Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (formerly Brown Group, Inc.)
Filing Type: Form 10-K Annual Report
Reporting Period: Fiscal year ended February 1, 2003
Industry: Footwear (Retail and Wholesale)
Operations: The Company operates retail shoe stores (Famous Footwear, Naturalizer, F.X. LaSalle) and sources/markets footwear for wholesale customers. Business is seasonal, with significant earnings in the third fiscal quarter.
Key Financial Metrics and Operational Data
Note: Specific consolidated revenue, net income, and cash flow figures are incorporated by reference from the Annual Report to Shareholders and are not explicitly stated in the provided text. The following operational and specific financial data points are available:
- Store Count: 1,307 total retail stores at period end (918 Famous Footwear, 373 Naturalizer, 16 F.X. LaSalle).
- Sales Mix (2002): 59% Women's, 27% Men's, 14% Children's. 69% of sales were retail (down from 71% in 2001).
- Wholesale Backlog: Approximately $151 million as of April 5, 2003 (up from $142 million in 2002).
- Inventory Metrics: Inventories per square foot of retail space reduced by 21% over the past 24 months.
- Productivity: Famous Footwear sales per square foot were $177 (down 3.3% from $183 in 2001). Naturalizer sales per square foot were $301 (up from $288 in 2001).
- Equity Compensation: 2,086,250 securities to be issued upon exercise of outstanding options; weighted-average exercise price of $16.29.
- Environmental Liability: Accrued liability of $7.3 million as of February 1, 2003, for site remediation.
Material Changes Versus Prior Period
- Store Rationalization: The Company closed 106 under-performing Naturalizer stores (increased from an initial plan of 97) and reduced total store count from 1,376 in 2001 to 1,307 in 2002.
- Real Estate Strategy: Famous Footwear shifted toward larger store formats (8,000-10,000 sq. ft.) in power strip centers. Total square footage increased to 6.2 million, though sales per square foot declined due to new store ramp-up and a 1.3% same-store sales decline.
- Inventory Management: Completed the "IMPACT" initiative to liquidate prior season merchandise. Inventory aging improved significantly, and base inventory levels were reduced.
- Sourcing: Sourced 77.2 million pairs of shoes in 2002, with over 80% originating from China.
Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management expects the store closures and inventory initiatives to significantly improve operating performance in fiscal 2003. Plans include opening approximately 55 new Famous Footwear stores and closing 85, while opening 5 and closing 10 Naturalizer stores.
Risk Factors
- Foreign Sourcing Reliance: Heavy dependence on third-party manufacturers in China (80% of sourcing). Risks include trade relationship deterioration, political instability, and lack of long-term contracts.
- Competition: Intense competition in a fragmented market; success depends on anticipating fashion trends and consumer preferences.
- Customer Concentration: Wholesale business relies on major department stores and mass merchandisers; consolidation or purchasing decisions by these customers could materially impact results.
- Intellectual Property: Reliance on licensed brands (e.g., Dr. Scholl's, Carlos Santana); licenses are generally short-term (2-3 years) and subject to renewal based on performance.
Legal and Environmental Contingencies
The Company is a defendant in a class-action lawsuit in Colorado regarding environmental contamination at a former facility. Plaintiffs seek approximately $80 million in damages. The Company contests the claims and does not believe the outcome will have a material adverse effect on its consolidated financial position, though quarterly results could be affected. Remediation charges were $4.1 million in fiscal 2002.
Investor Verification Checklist
- Verify the full consolidated revenue, net income, and cash flow figures in the Annual Report to Shareholders (incorporated by reference).
- Monitor the progress of the Colorado class-action lawsuit and potential impact on quarterly earnings.
- Assess the impact of the shift to larger Famous Footwear store formats on long-term sales per square foot productivity.
- Review the renewal status of key brand licenses (Dr. Scholl's, Carlos Santana) and the performance of licensed products (9% of consolidated sales).
- Track the execution of the store closure plan for Naturalizer and the opening of new Famous Footwear locations in fiscal 2003.