CAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 30, 2011, for Brown Shoe Company, Inc. (filing under the name Caleres Inc. in metadata, but the document identifies the registrant as Brown Shoe Company, Inc.). The company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations, and Specialty Retail. The quarter was significantly impacted by the acquisition of American Sporting Goods Corporation (ASG) on February 17, 2011, which added athletic and outdoor footwear brands to the company's portfolio.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition Impact: The acquisition of ASG drove a $47.4 million increase in Wholesale Operations sales but resulted in a $2.7 million increase in Cost of Goods Sold (COGS) due to inventory fair value adjustments. This adjustment reduced the consolidated gross margin.
• Segment Performance:
  • Famous Footwear: Sales declined 5.4% due to a 3.9% drop in same-store sales, attributed to lower customer traffic, difficult weather, and reduced promotional activity.
  • Wholesale Operations: Sales increased 27.1%, primarily due to ASG ($41.0 million contribution), offset by declines in legacy brands like Dr. Scholl's and Carlos by Carlos Santana.
  • Specialty Retail: Sales decreased 1.7% due to a lower store count and a 1.0% decline in same-store sales.
• Expense Structure: Selling and administrative expenses increased 4.9% to $235.5 million, driven by ASG integration costs and higher marketing/IT expenses, partially offset by lower incentive plan payouts.
• Liquidity and Debt: Total debt surged to $438.0 million, primarily due to $288.0 million in borrowings under the revolving credit facility to fund the ASG acquisition. The debt-to-capital ratio rose to 51.1% from 26.3%.

Guidance, Outlook, and Risks

• Outlook: Management expects same-store sales at Famous Footwear to be in the low to mid-single-digit percentage range for 2011. For the wholesale business, a low to mid-single-digit net sales increase is expected for legacy brands compared to the prior year.
• Subsequent Events (Debt Refinancing):
  • Completed a tender offer for $99.2 million of 2012 Senior Notes.
  • Issued $200.0 million of 7.375% Senior Notes due 2019.
  • Called for redemption the remaining $50.8 million of 2012 Senior Notes.
  • Used net proceeds to repay amounts under the Credit Agreement.
• Risks and Contingencies:
  • Integration Risk: Potential disruption to operations while integrating ASG and implementing the new ERP system.
  • Environmental: Ongoing remediation at the Redfield site (Colorado) with a recorded liability of $7.8 million; total accrued environmental liability is $9.5 million.
  • Market Risk: Exposure to foreign currency fluctuations (hedged via forward contracts) and reliance on third-party manufacturing in China.

Investor Verification Checklist

• ASG Integration: Verify the timeline and cost of integrating ASG's systems and the realization of projected synergies.
• Debt Covenants: Confirm compliance with the Credit Agreement covenants, specifically the fixed charge coverage ratio and excess availability requirements, given the increased leverage.
• Inventory Valuation: Monitor the impact of the $2.7 million inventory fair value adjustment on future COGS and gross margins.
• Refinancing Completion: Confirm the final terms and interest savings realized from the refinancing of the 2012 Senior Notes with the new 2019 issuance.
• Environmental Liabilities: Track the actual costs of the Redfield site remediation against the $7.8 million reserve.