Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (d/b/a Caleres Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2009 (Third Fiscal Quarter)
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations (brand licensing and distribution), and Specialty Retail (including Shoes.com and Naturalizer). The business is seasonal, with the third quarter traditionally accounting for a substantial portion of annual earnings due to back-to-school and holiday shopping.
Key Financial Metrics
| ($ in thousands, except per share) | 13 Weeks Ended Oct 31, 2009 | 13 Weeks Ended Nov 1, 2008 | 39 Weeks Ended Oct 31, 2009 | 39 Weeks Ended Nov 1, 2008 |
|---|---|---|---|---|
| Net Sales | $625,635 | $631,657 | $1,675,996 | $1,755,367 |
| Gross Profit | $258,943 | $248,491 | $670,747 | $688,450 |
| Gross Margin % | 41.4% | 39.3% | 40.0% | 39.2% |
| Operating Earnings | $34,337 | $13,121 | $22,192 | $31,828 |
| Net Earnings (Total) | $17,004 | $10,344 | $5,717 | $19,221 |
| Net Earnings Attributable to Brown Shoe | $16,300 | $10,398 | $4,452 | $19,810 |
| Diluted EPS (Attributable to Brown Shoe) | $0.38 | $0.25 | $0.10 | $0.47 |
| Cash and Cash Equivalents | $34,102 | $35,977 | $34,102 | $35,977 |
| Total Debt | $200,000 | $174,000 | $200,000 | $174,000 |
| Working Capital | $278,945 | $320,298 | $278,945 | $320,298 |
Liquidity: As of October 31, 2009, the Company had $319.4 million in additional borrowing availability under its revolving credit agreement. The current ratio was 1.88 to 1.
Material Changes vs. Prior Period
- Quarterly Performance: Net sales declined 1.0% year-over-year to $625.6 million. However, operating earnings surged 161.7% to $34.3 million, and net earnings attributable to shareholders increased 56.8% to $16.3 million. This improvement was driven by a significant reduction in restructuring charges and an improved gross profit rate.
- Year-to-Date Performance: For the 39 weeks ended October 31, 2009, net sales decreased 4.5% to $1.676 billion. Net earnings attributable to shareholders declined 77.5% to $4.5 million compared to the prior year period.
- Segment Highlights:
- Famous Footwear: Net sales increased 7.3% with a 4.7% same-store sales increase. Operating earnings rose 42.7% to $28.6 million.
- Wholesale Operations: Net sales decreased 16.5% due to weak consumer demand and retailer inventory reductions. Operating earnings declined 10.2% to $16.6 million, though the operating margin improved to 9.8%.
- Specialty Retail: Net sales increased 1.4% to $66.5 million. The operating loss narrowed to $1.4 million from $3.0 million in the prior year.
- Restructuring Charges: Restructuring and special charges dropped significantly to $2.2 million in the quarter (vs. $16.5 million in the prior year) and $6.8 million year-to-date (vs. $18.3 million). The prior year included $15.6 million in charges related to headquarters consolidation and $10.2 million in environmental insurance recoveries, neither of which occurred in the current period.
Guidance, Outlook, and Risks
Outlook: Management expects conditions to remain challenging across retail. For the fourth quarter of 2009, the Company anticipates a slight increase in net sales compared to the fourth quarter of 2008. Same-store sales for retail businesses are expected to be flat to up slightly, while wholesale net sales are expected to increase.
Key Initiatives: The Company is continuing its integrated Enterprise Resource Planning (ERP) implementation, expected to conclude in 2011. Expenses related to this initiative were $2.2 million in the quarter.
Risks and Contingencies:
- Environmental Remediation: The Company has an accrued liability of $10.0 million for environmental cleanup at various sites, including the Redfield facility in Colorado. Ultimate costs may vary based on regulatory oversight.
- Debt Covenants: The Credit Agreement contains covenants regarding excess availability and fixed charge coverage ratios. A "cash dominion event" could be triggered if excess availability falls below specified thresholds.
- Market Risks: Risks include changing consumer demands, intense competition, supply chain disruptions (particularly from China and Brazil), and foreign currency fluctuations.
Investor Verification Checklist
- Debt Capacity: Verify the current borrowing base calculation and excess availability under the $380 million credit facility to ensure compliance with covenants.
- Wholesale Demand: Monitor the "unfilled order position" and retailer inventory levels, as the Wholesale segment continues to face significant headwinds.
- ERP Implementation: Track the progress and cost overruns of the ERP system implementation, which is a multi-year project impacting operating expenses.
- Environmental Liabilities: Review updates on the Redfield site remediation costs and potential insurance recoveries.
- Same-Store Sales: Validate the sustainability of the 4.7% same-store sales growth in the Famous Footwear segment against broader retail trends.