Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (Caleres Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 2, 2009
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. The Company is currently navigating a challenging economic climate characterized by reduced consumer spending.
Key Financial Metrics
| Metric ($ thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $538,740 | $554,491 |
| Gross Profit | $208,164 | $216,462 |
| Gross Margin | 38.6% | 39.0% |
| Operating (Loss) Earnings | $(7,167) | $13,560 |
| Net (Loss) Earnings | $(7,071) | $6,822 |
| Net Loss Attributable to Brown Shoe | $(7,603) | $7,195 |
| Diluted EPS (Loss) | $(0.18) | $0.17 |
| Cash and Cash Equivalents | $46,121 | $63,197 |
| Total Debt | $189,000 | $150,000 |
| Net Cash Provided by Operating Activities | $49,451 | $36,291 |
Liquidity & Capital Structure:
- Current Ratio: 1.91 to 1 (May 2, 2009) vs. 2.32 to 1 (May 3, 2008).
- Debt-to-Capital Ratio: 32.5% (May 2, 2009) vs. 21.1% (May 3, 2008).
- Revolving Credit Facility: $39.0 million outstanding with $299.7 million additional availability under a $380.0 million agreement.
- Senior Notes: $150.0 million of 8.75% notes due in 2012.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 2.8% ($15.8 million) year-over-year. All segments were impacted by the weak consumer environment.
- Famous Footwear: Sales down 0.4%; same-store sales down 4.9%.
- Wholesale Operations: Sales down 5.0% ($8.9 million) due to retail partners tightening inventory management.
- Specialty Retail: Sales down 9.7% ($5.6 million) driven by a weaker Canadian dollar and same-store sales decline of 6.1%.
- Profitability Reversal: The Company reported an operating loss of $7.2 million compared to operating earnings of $13.6 million in the prior year. This swing was driven by lower sales, a decline in gross profit rates (due to higher markdowns and promotional activity), and increased selling and administrative expenses relative to sales volume.
- Special Items Impact:
- 2009: Incurred $2.6 million in costs related to ERP information technology initiatives.
- 2008: Recorded $10.2 million in environmental insurance recoveries and incurred $1.8 million in headquarters consolidation charges. The absence of the 2008 recoveries significantly impacted the year-over-year comparison.
- Balance Sheet: Total debt increased by $39.0 million due to higher borrowings under the revolving credit agreement. Cash and cash equivalents decreased by $40.8 million.
Guidance, Outlook, and Risks
Outlook for Remainder of 2009:
Management expects the economic environment to remain difficult. The Company anticipates negative same-store sales for its retail business for the full year 2009.
- Store Strategy: Plans to open 55 new Famous Footwear stores while closing 55 to 70 stores.
- Wholesale: Expects a decline in sales for existing brands and private label business, partially offset by growth in new brands and distribution channels.
- Focus Areas: Liquidity and capital management, expense discipline, and investment in brands driving future growth.
Risks and Contingencies:
- Environmental Remediation: The Company has an accrued liability of $10.2 million for environmental cleanup (primarily the Redfield site in Colorado). Future costs may vary based on regulatory oversight.
- IT Implementation: Risks associated with the timing, cost, and disruption of the new integrated ERP system implementation expected to continue through 2011.
- Supply Chain: Reliance on third-party manufacturing in China and Brazil exposes the Company to political and economic disruptions.
- Debt Covenants: The Credit Agreement contains covenants regarding excess availability and fixed charge coverage ratios. A breach could trigger a "cash dominion event" where lenders assume control of cash.
Investor Verification Checklist
- Inventory Levels: Verify the $408.5 million inventory balance, noting the increase is partly due to the consolidation of Edelman Shoe, Inc., and assess the risk of further markdowns in a weak retail environment.
- Debt Covenants: Confirm compliance with the Credit Agreement's excess availability requirements (must remain above the greater of 17.5% of the borrowing base or $25.0 million) to avoid a cash dominion event.
- IT Project Costs: Monitor the $2.6 million Q1 spend on ERP initiatives against the total projected cost and timeline (through 2011) to ensure no further material overruns.
- Environmental Reserves: Review the $10.2 million environmental liability reserve for adequacy given the ongoing remediation at the Redfield site and potential for cost increases.
- Same-Store Sales Trend: Track the negative same-store sales trends (-4.9% Famous Footwear, -6.1% Specialty Retail) to gauge the severity of the consumer spending slowdown.