Filing summary: Brown Shoe Company, Inc. FY2012 Form 10-K
Entity and period mismatch: The supplied filing is for Brown Shoe Company, Inc. (NYSE: BWS), not Caleres Inc. It reports the fiscal year ended February 2, 2013, comprising 53 weeks, and compares primarily with the 52-week year ended January 28, 2012. It is not a filing for 2011 Q4.
Business context
Brown Shoe was a footwear retailer and wholesaler, operating Famous Footwear, Specialty Retail and Wholesale Operations. It reported 1,277 stores and approximately $2.6 billion in annual sales. Retail represented about 67% of 2012 footwear sales. Business is seasonal, with a substantial share of earnings typically generated in the third fiscal quarter.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $2,598.1 million | $2,582.8 million |
| Gross profit / margin | $1,010.4 million / 38.9% | $996.6 million / 38.6% |
| Operating earnings / margin | $61.6 million / 2.4% | $35.6 million / 1.4% |
| Net earnings attributable to Brown Shoe | $27.5 million | $24.6 million |
| Diluted EPS attributable to Brown Shoe | $0.64 | $0.56 |
| Net cash from operating activities | $197.9 million | $48.1 million |
| Cash and cash equivalents at year-end | $68.2 million | $47.7 million |
| Total debt | $303.8 million | $399.6 million |
| Working capital / current ratio | $303.3 million / 1.65 | $290.6 million / 1.55 |
Cost of goods sold was $1,587.7 million; selling and administrative expenses were $919.0 million. Interest expense was $23.4 million. The effective tax rate on continuing operations was 29.4%, compared with 3.6% in FY2011.
- Famous Footwear: Sales rose 4.0% to $1,514.3 million; same-store sales increased 4.5% on a 52-week basis. Operating earnings rose to $94.1 million from $62.5 million.
- Wholesale Operations: Sales fell 3.0% to $845.2 million, mainly due to brands being exited; operating earnings were $17.6 million versus $16.7 million.
- Specialty Retail: Sales declined 6.7% to $238.5 million, reflecting lower store count and Shoes.com sales; the operating loss widened to $8.9 million from $7.6 million.
Changes, unusual items and management commentary
- Consolidated sales increased just 0.6%. The extra 53rd week contributed approximately $21.2 million of retail sales, with an immaterial earnings effect; therefore, reported growth benefits from the longer year.
- Operating earnings improved as gross profit rose and selling and administrative expenses fell. Famous Footwear’s lower markdowns and cost reductions from portfolio realignment helped; wholesale markdowns and customer allowances weighed on its gross margin.
- FY2012 included $29.9 million of portfolio realignment costs, including a $5.8 million impairment after termination of the Etienne Aigner license. Restructuring and other special charges were $24.0 million. The company said its portfolio realignment was substantially completed.
- FY2011 net earnings included $15.7 million from discontinued operations, including a $14.0 million after-tax gain on the sale of TBMC/AND 1. Thus, FY2012’s higher reported net earnings do not directly indicate growth in continuing operations alone; continuing-operations earnings were $27.2 million in FY2012 versus $8.7 million in FY2011.
- Operating cash flow increased substantially, with management citing improved collections, lower inventory, and higher accounts payable and accruals. Inventory decreased to $533.3 million from $561.8 million.
Debt, liquidity and cash uses
Year-end debt comprised $105.0 million outstanding under a revolving credit facility and approximately $198.8 million carrying value of 7.125% senior notes due 2019. The company reported $380.6 million of additional revolver availability and $9.0 million of letters of credit; it was in compliance with debt covenants. The $530 million facility matures in 2016 and is subject to borrowing-base limits and covenants. Debt-to-capital decreased to 41.6% from 49.1%.
Cash used for investing was $68.7 million, including $55.8 million of property and equipment purchases and $7.9 million of capitalized software. Cash used for financing was $108.8 million, principally reflecting net revolver repayments. Dividends were $0.28 per share for the year. Management expected 2013 capital expenditures and capitalized software of approximately $50–55 million.
Outlook, risks and contingencies
- For 2013, management expected Famous Footwear same-store sales growth in the low single digits and Wholesale Operations sales to decline in the low-to-mid single digits. It noted continued uncertainty around consumer activity, tax-rate changes and the economy.
- Major business risks include discretionary consumer demand, fashion and inventory forecasting, intense competition, dependence on wholesale customers and branded suppliers, and concentration of approximately 97% of sourced footwear production in China. Trade restrictions, labor availability, costs, currency and supply interruptions could affect margins and deliveries.
- The Etienne Aigner licensor disputed the company’s termination of its license. Arbitration was scheduled for May 2013; the company had recorded no liability or receivable and stated the outcome was uncertain. The terminated agreement otherwise involved $20.9 million of minimum royalties through 2018.
- Environmental remediation liabilities totaled $9.4 million, including $7.8 million for the Redfield site. The company cautioned that ultimate costs could exceed recorded amounts. It also reported a $1.4 million accrued liability related to claims involving an insolvent former insurer.
- Goodwill impairment testing found no impairment, but one reporting unit’s fair value exceeded carrying value by less than 20%; goodwill allocated to it was $39.6 million. Pension assumptions are also sensitive: a 50-basis-point decline in the discount rate was estimated to increase pension obligations by about $24.8 million.
Important facts for investors to verify
- Confirm the intended issuer and period: this document is Brown Shoe Company’s FY2012 10-K, not a Caleres 10-K or a 2011 Q4 filing.
- Assess sales and earnings on a comparable 52-week basis, including the extra-week contribution and the prior-year TBMC sale gain.
- Review the sustainability of the strong operating cash flow and debt reduction, including working-capital movements and the location and accessibility of foreign cash.
- Track 2013 segment performance against management’s sales outlook, especially Famous Footwear comps and Wholesale Operations declines.
- Monitor the Etienne Aigner arbitration, environmental remediation estimates, China sourcing concentration, and the reporting unit’s limited goodwill impairment cushion.