related to the calculation of earnings (loss) per common share attributable to Caleres, Inc. shareholders.
Comprehensive Income (Loss)
Comprehensive income (loss) includes the effect of foreign currency translation adjustments, pension and other postretirement benefits adjustments and unrealized gains or losses from derivatives used for hedging activities.
Foreign Currency Translation Adjustment
For certain of the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings (loss) amounts are translated at average exchange rates for the period.
The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity. Transaction gains and losses are included in the consolidated statements of earnings (loss).
Pension and Other Postretirement Benefits Adjustments
The Company determines the expense and obligations for retirement and other benefit plans using assumptions related to discount rates, expected long-term rates of return on invested plan assets, expected salary increases and certain employee-related factors. The Company determines the fair value of plan assets and benefit obligations as of the January 31 measurement date. The unrecognized portion of the gain or loss on plan assets is included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity and is recognized into the plans’ expense over time. Refer to additional information related to pension and other postretirement benefits in Note 5 and Note 14 to the consolidated financial statements.
Derivative Financial Instruments
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 evaluates its exposure to volatility in foreign currency rates and may enter into derivative transactions that are intended to mitigate a portion of the effect of exchange rate fluctuations. The Company’s hedging strategy permits the use of forward contracts as cash flow hedging instruments to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. The Company recognizes all derivative financial instruments as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss ("OCL") and reclassified to earnings in the period that the hedged transaction is recognized in earnings.
Litigation Contingencies
The Company is the defendant in several claims and lawsuits arising in the ordinary course of business. The Company believes the outcome of such proceedings and litigation currently pending will not have a material adverse effect on the consolidated financial position or results of operations. The Company accrues its best estimate of the cost of resolution of these claims. Legal defense costs of such claims are recognized in the period in which the costs are incurred. Refer to Note 16 to the consolidated financial statements for further discussion of commitments and contingencies.
Environmental Matters
The Company is involved in environmental remediation and ongoing compliance activities at several sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the facility. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. The Company’s prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws to address conditions that may be identified in the future. Refer to Note 16 to the consolidated financial statements for additional information.
Environmental expenditures relating to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Based upon independent environmental assessments, liabilities are recorded when remedial action is considered probable and the costs can be reasonably estimated and are evaluated independently of any future claims recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company’s commitment to a formal plan of action, and our estimates of cost are subject to change as new information becomes available. Costs of future expenditures for environmental remediation obligations are discounted to their present value in those situations requiring only continuing maintenance and monitoring based upon a schedule of fixed payments.
Share-Based Compensation
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards and stock options. Additionally, share-based grants may be made to non-employee members of the Board of Directors in the form of restricted stock units (“RSUs”) payable in cash or the Company’s common stock. The Company accounts for share-based
compensation in accordance with the fair value recognition provisions of ASC 718, Compensation - Stock Compensation, and ASC 505, Equity, which require all share-based payments to employees and members of the Board of Directors, including grants of employee stock options, to be recognized as expense in the consolidated financial statements based on their fair values. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Stock options generally vest over four years, with 25% vesting annually and expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. Expense for restricted stock is based on the fair value of the restricted stock on the date of grant. Expense for graded-vesting grants is recognized ratably over the respective vesting periods, which is generally 50% over two years and 50% over three years, and expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period, which is generally one year. Expense for stock performance awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or units to be awarded on a straight-line basis over the respective term of the award, or individual vesting portion of an award. Expense for the initial grant of RSUs is recognized ratably over the one-year vesting period based upon the fair value of the RSUs, and for cash-equivalent RSUs, is remeasured at the end of each period. The Company accounts for forfeitures of share-based grants as they occur. If the anticipated number of shares to be awarded changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Refer to additional information related to share-based compensation in Note 15 to the consolidated financial statements.
Consolidated Statements of Cash Flows Supplemental Disclosures
The Company made payments for federal, state and international taxes, net of refunds, of $29.3 million, and $10.2 million in 2021 and 2019, respectively, and received refunds, net of payments, of $0.6 million in 2020. Refer to Note 6 to the consolidated financial statements for further information regarding income taxes.
Cash payments of interest for the Company’s borrowings under the revolving credit agreement and long-term debt during 2021, 2020 and 2019 were $20.4 million, $23.6 million and $26.8 million, respectively. Refer to Note 11 to the consolidated financial statements for further discussion regarding the Company’s financing arrangements.
Impact of Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The Company adopted the ASU during the first quarter of 2021, which did not have a material impact on the Company’s financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions in ASC 740 related to intraperiod tax allocation, simplifies certain elements of accounting for basis differences and deferred tax liabilities during a business combination, and standardizes the classification of franchise taxes. The Company adopted ASU 2019-12 during the first quarter of 2021, which did not have a material impact on the Company’s consolidated financial statements.
In November 2020, the SEC issued SEC Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information. The rule amends existing requirements in Regulation S-K for disclosures related to management’s discussion and analysis and certain financial disclosure requirements. The final rule became effective on February 10, 2021 and the amendments are required for a registrant’s first fiscal year ending on or after August 9, 2021, with early adoption permitted on an item-by item basis. The Company adopted the amendments associated with Items 301 and 302 of the rule during 2020. The remaining provisions of the rule are reflected in this Form 10-K and did not have a material impact on the Company’s financial statement disclosures.
Impact of Prospective Accounting Pronouncements
The Company has evaluated all recently issued, but not yet effective, accounting pronouncements and does not expect any of the pronouncements to have a material impact on the Company’s consolidated financial statements or disclosures.
2. REVENUES
Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for 2021, 2020 and 2019:
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
1,494,595
$
59,269
$
-
$
1,553,864
Landed wholesale - e-commerce - drop ship (1)
-
93,783
(2,427)
91,356
E-commerce - Company websites (1)
251,823
189,564
-
441,387
Total direct-to-consumer sales
$
1,746,418
$
342,616
$
(2,427)
$
2,086,607
First-cost wholesale - e-commerce (1)
-
3,011
-
3,011
Landed wholesale - e-commerce (1)
-
154,184
-
154,184
Landed wholesale - other
-
468,436
(49,263)
419,173
First-cost wholesale
-
100,467
-
100,467
Licensing and royalty
1,010
12,138
-
13,148
Other (2)
-
1,014
Total net sales
$
1,748,291
$
1,081,003
$
(51,690)
$
2,777,604
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
983,669
$
52,796
$
-
$
1,036,465
Landed wholesale - e-commerce - drop ship (1)
-
87,226
(4,192)
83,034
E-commerce - Company websites (1)
279,353
149,090
-
428,443
Total direct-to-consumer sales
$
1,263,022
$
289,112
$
(4,192)
$
1,547,942
First-cost wholesale - e-commerce (1)
-
1,249
-
1,249
Landed wholesale - e-commerce (1)
-
124,548
-
124,548
Landed wholesale - other
-
408,752
(44,770)
363,982
First-cost wholesale
-
69,172
-
69,172
Licensing and royalty
-
9,478
-
9,478
Other (2)
-
Net sales
$
1,263,551
$
902,481
$
(48,962)
$
2,117,070
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
1,427,473
$
154,549
$
-
$
1,582,022
Landed wholesale - e-commerce - drop ship (1)
-
93,249
-
93,249
E-commerce - Company websites (1)
159,724
145,897
-
305,621
Total direct-to-consumer sales
$
1,587,197
$
393,695
$
-
$
1,980,892
First-cost wholesale - e-commerce (1)
-
2,204
-
2,204
Landed wholesale - e-commerce (1)
-
190,536
-
190,536
Landed wholesale - other
-
708,262
(72,955)
635,307
First-cost wholesale
-
96,021
-
96,021
Licensing and royalty
-
15,469
-
15,469
Other (2)
-
1,133
Net sales
$
1,588,057
$
1,406,460
$
(72,955)
$
2,921,562
(1) Collectively referred to as "e-commerce" below
(2) Includes breakage revenue from unredeemed gift cards
Retail stores
Traditionally, the majority of the Company’s revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company records a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Company’s loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired.
Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many customers that purchase footwear on a landed basis arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.
First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product and subsequently sells to a customer at an overseas port. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.
E-commerce
The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company’s distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company’s stores and e-commerce sales from the Company’s wholesale customers’ websites that are fulfilled on a drop-ship or first cost basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.
Licensing and royalty
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company’s symbolic intellectual property, and revenue is therefore recognized over the license term. For
royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee’s sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.
The Company also licenses its Famous Footwear trade name and logo to a third-party financial institution to offer Famous Footwear-branded credit cards to its consumers. The Company receives royalties based upon cardholder spending, which is recognized as licensing revenue at the time when the credit card is used.
Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.
Information about significant contract balances from contracts with customers is as follows:
($ thousands)
January 29, 2022
January 30, 2021
Customer allowances and discounts
$
20,328
$
17,043
Loyalty programs liability
18,814
13,986
Returns reserve
12,468
11,040
Gift card liability
6,804
6,091
Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during 2021, the loyalty programs liability increased $36.3 million due to points and material rights earned on purchases and decreased $31.5 million due to expirations and redemptions. During 2020, the loyalty programs liability increased $26.4 million due to points and material rights earned on purchases and decreased $28.8 million due to expirations and redemptions.
Allowance for Expected Credit Losses
The following table summarizes the activity in the Company’s allowance for expected credit losses for 2021 and 2020:
($ thousands)
Balance, beginning of period
$
14,928
$
1,813
Adjustment upon adoption of ASU 2016-13
-
2,521
Provision/adjustment for expected credit losses (1)
(2,242)
10,575
Uncollectible accounts written off, net of recoveries
(3,085)
Balance, end of period
$
9,601
$
14,928
(1) The Company’s provision/adjustment for expected credit losses for 2020 was higher than in 2021 as a result of the COVID-19 pandemic and its impact on the financial condition of several of the Company’s wholesale customers.
3. EARNINGS (LOSS) PER SHARE
The Company uses the two-class method to compute basic and diluted earnings (loss) 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 (loss) per common share attributable to Caleres, Inc. shareholders:
($ thousands, except per share amounts)
NUMERATOR
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Net (earnings) loss attributable to noncontrolling interests
(1,144)
(120)
Net earnings (loss) attributable to Caleres, Inc.
$
137,019
$
(439,114)
$
62,819
Net earnings allocated to participating securities
(4,982)
-
(1,988)
Net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities
$
132,037
$
(439,114)
$
60,831
DENOMINATOR
Denominator for basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
36,741
37,220
39,796
Dilutive effect of share-based awards
-
Denominator for diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
37,095
37,220
39,853
Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.59
$
(11.80)
$
1.53
Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.56
$
(11.80)
$
1.53
Options to purchase 16,667 shares of common stock in both 2021 and 2019 and 22,667 shares of common stock in 2020, were not included in the denominator for diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders because the effect would be antidilutive. Due to the Company’s net loss attributable to Caleres, Inc. in 2020, the denominator for diluted loss per common share attributed to Caleres, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Caleres, Inc. shareholders.
The Company repurchased 661,265, 2,902,122 and 1,704,240 shares at a cost of $17.0 million, $23.3 million and $33.4 million during the years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively, under the 2011, 2018 and 2019 publicly announced share repurchase programs. The 2011 and 2018 repurchase programs permit repurchases of up to 2.5 million shares and the 2019 repurchase program permits repurchases of up to 5.0 million shares, as further discussed in Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
4. RESTRUCTURING AND OTHER INITIATIVES
Blowfish Mandatory Purchase Obligation
On July 6, 2018, the Company acquired a controlling interest in Blowfish Malibu. The remaining interest was subject to a mandatory purchase obligation after a three-year period, which ended on July 31, 2021, based upon an earnings multiple formula as specified in the purchase agreement. Approximately $9.0 million was initially assigned to the mandatory purchase obligation and remeasurement adjustments on the mandatory purchase obligation were recorded as interest expense. The fair value adjustments on the mandatory purchase obligation totaled $15.4 million ($11.5 million on an after-tax basis, or $0.30 per diluted share) in 2021, $23.9 million ($17.8 million on an after-tax basis, or $0.48 per diluted share) in 2020 and $5.4 million ($4.0 million on an after-tax basis, or $0.10 per diluted share) in 2019. The mandatory
purchase obligation was settled for $54.6 million on November 4, 2021. The settlement of the $9.0 million initially assigned to the mandatory purchase obligation is presented within financing activities on the consolidated statements of cash flows and the remaining $45.6 million is presented within operating activities, in accordance with ASC 230, Statement of Cash Flows. Refer to further discussion regarding the mandatory purchase obligation in Note 13 to the consolidated financial statements.
Brand Portfolio - Business Exits
During 2021, the Company incurred costs of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) related to the strategic realignment of the Naturalizer retail store operations. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed during the first quarter of 2021. These charges are presented in restructuring and special charges on the consolidated statement of earnings (loss) within the Brand Portfolio segment. As of January 29, 2022 and January 30, 2021, reserves of $0.4 million and $2.1 million, respectively, were included in other accrued expenses on the consolidated balance sheets related to the strategic realignment of the Naturalizer retail store operations.
During 2020, the Company incurred costs of $16.4 million ($14.9 million on an after-tax basis, or $0.40 per diluted share) related to the decision to close all but a limited number of its Naturalizer retail stores and exit the Fergie brand. Of these charges, which are all reflected within the Brand Portfolio segment, $12.4 million is presented as restructuring and other special charges and primarily represents non-cash impairment of property and right-of-use lease assets, incremental rent and lease termination costs, and severance costs. An additional $4.0 million is presented as cost of goods sold and represents the incremental inventory markdowns required to reduce the value of inventory for these two brands to net realizable value.
During 2019, the Company incurred costs of $3.5 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) related to the decision to exit the Carlos brand and reposition the Via Spiga brand. Of these charges, which are all reflected within the Brand Portfolio segment, $3.0 million relates to incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the consolidated statements of earnings (loss), while the remaining $0.5 million, which is presented in restructuring and other special charges, is for severance and other related costs.
COVID-19-Related Impairments and Expenses
The Company incurred costs associated with the COVID-19 pandemic and related impacts on the Company’s business, totaling $114.3 million ($115.5 million on an after-tax basis, or $3.10 per diluted share) during 2020. These costs included non-cash impairment of property and equipment and lease right-of-use assets, incremental inventory markdowns, employee severance and other direct expenses specific to the impact of COVID-19 on the Company’s operations. Of the $114.3 million in charges, $80.9 million is presented in restructuring and other special charges, net and $33.4 million is reflected as cost of goods sold in the consolidated statements of earnings (loss). Of the $80.9 million presented as restructuring and other special charges, $63.7 million is reflected in the Brand Portfolio segment, $16.6 million is reflected in the Famous Footwear segment and $0.6 million is reflected within the Eliminations and Other category. The $33.4 million presented as cost of goods sold represents incremental inventory markdowns, of which $27.4 million is reflected in the Brand Portfolio segment and $6.0 million is reflected in the Famous Footwear segment. There were no corresponding charges in 2021 or 2019.
Vionic Acquisition and Integration-Related Costs
On October 18, 2018, the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC. The Company incurred acquisition and integration-related costs associated with the acquisition totaling $3.4 million ($2.6 million on an after-tax basis, $0.07 per diluted share) and $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) during 2020 and 2019, respectively. Of the $3.4 million in charges in 2020, which were presented as restructuring and other special charges in the consolidated statements of earnings (loss), $3.3 million is reflected within the Brand Portfolio segment and $0.1 million is reflected within the Eliminations and Other category, and represent non-cash impairment of assets, severance and other related costs. Of the $1.9 million in charges in 2019 presented as restructuring and other special charges, which were primarily for severance and professional fees, $1.8 million is reflected within the Eliminations and Other category and $0.1 million is reflected in the Brand Portfolio segment. There were no corresponding charges during 2021.
Expense Containment Initiatives
During the fourth quarter of 2019, the Company announced expense containment initiatives, including a Voluntary Early Retirement Program ("VERP") and other restructuring actions. The total costs to implement these initiatives, including employee-related costs for severance, health care benefits and enhanced pension benefits, which were recorded in the fourth quarter of 2019, were $15.0 million ($11.2 million on an after-tax basis, or $0.27 per diluted share). Of the $15.0 million in charges recorded in the fourth quarter of 2019, $12.3 million is presented as restructuring and other special charges, net and $2.7 million is presented as other income, net in the consolidated statements of earnings (loss). Of the $12.3 million presented as restructuring and other special charges, $5.0 million is reflected in the Brand Portfolio segment, $3.8 million is reflected within the Eliminations and Other category and $3.5 million is reflected in the Famous Footwear segment. The $2.7 million presented in other income within the Eliminations and Other category is a one-time pension settlement charge and special termination benefit costs associated with the VERP, as further discussed in Note 5 to the consolidated financial statements.
5. RETIREMENT AND OTHER BENEFIT PLANS
The Company sponsors pension plans in both the United States and Canada. Under the domestic plans, salaried, management and certain hourly employees’ pension benefits are based on a two-rate formula applied to each year of service. Participants receive the larger of the accrued benefit as of December 31, 2015 (based on service commencing at the date of hire and a 35-year service cap and an average annual salary for the five highest consecutive years during the last 10 year period) and the benefit calculated under the current plan provisions from the date of hire. Generally, under the current plan provisions, a participant receives credit for one year of service for each 365 days of employment as an eligible employee with the Company commencing after the employee’s date of participation in the plan, up to 30 years. Except for grandfathered employees and certain hourly associates in the Company’s retail divisions, final average compensation, taxable covered compensation and credit service for purposes of determining accrued pension benefits were frozen as of December 31, 2018.
The Company’s Canadian pension plans cover certain employees based on plan specifications. Under the Canadian plans, employees’ pension benefits are based on the employee’s highest consecutive five years of compensation during the 10 years before retirement. The Company’s funding policy for all plans is to make the minimum annual contributions required by applicable regulations. The Company also maintains an unfunded Supplemental Executive Retirement Plan (“SERP”). In addition to providing pension benefits, the Company sponsors unfunded postretirement life insurance plans that cover both salaried and hourly employees who became eligible for benefits by January 1, 1995. The life insurance plans provide coverage of up to $20,000 for qualifying retired employees.
Benefit Obligations
The following table sets forth changes in benefit obligations, including all domestic and Canadian plans:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Benefit obligation at beginning of year
$
365,570
$
388,288
$
1,249
$
1,371
Service cost
7,494
8,492
-
-
Interest cost
11,236
12,205
Plan participants’ contribution
Actuarial (gain) loss
(13,962)
8,710
(50)
(55)
Benefits paid
(15,062)
(15,272)
(96)
(112)
Settlements
-
(36,747)
-
-
Curtailments
-
(95)
-
-
Foreign exchange rate changes
(1)
(18)
-
-
Benefit obligation at end of year
$
355,286
$
365,570
$
1,143
$
1,249
The accumulated benefit obligation for the United States pension plans was $348.8 million and $358.7 million as of January 29, 2022 and January 30, 2021, respectively. The accumulated benefit obligation for the Canadian pension plans was $3.9 million and $4.0 million as of January 29, 2022 and January 30, 2021, respectively.
Pension Benefits
Other Postretirement Benefits
Weighted-average assumptions used to determine benefit obligations, end of year
Discount rate
3.40
%
3.10
%
3.40
%
3.10
%
Rate of compensation increase
3.00
%
3.00
%
N/A
N/A
As of January 29, 2022, the Company is using the PRI-2012 Bottom Quartile mortality table, projected using generational scale MP-2021, an updated base mortality table issued by the Society of Actuaries in 2021, to estimate the plan liabilities. Actuarial losses related to the change in mortality projection scales from the MP-2020 scale used in 2020 and the MP-2019 scale used in 2019, increased the projected benefit obligation by approximately $1.1 million and $2.0 million as of January 29, 2022 and January 30, 2021, respectively.
In the fourth quarter of 2020, a lump sum option was offered to certain former employees, resulting in $35.7 million of lump sum payments and a settlement charge that decreased the net periodic benefit income for 2020 by $1.1 million. During the fourth quarter of 2019, in conjunction with the Company’s expense containment initiatives, a Voluntary Early Retirement Program ("VERP") was offered to pension participants who met certain criteria. A lump sum option was also offered to certain former employees during the fourth quarter of 2019. The VERP and terminated vested lump sums resulted in $19.9 million of lump sum payments, and a settlement charge and curtailment that decreased the net periodic benefit income for 2019 by $2.7 million.
Plan Assets
Pension assets are managed in accordance with the prudent investor standards of the Employee Retirement Income Security Act (“ERISA”). The plan’s investment objective is to earn a competitive total return on assets, while also ensuring plan assets are adequately managed to provide for future pension obligations. This results in the protection of plan surplus and is accomplished by matching the duration of the projected benefit obligation using leveraged fixed income instruments and, while maintaining an equity commitment, managing an equity overlay strategy. The overlay strategy is intended to protect the managed equity portfolios against adverse stock market environments. The Company delegates investment management of the plan assets to specialists in each asset class and regularly monitors manager performance and compliance with investment guidelines. The Company’s overall investment strategy is to achieve a mix of approximately 97% of investments for long-term growth and 3% for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers. The target allocations for plan assets for 2021 were 70% equities and 30% debt securities. Allocations may change periodically based upon changing market conditions. Corporate stocks - common did not include any Company stock at January 29, 2022 or January 30, 2021.
Assets of the Canadian pension plans, which total approximately $5.0 million at January 29, 2022, were invested 55% in equity funds, 42% in bond funds and 3% in money market funds. The Canadian pension plans did not include any Company stock as of January 29, 2022 or January 30, 2021.
A financial instrument’s level within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Refer to further discussion on the fair value hierarchy in Note 13 to the consolidated financial statements. Following is a description of the pension plan investments measured at fair value, including the general classification of such investments pursuant to the valuation hierarchy.
● Cash and cash equivalents include cash collateral and margin as well as money market funds. The fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency and therefore are classified within Level 1 of the fair value hierarchy.
● Investments in U.S. government securities, the mutual fund, exchange-traded funds, corporate stocks - common, preferred securities and S&P 500 Index put and call options (traded on security exchanges) are classified within Level 1 of the fair value hierarchy because the fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency. Interest rate swap agreements and certain U.S. government securities are not traded on an exchange but are based on observable inputs that can be corroborated. Therefore, these investments are classified within Level 2 of the fair value hierarchy. Certain preferred securities and corporate stocks - common were offered in a private placement. The fair value of these investments is based on unobservable prices and therefore, they are classified within Level 3 of the fair value hierarchy.
● The alternative investment fund is an investment in a pool of long-duration domestic investment grade assets. This investment is measured using net asset value per share, and therefore, is not classified within the fair value hierarchy.
● The unallocated insurance contract is measured at net asset value per share, and therefore, is not classified within the fair value hierarchy.
The fair values of the Company’s pension plan assets at January 29, 2022 by asset category are as follows:
Fair Value Measurements at January 29, 2022
($ thousands)
Total
Level 1
Level 2
Level 3
Asset
Cash and cash equivalents
$
11,714
$
11,714
$
-
$
-
U.S. government securities
102,525
46,668
55,857
-
Interest rate swap agreements
(232)
-
(232)
-
Mutual fund
31,595
31,595
-
-
Exchange-traded funds
120,323
120,323
-
-
Corporate stocks - common
155,014
155,014
-
-
Preferred securities
-
-
S&P 500 Index options
5,694
5,694
-
-
Total investments in the fair value hierarchy
$
427,156
$
371,008
$
55,625
$
Investments measured at net asset value:
Alternative investment fund
16,891
-
-
-
Unallocated insurance contract
-
-
-
Total investments measured at net asset value
16,935
-
-
-
Total investments at fair value
$
444,091
$
371,008
$
55,625
$
The fair values of the Company’s pension plan assets at January 30, 2021 by asset category are as follows:
Fair Value Measurements at January 30, 2021
($ thousands)
Total
Level 1
Level 2
Level 3
Asset
Cash and cash equivalents
$
9,149
$
9,149
$
-
$
-
U.S. government securities
108,733
50,116
58,617
-
Interest rate swap agreements
(4,597)
-
(4,597)
Mutual fund
38,064
38,064
-
-
Exchange-traded funds
119,647
119,647
-
-
Corporate stocks - common
160,137
160,112
-
Preferred securities
2,495
-
-
2,495
S&P 500 Index options
(6,482)
(6,482)
-
-
Total investments in the fair value hierarchy
$
427,146
$
370,606
$
54,020
$
2,520
Investments measured at net asset value:
Alternative investment fund
17,522
-
-
-
Unallocated insurance contract
-
-
-
Total investments measured at net asset value
17,571
-
-
-
Total investments at fair value
$
444,717
$
370,606
$
54,020
$
2,520
The following table sets forth changes in the fair value of plan assets, including all domestic and Canadian plans:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Fair value of plan assets at beginning of year
$
444,717
$
428,186
$
-
$
-
Actual return on plan assets
14,322
67,413
-
-
Employer contributions
1,148
Plan participants’ contributions
Benefits paid
(15,062)
(15,272)
(96)
(112)
Settlements
-
(36,747)
-
-
Foreign exchange rate changes
(1)
(18)
-
-
Fair value of plan assets at end of year
$
444,091
$
444,717
$
-
$
-
Funded Status
The over-funded status as of January 29, 2022 and January 30, 2021 for pension benefits was $88.8 million and $79.1 million, respectively. The under-funded status for other postretirement benefits was $1.1 million and $1.2 million as of January 29, 2022 and January 30, 2021, respectively.
Amounts recognized in the consolidated balance sheets consist of:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Prepaid pension costs (noncurrent assets)
$
99,139
$
88,833
$
-
$
-
Accrued benefit liabilities (current liability)
(3,755)
(1,896)
(189)
(194)
Accrued benefit liabilities (noncurrent liability)
(6,579)
(7,790)
(954)
(1,055)
Net amount recognized at end of year
$
88,805
$
79,147
$
(1,143)
$
(1,249)
The projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation in excess of plan assets, which includes only the Company’s SERP, were as follows:
Projected Benefit Obligation Exceeds the
Accumulated Benefit Obligation
Fair Value of Plan Assets
Exceeds the Fair Value of Plan Assets
($ thousands)
End of Year
Projected benefit obligation
$
10,334
$
9,686
$
10,334
$
9,686
Accumulated benefit obligation
9,247
8,954
9,247
8,954
Fair value of plan assets
-
-
-
-
The accumulated postretirement benefit obligation exceeds assets for all of the Company’s other postretirement benefit plans.
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit income at January 29, 2022 and January 30, 2021 are as follows:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Components of accumulated other comprehensive loss, net of tax:
Net actuarial loss (gain)
$
8,807
$
10,438
$
(424)
$
(466)
Net prior service credit
(565)
(947)
-
-
Accumulated other comprehensive loss, net of tax
$
8,242
$
9,491
$
(424)
$
(466)
Net Periodic Benefit Income
Net periodic benefit income for 2021, 2020 and 2019 for all domestic and Canadian plans included the following components:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Service cost
$
7,494
$
8,492
$
7,219
$
-
$
-
$
-
Interest cost
11,236
12,205
14,811
Expected return on assets
(28,437)
(31,498)
(27,735)
-
-
-
Amortization of:
Actuarial loss (gain)
2,410
2,718
3,904
(108)
(110)
(107)
Prior service credit
(514)
(1,354)
(1,486)
-
-
-
Settlement cost
-
1,353
2,236
-
-
-
Curtailments
-
(189)
-
-
-
-
Cost of contractual termination benefits
-
-
-
-
-
Total net periodic benefit income
$
(7,811)
$
(8,273)
$
(569)
$
(73)
$
(69)
$
(47)
The non-service cost components of net periodic benefit income are included in other income, net in the consolidated statements of earnings (loss). Service cost is included in selling and administrative expenses.
Pension Benefits
Other Postretirement Benefits
Weighted-average assumptions used to determine net periodic benefit income
Discount rate
3.10
%
3.25
%
4.35
%
3.10
%
3.25
%
4.35
%
Rate of compensation increase
3.00
%
3.00
%
3.00
%
N/A
N/A
N/A
Expected return on plan assets
7.25
%
7.50
%
7.75
%
N/A
N/A
N/A
The net actuarial loss (gain) subject to amortization is amortized on a straight-line basis over the average future service of active plan participants as of the measurement date. The prior service credit is amortized on a straight-line basis over the average future service of active plan participants benefiting under the plan at the time of each plan amendment.
The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class.
Expected Cash Flows
Information about expected cash flows for all pension and postretirement benefit plans follows:
Pension Benefits
Other
Postretirement
($ thousands)
Funded Plan
SERP
Total
Benefits
Employer Contributions
2022 expected contributions to plan trusts
$
$
-
$
$
-
2022 expected contributions to plan participants
3,818
4,238
2022 refund of assets (e.g. surplus) to employer
-
-
Expected Benefit Payments
-
$
17,852
$
3,818
$
21,670
$
15,148
3,376
18,524
15,618
1,021
16,639
16,241
1,315
17,556
16,782
17,261
2027-2031
89,409
1,600
91,009
Defined Contribution Plans
The Company’s domestic defined contribution 401(k) plan covers certain salaried employees. For eligible salaried employees, the Company makes a core contribution of 1.5% and a matching contribution of up to 50% of the first 6% of the employees’ contributions. The Company’s expense for this plan was $5.5 million in 2021, $4.0 million in 2020, and $5.4 million in 2019. In addition to the core and matching contributions, the Company has the discretion to contribute up to an additional 2% profit-sharing benefit based on the Company’s performance. The Company’s expense for the profit-sharing contribution was $3.3 million for 2021, with no corresponding expenses in 2020 or 2019.
The Company’s Canadian defined contribution plan covers certain salaried and hourly employees. The Company makes contributions for all eligible employees, ranging from 3% to 5% of the employee’s salary. In addition, eligible employees may voluntarily contribute to the plan. The Company’s expense for this plan was $0.1 million in both 2021 and 2020, and $0.2 million in 2019.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan of $7.5 million and $7.9 million as of January 29, 2022 and January 30, 2021, respectively, are presented in employee compensation and benefits in the accompanying consolidated balance sheets. The assets held by the trust of $7.5 million and $7.9 million as of January 29, 2022 and January 30, 2021, respectively, are presented within prepaid expenses and other current assets in the
accompanying consolidated balance sheets, with changes in the deferred compensation charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan, whereby deferred compensation amounts are valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the fair value (as determined based on 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 PSUs are payable in cash based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair value at fiscal quarter-end on or following termination of the director’s service. The liabilities of the plan of $1.8 million as of January 29, 2022 and $1.0 million as of January 30, 2021 are based on 64,227 and 23,644 outstanding PSUs, respectively, and are presented in other liabilities in the accompanying consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
6. INCOME TAXES
The components of earnings (loss) before income taxes consisted of domestic earnings before income taxes of $152.5 million and $37.3 million in 2021 and 2019, respectively, and domestic loss before income taxes of $441.5 million in 2020. The Company’s international earnings before incomes taxes were $36.7 and $41.3 million in 2021 and 2019, respectively, and international losses before income taxes were $75.6 million in 2020.
The components of income tax provision (benefit) on earnings (loss) were as follows:
($ thousands)
Federal
Current
$
36,388
$
(37,140)
$
4,003
Deferred
(227)
(45,145)
5,390
Total federal income tax provision (benefit)
36,161
(82,285)
9,393
State
Current
4,012
1,532
Deferred
6,531
(9,038)
2,403
Total state income tax provision (benefit)
10,543
(7,506)
2,693
International
Current
4,615
2,288
3,914
Deferred
(238)
9,386
Total international income tax provision
4,377
11,674
4,425
Total income tax provision (benefit)
$
51,081
$
(78,117)
$
16,511
The differences between the income tax provision (benefit) reflected in the consolidated financial statements and the amounts calculated at the federal statutory income tax rate were as follows:
($ thousands)
Income taxes at statutory rate
$
39,741
$
(108,593)
$
16,505
State income taxes, net of federal tax benefit
8,361
(17,433)
2,218
International earnings taxed at differing rates from U.S. statutory
(3,588)
(5,210)
(4,071)
Share-based compensation
1,094
Non-deductibility of goodwill impairment
-
20,179
-
Impairment of international trade name taxed at higher rate
-
(1,440)
-
Provision for valuation allowance, net of utilization
8,978
41,019
CARES Act NOL, net carryback benefit (1)
(8,203)
-
Non-deductibility of 162(m) limitations
3,377
1,005
1,113
GILTI, BEAT and FDII provisions
-
International entity restructuring (2)
(6,697)
-
-
Other (3)
(535)
(880)
Total income tax provision (benefit)
$
51,081
$
(78,117)
$
16,511
(1) The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law during 2020. Among the Internal Revenue Code provisions modified by the CARES Act was a five-year carryback period for net operating losses incurred in the 2018, 2019 and 2020 tax years; temporary removal of the 80% limitation on net operating loss usage, reinstated for tax years after 2020; a temporary increase in the interest expense limitation and acceleration of refundable AMT credit. The five-year carryback presented an opportunity to carry back net operating losses from years with a statutory 21% federal tax rate to years when the rate was 35%.
(2) Reflects the deferred tax impacts of the liquidation of certain international subsidiaries, with related impacts presented in the provision for valuation allowance, net of utilization line in the table above.
(3) The other category of income tax provision (benefit) principally represents the impact of expenses that are not deductible or partially deductible for federal income tax purposes and the impact of any return-to-provision adjustments.
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
($ thousands)
January 29, 2022
January 30, 2021
Deferred Tax Assets
Lease obligations
$
149,123
$
176,953
Goodwill
43,510
56,191
Net operating loss carryforward/carryback
14,441
20,736
Accrued expenses
25,314
18,610
Employee benefits, compensation and insurance
15,751
11,006
Accounts receivable
5,735
6,149
Inventory capitalization and inventory reserves
6,013
4,130
Impairment of investment in nonconsolidated affiliate
1,470
1,470
Postretirement and postemployment benefit plans
Other
1,261
1,259
Total deferred tax assets, before valuation allowance
262,877
296,789
Valuation allowance
(58,959)
(49,981)
Total deferred tax assets, net of valuation allowance
$
203,918
$
246,808
Deferred Tax Liabilities
Lease right-of-use assets
$
(134,888)
$
(151,962)
Intangible assets
(10,624)
(30,532)
LIFO inventory valuation
(37,675)
(38,437)
Retirement plans
(23,718)
(21,041)
Capitalized software
(5,042)
(5,331)
Depreciation
(3,818)
(4,779)
Other
(2,884)
(2,970)
Total deferred tax liabilities
(218,649)
(255,052)
Net deferred tax liability
$
(14,731)
$
(8,244)
As of January 29, 2022, the Company had various federal, state and international net operating loss (“NOL”) carryforwards with tax values totaling $14.4 million. The state NOLs totaling $4.8 million have carryforward periods ranging from one to 20 years. The Company has NOLs in Canada and the United Kingdom of $7.7 million and $1.9 million, respectively. The Canada NOLs have carryforward periods ranging from 15 to 20 years, while the United Kingdom NOLs have no expiration. As of January 29, 2022, the Company is in a three-year cumulative loss position for federal, state and certain international tax jurisdictions. Accordingly, as of January 29, 2022, the Company increased its valuation allowances on deferred tax assets to $59.0 million, reflecting the uncertainty regarding the utilization of its deferred tax assets.
As of January 29, 2022, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s international subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative international earnings, as required by the Tax Cuts and Jobs Act. The Company periodically evaluates its international investment opportunities and plans, as well as its international working capital needs, to determine the level of investment required and, accordingly, determines the level of international earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s international subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted international earnings. If the Company’s unremitted international earnings were not considered indefinitely reinvested as of January 29, 2022, an immaterial amount of additional deferred taxes would have been provided.
Uncertain Tax Positions
ASC 740, Income Taxes, establishes a single model to address accounting for uncertain tax positions. The standard clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The standard also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. As of January 29, 2022,
January 30, 2021 and February 1, 2020, the Company had unrecognized tax benefits of $1.0 million, $1.5 million and $1.9 million, respectively, associated with international jurisdictions.
For federal purposes, the Company’s tax filings for fiscal years 2018 to 2020 remain open to examination but are not currently being examined. The Company also files tax returns in various international jurisdictions and numerous states for which various tax years are subject to examination and currently involved in audits. While the Company is involved in examinations in certain jurisdictions, it does not expect any significant changes in its liability for uncertain tax positions during the next 12 months.
7. BUSINESS SEGMENT INFORMATION
The Company’s reportable segments are Famous Footwear and Brand Portfolio. The Famous Footwear segment is comprised of Famous Footwear, famousfootwear.com and famousfootwear.ca. Famous Footwear operated 894 stores at the end of 2021, selling primarily branded footwear for the entire family.
The Brand Portfolio segment is comprised of wholesale operations selling the Company’s branded footwear, and the retail stores and e-commerce sites associated with those brands. This segment sources, manufactures and markets licensed, branded and private-label footwear primarily to online retailers, national chains, department stores, mass merchandisers and independent retailers as well as Company-owned Famous Footwear, Sam Edelman, Naturalizer and Allen Edmonds stores and e-commerce businesses. The Brand Portfolio segment included 70 branded retail stores in the United States and 16 branded retail stores in China at the end of 2021.
The Company’s Famous Footwear and Brand Portfolio reportable segments are operating units that are managed separately. These reportable segments reflect the level at which the Company’s chief operating decision maker evaluates financial performance and allocates resources. Operating earnings (loss) for the reportable segments represents gross profit, less selling and administrative expenses, impairment of goodwill and intangible assets and restructuring and other special charges, net. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements. Intersegment sales are generally recorded at a profit, and intersegment earnings related to inventory on hand at the purchasing segment are eliminated against the earnings.
Corporate assets, administrative expenses and other costs and recoveries that are not allocated to the operating units, as well as the elimination of intersegment sales and profit, are reported in the Eliminations and Other category.
Following is a summary of certain key financial measures for the respective periods:
Famous
Brand
Eliminations
($ thousands)
Footwear
Portfolio
and Other
Total
Fiscal 2021
Net sales
$
1,748,291
$
1,081,003
$
(51,690)
$
2,777,604
Intersegment sales
-
51,690
-
51,690
Depreciation and amortization
20,333
23,762
8,235
52,330
Operating earnings (loss)
276,415
35,928
(106,536)
205,807
Segment assets
705,063
944,241
194,622
1,843,926
Purchases of property and equipment
12,480
3,977
1,936
18,393
Capitalized software
5,623
5,752
Fiscal 2020
Net sales
$
1,263,551
$
902,481
$
(48,962)
$
2,117,070
Intersegment sales
-
48,962
-
48,962
Depreciation and amortization
23,090
28,889
8,560
60,539
Operating loss
(23,821)
(408,444)
(53,393)
(485,658)
Segment assets
765,754
851,027
250,269
1,867,050
Purchases of property and equipment
7,693
6,486
2,607
16,786
Capitalized software
4,251
5,274
Fiscal 2019
Net sales
$
1,588,057
$
1,406,460
$
(72,955)
$
2,921,562
Intersegment sales
-
72,955
-
72,955
Depreciation and amortization
26,706
29,875
8,981
65,562
Operating earnings (loss)
76,896
58,153
(31,236)
103,813
Segment assets
891,042
1,383,500
157,165
2,431,707
Purchases of property and equipment
16,129
21,973
6,431
44,533
Capitalized software
1,544
4,059
5,619
Products purchased for the Famous Footwear segment from three key third-party suppliers (Nike, Skechers and adidas) represented approximately 26%, 25% and 22% of consolidated net sales for 2021, 2020 and 2019, respectively.
Following is a reconciliation of operating earnings (loss) to earnings (loss) before income taxes:
($ thousands)
Operating earnings (loss)
$
205,807
$
(485,658)
$
103,813
Interest expense, net
(30,930)
(48,287)
(33,123)
Loss on early extinguishment of debt
(1,011)
-
-
Other income, net
15,378
16,834
7,903
Earnings (loss) before income taxes
$
189,244
$
(517,111)
$
78,593
For geographic purposes, the domestic operations include the Company’s domestic retail operations, the wholesale distribution of licensed, branded and private-label footwear to a variety of retail customers, including the Famous Footwear and Brand Portfolio stores, as well as the Company’s e-commerce businesses.
The Company’s international operations consist of wholesale and retail operations primarily in Eastern Asia, Canada and Europe. The Eastern Asia operations primarily include first-cost transactions, where footwear is sold at international ports to customers who then import the footwear into the United States and other countries.
A summary of the Company’s net sales and long-lived assets, including lease right-of-use assets and property and equipment, by geographic area were as follows:
($ thousands)
Net Sales
United States
$
2,600,848
$
1,984,713
$
2,734,912
Eastern Asia
119,857
77,793
98,045
Canada
43,789
46,781
80,247
Other
13,110
7,783
8,358
Total net sales
$
2,777,604
$
2,117,070
$
2,921,562
Long-Lived Assets (1)
United States
$
630,519
$
703,642
$
881,338
Canada
14,687
20,246
35,317
Eastern Asia
8,357
2,660
3,527
Other
Total long-lived assets
$
653,668
$
726,740
$
920,440
(1) Long-lived assets include $503,430, $554,303 and $695,594 of lease right-of-use assets in 2021, 2020 and 2019, respectively.
8. INVENTORIES
The Company’s net inventory balance was comprised of the following:
($ thousands)
January 29, 2022
January 30, 2021
Raw materials
$
16,764
$
14,592
Work-in-process
Finished goods
579,429
473,014
Inventories, net
$
596,807
$
487,955
As of January 29, 2022 and January 30, 2021, the Company’s inventory balance included $0.1 million and $0.8 million, respectively, of finished goods product subject to consignment arrangements with wholesale customers.
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
($thousands)
January 29, 2022
January 30, 2021
Land and buildings
$
48,355
$
53,561
Leasehold improvements
197,218
208,939
Technology equipment
49,550
49,105
Machinery and equipment
98,308
98,862
Furniture and fixtures
127,125
126,405
Construction in progress
3,066
6,773
Property and equipment
523,622
543,645
Allowances for depreciation
(373,384)
(371,208)
Property and equipment, net
$
150,238
$
172,437
Useful lives of property and equipment are as follows:
Years
Buildings
5 - 30
Leasehold improvements
5 - 20
Technology equipment
2 - 10
Machinery and equipment
4 - 20
Furniture and fixtures
3 - 10
The Company recorded charges for impairment of $4.1 million, $56.3 million and $5.9 million in 2021, 2020 and 2019, respectively, primarily for operating lease right-of-use assets, leasehold improvements and furniture and fixtures in the Company’s retail stores. All of the charges in 2021 and 2019 are presented in selling and administrative expenses. Of the $56.3 million of impairment charges in 2020, $55.3 million is reflected in restructuring and other special charges, and $1.0 million is reflected in selling and administrative expenses. Fair value was based on estimated future cash flows to be generated by retail stores, discounted at a market rate of interest. Refer to Note 4, Note 12 and Note 13 to the consolidated financial statements for further discussion of these impairment charges.
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. The Company capitalized interest of $0.6 million in 2019 related to the new company-operated Brand Portfolio warehouse facilities in California, with no corresponding interest capitalized in 2021 or 2020.
Property and Equipment, Held for Sale
In April 2021, the Company announced that it would begin marketing for sale its nine-acre corporate headquarters campus (the “Campus”) located in Clayton, Missouri and the Company is currently in negotiations to sell the campus. The Company expects a portion of the campus to qualify as a completed sale within twelve months. Accordingly, as of January 29, 2022, that portion of the Campus, which is included in the Eliminations and Other category, is classified within property and equipment, held for sale on the consolidated balance sheet. The remaining portion of the Campus that is not anticipated to qualify as a completed sale within twelve months is classified as property and equipment, net on the consolidated balance sheet as of January 29, 2022. The Company evaluated the Campus asset group for impairment indicators and determined that no indicators were present.
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets were as follows:
($ thousands)
January 29, 2022
January 30, 2021
Intangible Assets
Famous Footwear
$
2,800
$
2,800
Brand Portfolio
342,083
342,083
Total intangible assets
344,883
344,883
Accumulated amortization
(122,336)
(109,768)
Total intangible assets, net
222,547
235,115
Goodwill
Brand Portfolio (1)
4,956
4,956
Total goodwill
4,956
4,956
Goodwill and intangible assets, net
$
227,503
$
240,071
(1) The carrying amount of goodwill as of January 29, 2022 and January 30, 2021 is presented net of accumulated impairment charges of $415.7 million.
The Company’s intangible assets as of January 29, 2022 and January 30, 2021 were as follows:
($ thousands)
January 29, 2022
Estimated Useful Lives
Accumulated
Accumulated
(In Years)
Cost Basis
Amortization
Impairment
Net Carrying Value
Trade names
2 - 40
$
299,488
$
112,061
$
10,200
$
177,227
Trade names
Indefinite
107,400
-
92,000
15,400
Customer relationships
15 - 16
44,200
10,275
4,005
29,920
$
451,088
$
122,336
$
106,205
$
222,547
January 30, 2021
Estimated Useful Lives
Accumulated
Accumulated
(In Years)
Cost Basis
Amortization
Impairment
Net Carrying Value
Trade names
2 - 40
$
299,488
$
101,919
$
10,200
$
187,369
Trade names
Indefinite
107,400
-
92,000
15,400
Customer relationships
15 - 16
44,200
7,849
4,005
32,346
$
451,088
$
109,768
$
106,205
$
235,115
Amortization expense related to intangible assets was $12.6 million in 2021, $13.0 million in 2020 and $13.1 million in 2019. The Company estimates $12.1 million of amortization expense related to intangible assets in 2022, $11.9 million in 2023 and $11.0 million in 2024, 2025 and 2026.
Goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate it might be impaired, using either the qualitative assessment or a quantitative fair value-based test. During 2021 and 2019, the goodwill impairment testing was performed as of the first day of the fourth fiscal quarter, which resulted in no impairment charges. During the first quarter of 2020, as a result of the significant decline in the Company’s share price and market capitalization and the impact of the pandemic on the Company’s business operations, the Company determined that an interim assessment of goodwill was required. A quantitative assessment was performed for all reporting units as of May 2, 2020. The assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units was impaired, resulting in total goodwill impairment charges of $240.3 million, which are reflected within the Brand Portfolio segment. In addition to the interim assessment, the Company performed an impairment review of the remaining goodwill balance, which is associated with the Blowfish Malibu reporting unit, as of the first day of the fourth fiscal quarter. That review indicated no impairment.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The Company did not record any impairment charges for intangible assets during 2021 or 2019. As a result of the triggering event from the economic impacts of the pandemic, an interim assessment was performed as of May 2, 2020. The interim indefinite-lived trade name impairment review resulted in total impairment charges of $22.4 million, including $12.2 million associated with the indefinite-lived Allen Edmonds trade name and $10.2 million of impairment associated with the indefinite-lived Via Spiga trade name. In addition to the interim assessment, the Company tested the indefinite-lived intangible assets as of the first day of the fourth fiscal quarter. As a result of the impairment indicator for Allen Edmonds, the Company also tested the definite-lived Allen Edmonds customer relationships intangible asset. Those reviews resulted in additional impairment totaling $23.8 million, consisting of $19.8 million associated with the Allen Edmonds trade name and $4.0 million associated with the Allen Edmonds customer relationships intangible asset. Total intangible asset impairment charges of $46.2 million in 2020 are reflected within the Brand Portfolio segment.
11. LONG-TERM AND SHORT-TERM FINANCING ARRANGEMENTS
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. The Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds LLC, Vionic Group LLC and Vionic International LLC
are each co-borrowers and guarantors. On October 5, 2021, the Company entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, extended the maturity date of the credit facility from January 18, 2024 to October 5, 2026, and decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, which may be further increased by up to $250.0 million. The Credit Agreement also decreased the spread applied to the London Interbank Offered Rate (“LIBOR”) or prime rate by a total of 75 basis points.
Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.
Interest on borrowings is at variable rates based on LIBOR (with a floor of 0.0%) or the prime rate (as defined in the Credit Agreement), plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, if excess availability falls below the greater of 10.0% of the Loan Cap and $40.0 million for three consecutive business days, and the fixed charge coverage ratio is less than 1.25 to 1.0, the Company would be in default under the Credit Agreement and certain additional covenants would be triggered.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. If an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of January 29, 2022.
The maximum amount of borrowings under the Credit Agreement at the end of any month was $290.0 million and $438.5 million in 2021 and 2020, respectively. In March 2020, the Company increased the borrowings on the revolving credit facility to $440.0 million as a precautionary measure to increase its cash position and preserve financial flexibility given the uncertainty resulting from COVID-19. The Company made debt reduction a priority during the second half of 2020 and throughout 2021. As of January 29, 2022, the Company had $290.0 million of borrowings outstanding and $10.8 million in letters of credit outstanding under the Credit Agreement, with total additional borrowing availability of $155.2 million at January 29, 2022. Average daily borrowings during the year were $172.8 million and $299.8 million in 2021 and 2020, respectively, and the weighted-average interest rates approximated 2.5% and 3.4% for the respective periods.
Senior Notes
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 2023 (the "Senior Notes"). The Senior Notes bore interest at 6.25%, which was payable on February 15 and August 15 of each year. The Senior Notes were guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that is a borrower or guarantor under the Credit Agreement. On August 16, 2021, the Company redeemed $100.0 million of Senior
Notes at 100.0%. In addition, on January 3, 2022, the remaining $100.0 million of Senior Notes were redeemed at 100.0%, extinguishing the Company’s long-term debt.
Loss on Early Extinguishment of Debt
In conjunction with the redemptions of the Senior Notes in August 2021 and January 2022, prior to the maturity in August 2023, the Company incurred losses on early extinguishment of debt totaling $0.8 million. In addition, the Company incurred a loss on early extinguishment of debt of $0.2 million associated with the amendment of the revolving credit facility prior to its maturity.
12. LEASES
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
During the first quarter of 2019, the Company adopted ASC 842, using the modified retrospective transition method. The Company elected the package of practical expedients and the expedient to account for lease and non-lease components as a single component for the entire population of operating lease assets. The Company did not elect the hindsight practical expedient to reevaluate the lease term of existing contracts.
Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The fair value of the lease right-of-use assets is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates. The Company recorded asset impairment charges, primarily related to underperforming retail stores, of $4.1 million, $56.3 million and $5.9 million during 2021, 2020 and 2019, respectively. The impairment charges recorded in 2020, including $31.4 million associated with operating lease right-of-use assets and $24.9 million associated with property and equipment, primarily reflect the impact of the pandemic on the Company’s retail operations and estimates of remaining cash flows for each store, as well as the decision to close all but two of the Company’s Naturalizer retail stores. Refer to Note 4 and Note 13 to the consolidated financial statements for further discussion on these impairment charges.
As a result of the temporary store closures during the first half of 2020 associated with the pandemic, certain leases were amended to provide rent abatements and/or deferral of lease payments. Deferred payments continue to be reflected in the lease obligations on the consolidated balance sheets. Under relief provided by the FASB, entities could make a policy election to account for the lease concessions related to COVID-19 as if the enforceable rights existed under the original contract, accounting for them as variable rent rather than lease modifications. The Company made a policy election to account for rent abatements as variable rent. Accordingly, in 2021 and 2020, the Company recorded $2.1 million and $5.4 million, respectively, in lease concessions as a reduction of rent expense within selling and administrative expenses in the consolidated statements of earnings (loss). Rent concessions for leases that were extended were recognized as a lease modification.
The weighted-average lease term and discount rate as of January 29, 2022 and January 30, 2021 were as follows:
January 29, 2022
January 30, 2021
Weighted-average remaining lease term (in years)
6.5
6.8
Weighted-average discount rate
4.2
%
4.2
%
During 2021, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $118.1 million on the consolidated balance sheets. As of January 29, 2022, the Company has entered into lease commitments for four retail locations for which the leases have not yet commenced. The Company anticipates that the leases for three of the new retail locations will begin in the next fiscal year and one will begin in fiscal year 2023. Upon commencement, right-of-use assets and lease liabilities of approximately $2.2 million and $1.2 million will be recorded on the consolidated balance sheets, in 2022 and 2023, respectively.
The components of lease expense for 2021 and 2020 were as follows:
($ thousands)
Operating lease expense
$
149,850
$
167,624
Variable lease expense
40,654
48,443
Short-term lease expense
2,837
4,512
Sublease income
(652)
(96)
Total lease expense (1)
$
192,689
$
220,483
(1) Net of lease concessions recognized of $2.1 million and $5.4 million for 2021 and 2020, respectively.
The aggregate future annual lease obligations at January 29, 2022 were as follows:
($ thousands)
$
149,984
122,059
96,474
76,467
58,845
Thereafter
165,948
Total minimum operating lease payments
$
669,777
Less imputed interest
(88,373)
Present value of lease obligations
$
581,404
Supplemental cash flow information related to leases is as follows:
($ thousands)
Cash paid for lease liabilities (1)
$
179,921
$
145,552
$
196,033
Cash received from sublease income
(1) Cash paid for lease liabilities in 2021 includes payment of certain lease payments deferred in 2020, as described above, as well as lease termination costs associated with the Naturalizer retail store closures, as further discussed in Note 4 to the consolidated financial statements. In addition, cash paid for lease liabilities in 2020 was significantly lower than comparable periods, reflecting the deferral of lease payments during the onset of the pandemic.
13. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained
from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows:
● Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
● Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
● Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Measurement of Fair Value
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value.
Money Market Funds
The Company has cash equivalents primarily consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan Assets and Liabilities
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified within prepaid expenses and other current assets in the accompanying consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying 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 consolidated statements of earnings (loss). The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company were previously granted at no cost to non-employee directors. These cash-equivalent RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each cash-equivalent RSU payable is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). Additional information related to RSUs for non-employee directors is disclosed in Note 15 to the consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July 2018 as further discussed in Note 4 in the consolidated financial statements. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the Purchase Agreement (Level 3). The mandatory purchase obligation and any fair value adjustments are recorded as interest expense. The Company recorded fair value adjustments of $15.4 million, $23.9 million, $6.0 million during 2021, 2020 and 2019, respectively. The earnings projections and discount rate utilized in the initial estimate of the fair value of the mandatory purchase obligation required management judgment and were the assumptions to which the fair value calculation was the most sensitive.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at January 29, 2022 and January 30, 2021. The Company did not have any transfers between Level 1, Level 2 or Level 3 during 2021, 2020 or 2019.
Fair Value Measurements
($ thousands)
Total
Level 1
Level 2
Level 3
Asset (Liability)
January 29, 2022:
Non-qualified deferred compensation plan assets
$
7,463
$
7,463
$
-
$
-
Non-qualified deferred compensation plan liabilities
(7,463)
(7,463)
-
-
Deferred compensation plan liabilities for non-employee directors
(1,770)
(1,770)
-
-
Restricted stock units for non-employee directors
(2,568)
(2,568)
-
-
January 30, 2021:
Cash equivalents - money market funds
$
45,000
$
45,000
$
-
$
-
Non-qualified deferred compensation plan assets
7,918
7,918
-
-
Non-qualified deferred compensation plan liabilities
(7,918)
(7,918)
-
-
Deferred compensation plan liabilities for non-employee directors
(989)
(989)
-
-
Restricted stock units for non-employee directors
(1,661)
(1,661)
-
-
Mandatory purchase obligation - Blowfish Malibu
(39,134)
-
-
(39,134)
Impairment Charges
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $545.1 million, $615.7 million and $780.2 million in 2021, 2020 and 2019, respectively, were assessed for indicators of impairment. This assessment resulted in the impairment charges presented in the table below, primarily for operating lease right-of-use assets, leasehold
improvements, and furniture and fixtures in the Company’s retail stores. Higher impairment charges were recorded in 2020, reflecting adverse economic conditions, driven in part by the COVID-19 pandemic.
($ thousands)
Long-Lived Asset Impairment Charges
Famous Footwear
$
1,241
$
14,900
$
1,980
Brand Portfolio
2,894
41,443
3,887
Total long-lived asset impairment charges
$
4,135
$
56,343
$
5,867
The Company performed its annual impairment review of intangible assets, which involves estimating the fair value using significant unobservable inputs (Level 3). The intangible asset impairment reviews performed in 2021 and 2019 resulted in no impairment charges. As a result of its annual impairment testing, the Company recorded $46.2 million in impairment charges in 2020, as further discussed in Note 1 and Note 10 to the consolidated financial statements.
During 2021, the Company performed a qualitative assessment of goodwill as of the first day of the fourth fiscal quarter. The review indicated no impairment. During 2020, the Company performed an interim impairment test of goodwill, as further discussed in Note 10 to the consolidated financial statements. A quantitative assessment was performed for all reporting units as of May 2, 2020, which involved estimating the fair value of the reporting units using significant unobservable inputs (Level 3). The assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units was impaired, resulting in total goodwill impairment charges of $240.3 million. The quantitative assessments performed as of the first day of the fourth fiscal quarter of 2020 and 2019 resulted in no impairment charges. Refer to Note 1 and Note 10 to the consolidated financial statements for additional information related to the goodwill impairment tests.
Fair Value of the Company’s Other Financial Instruments
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.
The carrying amounts and fair values of the Company’s other financial instruments subject to fair value disclosures are as follows:
January 29, 2022
January 30, 2021
Carrying
Carrying
($ thousands)
Value (1)
Fair Value
Value (1)
Fair Value
Borrowings under revolving credit agreement
$
290,000
$
290,000
$
250,000
$
250,000
Long-term debt
-
-
200,000
201,000
Total debt
$
290,000
$
290,000
$
450,000
$
451,000
(1) Excludes unamortized debt issuance costs and debt discount
The fair value of the borrowings under revolving credit agreement approximates its carrying value due to its short-term nature (Level 1). The fair value of the Company’s long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).
14. SHAREHOLDERS’ EQUITY
Stock Repurchase Programs
On December 14, 2018 and September 2, 2019, the Board of Directors approved stock repurchase programs (“2018 Program" and "2019 Program", respectively) authorizing the repurchase of the Company’s outstanding common stock of up to 2.5 million shares in the 2018 Program and 5.0 million shares in the 2019 Program. The Company can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase programs do not have an expiration date. Repurchases of common stock are limited
under the Company’s debt agreements. In total, 2.5 million shares have been repurchased under the 2018 Program and there are no additional shares authorized to be repurchased. During 2021, the Company repurchased 661,265 shares under the 2019 Program. There are 1,990,224 additional shares authorized to be repurchased under the 2019 Program as of January 29, 2022. Subsequent to year-end, the Board of Directors authorized an additional 7,000,000 shares under the Company’s stock repurchase programs. With this increase, the Company has 8,990,224 shares authorized to be repurchased under the repurchase programs.
Repurchases Related to Employee Share-based Awards
During 2021, 2020 and 2019, employees tendered 205,213, 160,101 and 100,728 shares, respectively, related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share repurchases are not considered a part of the Company’s publicly announced stock repurchase programs.
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss, net of tax, by component for 2021, 2020 and 2019:
Pension and
Accumulated
Foreign
Other
Other
Currency
Postretirement
Derivative
Comprehensive
($ thousands)
Translation
Transactions (1)
Transactions (2)
(Loss) Income
Balance February 2, 2019
$
$
(31,055)
$
(608)
$
(31,601)
Other comprehensive (loss) income before reclassifications
(642)
(3,523)
(3,850)
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
4,590
4,846
Tax benefit
-
(1,183)
(55)
(1,238)
Net reclassifications
-
3,407
3,608
Other comprehensive (loss) income
(642)
(116)
(242)
Balance February 1, 2020
$
(580)
$
(31,171)
$
(92)
$
(31,843)
Other comprehensive income before reclassifications
20,351
20,907
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
2,418
2,424
Tax benefit
-
(623)
(1)
(624)
Net reclassifications
-
1,795
1,800
Other comprehensive income
22,146
22,707
Balance January 30, 2021
$
(111)
$
(9,025)
$
-
$
(9,136)
Other comprehensive loss before reclassifications
(677)
(116)
-
(793)
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
1,788
-
1,788
Tax benefit
-
(465)
-
(465)
Net reclassifications
-
1,323
-
1,323
Other comprehensive (loss) income
(677)
1,207
-
Balance January 29, 2022
$
(788)
$
(7,818)
$
-
$
(8,606)
(1) Amounts reclassified are included in other income, net. Refer to Note 5 to the consolidated financial statements for additional information related to pension and other postretirement benefits.
(2) Amounts reclassified are included in net sales, costs of goods sold and selling and administrative expenses. Refer to Note 1 to the consolidated financial statements for additional information related to derivative financial instruments.
15. SHARE-BASED COMPENSATION
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards, restricted stock units and stock options.
ASC 718, Compensation - Stock Compensation, and ASC 505, Equity, require companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees over the requisite service period for each award. In certain limited circumstances, the Company’s incentive compensation plan provides for accelerated vesting of the awards, such as in the event of a change in control, qualified retirement, death or disability. The Company has a policy of issuing treasury shares in satisfaction of share-based awards.
Share-based compensation expense of $12.3 million, $8.1 million and $10.2 million was recognized in 2021, 2020 and 2019, respectively, as a component of selling and administrative expenses. The following table details the share-based compensation expense by plan for 2021, 2020 and 2019:
($ thousands)
Expense for share-based compensation plans, net of forfeitures:
Restricted stock
$
7,308
$
6,840
$
9,597
Stock performance awards
3,904
(502)
Restricted stock units
1,085
1,109
1,129
Stock options
-
Total share-based compensation expense
$
12,297
$
8,097
$
10,246
The Company issued 330,206, 471,569 and 214,435 shares of common stock in 2021, 2020 and 2019, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement.
The Company recognized an excess tax provision of $0.1 in both 2021 and 2019 and $1.1 million in 2020 related to restricted stock vestings and dividends, performance share award vestings and stock options exercised. The excess tax provision for the respective periods were recorded in income tax (provision) benefit.
Restricted Stock
Under the Company’s incentive compensation plans, restricted stock of the Company may be granted at no cost to certain officers, key employees and directors. Plan participants are entitled to cash dividends and voting rights for their respective shares. The restricted stock awards limit the sale or transfer of these shares during the requisite service period. Expense for restricted stock grants is recognized on a straight-line basis separately for each vesting portion of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock grants is the quoted market price for the Company’s common stock on the date of grant.
The following table summarizes restricted stock activity for 2021, 2020 and 2019:
Number of
Nonvested
Weighted-
Restricted
Average Grant
Shares
Date Fair Value
Nonvested at February 2, 2019
1,249,223
$
29.17
Granted
463,234
22.93
Vested
(222,562)
30.26
Forfeited
(218,100)
28.83
Nonvested at February 1, 2020
1,271,795
26.77
Granted
707,931
6.99
Vested
(430,837)
28.27
Forfeited
(151,662)
22.19
Nonvested at January 30, 2021
1,397,227
16.74
Granted
616,442
19.40
Vested
(540,647)
26.39
Forfeited
(82,625)
15.37
Nonvested at January 29, 2022
1,390,397
$
14.24
Of the 616,442 restricted shares granted during 2021, 4,910 shares have a cliff-vesting term of one year, 20,000 shares have a cliff-vesting term of two years and 591,532 shares have a graded-vesting term of three years. Of the 707,931 restricted shares granted during 2020, 12,748 shares have a cliff-vesting term of one year and 695,183 shares have a graded-vesting term of three years. Of the 463,234 restricted shares granted during 2019, 12,914 shares had a cliff-vesting term of one year and 450,320 shares have a graded-vesting term of three years. The shares that have a graded-vesting term of three years vest 50% after two years and 50% after three years.
The total grant date fair value of restricted stock awards vested during the years ended January 29, 2022, January 30, 2021 and February 1, 2020, was $14.3 million, $4.4 million and $6.7 million, respectively. As of January 29, 2022, the total remaining unrecognized compensation cost related to nonvested restricted stock grants was $9.2 million, which will be amortized over the weighted-average remaining requisite service period of 1.6 years.
Performance Share Awards
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 between 0% and 200% of the targeted award, depending on the attainment of certain financial goals during the service period. If the awards are granted in units, the employee will be given an amount of cash ranging from 0% to 200% of the equivalent market value of the targeted award. Expense for performance share awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or cash to be awarded on a straight-line basis for each vesting portion of the share award.
The following table summarizes performance share award activity for 2021, 2020 and 2019:
Number of Nonvested
Number of Nonvested
Performance Share
Performance Share
Awards at Target
Awards at Maximum
Weighted-Average
Level
Level
Grant Date Fair Value
Nonvested at February 2, 2019
457,833
915,666
$
28.49
Granted
180,000
360,000
23.42
Vested
(149,833)
(299,666)
26.64
Forfeited
(12,000)
(24,000)
28.33
Nonvested at February 1, 2020
476,000
952,000
27.16
Granted
87,750
175,500
7.47
Vested
(153,000)
(306,000)
26.90
Forfeited
(25,000)
(50,000)
18.64
Nonvested at January 30, 2021
385,750
771,500
23.33
Granted
160,500
321,000
13.05
Vested
(148,000)
(296,000)
31.84
Forfeited
(7,500)
(15,000)
11.19
Nonvested at January 29, 2022
390,750
781,500
$
16.12
As of January 29, 2022, the remaining unrecognized compensation cost related to nonvested performance share awards was $2.7 million, which will be recognized over the remaining service period of one year.
During 2021, the Company granted long-term incentive awards payable in cash for the 2021-2023 performance period, with a target value of $7.3 million and a maximum value of $14.6 million. These awards, which vest after a three-year period, are dependent upon the attainment of certain financial goals of the Company for each of the three years and individual achievement of strategic initiatives over the cumulative period of the award. The estimated value of the award, which is reflected within other liabilities on the consolidated balance sheets, is being accrued over the three-year performance period. There were no long-term cash incentive awards granted by the Company during 2020 or 2019.
Stock Options
Stock options are granted to employees at exercise prices equal to the quoted market price of the Company’s stock at the date of grant. Stock options generally vest over four years and have a term of 10 years. Compensation cost for all stock options is recognized over the requisite service period for each award. No dividends are paid on unexercised options. Expense for stock options is recognized on a straight-line basis separately for each vesting portion of the stock option award. The Company granted no stock options during 2021, 2020 and 2019.
The following table summarizes stock option activity for 2021:
Weighted-
Number of
Average
Options
Exercise Price
Outstanding at January 30, 2021
24,667
$
23.74
Exercised
(2,000)
8.85
Canceled or expired
(6,000)
13.60
Outstanding at January 29, 2022
16,667
$
29.18
Exercisable at January 29, 2022
16,667
$
29.18
As of January 29, 2022, there are no nonvested options.
Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units (“RSUs”) payable in cash or common stock at no cost to the non-employee director. The RSUs are subject to a vesting requirement (usually one
year), earn dividend equivalent units and are payable in cash or common stock 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. Dividend equivalents are paid on outstanding RSUs at the same rate as dividends on the Company’s common stock, are automatically re-invested in additional RSUs and vest immediately as of the payment date for the dividend. Expense related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value immediately. Gains and losses resulting from changes in the fair value of the RSUs payable in cash subsequent to the vesting period and through the settlement date are recognized in the Company’s consolidated statements of earnings (loss). Refer to Note 5 and Note 13 to the consolidated financial statements for information regarding the deferred compensation plan for non-employee directors.
The following table summarizes restricted stock unit activity for the year ended January 29, 2022:
Nonvested
Outstanding
Accrued (3)
RSUs
Weighted-
Number of
Number of
Total
Total
Average
Vested
Nonvested
Number of
Number of
Grant Date
RSUs
RSUs
RSUs (2)
RSUs
Fair Value
January 30, 2021
416,234
107,784
524,018
488,089
$
9.85
Granted (1)
5,901
39,984
45,885
32,792
27.41
Vested
102,689
(102,689)
-
33,995
10.67
January 29, 2022
524,824
45,079
569,903
554,876
$
23.56
(1) Granted RSUs include 6,605 RSUs resulting from dividend equivalents paid on outstanding RSUs, of which 5,901 related to outstanding vested RSUs and 704 to outstanding nonvested RSUs.
(2) Total number of RSUs as of January 29, 2022 includes 433,298 RSUs payable in shares and 136,605 RSUs payable in cash.
(3) Accrued RSUs include all fully vested awards and a pro-rata portion of nonvested awards based on the elapsed portion of the vesting period.
The following table summarizes RSUs granted, vested and settled during 2021, 2020 and 2019:
($ thousands, except per unit amounts)
Weighted-average grant date fair value of RSUs granted (1)
$
26.88
$
10.12
$
19.59
Fair value of RSUs vested
$
2,370
$
1,125
$
RSUs settled
-
88,370
4,574
(1) Includes dividend equivalents granted on outstanding RSUs, which vest immediately.
The following table details the RSU compensation expense and the related income tax (benefit) provision for 2021, 2020 and 2019:
($ thousands)
Compensation expense (income)
$
$
(613)
$
(1,756)
Income tax (benefit) provision
(233)
Compensation expense (income), net of tax
$
$
(455)
$
(1,304)
The aggregate fair value of RSUs outstanding and currently vested at January 29, 2022 is $13.2 million and $12.1 million, respectively. The liabilities associated with the accrued RSUs totaled $2.6 million and $1.7 million as of January 29, 2022 and January 30, 2021, respectively.
16. COMMITMENTS AND CONTINGENCIES
Environmental Remediation
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.
As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy workplan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one. During 2019, a final response was received from the oversight authorities, which is allowing the Company to move forward with implementation of the revised plan on a portion of the treatment system. The Company continues to pursue approval from the oversight authorities for the full conversion of the perimeter pump and treat active remediation system to a passive one. The Company also continues to work with the oversight authorities on the off-site work plan.
The cumulative expenditures for both on-site and off-site remediation through January 29, 2022 were $32.4 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at January 29, 2022 is $9.8 million, of which $8.8 million is recorded within other liabilities and $1.0 million is recorded within other accrued expenses. Of the total $9.8 million reserve, $5.0 million is for off-site remediation and $4.8 million is for on-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $13.3 million as of January 29, 2022. The Company expects to spend approximately $0.5 million in the next year, $0.1 million in each of the following four years and $12.4 million in the aggregate thereafter related to the on-site remediation.
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A
Col. B
Col. C
Col. D
Col. E
Additions
Balance at
Charged to
Charged to Other
Balance at
Beginning of
Costs and
Accounts -
Deductions -
End of
Description
Period
Expenses
Describe
Describe
Period
($ thousands)
YEAR ENDED JANUARY 29, 2022
Deducted from assets or accounts:
Doubtful accounts and allowances
$
14,928
$
(2,242)
$
-
$
3,085
(A)
$
9,601
Customer allowances
15,151
26,100
-
23,394
(B)
17,857
Customer discounts
1,892
7,459
-
6,879
(B)
2,472
Inventory valuation allowances
32,628
23,825
-
25,998
(C)
30,455
Deferred tax asset valuation allowance
49,981
8,978
-
-
(D)
58,959
YEAR ENDED JANUARY 30, 2021
Deducted from assets or accounts:
Doubtful accounts and allowances
$
1,813
$
10,575
$
2,521
(E)
$
(19)
(A)
$
14,928
Customer allowances
25,816
20,355
-
31,020
(B)
15,151
Customer discounts
1,198
11,692
-
10,998
(B)
1,892
Inventory valuation allowances
20,610
63,543
-
51,525
(C)
32,628
Deferred tax asset valuation allowance
4,809
45,434
-
(D)
49,981
YEAR ENDED FEBRUARY 1, 2020
Deducted from assets or accounts:
Doubtful accounts and allowances
$
3,050
$
$
-
$
2,010
(A)
$
1,813
Customer allowances
24,750
62,737
-
61,671
(B)
25,816
Customer discounts
1,198
12,046
-
12,046
(B)
1,198
Inventory valuation allowances
14,401
45,489
-
39,280
(C)
20,610
Deferred tax asset valuation allowance
4,199
-
(D)
4,809
(A) Accounts written off, net of recoveries.
(B) Discounts and allowances granted to wholesale customers of the Brand Portfolio segment.
(C) Adjustment upon sale of related inventories.
(D) Reductions to the valuation allowances for the net operating loss carryforwards for certain states based on the Company’s expectations for utilization of net operating loss carryforwards.
(E) Adjustment upon adoption of ASU 2016-13. Refer to additional detail in Note 2 to the consolidated financial statements.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9ACONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
It is the Chief Executive Officer’s and Chief Financial Officer’s ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events; automated accounting processing and reporting; management review of monthly, quarterly and annual results; an established system of internal controls; and internal control reviews by our internal auditors.
A control system, no matter how well-conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved. As of January 29, 2022, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting or in other factors during the quarter ended January 29, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9BOTHER INFORMATION
None.
ITEM 9CDISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Directors of the Company is set forth under the caption Proposal 1 - Election of Directors in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Executive Officers of the Registrant is set forth under the caption Information about our Executive Officers that can be found in Item 1 of this report, which information is incorporated herein by reference.
Information regarding Section 16, Beneficial Ownership Reporting Compliance, is set forth under the caption Delinquent Section 16(a) Reports in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Audit Committee and the Audit Committee financial expert is set forth under the caption Board Meetings and Committees in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Corporate Governance Guidelines, Code of Business Conduct, and Code of Ethics is set forth under the caption Corporate Governance in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 11EXECUTIVE COMPENSATION
Information regarding Executive Compensation is set forth under the captions Compensation Discussion and Analysis, Executive Compensation, and Compensation of Non-Employee Directors in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Compensation Committee Report is set forth under the caption Compensation Committee Report in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Compensation Committee Interlocks and Insider Participation is set forth under the caption Compensation Committee Interlocks and Insider Participation in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding Company Stock Ownership by Directors, Officers and Principal Holders of Our Stock is set forth under the caption Stock Ownership by Directors, Executive Officers and 5% Shareholders in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregate information regarding the Company’s equity compensation plans as of January 29, 2022:
Number of
securities
remaining
available for
future
Number of
issuance
securities to be
Weighted-
under equity
issued upon
average
compensation
exercise of
exercise price
plans
outstanding
of outstanding
(excluding
options,
options,
securities
warrants and
warrants and
reflected in
rights
rights
column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
798,167
(1)
$
29.18
(1)
2,515,912
(2)
Equity compensation plans not approved by security holders
-
-
-
Total
798,167
$
29.18
2,515,912
(1) Column (a) includes 16,667 outstanding (vested and nonvested) stock options and 781,500 performance share units payable in stock, which reflects the maximum number of shares to be issued under the performance share plans. The target number of shares to be issued under the plans is 390,750. Performance share awards were disregarded for purposes of computing the weighted-average exercise price in column (b). This table excludes independent directors’ deferred compensation units and restricted stock units payable in cash.
(2) Represents our remaining shares available for award grants based upon the provisions of the plans, which reflect our practice to reserve shares for outstanding awards. The number of securities available for grant has been reduced for stock option grants and performance share awards payable in stock. Performance share awards are reserved based on the maximum payout level.
Information regarding share-based plans is set forth in Note 15 to the consolidated financial statements and is hereby incorporated by reference.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding Certain Relationships and Related Transactions is set forth under the caption Related Party Transactions in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Director Independence is set forth under the caption Director Independence in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding our Principal Accountant Fees and Services is set forth under the caption Fees Paid to Independent Registered Public Accountants in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
PART IV
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) and (2) The list of financial statements and Financial Statement Schedules required by this item is included in the Index under Financial Statements and Supplementary Data. All other schedules specified under Regulation S-X have been omitted because they are not applicable, because they are not required or because the information required is included in the financial statements or notes thereto.
(3) Exhibits
Certain instruments defining the rights of holders of long-term debt securities of the Company are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K, and the Company hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Exhibit No.
Description
2.1
Equity and Asset Purchase Agreement, dated October 18, 2018, by and among Caleres, Inc., the Equity Sellers (as defined therein), VCG Holdings Ltd., Christopher T. Gallagher and Daniel M. Sanner, solely in their capacity as Sellers’ Representative (as defined therein), and Christopher T. Gallagher and C. Bruce Campbell, solely with respect to specified provisions, incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed October 19, 2018.
3.1
Restated Certificate of Incorporation of Caleres, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed June 1, 2020.
3.2
Bylaws of the Company as amended through March 10, 2022, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 11, 2022.
4.1
Description of the Registrant's Securities Registered Pursuant to Section 12 of The Securities Exchange Act of 1934, incorporated herein by reference to Exhibit 4.1 to the Company’s Form 10-K for the year ended February 1, 2020, and filed March 31, 2020.
10.1
First Amendment to Fourth Amended and Restated Credit Agreement, dated as of July 20, 2015 (the “Credit Agreement”), among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and Bank of America, N.A., as lead issuing bank, administrative agent and collateral agent, Wells Fargo Bank, National Association, as an issuing bank, Wells Fargo Bank, National Association, as syndication agent, JPMorgan Chase Bank, N.A. and SunTrust Bank, as co-documentation agents, and the other financial institutions party thereto, as lenders, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed July 20, 2015.
10.1a
Second Amendment to Fourth Amended and Restated Credit Agreement, dated August 17, 2016, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended July 30, 2016.
10.1b
Third Amendment to Fourth Amended and Restated Credit Agreement, dated January 18, 2019, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed January 23, 2019.
10.1c
Fourth Amendment to Fourth Amended and Restated Credit Agreement, dated April 14, 2020, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K dated and filed April 20, 2020.
10.1d
Fifth Amendment to Fourth Amended and Restated Credit Agreement, dated October 5, 2021, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K dated and filed October 7, 2021.
10.2a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2002, as Amended and Restated as of May 22, 2008, incorporated herein by reference to Exhibit A to the Company’s definitive proxy statement dated and filed April 11, 2008.
10.2b(1)*
Form of Incentive Stock Option Award Agreement (for grants commencing May 2008) under the Company's Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.5b(1) to the Company’s Form 10-K for the year ended January 31, 2009, and filed March 31, 2009.
10.2b(2)*
Form of Incentive Stock Option Award Agreement (for grants prior to May 2008) under the Company's Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended July 31, 2004, and filed September 8, 2004.
10.2c(1)*
Form of Non-Qualified Stock Option Award Agreement (for grants commencing May 2008) under the Company’s Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.5c(1) to the Company’s Form 10-K for the year ended January 31, 2009, and filed March 31, 2009.
10.2c(2)*
Form of Non-Qualified Stock Option Award Agreement (for grants prior to May 2008) under the Company’s Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended July 31, 2004, and filed September 8, 2004.
10.3a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2011, as amended and restated effective May 28, 2015, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.3b*
Form of Restricted Stock Award Agreement (for employee grants commencing December 2016 and March 2017) under the Company’s Incentive and Stock Compensation Plan of 2011, incorporated herein by reference to Exhibit 10.2(g) to the Company’s Form 10-K for the year ended January 28, 2017, and filed March 28, 2017.
10.4a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit A to the Company’s definitive proxy statement dated and filed April 14, 2017.
10.4b*
Form of Performance Award Agreement (for 2019-2021 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4c to the Company’s Form 10-K for the year ended February 2, 2019, and filed April 2, 2019.
10.4c*
Form of Performance Award Agreement (for 2020-2022 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4a to the Company’s Form 10-Q for the quarterly period ended October 31, 2020, and filed December 9, 2020.
10.4d*
Form of Performance Award Agreement (for 2021-2023 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4e to the Company’s Form 10-K for the year ended January 30, 2021, and filed March 30, 2021.
†10.4e*
Form of Performance Award Agreement (for 2022-2024 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, filed herewith.
10.4f*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2018) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4d to the Company’s Form 10-K for the year ended February 3, 2018, and filed April 4, 2018.
10.4g*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2019) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4f to the Company’s Form 10-K for the year ended February 2, 2019, and filed April 2, 2019.
10.4h*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2020) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4h to the Company’s 10-K for the year ended February 1, 2020, and filed March 31, 2020.
10.4i*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2021) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4j to the Company’s 10-K for the year ended January 31, 2021, and filed March 30, 2021.
†10.4j*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2022) under the Company’s Incentive and Stock Compensation Plan of 2017, filed herewith.
10.5*
Form of Non-Employee Director Restricted Stock Unit Agreement between the Company and its Non-Employee Directors (for grants commencing in 2015), incorporated herein by reference to Exhibit 10.4a to the Company’s Form 10-K for the year ended January 30, 2016, and filed March 29, 2016.
10.6*
Caleres, Inc. Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.7*
Caleres, Inc. Supplemental Executive Retirement Plan (SERP), as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.8*
Caleres, Inc. Deferred Compensation Plan, as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.9*
Caleres, Inc. Non-Employee Director Share Plan (2009), incorporated herein by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.10*
Severance Agreement, effective April 1, 2006, between the Company and Diane M. Sullivan, incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated and filed April 6, 2006.
10.11*
Severance Agreement, dated March 24, 2009 and effective as of April 1, 2009, between the Company and Daniel R. Friedman, incorporated herein by reference to Exhibit 10.16 to the Company’s Form 10-K for the year ended January 31, 2015, and filed March 31, 2015.
10.12*
Form of Amendment letter dated December 18, 2009, to the Severance Agreements between the Company and each of: Daniel R. Friedman and Diane M. Sullivan, as incorporated herein by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended July 31, 2010, and filed September 7, 2010.
10.13*
Severance Agreement, effective February 16, 2015, between the Company and Kenneth H. Hannah, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed February 6, 2015.
10.14*
Severance Agreement, effective June 14, 2018, between the Company and John W. Schmidt, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 4, 2018, and filed September 12, 2018.
†10.15*
Severance Agreement, effective January 31, 2022, between the Company and Michael R. Edwards, filed herewith.
†21
Subsidiaries of the registrant.
†23
Consent of Independent Registered Public Accounting Firm.
†24
Power of attorney (contained on signature page).
†31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1
Certification of the Chief Executive and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101.INS
Inline XBRL Instance Document
†101.SCH
Inline XBRL Taxonomy Extension Schema Document
†101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
†101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
†101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document
†101.DEF
Inline XBRL Taxonomy Definition Linkbase Document
†104
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
(b)Exhibits:
See Item 15(a)(3) above. On request, copies of any exhibit will be furnished to shareholders upon payment of the Company’s reasonable expenses incurred in furnishing such exhibits.
(c)Financial Statement Schedules:
See Item 8 above.
*
Denotes management contract or compensatory plan arrangements.
†
Denotes exhibit is filed with this Form 10-K.
ITEM 16FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CALERES, INC.
By:
/s/ Kenneth H. Hannah
Kenneth H. Hannah
Senior Vice President and Chief Financial Officer
Date: March 28, 2022
Know all men by these presents, that each person whose signature appears below constitutes and appoints Diane M. Sullivan and Kenneth H. Hannah his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, on the dates and in the capacities indicated.
Signatures
Date
Title
/s/ Diane M. Sullivan
Diane M. Sullivan
March 28, 2022
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
/s/ Kenneth H. Hannah
Kenneth H. Hannah
March 28, 2022
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Todd E. Hasty
Todd E. Hasty
March 28, 2022
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Lisa A. Flavin
Lisa A. Flavin
March 23, 2022
Director
/s/ Brenda Freeman
Brenda Freeman
March 23, 2022
Director
/s/ Lori H. Greeley
Lori H. Greeley
March 23, 2022
Director
/s/ Mahendra R. Gupta
Mahendra R. Gupta
March 23, 2022
Director
/s/ Carla C. Hendra
Carla C. Hendra
March 23, 2022
Director
/s/ Ward M. Klein
Ward M. Klein
March 23, 2022
Director
/s/ Steven W. Korn
Steven W. Korn
March 23, 2022
Director
/s/ W. Patrick McGinnis
W. Patrick McGinnis
March 23, 2022
Director
/s/ Wenda Harris Millard
Wenda Harris Millard
March 23, 2022
Director

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation, our principal executive officer and principal financial officer have concluded that the Company’s internal control over financial reporting was effective as of January 29, 2022. The effectiveness of our internal control over financial reporting as of January 29, 2022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included herein.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Caleres, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Caleres, Inc.’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Caleres, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Caleres, Inc. as of January 29, 2022 and January 30, 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated March 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 28, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Caleres, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Caleres, Inc. (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of earnings (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended January 29, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Inventory Markdown Reserve
Description of the Matter
As described in Note 1 and Note 8, the Company had inventories of $596.8 million as of January 29, 2022 which included finished goods of $579.4 million, net of related reserves of $30.5 million. The Company provides markdown reserves to reduce the carrying values of inventories. In determining markdown reserves, the Company considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory, quantities of various product styles contained in inventory as well as demand, among other factors.
Auditing the Company’s Brand Portfolio markdown reserves was complex and involved a high degree of subjectivity, as it included assessing the significant assumptions, including forecasted sales prices, gross profit rates and demand.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's markdown reserves determination process. This included controls over the Company’s review of the significant assumptions underlying the markdown reserves estimate, as outlined above.
We performed audit procedures which included, among other procedures, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions, including forecasted sales prices, gross profit rates and demand. For example, we compared recent sales and gross margins of inventory items on-hand at year-end, performed a retrospective review analysis comparing sales activity in the current year to the inventory markdown reserves estimated by the Company in the prior year to evaluate management’s ability to accurately estimate the markdown reserves, and developed an independent expectation of the markdown reserves using historical activity and compared our independent expectation to the markdown reserves recorded. In addition, we performed inquiries of the Company’s management to evaluate the Company’s estimate of the markdown reserves.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1917.
St. Louis, Missouri
March 28, 2022
Consolidated Balance Sheets
($ thousands)
January 29, 2022
January 30, 2021
Assets
Current assets:
Cash and cash equivalents
$
30,115
$
88,295
Receivables, net of allowances of $29,930 in 2021 and $31,971 in 2020
122,236
126,994
Inventories, net of adjustment to last-in, first-out cost of $1,255 in 2021 and $793 in 2020
596,807
487,955
Income taxes
33,073
33,925
Property and equipment, held for sale
5,455
-
Prepaid expenses and other current assets
48,790
45,387
Total current assets
836,476
782,556
Prepaid pension costs
99,139
88,833
Lease right-of-use assets
503,430
554,303
Property and equipment, net
150,238
172,437
Goodwill and intangible assets, net
227,503
240,071
Other assets
27,140
28,850
Total assets
$
1,843,926
$
1,867,050
Liabilities and Equity
Current liabilities:
Borrowings under revolving credit agreement
$
290,000
$
250,000
Mandatory purchase obligation - Blowfish Malibu
-
39,134
Trade accounts payable
331,470
280,501
Employee compensation and benefits
88,034
48,641
Income taxes
22,622
5,069
Lease obligations
128,495
153,060
Other accrued expenses
164,992
129,104
Total current liabilities
1,025,613
905,509
Other liabilities:
Noncurrent lease obligations
452,909
518,942
Long-term debt
-
198,851
Income taxes
2,464
5,038
Deferred income taxes
14,731
8,244
Other liabilities
24,822
26,612
Total other liabilities
494,926
757,687
Equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares outstanding
-
-
Common stock, $0.01 par value, 100,000,000 shares authorized; 37,635,145 and 37,966,204 shares outstanding, net of 8,451,650 and 8,120,591 treasury shares in 2021 and 2020, respectively
Additional paid-in capital
168,830
160,446
Accumulated other comprehensive loss
(8,606)
(9,136)
Retained earnings
157,970
48,557
Total Caleres, Inc. shareholders’ equity
318,570
200,247
Noncontrolling interests
4,817
3,607
Total equity
323,387
203,854
Total liabilities and equity
$
1,843,926
$
1,867,050
See notes to consolidated financial statements.
Consolidated Statements of Earnings (Loss)
($ thousands, except per share amounts)
Net sales
$
2,777,604
$
2,117,070
$
2,921,562
Cost of goods sold
1,550,287
1,330,021
1,737,202
Gross profit
1,227,317
787,049
1,184,360
Selling and administrative expenses
1,008,028
889,489
1,065,760
Impairment of goodwill and intangible assets
-
286,524
-
Restructuring and other special charges, net
13,482
96,694
14,787
Operating earnings (loss)
205,807
(485,658)
103,813
Interest expense, net
(30,930)
(48,287)
(33,123)
Loss on early extinguishment of debt
(1,011)
-
-
Other income, net
15,378
16,834
7,903
Earnings (loss) before income taxes
189,244
(517,111)
78,593
Income tax (provision) benefit
(51,081)
78,117
(16,511)
Net earnings (loss)
138,163
(438,994)
62,082
Net earnings (loss) attributable to noncontrolling interests
1,144
(737)
Net earnings (loss) attributable to Caleres, Inc.
137,019
(439,114)
62,819
Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.59
$
(11.80)
$
1.53
Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.56
$
(11.80)
$
1.53
See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
($ thousands)
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Other comprehensive income (loss) ("OCI"), net of tax:
Foreign currency translation adjustment
(611)
(607)
Pension and other postretirement benefits adjustments
1,207
22,146
(116)
Derivative financial instruments
-
Other comprehensive income (loss), net of tax
22,875
(207)
Comprehensive income (loss)
138,759
(416,119)
61,875
Comprehensive income (loss) attributable to noncontrolling interests
1,210
(702)
Comprehensive income (loss) attributable to Caleres, Inc.
$
137,549
$
(416,407)
$
62,577
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
($ thousands)
Operating Activities
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation
34,069
41,644
46,014
Amortization of capitalized software
5,693
5,911
6,486
Amortization of intangible assets
12,568
12,984
13,062
Amortization of debt issuance costs and debt discount
1,359
7,261
Fair value adjustments to Blowfish mandatory purchase obligation
15,424
23,934
5,955
Blowfish mandatory purchase obligation
(45,562)
-
-
Loss on early extinguishment of debt
1,011
-
-
Share-based compensation expense
12,297
8,097
10,246
Loss on disposal of property and equipment
2,890
1,469
Impairment charges for property, equipment, and lease right-of-use assets
4,135
56,343
5,867
Impairment of goodwill and intangible assets
-
286,524
-
Provision/adjustment for expected credit losses
(2,242)
10,575
Deferred income taxes
6,487
(37,034)
9,796
Changes in operating assets and liabilities:
Receivables
7,002
22,465
28,768
Inventories
(108,772)
130,796
63,430
Prepaid expenses and other current and noncurrent assets
(11,843)
(12,400)
(16,833)
Trade accounts payable
50,936
13,373
(46,106)
Accrued expenses and other liabilities
32,656
30,181
(27,304)
Income taxes, net
15,831
(32,600)
(517)
Other, net
(758)
Net cash provided by operating activities
168,441
126,353
170,786
Investing Activities
Purchases of property and equipment
(18,393)
(16,786)
(44,533)
Disposals of property and equipment
-
-
Capitalized software
(5,752)
(5,274)
(5,619)
Net cash used for investing activities
(24,145)
(22,060)
(49,516)
Financing Activities
Borrowings under revolving credit agreement
632,000
438,500
288,500
Repayments under revolving credit agreement
(592,000)
(463,500)
(348,500)
Redemption of senior notes
(200,000)
-
-
Dividends paid
(10,648)
(10,764)
(11,422)
Blowfish Malibu mandatory purchase obligation
(8,996)
-
-
Debt issuance costs
(1,190)
-
-
Acquisition of treasury stock
(16,965)
(23,348)
(33,424)
Issuance of common stock under share-based plans, net
(3,910)
(1,135)
(2,644)
Contributions by noncontrolling interests, net
-
2,500
Other
(676)
(1,198)
(1,342)
Net cash used for financing activities
(202,385)
(61,306)
(106,332)
Effect of exchange rate changes on cash and cash equivalents
(91)
(Decrease) increase in cash and cash equivalents
(58,180)
43,077
15,018
Cash and cash equivalents at beginning of period
88,295
45,218
30,200
Cash and cash equivalents at end of period
$
30,115
$
88,295
$
45,218
See notes to consolidated financial statements, including the supplemental disclosures on cash flows in Note 1.
Consolidated Statements of Shareholders’ Equity
Accumulated
Other
Total
Comprehensive
Caleres, Inc.
Non-
($ thousands, except number of shares
Common Stock
Additional
(Loss)
Retained
Shareholders’
controlling
and per share amounts)
Shares
Dollars
Paid-In Capital
Income
Earnings
Equity
Interests
Total Equity
BALANCE FEBRUARY 2, 2019
41,886,562
$
$
145,889
$
(31,601)
$
519,346
$
634,053
$
1,382
$
635,435
Net earnings (loss)
62,819
62,819
(737)
62,082
Foreign currency translation adjustment
(642)
(642)
(607)
Unrealized gain on derivative financial instruments, net of tax of $127
Pension and other postretirement benefits adjustments, net of tax of $42
(116)
(116)
(116)
Comprehensive (loss) income
(242)
62,819
62,577
(702)
61,875
Contributions by noncontrolling interests
2,500
2,500
Dividends ($0.28 per share)
(11,422)
(11,422)
(11,422)
Acquisition of treasury stock
(1,704,240)
(17)
(33,407)
(33,424)
(33,424)
Issuance of common stock under share-based plans, net
214,435
(2,646)
(2,644)
(2,644)
Cumulative-effect adjustment from adoption of ASC 842
(13,436)
(13,436)
(13,436)
Share-based compensation expense
10,246
10,246
10,246
BALANCE FEBRUARY 1, 2020
40,396,757
$
$
153,489
$
(31,843)
$
523,900
$
645,950
$
3,180
$
649,130
Net (loss) earnings
(439,114)
(439,114)
(438,994)
Foreign currency translation adjustment
Unrealized gain on derivative financial instruments, net of tax of $31
Pension and other postretirement benefits adjustments, net of tax of $7,671
22,146
22,146
22,146
Comprehensive income (loss)
22,707
(439,114)
(416,407)
(416,119)
Contributions by noncontrolling interests, net
Dividends ($0.28 per share)
(10,764)
(10,764)
(10,764)
Acquisition of treasury stock
(2,902,122)
(29)
(23,319)
(23,348)
(23,348)
Issuance of common stock under share-based plans, net
471,569
(1,140)
(1,135)
(1,135)
Cumulative-effect adjustment from adoption of ASC 326
(2,146)
(2,146)
(2,146)
Share-based compensation expense
8,097
8,097
8,097
BALANCE JANUARY 30, 2021
37,966,204
$
$
160,446
$
(9,136)
$
48,557
$
200,247
$
3,607
$
203,854
Net earnings
137,019
137,019
1,144
138,163
Foreign currency translation adjustment
(677)
(677)
(611)
Pension and other postretirement benefits adjustments, net of tax of $444
1,207
1,207
1,207
Comprehensive income
137,019
137,549
1,210
138,759
Dividends ($0.28 per share)
(10,648)
(10,648)
(10,648)
Acquisition of treasury stock
(661,265)
(7)
(16,958)
(16,965)
(16,965)
Issuance of common stock under share-based plans, net
330,206
(3,913)
(3,910)
(3,910)
Share-based compensation expense
12,297
12,297
12,297
BALANCE JANUARY 29, 2022
37,635,145
$
$
168,830
$
(8,606)
$
157,970
$
318,570
$
4,817
$
323,387
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Caleres, Inc., originally founded as Brown Shoe Company in 1878 and incorporated in 1913, is a global footwear company. The Company’s shares are traded under the “CAL” symbol on the New York Stock Exchange.
The Company provides a broad offering of licensed, branded and private-label athletic, casual and dress footwear products to women, men and children. The footwear is sold at a variety of price points through multiple distribution channels both domestically and internationally. The Company currently operates 980 retail shoe stores in the United States, Canada, China and Guam under the Famous Footwear, Sam Edelman, Naturalizer and Allen Edmonds names. In addition, through its Brand Portfolio segment, the Company designs, sources, manufactures and markets footwear to retail stores domestically and internationally, including online retailers, national chains, department stores, mass merchandisers and independent retailers. Refer to Note 2 to the consolidated financial statements for additional information regarding the Company’s revenue by category and Note 7 for discussion of the Company’s business segments.
The Company’s business is seasonal in nature due to consumer spending patterns with higher back-to-school and holiday season sales. Although the third fiscal quarter has historically accounted for a substantial portion of the Company’s earnings for the year, the Company is beginning to experience more equal distribution among the quarters.
Certain prior period amounts in the notes to the consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings (loss) attributable to Caleres, Inc.
Consolidation
The 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.
Noncontrolling Interests
Noncontrolling interests in the Company’s consolidated financial statements result from the accounting for noncontrolling interests in partially-owned consolidated subsidiaries or affiliates. During 2019, the Company entered into a joint venture with Brand Investment Holding Limited ("Brand Investment Holding"), a member of the Gemkell Group, to sell branded footwear in China, including Sam Edelman, Naturalizer and other brands. The Company and Brand Investment Holding are each 50% owners of the joint venture, which is named CLT Brand Solutions ("CLT"). During 2020, CLT was funded with $3.0 million in capital contributions, including $1.5 million from the Company and $1.5 million from Brand Investment Holding. In 2019, CLT was funded with $5.0 million in capital contributions, including $2.5 million from the Company and $2.5 million from Brand Investment Holding. Net sales and operating earnings of CLT were $17.5 million and $1.2 million, respectively, in 2021. Net sales and operating earnings were immaterial in both 2020 and 2019.
The Company had a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) to market Naturalizer footwear in China. The Company was a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. The license enabling the joint venture to market the footwear expired in August 2017 and the parties are in the process of dissolving their joint venture arrangements.
The Company consolidates CLT and B&H Footwear into its consolidated financial statements. Net earnings (loss) attributable to noncontrolling interests represents the share of net earnings or losses that are attributable to Brand Investment Holding and CBI. Transactions between the Company and the joint ventures have been eliminated in the consolidated financial statements.
Accounting Period
The Company’s fiscal year is the 52- or 53-week period ending the Saturday nearest to January 31. Fiscal years 2021, 2020 and 2019, all of which included 52 weeks, ended on January 29, 2022, January 30, 2021 and February 1, 2020, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
COVID-19 Pandemic
The United States and global economies continue to be adversely affected by the coronavirus (“COVID-19”) pandemic. Variants of the virus have emerged, resulting in additional shutdowns and supply chain disruptions. During 2020, the Company’s financial results were adversely impacted by COVID-19, driven by the temporary closure of all retail store locations for a portion of the first half of 2020. The Company took actions to manage its resources conservatively to mitigate the adverse impact of the pandemic, including reductions in the workforce, associate furloughs for a significant portion of the workforce during the first half of 2020, and reductions in salary for most remaining associates, as well as a reduction in the cash retainers for the Board of Directors through the end of the second quarter; reducing inventory purchases; reducing marketing expenses; and minimizing costs associated with the temporarily closed retail facilities.
In 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted. The CARES Act includes a provision that allowed the Company to defer the employer portion of social security payroll tax payments that would have been paid between the enactment date and December 31, 2020, with 50% payable by December 31, 2021 and 50% payable by December 31, 2022. As of January 29, 2022, the Company has deferred $5.0 million of employer social security payroll taxes, which are payable by December 31, 2022 and presented in other accrued expenses on the consolidated balance sheet. As of January 30, 2021, the Company had deferred $9.4 million of employer social security payroll taxes, of which $4.7 million are presented in other accrued expenses and $4.7 million are presented in other liabilities on the consolidated balance sheet. In addition, as further discussed below and in Note 6 to the consolidated financial statements, the CARES Act permits the carryback of certain current operating losses to prior years, which resulted in an incremental tax benefit of $8.2 million in 2020.
Refer to further discussion of the impact of the pandemic on the Company’s business throughout this document, including Note 4, Note 6, Note 10 and Note 12 to the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had an immaterial amount of restricted cash as of January 29, 2022 and January 30, 2021.
Receivables
In accordance with Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments - Credit Losses, the Company estimates and records an expected lifetime credit loss on accounts receivable by utilizing credit ratings and other customer-related information, as well as historical loss experience. The allowance for expected credit losses is adjusted for current conditions and reasonable and supportable forecasts. The Company recognized an adjustment to the provision for expected credit losses of $2.2 million in 2021 and a provision for expected credit losses of $10.6 million and $0.8 million in 2020 and 2019, respectively. As a result of the COVID-19 pandemic, the financial results of many of the Company’s wholesale customers were adversely impacted due to store closures during the first half of 2020. Many of those customers also experienced deterioration in their credit ratings, which resulted in higher expected credit losses for the Company and an increase in expense in 2020, as well as a corresponding increase in uncollectible accounts written off in 2021.
Customer allowances represent reserves against the Company’s wholesale customers’ accounts receivable for margin assistance, product returns, customer deductions and co-op advertising allowances. The Company estimates the reserves needed for margin assistance by reviewing inventory levels on the retail floors, sell-through rates, historical dilution, current gross margin levels and other performance indicators of our major retail customers. Product returns and customer deductions are estimated using historical experience and anticipated future trends. Co-op advertising allowances are estimated based on customer agreements. The Company recognized a provision for customer allowances of $26.1 million in 2020, $20.4 million in 2020 and $62.7 million in 2019.
Customer discounts represent reserves against the Company’s accounts receivable for discounts that wholesale customers may take based on meeting certain order, payment or return guidelines. The Company estimates the reserves needed for customer discounts based upon customer net sales and respective agreement terms. The Company recognized a provision for customer discounts of $7.5 million in 2021, $11.7 million in 2020 and $12.0 million in 2019.
Inventories
The Company values inventories at the lower of cost or market for approximately 89% of consolidated inventories, which represents divisions using the last-in, first-out (“LIFO”) method. For the remaining portion, the Company’s inventories are valued at the lower of cost or net realizable value. For inventory valued at LIFO, the Company regularly reviews the inventory for excess, obsolete or impaired inventory, and writes it down to the lower of cost or market. 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. If the first-in, first-out (“FIFO”) method had been used, consolidated inventories would have been $1.3 million and $0.8 million higher at January 29, 2022 and January 30, 2021, respectively. In the fourth quarter of 2020, a reduction in inventory quantities associated with the ongoing exit of the Naturalizer retail business resulted in a liquidation of LIFO layers and reduction of the LIFO reserve of $2.9 million, with a corresponding reduction of cost of goods sold. Refer to Note 8 to the consolidated financial statements for additional information related to inventories.
The Company applies judgment in determining the market value of inventory, which requires an estimate of net realizable value, including current and expected selling prices, costs to sell and normal gross profit rates. The method used to determine market value varies by business division, based on the unique operating models. At the Famous Footwear segment and certain operations within the Brand Portfolio segment, market value is determined based on net realizable value less an estimate of expected costs to be incurred to sell the product. Accordingly, the Company records markdowns when it becomes evident that inventory items will be sold at prices below cost. As a result, gross profit rates at the Famous Footwear segment and, to a lesser extent, the Brand Portfolio segment are lower than the initial markup during periods when permanent price reductions are taken to clear product. For the majority of the Brand Portfolio segment, the Company determines market value based upon the net realizable value of inventory less a normal gross profit rate. The Company believes these policies reflect the difference in operating models between the Famous Footwear and Brand Portfolio segments. 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.
The determination of markdown reserves for the Brand Portfolio segment requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. In determining markdown reserves, management considers recent and forecasted sales prices, historical gross profit rates, the length of time the product is held in inventory and quantities of various product styles contained in inventory, as well as demand, among other factors. The ultimate amount realized from the sale of certain products could differ from management estimates.
The costs of inventory, inbound freight and duties, markdowns, shrinkage and royalty expense are classified in cost of goods sold. Costs of warehousing and distribution are classified in selling and administrative expenses and are expensed as incurred. Such warehousing and distribution costs totaled $99.5 million, $84.0 million and $106.0 million in 2021, 2020 and 2019, respectively. Costs of overseas sourcing offices and other inventory procurement costs are reflected in selling and administrative expenses and are expensed as incurred. Such sourcing and procurement costs totaled $22.2 million, $18.6 million and $23.1 million in 2021, 2020 and 2019, respectively.
The Company performs physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjusts the recorded balance to reflect the results. The Company records estimated shrinkage between physical inventory counts based on historical results.
Computer Software Costs
The Company capitalizes certain costs in other assets, including internal payroll costs incurred in connection with the development or acquisition of software for internal use. Other assets on the consolidated balance sheets include $14.1 million and $15.5 million of computer software costs as of January 29, 2022 and January 30, 2021, respectively, which are net of accumulated amortization of $130.3 million and $131.1 million as of the end of the respective periods. In addition, other assets on the consolidated balance sheets include $7.7 million and $9.6 million of implementation costs for
software as a service as of January 29, 2022 and January 30, 2021, respectively, which are net of accumulated amortization of $2.7 million and $0.6 million as of the end of the respective periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided over the estimated useful lives of the assets or the remaining lease terms, where applicable, using the straight-line method.
Interest Expense
Capitalized Interest
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. There was no interest capitalized in 2021 or 2020. The Company capitalized interest of $0.6 million in 2019 related to the new company-operated Brand Portfolio warehouse facilities in California.
Interest Expense
Interest expense includes interest for borrowings under both the Company’s short-term and long-term debt, net of amounts capitalized, as well as fair value adjustments on the mandatory purchase obligation from the acquisition of Blowfish Malibu, as further described in Note 4 to the consolidated financial statements. Interest expense also includes fees paid under the short-term revolving credit agreement for the unused portion of its line of credit, and the amortization of deferred debt issuance costs and debt discount.
Goodwill and Intangible Assets
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, the 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. A fair value-based test is applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the fair value of the Company’s reporting units to the carrying value of those reporting units. 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 both a market approach and discounted cash flow analysis. The market approach method includes the use of multiples of comparable publicly-traded companies. The discounted cash flow approach estimates the fair value of the reporting unit using projected 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 expense, capital expenditures and working capital requirements are based on the Company’s internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting units directly resulting from the use of its assets in its operations. Assumptions that market participants may use are also considered. The estimate of the fair values of the Company’s reporting units is based on the best information available to the Company’s management as of the date of the assessment. Goodwill impairment is recorded if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit, not to exceed the carrying value of goodwill.
The Company performs its goodwill impairment assessment as of the first day of the fourth quarter of each fiscal year unless events indicate an interim test is required. In 2021, the Company elected to perform the qualitative assessment for the goodwill associated with the Blowfish Malibu reporting unit, resulting in no impairment. During the first quarter of 2020, as a result of the significant decline in the Company’s share price and market capitalization, and the impact of COVID-19 on business operations, the Company determined that an interim assessment of goodwill was required and performed the quantitative assessment for all reporting units as of May 2, 2020. The interim assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units exceeded the carrying value, resulting in non-cash goodwill impairment charges totaling $240.3 million in the first quarter of 2020. In addition to the interim assessment, an impairment review of the goodwill associated with the Blowfish Malibu reporting unit was performed as of the first day of the fourth fiscal quarter, which indicated no impairment. In 2019, the Company elected to perform the quantitative assessment for all reporting units and determined that the fair values of the reporting units exceeded the carrying values, resulting in no impairment. Refer to Note 10 to the consolidated financial statements for further discussion of goodwill and intangible assets.
The Company performs impairment tests on its indefinite-lived intangible assets as of the first day of the fourth quarter of each fiscal year unless events indicate an interim test is required. Definite-lived intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present. The indefinite-lived intangible asset impairment reviews performed as of the first day of the Company’s fourth fiscal quarter in 2021 and 2019 resulted in no impairment charges. During the first quarter of 2020, as a result of the triggering event from the economic impacts of COVID-19, an interim assessment of the Company’s indefinite-lived intangible assets was performed as of May 2, 2020. The impairment review resulted in total impairment charges of $22.4 million in the first quarter of 2020, including $12.2 million associated with the indefinite-lived Allen Edmonds trade name and $10.2 million of impairment associated with the indefinite-lived Via Spiga trade name. In addition to the interim assessment, the Company evaluated the indefinite-lived intangible assets and the definite-lived Allen Edmonds customer relationship intangible asset as of the first day of the fourth fiscal quarter. These impairment reviews resulted in additional impairment totaling $23.8 million, consisting of $19.8 million associated with the Allen Edmonds tradename and $4.0 million associated with the Allen Edmonds customer relationships intangible asset. Refer to Note 10 to the consolidated financial statements for further discussion.
Self-Insurance Reserves
The Company is self-insured and/or retains high deductibles for a significant portion of its workers’ compensation, health, disability, cyber risk, general liability, automobile and property programs, among others. Liabilities associated with the risks that are retained by the Company are estimated by considering historical claims experience, trends of the Company and the industry and other actuarial assumptions. The estimated accruals for these liabilities could be affected if development of costs on claims differ from these assumptions and historical trends. Based on available information as of January 29, 2022, the Company believes it has provided adequate reserves for its self-insurance exposure. As of January 29, 2022 and January 30, 2021, self-insurance reserves were $11.4 million and $10.4 million, respectively.
Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales are recorded, net of returns, allowances and discounts, when obligations under the terms of a contract with the consumer are satisfied. This generally occurs at the time of transfer of control of merchandise. The Company considers several control indicators in its assessment of the timing of the transfer of control, including significant risks and rewards of ownership, physical possession and the Company’s right to receive payment. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring merchandise. Reserves for projected merchandise returns, discounts and allowances are determined based on historical experience and current expectations. Revenue is recognized on license fees related to Company-owned brand names, where the Company is the licensor, when the related sales of the licensee are made. The Company applies the guidance using the portfolio approach in ASC 606, Revenue from Contracts with Customers, because this methodology would not differ materially from applying the guidance to the individual contracts within the portfolio. The Company excludes sales and similar taxes collected from customers from the measurement of the transaction price for its retail sales.
Gift Cards
The Company sells gift cards to its customers in its retail stores, through its e-commerce sites and at other retailers. The Company’s gift cards do not have expiration dates or inactivity fees. The Company recognizes revenue from gift cards when (i) the gift card is redeemed by the consumer or (ii) the likelihood of the gift card being redeemed by the consumer is remote (“gift card breakage”) and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The gift card breakage rate is determined based upon historical redemption patterns. Gift card breakage is recognized during the 24-month period following the sale of the gift card, according to the Company’s historical redemption pattern. Gift card breakage income is included in net sales in the consolidated statements of earnings (loss) and the liability established upon the sale of a gift card is included in other accrued expenses within the consolidated balance sheets. The Company recognized gift card breakage of $1.0 million, $0.7 million and $1.1 million in 2021, 2020 and 2019, respectively.
Loyalty Program
The Company maintains a loyalty program at Famous Footwear, through which consumers earn points toward savings certificates for qualifying purchases. Upon reaching specified point values, consumers are issued a savings certificate that may be redeemed for purchases at Famous Footwear. Savings certificates earned must be redeemed within stated
expiration dates. In addition to the savings certificates, the Company also offers exclusive member discounts. The value of points and rewards earned by Famous Footwear’s loyalty program members are recorded as a reduction of net sales and a liability is established within other accrued expenses at the time the points are earned based on historical conversion and redemption rates. Approximately 78% of net sales in the Famous Footwear segment were made to its loyalty program members in 2021, compared to 79% in 2020. As of January 29, 2022 and January 30, 2021, the Company had a loyalty program liability of $18.8 million and $14.0 million, respectively, which is included in other accrued expenses on the consolidated balance sheets.
Store Impairment Charges
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, property and equipment at stores and the lease right-of-use asset, indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The Company recorded asset impairment charges, primarily for operating lease right-of-use assets, leasehold improvements, and furniture and fixtures in the Company’s retail stores, of $4.1 million, $56.3 million and $5.9 million in 2021, 2020 and 2019, respectively. Impairment charges were higher in 2020 as a result of the adverse economic conditions driven by the COVID-19 pandemic.
Advertising and Marketing Expense
Advertising and marketing costs are expensed as incurred, except for the costs of direct response advertising that relate primarily to the production and distribution of the Company’s catalogs and coupon mailers. Direct response advertising costs are capitalized and amortized over the expected future revenue stream, which is generally one to three months from the date the materials are mailed. External production costs of advertising are expensed when the advertising first appears in the media or in the store.
In addition, the Company participates in co-op advertising programs with certain of its wholesale customers. For those co-op advertising programs where the Company has validated the fair value of the advertising received, co-op advertising costs are reflected as advertising expense within selling and administrative expenses. Otherwise, co-op advertising costs are reflected as a reduction of net sales.
Total advertising and marketing expense was $118.1 million, $77.9 million and $100.9 million in 2021, 2020 and 2019, respectively. These costs were offset by co-op advertising allowances recovered by the Company’s retail business of $5.4 million, $3.4 million and $7.8 million in 2021, 2020 and 2019, respectively. Total co-op advertising costs reflected as a reduction of net sales were $10.8 million in 2021, $7.2 million in 2020 and $13.3 million in 2019. Total advertising costs attributable to future periods that are deferred and recognized as a component of prepaid expenses and other current assets were $4.4 million and $4.6 million at January 29, 2022 and January 30, 2021, respectively.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of its assets and liabilities. The Company establishes valuation allowances if it believes that it is more-likely-than-not that some or all of its deferred tax assets will not be realized. The Company does not recognize a tax benefit unless it concludes that it is more-likely-than-not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in its judgment, is greater than 50% likely to be realized. The Company records interest and penalties related to unrecognized tax positions within the income tax (provision) benefit on the consolidated statements of earnings (loss).
Operating Leases
The Company leases all of its retail locations, a manufacturing facility and certain office locations, distribution centers and equipment under operating leases. Approximately 38% of the leases entered into by the Company include options that allow the Company to extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. Some leases also include early termination options that can be exercised under specific conditions. In accordance with ASC Topic 842, Leases (“ASC 842”), lease right-of-use assets and lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on the information available at the commencement date, including implied traded debt yield and seniority adjustments, to determine the present value of future payments. Lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred. During 2020, the Company elected to account for COVID-19-related lease concessions as though the enforceable rights and obligations existed in the original lease and accordingly, treated those lease concessions as variable rent.
Contingent Rentals
Many of the leases covering retail stores require contingent rental payments in addition to the minimum monthly rental charge based on retail sales volume. The Company excludes from lease payments any variable payments that are not based on an index or market. If payment for a lease is fully contingent on sales, such as a percentage of sales gross rent lease, none of the lease payments are included in the lease right-of-use asset or the lease liability.
Construction Allowances Received From Landlords
At the time its retail facilities are initially leased, the Company often receives consideration from landlords to be applied against the cost of leasehold improvements necessary to open the store. The Company treats these construction allowances as a lease incentive. In accordance with ASC 842, the allowances are recorded within the lease right-of-use asset and amortized to income over the lease term as a reduction of rent expense.
Straight-Line Rents and Rent Holidays
The Company records rent expense on a straight-line basis over the lease term for all of its leased facilities. For leases that have predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as the lease right-of-use asset. At the time its retail facilities are leased, the Company is frequently not charged rent for a specified period of time, typically 30 to 60 days, while the store is being prepared for opening. This rent-free period is referred to as a rent holiday. The Company recognizes rent expense over the lease term, including any rent holiday, within selling and administrative expenses on the consolidated statements of earnings (loss).
Pre-opening Costs
Pre-opening costs associated with opening retail stores, including payroll, supplies and facility costs, are expensed as incurred.
Earnings (Loss) Per Common Share Attributable to Caleres, Inc. Shareholders
The Company uses the two-class method to calculate basic and diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders. Unvested restricted stock awards are considered participating units because they entitle holders to non-forfeitable rights to dividends or dividend equivalents during the vesting term. Under the two-class method, basic earnings (loss) per common share attributable to Caleres, Inc. shareholders is computed by dividing the net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders is computed by dividing the net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities by the weighted-average number of common shares and potential dilutive securities outstanding during the year. Potential dilutive securities consist of outstanding stock options and contingently issuable shares for the Company’s performance share awards. Refer to Note 3 to the consolidated financial statements for additional information related to the calculation of earnings (loss) per common share attributable to Caleres, Inc. shareholders.
Comprehensive Income (Loss)
Comprehensive income (loss) includes the effect of foreign currency translation adjustments, pension and other postretirement benefits adjustments and unrealized gains or losses from derivatives used for hedging activities.
Foreign Currency Translation Adjustment
For certain of the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings (loss) amounts are translated at average exchange rates for the period.
The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity. Transaction gains and losses are included in the consolidated statements of earnings (loss).
Pension and Other Postretirement Benefits Adjustments
The Company determines the expense and obligations for retirement and other benefit plans using assumptions related to discount rates, expected long-term rates of return on invested plan assets, expected salary increases and certain employee-related factors. The Company determines the fair value of plan assets and benefit obligations as of the January 31 measurement date. The unrecognized portion of the gain or loss on plan assets is included in the consolidated balance sheets as a component of accumulated other comprehensive loss in total Caleres, Inc. shareholders’ equity and is recognized into the plans’ expense over time. Refer to additional information related to pension and other postretirement benefits in Note 5 and Note 14 to the consolidated financial statements.
Derivative Financial Instruments
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 evaluates its exposure to volatility in foreign currency rates and may enter into derivative transactions that are intended to mitigate a portion of the effect of exchange rate fluctuations. The Company’s hedging strategy permits the use of forward contracts as cash flow hedging instruments to manage its currency exposures. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. The Company recognizes all derivative financial instruments as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive loss ("OCL") and reclassified to earnings in the period that the hedged transaction is recognized in earnings.
Litigation Contingencies
The Company is the defendant in several claims and lawsuits arising in the ordinary course of business. The Company believes the outcome of such proceedings and litigation currently pending will not have a material adverse effect on the consolidated financial position or results of operations. The Company accrues its best estimate of the cost of resolution of these claims. Legal defense costs of such claims are recognized in the period in which the costs are incurred. Refer to Note 16 to the consolidated financial statements for further discussion of commitments and contingencies.
Environmental Matters
The Company is involved in environmental remediation and ongoing compliance activities at several sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the facility. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. The Company’s prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws to address conditions that may be identified in the future. Refer to Note 16 to the consolidated financial statements for additional information.
Environmental expenditures relating to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Based upon independent environmental assessments, liabilities are recorded when remedial action is considered probable and the costs can be reasonably estimated and are evaluated independently of any future claims recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company’s commitment to a formal plan of action, and our estimates of cost are subject to change as new information becomes available. Costs of future expenditures for environmental remediation obligations are discounted to their present value in those situations requiring only continuing maintenance and monitoring based upon a schedule of fixed payments.
Share-Based Compensation
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards and stock options. Additionally, share-based grants may be made to non-employee members of the Board of Directors in the form of restricted stock units (“RSUs”) payable in cash or the Company’s common stock. The Company accounts for share-based
compensation in accordance with the fair value recognition provisions of ASC 718, Compensation - Stock Compensation, and ASC 505, Equity, which require all share-based payments to employees and members of the Board of Directors, including grants of employee stock options, to be recognized as expense in the consolidated financial statements based on their fair values. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Stock options generally vest over four years, with 25% vesting annually and expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. Expense for restricted stock is based on the fair value of the restricted stock on the date of grant. Expense for graded-vesting grants is recognized ratably over the respective vesting periods, which is generally 50% over two years and 50% over three years, and expense for cliff-vesting grants is recognized on a straight-line basis over the vesting period, which is generally one year. Expense for stock performance awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or units to be awarded on a straight-line basis over the respective term of the award, or individual vesting portion of an award. Expense for the initial grant of RSUs is recognized ratably over the one-year vesting period based upon the fair value of the RSUs, and for cash-equivalent RSUs, is remeasured at the end of each period. The Company accounts for forfeitures of share-based grants as they occur. If the anticipated number of shares to be awarded changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Refer to additional information related to share-based compensation in Note 15 to the consolidated financial statements.
Consolidated Statements of Cash Flows Supplemental Disclosures
The Company made payments for federal, state and international taxes, net of refunds, of $29.3 million, and $10.2 million in 2021 and 2019, respectively, and received refunds, net of payments, of $0.6 million in 2020. Refer to Note 6 to the consolidated financial statements for further information regarding income taxes.
Cash payments of interest for the Company’s borrowings under the revolving credit agreement and long-term debt during 2021, 2020 and 2019 were $20.4 million, $23.6 million and $26.8 million, respectively. Refer to Note 11 to the consolidated financial statements for further discussion regarding the Company’s financing arrangements.
Impact of Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The guidance changes the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans, eliminating the requirements for certain disclosures that are no longer considered cost beneficial and requiring new disclosures that the FASB considers pertinent. The Company adopted the ASU during the first quarter of 2021, which did not have a material impact on the Company’s financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions in ASC 740 related to intraperiod tax allocation, simplifies certain elements of accounting for basis differences and deferred tax liabilities during a business combination, and standardizes the classification of franchise taxes. The Company adopted ASU 2019-12 during the first quarter of 2021, which did not have a material impact on the Company’s consolidated financial statements.
In November 2020, the SEC issued SEC Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information. The rule amends existing requirements in Regulation S-K for disclosures related to management’s discussion and analysis and certain financial disclosure requirements. The final rule became effective on February 10, 2021 and the amendments are required for a registrant’s first fiscal year ending on or after August 9, 2021, with early adoption permitted on an item-by item basis. The Company adopted the amendments associated with Items 301 and 302 of the rule during 2020. The remaining provisions of the rule are reflected in this Form 10-K and did not have a material impact on the Company’s financial statement disclosures.
Impact of Prospective Accounting Pronouncements
The Company has evaluated all recently issued, but not yet effective, accounting pronouncements and does not expect any of the pronouncements to have a material impact on the Company’s consolidated financial statements or disclosures.
2. REVENUES
Disaggregation of Revenues
The following table disaggregates revenue by segment and major source for 2021, 2020 and 2019:
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
1,494,595
$
59,269
$
-
$
1,553,864
Landed wholesale - e-commerce - drop ship (1)
-
93,783
(2,427)
91,356
E-commerce - Company websites (1)
251,823
189,564
-
441,387
Total direct-to-consumer sales
$
1,746,418
$
342,616
$
(2,427)
$
2,086,607
First-cost wholesale - e-commerce (1)
-
3,011
-
3,011
Landed wholesale - e-commerce (1)
-
154,184
-
154,184
Landed wholesale - other
-
468,436
(49,263)
419,173
First-cost wholesale
-
100,467
-
100,467
Licensing and royalty
1,010
12,138
-
13,148
Other (2)
-
1,014
Total net sales
$
1,748,291
$
1,081,003
$
(51,690)
$
2,777,604
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
983,669
$
52,796
$
-
$
1,036,465
Landed wholesale - e-commerce - drop ship (1)
-
87,226
(4,192)
83,034
E-commerce - Company websites (1)
279,353
149,090
-
428,443
Total direct-to-consumer sales
$
1,263,022
$
289,112
$
(4,192)
$
1,547,942
First-cost wholesale - e-commerce (1)
-
1,249
-
1,249
Landed wholesale - e-commerce (1)
-
124,548
-
124,548
Landed wholesale - other
-
408,752
(44,770)
363,982
First-cost wholesale
-
69,172
-
69,172
Licensing and royalty
-
9,478
-
9,478
Other (2)
-
Net sales
$
1,263,551
$
902,481
$
(48,962)
$
2,117,070
Eliminations and
($ thousands)
Famous Footwear
Brand Portfolio
Other
Total
Retail stores
$
1,427,473
$
154,549
$
-
$
1,582,022
Landed wholesale - e-commerce - drop ship (1)
-
93,249
-
93,249
E-commerce - Company websites (1)
159,724
145,897
-
305,621
Total direct-to-consumer sales
$
1,587,197
$
393,695
$
-
$
1,980,892
First-cost wholesale - e-commerce (1)
-
2,204
-
2,204
Landed wholesale - e-commerce (1)
-
190,536
-
190,536
Landed wholesale - other
-
708,262
(72,955)
635,307
First-cost wholesale
-
96,021
-
96,021
Licensing and royalty
-
15,469
-
15,469
Other (2)
-
1,133
Net sales
$
1,588,057
$
1,406,460
$
(72,955)
$
2,921,562
(1) Collectively referred to as "e-commerce" below
(2) Includes breakage revenue from unredeemed gift cards
Retail stores
Traditionally, the majority of the Company’s revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company records a returns reserve and a corresponding return asset for expected returns of merchandise.
Retail sales to members of the Company’s loyalty programs, including the Famously You Rewards program, include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired.
Landed wholesale
Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many customers that purchase footwear on a landed basis arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.
First-cost wholesale
First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product and subsequently sells to a customer at an overseas port. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.
E-commerce
The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company’s distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company’s stores and e-commerce sales from the Company’s wholesale customers’ websites that are fulfilled on a drop-ship or first cost basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.
Licensing and royalty
The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company’s symbolic intellectual property, and revenue is therefore recognized over the license term. For
royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee’s sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.
The Company also licenses its Famous Footwear trade name and logo to a third-party financial institution to offer Famous Footwear-branded credit cards to its consumers. The Company receives royalties based upon cardholder spending, which is recognized as licensing revenue at the time when the credit card is used.
Contract Balances
Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.
Information about significant contract balances from contracts with customers is as follows:
($ thousands)
January 29, 2022
January 30, 2021
Customer allowances and discounts
$
20,328
$
17,043
Loyalty programs liability
18,814
13,986
Returns reserve
12,468
11,040
Gift card liability
6,804
6,091
Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during 2021, the loyalty programs liability increased $36.3 million due to points and material rights earned on purchases and decreased $31.5 million due to expirations and redemptions. During 2020, the loyalty programs liability increased $26.4 million due to points and material rights earned on purchases and decreased $28.8 million due to expirations and redemptions.
Allowance for Expected Credit Losses
The following table summarizes the activity in the Company’s allowance for expected credit losses for 2021 and 2020:
($ thousands)
Balance, beginning of period
$
14,928
$
1,813
Adjustment upon adoption of ASU 2016-13
-
2,521
Provision/adjustment for expected credit losses (1)
(2,242)
10,575
Uncollectible accounts written off, net of recoveries
(3,085)
Balance, end of period
$
9,601
$
14,928
(1) The Company’s provision/adjustment for expected credit losses for 2020 was higher than in 2021 as a result of the COVID-19 pandemic and its impact on the financial condition of several of the Company’s wholesale customers.
3. EARNINGS (LOSS) PER SHARE
The Company uses the two-class method to compute basic and diluted earnings (loss) 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 (loss) per common share attributable to Caleres, Inc. shareholders:
($ thousands, except per share amounts)
NUMERATOR
Net earnings (loss)
$
138,163
$
(438,994)
$
62,082
Net (earnings) loss attributable to noncontrolling interests
(1,144)
(120)
Net earnings (loss) attributable to Caleres, Inc.
$
137,019
$
(439,114)
$
62,819
Net earnings allocated to participating securities
(4,982)
-
(1,988)
Net earnings (loss) attributable to Caleres, Inc. after allocation of earnings to participating securities
$
132,037
$
(439,114)
$
60,831
DENOMINATOR
Denominator for basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
36,741
37,220
39,796
Dilutive effect of share-based awards
-
Denominator for diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
37,095
37,220
39,853
Basic earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.59
$
(11.80)
$
1.53
Diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders
$
3.56
$
(11.80)
$
1.53
Options to purchase 16,667 shares of common stock in both 2021 and 2019 and 22,667 shares of common stock in 2020, were not included in the denominator for diluted earnings (loss) per common share attributable to Caleres, Inc. shareholders because the effect would be antidilutive. Due to the Company’s net loss attributable to Caleres, Inc. in 2020, the denominator for diluted loss per common share attributed to Caleres, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Caleres, Inc. shareholders.
The Company repurchased 661,265, 2,902,122 and 1,704,240 shares at a cost of $17.0 million, $23.3 million and $33.4 million during the years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively, under the 2011, 2018 and 2019 publicly announced share repurchase programs. The 2011 and 2018 repurchase programs permit repurchases of up to 2.5 million shares and the 2019 repurchase program permits repurchases of up to 5.0 million shares, as further discussed in Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
4. RESTRUCTURING AND OTHER INITIATIVES
Blowfish Mandatory Purchase Obligation
On July 6, 2018, the Company acquired a controlling interest in Blowfish Malibu. The remaining interest was subject to a mandatory purchase obligation after a three-year period, which ended on July 31, 2021, based upon an earnings multiple formula as specified in the purchase agreement. Approximately $9.0 million was initially assigned to the mandatory purchase obligation and remeasurement adjustments on the mandatory purchase obligation were recorded as interest expense. The fair value adjustments on the mandatory purchase obligation totaled $15.4 million ($11.5 million on an after-tax basis, or $0.30 per diluted share) in 2021, $23.9 million ($17.8 million on an after-tax basis, or $0.48 per diluted share) in 2020 and $5.4 million ($4.0 million on an after-tax basis, or $0.10 per diluted share) in 2019. The mandatory
purchase obligation was settled for $54.6 million on November 4, 2021. The settlement of the $9.0 million initially assigned to the mandatory purchase obligation is presented within financing activities on the consolidated statements of cash flows and the remaining $45.6 million is presented within operating activities, in accordance with ASC 230, Statement of Cash Flows. Refer to further discussion regarding the mandatory purchase obligation in Note 13 to the consolidated financial statements.
Brand Portfolio - Business Exits
During 2021, the Company incurred costs of $13.5 million ($11.9 million on an after-tax basis, or $0.31 per diluted share) related to the strategic realignment of the Naturalizer retail store operations. These costs primarily represented lease termination and other store closure costs, including employee severance, for the 73 stores that were closed during the first quarter of 2021. These charges are presented in restructuring and special charges on the consolidated statement of earnings (loss) within the Brand Portfolio segment. As of January 29, 2022 and January 30, 2021, reserves of $0.4 million and $2.1 million, respectively, were included in other accrued expenses on the consolidated balance sheets related to the strategic realignment of the Naturalizer retail store operations.
During 2020, the Company incurred costs of $16.4 million ($14.9 million on an after-tax basis, or $0.40 per diluted share) related to the decision to close all but a limited number of its Naturalizer retail stores and exit the Fergie brand. Of these charges, which are all reflected within the Brand Portfolio segment, $12.4 million is presented as restructuring and other special charges and primarily represents non-cash impairment of property and right-of-use lease assets, incremental rent and lease termination costs, and severance costs. An additional $4.0 million is presented as cost of goods sold and represents the incremental inventory markdowns required to reduce the value of inventory for these two brands to net realizable value.
During 2019, the Company incurred costs of $3.5 million ($2.6 million on an after-tax basis, or $0.06 per diluted share) related to the decision to exit the Carlos brand and reposition the Via Spiga brand. Of these charges, which are all reflected within the Brand Portfolio segment, $3.0 million relates to incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the consolidated statements of earnings (loss), while the remaining $0.5 million, which is presented in restructuring and other special charges, is for severance and other related costs.
COVID-19-Related Impairments and Expenses
The Company incurred costs associated with the COVID-19 pandemic and related impacts on the Company’s business, totaling $114.3 million ($115.5 million on an after-tax basis, or $3.10 per diluted share) during 2020. These costs included non-cash impairment of property and equipment and lease right-of-use assets, incremental inventory markdowns, employee severance and other direct expenses specific to the impact of COVID-19 on the Company’s operations. Of the $114.3 million in charges, $80.9 million is presented in restructuring and other special charges, net and $33.4 million is reflected as cost of goods sold in the consolidated statements of earnings (loss). Of the $80.9 million presented as restructuring and other special charges, $63.7 million is reflected in the Brand Portfolio segment, $16.6 million is reflected in the Famous Footwear segment and $0.6 million is reflected within the Eliminations and Other category. The $33.4 million presented as cost of goods sold represents incremental inventory markdowns, of which $27.4 million is reflected in the Brand Portfolio segment and $6.0 million is reflected in the Famous Footwear segment. There were no corresponding charges in 2021 or 2019.
Vionic Acquisition and Integration-Related Costs
On October 18, 2018, the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC. The Company incurred acquisition and integration-related costs associated with the acquisition totaling $3.4 million ($2.6 million on an after-tax basis, $0.07 per diluted share) and $1.9 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) during 2020 and 2019, respectively. Of the $3.4 million in charges in 2020, which were presented as restructuring and other special charges in the consolidated statements of earnings (loss), $3.3 million is reflected within the Brand Portfolio segment and $0.1 million is reflected within the Eliminations and Other category, and represent non-cash impairment of assets, severance and other related costs. Of the $1.9 million in charges in 2019 presented as restructuring and other special charges, which were primarily for severance and professional fees, $1.8 million is reflected within the Eliminations and Other category and $0.1 million is reflected in the Brand Portfolio segment. There were no corresponding charges during 2021.
Expense Containment Initiatives
During the fourth quarter of 2019, the Company announced expense containment initiatives, including a Voluntary Early Retirement Program ("VERP") and other restructuring actions. The total costs to implement these initiatives, including employee-related costs for severance, health care benefits and enhanced pension benefits, which were recorded in the fourth quarter of 2019, were $15.0 million ($11.2 million on an after-tax basis, or $0.27 per diluted share). Of the $15.0 million in charges recorded in the fourth quarter of 2019, $12.3 million is presented as restructuring and other special charges, net and $2.7 million is presented as other income, net in the consolidated statements of earnings (loss). Of the $12.3 million presented as restructuring and other special charges, $5.0 million is reflected in the Brand Portfolio segment, $3.8 million is reflected within the Eliminations and Other category and $3.5 million is reflected in the Famous Footwear segment. The $2.7 million presented in other income within the Eliminations and Other category is a one-time pension settlement charge and special termination benefit costs associated with the VERP, as further discussed in Note 5 to the consolidated financial statements.
5. RETIREMENT AND OTHER BENEFIT PLANS
The Company sponsors pension plans in both the United States and Canada. Under the domestic plans, salaried, management and certain hourly employees’ pension benefits are based on a two-rate formula applied to each year of service. Participants receive the larger of the accrued benefit as of December 31, 2015 (based on service commencing at the date of hire and a 35-year service cap and an average annual salary for the five highest consecutive years during the last 10 year period) and the benefit calculated under the current plan provisions from the date of hire. Generally, under the current plan provisions, a participant receives credit for one year of service for each 365 days of employment as an eligible employee with the Company commencing after the employee’s date of participation in the plan, up to 30 years. Except for grandfathered employees and certain hourly associates in the Company’s retail divisions, final average compensation, taxable covered compensation and credit service for purposes of determining accrued pension benefits were frozen as of December 31, 2018.
The Company’s Canadian pension plans cover certain employees based on plan specifications. Under the Canadian plans, employees’ pension benefits are based on the employee’s highest consecutive five years of compensation during the 10 years before retirement. The Company’s funding policy for all plans is to make the minimum annual contributions required by applicable regulations. The Company also maintains an unfunded Supplemental Executive Retirement Plan (“SERP”). In addition to providing pension benefits, the Company sponsors unfunded postretirement life insurance plans that cover both salaried and hourly employees who became eligible for benefits by January 1, 1995. The life insurance plans provide coverage of up to $20,000 for qualifying retired employees.
Benefit Obligations
The following table sets forth changes in benefit obligations, including all domestic and Canadian plans:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Benefit obligation at beginning of year
$
365,570
$
388,288
$
1,249
$
1,371
Service cost
7,494
8,492
-
-
Interest cost
11,236
12,205
Plan participants’ contribution
Actuarial (gain) loss
(13,962)
8,710
(50)
(55)
Benefits paid
(15,062)
(15,272)
(96)
(112)
Settlements
-
(36,747)
-
-
Curtailments
-
(95)
-
-
Foreign exchange rate changes
(1)
(18)
-
-
Benefit obligation at end of year
$
355,286
$
365,570
$
1,143
$
1,249
The accumulated benefit obligation for the United States pension plans was $348.8 million and $358.7 million as of January 29, 2022 and January 30, 2021, respectively. The accumulated benefit obligation for the Canadian pension plans was $3.9 million and $4.0 million as of January 29, 2022 and January 30, 2021, respectively.
Pension Benefits
Other Postretirement Benefits
Weighted-average assumptions used to determine benefit obligations, end of year
Discount rate
3.40
%
3.10
%
3.40
%
3.10
%
Rate of compensation increase
3.00
%
3.00
%
N/A
N/A
As of January 29, 2022, the Company is using the PRI-2012 Bottom Quartile mortality table, projected using generational scale MP-2021, an updated base mortality table issued by the Society of Actuaries in 2021, to estimate the plan liabilities. Actuarial losses related to the change in mortality projection scales from the MP-2020 scale used in 2020 and the MP-2019 scale used in 2019, increased the projected benefit obligation by approximately $1.1 million and $2.0 million as of January 29, 2022 and January 30, 2021, respectively.
In the fourth quarter of 2020, a lump sum option was offered to certain former employees, resulting in $35.7 million of lump sum payments and a settlement charge that decreased the net periodic benefit income for 2020 by $1.1 million. During the fourth quarter of 2019, in conjunction with the Company’s expense containment initiatives, a Voluntary Early Retirement Program ("VERP") was offered to pension participants who met certain criteria. A lump sum option was also offered to certain former employees during the fourth quarter of 2019. The VERP and terminated vested lump sums resulted in $19.9 million of lump sum payments, and a settlement charge and curtailment that decreased the net periodic benefit income for 2019 by $2.7 million.
Plan Assets
Pension assets are managed in accordance with the prudent investor standards of the Employee Retirement Income Security Act (“ERISA”). The plan’s investment objective is to earn a competitive total return on assets, while also ensuring plan assets are adequately managed to provide for future pension obligations. This results in the protection of plan surplus and is accomplished by matching the duration of the projected benefit obligation using leveraged fixed income instruments and, while maintaining an equity commitment, managing an equity overlay strategy. The overlay strategy is intended to protect the managed equity portfolios against adverse stock market environments. The Company delegates investment management of the plan assets to specialists in each asset class and regularly monitors manager performance and compliance with investment guidelines. The Company’s overall investment strategy is to achieve a mix of approximately 97% of investments for long-term growth and 3% for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers. The target allocations for plan assets for 2021 were 70% equities and 30% debt securities. Allocations may change periodically based upon changing market conditions. Corporate stocks - common did not include any Company stock at January 29, 2022 or January 30, 2021.
Assets of the Canadian pension plans, which total approximately $5.0 million at January 29, 2022, were invested 55% in equity funds, 42% in bond funds and 3% in money market funds. The Canadian pension plans did not include any Company stock as of January 29, 2022 or January 30, 2021.
A financial instrument’s level within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Refer to further discussion on the fair value hierarchy in Note 13 to the consolidated financial statements. Following is a description of the pension plan investments measured at fair value, including the general classification of such investments pursuant to the valuation hierarchy.
● Cash and cash equivalents include cash collateral and margin as well as money market funds. The fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency and therefore are classified within Level 1 of the fair value hierarchy.
● Investments in U.S. government securities, the mutual fund, exchange-traded funds, corporate stocks - common, preferred securities and S&P 500 Index put and call options (traded on security exchanges) are classified within Level 1 of the fair value hierarchy because the fair values are based on unadjusted quoted market prices in active markets with sufficient volume and frequency. Interest rate swap agreements and certain U.S. government securities are not traded on an exchange but are based on observable inputs that can be corroborated. Therefore, these investments are classified within Level 2 of the fair value hierarchy. Certain preferred securities and corporate stocks - common were offered in a private placement. The fair value of these investments is based on unobservable prices and therefore, they are classified within Level 3 of the fair value hierarchy.
● The alternative investment fund is an investment in a pool of long-duration domestic investment grade assets. This investment is measured using net asset value per share, and therefore, is not classified within the fair value hierarchy.
● The unallocated insurance contract is measured at net asset value per share, and therefore, is not classified within the fair value hierarchy.
The fair values of the Company’s pension plan assets at January 29, 2022 by asset category are as follows:
Fair Value Measurements at January 29, 2022
($ thousands)
Total
Level 1
Level 2
Level 3
Asset
Cash and cash equivalents
$
11,714
$
11,714
$
-
$
-
U.S. government securities
102,525
46,668
55,857
-
Interest rate swap agreements
(232)
-
(232)
-
Mutual fund
31,595
31,595
-
-
Exchange-traded funds
120,323
120,323
-
-
Corporate stocks - common
155,014
155,014
-
-
Preferred securities
-
-
S&P 500 Index options
5,694
5,694
-
-
Total investments in the fair value hierarchy
$
427,156
$
371,008
$
55,625
$
Investments measured at net asset value:
Alternative investment fund
16,891
-
-
-
Unallocated insurance contract
-
-
-
Total investments measured at net asset value
16,935
-
-
-
Total investments at fair value
$
444,091
$
371,008
$
55,625
$
The fair values of the Company’s pension plan assets at January 30, 2021 by asset category are as follows:
Fair Value Measurements at January 30, 2021
($ thousands)
Total
Level 1
Level 2
Level 3
Asset
Cash and cash equivalents
$
9,149
$
9,149
$
-
$
-
U.S. government securities
108,733
50,116
58,617
-
Interest rate swap agreements
(4,597)
-
(4,597)
Mutual fund
38,064
38,064
-
-
Exchange-traded funds
119,647
119,647
-
-
Corporate stocks - common
160,137
160,112
-
Preferred securities
2,495
-
-
2,495
S&P 500 Index options
(6,482)
(6,482)
-
-
Total investments in the fair value hierarchy
$
427,146
$
370,606
$
54,020
$
2,520
Investments measured at net asset value:
Alternative investment fund
17,522
-
-
-
Unallocated insurance contract
-
-
-
Total investments measured at net asset value
17,571
-
-
-
Total investments at fair value
$
444,717
$
370,606
$
54,020
$
2,520
The following table sets forth changes in the fair value of plan assets, including all domestic and Canadian plans:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Fair value of plan assets at beginning of year
$
444,717
$
428,186
$
-
$
-
Actual return on plan assets
14,322
67,413
-
-
Employer contributions
1,148
Plan participants’ contributions
Benefits paid
(15,062)
(15,272)
(96)
(112)
Settlements
-
(36,747)
-
-
Foreign exchange rate changes
(1)
(18)
-
-
Fair value of plan assets at end of year
$
444,091
$
444,717
$
-
$
-
Funded Status
The over-funded status as of January 29, 2022 and January 30, 2021 for pension benefits was $88.8 million and $79.1 million, respectively. The under-funded status for other postretirement benefits was $1.1 million and $1.2 million as of January 29, 2022 and January 30, 2021, respectively.
Amounts recognized in the consolidated balance sheets consist of:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Prepaid pension costs (noncurrent assets)
$
99,139
$
88,833
$
-
$
-
Accrued benefit liabilities (current liability)
(3,755)
(1,896)
(189)
(194)
Accrued benefit liabilities (noncurrent liability)
(6,579)
(7,790)
(954)
(1,055)
Net amount recognized at end of year
$
88,805
$
79,147
$
(1,143)
$
(1,249)
The projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and for pension plans with an accumulated benefit obligation in excess of plan assets, which includes only the Company’s SERP, were as follows:
Projected Benefit Obligation Exceeds the
Accumulated Benefit Obligation
Fair Value of Plan Assets
Exceeds the Fair Value of Plan Assets
($ thousands)
End of Year
Projected benefit obligation
$
10,334
$
9,686
$
10,334
$
9,686
Accumulated benefit obligation
9,247
8,954
9,247
8,954
Fair value of plan assets
-
-
-
-
The accumulated postretirement benefit obligation exceeds assets for all of the Company’s other postretirement benefit plans.
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit income at January 29, 2022 and January 30, 2021 are as follows:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Components of accumulated other comprehensive loss, net of tax:
Net actuarial loss (gain)
$
8,807
$
10,438
$
(424)
$
(466)
Net prior service credit
(565)
(947)
-
-
Accumulated other comprehensive loss, net of tax
$
8,242
$
9,491
$
(424)
$
(466)
Net Periodic Benefit Income
Net periodic benefit income for 2021, 2020 and 2019 for all domestic and Canadian plans included the following components:
Pension Benefits
Other Postretirement Benefits
($ thousands)
Service cost
$
7,494
$
8,492
$
7,219
$
-
$
-
$
-
Interest cost
11,236
12,205
14,811
Expected return on assets
(28,437)
(31,498)
(27,735)
-
-
-
Amortization of:
Actuarial loss (gain)
2,410
2,718
3,904
(108)
(110)
(107)
Prior service credit
(514)
(1,354)
(1,486)
-
-
-
Settlement cost
-
1,353
2,236
-
-
-
Curtailments
-
(189)
-
-
-
-
Cost of contractual termination benefits
-
-
-
-
-
Total net periodic benefit income
$
(7,811)
$
(8,273)
$
(569)
$
(73)
$
(69)
$
(47)
The non-service cost components of net periodic benefit income are included in other income, net in the consolidated statements of earnings (loss). Service cost is included in selling and administrative expenses.
Pension Benefits
Other Postretirement Benefits
Weighted-average assumptions used to determine net periodic benefit income
Discount rate
3.10
%
3.25
%
4.35
%
3.10
%
3.25
%
4.35
%
Rate of compensation increase
3.00
%
3.00
%
3.00
%
N/A
N/A
N/A
Expected return on plan assets
7.25
%
7.50
%
7.75
%
N/A
N/A
N/A
The net actuarial loss (gain) subject to amortization is amortized on a straight-line basis over the average future service of active plan participants as of the measurement date. The prior service credit is amortized on a straight-line basis over the average future service of active plan participants benefiting under the plan at the time of each plan amendment.
The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class.
Expected Cash Flows
Information about expected cash flows for all pension and postretirement benefit plans follows:
Pension Benefits
Other
Postretirement
($ thousands)
Funded Plan
SERP
Total
Benefits
Employer Contributions
2022 expected contributions to plan trusts
$
$
-
$
$
-
2022 expected contributions to plan participants
3,818
4,238
2022 refund of assets (e.g. surplus) to employer
-
-
Expected Benefit Payments
-
$
17,852
$
3,818
$
21,670
$
15,148
3,376
18,524
15,618
1,021
16,639
16,241
1,315
17,556
16,782
17,261
2027-2031
89,409
1,600
91,009
Defined Contribution Plans
The Company’s domestic defined contribution 401(k) plan covers certain salaried employees. For eligible salaried employees, the Company makes a core contribution of 1.5% and a matching contribution of up to 50% of the first 6% of the employees’ contributions. The Company’s expense for this plan was $5.5 million in 2021, $4.0 million in 2020, and $5.4 million in 2019. In addition to the core and matching contributions, the Company has the discretion to contribute up to an additional 2% profit-sharing benefit based on the Company’s performance. The Company’s expense for the profit-sharing contribution was $3.3 million for 2021, with no corresponding expenses in 2020 or 2019.
The Company’s Canadian defined contribution plan covers certain salaried and hourly employees. The Company makes contributions for all eligible employees, ranging from 3% to 5% of the employee’s salary. In addition, eligible employees may voluntarily contribute to the plan. The Company’s expense for this plan was $0.1 million in both 2021 and 2020, and $0.2 million in 2019.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan of $7.5 million and $7.9 million as of January 29, 2022 and January 30, 2021, respectively, are presented in employee compensation and benefits in the accompanying consolidated balance sheets. The assets held by the trust of $7.5 million and $7.9 million as of January 29, 2022 and January 30, 2021, respectively, are presented within prepaid expenses and other current assets in the
accompanying consolidated balance sheets, with changes in the deferred compensation charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan, whereby deferred compensation amounts are valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the fair value (as determined based on 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 PSUs are payable in cash based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair value at fiscal quarter-end on or following termination of the director’s service. The liabilities of the plan of $1.8 million as of January 29, 2022 and $1.0 million as of January 30, 2021 are based on 64,227 and 23,644 outstanding PSUs, respectively, and are presented in other liabilities in the accompanying consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are charged to selling and administrative expenses in the accompanying consolidated statements of earnings (loss).
6. INCOME TAXES
The components of earnings (loss) before income taxes consisted of domestic earnings before income taxes of $152.5 million and $37.3 million in 2021 and 2019, respectively, and domestic loss before income taxes of $441.5 million in 2020. The Company’s international earnings before incomes taxes were $36.7 and $41.3 million in 2021 and 2019, respectively, and international losses before income taxes were $75.6 million in 2020.
The components of income tax provision (benefit) on earnings (loss) were as follows:
($ thousands)
Federal
Current
$
36,388
$
(37,140)
$
4,003
Deferred
(227)
(45,145)
5,390
Total federal income tax provision (benefit)
36,161
(82,285)
9,393
State
Current
4,012
1,532
Deferred
6,531
(9,038)
2,403
Total state income tax provision (benefit)
10,543
(7,506)
2,693
International
Current
4,615
2,288
3,914
Deferred
(238)
9,386
Total international income tax provision
4,377
11,674
4,425
Total income tax provision (benefit)
$
51,081
$
(78,117)
$
16,511
The differences between the income tax provision (benefit) reflected in the consolidated financial statements and the amounts calculated at the federal statutory income tax rate were as follows:
($ thousands)
Income taxes at statutory rate
$
39,741
$
(108,593)
$
16,505
State income taxes, net of federal tax benefit
8,361
(17,433)
2,218
International earnings taxed at differing rates from U.S. statutory
(3,588)
(5,210)
(4,071)
Share-based compensation
1,094
Non-deductibility of goodwill impairment
-
20,179
-
Impairment of international trade name taxed at higher rate
-
(1,440)
-
Provision for valuation allowance, net of utilization
8,978
41,019
CARES Act NOL, net carryback benefit (1)
(8,203)
-
Non-deductibility of 162(m) limitations
3,377
1,005
1,113
GILTI, BEAT and FDII provisions
-
International entity restructuring (2)
(6,697)
-
-
Other (3)
(535)
(880)
Total income tax provision (benefit)
$
51,081
$
(78,117)
$
16,511
(1) The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law during 2020. Among the Internal Revenue Code provisions modified by the CARES Act was a five-year carryback period for net operating losses incurred in the 2018, 2019 and 2020 tax years; temporary removal of the 80% limitation on net operating loss usage, reinstated for tax years after 2020; a temporary increase in the interest expense limitation and acceleration of refundable AMT credit. The five-year carryback presented an opportunity to carry back net operating losses from years with a statutory 21% federal tax rate to years when the rate was 35%.
(2) Reflects the deferred tax impacts of the liquidation of certain international subsidiaries, with related impacts presented in the provision for valuation allowance, net of utilization line in the table above.
(3) The other category of income tax provision (benefit) principally represents the impact of expenses that are not deductible or partially deductible for federal income tax purposes and the impact of any return-to-provision adjustments.
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
($ thousands)
January 29, 2022
January 30, 2021
Deferred Tax Assets
Lease obligations
$
149,123
$
176,953
Goodwill
43,510
56,191
Net operating loss carryforward/carryback
14,441
20,736
Accrued expenses
25,314
18,610
Employee benefits, compensation and insurance
15,751
11,006
Accounts receivable
5,735
6,149
Inventory capitalization and inventory reserves
6,013
4,130
Impairment of investment in nonconsolidated affiliate
1,470
1,470
Postretirement and postemployment benefit plans
Other
1,261
1,259
Total deferred tax assets, before valuation allowance
262,877
296,789
Valuation allowance
(58,959)
(49,981)
Total deferred tax assets, net of valuation allowance
$
203,918
$
246,808
Deferred Tax Liabilities
Lease right-of-use assets
$
(134,888)
$
(151,962)
Intangible assets
(10,624)
(30,532)
LIFO inventory valuation
(37,675)
(38,437)
Retirement plans
(23,718)
(21,041)
Capitalized software
(5,042)
(5,331)
Depreciation
(3,818)
(4,779)
Other
(2,884)
(2,970)
Total deferred tax liabilities
(218,649)
(255,052)
Net deferred tax liability
$
(14,731)
$
(8,244)
As of January 29, 2022, the Company had various federal, state and international net operating loss (“NOL”) carryforwards with tax values totaling $14.4 million. The state NOLs totaling $4.8 million have carryforward periods ranging from one to 20 years. The Company has NOLs in Canada and the United Kingdom of $7.7 million and $1.9 million, respectively. The Canada NOLs have carryforward periods ranging from 15 to 20 years, while the United Kingdom NOLs have no expiration. As of January 29, 2022, the Company is in a three-year cumulative loss position for federal, state and certain international tax jurisdictions. Accordingly, as of January 29, 2022, the Company increased its valuation allowances on deferred tax assets to $59.0 million, reflecting the uncertainty regarding the utilization of its deferred tax assets.
As of January 29, 2022, no deferred taxes have been provided on the accumulated unremitted earnings of the Company’s international subsidiaries that are not subject to United States income tax, beyond the amounts recorded for the one-time transition tax for the mandatory deemed repatriation of cumulative international earnings, as required by the Tax Cuts and Jobs Act. The Company periodically evaluates its international investment opportunities and plans, as well as its international working capital needs, to determine the level of investment required and, accordingly, determines the level of international earnings that is considered indefinitely reinvested. Based upon that evaluation, earnings of the Company’s international subsidiaries that are not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted international earnings. If the Company’s unremitted international earnings were not considered indefinitely reinvested as of January 29, 2022, an immaterial amount of additional deferred taxes would have been provided.
Uncertain Tax Positions
ASC 740, Income Taxes, establishes a single model to address accounting for uncertain tax positions. The standard clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The standard also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition. As of January 29, 2022,
January 30, 2021 and February 1, 2020, the Company had unrecognized tax benefits of $1.0 million, $1.5 million and $1.9 million, respectively, associated with international jurisdictions.
For federal purposes, the Company’s tax filings for fiscal years 2018 to 2020 remain open to examination but are not currently being examined. The Company also files tax returns in various international jurisdictions and numerous states for which various tax years are subject to examination and currently involved in audits. While the Company is involved in examinations in certain jurisdictions, it does not expect any significant changes in its liability for uncertain tax positions during the next 12 months.
7. BUSINESS SEGMENT INFORMATION
The Company’s reportable segments are Famous Footwear and Brand Portfolio. The Famous Footwear segment is comprised of Famous Footwear, famousfootwear.com and famousfootwear.ca. Famous Footwear operated 894 stores at the end of 2021, selling primarily branded footwear for the entire family.
The Brand Portfolio segment is comprised of wholesale operations selling the Company’s branded footwear, and the retail stores and e-commerce sites associated with those brands. This segment sources, manufactures and markets licensed, branded and private-label footwear primarily to online retailers, national chains, department stores, mass merchandisers and independent retailers as well as Company-owned Famous Footwear, Sam Edelman, Naturalizer and Allen Edmonds stores and e-commerce businesses. The Brand Portfolio segment included 70 branded retail stores in the United States and 16 branded retail stores in China at the end of 2021.
The Company’s Famous Footwear and Brand Portfolio reportable segments are operating units that are managed separately. These reportable segments reflect the level at which the Company’s chief operating decision maker evaluates financial performance and allocates resources. Operating earnings (loss) for the reportable segments represents gross profit, less selling and administrative expenses, impairment of goodwill and intangible assets and restructuring and other special charges, net. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements. Intersegment sales are generally recorded at a profit, and intersegment earnings related to inventory on hand at the purchasing segment are eliminated against the earnings.
Corporate assets, administrative expenses and other costs and recoveries that are not allocated to the operating units, as well as the elimination of intersegment sales and profit, are reported in the Eliminations and Other category.
Following is a summary of certain key financial measures for the respective periods:
Famous
Brand
Eliminations
($ thousands)
Footwear
Portfolio
and Other
Total
Fiscal 2021
Net sales
$
1,748,291
$
1,081,003
$
(51,690)
$
2,777,604
Intersegment sales
-
51,690
-
51,690
Depreciation and amortization
20,333
23,762
8,235
52,330
Operating earnings (loss)
276,415
35,928
(106,536)
205,807
Segment assets
705,063
944,241
194,622
1,843,926
Purchases of property and equipment
12,480
3,977
1,936
18,393
Capitalized software
5,623
5,752
Fiscal 2020
Net sales
$
1,263,551
$
902,481
$
(48,962)
$
2,117,070
Intersegment sales
-
48,962
-
48,962
Depreciation and amortization
23,090
28,889
8,560
60,539
Operating loss
(23,821)
(408,444)
(53,393)
(485,658)
Segment assets
765,754
851,027
250,269
1,867,050
Purchases of property and equipment
7,693
6,486
2,607
16,786
Capitalized software
4,251
5,274
Fiscal 2019
Net sales
$
1,588,057
$
1,406,460
$
(72,955)
$
2,921,562
Intersegment sales
-
72,955
-
72,955
Depreciation and amortization
26,706
29,875
8,981
65,562
Operating earnings (loss)
76,896
58,153
(31,236)
103,813
Segment assets
891,042
1,383,500
157,165
2,431,707
Purchases of property and equipment
16,129
21,973
6,431
44,533
Capitalized software
1,544
4,059
5,619
Products purchased for the Famous Footwear segment from three key third-party suppliers (Nike, Skechers and adidas) represented approximately 26%, 25% and 22% of consolidated net sales for 2021, 2020 and 2019, respectively.
Following is a reconciliation of operating earnings (loss) to earnings (loss) before income taxes:
($ thousands)
Operating earnings (loss)
$
205,807
$
(485,658)
$
103,813
Interest expense, net
(30,930)
(48,287)
(33,123)
Loss on early extinguishment of debt
(1,011)
-
-
Other income, net
15,378
16,834
7,903
Earnings (loss) before income taxes
$
189,244
$
(517,111)
$
78,593
For geographic purposes, the domestic operations include the Company’s domestic retail operations, the wholesale distribution of licensed, branded and private-label footwear to a variety of retail customers, including the Famous Footwear and Brand Portfolio stores, as well as the Company’s e-commerce businesses.
The Company’s international operations consist of wholesale and retail operations primarily in Eastern Asia, Canada and Europe. The Eastern Asia operations primarily include first-cost transactions, where footwear is sold at international ports to customers who then import the footwear into the United States and other countries.
A summary of the Company’s net sales and long-lived assets, including lease right-of-use assets and property and equipment, by geographic area were as follows:
($ thousands)
Net Sales
United States
$
2,600,848
$
1,984,713
$
2,734,912
Eastern Asia
119,857
77,793
98,045
Canada
43,789
46,781
80,247
Other
13,110
7,783
8,358
Total net sales
$
2,777,604
$
2,117,070
$
2,921,562
Long-Lived Assets (1)
United States
$
630,519
$
703,642
$
881,338
Canada
14,687
20,246
35,317
Eastern Asia
8,357
2,660
3,527
Other
Total long-lived assets
$
653,668
$
726,740
$
920,440
(1) Long-lived assets include $503,430, $554,303 and $695,594 of lease right-of-use assets in 2021, 2020 and 2019, respectively.
8. INVENTORIES
The Company’s net inventory balance was comprised of the following:
($ thousands)
January 29, 2022
January 30, 2021
Raw materials
$
16,764
$
14,592
Work-in-process
Finished goods
579,429
473,014
Inventories, net
$
596,807
$
487,955
As of January 29, 2022 and January 30, 2021, the Company’s inventory balance included $0.1 million and $0.8 million, respectively, of finished goods product subject to consignment arrangements with wholesale customers.
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
($thousands)
January 29, 2022
January 30, 2021
Land and buildings
$
48,355
$
53,561
Leasehold improvements
197,218
208,939
Technology equipment
49,550
49,105
Machinery and equipment
98,308
98,862
Furniture and fixtures
127,125
126,405
Construction in progress
3,066
6,773
Property and equipment
523,622
543,645
Allowances for depreciation
(373,384)
(371,208)
Property and equipment, net
$
150,238
$
172,437
Useful lives of property and equipment are as follows:
Years
Buildings
5 - 30
Leasehold improvements
5 - 20
Technology equipment
2 - 10
Machinery and equipment
4 - 20
Furniture and fixtures
3 - 10
The Company recorded charges for impairment of $4.1 million, $56.3 million and $5.9 million in 2021, 2020 and 2019, respectively, primarily for operating lease right-of-use assets, leasehold improvements and furniture and fixtures in the Company’s retail stores. All of the charges in 2021 and 2019 are presented in selling and administrative expenses. Of the $56.3 million of impairment charges in 2020, $55.3 million is reflected in restructuring and other special charges, and $1.0 million is reflected in selling and administrative expenses. Fair value was based on estimated future cash flows to be generated by retail stores, discounted at a market rate of interest. Refer to Note 4, Note 12 and Note 13 to the consolidated financial statements for further discussion of these impairment charges.
Interest costs for major asset additions are capitalized during the construction or development period and amortized over the lives of the related assets. The Company capitalized interest of $0.6 million in 2019 related to the new company-operated Brand Portfolio warehouse facilities in California, with no corresponding interest capitalized in 2021 or 2020.
Property and Equipment, Held for Sale
In April 2021, the Company announced that it would begin marketing for sale its nine-acre corporate headquarters campus (the “Campus”) located in Clayton, Missouri and the Company is currently in negotiations to sell the campus. The Company expects a portion of the campus to qualify as a completed sale within twelve months. Accordingly, as of January 29, 2022, that portion of the Campus, which is included in the Eliminations and Other category, is classified within property and equipment, held for sale on the consolidated balance sheet. The remaining portion of the Campus that is not anticipated to qualify as a completed sale within twelve months is classified as property and equipment, net on the consolidated balance sheet as of January 29, 2022. The Company evaluated the Campus asset group for impairment indicators and determined that no indicators were present.
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets were as follows:
($ thousands)
January 29, 2022
January 30, 2021
Intangible Assets
Famous Footwear
$
2,800
$
2,800
Brand Portfolio
342,083
342,083
Total intangible assets
344,883
344,883
Accumulated amortization
(122,336)
(109,768)
Total intangible assets, net
222,547
235,115
Goodwill
Brand Portfolio (1)
4,956
4,956
Total goodwill
4,956
4,956
Goodwill and intangible assets, net
$
227,503
$
240,071
(1) The carrying amount of goodwill as of January 29, 2022 and January 30, 2021 is presented net of accumulated impairment charges of $415.7 million.
The Company’s intangible assets as of January 29, 2022 and January 30, 2021 were as follows:
($ thousands)
January 29, 2022
Estimated Useful Lives
Accumulated
Accumulated
(In Years)
Cost Basis
Amortization
Impairment
Net Carrying Value
Trade names
2 - 40
$
299,488
$
112,061
$
10,200
$
177,227
Trade names
Indefinite
107,400
-
92,000
15,400
Customer relationships
15 - 16
44,200
10,275
4,005
29,920
$
451,088
$
122,336
$
106,205
$
222,547
January 30, 2021
Estimated Useful Lives
Accumulated
Accumulated
(In Years)
Cost Basis
Amortization
Impairment
Net Carrying Value
Trade names
2 - 40
$
299,488
$
101,919
$
10,200
$
187,369
Trade names
Indefinite
107,400
-
92,000
15,400
Customer relationships
15 - 16
44,200
7,849
4,005
32,346
$
451,088
$
109,768
$
106,205
$
235,115
Amortization expense related to intangible assets was $12.6 million in 2021, $13.0 million in 2020 and $13.1 million in 2019. The Company estimates $12.1 million of amortization expense related to intangible assets in 2022, $11.9 million in 2023 and $11.0 million in 2024, 2025 and 2026.
Goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate it might be impaired, using either the qualitative assessment or a quantitative fair value-based test. During 2021 and 2019, the goodwill impairment testing was performed as of the first day of the fourth fiscal quarter, which resulted in no impairment charges. During the first quarter of 2020, as a result of the significant decline in the Company’s share price and market capitalization and the impact of the pandemic on the Company’s business operations, the Company determined that an interim assessment of goodwill was required. A quantitative assessment was performed for all reporting units as of May 2, 2020. The assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units was impaired, resulting in total goodwill impairment charges of $240.3 million, which are reflected within the Brand Portfolio segment. In addition to the interim assessment, the Company performed an impairment review of the remaining goodwill balance, which is associated with the Blowfish Malibu reporting unit, as of the first day of the fourth fiscal quarter. That review indicated no impairment.
Indefinite-lived intangible assets are tested for impairment as of the first day of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required. The Company did not record any impairment charges for intangible assets during 2021 or 2019. As a result of the triggering event from the economic impacts of the pandemic, an interim assessment was performed as of May 2, 2020. The interim indefinite-lived trade name impairment review resulted in total impairment charges of $22.4 million, including $12.2 million associated with the indefinite-lived Allen Edmonds trade name and $10.2 million of impairment associated with the indefinite-lived Via Spiga trade name. In addition to the interim assessment, the Company tested the indefinite-lived intangible assets as of the first day of the fourth fiscal quarter. As a result of the impairment indicator for Allen Edmonds, the Company also tested the definite-lived Allen Edmonds customer relationships intangible asset. Those reviews resulted in additional impairment totaling $23.8 million, consisting of $19.8 million associated with the Allen Edmonds trade name and $4.0 million associated with the Allen Edmonds customer relationships intangible asset. Total intangible asset impairment charges of $46.2 million in 2020 are reflected within the Brand Portfolio segment.
11. LONG-TERM AND SHORT-TERM FINANCING ARRANGEMENTS
Credit Agreement
The Company maintains a revolving credit facility for working capital needs. The Company is the lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds LLC, Vionic Group LLC and Vionic International LLC
are each co-borrowers and guarantors. On October 5, 2021, the Company entered into a Fifth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the "Credit Agreement") which, among other modifications, extended the maturity date of the credit facility from January 18, 2024 to October 5, 2026, and decreased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $500.0 million, subject to borrowing base restrictions, which may be further increased by up to $250.0 million. The Credit Agreement also decreased the spread applied to the London Interbank Offered Rate (“LIBOR”) or prime rate by a total of 75 basis points.
Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.
Interest on borrowings is at variable rates based on LIBOR (with a floor of 0.0%) or the prime rate (as defined in the Credit Agreement), plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to create, incur, assume or permit to exist additional indebtedness and liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, if excess availability falls below the greater of 10.0% of the Loan Cap and $40.0 million for three consecutive business days, and the fixed charge coverage ratio is less than 1.25 to 1.0, the Company would be in default under the Credit Agreement and certain additional covenants would be triggered.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. If an event of default occurs, the collateral agent may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days, provided that a cash dominion event shall be deemed continuing (even if an event of default is no longer continuing and/or excess availability exceeds the required amount for 30 consecutive business days) after a cash dominion event has occurred and been discontinued on two occasions in any 12-month period. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of January 29, 2022.
The maximum amount of borrowings under the Credit Agreement at the end of any month was $290.0 million and $438.5 million in 2021 and 2020, respectively. In March 2020, the Company increased the borrowings on the revolving credit facility to $440.0 million as a precautionary measure to increase its cash position and preserve financial flexibility given the uncertainty resulting from COVID-19. The Company made debt reduction a priority during the second half of 2020 and throughout 2021. As of January 29, 2022, the Company had $290.0 million of borrowings outstanding and $10.8 million in letters of credit outstanding under the Credit Agreement, with total additional borrowing availability of $155.2 million at January 29, 2022. Average daily borrowings during the year were $172.8 million and $299.8 million in 2021 and 2020, respectively, and the weighted-average interest rates approximated 2.5% and 3.4% for the respective periods.
Senior Notes
On July 27, 2015, the Company issued $200.0 million aggregate principal amount of Senior Notes due on August 15, 2023 (the "Senior Notes"). The Senior Notes bore interest at 6.25%, which was payable on February 15 and August 15 of each year. The Senior Notes were guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that is a borrower or guarantor under the Credit Agreement. On August 16, 2021, the Company redeemed $100.0 million of Senior
Notes at 100.0%. In addition, on January 3, 2022, the remaining $100.0 million of Senior Notes were redeemed at 100.0%, extinguishing the Company’s long-term debt.
Loss on Early Extinguishment of Debt
In conjunction with the redemptions of the Senior Notes in August 2021 and January 2022, prior to the maturity in August 2023, the Company incurred losses on early extinguishment of debt totaling $0.8 million. In addition, the Company incurred a loss on early extinguishment of debt of $0.2 million associated with the amendment of the revolving credit facility prior to its maturity.
12. LEASES
The Company leases all of its retail locations, a manufacturing facility, and certain office locations, distribution centers and equipment. At contract inception, leases are evaluated and classified as either operating or finance leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
During the first quarter of 2019, the Company adopted ASC 842, using the modified retrospective transition method. The Company elected the package of practical expedients and the expedient to account for lease and non-lease components as a single component for the entire population of operating lease assets. The Company did not elect the hindsight practical expedient to reevaluate the lease term of existing contracts.
Lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The majority of the Company’s leases do not provide an implicit rate and therefore, the Company uses an incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred.
The Company regularly analyzes the results of all of its stores and assesses the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events, property and equipment at stores and the lease right-of-use assets indicated as impaired are written down to fair value as calculated using a discounted cash flow method. The fair value of the lease right-of-use assets is determined utilizing projected cash flows for each store location, discounted using a risk-adjusted discount rate, subject to a market floor based on current market lease rates. The Company recorded asset impairment charges, primarily related to underperforming retail stores, of $4.1 million, $56.3 million and $5.9 million during 2021, 2020 and 2019, respectively. The impairment charges recorded in 2020, including $31.4 million associated with operating lease right-of-use assets and $24.9 million associated with property and equipment, primarily reflect the impact of the pandemic on the Company’s retail operations and estimates of remaining cash flows for each store, as well as the decision to close all but two of the Company’s Naturalizer retail stores. Refer to Note 4 and Note 13 to the consolidated financial statements for further discussion on these impairment charges.
As a result of the temporary store closures during the first half of 2020 associated with the pandemic, certain leases were amended to provide rent abatements and/or deferral of lease payments. Deferred payments continue to be reflected in the lease obligations on the consolidated balance sheets. Under relief provided by the FASB, entities could make a policy election to account for the lease concessions related to COVID-19 as if the enforceable rights existed under the original contract, accounting for them as variable rent rather than lease modifications. The Company made a policy election to account for rent abatements as variable rent. Accordingly, in 2021 and 2020, the Company recorded $2.1 million and $5.4 million, respectively, in lease concessions as a reduction of rent expense within selling and administrative expenses in the consolidated statements of earnings (loss). Rent concessions for leases that were extended were recognized as a lease modification.
The weighted-average lease term and discount rate as of January 29, 2022 and January 30, 2021 were as follows:
January 29, 2022
January 30, 2021
Weighted-average remaining lease term (in years)
6.5
6.8
Weighted-average discount rate
4.2
%
4.2
%
During 2021, the Company entered into new or amended leases that resulted in the recognition of right-of-use assets and lease obligations of $118.1 million on the consolidated balance sheets. As of January 29, 2022, the Company has entered into lease commitments for four retail locations for which the leases have not yet commenced. The Company anticipates that the leases for three of the new retail locations will begin in the next fiscal year and one will begin in fiscal year 2023. Upon commencement, right-of-use assets and lease liabilities of approximately $2.2 million and $1.2 million will be recorded on the consolidated balance sheets, in 2022 and 2023, respectively.
The components of lease expense for 2021 and 2020 were as follows:
($ thousands)
Operating lease expense
$
149,850
$
167,624
Variable lease expense
40,654
48,443
Short-term lease expense
2,837
4,512
Sublease income
(652)
(96)
Total lease expense (1)
$
192,689
$
220,483
(1) Net of lease concessions recognized of $2.1 million and $5.4 million for 2021 and 2020, respectively.
The aggregate future annual lease obligations at January 29, 2022 were as follows:
($ thousands)
$
149,984
122,059
96,474
76,467
58,845
Thereafter
165,948
Total minimum operating lease payments
$
669,777
Less imputed interest
(88,373)
Present value of lease obligations
$
581,404
Supplemental cash flow information related to leases is as follows:
($ thousands)
Cash paid for lease liabilities (1)
$
179,921
$
145,552
$
196,033
Cash received from sublease income
(1) Cash paid for lease liabilities in 2021 includes payment of certain lease payments deferred in 2020, as described above, as well as lease termination costs associated with the Naturalizer retail store closures, as further discussed in Note 4 to the consolidated financial statements. In addition, cash paid for lease liabilities in 2020 was significantly lower than comparable periods, reflecting the deferral of lease payments during the onset of the pandemic.
13. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value measurement disclosure requirements specify a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained
from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the inputs to valuation techniques used to measure fair value are categorized into three levels based on the reliability of the inputs as follows:
● Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
● Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
● Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
In determining fair value, the Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company also considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Measurement of Fair Value
The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value.
Money Market Funds
The Company has cash equivalents primarily consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations and it does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan Assets and Liabilities
The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participants generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified within prepaid expenses and other current assets in the accompanying consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1).
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs equal to the number of shares of the Company’s common stock that the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other accrued expenses (current portion) or other liabilities in the accompanying 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 consolidated statements of earnings (loss). The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).
Restricted Stock Units for Non-Employee Directors
Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company were previously granted at no cost to non-employee directors. These cash-equivalent RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent units and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each cash-equivalent RSU payable is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). Additional information related to RSUs for non-employee directors is disclosed in Note 15 to the consolidated financial statements.
Mandatory Purchase Obligation
The Company recorded a mandatory purchase obligation of the noncontrolling interest in conjunction with the acquisition of Blowfish Malibu in July 2018 as further discussed in Note 4 in the consolidated financial statements. The fair value of the mandatory purchase obligation is based on the earnings formula specified in the Purchase Agreement (Level 3). The mandatory purchase obligation and any fair value adjustments are recorded as interest expense. The Company recorded fair value adjustments of $15.4 million, $23.9 million, $6.0 million during 2021, 2020 and 2019, respectively. The earnings projections and discount rate utilized in the initial estimate of the fair value of the mandatory purchase obligation required management judgment and were the assumptions to which the fair value calculation was the most sensitive.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at January 29, 2022 and January 30, 2021. The Company did not have any transfers between Level 1, Level 2 or Level 3 during 2021, 2020 or 2019.
Fair Value Measurements
($ thousands)
Total
Level 1
Level 2
Level 3
Asset (Liability)
January 29, 2022:
Non-qualified deferred compensation plan assets
$
7,463
$
7,463
$
-
$
-
Non-qualified deferred compensation plan liabilities
(7,463)
(7,463)
-
-
Deferred compensation plan liabilities for non-employee directors
(1,770)
(1,770)
-
-
Restricted stock units for non-employee directors
(2,568)
(2,568)
-
-
January 30, 2021:
Cash equivalents - money market funds
$
45,000
$
45,000
$
-
$
-
Non-qualified deferred compensation plan assets
7,918
7,918
-
-
Non-qualified deferred compensation plan liabilities
(7,918)
(7,918)
-
-
Deferred compensation plan liabilities for non-employee directors
(989)
(989)
-
-
Restricted stock units for non-employee directors
(1,661)
(1,661)
-
-
Mandatory purchase obligation - Blowfish Malibu
(39,134)
-
-
(39,134)
Impairment Charges
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurement. Long-lived assets held and used with a carrying amount of $545.1 million, $615.7 million and $780.2 million in 2021, 2020 and 2019, respectively, were assessed for indicators of impairment. This assessment resulted in the impairment charges presented in the table below, primarily for operating lease right-of-use assets, leasehold
improvements, and furniture and fixtures in the Company’s retail stores. Higher impairment charges were recorded in 2020, reflecting adverse economic conditions, driven in part by the COVID-19 pandemic.
($ thousands)
Long-Lived Asset Impairment Charges
Famous Footwear
$
1,241
$
14,900
$
1,980
Brand Portfolio
2,894
41,443
3,887
Total long-lived asset impairment charges
$
4,135
$
56,343
$
5,867
The Company performed its annual impairment review of intangible assets, which involves estimating the fair value using significant unobservable inputs (Level 3). The intangible asset impairment reviews performed in 2021 and 2019 resulted in no impairment charges. As a result of its annual impairment testing, the Company recorded $46.2 million in impairment charges in 2020, as further discussed in Note 1 and Note 10 to the consolidated financial statements.
During 2021, the Company performed a qualitative assessment of goodwill as of the first day of the fourth fiscal quarter. The review indicated no impairment. During 2020, the Company performed an interim impairment test of goodwill, as further discussed in Note 10 to the consolidated financial statements. A quantitative assessment was performed for all reporting units as of May 2, 2020, which involved estimating the fair value of the reporting units using significant unobservable inputs (Level 3). The assessment indicated that the carrying value of the goodwill associated with the Brand Portfolio and Vionic reporting units was impaired, resulting in total goodwill impairment charges of $240.3 million. The quantitative assessments performed as of the first day of the fourth fiscal quarter of 2020 and 2019 resulted in no impairment charges. Refer to Note 1 and Note 10 to the consolidated financial statements for additional information related to the goodwill impairment tests.
Fair Value of the Company’s Other Financial Instruments
The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables and trade accounts payable approximate their carrying values due to the short-term nature of these instruments.
The carrying amounts and fair values of the Company’s other financial instruments subject to fair value disclosures are as follows:
January 29, 2022
January 30, 2021
Carrying
Carrying
($ thousands)
Value (1)
Fair Value
Value (1)
Fair Value
Borrowings under revolving credit agreement
$
290,000
$
290,000
$
250,000
$
250,000
Long-term debt
-
-
200,000
201,000
Total debt
$
290,000
$
290,000
$
450,000
$
451,000
(1) Excludes unamortized debt issuance costs and debt discount
The fair value of the borrowings under revolving credit agreement approximates its carrying value due to its short-term nature (Level 1). The fair value of the Company’s long-term debt was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).
14. SHAREHOLDERS’ EQUITY
Stock Repurchase Programs
On December 14, 2018 and September 2, 2019, the Board of Directors approved stock repurchase programs (“2018 Program" and "2019 Program", respectively) authorizing the repurchase of the Company’s outstanding common stock of up to 2.5 million shares in the 2018 Program and 5.0 million shares in the 2019 Program. The Company can use the repurchase programs to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase programs do not have an expiration date. Repurchases of common stock are limited
under the Company’s debt agreements. In total, 2.5 million shares have been repurchased under the 2018 Program and there are no additional shares authorized to be repurchased. During 2021, the Company repurchased 661,265 shares under the 2019 Program. There are 1,990,224 additional shares authorized to be repurchased under the 2019 Program as of January 29, 2022. Subsequent to year-end, the Board of Directors authorized an additional 7,000,000 shares under the Company’s stock repurchase programs. With this increase, the Company has 8,990,224 shares authorized to be repurchased under the repurchase programs.
Repurchases Related to Employee Share-based Awards
During 2021, 2020 and 2019, employees tendered 205,213, 160,101 and 100,728 shares, respectively, related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share repurchases are not considered a part of the Company’s publicly announced stock repurchase programs.
Accumulated Other Comprehensive Loss
The following table sets forth the changes in accumulated other comprehensive loss, net of tax, by component for 2021, 2020 and 2019:
Pension and
Accumulated
Foreign
Other
Other
Currency
Postretirement
Derivative
Comprehensive
($ thousands)
Translation
Transactions (1)
Transactions (2)
(Loss) Income
Balance February 2, 2019
$
$
(31,055)
$
(608)
$
(31,601)
Other comprehensive (loss) income before reclassifications
(642)
(3,523)
(3,850)
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
4,590
4,846
Tax benefit
-
(1,183)
(55)
(1,238)
Net reclassifications
-
3,407
3,608
Other comprehensive (loss) income
(642)
(116)
(242)
Balance February 1, 2020
$
(580)
$
(31,171)
$
(92)
$
(31,843)
Other comprehensive income before reclassifications
20,351
20,907
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
2,418
2,424
Tax benefit
-
(623)
(1)
(624)
Net reclassifications
-
1,795
1,800
Other comprehensive income
22,146
22,707
Balance January 30, 2021
$
(111)
$
(9,025)
$
-
$
(9,136)
Other comprehensive loss before reclassifications
(677)
(116)
-
(793)
Reclassifications:
Amounts reclassified from accumulated other comprehensive loss
-
1,788
-
1,788
Tax benefit
-
(465)
-
(465)
Net reclassifications
-
1,323
-
1,323
Other comprehensive (loss) income
(677)
1,207
-
Balance January 29, 2022
$
(788)
$
(7,818)
$
-
$
(8,606)
(1) Amounts reclassified are included in other income, net. Refer to Note 5 to the consolidated financial statements for additional information related to pension and other postretirement benefits.
(2) Amounts reclassified are included in net sales, costs of goods sold and selling and administrative expenses. Refer to Note 1 to the consolidated financial statements for additional information related to derivative financial instruments.
15. SHARE-BASED COMPENSATION
The Company has share-based incentive compensation plans under which certain officers, employees and members of the Board of Directors are participants and may be granted restricted stock, stock performance awards, restricted stock units and stock options.
ASC 718, Compensation - Stock Compensation, and ASC 505, Equity, require companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees over the requisite service period for each award. In certain limited circumstances, the Company’s incentive compensation plan provides for accelerated vesting of the awards, such as in the event of a change in control, qualified retirement, death or disability. The Company has a policy of issuing treasury shares in satisfaction of share-based awards.
Share-based compensation expense of $12.3 million, $8.1 million and $10.2 million was recognized in 2021, 2020 and 2019, respectively, as a component of selling and administrative expenses. The following table details the share-based compensation expense by plan for 2021, 2020 and 2019:
($ thousands)
Expense for share-based compensation plans, net of forfeitures:
Restricted stock
$
7,308
$
6,840
$
9,597
Stock performance awards
3,904
(502)
Restricted stock units
1,085
1,109
1,129
Stock options
-
Total share-based compensation expense
$
12,297
$
8,097
$
10,246
The Company issued 330,206, 471,569 and 214,435 shares of common stock in 2021, 2020 and 2019, respectively, for restricted stock grants, stock performance awards issued to employees, stock options exercised and common and restricted stock grants issued to non-employee directors, net of forfeitures and shares withheld to satisfy the tax withholding requirement.
The Company recognized an excess tax provision of $0.1 in both 2021 and 2019 and $1.1 million in 2020 related to restricted stock vestings and dividends, performance share award vestings and stock options exercised. The excess tax provision for the respective periods were recorded in income tax (provision) benefit.
Restricted Stock
Under the Company’s incentive compensation plans, restricted stock of the Company may be granted at no cost to certain officers, key employees and directors. Plan participants are entitled to cash dividends and voting rights for their respective shares. The restricted stock awards limit the sale or transfer of these shares during the requisite service period. Expense for restricted stock grants is recognized on a straight-line basis separately for each vesting portion of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock grants is the quoted market price for the Company’s common stock on the date of grant.
The following table summarizes restricted stock activity for 2021, 2020 and 2019:
Number of
Nonvested
Weighted-
Restricted
Average Grant
Shares
Date Fair Value
Nonvested at February 2, 2019
1,249,223
$
29.17
Granted
463,234
22.93
Vested
(222,562)
30.26
Forfeited
(218,100)
28.83
Nonvested at February 1, 2020
1,271,795
26.77
Granted
707,931
6.99
Vested
(430,837)
28.27
Forfeited
(151,662)
22.19
Nonvested at January 30, 2021
1,397,227
16.74
Granted
616,442
19.40
Vested
(540,647)
26.39
Forfeited
(82,625)
15.37
Nonvested at January 29, 2022
1,390,397
$
14.24
Of the 616,442 restricted shares granted during 2021, 4,910 shares have a cliff-vesting term of one year, 20,000 shares have a cliff-vesting term of two years and 591,532 shares have a graded-vesting term of three years. Of the 707,931 restricted shares granted during 2020, 12,748 shares have a cliff-vesting term of one year and 695,183 shares have a graded-vesting term of three years. Of the 463,234 restricted shares granted during 2019, 12,914 shares had a cliff-vesting term of one year and 450,320 shares have a graded-vesting term of three years. The shares that have a graded-vesting term of three years vest 50% after two years and 50% after three years.
The total grant date fair value of restricted stock awards vested during the years ended January 29, 2022, January 30, 2021 and February 1, 2020, was $14.3 million, $4.4 million and $6.7 million, respectively. As of January 29, 2022, the total remaining unrecognized compensation cost related to nonvested restricted stock grants was $9.2 million, which will be amortized over the weighted-average remaining requisite service period of 1.6 years.
Performance Share Awards
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 between 0% and 200% of the targeted award, depending on the attainment of certain financial goals during the service period. If the awards are granted in units, the employee will be given an amount of cash ranging from 0% to 200% of the equivalent market value of the targeted award. Expense for performance share awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or cash to be awarded on a straight-line basis for each vesting portion of the share award.
The following table summarizes performance share award activity for 2021, 2020 and 2019:
Number of Nonvested
Number of Nonvested
Performance Share
Performance Share
Awards at Target
Awards at Maximum
Weighted-Average
Level
Level
Grant Date Fair Value
Nonvested at February 2, 2019
457,833
915,666
$
28.49
Granted
180,000
360,000
23.42
Vested
(149,833)
(299,666)
26.64
Forfeited
(12,000)
(24,000)
28.33
Nonvested at February 1, 2020
476,000
952,000
27.16
Granted
87,750
175,500
7.47
Vested
(153,000)
(306,000)
26.90
Forfeited
(25,000)
(50,000)
18.64
Nonvested at January 30, 2021
385,750
771,500
23.33
Granted
160,500
321,000
13.05
Vested
(148,000)
(296,000)
31.84
Forfeited
(7,500)
(15,000)
11.19
Nonvested at January 29, 2022
390,750
781,500
$
16.12
As of January 29, 2022, the remaining unrecognized compensation cost related to nonvested performance share awards was $2.7 million, which will be recognized over the remaining service period of one year.
During 2021, the Company granted long-term incentive awards payable in cash for the 2021-2023 performance period, with a target value of $7.3 million and a maximum value of $14.6 million. These awards, which vest after a three-year period, are dependent upon the attainment of certain financial goals of the Company for each of the three years and individual achievement of strategic initiatives over the cumulative period of the award. The estimated value of the award, which is reflected within other liabilities on the consolidated balance sheets, is being accrued over the three-year performance period. There were no long-term cash incentive awards granted by the Company during 2020 or 2019.
Stock Options
Stock options are granted to employees at exercise prices equal to the quoted market price of the Company’s stock at the date of grant. Stock options generally vest over four years and have a term of 10 years. Compensation cost for all stock options is recognized over the requisite service period for each award. No dividends are paid on unexercised options. Expense for stock options is recognized on a straight-line basis separately for each vesting portion of the stock option award. The Company granted no stock options during 2021, 2020 and 2019.
The following table summarizes stock option activity for 2021:
Weighted-
Number of
Average
Options
Exercise Price
Outstanding at January 30, 2021
24,667
$
23.74
Exercised
(2,000)
8.85
Canceled or expired
(6,000)
13.60
Outstanding at January 29, 2022
16,667
$
29.18
Exercisable at January 29, 2022
16,667
$
29.18
As of January 29, 2022, there are no nonvested options.
Restricted Stock Units for Non-Employee Directors
Equity-based grants may be made to non-employee directors in the form of restricted stock units (“RSUs”) payable in cash or common stock at no cost to the non-employee director. The RSUs are subject to a vesting requirement (usually one
year), earn dividend equivalent units and are payable in cash or common stock 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. Dividend equivalents are paid on outstanding RSUs at the same rate as dividends on the Company’s common stock, are automatically re-invested in additional RSUs and vest immediately as of the payment date for the dividend. Expense related to the initial grant of RSUs is recognized ratably over the vesting period based upon the fair value of the RSUs. The RSUs payable in cash are remeasured at the end of each period. Expense for the dividend equivalents is recognized at fair value immediately. Gains and losses resulting from changes in the fair value of the RSUs payable in cash subsequent to the vesting period and through the settlement date are recognized in the Company’s consolidated statements of earnings (loss). Refer to Note 5 and Note 13 to the consolidated financial statements for information regarding the deferred compensation plan for non-employee directors.
The following table summarizes restricted stock unit activity for the year ended January 29, 2022:
Nonvested
Outstanding
Accrued (3)
RSUs
Weighted-
Number of
Number of
Total
Total
Average
Vested
Nonvested
Number of
Number of
Grant Date
RSUs
RSUs
RSUs (2)
RSUs
Fair Value
January 30, 2021
416,234
107,784
524,018
488,089
$
9.85
Granted (1)
5,901
39,984
45,885
32,792
27.41
Vested
102,689
(102,689)
-
33,995
10.67
January 29, 2022
524,824
45,079
569,903
554,876
$
23.56
(1) Granted RSUs include 6,605 RSUs resulting from dividend equivalents paid on outstanding RSUs, of which 5,901 related to outstanding vested RSUs and 704 to outstanding nonvested RSUs.
(2) Total number of RSUs as of January 29, 2022 includes 433,298 RSUs payable in shares and 136,605 RSUs payable in cash.
(3) Accrued RSUs include all fully vested awards and a pro-rata portion of nonvested awards based on the elapsed portion of the vesting period.
The following table summarizes RSUs granted, vested and settled during 2021, 2020 and 2019:
($ thousands, except per unit amounts)
Weighted-average grant date fair value of RSUs granted (1)
$
26.88
$
10.12
$
19.59
Fair value of RSUs vested
$
2,370
$
1,125
$
RSUs settled
-
88,370
4,574
(1) Includes dividend equivalents granted on outstanding RSUs, which vest immediately.
The following table details the RSU compensation expense and the related income tax (benefit) provision for 2021, 2020 and 2019:
($ thousands)
Compensation expense (income)
$
$
(613)
$
(1,756)
Income tax (benefit) provision
(233)
Compensation expense (income), net of tax
$
$
(455)
$
(1,304)
The aggregate fair value of RSUs outstanding and currently vested at January 29, 2022 is $13.2 million and $12.1 million, respectively. The liabilities associated with the accrued RSUs totaled $2.6 million and $1.7 million as of January 29, 2022 and January 30, 2021, respectively.
16. COMMITMENTS AND CONTINGENCIES
Environmental Remediation
Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.
Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. In 2016, the Company submitted a revised plan to address on-site conditions, including direct treatment of source areas, and received approval from the oversight authorities to begin implementing the revised plan.
As the treatment of the on-site source areas progresses, the Company expects to convert the pump and treat system to a passive treatment barrier system. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company continues to implement the expanded remedy workplan that was approved by the oversight authorities in 2015. Based on the progress of the direct remedial action of on-site conditions, the Company submitted a request to the oversight authorities for permission to convert the perimeter pump and treat active remediation system to a passive one. During 2019, a final response was received from the oversight authorities, which is allowing the Company to move forward with implementation of the revised plan on a portion of the treatment system. The Company continues to pursue approval from the oversight authorities for the full conversion of the perimeter pump and treat active remediation system to a passive one. The Company also continues to work with the oversight authorities on the off-site work plan.
The cumulative expenditures for both on-site and off-site remediation through January 29, 2022 were $32.4 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at January 29, 2022 is $9.8 million, of which $8.8 million is recorded within other liabilities and $1.0 million is recorded within other accrued expenses. Of the total $9.8 million reserve, $5.0 million is for off-site remediation and $4.8 million is for on-site remediation. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $13.3 million as of January 29, 2022. The Company expects to spend approximately $0.5 million in the next year, $0.1 million in each of the following four years and $12.4 million in the aggregate thereafter related to the on-site remediation.
Other
Various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.
The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.
Litigation
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Col. A
Col. B
Col. C
Col. D
Col. E
Additions
Balance at
Charged to
Charged to Other
Balance at
Beginning of
Costs and
Accounts -
Deductions -
End of
Description
Period
Expenses
Describe
Describe
Period
($ thousands)
YEAR ENDED JANUARY 29, 2022
Deducted from assets or accounts:
Doubtful accounts and allowances
$
14,928
$
(2,242)
$
-
$
3,085
(A)
$
9,601
Customer allowances
15,151
26,100
-
23,394
(B)
17,857
Customer discounts
1,892
7,459
-
6,879
(B)
2,472
Inventory valuation allowances
32,628
23,825
-
25,998
(C)
30,455
Deferred tax asset valuation allowance
49,981
8,978
-
-
(D)
58,959
YEAR ENDED JANUARY 30, 2021
Deducted from assets or accounts:
Doubtful accounts and allowances
$
1,813
$
10,575
$
2,521
(E)
$
(19)
(A)
$
14,928
Customer allowances
25,816
20,355
-
31,020
(B)
15,151
Customer discounts
1,198
11,692
-
10,998
(B)
1,892
Inventory valuation allowances
20,610
63,543
-
51,525
(C)
32,628
Deferred tax asset valuation allowance
4,809
45,434
-
(D)
49,981
YEAR ENDED FEBRUARY 1, 2020
Deducted from assets or accounts:
Doubtful accounts and allowances
$
3,050
$
$
-
$
2,010
(A)
$
1,813
Customer allowances
24,750
62,737
-
61,671
(B)
25,816
Customer discounts
1,198
12,046
-
12,046
(B)
1,198
Inventory valuation allowances
14,401
45,489
-
39,280
(C)
20,610
Deferred tax asset valuation allowance
4,199
-
(D)
4,809
(A) Accounts written off, net of recoveries.
(B) Discounts and allowances granted to wholesale customers of the Brand Portfolio segment.
(C) Adjustment upon sale of related inventories.
(D) Reductions to the valuation allowances for the net operating loss carryforwards for certain states based on the Company’s expectations for utilization of net operating loss carryforwards.
(E) Adjustment upon adoption of ASU 2016-13. Refer to additional detail in Note 2 to the consolidated financial statements.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9ACONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
It is the Chief Executive Officer’s and Chief Financial Officer’s ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events; automated accounting processing and reporting; management review of monthly, quarterly and annual results; an established system of internal controls; and internal control reviews by our internal auditors.
A control system, no matter how well-conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved. As of January 29, 2022, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
Based on the evaluation of internal control over financial reporting, the Chief Executive Officer and Chief Financial Officer have concluded that there have been no changes in the Company’s internal controls over financial reporting or in other factors during the quarter ended January 29, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9BOTHER INFORMATION
None.
ITEM 9CDISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Directors of the Company is set forth under the caption Proposal 1 - Election of Directors in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Executive Officers of the Registrant is set forth under the caption Information about our Executive Officers that can be found in Item 1 of this report, which information is incorporated herein by reference.
Information regarding Section 16, Beneficial Ownership Reporting Compliance, is set forth under the caption Delinquent Section 16(a) Reports in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Audit Committee and the Audit Committee financial expert is set forth under the caption Board Meetings and Committees in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Corporate Governance Guidelines, Code of Business Conduct, and Code of Ethics is set forth under the caption Corporate Governance in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 11EXECUTIVE COMPENSATION
Information regarding Executive Compensation is set forth under the captions Compensation Discussion and Analysis, Executive Compensation, and Compensation of Non-Employee Directors in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding the Compensation Committee Report is set forth under the caption Compensation Committee Report in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Compensation Committee Interlocks and Insider Participation is set forth under the caption Compensation Committee Interlocks and Insider Participation in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding Company Stock Ownership by Directors, Officers and Principal Holders of Our Stock is set forth under the caption Stock Ownership by Directors, Executive Officers and 5% Shareholders in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregate information regarding the Company’s equity compensation plans as of January 29, 2022:
Number of
securities
remaining
available for
future
Number of
issuance
securities to be
Weighted-
under equity
issued upon
average
compensation
exercise of
exercise price
plans
outstanding
of outstanding
(excluding
options,
options,
securities
warrants and
warrants and
reflected in
rights
rights
column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by security holders
798,167
(1)
$
29.18
(1)
2,515,912
(2)
Equity compensation plans not approved by security holders
-
-
-
Total
798,167
$
29.18
2,515,912
(1) Column (a) includes 16,667 outstanding (vested and nonvested) stock options and 781,500 performance share units payable in stock, which reflects the maximum number of shares to be issued under the performance share plans. The target number of shares to be issued under the plans is 390,750. Performance share awards were disregarded for purposes of computing the weighted-average exercise price in column (b). This table excludes independent directors’ deferred compensation units and restricted stock units payable in cash.
(2) Represents our remaining shares available for award grants based upon the provisions of the plans, which reflect our practice to reserve shares for outstanding awards. The number of securities available for grant has been reduced for stock option grants and performance share awards payable in stock. Performance share awards are reserved based on the maximum payout level.
Information regarding share-based plans is set forth in Note 15 to the consolidated financial statements and is hereby incorporated by reference.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding Certain Relationships and Related Transactions is set forth under the caption Related Party Transactions in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
Information regarding Director Independence is set forth under the caption Director Independence in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding our Principal Accountant Fees and Services is set forth under the caption Fees Paid to Independent Registered Public Accountants in the Proxy Statement for the Annual Meeting of Shareholders to be held May 26, 2022, which information is incorporated herein by reference.
PART IV
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) and (2) The list of financial statements and Financial Statement Schedules required by this item is included in the Index under Financial Statements and Supplementary Data. All other schedules specified under Regulation S-X have been omitted because they are not applicable, because they are not required or because the information required is included in the financial statements or notes thereto.
(3) Exhibits
Certain instruments defining the rights of holders of long-term debt securities of the Company are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K, and the Company hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Exhibit No.
Description
2.1
Equity and Asset Purchase Agreement, dated October 18, 2018, by and among Caleres, Inc., the Equity Sellers (as defined therein), VCG Holdings Ltd., Christopher T. Gallagher and Daniel M. Sanner, solely in their capacity as Sellers’ Representative (as defined therein), and Christopher T. Gallagher and C. Bruce Campbell, solely with respect to specified provisions, incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed October 19, 2018.
3.1
Restated Certificate of Incorporation of Caleres, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company's Form 8-K filed June 1, 2020.
3.2
Bylaws of the Company as amended through March 10, 2022, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 11, 2022.
4.1
Description of the Registrant's Securities Registered Pursuant to Section 12 of The Securities Exchange Act of 1934, incorporated herein by reference to Exhibit 4.1 to the Company’s Form 10-K for the year ended February 1, 2020, and filed March 31, 2020.
10.1
First Amendment to Fourth Amended and Restated Credit Agreement, dated as of July 20, 2015 (the “Credit Agreement”), among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and Bank of America, N.A., as lead issuing bank, administrative agent and collateral agent, Wells Fargo Bank, National Association, as an issuing bank, Wells Fargo Bank, National Association, as syndication agent, JPMorgan Chase Bank, N.A. and SunTrust Bank, as co-documentation agents, and the other financial institutions party thereto, as lenders, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed July 20, 2015.
10.1a
Second Amendment to Fourth Amended and Restated Credit Agreement, dated August 17, 2016, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended July 30, 2016.
10.1b
Third Amendment to Fourth Amended and Restated Credit Agreement, dated January 18, 2019, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed January 23, 2019.
10.1c
Fourth Amendment to Fourth Amended and Restated Credit Agreement, dated April 14, 2020, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K dated and filed April 20, 2020.
10.1d
Fifth Amendment to Fourth Amended and Restated Credit Agreement, dated October 5, 2021, among the Company, as lead borrower for itself and on behalf of certain of its subsidiaries, and the financial institutions party thereto, incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K dated and filed October 7, 2021.
10.2a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2002, as Amended and Restated as of May 22, 2008, incorporated herein by reference to Exhibit A to the Company’s definitive proxy statement dated and filed April 11, 2008.
10.2b(1)*
Form of Incentive Stock Option Award Agreement (for grants commencing May 2008) under the Company's Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.5b(1) to the Company’s Form 10-K for the year ended January 31, 2009, and filed March 31, 2009.
10.2b(2)*
Form of Incentive Stock Option Award Agreement (for grants prior to May 2008) under the Company's Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended July 31, 2004, and filed September 8, 2004.
10.2c(1)*
Form of Non-Qualified Stock Option Award Agreement (for grants commencing May 2008) under the Company’s Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.5c(1) to the Company’s Form 10-K for the year ended January 31, 2009, and filed March 31, 2009.
10.2c(2)*
Form of Non-Qualified Stock Option Award Agreement (for grants prior to May 2008) under the Company’s Incentive and Stock Compensation Plan of 2002, incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended July 31, 2004, and filed September 8, 2004.
10.3a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2011, as amended and restated effective May 28, 2015, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.3b*
Form of Restricted Stock Award Agreement (for employee grants commencing December 2016 and March 2017) under the Company’s Incentive and Stock Compensation Plan of 2011, incorporated herein by reference to Exhibit 10.2(g) to the Company’s Form 10-K for the year ended January 28, 2017, and filed March 28, 2017.
10.4a*
Caleres, Inc. Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit A to the Company’s definitive proxy statement dated and filed April 14, 2017.
10.4b*
Form of Performance Award Agreement (for 2019-2021 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4c to the Company’s Form 10-K for the year ended February 2, 2019, and filed April 2, 2019.
10.4c*
Form of Performance Award Agreement (for 2020-2022 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4a to the Company’s Form 10-Q for the quarterly period ended October 31, 2020, and filed December 9, 2020.
10.4d*
Form of Performance Award Agreement (for 2021-2023 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4e to the Company’s Form 10-K for the year ended January 30, 2021, and filed March 30, 2021.
†10.4e*
Form of Performance Award Agreement (for 2022-2024 performance period) under the Company’s Incentive and Stock Compensation Plan of 2017, filed herewith.
10.4f*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2018) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4d to the Company’s Form 10-K for the year ended February 3, 2018, and filed April 4, 2018.
10.4g*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2019) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4f to the Company’s Form 10-K for the year ended February 2, 2019, and filed April 2, 2019.
10.4h*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2020) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4h to the Company’s 10-K for the year ended February 1, 2020, and filed March 31, 2020.
10.4i*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2021) under the Company’s Incentive and Stock Compensation Plan of 2017, incorporated herein by reference to Exhibit 10.4j to the Company’s 10-K for the year ended January 31, 2021, and filed March 30, 2021.
†10.4j*
Form of Restricted Stock Award Agreement (for employee grants commencing March 2022) under the Company’s Incentive and Stock Compensation Plan of 2017, filed herewith.
10.5*
Form of Non-Employee Director Restricted Stock Unit Agreement between the Company and its Non-Employee Directors (for grants commencing in 2015), incorporated herein by reference to Exhibit 10.4a to the Company’s Form 10-K for the year ended January 30, 2016, and filed March 29, 2016.
10.6*
Caleres, Inc. Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.7*
Caleres, Inc. Supplemental Executive Retirement Plan (SERP), as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.8*
Caleres, Inc. Deferred Compensation Plan, as amended and restated as of May 28, 2015, incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.9*
Caleres, Inc. Non-Employee Director Share Plan (2009), incorporated herein by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended May 2, 2015, and filed June 10, 2015.
10.10*
Severance Agreement, effective April 1, 2006, between the Company and Diane M. Sullivan, incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K dated and filed April 6, 2006.
10.11*
Severance Agreement, dated March 24, 2009 and effective as of April 1, 2009, between the Company and Daniel R. Friedman, incorporated herein by reference to Exhibit 10.16 to the Company’s Form 10-K for the year ended January 31, 2015, and filed March 31, 2015.
10.12*
Form of Amendment letter dated December 18, 2009, to the Severance Agreements between the Company and each of: Daniel R. Friedman and Diane M. Sullivan, as incorporated herein by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended July 31, 2010, and filed September 7, 2010.
10.13*
Severance Agreement, effective February 16, 2015, between the Company and Kenneth H. Hannah, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed February 6, 2015.
10.14*
Severance Agreement, effective June 14, 2018, between the Company and John W. Schmidt, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended August 4, 2018, and filed September 12, 2018.
†10.15*
Severance Agreement, effective January 31, 2022, between the Company and Michael R. Edwards, filed herewith.
†21
Subsidiaries of the registrant.
†23
Consent of Independent Registered Public Accounting Firm.
†24
Power of attorney (contained on signature page).
†31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1
Certification of the Chief Executive and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101.INS
Inline XBRL Instance Document
†101.SCH
Inline XBRL Taxonomy Extension Schema Document
†101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
†101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
†101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document
†101.DEF
Inline XBRL Taxonomy Definition Linkbase Document
†104
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
(b)Exhibits:
See Item 15(a)(3) above. On request, copies of any exhibit will be furnished to shareholders upon payment of the Company’s reasonable expenses incurred in furnishing such exhibits.
(c)Financial Statement Schedules:
See Item 8 above.
*
Denotes management contract or compensatory plan arrangements.
†
Denotes exhibit is filed with this Form 10-K.
ITEM 16FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CALERES, INC.
By:
/s/ Kenneth H. Hannah
Kenneth H. Hannah
Senior Vice President and Chief Financial Officer
Date: March 28, 2022
Know all men by these presents, that each person whose signature appears below constitutes and appoints Diane M. Sullivan and Kenneth H. Hannah his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, on the dates and in the capacities indicated.
Signatures
Date
Title
/s/ Diane M. Sullivan
Diane M. Sullivan
March 28, 2022
Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
/s/ Kenneth H. Hannah
Kenneth H. Hannah
March 28, 2022
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Todd E. Hasty
Todd E. Hasty
March 28, 2022
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Lisa A. Flavin
Lisa A. Flavin
March 23, 2022
Director
/s/ Brenda Freeman
Brenda Freeman
March 23, 2022
Director
/s/ Lori H. Greeley
Lori H. Greeley
March 23, 2022
Director
/s/ Mahendra R. Gupta
Mahendra R. Gupta
March 23, 2022
Director
/s/ Carla C. Hendra
Carla C. Hendra
March 23, 2022
Director
/s/ Ward M. Klein
Ward M. Klein
March 23, 2022
Director
/s/ Steven W. Korn
Steven W. Korn
March 23, 2022
Director
/s/ W. Patrick McGinnis
W. Patrick McGinnis
March 23, 2022
Director
/s/ Wenda Harris Millard
Wenda Harris Millard
March 23, 2022
Director

---

ITEM 9A. CONTROLS AND PROCEDURES

---

ITEM 9B. OTHER INFORMATION

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

---

ITEM 11. EXECUTIVE COMPENSATION

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES