Acquisition of Blowfish, LLC

On July 6, 2018, the Company entered into a Membership Interest Purchase Agreement ("Purchase Agreement") with Blowfish, LLC ("Blowfish", or "Blowfish Malibu"), pursuant to which the Company acquired a controlling interest in Blowfish. The noncontrolling interest is subject to a mandatory purchase obligation after a three-year period based upon an earnings multiple formula, as specified in the Purchase Agreement. The aggregate purchase price is estimated to be $28.1 million, including approximately $9.1 million preliminarily assigned to the mandatory purchase obligation, which will be paid upon settlement in 2021. The remaining $19.0 million (or $16.8 million, net of $2.2 million of cash received) was funded with cash. The preliminary estimate of the mandatory purchase obligation, which is recorded within other liabilities on the condensed consolidated balance sheet, is presented on a discounted basis and is subject to remeasurement based on the earnings formula specified in the Purchase Agreement. Accretion of the mandatory purchase obligation and any remeasurement adjustments will be recorded as interest expense. The operating results of Blowfish since July 6, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment.

Blowfish Malibu, which was founded in 2005, designs and sells women's and children's footwear that captures the fresh youthful spirit and casual living that is distinctively Southern California. Footwear is marketed under the "Blowfish" and Blowfish Malibu" tradenames. The acquisition allows for continued expansion of the Company's overall business and provides additional exposure to the growing sneaker and casual lifestyle segment of the market.

The Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) and $1.5 million ($1.1 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, related to the amortization of the inventory fair value adjustment required for purchase accounting. In addition, the Company incurred acquisition-related costs of $0.1 million ($0.1 million on an after-tax basis) and $0.3 million ($0.2 million on an after-tax basis, or $0.01 per diluted share) in the thirteen and thirty-nine weeks ended November 3, 2018, respectively, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs.

The assets and liabilities of Blowfish Malibu were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company has allocated the purchase price as of the acquisition date, July 6, 2018, as follows:



($ thousands)	July 6, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	2,207
Receivables	4,612
Inventories	6,400
Prepaid expense and other current assets	317
Total current assets	13,536
Other assets	539
Goodwill	5,701
Intangible assets	17,600
Property and equipment	112
Total assets	$	37,488

LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable	$	2,915
Other accrued expenses	5,739
Total current liabilities	8,654
Deferred income taxes	617
Other liabilities	77
Total liabilities	9,348
Net assets	$	28,140

The assets and liabilities of Blowfish Malibu were recorded at their estimated fair values and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill during the second quarter of 2018. The allocation of the purchase price was based on certain preliminary valuations and analyses. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. During the thirteen weeks ended November 3, 2018, the Company recorded a purchase price allocation adjustment of $1.8 million to intangible assets, with a corresponding adjustment to goodwill.

The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows (Level 3 fair value measurements). Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies.

Goodwill and intangible assets reflected above were determined to meet the criteria for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized, which is deductible for tax purposes, is primarily attributable to synergies and an assembled workforce. Refer to Note 9 to the condensed consolidated financial statements for additional information regarding goodwill and intangible assets.

During the thirteen and thirty-nine weeks ended November 3, 2018, Blowfish Malibu contributed $6.4 million and $8.9 million of net sales, respectively. Blowfish Malibu experienced a net loss of approximately $0.5 million and $0.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively. The loss primarily reflects incremental cost of goods sold related to the amortization of the inventory fair value adjustment required for purchase accounting, which was $0.9 million and $1.5 million for the thirteen and thirty-nine weeks ended November 3, 2018. The net loss excludes the acquisition costs and incremental interest expense associated with the transaction.

Acquisition of Vionic

On October 18, 2018, the Company entered into an Equity and Asset Purchase Agreement (the "Agreement") with the equity holders of Vionic Group LLC and Vionic International LLC, and VCG Holdings Ltd., a Cayman Islands corporation (collectively, "Vionic"), pursuant to which the Company acquired all of the outstanding equity interests of Vionic Group LLC and Vionic International LLC and certain related intellectual property from VCG Holdings Ltd for $360.0 million plus adjustments for cash and indebtedness, as defined in the Agreement. The aggregate purchase price is estimated to be $360.7 million (or $352.2 million, net of $8.5 million of cash received). Of the $352.2 million, $344.9 million was funded during the thirteen weeks ended November 3, 2018 and $7.3 million was funded early in the fourth quarter. The purchase was funded with borrowings from the Company's revolving credit agreement. The operating results of Vionic since October 18, 2018 have been included in the Company's condensed consolidated financial statements within the Brand Portfolio segment.

Vionic, which was founded in 1979, brings together style and science, combining innovative biomechanics with the most coveted trends. As pioneers in foot health with a global team of experts behind the dual gender brand, Vionic brings a fresh perspective to stylish, supportive footwear, offering a vast selection of active, casual and dress styles, sandals and slippers. The acquisition of Vionic allows the Company to continue to expand its portfolio of brands and gives it additional access to the growing contemporary comfort footwear category.

The Company incurred acquisition-related costs of $4.1 million ($3.5 million on an after-tax basis, or $0.08 per diluted share) in the thirteen weeks ended November 3, 2018, which were recorded as a component of restructuring and other special charges, net within the Other category. Refer to Note 6 to the condensed consolidated financial statements for additional information related to the acquisition costs. In addition, the Brand Portfolio segment recognized $0.9 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) in incremental cost of goods sold in the thirteen weeks ended November 3, 2018 related to the amortization of the inventory fair value adjustment required for purchase accounting.

Purchase Price Allocation

The assets and liabilities of Vionic were recorded at their estimated fair values, and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, including identified intangible assets, was recorded as goodwill. The Company has preliminarily allocated the purchase price as of the acquisition date, October 18, 2018, as follows:



($ thousands)	October 18, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	8,502
Receivables	28,930
Inventories	65,700
Prepaid expense and other current assets	1,489
Total current assets	104,621
Goodwill	148,763
Intangible assets	144,700
Property and equipment	6,864
Total assets	$	404,948

LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable	$	24,085
Other accrued expenses	16,632
Total current liabilities	40,717
Other liabilities - capital lease obligation	3,541
Total liabilities	44,258
Net assets	$	360,690

The allocation of the purchase price is based on certain preliminary valuations and analyses that have not been completed as of the date of this filing. Any subsequent changes in the estimated fair values assumed upon the finalization of more detailed analyses within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. The Company’s purchase price allocation contains uncertainties because it required management to make assumptions and to apply judgment to estimate the fair value of the acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of the acquired assets and assumed liabilities could materially affect the results of its operations. Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows (Level 3 fair value measurements). Unanticipated events or circumstances may occur, which could affect the accuracy of the Company’s fair value estimates, including assumptions regarding industry economic factors and business strategies. A third-party valuation specialist assisted the Company with its preliminary fair value estimates for inventory and intangible assets other than goodwill. The Company used all available information to make its best estimate of fair values at the acquisition date.

Pro Forma Information

The table below illustrates the unaudited pro forma impact on operating results as if the acquisition had been completed as of the beginning of 2017. Prior to the acquisition, Vionic’s fiscal calendar ended on December 31 of each year. For purposes of the financial information presented, the Company has combined the operating results of the relevant fiscal quarters for Vionic with the Company’s actual fiscal quarters. For example, the information presented in the thirteen weeks ended columns includes Vionic’s operations for the fiscal months of July through September of each respective period. The information presented in the thirty-nine weeks ended columns includes Vionic’s operations for the fiscal months of January through September for each respective period.



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
($ thousands, except per share amounts)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Net sales	$	814,700	$	816,429	$	2,252,727	$	2,205,046
Net earnings attributable to Caleres, Inc.	31,181		33,408		74,680		65,603
Basic earnings per common share attributable to Caleres, Inc. shareholders	$	0.72	$	0.78	$	1.73	$	1.53
Diluted earnings per common share attributable to Caleres, Inc. shareholders	$	0.72	$	0.77	$	1.73	$	1.52

For purposes of the pro forma disclosures, the pro forma adjustments primarily include the following:


•	The elimination of material costs from thirteen and thirty-nine weeks ended November 3, 2018 that were directly attributable to the acquisition and have no continuing impact on operating results, including:


◦	the non-cash cost of goods sold impact of $0.9 million related to the fair value adjustment to the acquired inventory, and related tax effects; and


◦	transaction costs of $4.1 million, and related tax effects.


•	Amortization of acquired intangibles of $2.0 million and $5.9 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, and $2.0 million and $6.0 million for the thirteen and thirty-nine weeks ended October 28, 2017, respectively.


•	Estimated interest expense on additional borrowings under the Company's revolving credit agreement at the Company's current interest rate of 3.75%. Assumes no paydown of the revolving credit agreement during the thirty-nine weeks ended October 28, 2017 and gradual paydown to $285.0 million from October 29, 2017 to November 3, 2018.


•	Tax impact of the change in tax status of Vionic and the tax impact of the pro forma adjustments based on the estimated statutory tax rate in effect during the respective periods. The tax effect of the pro forma interest expense adjustments for

borrowings under the Company's revolving credit agreement was calculated at 25.74% for the thirteen and thirty-nine weeks ended November 3, 2018 and at 38.9% for the thirteen and thirty-nine weeks ended October 28, 2017, reflecting the Company's effective tax rates. The tax effect of the other pro forma adjustments for the thirty-nine weeks ended November 3, 2018 and October 28, 2017 was calculated utilizing an estimated effective tax rate of 28.0% and 40.0%, respectively.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the Company completed the acquisition on the date assumed, nor is it necessarily indicative of the results of operations that may be expected in future periods.

During the period from the acquisition date through November 3, 2018, Vionic contributed $5.8 million of net sales and reported a net loss of approximately $1.2 million, primarily associated with the incremental cost of goods sold of $0.9 million related to the amortization of the inventory fair value adjustment required for purchase accounting. The net loss excludes the Company's acquisition costs and any incremental interest expense associated with the transaction.

Acquisition of Allen Edmonds

On December 13, 2016, the Company entered into a Stock Purchase Agreement with Apollo Investors, LLC and Apollo Buyer Holding Company, Inc., pursuant to which the Company acquired all outstanding capital stock of Allen Edmonds ("Allen Edmonds"). The aggregate purchase price for the Allen Edmonds stock was $259.9 million, net of cash received of $0.7 million. The operating results of Allen Edmonds are included in the Company’s condensed consolidated financial statements within the Brand Portfolio segment.

Management estimated the fair value of the assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. During the thirty-nine weeks ended October 28, 2017, the Company recognized $4.9 million in cost of goods sold ($3.0 million on an after-tax basis, or $0.07 per diluted share) related to the amortization of the inventory fair value adjustment required for purchase accounting. The inventory fair value adjustment was fully amortized as of July 29, 2017. As further discussed in Note 6 to the consolidated financial statements, the Company also incurred acquisition and integration costs during the thirty-nine weeks ended November 3, 2018 and October 28, 2017.