Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (filing under Caleres Inc. metadata)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 30, 2010
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations (brands including Naturalizer, Dr. Scholl's, and Sam Edelman), and Specialty Retail (including Shoes.com and international operations). 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 Oct 30, 2010 | 39 Weeks Ended Oct 30, 2010 |
|---|---|---|
| Net Sales | $716,093 | $1,899,567 |
| Gross Profit | $282,219 (39.4% margin) | $768,249 (40.4% margin) |
| Operating Earnings | $33,278 (4.6% margin) | $66,737 (3.5% margin) |
| Net Earnings (Attributable to Brown Shoe) | $18,573 | $33,880 |
| Diluted EPS | $0.42 | $0.77 |
| Cash and Cash Equivalents | $29,707 | $29,707 (Ending Balance) |
| Total Debt | $263,000 | $263,000 (Ending Balance) |
| Working Capital | $292,200 | $292,200 (Ending Balance) |
Debt Structure: Total debt consists of $113.0 million in borrowings under a revolving credit agreement and $150.0 million in 8.75% Senior Notes due in 2012. The debt-to-capital ratio increased to 39.1% as of October 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.5% ($90.5 million) in the third quarter and 13.3% ($223.6 million) year-to-date compared to the prior year. Growth was driven by all segments, with Wholesale Operations up 33.7% and Famous Footwear up 8.3% (10.6% same-store sales increase) in the quarter.
- Profitability: While net earnings increased significantly year-to-date ($33.9 million vs. $4.5 million), operating earnings for the third quarter declined slightly to $33.3 million from $34.3 million in the prior year. This was due to a decrease in gross profit rate (39.4% vs. 41.4%) and higher selling and administrative expenses.
- Cash Flow: Operating cash flow turned negative, using $32.8 million for the 39 weeks ended October 30, 2010, compared to providing $58.3 million in the prior year. This shift was primarily due to a significant increase in inventory ($82.5 million usage) and receivables ($47.3 million usage) to support higher sales volumes.
- Acquisition: 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.
Guidance, Outlook, and Risks
Outlook: Management expects solid sales growth for the remainder of 2010. Specific guidance includes:
- Famous Footwear: Same-store sales expected to increase in the high single-digit percentage range for the fourth quarter.
- Wholesale Operations: Net sales expected to increase in the high-teens to low 20s percentage range for the fourth quarter.
Management Commentary: The Company is pleased with third-quarter results, citing effective merchandising and marketing plans during the back-to-school season. However, gross profit rates were pressured by shifts in channel mix and increased markdown provisions in the Wholesale segment.
Risks and Contingencies:
- Environmental Remediation: The Company has an accrued liability of $9.5 million for environmental cleanup at various sites, including the Redfield site in Colorado. Future costs may vary based on regulatory oversight.
- IT Implementation: The Company is implementing a new integrated ERP system, expected to be substantially complete in Q4 2010. Risks include potential disruption to operations and timing uncertainties.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forward contracts), changing consumer demands, and supply chain dependencies on third-party manufacturing in China and Brazil.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the $539.9 million inventory balance (up 20% YoY) and the risk of future markdowns given the decline in Wholesale gross margins.
- Cash Burn: Monitor the negative operating cash flow of $32.8 million YTD and the reliance on the revolving credit facility (utilization increased to $113 million) to fund working capital.
- Debt Covenants: Confirm continued compliance with the Credit Agreement, specifically the fixed charge coverage ratio and excess availability requirements, given the increased debt load.
- IT Transition: Assess the progress and cost overruns of the ERP implementation, which incurred $5.5 million in charges YTD and is a critical operational risk.
- Environmental Liabilities: Review the status of the Redfield site remediation and the pending judgment in the La Plata County litigation to ensure the $9.5 million reserve is adequate.