Caleres(CAL) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements detail the company's financial position and performance CONDENSED CONSOLIDATED BALANCE SHEETS Metric ($ thousands) | Metric | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Total Assets | $2,644,393 | $1,693,645 | $1,838,568 | | Total Liabilities | $2,019,715 | $956,451 | $1,203,133 | | Total Equity | $624,678 | $737,194 | $635,435 | - Lease right-of-use assets and lease obligations were recognized for the first time in August 2019 due to the adoption of ASC 842, significantly impacting the balance sheet[5] CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Metric ($ thousands) | Metric | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $752,485 | $706,612 | $1,430,239 | $1,338,754 | | Gross Profit | $305,944 | $293,101 | $585,780 | $568,023 | | Operating Earnings | $37,804 | $32,143 | $54,673 | $55,090 | | Net Earnings Attributable to Caleres, Inc. | $25,341 | $23,646 | $34,424 | $40,858 | | Basic EPS | $0.61 | $0.55 | $0.83 | $0.95 | | Diluted EPS | $0.61 | $0.55 | $0.82 | $0.94 | - For the thirteen weeks ended August 3, 2019, net sales increased by 6.5% and diluted EPS increased by 10.9% compared to the prior year[7] - For the twenty-six weeks ended August 3, 2019, net sales increased by 6.8%, but diluted EPS decreased by 12.8% compared to the prior year[7] CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Metric ($ thousands) | Metric | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $25,227 | $23,611 | $34,312 | $40,791 | | Other Comprehensive Income (Loss), net of tax | $435 | $(704) | $175 | $(1,599) | | Comprehensive Income Attributable to Caleres, Inc. | $25,809 | $22,999 | $34,620 | $39,324 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Metric ($ thousands) | Metric | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $116,578 | $91,007 | | Net cash used for investing activities | $(30,189) | $(38,303) | | Net cash used for financing activities | $(74,044) | $(13,706) | | Increase in cash and cash equivalents | $12,401 | $38,837 | | Cash and cash equivalents at end of period | $42,601 | $102,884 | - Net cash provided by operating activities increased by $25.6 million, primarily due to a smaller increase in inventory and a larger decrease in receivables[214] - Net cash used for financing activities increased by $60.3 million, mainly due to more share repurchases and $35.0 million in net repayments under the revolving credit agreement[217] NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 Basis of Presentation - The company's business is seasonal, with the third fiscal quarter traditionally accounting for a substantial portion of annual earnings[15] - Prior period amounts were reclassified to conform to current presentation, with no impact on net earnings attributable to Caleres, Inc[16] Note 2 Impact of New Accounting Pronouncements - Adopted ASC 842 (Leases) in Q1 2019 using a modified retrospective approach, recording $729.2 million in operating lease right-of-use assets and $791.7 million in lease liabilities, along with a $13.4 million cumulative-effect adjustment to retained earnings[17] - Anticipates ASU 2016-13 (Credit Losses) adoption in Q1 2020 will not materially impact consolidated financial statements due to historically insignificant trade receivable credit losses[18] Note 3 Acquisitions - Acquired a controlling interest in Blowfish, LLC on July 6, 2018, for an estimated $28.8 million, expanding into the sneaker and casual lifestyle market[23][24] Blowfish Malibu Contribution | Blowfish Malibu Contribution | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 3, 2019 | Acquisition Date - Aug 4, 2018 | | :--- | :--- | :--- | :--- | | Net Sales (consolidated) | $14.2 million | $30.4 million | $2.5 million | | Net Loss (consolidated) | $(0.4) million | $(0.2) million (Net Income) | Immaterial | - Acquired Vionic on October 18, 2018, for $360.7 million, funded by revolving credit, to expand into the contemporary comfort footwear category[28][29] Vionic Contribution | Vionic Contribution | 13 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 3, 2019 | | :--- | :--- | :--- | | Net Sales (consolidated) | $46.8 million | $100.0 million | | Net Loss (consolidated) | $(1.4) million | $(2.7) million | Note 4 Revenues - Revenue is recognized when control of merchandise is transferred, typically at the point of sale for retail or shipment for wholesale[39] Revenue Source ($ thousands) | Revenue Source | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Retail stores | $424,562 | $444,595 | $781,454 | $825,635 | | Landed wholesale | $158,031 | $127,365 | $329,784 | $261,017 | | E-commerce - Company websites | $63,933 | $52,312 | $131,410 | $108,736 | | Total Net Sales | $752,485 | $706,612 | $1,430,239 | $1,338,754 | Contract Balance ($ thousands) | Contract Balance | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Loyalty programs liability | $16,929 | $14,780 | $14,637 | | Returns reserve | $13,417 | $10,774 | $13,841 | Note 5 Earnings Per Share EPS Metric | EPS Metric | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.61 | $0.55 | $0.83 | $0.95 | | Diluted EPS | $0.61 | $0.55 | $0.82 | $0.94 | - The company repurchased 1,530,478 shares during the thirteen weeks ended August 3, 2019, and 1,530,478 shares during the twenty-six weeks ended August 3, 2019, under its share repurchase programs[55] Note 6 Restructuring and Other Initiatives - Incurred $0.6 million (Q2 2019) and $0.9 million (YTD 2019) in Vionic integration-related costs, primarily for severance[56] - Incurred $1.9 million in restructuring costs (YTD 2019) for the Carlos brand exit, including inventory markdowns and severance[58] - Incurred $1.9 million (Q2 2018) and $3.7 million (YTD 2018) for men's business integration and reorganization costs[60] Note 7 Business Segment Information - Changed segment presentation in Q1 2019 to include intersegment sales within Brand Portfolio, with eliminations in "Eliminations and Other" category[61] Segment Performance ($ thousands) | Segment Performance | Famous Footwear (Q2 2019) | Brand Portfolio (Q2 2019) | Eliminations & Other (Q2 2019) | Total (Q2 2019) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $419,841 | $359,575 | $(26,931) | $752,485 | | Operating Earnings (Loss) | $31,542 | $13,898 | $(7,636) | $37,804 | | Segment Assets | $1,095,457 | $1,427,002 | $121,934 | $2,644,393 | Segment Performance ($ thousands) | Segment Performance | Famous Footwear (YTD 2019) | Brand Portfolio (YTD 2019) | Eliminations & Other (YTD 2019) | Total (YTD 2019) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $772,006 | $700,625 | $(42,392) | $1,430,239 | | Operating Earnings (Loss) | $42,355 | $26,827 | $(14,509) | $54,673 | Note 8 Inventories Inventory Component ($ thousands) | Inventory Component | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Raw materials | $18,785 | $17,697 | $19,128 | | Work-in-process | $446 | $799 | $745 | | Finished goods | $772,833 | $697,209 | $663,298 | | Inventories, net | $792,064 | $715,705 | $683,171 | Note 9 Goodwill and Intangible Assets Asset Type ($ thousands) | Asset Type | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Total intangible assets, net | $300,835 | $227,503 | $307,366 | | Total goodwill | $245,275 | $134,546 | $242,531 | | Goodwill and intangible assets, net | $546,110 | $362,049 | $549,897 | - Vionic acquisition added $144.7 million in intangible assets and $151.3 million in goodwill; Blowfish Malibu acquisition added $17.6 million in intangible assets and $5.0 million in goodwill[66] - Amortization expense for intangible assets was $3.2 million (Q2 2019) and $6.5 million (YTD 2019)[68] - No goodwill or indefinite-lived intangible asset impairment charges were recorded in Q2 or YTD 2019 or 2018[69][70] Note 10 Leases - Adopted ASC 842 in Q1 2019, recognizing lease right-of-use assets and lease liabilities on the balance sheet[71] Lease Metrics (as of Aug 3, 2019) | Lease Metrics | Value | | :--- | :--- | | Lease right-of-use assets | $723,415 | | Current lease obligations | $(143,202) | | Noncurrent lease obligations | $(649,100) | | Weighted-average remaining lease term | 7.0 years | | Weighted-average discount rate | 4.0% | Lease Expense (26 Weeks Ended Aug 3, 2019) | Lease Expense | Amount ($ thousands) | | :--- | :--- | | Operating lease expense | $92,312 | | Variable lease expense | $23,483 | | Short-term lease expense | $2,077 | | Total lease expense | $117,725 | Note 11 Long-term and Short-term Financing Arrangements - Maintains a revolving credit facility with a borrowing capacity of up to $500.0 million (option to increase by $250.0 million), maturing January 18, 2024[77] Credit Facility Status (as of Aug 3, 2019) | Credit Facility Status | Amount ($ millions) | | :--- | :--- | | Borrowings outstanding | $300.0 | | Letters of credit outstanding | $10.5 | | Total additional borrowing availability | $189.5 | - Issued $200.0 million aggregate principal amount of 6.25% Senior Notes due August 15, 2023[83] - The company was in compliance with all covenants and restrictions under both the Credit Agreement and Senior Notes as of August 3, 2019[81][85] Note 12 Shareholders' Equity Accumulated Other Comprehensive Loss ($ thousands) | Accumulated Other Comprehensive Loss | Balance at May 4, 2019 | Balance at Aug 3, 2019 | | :--- | :--- | :--- | | Foreign Currency Translation | $(908) | $(896) | | Pension and Other Postretirement Transactions | $(30,660) | $(30,199) | | Derivative Financial Instrument Transactions | $(305) | $(310) | | Total Accumulated Other Comprehensive (Loss) Income | $(31,873) | $(31,405) | Note 13 Share-Based Compensation Share-Based Compensation Expense ($ millions) | Share-Based Compensation Expense | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Expense | $3.2 | $4.5 | $6.5 | $8.1 | - Granted 52,684 restricted shares (Q2 2019) and 450,234 restricted shares (YTD 2019) with varying vesting terms[92] - Granted performance share awards for a targeted 180,000 shares (YTD 2019), vesting based on financial performance over three years[93] Note 14 Retirement and Other Benefit Plans Net Periodic Benefit Income ($ thousands) | Net Periodic Benefit Income | Pension (13 Weeks Ended Aug 3, 2019) | Other Postretirement Benefits (13 Weeks Ended Aug 3, 2019) | Pension (26 Weeks Ended Aug 3, 2019) | Other Postretirement Benefits (26 Weeks Ended Aug 3, 2019) | | :--- | :--- | :--- | :--- | :--- | | Service cost | $1,755 | $0 | $3,609 | $0 | | Interest cost | $3,680 | $15 | $7,405 | $30 | | Expected return on assets | $(6,967) | $0 | $(13,859) | $0 | | Total net periodic benefit income | $(886) | $(9) | $(1,636) | $(24) | Note 15 Risk Management and Derivatives - Uses derivative financial instruments (forward contracts) to hedge foreign currency exposures, designating them as cash flow hedges[100][102] Notional Amount of Forward Contracts (U.S. $ equivalent in thousands) | Notional Amount of Forward Contracts | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Total financial instruments | $19,570 | $44,155 | $33,929 | Effect of Derivative Instruments on Earnings (13 Weeks Ended Aug 3, 2019) | Effect of Derivative Instruments on Earnings | (Loss) Gain Recognized in OCL on Derivatives | Loss Reclassified from Accumulated OCL into Earnings | | :--- | :--- | :--- | | Net sales | $(22) | $(5) | | Cost of goods sold | $63 | $(16) | | Selling and administrative expenses | $(150) | $(66) | Note 16 Fair Value Measurements - Uses a three-level fair value hierarchy based on observability of inputs, maximizing observable inputs[107][108] - Mandatory purchase obligation for Blowfish Malibu is a Level 3 fair value measurement, sensitive to earnings projections and discount rate[117] Asset (Liability) ($ thousands) | Asset (Liability) | Total (Aug 3, 2019) | Level 1 (Aug 3, 2019) | Level 2 (Aug 3, 2019) | Level 3 (Aug 3, 2019) | | :--- | :--- | :--- | :--- | :--- | | Non-qualified deferred compensation plan assets | $7,949 | $7,949 | $0 | $0 | | Derivative financial instruments, net | $(358) | $0 | $(358) | $0 | | Mandatory purchase obligation - Blowfish Malibu | $(9,772) | $0 | $0 | $(9,772) | Debt Fair Value ($ thousands) | Debt Fair Value | Carrying Value (Aug 3, 2019) | Fair Value (Aug 3, 2019) | | :--- | :--- | :--- | | Borrowings under revolving credit agreement | $300,000 | $300,000 | | Long-term debt | $200,000 | $205,500 | Note 17 Income Taxes Effective Tax Rate | Effective Tax Rate | 13 Weeks Ended Aug 3, 2019 | 13 Weeks Ended Aug 4, 2018 | 26 Weeks Ended Aug 3, 2019 | 26 Weeks Ended Aug 4, 2018 | | :--- | :--- | :--- | :--- | :--- | | Consolidated ETR | 23.7% | 25.3% | 24.1% | 24.4% | - Q2 2018 included $0.2 million in discrete tax benefits from share-based compensation, which would have resulted in a 26.0% ETR without them[124] - No deferred taxes provided on unremitted earnings of foreign subsidiaries considered indefinitely reinvested[126] Note 18 Commitments and Contingencies - Involved in environmental remediation at the Redfield site in Colorado, with cumulative expenditures of $30.8 million through August 3, 2019[131][133] Redfield Site Remediation Reserve (as of Aug 3, 2019) | Redfield Site Remediation Reserve | Amount ($ millions) | | :--- | :--- | | Total reserve | $9.6 | | Off-site remediation | $5.0 | | On-site remediation | $4.6 | | On-site remediation liability (undiscounted) | $14.0 | - Legal proceedings and litigation arising in the ordinary course of business are not expected to have a material adverse effect[136] Note 19 Financial Information for the Company and its Subsidiaries - Senior notes are fully and unconditionally guaranteed by subsidiaries that are guarantors under the revolving credit facility[137] Consolidated Balance Sheet ($ thousands) | Consolidated Balance Sheet | Parent (Aug 3, 2019) | Guarantors (Aug 3, 2019) | Non-Guarantors (Aug 3, 2019) | Total (Aug 3, 2019) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $2,854,455 | $2,320,301 | $1,017,044 | $2,644,393 | | Total Liabilities | $2,231,026 | $1,054,327 | $769,786 | $2,019,715 | | Total Equity | $623,429 | $1,265,974 | $247,258 | $624,678 | Consolidated Earnings ($ thousands) | Consolidated Earnings | Parent (13 Weeks Ended Aug 3, 2019) | Guarantors (13 Weeks Ended Aug 3, 2019) | Non-Guarantors (13 Weeks Ended Aug 3, 2019) | Total (13 Weeks Ended Aug 3, 2019) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $208,248 | $532,882 | $82,745 | $752,485 | | Net earnings attributable to Caleres, Inc. | $25,341 | $13,286 | $18,753 | $25,341 | ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial performance, condition, and results for the second quarter and six months ended August 3, 2019 OVERVIEW Financial Highlights Metric (Q2 2019 vs Q2 2018) | Metric | 2019 Amount ($ millions) | 2018 Amount ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $752.5 | $706.6 | +6.5% | | Consolidated Gross Profit | $305.9 | $293.1 | +4.4% | | Consolidated Operating Earnings | $37.8 | $32.1 | +17.6% | | Consolidated Net Earnings Attributable to Caleres, Inc. | $25.3 | $23.6 | +7.2% | | Diluted EPS | $0.61 | $0.55 | +10.9% | - Acquisitions of Vionic and Blowfish Malibu contributed $46.8 million and $11.7 million, respectively, to consolidated net sales in Q2 2019[148] Recent Developments - U.S. Administration announced 15% tariffs on List 4a products from China effective September 1, 2019, impacting approximately 60% of the company's branded products sourced from China[156][157] - Mitigation strategies include diversifying production away from China (40% of branded products now sourced outside China) and working with factory partners to reduce costs[157] - A prolonged trade war and further tariff escalation may result in lower gross margins[157] CONSOLIDATED RESULTS Net Sales Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $752.5 | $706.6 | $45.9 | +6.5% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,430.2 | $1,338.8 | $91.4 | +6.8% | - Brand Portfolio net sales increased by $54.6 million (17.9%) in Q2 2019, driven by Vionic and Blowfish Malibu acquisitions, partially offset by a 9.3% decrease in same-store sales[159] - Famous Footwear net sales decreased by $9.7 million (2.2%) in Q2 2019, due to a smaller store base, but same-store sales improved by 1.5%[159] Gross Profit Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $305.9 | $293.1 | $12.8 | +4.4% | 40.7% | 41.5% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $585.8 | $568.0 | $17.8 | +3.1% | 41.0% | 42.4% | - Gross profit rate decreased due to a difficult retail environment, a higher mix of e-commerce sales (lower margins), and incremental costs from purchase accounting adjustments and the Carlos brand exit[162][166] Selling and Administrative Expenses Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $267.5 | $258.9 | $8.6 | +3.4% | 35.6% | 36.7% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $529.6 | $509.0 | $20.6 | +4.0% | 37.0% | 38.0% | - Increase driven by Vionic and Blowfish Malibu acquisitions, partially offset by lower cash and share-based incentive compensation and reduced store rent/facilities expenses[168] Restructuring and Other Special Charges, Net Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Restructuring and Other Special Charges, Net | $0.6 | $2.1 | $1.5 | $3.9 | - Q2 2019 charges were for Vionic integration and Carlos brand exit; Q2 2018 charges were for men's business reorganization and Blowfish Malibu acquisition[170] Operating Earnings Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $37.8 | $32.1 | $5.7 | +17.6% | 5.0% | 4.5% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $54.7 | $55.1 | $(0.4) | -0.8% | 3.8% | 4.1% | Interest Expense, Net Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Interest Expense, Net | $7.4 | $3.6 | $3.8 | +105.1% | Metric ($ millions) | Metric | YTD 2019 | YTD 2018 | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Interest Expense, Net | $14.7 | $7.3 | $7.4 | +102.2% | - Higher interest expense driven by increased borrowings for Vionic acquisition and $0.4 million (Q2 2019) / $0.5 million (YTD 2019) accretion from Blowfish Malibu mandatory purchase obligation[173][174] Other Income, Net Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Other Income, Net | $2.7 | $3.1 | $(0.4) | -13.9% | Metric ($ millions) | Metric | YTD 2019 | YTD 2018 | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Other Income, Net | $5.2 | $6.2 | $(1.0) | -14.6% | Income Tax Provision Metric | Metric | Q2 2019 ETR | Q2 2018 ETR | YTD 2019 ETR | YTD 2018 ETR | | :--- | :--- | :--- | :--- | :--- | | Consolidated Effective Tax Rate | 23.7% | 25.3% | 24.1% | 24.4% | - Q2 2018 included $0.2 million in discrete tax benefits from share-based compensation, which would have resulted in a 26.0% ETR without them[178] Net Earnings Attributable to Caleres, Inc. Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings Attributable to Caleres, Inc. | $25.3 | $23.6 | $34.4 | $40.9 | FAMOUS FOOTWEAR Net Sales Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $419.8 | $429.5 | $(9.7) | -2.2% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $772.0 | $792.9 | $(20.9) | -2.6% | - Same-store sales increased by 1.5% in Q2 2019 and 0.4% YTD 2019[180][181][183] - Store base decreased, resulting in a $15.8 million sales decrease from new/closed stores in Q2 2019 and $23.3 million YTD 2019[180][181][183] - Sales to Famously You Rewards members accounted for approximately 77% of net sales in Q2 2019[182] Gross Profit Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $182.3 | $187.1 | $(4.8) | -2.6% | 43.4% | 43.6% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $335.0 | $352.3 | $(17.3) | -4.9% | 43.4% | 44.4% | - Gross profit rate declined due to a competitive selling environment, a higher mix of lower margin products, and increased freight expenses from e-commerce growth[184][185] Selling and Administrative Expenses Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $150.8 | $153.9 | $(3.1) | -2.0% | 35.9% | 35.9% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $292.6 | $297.2 | $(4.6) | -1.5% | 37.9% | 37.5% | - Decrease in expenses driven by lower rent and facilities due to a smaller store base, partially offset by higher marketing for new television advertising and the Rewards program launch[186][187] Operating Earnings Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $31.5 | $33.2 | $(1.7) | -5.1% | 7.5% | 7.7% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $42.4 | $55.1 | $(12.7) | -23.1% | 5.5% | 6.9% | BRAND PORTFOLIO Net Sales Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $359.6 | $305.0 | $54.6 | +17.9% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $700.6 | $588.5 | $112.1 | +19.0% | - Vionic and Blowfish Malibu acquisitions contributed $47.0 million and $12.6 million, respectively, to Q2 2019 net sales growth, and $101.8 million and $32.0 million, respectively, to YTD 2019 net sales growth[193][194][195] - Same-store sales declined 9.3% in Q2 2019 and 8.9% YTD 2019, impacted by a difficult and promotional retail environment[193][194][195] - Unfilled wholesale order position increased by $26.8 million (10.2%) to $290.1 million at August 3, 2019, driven by acquisitions[196] - Announced new brands (Veronica Beard, Zodiac relaunch) and a joint venture with Gemkell Group for distribution in Greater China (Naturalizer, Sam Edelman)[197] Gross Profit Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $124.8 | $108.3 | $16.5 | +15.3% | 34.7% | 35.5% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $251.7 | $217.1 | $34.6 | +15.9% | 35.9% | 36.9% | - Gross profit rate decreased due to the promotional retail environment and incremental cost of goods sold from purchase accounting inventory adjustments and the Carlos brand exit[198][199] - Tariffs on Chinese imports pose a risk to future gross margins, though the company is mitigating impacts by diversifying sourcing (40% outside China)[201] Selling and Administrative Expenses Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $110.9 | $90.6 | $20.3 | +22.5% | 30.8% | 29.7% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling and Administrative Expenses | $224.3 | $186.2 | $38.1 | +20.5% | 32.0% | 31.6% | - Increase driven by higher expenses associated with the Vionic and Blowfish Malibu acquisitions[202][203] Restructuring and Other Special Charges, Net Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Restructuring and Other Special Charges, Net | $0.0 | $1.8 | $0.6 | $3.4 | - Q2 2018 charges were related to men's business integration and reorganization; YTD 2019 charges were primarily for the Vionic acquisition[204] Operating Earnings Metric | Metric | Q2 2019 ($ millions) | Q2 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $13.9 | $15.9 | $(2.0) | -12.6% | 3.9% | 5.2% | Metric | Metric | YTD 2019 ($ millions) | YTD 2018 ($ millions) | Change ($ millions) | Change (%) | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Earnings | $26.8 | $27.5 | $(0.7) | -2.6% | 3.8% | 4.7% | ELIMINATIONS AND OTHER Metric ($ millions) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Operating Loss | $(7.6) | $(17.0) | $(14.5) | $(27.5) | - Selling and administrative expenses decreased due to lower cash and share-based incentive compensation plans and reduced expenses for cash-equivalent restricted stock units[208] LIQUIDITY AND CAPITAL RESOURCES Borrowings Metric ($ millions) | Metric | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Borrowings under revolving credit agreement | $300.0 | $0.0 | $335.0 | | Long-term debt | $198.2 | $197.7 | $197.9 | | Total debt | $498.2 | $197.7 | $532.9 | - Total debt increased by $300.5 million from August 4, 2018, to August 3, 2019, mainly due to Vionic acquisition funding[209] Credit Agreement - Revolving credit facility has a $500.0 million capacity (with option for $250.0 million increase) and matures January 18, 2024[211] Credit Facility Status (as of Aug 3, 2019) | Credit Facility Status | Amount ($ millions) | | :--- | :--- | | Borrowings outstanding | $300.0 | | Letters of credit outstanding | $10.5 | | Total additional borrowing availability | $189.5 | - The company was in compliance with all covenants and restrictions under the Credit Agreement as of August 3, 2019[211] $200 Million Senior Notes - Issued $200.0 million aggregate principal amount of 6.25% Senior Notes due August 15, 2023, guaranteed by subsidiaries[212] - The company was in compliance with all covenants and restrictions relating to the Senior Notes as of August 3, 2019[213] Working Capital and Cash Flow Metric ($ millions) | Metric | Aug 3, 2019 | Aug 4, 2018 | Feb 2, 2019 | | :--- | :--- | :--- | :--- | | Working capital (deficit) surplus | $(28.3) | $437.8 | $123.1 | | Current ratio | 0.97:1 | 1.73:1 | 1.14:1 | | Debt-to-capital ratio | 44.4% | 21.1% | 45.6% | - Working capital and current ratio decreased primarily due to ASC 842 adoption (adding $143.2 million in current operating lease obligations) and higher borrowings for the Vionic acquisition[219] Cash Flow Activity (26 Weeks Ended) | Cash Flow Activity | Aug 3, 2019 ($ millions) | Aug 4, 2018 ($ millions) | Change ($ millions) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $116.6 | $91.0 | +$25.6 | | Net cash used for investing activities | $(30.2) | $(38.3) | +$8.1 | | Net cash used for financing activities | $(74.0) | $(13.7) | -$(60.3) | - Cash used for financing activities increased due to more share repurchases and $35.0 million in net repayments under the revolving credit agreement[217] - Declared and paid dividends of $0.07 per share in Q2 2019 and 2018, with future dividends expected[221] CONTRACTUAL OBLIGATIONS - Contractual obligations include purchase obligations, operating and finance lease commitments, long-term debt, interest, minimum license commitments, financial instruments, mandatory purchase obligation (Blowfish Malibu), and retirement benefits[222] - No material changes to contractual obligations since February 2, 2019, other than normal course of business fluctuations[223][224] CRITICAL ACCOUNTING POLICIES AND ESTIMATES - No material changes to critical accounting policies and estimates since February 2, 2019, other than the adoption of ASC 842[225] RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - Information on recently issued accounting pronouncements and their impact is detailed in Note 2 to the condensed consolidated financial statements[226] FORWARD-LOOKING STATEMENTS - Forward-looking statements are subject to risks and uncertainties, including changing consumer demands, fashion trends, intense competition, political/economic conditions, tariffs, inventory management, cybersecurity threats, and acquisition challenges[227] ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the company's quantitative and qualitative information about market risk - No material changes in quantitative and qualitative information about market risk since February 2, 2019[230] ITEM 4 CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - CEO and CFO concluded that disclosure controls and procedures were effective at the reasonable assurance level as of August 3, 2019[231] - No material changes in internal controls over financial reporting during the quarter ended August 3, 2019[232] PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Ordinary course legal proceedings are not expected to have a material adverse effect on the company's financial position - Legal proceedings and litigation in the ordinary course of business are not expected to have a material adverse effect on results of operations or financial position[233] ITEM 1A RISK FACTORS The primary new risk factor is the imposition of tariffs on products imported from China, which could reduce gross profits - No material changes to risk factors since February 2, 2019, except for the added risk of tariffs[235] - Imposition of 15% tariffs on products from China (effective Sept 1, 2019, for List 4a) may result in higher product costs and decreased gross profits, as approximately 60% of branded footwear is sourced from China[236][237] ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company repurchased common stock during the second quarter under its publicly announced repurchase programs Fiscal Period (Q2 2019) | Fiscal Period | Total Number of Shares Purchased | Average Price Paid per Share | Purchased as Part of Publicly Announced Program | Maximum Number of Shares that May Yet be Purchased Under the Program | | :--- | :--- | :--- | :--- | :--- | | May 5, 2019 - June 1, 2019 | 4,518 | $20.54 | — | 2,257,851 | | June 2, 2019 - July 6, 2019 | 1,530,478 | $19.60 | 1,530,478 | 727,373 | | July 7, 2019 - August 3, 2019 | — | — | — | 727,373 | | Total | 1,534,996 | $19.60 | 1,530,478 | 727,373 | - The Board of Directors approved an additional 5,000,000 share repurchase program subsequent to quarter-end[240] ITEM 3 DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities during the period - No defaults upon senior securities[241] ITEM 4 MINE SAFETY DISCLOSURES This item is not applicable to the company - Not applicable[242] ITEM 5 OTHER INFORMATION There is no other information to report under this item - None[243] ITEM 6 EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance and certification documents - Includes Restated Certificate of Incorporation, Bylaws, CEO/CFO certifications (302 and 906), and iXBRL documents[244] SIGNATURE The report was duly signed on behalf of the company by the Senior Vice President and Chief Financial Officer - Report signed by Kenneth H. Hannah, Senior Vice President and Chief Financial Officer, on September 11, 2019[250]