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Item 7. Management’s Discussion and Analysis

2022-03-28 compared with 2021-03-30 · 256 added, 361 removed, 183 unchanged (77% of the section changed)

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Business Overview

We are a global footwear company that operates retail shoe stores and e-commerce websites, and designs, develops, sources, and distributes footwear for people of all ages.

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.

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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.

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

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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 Naturalizer, Vionic, Sam Edelman, Dr.

Scholl’s Shoes, Blowfish Malibu, Allen Edmonds, LifeStride, Franco Sarto, Rykä, Vince, Bzees, Zodiac, Via Spiga and Veronica Beard brands.

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 170 retail stores in the United States, Canada, China and Guam for our Naturalizer, Allen Edmonds and Sam Edelman brands.

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 Naturalizer and Sam Edelman brands in China.

COVID-19 Pandemic

The United States and global economies continue to be adversely affected by the coronavirus (“COVID-19”), which was declared a global pandemic by the World Health Organization in March 2020.

During the first half of 2020, our retail stores were temporarily closed as a result of the COVID-19 pandemic.

We took decisive actions to mitigate the adverse impact of the pandemic, including the following:

● Aligned our workforce and related expenses to meet the needs of a lower demand environment, including associate furloughs for a significant portion of the workforce, salary reductions for most remaining associates, and reductions in the cash retainers for our Board of Directors;

● Reduced marketing expenses and variable expenses during the store closure period;

● Tightly managed inventory levels, continuously balancing supply and demand;

● Leveraged strong supplier partnerships to reduce product receipts and extend payment terms;

● Negotiated with landlords to abate and/or defer certain lease payments;

● Eliminated or deferred all non-essential capital projects, including Famous Footwear store remodels and planned store openings, during the first half of 2020 and reduced capital expenditures for the remainder of 2020;

● Expanded e-commerce sales by capitalizing on the significant enhancements in our omni-channel capabilities;

● Utilized our expansive network of temporarily closed retail locations during the first half of 2020 as distribution centers to support increased e-commerce business;

● Adapted our buy online, pick-up-in-store capability to include a contactless curbside pickup option at certain retail locations.

In addition, as a precautionary measure to increase our cash position and preserve financial flexibility given the uncertainty in the United States and global markets resulting from the COVID-19 pandemic, we increased the borrowings on our revolving credit facility from $275.0 million at February 1, 2020 to $440.0 million in March 2020.

We have made significant progress repaying the incremental borrowings from March, with total net repayments of $188.5 million since the end of the first quarter of 2020, reducing overall indebtedness to a level lower than the onset of the pandemic.

Although we have reopened all of our retail stores from the temporary store closures in the first half of 2020, our business results were negatively impacted in 2020 by the COVID-19 pandemic and continue to be impacted.

Many of our stores have reduced operating hours and have experienced declines in foot traffic with stay-at-home orders and other government

mandates, which resulted in lower sales in 2020, despite the robust growth of our e-commerce business.

In addition, a small number of stores have experienced additional closure days on a temporary basis, due to local government mandates or illness.

We believe we are better positioned and prepared to manage through this period as a result of the actions we took during 2020.

However, the depth and duration of the pandemic and its impact on overall consumer confidence and spending is uncertain.

While vaccination efforts are currently underway, we continue to experience disruption to our business, and expect that our 2021 financial results will continue to be adversely affected.

The extent and duration of COVID-19 on our financial performance depends on many factors outside of our control, including actions taken by government officials, the pace of vaccination efforts and the introduction or spread of any COVID-19 variants.

Recent Developments – Brand Portfolio Retail Store Closings

During the fourth quarter of 2020, we announced the decision to close all but a limited number of our Naturalizer retail stores.

During 2020, we closed 60 Naturalizer retail stores and anticipate the remaining 73 scheduled store closures to be completed by the end of the first quarter of 2021.

Refer to further discussion below regarding the costs we incurred in 2020 associated with the store closures.

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 decreased $804.5 million, or 27.5%, to $2,117.1 million in 2020, compared to $2,921.6 million last year, driven primarily by the impacts of the COVID-19 pandemic, which led to the temporary closure of all of our retail stores from mid-March through mid-May, as well as canceled and reduced orders from our wholesale customers.

The shift towards working from home resulted in softer demand for dress footwear categories.

While nearly all of our brands experienced lower demand in 2020, our Allen Edmonds business was impacted more significantly.

Although sales were adversely impacted by the COVID-19 pandemic throughout 2020, we experienced strong growth in our e-commerce business, with e-commerce sales penetration rising to 30% of consolidated net sales, compared to 20% in 2019.

● Consolidated operating (loss) earnings decreased to an operating loss of $485.7 million in 2020, compared to operating earnings of $103.8 million last year.

The decrease was primarily driven by lower net sales, $286.5 million of non-cash goodwill and intangible asset impairment charges and $96.7 million of restructuring and other special charges, primarily attributable to the COVID-19 pandemic and the ongoing efforts to exit our Naturalizer retail stores.

● Consolidated net loss attributable to Caleres, Inc.

was $439.1 million, or $11.80 per diluted share, in 2020, compared to net earnings of $62.8 million, or $1.53 per diluted share, last year.

● 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.

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.

● Other COVID-19-related impairments and expenses – During 2020, 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).

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.

● Blowfish Malibu mandatory purchase obligation – As further discussed in Note 5 and 15 to the consolidated financial statements, the Blowfish Malibu noncontrolling interest is subject to a mandatory purchase obligation after a three-year period, based on an earnings multiple formula.

During 2020, based on the strong financial performance of Blowfish Malibu, we recorded a fair value adjustment of $23.9 million ($17.8 million on an after-tax basis, or $0.48 per diluted share), which is recorded as interest expense, net in the consolidated statements of earnings (loss).

A fair value adjustment of $5.4 million ($4.0 million on an after-tax basis, or $0.10 per diluted share), was recorded in 2019.

As further discussed in Liquidity and Capital Resources , we anticipate settling the mandatory purchase obligation during the third quarter of 2021 using funds from the revolving credit agreement.

● Brand Portfolio—business exits – 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.

Of these charges, $12.4 million is reflected as restructuring and other special charges and primarily represents non-cash impairment charges for property and right-of-use lease assets, incremental rent and lease termination costs and severance costs.

An additional $4.0 million is reflected 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.

In 2019, in connection with the decision to exit our Carlos Santana brand and reposition our Via Spiga brand, we incurred incremental costs of $3.5 million ($2.6 million on an after-tax basis, or $0.06 per diluted share).

Of these charges, $3.0 million primarily represents incremental inventory markdowns required to reduce the value of inventory to net realizable value and is presented in cost of goods sold on the statements of earnings (loss).

The remaining $0.5 million represents severance and other related costs and is presented in restructuring and other special 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.

● Vionic acquisition and integration-related costs – On October 18, 2018, we acquired the Vionic business for $360.7 million, as further discussed in Note 2 to the consolidated financial statements.

In aggregate, we incurred acquisition and integration-related charges totaling $3.4 million ($2.6 million on an after-tax basis, $0.07 per diluted share) and $7.7 million ($5.7 million on an after-tax basis, or $0.14 per diluted share) during 2020 and 2019, respectively.

The $3.4 million in charges in 2020, which are presented as restructuring and other special charges in the consolidated statements of earnings (loss), primarily represents non-cash charges for impairment of assets, warehouse and logistics integration expenses and severance costs.

The $7.7 million in charges incurred in 2019 included $5.8 million of incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting and $1.9 million of acquisition and integration-related costs, primarily for severance and professional fees, which are presented as restructuring and other special charges, net.

● Expense containment initiatives – We incurred charges of $15.0 million ($11.2 million on an after-tax basis, or $0.27 per diluted share) during 2019, related to our expense containment initiatives, with no corresponding charges in 2020.

These costs included employee-related costs for severance, including health care benefits and enhanced pension benefits, primarily associated with the Voluntary Early Retirement Program ("VERP") in the fourth quarter of 2019.

Financial Outlook

While the pace of recovery is still uncertain, there are signs of stabilization in the marketplace.

We believe we are well-positioned to capitalize as the market resumes its upward trajectory and the world returns to a greater degree of normalcy.

As we plan for future success, we will focus on maintaining our strong momentum at Famous Footwear;

driving enhanced consumer alignment and improved performance in the Brand Portfolio segment;

taking a careful and disciplined approach to cost control and capital spending;

reducing debt levels still further;

and returning excess cash to shareholders.

We are a more agile and focused organization than we were at the start of 2020, with an even more vigorous commitment to connecting with our consumers and providing them with compelling and fresh product.

We are confident that we can leverage our talented and dedicated workforce, strong operating platform, powerful portfolio and improved financial position to capitalize on the opportunities we see ahead in order to drive long-term value for our shareholders.

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

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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 it is performing consistent with expectations.

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 (whether temporary or permanent closures) are excluded from the same-store sales metric for each day of the closure.

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 our retail stores performance of existing locations with comparable prior year sales, separate from the impact of store openings or closures.

Beginning in mid-March 2020, all of our Famous Footwear and Brand Portfolio stores in North America were temporarily closed and we began a phased reopening of retail stores in mid-May.

As discussed above, our same-store sales calculation excludes the impact of both permanent and temporary store closures.

In addition to the temporary store closures during the first half of 2020, we experienced temporary closures of certain stores during the second half of 2020 related to illness, weather, fires, civil unrest and local government mandates.

Accordingly, our same-store sales calculation is impacted more heavily by our e-commerce sales penetration, which was higher than in prior periods, reflecting strong growth in that channel and that our e-commerce sites operated continuously throughout 2020.

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 calculate the efficiency of sales based upon the square footage in a store.

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.

This metric was adversely impacted by the temporary retail store closures during 2020 and therefore, the metric is not comparable to 2019.

Comparison of Financial Results

The following sections discuss the consolidated and segment results of our operations for the year ended January 30, 2021 compared to the year ended February 1, 2020.

For a discussion of the year ended February 1, 2020 compared to the year ended February 2, 2019, refer to Part II, Item 7 "

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 February 1, 2020.

in our Annual Report on Form 10-K for the year ended January 30, 2021.

CONSOLIDATED RESULTS

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Restructuring and other special charges, net

Operating (loss) earnings

Operating earnings (loss)

Interest expense, net

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Other income, net

(Loss) earnings before income taxes

Income tax benefit (provision)

Net (loss) earnings

Earnings (loss) before income taxes

Income tax (provision) benefit

Net earnings (loss)

Net earnings (loss) attributable to noncontrolling interests

Net (loss) earnings attributable to Caleres, Inc.

Net sales decreased $804.5 million, or 27.5%, to $2,117.1 million in 2020, compared to $2,921.6 million last year.

We experienced lower sales across both of our segments, as the COVID-19 pandemic drove the temporary closure of all of our retail stores in North America and softened demand for dress footwear categories.

In addition, many of our wholesale customers were adversely affected by the pandemic and canceled orders as a result of the temporary closure of their retail stores.

These factors resulted in a $504.0 million, or 35.8% decrease in net sales for our Brand Portfolio segment and a $324.5 million, or 20.4% decrease in net sales for our Famous Footwear segment.

Despite the closure of our retail stores and ongoing impact of the pandemic throughout 2020, we experienced strong growth in our e-commerce business.

Our Famous Footwear e-commerce net sales increased approximately 75% in 2020.

The investments we made in our e-commerce and logistics capabilities positioned us to capitalize on the accelerating shift to online purchasing, driving consolidated e-commerce penetration to approximately 30% of net sales, compared to 20% last year.

Gross profit decreased $397.4 million, or 33.5%, to $787.0 million in 2020, compared to $1,184.4 million in 2019 driven by lower net sales, higher freight expenses and incremental inventory markdowns reflecting the difficult retail environment in 2020, and our business exits described earlier.

Cost of goods sold in 2019 includes $5.8 million related to the amortization of the inventory fair value adjustment required by purchase accounting from our Vionic acquisition and $3.0 million of incremental cost of goods sold associated with the decision to exit our Carlos brand and reposition our Via Spiga brand.

As a percentage of net sales, our gross profit rate decreased to 37.2% in 2020, compared to 40.5% in 2019.

The lower gross profit rate reflects declines at both the Brand Portfolio and Famous Footwear segments as a result of the incremental inventory markdowns, a more promotional retail environment and higher e-commerce sales volume.

Our e-commerce sales generally result in lower margins than traditional retail sales as a result of the incremental freight expenses.

Net earnings (loss) attributable to Caleres, Inc.

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 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.

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Selling and Administrative Expenses

Selling and administrative expenses decreased $176.3 million, or 16.5%, to $889.5 million in 2020, compared to $1,065.8 million last year.

Throughout 2020, we increased our focus on the management of our controllable expenses in response to the difficult business environment and lower sales volume.

The decrease reflects lower salaries and benefits expense;

lower variable expenses associated with the temporary retail store closures, including the impact of certain rent concessions received from landlords;

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 increased to 42.0% in 2020 from 36.5% last year.

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

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There were no corresponding impairment charges in 2021.

Refer to Note 1 and Note 11 to the consolidated financial statements for additional information related to these charges.

Refer to Note 10 to the consolidated financial statements for additional information related to these charges.

Restructuring and Other Special Charges, Net

Restructuring and other special charges of $96.7 million were incurred in 2020, compared to $14.8 million in 2019, as follows:

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;

● Brand Portfolio business exit costs of $12.4 million in 2020 related to the decision to close all but a limited number of Naturalizer retail stores, compared to $0.5 million in 2019 related to the exit of our Carlos brand and repositioning of our Via Spiga brand;

● Integration-related costs for Vionic of $3.4 million in 2020, compared to acquisition and integration-related costs for Vionic of $1.9 million in 2019;

● Expense containment initiatives of $12.4 million in 2019, including employee-related costs for severance, health care and enhanced pension benefit, primarily associated with the VERP;

● 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 (Loss) Earnings

Operating (loss) earnings decreased $589.5 million to an operating loss of $485.7 million in 2020, compared to operating earnings of $103.8 million last year, primarily reflecting the lower net sales and higher impairment and restructuring charges described above.

As a percentage of net sales, the operating loss was 22.9% in 2020, compared to operating earnings of 3.6% in 2019.

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 increased $15.1 million, or 45.8%, to $48.2 million in 2020, compared to $33.1 million last year, which primarily reflects the higher fair value adjustment to the mandatory purchase obligation associated with the Blowfish Malibu acquisition of $23.9 million in 2020, compared to fair value adjustments and accretion totaling $6.0 million in 2019.

This increase was partially offset by lower average borrowings under our revolving credit agreement.

We anticipate interest expense to remain higher in 2021 than historical levels as we continue to pay down the revolving credit agreement.

The Blowfish Malibu mandatory purchase obligation will be remeasured each quarter until the anticipated settlement in the third quarter of 2021.

Refer to Note 12 to the consolidated financial statements for additional information related to our borrowings and Note 15 for additional information related to the mandatory purchase obligation.

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 increased $8.9 million, or 113.0%, to $16.8 million in 2020, compared to $7.9 million in 2019, reflecting an increase in income from our qualified pension plans.

This increase was primarily driven by a higher expected return on assets and lower discount rate for our domestic pension plans in 2020, as well as lower pension settlement costs.

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 Benefit (Provision)

Income Tax (Provision) Benefit

Our consolidated effective tax rate was 27.0% in 2021, compared to 15.1% in 2020.

In 2020, our effective tax rate was impacted by several discrete tax items, including the non-deductibility of a portion of our intangible asset impairment charges and the incremental tax provision related to the vesting of stock awards.

Our tax benefit 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 is in a three-year cumulative loss position for federal, state and certain international jurisdictions.

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.

In 2019, our effective tax rate was impacted by discrete tax benefits totaling $1.4 million, primarily reflecting adjustments to tax rates in state and other international jurisdictions.

The effective tax rate in 2019 was also impacted by a higher mix of international earnings, as our international earnings are generally subject to lower tax rates.

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 (Loss) Earnings Attributable to Caleres, Inc.

Consolidated net loss attributable to Caleres, Inc.

was $439.1 million in 2020, compared to net income of $62.8 million last year, reflecting the factors described above.

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

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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 before income taxes is as follows:

The breakdown of domestic and international net sales and earnings (loss) before income taxes is as follows:

Earnings Before

(Loss) Before

Earnings Before

International

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 trade name impairment charges described earlier.

Our international earnings were impacted in 2018 by the goodwill and trade name impairment charges for our Allen Edmonds business.

In 2020, both our domestic and international earnings were impacted by the goodwill and intangible asset impairment charges described earlier.

FAMOUS FOOTWEAR

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Restructuring and other special charges, net

Operating (loss) earnings

Operating earnings (loss)

Same-store sales % change

Same-store sales $ change

Sales change from 53rd week

Sales change from new and closed stores, net (1)

1 unchanged sentence

Sales per square foot, excluding e-commerce

Square footage, end of year (thousand sq.

Square footage (thousand sq.

Stores opened

1 unchanged sentence

Ending stores

Net sales decreased $324.5 million, or 20.4%, to $1,263.6 million in 2020, compared to $1,588.1 million last year.

The sales decrease was primarily driven by the temporary closure of all Famous Footwear stores during the first half of 2020 due to the COVID-19 pandemic, as well as the ongoing impact of the pandemic for the second half of 2020.

During the period of temporary store closures, Famous Footwear continued to serve customers through its e-commerce business.

Even as the retail stores began to open in the second quarter of 2020, our e-commerce business remained strong, generating a 75% increase in sales for 2020, with e-commerce penetration rising to approximately 22% of net sales, from 10% in 2019.

In both our brick and mortar and e-commerce channels, we experienced strong sales of athletics and casual styles, as the consumer adjusted to their work-from-home environment and limited social gatherings.

This sales trend was partially offset by weakness in demand for dress footwear.

Since the beginning of 2018, we have had net closures of 110 stores, or approximately 11%, as we continue to focus on optimizing our store base, and eliminating underperforming locations, particularly given the consumer shift to online shopping.

(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 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.

We continue to make improvements in digital technology in an effort to grow our Rewards program and drive increased engagement, conversion and retention.

In January 2021, we upgraded our famousfootwear.com e-commerce platform and launched a new version of the Famous Footwear Rewards mobile application.

The newly launched famousfootwear.com platform adds optimized mobile capabilities to deliver a superior experience for the 80% of our online shoppers who visit our site on a mobile device.

Gross profit decreased $185.5 million, or 27.5%, to $489.9 million in 2020, compared to $675.4 million in 2019, reflecting lower net sales, higher freight expenses associated with the growth in our e-commerce business and higher inventory markdowns as a result of the difficult retail environment.

As a percentage of net sales, our gross profit rate decreased to 38.8% in 2020, compared to 42.5% in 2019, driven by the impact of increased promotional activity to drive sales volume, higher freight expenses and the incremental inventory markdowns.

We expect the trend toward a higher mix of e-commerce sales to continue, further leveraging the investment we have made in our e-commerce platform.

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 decreased $97.9 million, or 16.5%, to $497.1 million during 2020 compared to $595.0 million last year.

The decrease was driven primarily by lower salaries expense attributable to the actions taken to mitigate the impact of the COVID-19 pandemic during the period of temporary retail store closures, as well as lower

variable expenses associated with the temporary retail store closures, including certain rent reductions and lease concessions.

As a percentage of net sales, selling and administrative expenses increased to 39.4% in 2020 from 37.5% last year.

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.

In 2019, we incurred restructuring and other special charges of $3.5 million related to expense containment initiatives.

Refer to Note 4 to the consolidated financial statements for additional information related to these charges.

Operating (Loss) Earnings

Operating (loss) earnings decreased $100.7 million to an operating loss of $23.8 million for 2020, compared to operating earnings of $76.9 million last year, reflecting lower net sales, a decline in gross profit rate and the other factors described above.

As a percentage of net sales, the operating loss was 1.9% for 2020, compared to operating earnings of 4.8% in 2019.

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

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Restructuring and other special charges, net

Operating (loss) earnings

Operating earnings (loss)

Direct-to-consumer (% of net sales) (1)

Wholesale/retail sales mix (%)

Change in wholesale net sales ($)

2 unchanged sentences

Same-store sales $ change

Sales change from 53rd week

Sales change from new and closed stores, net

Impact of changes in Canadian exchange rate on retail sales

Sales per square foot, excluding e-commerce

Square footage, end of year (thousands sq.

Sales per square foot, excluding e-commerce (trailing twelve months)

Square footage (thousands sq.

Stores opened

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(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 decreased $504.0 million, or 35.8%, to $902.5 million in 2020, compared to $1,406.5 million last year.

The sales decrease reflects the difficult selling environment driven by the COVID-19 pandemic, particularly in brands with a heavier concentration of dress footwear, including Naturalizer, Sam Edelman, Allen Edmonds and Franco Sarto.

In addition, sales were adversely impacted during the first half of 2020, as many of our wholesale customers canceled orders and temporarily closed their stores for several weeks.

Our retail stores were also temporarily closed during the first half of the year.

Our direct-to-consumer sales continue to grow as a percentage of the business, increasing to 32% in 2020, driven by strong growth in our e-commerce business.

We continue to strategically manage our portfolio of brands.

In the first quarter of 2020, we announced our decision to exit the Fergie brand.

In the fourth quarter of 2020, we announced that we were commencing a strategic realignment related to our Naturalizer retail operations in the United States and Canada.

In an effort to continue to improve future profitability and allow greater focus on high-growth, digital channels, we are in the process of closing all Naturalizer stores, with the exception of a limited number of flagship locations.

During the fourth quarter of 2020, we closed 39 Naturalizer stores and anticipate the remaining planned store closures to occur in the first quarter of 2021.

We continue to view the Naturalizer brand as a strong and value-driving component of our portfolio.

Therefore, we will be focusing on growing the brand’s e-commerce business through naturalizer.com, our retail partners and their websites, and the flagship stores.

During 2019, we entered into a partnership with Veronica Beard and also transformed and relaunched the Zodiac brand, while making the decision to shift away from the Carlos Santana brand and reposition the Via Spiga brand.

We opened 7 stores and closed 65 stores during 2020, resulting in a total of 170 stores at the end of 2020.

Sales per square foot, excluding e-commerce, decreased 54.1% to $179, compared to $390 last year.

Our unfilled order position for our wholesale business decreased $77.2 million, or 26.1%, to $218.2 million at the end of 2020, compared to $295.4 million at the end of last year.

The decrease in our backlog order levels reflects fewer orders as our wholesale customers shift to responding to consumer demand in-season, resulting in fewer upfront orders, as well as the ongoing economic impact of the COVID-19 pandemic.

Gross profit decreased $211.8 million, or 41.8%, to $294.8 million in 2020, compared to $506.6 million last year, primarily reflecting lower net sales and an incremental $27.5 million in inventory markdowns reflecting the difficult retail environment and $4.0 million in inventory markdowns related to the decision in 2020 to close all but a limited number of our Naturalizer retail stores and exit our Fergie brand.

Cost of goods sold in 2019 includes $5.8 million of incremental cost of goods sold related to purchase accounting inventory adjustments and $3.0 million associated with the decision to exit the Carlos brand and reposition our Via Spiga brand, as further discussed in the Overview section above.

As a percentage of sales, our gross profit rate decreased to 32.7% in 2020, compared to 36.0% last year, reflecting the above factors.

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 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 decreased $105.3 million, or 23.8%, to $337.4 million during 2020, compared to $442.7 million last year, driven by lower salaries expense reflecting the strategic actions taken during the first half of 2020 to mitigate the impact of the COVID-19 pandemic.

The decrease also reflects lower logistics expenses and a reduction of variable expenses, including certain rent concessions, associated with the retail store closures and the declining store base.

As a percentage of net sales, selling and administrative expenses increased to 37.4% in 2020 from 31.5% last year, reflecting the above named factors.

Selling and administrative expenses were $337.4 million in 2021, consistent with last year.

H igher 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 COVID-19 pandemic.

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.

See Note 1 and Note 11 to the consolidated financial statements for additional information related to the impairment.

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 $79.3 million in 2020 were 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, we incurred $12.4 million associated with the decision to close all but a limited number of Naturalizer retail stores and $3.3 million in integration-related costs for Vionic.

In 2019, restructuring and other special charges of $5.7 million in 2019 were comprised of $5.1 million for expense containment initiatives and $0.6 million of costs associated with the decision to exit the Carlos brand.

Refer to Note 2 and Note 5 to the consolidated financial statements for additional information related to these charges.

Operating (Loss) Earnings

Operating (loss) earnings decreased $466.6 million to an operating loss of $408.4 million in 2020, compared to operating earnings of $58.2 million last year, as a result of the factors described above.

As a percentage of net sales, the operating loss was 45.3% in 2020, compared to operating earnings of 4.1% last year.

Restructuring and other special charges of $13.5 million were recorded during 2021 for expenses associated with the s trategic 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

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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 $49.0 million for 2020 is $24.0 million, or 32.9%, lower than in 2019, reflecting a decrease in product sold from our Brand Portfolio segment to Famous Footwear.

Selling and administrative expenses increased $26.9 million, or 95.9%, to $54.9 million in 2020, compared to $28.0 million last year, primarily driven by higher unallocated logistics, insurance and consulting expenses.

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.

In 2019, restructuring and other special charges of $5.6 million were comprised of $3.8 million for expense containment initiatives and $1.8 million for Vionic integration-related costs.

There were no corresponding charges in 2021.

RESTRUCTURING AND OTHER INITIATIVES

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, consisting of 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 and $3.4 million of integration-related costs for Vionic.

During 2019, we incurred restructuring and other special charges of $14.8 million, including approximately $12.3 million related to our expense containment initiatives, $1.9 million of acquisition and integration-related costs for Vionic, and $0.5 million related to the decision to exit the Carlos brand and reposition our Via Spiga brand.

In addition to the severance and benefits presented as restructuring and other special charges, we also incurred $2.7 million in special charges for our pension associated with the VERP, which is included in other income, net in the consolidated statement of earnings, as further discussed in Note 6 to the consolidated financial statements.

During 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.

IMPACT OF INFLATION AND CHANGING PRICES

Although inflation has slowed in recent years, it is still a factor in our economy.

While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact over the last three years.

Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates.

For example, our products are manufactured in other countries, and a decline in the value of the

dollar and the impact of labor shortages in China or other countries, or the imposition of tariffs, may result in higher product costs.

Similarly, any potential shortage of quantities or, if significant, increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations.

In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease.

Moreover, increases in inflation may not be matched by increases in wages, which also could have a negative impact on consumer spending.

If we incur increased costs that we are unable to be recover through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected.

In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs.

Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors .

LIQUIDITY AND CAPITAL RESOURCES

January 29, 2022

February 1, 2020

(Decrease) Increase

January 30, 2021

Increase (Decrease)

Borrowings under revolving credit agreement

Long-term debt

Total debt (1)

(1) Total debt excludes the Blowfish Malibu mandatory purchase obligation, which was valued at $39.1 million and $15.2 million as of January 30, 2021 and February 1, 2020, respectively.

Total debt obligations decreased $24.5 million to $448.9 million at the end of 2020, compared to $473.4 million at the end of last year, as we made continued progress on paying back borrowings which were used to fund the Vionic acquisition in October 2018.

(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 increase in net interest expense in 2020 was primarily attributable to the fair value adjustment for the mandatory purchase obligation associated with the Blowfish Malibu acquisition, as further discussed in Note 2 and Note 15 to the consolidated financial statements, partially offset by lower average borrowings under our revolving credit agreement.

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

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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 January 18, 2019, the Loan Parties entered into the Third Amendment to Fourth Amended and Restated Credit Agreement to extend the maturity date to January 18, 2024 and changed the borrowing capacity under the former credit agreement from an aggregate amount of up to $600.0 million to an aggregate amount of up to $500.0 million, with the option to increase by up to $250.0 million.

The Third Amendment to Fourth Amended and Restated Credit Agreement also reduced upfront and unused borrowing fees, provided for less restrictive covenants and offered more flexibility.

On April 14, 2020, we entered into a Fourth Amendment to Fourth Amended and Restated Credit Agreement (as so amended, the “Credit Agreement”) which, among other modifications, increased the amount available under the revolving credit facility by $100.0 million to an aggregate amount of up to $600.0 million, subject to borrowing base restrictions, and may be further increased by up to $150.0 million.

Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base ("Loan Cap"), which is based on stated percentages of the sum of eligible accounts receivable, eligible inventory and eligible credit card receivables, as defined, less applicable reserves.

Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory and certain other collateral.

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) (with a floor of 1.0% imposed by the Credit Agreement) or the prime rate, as defined in the Credit Agreement, plus a spread.

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.

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.

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Total borrowing availability was $155.2 million at January 29, 2022.

Borrowings under the revolving credit facility, which will be used for working capital needs, will bear interest at LIBOR plus a spread of between 1.25% and 1.5%.

The accordion feature of our revolving credit facility provides us with a maximum of $250 million in additional borrowing capacity subject to our compliance with covenants and restrictions under the Credit Agreement.

Currently, based on our level of inventory and accounts receivable, the accordion feature would provide approximately $100.0 million of additional borrowing capacity.

We were in compliance with all covenants and restrictions under the Credit Agreement as of January 29, 2022.

Our credit rating was downgraded in March 2020 by Moody’s and S&P and again in April 2020 by Moody’s.

Further deterioration in our credit ratings or non-compliance with any covenants or restrictions under the Credit Agreement may impact our ability to access borrowings or capital, as well as negatively impact interest rates and the cost of borrowings.

$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 are guaranteed on a senior unsecured basis by each of the subsidiaries of Caleres, Inc.

that is an obligor under the Credit Agreement, and bear interest at 6.25%, which is payable on February 15 and August 15 of each year.

The Senior Notes mature on August 15, 2023.

We may redeem some or all of the Senior Notes at various redemption prices, as further discussed in Note 12 to the consolidated financial statements.

The Senior Notes also contain covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets.

As of January 30, 2021, we were in compliance with all covenants and restrictions relating to the Senior Notes.

Supplemental Guarantor Financial Information

The Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by all of our existing and future subsidiaries that are guarantors under the Credit Agreement.

The guarantors are 100% owned by Caleres, Inc.

On October 31, 2018, Vionic was joined to the Credit Agreement as a guarantor.

After giving effect to the joinder, the Company is lead borrower, and Sidney Rich Associates, Inc., BG Retail, LLC, Allen Edmonds and Vionic are each co-borrowers and guarantors under the Credit Agreement.

During the second quarter of 2020, we adopted SEC Release No.

33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities , as further discussed in Note 1 to the consolidated financial statements.

The following tables present summarized financial information for the Parent and guarantors on a combined basis after the elimination of intercompany transactions between entities and amounts related to investments in any subsidiary that is a non-guarantor:

January 30, 2021

Current assets

Non-current assets

Current liabilities

Non-current liabilities

( $ millions )

Net sales (1)

Operating (loss) earnings

Net (loss) earnings

Net (loss) earnings attributable to Caleres, Inc.

(1) Intercompany activity with the non-guarantor entities in 2020, 2019 and 2018 was not material.

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

February 1, 2020

Working capital ($ millions) (1)

January 30, 2021

Operating working capital ($ millions) (1)

Current ratio (2)

Debt-to-capital ratio (3)

(1) Working capital has been computed as total current assets less total current liabilities.

(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.

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Total capitalization is defined as total debt and total equity.

Working capital at January 30, 2021, was a deficit of $123.0 million, which was $154.3 million lower than at February 1, 2020.

Our current ratio was 0.86 to 1 at February 1, 2020, compared to 1.04 to 1 at February 1, 2020.

The decrease in both working capital and current ratio from 2019 reflects many factors, including lower inventories driven by disciplined inventory management during 2020 and the impact of port delays at the end of 2020 which delayed the flow of certain product, as well as the reclassification of the Blowfish Malibu mandatory purchase obligation to current liabilities, reflecting the anticipated settlement in 2021.

Our debt-to-capital ratio was 68.8% as of January 30, 2021, compared to 42.2% at February 1, 2020, primarily reflecting lower equity resulting from our net loss in 2020.

Increase (Decrease)

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

Cash Equivalents

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Net cash used for investing activities

Net cash used for financing activities

Net cash used for provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase in cash and cash equivalents

Cash provided by operating activities was $44.4 million lower in 2020 than last year, reflecting the following factors:

● Lower earnings, after consideration of non-cash items, in 2020 compared to 2019, and

● A larger increase in income tax receivables in 2020 compared to 2019, partially offset by

● An increase in accrued expenses and other liabilities in 2020 compared to a decrease 2019, and

● A larger decrease in inventory in 2020, compared to 2019 due in part to our disciplined management of inventory during the pandemic and the impact of port delays at the end of 2020 which delayed the flow of certain product.

(Decrease) increase in cash and cash equivalents

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;

● 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;

● The settlement of the Blowfish mandatory purchase obligation.

Supply chain financing :

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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 30, 2021, we had $28.5 million of accounts payable subject to supply chain financing arrangements.

There was an immaterial amount of accounts payable subject to supply chain financing arrangements at February 1, 2020.

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 $27.4 million lower in 2020 than last year, primarily reflecting lower capital expenditures in 2020 as a result of the steps taken to reduce and/or defer capital expenditures to preserve financial flexibility during the pandemic.

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 $45.0 million lower in 2020 than last year, primarily due to lower net repayments on our revolving credit agreement of $25.0 million in 2020 compared to $60.0 million in 2019.

In addition, share repurchases under our share repurchase programs decreased $10.1 million to $23.3 million in 2020 compared to $33.4 million in 2019.

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 11, 2021, the Board of Directors declared a quarterly dividend of $0.07 per share, payable on April 9, 2021, to shareholders of record on March 25, 2021, marking the 392 nd consecutive quarterly dividend to be paid by the Company.

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 396 th 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 listed below.

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 Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other , a company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired.

If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.

If the recorded values of these assets are not recoverable, based on either the qualitative assessment or discounted cash flow analysis, goodwill impairment is recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

We perform impairment tests as of the beginning of the fourth quarter of each fiscal year unless events or circumstances indicate an interim test is required.

Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present.

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 our business operations, we determined that an interim assessment of goodwill was required and performed the quantitative assessment for all reporting units as of May 2, 2020.

The quantitative test is a fair value-based test applied at the reporting unit level, which is generally at or one level below the operating segment level.

The test compared the fair value of each reporting unit to the carrying value of that reporting unit.

This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity.

The fair value of the reporting unit is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows.

Projected net sales, gross profit, selling and administrative expenses, capital expenditures and working capital requirements are based on the past performance of the reporting units as well as our internal projections.

Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations.

We also considered assumptions that market participants may use.

The estimates of the fair values of our reporting units were based on the best information available to us as of the date of the assessment.

In our quantitative assessments of goodwill, our projected net sales growth rates, gross profit, selling and administrative expenses and discount rates require significant management judgment and are the assumptions to which the fair value calculation is the most sensitive.

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 total non-cash goodwill impairment charges of $240.3 million in the first quarter of 2020.

In addition to the interim assessment, we performed an impairment review of the goodwill associated with the Blowfish Malibu reporting unit as of the first day of our fourth fiscal quarter.

We elected to perform the optional qualitative assessment, which indicated no impairment.

During 2019 and 2018, the goodwill impairment testing was performed as of the first day of our fourth fiscal quarter, which resulted in no impairment charges recorded during 2019 and $38.0 million of non-cash impairment charges for the impairment of goodwill of our Allen Edmonds reporting unit in 2018.

Other Intangible Assets

During the first quarter of 2020, as a result of the triggering event from the economic impacts of COVID-19, an interim assessment of our indefinite-lived intangible assets was performed as of May 2, 2020.

We tested our indefinite-lived intangible assets, consisting of trade names, utilizing the relief-from-royalty method to determine the estimated fair value of each indefinite-lived intangible asset.

The relief-from-royalty method estimates the theoretical royalty savings from ownership of the trade name.

Key assumptions used in our assessments include net sales projections, discount rates and royalty rates.

Royalty rates are established by management based on comparable trade name licensing agreements in the market.

The net sales projections, discount rates and royalty rates utilized in our quantitative assessments of indefinite-lived intangible assets require significant management judgment and are the assumptions to which the fair value calculation is most sensitive.

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.

The carrying value of the Via Spiga trade name of $0.5 million will be amortized over approximately two years.

Changes in any of the assumptions used in the impairment assessments could negatively impact future fair value calculations, potentially resulting in an impairment charge on other trade names in subsequent assessments.

In addition to the interim assessment, we evaluated the indefinite-lived intangible assets and the definite-lived Allen Edmonds customer relationship intangible asset as of the first day of our fourth fiscal quarter.

The indefinite-lived trade names were evaluated using the key assumptions described above.

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.

The 2019 impairment reviews for indefinite-lived intangible assets indicated no impairment.

During 2018, we recorded a non-cash impairment charge of $60.0 million for the impairment of the Allen Edmonds indefinite-lived trade name.

Refer to Note 11 to the consolidated financial statements for additional information related to goodwill and intangible assets.

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.

We recorded asset impairment charges, primarily related to underperforming retail stores, of $56.3 million during 2020, including $31.4 million associated with operating lease right-of-use assets and $24.9 million associated with property and equipment, primarily reflecting the impact of the COVID-19 pandemic on our retail operations as well as the decision to close all but a few of our Naturalizer retail stores.

Our most significant policies requiring the use of estimates and judgments are described below.

Inventories are one of our most significant assets, representing approximately 32% of total assets at the end of 2021.

We value inventories at the lower of cost and net realizable value with 88% of consolidated inventories using the last-in, first-out (“LIFO”) method.

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time.

Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

As further discussed in Note 1 to the consolidated financial statements, a reduction in inventory quantities associated with the ongoing exit of our Naturalizer retail business resulted in a liquidation of LIFO layers and a reduction of the LIFO reserve of $2.9 million.

We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current selling prices.

At our Famous Footwear segment and certain operations within our Brand Portfolio segment, we recognize markdowns when it becomes evident that inventory items will be sold at prices less than cost, plus the cost to sell the product.

This policy causes the gross profit rates at our Famous Footwear segment and, to a lesser extent, our Brand Portfolio segment to be lower than the initial markup during periods when permanent price reductions are taken to clear product.

For the majority of our Brand Portfolio segment, we provide markdown reserves to reduce the carrying values

of inventories to a level where, upon sale of the product, we will realize our normal gross profit rate.

We 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.

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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.

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Inventory shrinkage is included as a component of cost of goods sold.

Store Impairment Charges

Income Tax Valuation Allowances

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Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements as of January 30, 2021.

CONTRACTUAL OBLIGATIONS

The table below sets forth our significant future obligations by time period.

Further information on certain of these commitments is provided in the notes to our consolidated financial statements, which are cross-referenced in this table.

Our obligations outstanding as of January 30, 2021 include the following:

Payments Due by Period

Borrowings under Credit Agreement (1)

Long-term debt (2)

Interest on long-term debt (2)

Operating lease commitments, including imputed interest (3)

Minimum license commitments

Purchase obligations (4)

Mandatory purchase obligation (5)

(1) Interest on borrowings is at variable rates based on LIBOR or the prime rate, as defined in the Credit Agreement, plus a spread.

The interest rate and fees for letters of credit varies based upon the level of excess availability under the Credit Agreement.

There is an unused line fee payable on the excess availability under the facility and a letter of credit fee payable on the outstanding exposure under letters of credit.

Interest obligations, which are variable in nature, are not included in the table above.

The borrowings under the Credit Agreement mature in January 2024.

Refer to Note 12 to the consolidated financial statements.

(2) Interest obligations have been presented based on our $200.0 million principal value of Senior Notes at a fixed interest rate of 6.25% as of fiscal year ended January 30, 2021.

Refer to Note 12 to the consolidated financial statements.

(3) The majority of our retail operating leases contain provisions that allow us to modify amounts payable under the lease or terminate the lease in certain circumstances, such as experiencing actual sales volume below a defined threshold and/or co-tenancy provisions associated with the facility.

The contractual obligations presented in the table above reflect the minimum rent obligations, irrespective of our ability to reduce or terminate rental payments in the future.

Refer to Note 13 to the consolidated financial statements.

(4) Purchase obligations include agreements to purchase assets, goods or services that specify all significant terms, including quantity and price provisions.

As a result of the temporary closure of our retail stores and those of our wholesale customers, as well as the overall impact of COVID-19 on the global economy, we have sought to cancel or reduce certain purchase obligations.

(5) Refer to Note 2, Note 5 and Note 15 to the consolidated financial statements for further discussion regarding the mandatory purchase obligation associated with the Blowfish Malibu acquisition.

(6) Includes obligations for our supplemental executive retirement plan and other postretirement benefits, as discussed in Note 6 to the consolidated financial statements, one-time transition tax for the mandatory deemed repatriation of cumulative international earnings related to income tax reform, as discussed in Note 7 to the consolidated financial statements, and other contractual obligations.

(7) Excludes liabilities of $7.9 million, $1.0 million and $1.7 million for our non-qualified deferred compensation plan, deferred compensation plan for non-employee directors and restricted stock units for non-employee directors, respectively, due to the uncertain nature in timing of payments.

Refer to Note 6, Note 15 and Note 17 to the consolidated financial statements.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FORWARD-LOOKING STATEMENTS

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What changed 10-K

Item 7. Management’s Discussion and Analysis