Business context and reporting period
The filing is Brown Shoe Company, Inc.’s unaudited Form 10-Q for the 13 and 26 weeks ended July 28, 2012. The request metadata identifies Caleres Inc.; the filing itself names Brown Shoe Company, Inc. as registrant. The company operates Famous Footwear, Wholesale Operations and Specialty Retail. Management notes that the business is seasonal, with a substantial portion of annual earnings typically in the third fiscal quarter.
Key financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $599.3m | $620.6m | $1,225.7m | $1,240.1m |
| Gross profit / margin | $233.8m / 39.0% | $233.6m / 37.6% | $472.9m / 38.6% | $481.6m / 38.8% |
| Operating earnings (loss) | $1.3m | $(1.0)m | $10.0m | $11.1m |
| Net loss attributable to Brown Shoe | $(2.5)m; $(0.06) per diluted share | $(4.6)m; $(0.11) per diluted share | $(0.8)m; $(0.02) per diluted share | $(0.9)m; $(0.02) per diluted share |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $119.4m | $43.5m |
Q2 selling and administrative expense was $219.3m, or 36.5% of sales, compared with $233.9m, or 37.7%. First-half expense was $438.2m, or 35.8%, versus $468.1m, or 37.7%. First-half investing cash outflow was $27.1m, principally capital spending; financing cash outflow was $92.3m. Cash decreased $0.3m to $47.4m.
Liquidity, debt and financial position
At July 28, 2012, total debt was $314.7m: $116.0m under the revolving credit agreement and $198.7m in senior notes. Revolver borrowings were down $134.0m from July 2011 and $85.0m from January 2012. The company reported $405.0m of additional borrowing availability, with $9.0m of letters of credit outstanding, and stated it was in compliance with credit and note covenants. The $530m revolving facility matures January 2016; the 7.125% senior notes mature May 2019.
Working capital was $292.9m; current ratio was 1.52:1, versus 1.31:1 a year earlier. Debt-to-capital was 43.6%, down from 53.4%. Cash was substantially held by foreign subsidiaries. Management attributed stronger first-half operating cash flow primarily to accrued liabilities and improved receivables collections. Capital spending and capitalized software for 2012 were expected to total approximately $58m–$63m.
Material changes and segment trends
- Consolidated Q2 sales fell 3.4%, while gross margin rose to 39.0% and operating results improved to modest earnings. Lower markdowns at Famous Footwear, fewer lower-margin wholesale sales and lower SG&A helped; restructuring and impairment charges weighed on results.
- Famous Footwear sales rose 1.6%; same-store sales increased 3.9% in Q2 and 3.2% in the first half. Q2 operating earnings increased to $20.5m from $7.5m, supported by improved gross margin and lower expenses.
- Wholesale Operations Q2 sales declined 9.4% and the segment recorded a $2.5m operating loss, compared with $2.9m earnings. Exited brands and lower Dr. Scholl’s Shoes and Avia sales contributed to the decline; the unfilled order position fell 9.7% to $308.2m.
- Specialty Retail Q2 sales declined 10.8%, same-store sales decreased 1.5%, and operating loss widened to $5.8m from $3.0m. The company cited a lower store count, weaker Shoes.com sales and Canadian currency effects.
Outlook, commentary, risks and unusual items
Management forecast 2012 diluted EPS of $0.34–$0.44, including approximately $34m pre-tax costs, or $0.51 per diluted share, for portfolio realignment, organizational changes and ASG integration. It expressed optimism about completing the realignment and improving ongoing operations. No more specific quarterly guidance was provided.
- Portfolio realignment costs were $12.4m in Q2 and $24.4m in the first half. Management estimated total expense of approximately $50m, with $43.7m recorded by July 28; including the gain on the TBMC sale, anticipated net expense was approximately $29m.
- The Etienne Aigner license was terminated July 12 following a dispute with the licensor. The company wrote off $5.8m of licensed trademark value and recorded additional markdown and related costs. The licensor disputes the basis for termination. The former agreement would have required $20.9m of further minimum royalty payments through 2018.
- Other Q2 items included $2.3m of corporate organizational-change costs. Prior-year results included ERP stabilization costs, a toning-inventory write-down, ASG acquisition-related costs and a $1.0m debt-extinguishment loss, affecting comparability.
- Environmental remediation reserves totaled $9.3m; management cautioned that ultimate costs may exceed recorded amounts. A separate $1.5m reserve relates to outstanding claims under an insolvent insurer. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Key disclosed risks include consumer demand and economic conditions, competition and fashion trends, sourcing and China-related supply disruption, customer and supplier relationships, product safety and the ability to execute the portfolio realignment and information-technology initiatives.
Important facts for investors to verify
- Confirm the issuer identity: this supplied filing names Brown Shoe Company, Inc., although the request metadata says Caleres Inc.
- Track whether the $0.34–$0.44 full-year EPS outlook and approximately $34m of expected pre-tax costs were achieved, and how much of the realignment plan remained.
- Monitor the Etienne Aigner license dispute, including any claims or costs beyond the recorded impairment and termination charges.
- Assess the sustainability of operating cash flow and debt reduction, given seasonal inventory needs and the first-half cash-flow contribution from working-capital movements.
- Evaluate the contrasting segment trends, particularly Wholesale order levels and Specialty Retail same-store sales, against Famous Footwear’s positive comparable sales.