Brown Shoe Company, Inc. — Form 10-Q Summary
Period and context. The filing is for the 13 weeks ended October 27, 2012 (third quarter) and the 39 weeks ended that date, compared with periods ended October 29, 2011. The statements are unaudited. The request identifies Caleres Inc., but the registrant named in this filing is Brown Shoe Company, Inc.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $732.2 million | $713.8 million | $1,957.9 million | $1,953.9 million |
| Gross profit / margin | $285.8 million / 39.0% | $276.5 million / 38.7% | $758.7 million / 38.7% | $758.1 million / 38.8% |
| Operating earnings / margin | $41.1 million / 5.6% | $32.4 million / 4.5% | $51.1 million / 2.6% | $43.4 million / 2.2% |
| Net earnings from continuing operations | $24.3 million | $17.6 million | $23.2 million | $15.5 million |
| Diluted EPS from continuing operations | $0.56 | $0.41 | $0.55 | $0.36 |
| Net earnings attributable to Brown Shoe | $24.3 million | $33.7 million | $23.5 million | $32.8 million |
Cash flow and liquidity. Operating cash flow for the first 39 weeks was $143.5 million, versus $12.6 million in the prior-year period. Investing activities used $49.5 million, including $39.1 million for property and equipment and $5.4 million for capitalized software; financing activities used $101.0 million. Cash declined $6.8 million from the fiscal-year opening balance to $40.9 million.
At October 27, 2012, total debt was $308.8 million, comprising $110.0 million of revolving-credit borrowings and $198.8 million of senior notes, compared with $420.6 million a year earlier. The company reported $380.9 million of additional borrowing availability and $8.8 million of letters of credit under its revolving facility. Working capital was $310.0 million; the current ratio was 1.70, versus 1.50 a year earlier. Management reported compliance with debt covenants. The 7.125% senior notes mature in 2019; the revolving facility matures in January 2016.
Changes and operating drivers
- Q3 sales rose 2.6%, led by Famous Footwear, where sales increased 4.9% and same-store sales increased 6.8%. Specialty Retail same-store sales rose 8.4%, but segment sales fell 1.8% as store count and Shoes.com sales declined. Wholesale Operations sales slipped 0.4%.
- Q3 operating earnings improved 27.1%, reflecting higher sales and gross margin, lower restructuring charges, and improved expense leverage. Gross margin benefited from a greater retail sales mix. Selling and administrative expense increased 1.2%, including $6.3 million of higher anticipated incentive-plan costs.
- For the first nine months, sales were nearly flat. Famous Footwear gains were largely offset by lower Wholesale Operations and Specialty Retail sales. Wholesale gross margin declined year over year, partly due to higher markdowns.
- Reported net earnings attributable to Brown Shoe fell versus 2011 because the prior-year period included discontinued operations and a $15.4 million after-tax gain on the sale of TBMC. Continuing-operations earnings and diluted EPS increased in both comparison periods.
- Inventory was $539.4 million, down from $580.2 million at the prior-year quarter-end. Management cited inventory management and a lower store count.
Outlook, unusual items, and risks
- Management expected 2012 diluted EPS of $0.55–$0.59, including approximately $34 million of pretax costs, or $0.51 per diluted share, for portfolio realignment, organizational changes, and ASG integration. Expected 2012 capital expenditures and capitalized software were approximately $63–$65 million.
- Portfolio realignment includes brand and business exits, distribution-center and facility closures, and retail-store closures or relocations. The company estimated total related expense of approximately $50 million, with $46.2 million recorded by October 27; most of the remaining $3.8 million was expected in Wholesale Operations. Net expense inclusive of the TBMC gain was estimated at approximately $30 million.
- The Etienne Aigner license was terminated in July 2012 following a dispute, and a $5.8 million intangible-asset impairment was recorded. The licensor disputes the termination; both parties seek damages in arbitration. The company recorded neither a liability nor a receivable because the outcome remained uncertain. The former agreement included $20.9 million of guaranteed minimum royalties through 2018.
- Environmental remediation liabilities were $9.4 million. Management cautioned that ultimate costs could exceed recorded amounts because future work is subject to regulatory oversight and approval. A separate $1.4 million reserve relates to outstanding historical insurance claims.
- The business is seasonal, with the third quarter traditionally contributing a substantial portion of annual earnings. Risks cited include consumer demand and fashion shifts, competition, sourcing and supply-chain disruption, product-safety compliance, foreign exchange, customer and supplier relationships, and execution of the portfolio realignment.
Important facts for investors to verify
- Confirm the registrant and period: this is Brown Shoe Company, Inc.’s 10-Q for the quarter ended October 27, 2012, notwithstanding the request’s Caleres Inc. label.
- Assess whether the 2012 EPS outlook was achieved and compare reported results with the stated $0.55–$0.59 range and included special costs.
- Track the remaining realignment costs, store and brand exits, and performance of Famous Footwear versus Wholesale Operations and Specialty Retail.
- Monitor the Etienne Aigner arbitration and environmental remediation exposure, including any changes to recorded reserves.
- Review cash generation, seasonal working-capital needs, revolver availability, and compliance with borrowing-base and covenant thresholds.