Business context and reporting period
Brown Shoe Company, Inc. (the registrant named in the filing) filed this Form 10-Q for the 13 weeks ended April 28, 2012, its first quarter of fiscal 2012. The request metadata identifies Caleres and 2011 Q1; both differ from the filing itself. Brown Shoe operated Famous Footwear, Wholesale Operations and Specialty Retail businesses. Results are seasonal, and management cautions that interim results may not indicate full-year performance.
Financial performance
| Metric | 13 weeks ended Apr. 28, 2012 | Comparable 2011 period |
|---|---|---|
| Net sales | $626.4 million | $619.6 million |
| Gross profit / margin | $239.1 million / 38.2% | $248.0 million / 40.0% |
| Selling and administrative expenses | $218.9 million | $234.1 million |
| Operating earnings | $8.7 million | $12.1 million |
| Net earnings attributable to Brown Shoe | $1.7 million; $0.04 diluted EPS | $3.7 million; $0.08 diluted EPS |
| Operating cash flow | $79.9 million | $3.7 million |
| Cash and cash equivalents at period end | $39.8 million | $54.2 million |
Gross margin fell 1.8 percentage points, primarily from higher inventory markdowns. Lower selling and administrative expenses partly offset the gross-profit decline and higher restructuring charges. The effective tax rate was 37.9%, versus 38.8%.
Liquidity and debt
At April 28, 2012, total debt was $322.7 million: $124.0 million under the revolving credit agreement and $198.7 million of senior notes. Total debt was $438.0 million a year earlier and $399.6 million at January 28, 2012. The company reported $354.3 million of additional revolver availability, $8.5 million of letters of credit, a 1.67:1 current ratio and a 43.9% debt-to-capital ratio. It was in compliance with its credit agreement and senior-note covenants.
Operating cash flow rose substantially year over year, with working-capital movements—including inventory and receivables—contributing to the increase. Investing used $7.0 million, compared with $163.2 million in 2011, which included the $156.6 million ASG acquisition. Financing used $81.4 million, largely reflecting net revolver repayments. Cash was predominantly held by foreign subsidiaries. The company expected 2012 capital spending, including capitalized software, of approximately $58–$60 million.
Material changes versus the prior period
- Sales grew 1.1%; Famous Footwear sales increased 1.3% and Wholesale Operations sales increased 2.8%, while Specialty Retail sales declined 6.1%.
- Famous Footwear same-store sales, including e-commerce, rose 2.5%; Specialty Retail same-store sales rose 2.6%. Wholesale unfilled orders declined 18.3% to $354.8 million.
- Operating earnings decreased 28.0%, primarily due to weaker gross margin and $11.5 million of restructuring and other special charges, versus $1.7 million a year earlier.
- Debt declined year over year, mainly reflecting operating cash generation and proceeds from the 2011 sale of TBMC. Prior-year results included TBMC discontinued operations and ASG acquisition-related costs, limiting comparability.
Outlook, commentary and risks
Management raised its fiscal 2012 diluted EPS outlook to $0.53–$0.65 after better-than-expected first-quarter sales and earnings. The outlook includes approximately $20 million of pretax portfolio-realignment costs, or $0.30 per diluted share. Management said it was optimistic about completing the realignment and improving ongoing operations. The first phase was expected to cost about $41 million in total; $31.3 million had been recorded by April 28, 2012.
Realignment activities include exiting brands and the children’s wholesale business, closing distribution and manufacturing facilities, and closing or relocating underperforming stores. The quarter included $12.1 million of portfolio-realignment costs (including amounts recorded in cost of goods sold), $0.7 million of ASG integration costs, and $2.8 million of long-lived asset impairment charges. The filing reports $13.0 million of remaining portfolio-realignment reserves at quarter-end.
Key stated risks include changing consumer demand and fashion trends, competition, retailer consolidation and customer concentration, supply-chain disruption and reliance on third-party manufacturing, inflation, product-safety compliance, execution of the realignment and information-technology initiatives, and retaining key personnel and licensors.
Environmental remediation reserves totaled $9.2 million; management says ultimate costs may exceed recorded amounts. A separate $1.5 million liability relates to outstanding claims insured by an insolvent insurer. Management did not expect ordinary-course litigation to materially adversely affect results or financial position. The company reported effective disclosure controls and no significant quarterly change in internal control over financial reporting.
Investor verification priorities
- Confirm the correct issuer and reporting period: the supplied metadata conflicts with the Brown Shoe 10-Q for the quarter ended April 28, 2012.
- Track whether the $0.53–$0.65 full-year EPS outlook and approximately $20 million of remaining 2012 realignment costs are achieved.
- Assess whether gross-margin pressure and markdowns abate, especially in Wholesale Operations, where operating earnings fell to $2.0 million.
- Evaluate the quality and repeatability of operating cash flow, including the effects of seasonal working-capital movements.
- Monitor debt, revolver availability and covenant headroom, as well as environmental remediation costs relative to reserves.