Business context and reporting period
The supplied filing is Brown Shoe Company, Inc.’s unaudited Form 10-Q for the 13 and 39 weeks ended November 2, 2013, not a 2012 Q3 filing. The company operated Famous Footwear, Wholesale Operations, and Specialty Retail. The filing describes seasonality, with the third quarter typically contributing substantially to annual earnings.
Financial performance and position
| Metric | 13 weeks ended Nov. 2, 2013 | Comparable 2012 period | 39 weeks ended Nov. 2, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Net sales | $702.8m | $696.0m | $1,913.2m | $1,859.1m |
| Gross profit / margin | $278.2m / 39.6% | $279.3m / 40.1% | $772.9m / 40.4% | $741.2m / 39.9% |
| Operating earnings / margin | $44.7m / 6.4% | $41.0m / 5.9% | $88.4m / 4.6% | $62.2m / 3.3% |
| Net earnings attributable to Brown Shoe | $27.3m; diluted EPS $0.63 | $24.3m; diluted EPS $0.56 | $31.9m; diluted EPS $0.73 | $23.5m; diluted EPS $0.55 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $62.0m | $143.5m |
For the first nine months, investing activities provided $27.7m, including $69.3m net proceeds from subsidiary sales; financing activities used $113.9m. Cash declined $25.8m to $42.4m. Capital expenditures were $37.9m and capitalized software was $3.7m.
At November 2, 2013, total assets were $1,086.9m, working capital was $397.9m, and the current ratio was 2.12:1. Debt totaled $199.0m, comprising senior notes, with no revolving-credit borrowings; available revolver capacity was $514.6m. Debt-to-capital was 30.6%. Cash was largely held by foreign subsidiaries. The quarterly dividend was $0.07 per share.
Material changes versus comparable periods
- Quarterly sales rose 1.0%; operating earnings increased 9.0% and attributable net earnings rose to $27.3m. Gross margin declined 0.5 percentage point, primarily due to wholesale markdowns and lower international wholesale profitability.
- Nine-month sales increased 2.9%, operating earnings rose 42.2%, and continuing-operations net earnings increased to $48.0m from $30.1m. Reported net earnings include discontinued operations and associated charges.
- Famous Footwear quarterly same-store sales rose 4.9%; Wholesale Operations sales grew 4.5%; Specialty Retail sales fell 7.8%, with lower e-commerce sales and store count among the factors.
- Operating cash flow fell $81.5m year over year, reflecting inventory investment, receivables and prepaid-asset movements, and payment timing. Inventory at quarter-end was $544.6m, versus $512.2m a year earlier.
- Revolver borrowings fell from $110.0m a year earlier and $105.0m at fiscal year-end to zero, mainly after the Avia and Nevados sale and operating cash generation.
Outlook, commentary, risks, and unusual items
Management raised its fiscal 2013 diluted EPS outlook to $0.82–$0.86, including approximately $31m pre-tax ($23.5m after tax, or $0.54 per diluted share) of portfolio-realignment costs. Management said results reflected a strong back-to-school season and remained cautious about the macroeconomic environment and consumer spending.
- Portfolio realignment initiatives were described as substantially complete. The company sold Avia and Nevados in May 2013; the sale agreement’s stated purchase price was $74.0m subject to adjustments and a pre-closing dividend. The company reported $69.3m net sale proceeds in investing cash flow and received $12.2m principal and interest on the buyer’s note on November 14, 2013.
- Nine-month discontinued operations included a reported $16.3m net loss, including $11.5m of impairment/disposition costs. The filing also describes a $12.6m ASG impairment charge and a $1.0m subsequent disposition gain. Etienne Aigner settlement terms required a $6.5m payment.
- The supply-chain asset sale carries a commitment to source at least 8 million pairs over two years at market pricing, estimated at approximately $100m, from specified facilities.
- Environmental remediation liabilities were $9.8m; the filing cautions that ultimate costs may exceed recorded amounts. Management said ordinary-course litigation was not expected to materially adversely affect results or financial position.
- Risks include consumer demand and fashion changes, competition, retail customer concentration, China-related sourcing disruption, supplier and licensing relationships, product-safety compliance, and inflationary cost pressures. Management reported compliance with material debt covenants and effective disclosure controls.
Important facts for investors to verify
- Confirm the filing identity and period: this is Brown Shoe Company’s 10-Q for the quarter ended November 2, 2013, despite the request metadata identifying Caleres and 2012 Q3.
- Assess the sustainability of improved earnings and margins, particularly wholesale markdowns, Famous Footwear trends, and continuing weakness in Specialty Retail and e-commerce.
- Reconcile reported net earnings with continuing operations, discontinued operations, and portfolio-realignment charges; review the ASG sale proceeds and subsequent note collection.
- Evaluate cash conversion and seasonal inventory needs against the $62.0m nine-month operating cash flow, $42.4m cash balance, and planned $54m–$56m annual property/software investment.
- Review the $100m sourcing commitment, environmental reserve assumptions, and the company’s reliance on foreign-subsidiary cash and available revolving-credit capacity.