Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (Note: Metadata listed "Caleres Inc," but the filing text identifies the registrant as Brown Shoe Company, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 31, 2010 (Second Quarter of Fiscal Year 2010)
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations (brands including Dr. Scholl's, Sam Edelman, Naturalizer), and Specialty Retail (Shoes.com and retail stores). The business is seasonal, with the third fiscal quarter traditionally accounting for a substantial portion of annual earnings.
Key Financial Metrics
| Metric ($ thousands) | 13 Weeks Ended July 31, 2010 | 26 Weeks Ended July 31, 2010 | 13 Weeks Ended Aug 1, 2009 | 26 Weeks Ended Aug 1, 2009 |
|---|---|---|---|---|
| Net Sales | $585,756 | $1,183,474 | $511,621 | $1,050,361 |
| Gross Profit | $238,470 | $486,030 | $203,640 | $411,804 |
| Gross Margin % | 40.7% | 41.1% | 39.8% | 39.2% |
| Operating Earnings | $12,131 | $33,459 | $(4,978) | $(12,145) |
| Net Earnings (Attributable to Brown Shoe) | $5,261 | $15,307 | $(4,245) | $(11,848) |
| Diluted EPS | $0.12 | $0.35 | $(0.10) | $(0.28) |
| Cash and Cash Equivalents | $30,724 | $30,724 | $37,274 | $37,274 |
| Total Debt | $185,500 | $185,500 | $197,500 | $197,500 |
| Working Capital | $278,144 | $278,144 | $263,172 | $263,172 |
Note: Total Debt consists of $35.5 million in borrowings under the revolving credit agreement and $150.0 million in Senior Notes.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.5% ($74.2 million) in the second quarter and 12.7% ($133.1 million) for the first half compared to the prior year. Growth was driven by all segments, with Wholesale Operations up 25.8% and Famous Footwear up 10.6%.
- Profitability Turnaround: The Company reported operating earnings of $12.1 million in Q2 2010, a significant improvement from an operating loss of $5.0 million in Q2 2009. Net earnings attributable to shareholders turned from a loss of $4.2 million to a profit of $5.3 million.
- Margin Expansion: Gross profit margin improved to 40.7% in Q2 2010 from 39.8% in Q2 2009, driven by higher sales of higher-margin categories and reduced promotional activity in the Famous Footwear segment.
- Debt Reduction: Total debt decreased by $12.0 million year-over-year and $59.0 million from the beginning of the fiscal year, primarily due to reduced borrowings under the revolving credit facility.
- Inventory Build: Inventories increased to $578.1 million (up from $526.8 million in Q2 2009) to support higher sales levels and the back-to-school season.
Guidance, Outlook, and Risks
- Outlook: Management expects same-store sales for retail businesses to grow in the high single- to low-double digit percentage range for the full year 2010. Wholesale net sales are expected to increase in the high-teens percentage range compared to 2009.
- Recent Developments: On June 4, 2010, the Company acquired the remaining 50% of Edelman Shoe, Inc. for $40.0 million ($32.7 million cash and $7.3 million stock), making it a wholly-owned subsidiary. This transaction reduced total equity by $32.7 million.
- IT Initiatives: The Company is implementing an integrated ERP system expected to be substantially complete in Q4 2010. Expenses related to this initiative were $1.9 million in Q2 2010.
- Risks and Contingencies:
- Environmental Remediation: The Company has an accrued liability of $9.6 million for environmental cleanup at various sites, including the Redfield site in Colorado. Future costs may vary based on regulatory oversight.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forward contracts) and reliance on third-party manufacturing in China and Brazil.
- Legal Proceedings: Ongoing litigation regarding soil and groundwater contamination in Durango, Colorado, with a trial date set for October 2010.
Investor Verification Checklist
- Edelman Shoe Acquisition Impact: Verify the long-term accretive nature of the $40 million acquisition of the remaining Edelman Shoe interest and its integration into the Wholesale segment.
- Inventory Levels: Monitor inventory turnover and potential markdown risks given the $578 million inventory balance built for the back-to-school season.
- ERP Implementation: Track the progress and cost overruns of the ERP system implementation scheduled for completion in Q4 2010.
- Environmental Liabilities: Review updates on the Redfield site remediation costs and the outcome of the Durango, Colorado litigation.
- Debt Covenants: Confirm continued compliance with the Credit Agreement covenants, specifically the fixed charge coverage ratio and excess availability requirements.