Business context and reporting period
The supplied filing identifies the registrant as Brown Shoe Company, Inc. (not Caleres Inc.) and is a Form 10-Q for the 13 and 26 weeks ended August 3, 2013; the comparable periods ended July 28, 2012. The company operated Famous Footwear, Wholesale Operations and Specialty Retail. Results are seasonal, and management said the third quarter traditionally contributes a substantial portion of annual earnings.
Financial performance
| Metric | Second quarter 2013 | First half 2013 |
|---|---|---|
| Net sales | $621.7 million, up 10.1% | $1,210.4 million, up 4.1% |
| Gross profit / margin | $254.6 million / 41.0% (40.3% prior year) | $494.6 million / 40.9% (39.7% prior year) |
| Operating earnings / margin | $22.8 million / 3.7% (prior year $8.6 million / 1.5%) | $43.8 million / 3.6% (prior year $21.2 million / 1.8%) |
| Net earnings attributable to Brown Shoe | $15.4 million; diluted EPS $0.35 (prior-year loss $2.5 million; diluted loss per share $0.06) | $4.6 million; diluted EPS $0.10 (prior-year loss $0.8 million; diluted loss per share $0.02) |
| Continuing-operations earnings | $13.6 million | $21.0 million |
| Operating cash flow | $35.5 million for the first half, versus $119.4 million in the prior-year period |
Second-quarter sales growth came from Famous Footwear (+10.8%; same-store sales +6.8%) and Wholesale Operations (+12.4%); Specialty Retail sales fell 1.8%, despite same-store sales growth of 4.8%. Famous Footwear delivered record second-quarter sales and operating earnings. Specialty Retail remained loss-making, with a $1.9 million second-quarter operating loss.
Liquidity, debt and cash flow
At August 3, 2013, cash was $53.1 million, total debt $221.9 million ($23.0 million revolver borrowings and $198.9 million senior notes), working capital $362.5 million and the current ratio 1.76:1. Debt-to-capital was 34.2%. The company reported $498.1 million of additional revolver availability and compliance with its credit-agreement and senior-note covenants. The $200 million senior notes carry a 7.125% coupon and mature in 2019; the revolving facility matures in 2016.
First-half operating cash flow fell $83.8 million year over year, chiefly reflecting inventory growth to support expected sales, higher receivables, and changes in prepaid assets and payment timing. Inventory was $615.9 million at August 3, up from $503.7 million at February 2. Investing activities provided $38.9 million, including $69.3 million of net sale proceeds, while financing activities used $88.0 million. Cash declined $15.1 million during the half. Planned 2013 purchases of property, equipment and capitalized software were approximately $55–$57 million.
Changes, outlook and material items
- Comparability and timing: Management estimated that the fiscal-calendar shift and earlier wholesale shipments moved about $22 million of sales from the third quarter into the second quarter, favorably affecting second-quarter operating earnings by about $6 million. The estimated after-tax earnings benefit from the shift was about $3.6 million, or $0.09 per diluted share.
- Guidance: Management raised its 2013 diluted EPS outlook to $0.73–$0.78, including approximately $31 million of pretax portfolio-realignment costs ($23.5 million after tax, or $0.54 per diluted share). It expected only immaterial additional realignment costs in the second half.
- Portfolio changes: The company sold the Avia and Nevados businesses in May for aggregate consideration of $74 million, subject to adjustments; it received $60.3 million in cash and a $12 million promissory note at closing. Sale proceeds helped reduce revolver borrowings. First-half discontinued operations recorded a $16.5 million net loss, including a $12.6 million first-quarter impairment; the second quarter included a $1.0 million gain on disposition. The company also agreed to pay $6.5 million to settle the Etienne Aigner license dispute and sold sourcing and supply-chain assets, with a $0.6 million second-quarter loss on that sale.
- Operating drivers: Higher gross margins reflected retail pricing and product mix, more profitable wholesale brand mix, lower product costs and lower customer allowances. Selling and administrative expense increased, including higher marketing, store labor and incentive-plan costs.
- Commitments and contingencies: The sourcing-asset buyer agreement requires purchases of at least four million pairs annually for two years at market pricing; estimated total purchase commitment was about $100 million. Environmental remediation liabilities totaled $9.5 million, and management cautioned actual costs could exceed reserves. Management did not expect ordinary-course litigation to have a material adverse effect.
- Principal disclosed risks: Consumer demand and fashion shifts, industry competition, retailer/customer concentration, supply-chain disruption (including reliance on China), supplier and licensor relationships, product-safety compliance, lease terms, hiring and retention, and inflationary cost pressures. The company also cited foreign-exchange exposure, managed primarily with forward contracts.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Brown Shoe Company, Inc., although the request metadata names Caleres Inc.
- Assess how much of second-quarter growth and earnings reflected the estimated $22 million timing shift, and whether shifted sales were recovered in the third quarter.
- Monitor inventory, receivables and operating cash flow; first-half cash generation was substantially below the prior-year period.
- Review the 2013 EPS guidance assumptions, including the $0.54-per-share portfolio-realignment impact and seasonal dependence on third-quarter performance.
- Track discontinued-operation results, the remaining $12 million sale note due November 14, 2013, and the ongoing supply-chain purchase commitment.
- Evaluate environmental-remediation estimates and the company’s ability to maintain liquidity and covenant compliance under its revolving credit facility.