Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (d/b/a Caleres Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 2, 2008 (Second Quarter of Fiscal 2008)
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations, and Specialty Retail. The reporting period reflects a challenging macroeconomic environment impacting consumer spending, alongside significant strategic initiatives including the relocation of the Famous Footwear headquarters and the commencement of an Enterprise Resource Planning (ERP) system implementation.
Key Financial Metrics
| Metric ($ thousands) | 13 Weeks Ended Aug 2, 2008 |
13 Weeks Ended Aug 4, 2007 |
26 Weeks Ended Aug 2, 2008 |
26 Weeks Ended Aug 4, 2007 |
|---|---|---|---|---|
| Net Sales | $569,219 | $576,571 | $1,123,710 | $1,142,919 |
| Gross Profit | $223,497 | $230,994 | $439,959 | $460,797 |
| Gross Margin % | 39.3% | 40.1% | 39.2% | 40.3% |
| Operating Earnings | $4,939 | $17,865 | $18,306 | $35,334 |
| Net Earnings | $2,217 | $9,830 | $9,412 | $19,466 |
| Diluted EPS | $0.05 | $0.22 | $0.23 | $0.44 |
| Cash & Equivalents | $64,420 | $64,335 | $64,420 | $64,335 |
| Operating Cash Flow (26 wks) | $63,908 (2008) vs $29,475 (2007) | |||
| Total Debt | $150,000 (Senior Notes only; no revolver borrowings) | |||
| Debt-to-Capital Ratio | 21.1% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 1.3% ($7.4 million) in the quarter and 1.7% ($19.2 million) year-to-date. The Wholesale Operations segment drove the decline with a 9.3% drop in quarterly sales due to softened demand and inventory management by retail partners. Famous Footwear sales increased 3.2% due to store count growth, though same-store sales declined 2.9%.
- Profitability Compression: Operating earnings plummeted 72.4% to $4.9 million in the quarter. Operating margin contracted from 3.1% to 0.9% of net sales. Gross margins declined across all segments due to increased promotional activity, markdowns, and a shift toward lower-margin licensed brands in the wholesale segment.
- Expense Variance: Selling and administrative expenses increased 2.4% in the quarter. This was driven by $9.7 million in relocation charges for the Famous Footwear headquarters and higher retail facility costs, partially offset by lower incentive plan costs ($3.9 million reduction) and the absence of prior-year Earnings Enhancement Plan charges.
- Cash Flow Improvement: Net cash provided by operating activities for the first half of 2008 was $63.9 million, a significant increase of $34.4 million compared to the prior year, primarily due to timing of vendor payments and accrued expenses.
Guidance, Outlook, and Risks
- Outlook: Management expressed caution regarding the remainder of 2008 due to uncertainty in consumer spending and the macroeconomic environment. The focus remains on inventory management and expense control.
- Strategic Initiatives:
- Headquarters Relocation: The Famous Footwear division is relocating from Madison, WI, to St. Louis, MO. Total estimated costs are $25-$30 million. $11.4 million has been incurred year-to-date, with the majority of remaining costs expected in the third quarter.
- ERP Implementation: A new integrated ERP system implementation began in Q2 2008 and is expected to continue through 2011. $0.5 million in charges were incurred in the quarter.
- Real Estate: The Company plans to redevelop its St. Louis property into a mixed-use project, potentially selling existing real estate and leasing new office space.
- Risks and Contingencies:
- Environmental Liability: The Company has an accrued liability of $9.8 million for environmental remediation at former sites (primarily Redfield, CO). While a $10.2 million insurance recovery was recognized in the first half, ultimate costs may vary.
- Implementation Risk: Risks associated with the ERP rollout and headquarters relocation include potential business disruption and cost overruns.
- Supply Chain: Reliance on third-party manufacturing in China and Brazil exposes the Company to political and economic disruptions.
Investor Verification Checklist
- Relocation Cost Accuracy: Verify if the $25-$30 million estimate for the Famous Footwear relocation remains accurate as the majority of costs are expected to be recognized in Q3 2008.
- Wholesale Demand Trends: Monitor the Wholesale Operations segment for continued softness in department store demand and the impact of the shift away from private label business.
- Same-Store Sales Recovery: Assess whether the 2.9% same-store sales decline in Famous Footwear stabilizes or worsens in the upcoming back-to-school season.
- ERP Execution: Track the progress and cost of the ERP implementation to ensure it does not cause operational disruptions or exceed budgeted estimates.
- Environmental Reserve Adequacy: Review the status of the Redfield site remediation and the finality of the $10.2 million insurance recovery to ensure no further material charges are required.