Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (d/b/a Caleres Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 1, 2010 (Thirteen Weeks)
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations, and Specialty Retail. The business is seasonal, with the third fiscal quarter traditionally accounting for a substantial portion of annual earnings.
Key Financial Metrics
| Metric ($ thousands) | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net Sales | $597,718 | $538,740 | +10.9% |
| Gross Profit | $247,560 | $208,164 | +18.9% |
| Gross Margin | 41.4% | 38.6% | +280 bps |
| Operating Earnings | $21,328 | $(7,167) | Turnaround to Profit |
| Net Earnings (Attributable to Brown Shoe) | $10,046 | $(7,603) | Turnaround to Profit |
| Diluted EPS | $0.23 | $(0.18) | $0.41 Improvement |
| Cash from Operations | $42,134 | $49,451 | -$7.3M |
| Total Debt | $150,000 | $189,000 | -$39.0M |
| Cash & Equivalents | $59,465 | $46,121 | +$13.3M |
| Debt-to-Capital Ratio | 26.3% | 32.5% | -6.2% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased $59.0 million (10.9%) driven by growth across all segments. Famous Footwear sales rose 14.0% (15.5% same-store sales increase), Wholesale Operations rose 3.5%, and Specialty Retail rose 16.2%.
- Profitability Turnaround: The Company reported operating earnings of $21.3 million compared to an operating loss of $7.2 million in the prior year. This was driven by higher net sales, improved gross profit rates (due to lower markdowns and better mix), and lower restructuring charges.
- Debt Reduction: Total debt decreased by $39.0 million as the Company paid down borrowings under its revolving credit agreement, resulting in zero outstanding borrowings on the revolver as of May 1, 2010. The debt-to-capital ratio improved to 26.3%.
- Segment Performance:
- Famous Footwear: Operating earnings surged to $28.2 million (7.8% margin) from $3.0 million (1.0% margin) due to higher traffic, conversion rates, and average retail prices.
- Wholesale Operations: Operating earnings increased 46.9% to $8.7 million, aided by strong demand for brands like Naturalizer and Sam Edelman.
- Specialty Retail: Operating loss narrowed to $2.9 million from $6.2 million, supported by a 16.2% same-store sales increase and favorable Canadian dollar exchange rates.
Guidance, Outlook, and Risks
- Outlook: Management expects solid sales growth for 2010. Same-store sales for retail businesses are projected to grow in the mid- to high-single digit range. Wholesale net sales are expected to increase in the low- to mid-teens percentage range compared to 2009.
- Capital Allocation: The Company plans to continue investing in marketing and operational efficiencies. Capital expenditures for 2010 are estimated between $62.0 million and $65.0 million, primarily for IT initiatives and store remodeling.
- Dividends: A quarterly dividend of $0.07 per share was declared, marking the 350th consecutive quarterly dividend.
- Subsequent Event: On June 4, 2010, the Company acquired the remaining 50% of Edelman Shoe for $39.6 million (cash and stock).
- Risks & Contingencies:
- Environmental: The Company has an accrued liability of $9.7 million for environmental remediation at various sites, including the Redfield site in Colorado. Ultimate costs may vary based on regulatory oversight.
- IT Implementation: The Company is implementing a new ERP system expected to be complete in early 2011. Risks include potential disruption to operations and timing uncertainties.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forward contracts) and reliance on third-party manufacturing in China and Brazil.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the Credit Agreement covenants, specifically the fixed charge coverage ratio and excess availability thresholds, given the reduction in revolver borrowings.
- Inventory Levels: Review the $431.5 million inventory balance (up from $408.5 million YoY) to ensure it aligns with the projected sales growth and does not indicate future markdown risks.
- IT Project Costs: Monitor the $1.7 million in IT-related restructuring charges and the projected $62M-$65M capital spend to ensure the ERP implementation stays on budget and timeline.
- Environmental Liabilities: Assess the $9.7 million environmental reserve and the status of the Redfield site litigation and remediation to evaluate potential future cash outflows.
- Wholesale Order Book: Confirm the $362.7 million unfilled order position (up 59.5% YoY) translates into actual sales in subsequent quarters.