CAL

Business Context and Reporting Period

Company: Brown Shoe Company, Inc. (filing as Brown Shoe Company, Inc., formerly Caleres Inc. in metadata context, but filing name is Brown Shoe).
Reporting Period: Fiscal year ended January 30, 2010 (52 weeks).
Business Overview: A diversified footwear marketer operating retail stores (Famous Footwear, Specialty Retail) and wholesale operations. The company sources and markets footwear for women, men, and children. As of January 30, 2010, it operated 1,411 retail stores globally and employed approximately 12,100 people.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company returned to profitability in 2009, reporting $31.5 million in operating earnings compared to a $173.3 million operating loss in 2008. This improvement was primarily driven by the absence of a $149.2 million non-cash impairment charge for goodwill and intangible assets recorded in 2008.
• Segment Performance:
  • Famous Footwear: Net sales increased 3.3% to $1.364 billion, with operating earnings rising 65.5% to $44.6 million. Same-store sales improved 0.5%.
  • Wholesale Operations: Net sales declined 10.2% to $631.8 million due to retailers reducing inventory levels. However, operating earnings turned positive at $41.1 million from a $108.1 million loss in 2008, largely due to the non-recurrence of impairment charges.
  • Specialty Retail: Net sales decreased 2.4% to $246.6 million. Operating loss narrowed to $14.2 million from $30.5 million in 2008.
• Restructuring Charges: Restructuring and other special charges decreased significantly to $11.9 million in 2009 from $54.3 million in 2008. 2009 charges included $9.2 million for IT initiatives and $4.6 million for executive retirements, partially offset by $1.9 million in income from headquarters consolidation subleases.

Guidance, Outlook, and Risks

• 2010 Outlook: Management expects a return to solid sales growth.
  • Retail: Same-store sales growth expected in the low to mid-single digit percentage range.
  • Wholesale: Net sales growth expected in the high single to low double-digit percentage range.
• Capital Allocation: The company plans to increase investment in marketing and sharpen focus on the consumer while driving efficiencies. Capital expenditures for 2010 are estimated at $60–$65 million.
• Key Risks:
  • Economic Conditions: Continued uncertainty in consumer spending and credit availability.
  • Foreign Sourcing: Heavy reliance on China (98% of sourced footwear) exposes the company to labor shortages, currency fluctuations, and trade relationship risks.
  • Competition: Intense competition in a fragmented market with low barriers to entry.
  • IT Implementation: Ongoing risks associated with the phased implementation of a new integrated ERP system through 2010.

Investor Verification Checklist

• Impairment Charges: Verify the sustainability of earnings by noting that the 2008 loss was heavily impacted by a one-time $149.2 million goodwill impairment, whereas 2009 had no such charge.
• Wholesale Backlog: Monitor the $246 million wholesale backlog (up from $200 million in 2009) as an indicator of future revenue, though the filing notes this is not always indicative of actual shipments.
• Inventory Levels: Review inventory trends ($456.7 million in 2009 vs. $466.0 million in 2008) to ensure the company is not overstocked given the challenging retail environment.
• Debt Covenants: Confirm compliance with the Credit Agreement, specifically the "excess availability" thresholds which could trigger a "cash dominion event" if breached.
• Environmental Liabilities: Assess the $9.7 million accrued liability for environmental remediation (Redfield site and others) and potential for cost overruns.