Business Context and Reporting Period
Company: Brown Shoe Company, Inc. (filing under Caleres Inc. metadata)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 1, 2009
Business Overview: The Company operates in the footwear industry through three primary segments: Famous Footwear (retail), Wholesale Operations, and Specialty Retail. The business is seasonal, with the third fiscal quarter traditionally accounting for a substantial portion of annual earnings. The Company is currently navigating a challenging economic climate characterized by reduced consumer spending.
Key Financial Metrics
| Metric | 13 Weeks Ended Aug 1, 2009 | 26 Weeks Ended Aug 1, 2009 | 13 Weeks Ended Aug 2, 2008 | 26 Weeks Ended Aug 2, 2008 |
|---|---|---|---|---|
| Net Sales ($ millions) | $511.6 | $1,050.4 | $569.2 | $1,123.7 |
| Gross Profit Margin | 39.8% | 39.2% | 39.3% | 39.2% |
| Operating (Loss) Earnings ($ millions) | $(5.0) | $(12.1) | $5.1 | $18.7 |
| Net (Loss) Earnings Attributable to Brown Shoe ($ millions) | $(4.2) | $(11.8) | $2.2 | $9.4 |
| Diluted EPS ($) | $(0.10) | $(0.28) | $0.05 | $0.22 |
| Cash and Cash Equivalents ($ millions) | $37.3 | $37.3 | $64.4 | $64.4 |
| Total Debt ($ millions) | $197.5 | $197.5 | $150.0 | $150.0 |
| Debt-to-Capital Ratio | 33.7% | 33.7% | 21.1% | 21.1% |
| Current Ratio | 1.63:1 | 1.63:1 | 1.86:1 | 1.86:1 |
Cash Flow (26 Weeks Ended Aug 1, 2009): Net cash provided by operating activities was $49.7 million. Net cash used for investing activities was $28.8 million, and net cash used for financing activities was $71.1 million.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10.1% in the second quarter and 6.5% in the first half of 2009 compared to the prior year. The Wholesale Operations segment saw the largest decline (21.1% in Q2) due to retailers reducing inventory levels and a continued decline in private label business.
- Profitability Reversal: The Company reported an operating loss of $5.0 million in Q2 2009, compared to operating earnings of $5.1 million in Q2 2008. This shift was driven by lower sales volumes and increased selling and administrative expenses as a percentage of sales.
- Segment Performance:
- Famous Footwear: Same-store sales decreased 6.7% in Q2 2009. Operating loss was $0.8 million vs. $11.3 million earnings in Q2 2008.
- Wholesale Operations: Operating earnings decreased to $7.9 million (5.5% margin) from $11.6 million (6.4% margin) in Q2 2008.
- Specialty Retail: Operating loss widened to $4.3 million from $3.1 million in Q2 2008, impacted by lower sales at Shoes.com and a weaker Canadian dollar.
- Balance Sheet: Total debt increased to $197.5 million due to $47.5 million in borrowings under the revolving credit agreement. Shareholders' equity declined due to accumulated net losses.
Guidance, Outlook, and Risks
Management Outlook:
- The Company expects to return to profitability in the third and fourth quarters of 2009.
- Net sales are anticipated to be flat to down slightly in the second half of 2009.
- Retail same-store sales are expected to decline in the second half of 2009.
- For the full year 2009, the Company plans to open 54 new Famous Footwear stores while closing 55 to 70 stores.
Key Initiatives and Costs:
- IT Initiatives: The Company incurred $2.0 million in expenses in Q2 2009 related to an integrated ERP system implementation expected to continue through 2011.
- Restructuring: No restructuring charges were recorded in Q2 2009 related to the 2008 expense containment or headquarters consolidation plans, though settlements continued.
Risks and Contingencies:
- Liquidity Covenants: The Credit Agreement contains covenants regarding excess availability and fixed charge coverage ratios. A "cash dominion event" could be triggered if excess availability falls below specified thresholds.
- Environmental Remediation: The Company has an accrued liability of $10.0 million for environmental cleanup at various sites, including the Redfield facility in Colorado. Ultimate costs may vary based on regulatory oversight.
- Market Risks: Exposure to foreign currency fluctuations (hedged via forward contracts) and reliance on third-party manufacturing in China and Brazil.
Investor Verification Checklist
- Debt Covenants: Verify current compliance with the Credit Agreement's fixed charge coverage ratio and excess availability requirements to assess risk of a cash dominion event.
- Inventory Levels: Review the $526.8 million inventory balance (up from $502.9 million prior year) to assess potential markdown risks given the sales decline.
- IT Implementation Progress: Monitor the timeline and cost overruns associated with the ERP system implementation, which is a significant ongoing expense.
- Same-Store Sales Trends: Track the trajectory of same-store sales declines in Famous Footwear and Specialty Retail segments to validate the "return to profitability" guidance.
- Environmental Liabilities: Confirm the status of the Redfield site remediation and potential for cost increases beyond the $10.0 million accrued liability.