Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (d/b/a Caleres Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 4, 2007 (Second Quarter of Fiscal 2007)
Business Overview: The Company operates through three primary segments: Famous Footwear (retail), Wholesale Operations (brand licensing and distribution), and Specialty Retail (including Shoes.com). The Company is currently executing an "Earnings Enhancement Plan" focused on cost reductions, logistics redesign, and supply chain refinement.
Key Financial Metrics
| ($ in thousands, except per share) | 13 Weeks Ended Aug 4, 2007 |
13 Weeks Ended July 29, 2006 |
26 Weeks Ended Aug 4, 2007 |
26 Weeks Ended July 29, 2006 |
|---|---|---|---|---|
| Net Sales | $576,571 | $579,319 | $1,142,919 | $1,154,857 |
| Gross Profit | $230,994 | $224,020 | $460,797 | $447,017 |
| Gross Margin % | 40.1% | 38.7% | 40.3% | 38.7% |
| Operating Earnings | $17,963 | $26,266 | $35,514 | $44,860 |
| Net Earnings | $9,830 | $15,191 | $19,466 | $25,222 |
| Diluted EPS | $0.22 | $0.35 | $0.44 | $0.58 |
| Cash & Equivalents | $64,335 | $31,001 | $64,335 | $31,001 |
| Total Debt | $150,000 | $200,000 | $150,000 | $200,000 |
| Operating Cash Flow (26 wks) | $25,837 (2007) vs $36,648 (2006) |
Material Changes vs. Prior Period
- Revenue: Consolidated net sales declined 0.5% in the quarter and 1.0% year-to-date. This was driven by a 12.6% decline in Wholesale Operations (due to reduced private label sales and the discontinuance of the Bass license), partially offset by an 8.0% increase in Famous Footwear sales.
- Profitability: Operating earnings decreased 31.6% in the quarter and 20.8% year-to-date. Net earnings fell 35.3% in the quarter and 22.8% year-to-date.
- Segment Performance:
- Famous Footwear: Operating earnings surged 59.3% to $19.0 million, driven by a 3.6% same-store sales increase and improved gross margins.
- Wholesale Operations: Operating earnings dropped 32.4% to $12.9 million due to lower sales volume and specific costs (WSA trade show, China joint venture startup).
- Specialty Retail: Reported an operating loss of $1.7 million, slightly wider than the prior year's $1.5 million loss, despite sales growth at Shoes.com.
- Balance Sheet: Total debt decreased by $50 million as the Company paid down borrowings under its revolving credit agreement. Cash and cash equivalents increased to $64.3 million. The debt-to-capital ratio improved to 21.1% from 29.9% a year ago.
Guidance, Outlook, and Risks
- Earnings Enhancement Plan: The Company expects to incur approximately $11 million in after-tax implementation costs in 2007, with expected after-tax benefits of $10–$12 million. By late 2008, annual after-tax savings are estimated at $17–$20 million. Recent actions include closing the Los Angeles office (Shoes.com HQ) and consolidating operations.
- China Joint Venture: A joint venture with Hongguo International Holdings (51% owned by Brown Shoe) is expected to begin operations in Fall 2007. Start-up costs and operating losses for 2007 are estimated at $1.5–$2.0 million.
- Investment: The Company invested $7 million in Edelman Shoe, Inc. in August 2007.
- Environmental & Litigation: The Company continues to remediate the Redfield site in Colorado. A $7.3 million insurance recovery recorded in Q2 2006 did not recur in 2007. A class action lawsuit regarding the Redfield site was affirmed by the Colorado Court of Appeals in August 2007, though the ultimate cost of further proceedings remains uncertain.
- Risks: Key risks include intense competition, changing consumer fashion trends, reliance on third-party manufacturing in China and Brazil, and the successful execution of the Earnings Enhancement Plan.
Investor Verification Checklist
- Wholesale Decline: Verify the long-term impact of exiting the Bass license and reducing private label sales on the Wholesale segment's revenue trajectory.
- Restructuring Costs: Monitor the actual costs versus the estimated $11 million for 2007 related to the Earnings Enhancement Plan and the closure of the Los Angeles office.
- China JV Viability: Track the performance of the new China joint venture against the projected $1.5–$2.0 million loss for 2007 and its path to profitability in 2008.
- Environmental Liabilities: Review updates on the Redfield site remediation costs and the status of insurance recovery claims, given the non-recurrence of the $7.3 million gain from the prior year.
- Same-Store Sales: Confirm the sustainability of the 3.6% same-store sales growth at Famous Footwear in a weak retail environment.