CALERES INC quarterly report, Q1 FY2014

Business context and reporting period

The supplied filing is for Brown Shoe Company, Inc. (not Caleres Inc.) and covers the 13 weeks ended May 3, 2014, its first quarter of fiscal 2014. The company operates Famous Footwear, Wholesale Operations and Specialty Retail. Management notes that the business is seasonal, with a substantial portion of annual earnings traditionally generated in the third quarter.

Financial results and liquidity

Amounts below are in millions of dollars unless stated otherwise.

• At May 3, 2014, cash was 36.7; total debt was 199.1, comprising 199.1 of senior notes and no revolving-credit borrowings. The notes carry a 7.125% coupon and mature in 2019.
• Revolver availability was 491.5, with 6.4 of letters of credit outstanding. The company reported compliance with its credit-agreement and senior-note covenants.
• Working capital was 355.7; the current ratio was 2.05:1 and debt-to-capital was 28.8%. Cash was substantially held by foreign subsidiaries.
• Inventory was 512.8 at quarter-end, compared with 485.9 a year earlier. The 45.9 decline in cash during the quarter reflected, among other things, the trademark acquisition; operating cash flow did not cover investing outflows.

Material changes versus the prior comparable period

• Sales increased 0.4%, while operating earnings rose 37.1%. The prior-year quarter included 5.2 of continuing-operations restructuring and impairment charges and 18.2 of discontinued-operations losses, including a 12.6 impairment related to Avia and Nevados. No portfolio realignment costs were recorded in Q1 2014.
• On February 3, 2014, the company acquired the Franco Sarto trademarks for 65.0 in cash. It ended the related license and royalty payments; management said lower royalties contributed to improved wholesale gross margin.
• Segment sales and operating results were mixed: Famous Footwear sales were 354.6, up 0.7%, but operating earnings declined to 27.9 from 29.0. Wholesale Operations sales rose 5.6% to 191.8 and operating earnings increased to 13.8 from 3.1. Specialty Retail sales fell 18.3% to 44.8 and its operating loss widened to 3.7 from 1.3.
• Specialty Retail same-store sales declined 5.6%; Famous Footwear same-store sales increased 1.3%. Wholesale unfilled orders were 368.6, up 17.1% year over year.
• Net intangible assets increased to 123.8 from 59.7 at fiscal year-end, primarily reflecting the Franco Sarto acquisition.

Outlook, commentary and risks

• Management said first-quarter results exceeded expectations despite weather-related headwinds in February and March. It forecast fiscal 2014 consolidated sales of 2.58–2.60 billion and diluted EPS of 1.47–1.57.
• Management expected capital spending on property, equipment and capitalized software of approximately 53–57 for fiscal 2014. It anticipated using the revolving facility as inventory purchases increased for the fall selling season.
• Key disclosed risks include changing consumer demand and fashion trends, competition, sales and inventory forecasting, reliance on China-based manufacturing and supply continuity, foreign currency movements, cybersecurity or distribution disruptions, retail customer consolidation, trade restrictions, product-safety compliance, and maintaining suppliers, licensors and favorable leases.
• Environmental cleanup and monitoring liabilities totaled 11.0 at May 3, 2014; the filing cautions actual costs may exceed reserves and remain subject to regulatory oversight. Management said ordinary-course litigation was not expected to have a material adverse effect.
• The company stated that its portfolio realignment efforts were complete. It also disclosed a minimum shoe-purchasing commitment of four million pairs annually for two years under its sourcing-asset sale agreement.

Important facts for investors to verify

• Confirm the issuer and period: the supplied document identifies Brown Shoe Company, Inc. and the quarter ended May 3, 2014, despite the request metadata naming Caleres Inc. and 2013 Q1.
• Track whether the 1.47–1.57 fiscal-year EPS and 2.58–2.60 billion sales outlook were achieved, and assess the seasonality caveat.
• Evaluate the sustainability of margin improvement, including the benefit from ending Franco Sarto royalties, against weaker Specialty Retail results and higher Famous Footwear selling costs.
• Monitor cash conversion, inventory levels, the cash impact of the trademark purchase, revolver availability and covenant headroom as seasonal inventory builds.
• Review environmental remediation cost estimates and the company’s exposure to the operating, supply-chain, currency and consumer risks described in the filing.