Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (d/b/a Caleres Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended October 30, 2004
Business Overview: The Company operates through three primary segments: Famous Footwear (retail), Wholesale Operations (including Bass, Dr. Scholl's, and Naturalizer), and Naturalizer Retail. The Company also holds an investment in Shoes.com, Inc. The business is subject to seasonal influences, particularly the back-to-school selling season.
Key Financial Metrics
| ($ in thousands, except per share) | 13 Weeks Ended Oct 30, 2004 |
39 Weeks Ended Oct 30, 2004 |
|---|---|---|
| Net Sales | $514,825 | $1,465,314 |
| Gross Profit | $208,043 | $596,653 |
| Gross Margin % | 40.4% | 40.7% |
| Operating Earnings | $28,281 | $56,476 |
| Net Earnings | $18,820 | $35,201 |
| Diluted EPS | $1.01 | $1.87 |
| Cash and Equivalents | $74,793 | $74,793 (Ending Balance) |
| Working Capital | $321,348 | $321,348 (Ending Balance) |
| Total Debt | $143,500 | $143,500 (Ending Balance) |
| Current Ratio | 2.3:1 | 2.3:1 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4.3% ($21.4 million) in the quarter and 4.8% ($67.0 million) year-to-date compared to the prior year. Growth was driven by the acquisition of the Bass footwear license and new Famous Footwear stores.
- Profitability Decline: Despite sales growth, Net Earnings decreased 11.2% in the quarter ($2.4 million) and 15.7% year-to-date ($6.6 million). Operating earnings declined 12.8% in the quarter and 15.0% year-to-date.
- Margin Compression: Gross profit margin decreased to 40.4% from 41.5% in the quarter due to aggressive back-to-school promotions, higher inventory markdowns, and increased allowances to department store customers.
- Segment Performance:
- Famous Footwear: Sales up 3.3%; Operating earnings up 5.9% to $24.8 million. Same-store sales declined 0.4%.
- Wholesale Operations: Sales up 6.2%; Operating earnings dropped 32.9% to $10.4 million due to weakness in children's business, Naturalizer sales, and Bass transition costs.
- Naturalizer Retail: Sales flat (0.2%); Operating loss widened to $1.5 million from $0.2 million due to same-store sales declines and lower gross margins.
- Compensation Costs: Stock-based and incentive compensation costs were $8.6 million lower in the quarter compared to the prior year, partially offsetting expense increases.
Outlook, Risks, and Contingencies
- Liquidity and Debt: The Company maintains a strong balance sheet with a current ratio of 2.3:1. Total debt increased to $143.5 million, primarily due to short-term notes payable used to fund Bass inventory and receivables. The Company has a $350 million revolving credit facility with approximately $165.5 million in additional availability.
- Environmental Remediation (Redfield Site): The Company is involved in ongoing remediation at its former Colorado facility. A jury awarded $1.0 million in damages in a class action suit; the Company has recorded $3.7 million in total pre-tax charges related to this matter. The Company is appealing the judgment and pursuing insurance recoveries, though the ultimate outcome is uncertain.
- Foreign Earnings Repatriation: The Company holds approximately $74.8 million in cash, mostly in foreign subsidiaries. The American Jobs Creation Act of 2004 may allow for the repatriation of $50-$60 million with an estimated tax expense of $9-$10 million, though no decision has been made.
- Guarantees: The Company guarantees a $3.5 million Industrial Development Bond for a facility sold in 1985. The current owner filed for bankruptcy, but management believes the facility's value covers the obligation.
- Forward-Looking Risks: Risks include general economic conditions, consumer preferences, intense competition, and supply chain disruptions from Brazil and China.
Investor Verification Checklist
- Wholesale Margin Pressure: Verify the sustainability of the Wholesale segment's gross margin decline (30.1% vs 32.4% prior year) and the impact of Bass integration costs.
- Same-Store Sales Trends: Monitor the decline in same-store sales for both Famous Footwear (-0.4%) and Naturalizer Retail (-2.8%) to assess underlying demand.
- Redfield Litigation Status: Track the appeal process of the $1.0 million class action verdict and the status of insurance recovery claims.
- Inventory Levels: Review inventory growth ($410.0 million, up $33.4 million year-over-year) to ensure it aligns with sales velocity and does not lead to future markdowns.
- Debt Covenants: Confirm continued compliance with the Amended and Restated Credit Agreement, specifically the fixed charge coverage ratio and borrowing base availability.