Business context and reporting period
Filing mismatch: The request identifies CALERES INC and 2013 Q3, but the supplied filing is Brown Shoe Company, Inc.’s Form 10-Q for the 13 weeks ended November 1, 2014, with year-to-date results for the 39 weeks ended that date. The comparisons below are against the corresponding 2013 periods.
The company operates Famous Footwear, Wholesale Operations, and Specialty Retail. Results are seasonal, and management says the third quarter traditionally contributes a substantial portion of annual earnings.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $729.3 million | $702.8 million | $1,956.3 million | $1,913.2 million |
| Gross profit / margin | $290.7 million / 39.9% | $278.2 million / 39.6% | $792.7 million / 40.5% | $772.9 million / 40.4% |
| Operating earnings / margin | $53.2 million / 7.3% | $44.7 million / 6.4% | $113.2 million / 5.8% | $88.4 million / 4.6% |
| Net earnings attributable to Brown Shoe | $33.1 million | $27.3 million | $66.6 million | $31.9 million |
| Diluted EPS attributable to Brown Shoe | $0.75 | $0.63 | $1.52 | $0.73 |
For the 39-week period, continuing-operations diluted EPS was $1.52 versus $1.11. Prior-year results included a $16.3 million discontinued-operations loss, including a $11.5 million disposition/impairment charge; there were no discontinued-operations earnings or losses in 2014.
Segments and principal changes
- Wholesale Operations: Q3 sales rose 18.2% to $242.6 million and operating earnings rose to $27.8 million from $16.8 million. Gross margin improved to 32.9% from 31.8%. The unfilled order position was $333.4 million, up 7.0% year over year.
- Famous Footwear: Q3 sales declined 1.0% to $435.4 million; same-store sales fell 0.2%. Operating earnings rose to $37.6 million from $37.0 million, and gross margin improved to 43.4% from 42.6%. Nine-month sales were a company record, up 0.3%.
- Specialty Retail: Q3 sales fell 11.4% to $51.3 million, same-store sales declined 6.9%, and the segment recorded a $0.4 million operating loss. Nine-month sales declined 13.0%, with a $6.8 million operating loss.
Consolidated Q3 sales grew 3.8% and operating earnings increased 19.1%. Higher wholesale sales and improved margins drove gains; lower Specialty Retail sales and modestly lower Famous Footwear sales were offsets. The Franco Sarto trademark acquisition eliminated related royalty expense and supported wholesale gross-margin improvement.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $68.5 million, versus $62.0 million. Investing cash outflow was $112.4 million, compared with $27.7 million of inflow in 2013; 2014 included $65.1 million for Franco Sarto trademarks and a $7.0 million investment in Jack Erwin. Financing provided $0.5 million, versus $113.9 million of outflow in 2013. Cash declined $43.5 million to $39.1 million.
- At November 1, 2014, total debt was $213.2 million: $14.0 million under the revolving credit agreement and $199.2 million of senior notes. Revolver availability was $509.6 million, with $6.4 million of letters of credit outstanding. The credit facility matures January 2016; senior notes bear 7.125% interest and mature in 2019.
- Working capital was $393.8 million; the current ratio was 2.01:1, versus 2.12:1 a year earlier. Debt-to-capital was 28.3%, versus 30.6%. Cash was substantially held by foreign subsidiaries, which the company uses to manage consolidated liquidity.
- Capital expenditure and capitalized software spending was $40.4 million for the 39 weeks. Management expected full-year fiscal 2014 spending of approximately $56–$59 million.
Outlook, commentary and risks
Management expected continued growth potential in Q4, while noting possible changes in consumer sentiment and a promotional holiday environment. Fiscal 2014 guidance was consolidated sales of $2.58–$2.59 billion and diluted EPS of $1.65–$1.69. The filing does not provide a separate updated outlook beyond these estimates.
The company reported compliance in all material respects with its credit agreement and senior-note covenants. It paid a $0.07-per-share quarterly dividend and said it presently expected dividends to continue, subject to Board discretion and business conditions. The portfolio realignment program was described as complete; $1.2 million of related reserves remained at quarter-end, with settlement expected by the end of fiscal 2016.
Key disclosed risks include shifts in consumer demand and fashion trends, competition, forecasting and inventory management, reliance on overseas third-party manufacturing and supply chains, currency fluctuations, cybersecurity or distribution disruptions, retailer concentration, trade restrictions, labor and product-safety compliance, licensing and intellectual-property relationships, and lease execution. Environmental remediation reserves were $9.8 million for the Redfield site and $1.4 million for other sites; management cautioned ultimate costs may exceed recorded amounts. Ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Brown Shoe Company, Inc., quarter ended November 1, 2014—not a CALERES INC 2013 Q3 filing.
- Assess whether Wholesale growth and margin improvement can offset continued weakness and operating losses in Specialty Retail.
- Compare full-year sales and EPS guidance with subsequent results, particularly given seasonality and management’s caution about promotional holiday conditions.
- Review cash availability, foreign-subsidiary cash location, revolver borrowing-base/covenant thresholds, and the January 2016 credit-facility maturity.
- Evaluate the returns and accounting effects of the $65.1 million Franco Sarto acquisition and $7.0 million Jack Erwin investment, and monitor environmental remediation cost exposure.