Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended April 30, 2005, for Brown Shoe Company, Inc. (d/b/a Caleres Inc.). The Company operates in three primary segments: Famous Footwear (retail), Wholesale Operations, and Specialty Retail. The financial statements for the prior year period ended May 1, 2004, have been restated to correct lease accounting issues regarding construction allowances and rent holidays.
Key Financial Metrics
| Metric ($ thousands) | Q1 2005 | Q1 2004 (Restated) |
|---|---|---|
| Net Sales | $523,283 | $491,832 |
| Gross Profit | $210,606 | $199,364 |
| Operating Earnings | $23,068 | $14,850 |
| Net Earnings | $3,779 | $8,526 |
| Diluted EPS | $0.20 | $0.45 |
| Operating Cash Flow | $29,893 | $(1,914) |
| Total Debt (Short & Long Term) | $279,500 | $143,000 |
| Cash and Equivalents | $25,748 | $66,422 |
Segment Performance: Famous Footwear sales rose 6.1% with operating earnings of $16.5 million. Wholesale Operations earnings increased to $17.5 million, aided by the Bennett acquisition. Specialty Retail reported an operating loss of $3.5 million due to higher markdowns.
Material Changes vs. Prior Period
- Acquisition of Bennett Footwear: On April 22, 2005, the Company acquired Bennett Footwear Group for approximately $205 million in cash. This added $5.8 million in sales and $1.2 million in operating earnings for the quarter. The transaction resulted in $81.1 million of goodwill and $92.9 million of intangible assets.
- Debt Structure: Total debt increased by $136.5 million to $279.5 million. This was driven by the issuance of $150 million in 8.75% Senior Notes due 2012 to fund the Bennett acquisition.
- Net Earnings Decline: Despite a 55% increase in operating earnings, Net Earnings dropped 55.7% to $3.8 million. This was primarily due to a $9.6 million tax expense from repatriating foreign earnings and $1.0 million in bank commitment fees related to the acquisition.
- Restatement: Prior period results were restated, reducing Q1 2004 pre-tax earnings by $66,000 and net earnings by $41,000 due to corrected lease accounting.
Outlook, Risks, and Unusual Items
- Restructuring Plan: On June 6, 2005, the Company announced the closure of approximately 80 underperforming Naturalizer retail stores. Expected pretax restructuring costs range from $14 million to $17 million, to be recognized primarily in the remainder of fiscal 2005.
- Foreign Earnings Repatriation: The Company repatriated $60.5 million of foreign earnings under the American Jobs Creation Act of 2004, incurring a $9.6 million tax charge. It anticipates repatriating an additional $20 million in 2005.
- Environmental and Legal Contingencies: The Company faces ongoing environmental remediation at the Redfield site in Colorado, with an accrued liability of $8.5 million. A class action lawsuit regarding this site resulted in a $1.0 million verdict (appealed), and the Company is pursuing insurance recoveries. Additionally, there is a $2.8 million accrued liability related to a guarantee for a bankrupt facility in Pennsylvania.
- Market Risks: Risks include intense competition, reliance on third-party manufacturing in Brazil and China, and the successful integration of the Bennett business.
Investor Verification Checklist
- Verify the final purchase price allocation for the Bennett Footwear acquisition, as the preliminary goodwill and intangible asset values are subject to adjustment.
- Monitor the execution and cost impact of the Naturalizer store closures and the consolidation of Canadian operations.
- Track the status of the class action lawsuit appeal regarding the Redfield site and the outcome of insurance recovery claims.
- Assess the impact of the new $150 million Senior Notes on future interest expenses and debt covenants.
- Confirm the actual tax impact of the remaining $20 million foreign earnings repatriation planned for fiscal 2005.