Filing summary
Filing identity discrepancy: The request identifies CALERES INC. and 2010 Q3, but the supplied filing is for Brown Shoe Company, Inc. for the quarter ended October 29, 2011, with comparative periods ended October 30, 2010. This summary reflects the supplied filing.
Business context and reporting period
Brown Shoe operated Famous Footwear, Wholesale Operations and Specialty Retail. The filing covers the 13-week third quarter and 39 weeks ended October 29, 2011. Results are seasonal; management notes the third quarter traditionally contributes substantially to annual earnings.
Financial performance
| Metric | Third quarter 2011 | Third quarter 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Net sales | $713.8 million | $716.1 million | $1,953.9 million | $1,899.6 million |
| Gross profit / margin | $276.5 million / 38.7% | $282.2 million / 39.4% | $758.1 million / 38.8% | $768.2 million / 40.4% |
| Operating earnings / margin | $32.4 million / 4.5% | $33.3 million / 4.6% | $43.4 million / 2.2% | $66.7 million / 3.5% |
| Continuing-operations earnings | $17.6 million | $18.5 million | $15.5 million | $33.8 million |
| Net earnings attributable to Brown Shoe | $33.7 million; diluted EPS $0.79 | $18.6 million; diluted EPS $0.42 | $32.8 million; diluted EPS $0.75 | $33.9 million; diluted EPS $0.77 |
- Third-quarter sales slipped 0.3%; nine-month sales rose 2.9%, principally reflecting ASG, acquired in February 2011. ASG contributed $33.3 million of third-quarter sales and $107.9 million from acquisition through quarter-end.
- Third-quarter gross margin fell 0.7 percentage point; nine-month margin fell 1.6 points. Management cited weaker toning-footwear demand, markdowns, higher freight/product costs and a greater wholesale sales mix.
- Third-quarter operating earnings decreased 2.8%; nine-month operating earnings declined 34.9%. Higher interest expense also reduced continuing-operations earnings.
- Famous Footwear’s third-quarter sales decreased 1.3% and same-store sales declined 0.4%; its operating earnings fell to $28.4 million from $32.2 million. Wholesale sales rose 2.9% with ASG, but Wholesale operating earnings fell to $9.6 million from $13.7 million. Specialty Retail sales fell 5.2%, and its operating earnings were $0.1 million versus $0.7 million.
Cash flow, debt and liquidity
- For the first 39 weeks, operating cash flow was $12.6 million, compared with cash used of $32.8 million in the prior-year period. Investing used $129.1 million, including the ASG acquisition; financing provided $31.9 million. Cash decreased $84.6 million to $42.0 million.
- At October 29, 2011, total debt was $420.6 million: $222.0 million under the revolving facility and $198.6 million carrying value of the 2019 Senior Notes. Total debt was $263.0 million a year earlier.
- The company issued $200 million of 7.125% Senior Notes due 2019 and redeemed its $150 million 2012 Senior Notes, recording a $1.0 million early-extinguishment loss.
- Revolver borrowing availability was $299.1 million, with $8.9 million of letters of credit outstanding. The company reported compliance with credit-agreement and senior-note covenants.
- Working capital was $273.2 million; current ratio was 1.50, down from 1.66 a year earlier. Debt-to-capital increased to 50.1% from 39.1%. Inventory was $580.2 million, up from $539.9 million a year earlier, mainly due to ASG.
Material changes, outlook and risks
- Brown Shoe acquired ASG for $156.6 million, including $11.6 million of assumed debt. ASG added athletic and outdoor brands. The company sold ASG subsidiary TBMC, which markets AND 1 footwear, on October 25 for $55.4 million cash; the sale generated a $21.6 million pretax gain ($15.4 million after tax, or $0.37 per share), reported in discontinued operations. Proceeds reduced revolver borrowings.
- Third-quarter reported earnings benefited from the TBMC gain. Continuing-operations earnings were $17.6 million, compared with reported attributable earnings of $33.7 million including discontinued operations.
- Management announced exits from the children’s wholesale business and certain women’s/specialty private-label brands, plans to close about 145 Famous Footwear stores across fiscal 2011 and 2012, all Brown Shoe Closet and F.X. LaSalle stores, and the Sun Prairie distribution center. Estimated implementation expense is about $20 million, of which $4.5 million had been recognized through Q3; roughly half was expected to be employee-related. Actual costs could differ.
- ERP stabilization issues—including customer allowances, chargebacks, lost sales and incremental costs—were estimated to reduce pretax earnings by $4.9 million in Q3 and $15.1 million year to date. Management expected stabilization to finish by year-end 2011 and forecast a full-year diluted EPS impact of $0.26, including $0.04 in Q4.
- Management expected wholesale portfolio exits to reduce revenue and expressed caution about holiday demand given macroeconomic conditions and consumer spending/pricing. It planned to focus on ERP stabilization, ASG integration and portfolio realignment. Capital spending and capitalized software for 2011 were estimated at $43–$45 million.
- Other risks include fashion and consumer-demand shifts, competition, reliance on third-party sourcing (including China), inflation, ERP execution, ASG integration, customer concentration, leases, suppliers and product-safety compliance. The filing states disclosure controls were effective at a reasonable-assurance level; ASG was excluded from the current-year internal-control effectiveness assessment as permitted for an acquisition year.
- Environmental reserves totaled $9.1 million, including $7.4 million for the Redfield site; management cautioned that ultimate cleanup costs may vary and could exceed recorded amounts. A judgment in a separate Colorado matter required payment of 75% of past cleanup costs and certain future costs; the company said it had no material adverse effect. A further $1.7 million liability related to claims from an insolvent insurer, and $0.6 million of contingent former-store lease commitments remained.
Important facts for investors to verify
- Confirm the filing entity and period: the source is Brown Shoe Company, Inc., Q3 2011—not Caleres, Q3 2010.
- Separate continuing operations from the TBMC discontinued operation and one-time sale gain when assessing earnings and EPS.
- Track whether ERP stabilization costs and disruption conclude as management expected, and whether the estimated full-year EPS impact is realized.
- Monitor post-acquisition legacy wholesale sales, margins, inventory markdowns and the revenue impact of announced brand and store exits.
- Assess debt, borrowing-base availability, covenant headroom, cash generation and the company’s ability to fund planned capital spending and restructuring.
- Follow actual business-exit costs and timing, and changes in environmental and litigation exposures.