Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (filing as Brown Shoe Company, Inc., formerly Caleres Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: January 29, 2011 (52 weeks)
Business Overview: A diversified footwear company operating in retail and wholesale segments. Key retail brands include Famous Footwear (family footwear) and Specialty Retail (Naturalizer, Shoes.com). Wholesale operations distribute brands such as Naturalizer, Dr. Scholl's, Sam Edelman, and Franco Sarto to national chains and department stores. The company operates approximately 1,369 retail stores globally.
Key Financial Metrics
| Metric | 2010 (52 Weeks) | 2009 (52 Weeks) |
|---|---|---|
| Net Sales | $2,504.1 million | $2,242.0 million |
| Gross Profit | $1,003.6 million (40.1% margin) | $903.1 million (40.3% margin) |
| Operating Earnings | $72.7 million (2.9% margin) | $31.5 million (1.4% margin) |
| Net Earnings (Attributable to Brown Shoe) | $37.2 million ($0.85 diluted EPS) | $9.5 million ($0.22 diluted EPS) |
| Total Debt | $348.0 million | $244.5 million |
| Working Capital | $296.4 million | $294.2 million |
| Cash and Cash Equivalents | $126.5 million | $125.8 million |
| Debt-to-Capital Ratio | 45.6% | 37.3% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.7% to a record $2.5 billion, driven by growth in all segments. Famous Footwear sales rose 9.0% (10.5% same-store sales increase), and Wholesale Operations sales rose 19.4%.
- Profitability: Operating earnings more than doubled to $72.7 million, and net earnings increased significantly to $37.2 million.
- Margin Pressure: Consolidated gross profit margin decreased slightly to 40.1% from 40.3%. The Wholesale segment experienced a decline in gross profit rate due to industry-wide sourcing issues, increased delivery costs, and disruptions from a new ERP system implementation in late 2010.
- Debt Levels: Total debt increased by $103.5 million, primarily due to higher borrowings under the Revolving Credit Agreement to support increased inventory and receivables levels.
- Store Count: Total retail stores decreased to 1,369 from 1,411 in 2009, reflecting a strategy of closing underperforming locations while opening new ones.
Guidance, Outlook, and Risks
- 2011 Outlook: Management expects same-store sales for retail businesses to grow in the low- to mid-single digit percentage range. Legacy wholesale net sales are expected to increase in the low- to mid-single digit range, with ASG brands contributing over $200 million in net sales.
- Recent Acquisition: On February 17, 2011, the company acquired American Sporting Goods Corporation (ASG) for $145.0 million in cash plus assumed debt. This adds performance athletic brands (Avia, rykä, AND1) to the portfolio.
- ERP Implementation: The company went live with a new integrated ERP system in Q4 2010. While expected to enhance long-term efficiency, the transition caused short-term disruptions in order fulfillment and financial reporting, impacting wholesale margins.
- Key Risks:
- Sourcing: Heavy reliance on foreign manufacturing (98% from China) exposes the company to labor shortages, currency fluctuations, and supply chain disruptions.
- Competition: Intense competition in a fragmented market with pressure on pricing and the rise of private label brands.
- Inventory: Risk of inventory write-downs if consumer demand forecasts are inaccurate.
- Debt Covenants: The Credit Agreement contains covenants regarding excess availability and fixed charge coverage ratios.
Investor Verification Checklist
- ASG Integration: Verify the successful integration of American Sporting Goods Corporation and the realization of projected synergies and sales targets.
- ERP Stabilization: Monitor the stabilization of the new ERP system and its impact on wholesale order fulfillment and margin recovery in 2011.
- Wholesale Margins: Track the Wholesale segment's gross profit rate to ensure it recovers from the decline caused by sourcing costs and system transition issues.
- Debt Refinancing: Confirm the refinancing of the $150 million Senior Notes due in May 2012 on favorable terms.
- Same-Store Sales: Validate the achievement of low- to mid-single digit same-store sales growth in the retail segment amidst economic uncertainty.