CALERES INC - Quarter Report: 2014 May (Form 10-Q)

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

 

 

FORM 10-Q 

 

(Mark One)

 

Commission file number: 1-2191 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☑     No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

   Yes  ☑     No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

   Yes  ☐     No ☑ 

 

As of May 30, 2014, 43,678,129 common shares were outstanding.

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See notes to condensed consolidated financial statements.

 

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See notes to condensed consolidated financial statements.

  

 

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See notes to condensed consolidated financial statements.

  

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See notes to condensed consolidated financial statements.

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The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission (“SEC”) and reflect all adjustments and accruals of a normal recurring nature, which management believes are necessary to present fairly the financial position, results of operations, comprehensive income and cash flows of Brown Shoe Company, Inc. (the “Company”). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations, comprehensive income, and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. 

 

The Company’s business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas and Easter holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of the Company’s earnings for the year. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. 

 

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings (loss) attributable to Brown Shoe Company, Inc. 

 

For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended February 1, 2014.

 

 

 

In July 2013, the Financial Accounting Standards Board (“FASB”)  issued Accounting Standards Update ("ASU") No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  This guidance requires entities to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss (“NOL”) carryforward, similar tax loss, or tax credit carryforward, rather than as a liability, when the uncertain tax position would reduce the NOL or other carryforward under the tax law. The amendments in this ASU do not require new recurring financial disclosures. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The Company adopted this guidance on February 2, 2014 and it did not have an impact on the Company’s condensed consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  The ASU amends the definition of a discontinued operation by raising the threshold for disposals to qualify as discontinued operations and requires new disclosures for disposals of individually significant components that do not meet the new definition of a discontinued operation.  Under the new guidance, discontinued operations treatment is required for disposals of a component or group of components that represent a strategic shift that has or will have a major impact on an entity’s operations or financial results.  The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted.   The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition.   The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principal that revenue is recognized to depict the transfer of  goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption prohibited.  The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements.

 

 

 

The Company’s discontinued operations include the Avia and Nevados brands of American Sporting Goods Corporation, as well as the Etienne Aigner and Vera Wang brands. There were no net sales or loss from discontinued operations for the thirteen weeks ended May 3, 2014.  In aggregate, discontinued operations included net sales of $20.5 million and loss before income taxes of $9.2 million for the thirteen weeks ended May 4, 2013.  For the thirteen weeks ended May 4, 2013, discontinued operations also included  disposition/impairment of discontinued operations of $12.6 million.

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American Sporting Goods Corporation

On May 14, 2013, Brown Shoe International Corp. (“BSIC”), the sole shareholder of American Sporting Goods Corporation, entered into and simultaneously closed a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, BSIC and Galaxy Brand Holdings, Inc. (“the Buyer”), pursuant to which the Buyer acquired all of the outstanding capital stock of American Sporting Goods Corporation from BSIC and the Company agreed to provide certain transition services. In connection with the transaction, American Sporting Goods Corporation sold inventory to a third party unaffiliated with the Buyer and distributed certain assets to BSIC. The aggregate purchase price for the stock of American Sporting Goods Corporation and the provision of such transition services was $74.0 million, subject to working capital adjustments, minus the amount of the pre-closing cash dividend declared by American Sporting Goods Corporation and paid to BSIC, representing proceeds from American Sporting Goods Corporation’s sale of inventory.

 

The Company purchased American Sporting Goods Corporation, comprised of Avia, Nevados, Ryka, AND 1, and other businesses, on February 17, 2011 and subsequently sold AND 1 during fiscal 2011. The Avia and Nevados businesses were sold under the Stock Purchase Agreement and the Company retained and is operating Ryka and other businesses. In this document, “ASG” refers to the subsidiary disposed on May 14, 2013, including the Avia and Nevados brands and excluding the Ryka brand and other retained businesses.

 

The Company received $60.3 million in cash and a promissory note of $12.0 million at closing, from the sale of stock, the sale of inventory, and for the provision of transitional services, less working capital adjustments. The promissory note matured on November 14, 2013.  In accordance with the terms of the promissory note, the Company received a payment of $12.2 million on November 14, 2013, representing the note principal and accrued interest. 

 

In anticipation of the sale of ASG, the Company recorded an impairment charge in the first quarter of 2013 of $12.6 million ($12.6 million after-tax, $0.30 per diluted share), representing the difference in the fair value less costs to sell as compared to the carrying value of the net assets to be sold. The $12.6 million impairment charge is reflected as disposition/impairment of discontinued operations, net of tax in the condensed consolidated statements of earnings. ASG was previously included in the Wholesale Operations segment.  Discontinued operations include net sales and earnings before income taxes of $18.3 million and $1.2 million, respectively, for the thirteen weeks ended May 4, 2013.

 

Etienne Aigner

During the second quarter of 2012, the Company terminated the Etienne Aigner license agreement due to a dispute with the licensor. On April 29, 2013, an agreement to resolve the dispute was reached, pursuant to which the Company agreed to pay Etienne Aigner $6.5 million. The financial results of Etienne Aigner and the $6.5 million settlement are reflected as a component of discontinued operations.  The results of Etienne Aigner were previously included in the Wholesale Operations segment.  Discontinued operations include net sales and loss before income taxes of $0.2 million and $7.0 million, respectively, for the thirteen weeks ended May 4, 2013.

 

Vera Wang

During the first quarter of 2013, the Company communicated its intention not to renew the Vera Wang license agreement. The financial results of Vera Wang are reflected as a component of discontinued operations.  The results of Vera Wang were previously included in the Wholesale Operations segment.   Discontinued operations include net sales and loss before income taxes of $2.0 million and $3.4 million, respectively, for the thirteen weeks ended May 4, 2013.

 

The detail of ASG, Etienne Aigner, and Vera Wang assets and liabilities reported as discontinued operations in the condensed consolidated balance sheets is as follows:

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Loss from discontinued operations, net of tax for the thirteen weeks ended May 3, 2014 and May 4, 2013 is as follows:

 

 

 

 

 

 

 

The Company uses the two-class method to compute basic and diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted earnings (loss) per common share attributable to Brown Shoe Company, Inc. shareholders for the periods ended May 3, 2014 and May 4, 2013:

 

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Options to purchase  74,997 and 432,466 shares of common stock for the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively, were not included in the denominator for diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders because the effect would be anti-dilutive.

 

 

 

 

Portfolio Realignment 

The Company's portfolio realignment efforts include the sale of ASG; the sale of the AND 1 division; exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; the sale and closure of sourcing and supply chain assets; closing or relocating numerous underperforming or poorly aligned retail stores; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang license in accordance with agreement terms, and other infrastructure changes. These portfolio realignment efforts began in 2011 and are complete.

 

During the first quarter of 2014, the Company incurred no expenses for portfolio realignment initiatives.  The following is a summary of the Company’s portfolio realignment expense for our continuing and discontinued operations for the thirteen weeks ended May 4, 2013: 

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Of the $28.8 million ($24.6 million after-tax, or $0.58 per diluted share) of portfolio realignment costs incurred during the first quarter of 2013, $27.7 million is included in the Wholesale Operations segment and $1.1 million is included in the Other segment.  The business exits and cost reductions of the Company’s continuing operations were recorded within restructuring and other special charges, net in the condensed consolidated statements of earnings.  The business exits and cost reductions of the Company’s discontinued operations were recorded within loss from discontinued operations, net of tax, in the condensed consolidated statements of earnings.  The non-cash impairments/dispositions of the Company’s continuing operations were recorded within impairment of assets held for sale in the condensed consolidated statements of earnings.  The non-cash impairments/dispositions of the Company’s discontinued operations were recorded within disposition/impairment of discontinued operations, net of tax in the condensed consolidated statements of earnings.  The non-cash impairments/dispositions are included in Other in the following table.

 

The following is a summary of the charges and settlements by category of costs:

 

 

 

Sale of Sourcing and Supply Chain Assets

As part of its portfolio realignment efforts, the Company entered into an agreement to sell certain of its supply chain and sourcing assets (“Sale Agreement”) on April 30, 2013 for $9.0 million, including $1.5 million in cash and a $7.5 million promissory note, subject to working capital adjustments. The sale closed during the second quarter of 2013. In anticipation of this transaction, the Company classified the related assets and liabilities of the supply chain and sourcing assets as held for sale as of May 4, 2013 on the condensed consolidated balance sheet and recognized an impairment charge in the first quarter of 2013 of $4.7 million  ($4.7 million after tax, or $0.11 per diluted share) to adjust the assets to their estimated fair value. The promissory note requires installments over two years with the first payment of $3.0 million due no later than 45 days from the closing date and the remaining balance payable in eight quarterly payments of $0.6 million, subject to working capital adjustments, plus accrued interest of 5%, compounded monthly, starting no later than three months after the closing date. In accordance with the terms of the promissory note, as of May 3, 2014, the Company has received a total of $4.8 million of installment payments.  As part of the Sale Agreement, the Company agreed to

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purchase a minimum of four million pairs of shoes each year for two years following the closing date at market pricing, which can be fulfilled from a group of facilities owned by the purchaser. 

 

 

 

Following is a summary of certain key financial measures for the Company’s business segments for the periods ended May 3, 2014 and May 4, 2013.  All financial measures below exclude discontinued operations. 

 

 

The Other segment includes corporate assets, administrative expenses, and other costs and recoveries, which are not allocated to the operating segments.  

 

Following is a reconciliation of operating earnings to earnings before income taxes from continuing operations:  

 

 

 

 

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Goodwill and intangible assets were attributable to the Company's operating segments as follows:

 

Intangible assets consist primarily of owned and licensed trademarks,  $21.0 million of which are not subject to amortization, with the remainder being amortized over useful lives ranging from four to 40 years as of May 3, 2014. Amortization expense related to intangible assets was $1.0 million and $1.7 million for the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively. 

 

On February 3, 2014, the Company entered into and simultaneously closed an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which the Company acquired the Franco Sarto trademarks.  As consideration, the Company agreed to pay a cash purchase price of $65.0 million, which was paid at the time of closing.  As a result of entering into and closing the Asset Purchase Agreement, the Company’s license agreement, granting the Company the right to sell footwear and other products using the Franco Sarto trademarks through 2019, was terminated.  The purchase price of $65.0 million, as well as transaction costs of $0.1 million, will be amortized over its useful life of 40 years. 

 

 

 

 

  

 

 

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively:

 

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Accumulated Other Comprehensive Income

The following table sets forth the changes in accumulated other comprehensive income by component for the thirteen weeks ended May 3, 2014 and May 4, 2013:

 

 

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The following table sets forth the reclassifications out of accumulated other comprehensive income and the related tax effect by component for the thirteen weeks ended May 3, 2014 and May 4, 2013:

 

 

 

 

 

 

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The Company recognized share-based compensation expense of $1.6 million for both the thirteen weeks ended May 3, 2014 and May 4, 2013.

 

The Company issued 452,125 shares of common stock during the thirteen weeks ended May 3, 2014 for restricted stock grants, stock options exercised, and directors’ fees.

 

During the thirteen weeks ended May 3, 2014, the Company granted 270,910 restricted shares to certain employees with a weighted-average grant date fair value of $28.18. Of the 270,910 restricted shares, 269,110 restricted shares will vest in four years and share-based compensation expense will be recognized on a straight-line basis over the four-year period. The remaining 1,800 restricted shares will vest in one year. During the thirteen weeks ended May 3, 2014, the Company did not cancel any restricted stock awards as a result of forfeitures.

 

The Company granted 88,185 performance share units during the thirteen weeks ended May 3, 2014 with a weighted-average grant date fair value of $28.18. Vesting of performance-based units is dependent upon the financial performance of the Company and the attainment of certain financial goals during the next three years. Performance share units are settled in cash based on the Company’s stock price upon payout. The performance share units may pay out at a maximum of 200% of the target number of units. Compensation expense is being recognized based on the fair value of the award and the anticipated number of units to be awarded in accordance with the vesting schedule of the units over the three-year service period. The performance share units are settled in cash and their value is dependent upon the Company’s stock price. As a result, these performance share units are adjusted each period based on the quoted market price for the Company’s common stock.  

 

The Company also granted 910 restricted stock units for dividend equivalents on previously granted restricted stock units to non-employee directors with a weighted-average grant date fair value of $26.63 during the thirteen weeks ended May 3, 2014. All restricted stock units granted during the thirteen weeks ended May 3, 2014 vested immediately as of the payment date for the dividend.

 

 

 

 

 

The following tables set forth the components of net periodic benefit cost (income) for the Company, including domestic and Canadian plans:

 

 

 

 

 

 

 

 

 

 

 

 

In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities, and cash flows as it makes a portion of its purchases and sales in local currencies. The Company has established policies and business practices that are intended to mitigate a portion of the effect of these exposures. The Company uses derivative financial instruments, primarily forward contracts, to manage its currency exposures. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are designated as cash flow hedges of forecasted foreign currency transactions. 

 

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Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major financial institutions and have varying maturities through May 2015. Credit risk is managed through the continuous monitoring of exposures to such counterparties. 

 

The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses, intercompany charges, as well as collections and payments. The Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in the condensed consolidated statement of earnings. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in the Company’s condensed consolidated statement of earnings. The amount of hedge ineffectiveness for the thirteen weeks ended May 3, 2014 and May 4, 2013 was not material. 

 

The Company’s hedging strategy uses forward contracts as cash flow hedging instruments, which are recorded in the Company’s condensed consolidated balance sheet at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income and reclassified to earnings in the period that the hedged transaction is recognized in earnings. 

 

As of May 3, 2014, May 4, 2013, and February 1, 2014, the Company had forward contracts maturing at various dates through May 2015,  May 2014, and January 2015, respectively. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.

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The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheets as of May 3, 2014, May 4, 2013, and February 1, 2014 are as follows:

 

For the thirteen weeks ended May 3, 2014 and May 4, 2013, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

 

 

All gains and losses currently included within accumulated other comprehensive income associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 12 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 12 to the condensed consolidated financial statements. 

 

 

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Fair Value Hierarchy 

FASB guidance on fair value measurements and disclosures specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (“observable inputs”) or reflect the Company’s own assumptions of market participant valuation (“unobservable inputs”). In accordance with the fair value guidance, the hierarchy is broken down into three levels based on the reliability of the inputs as follows: 

 

 

 

  

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. Classification of the financial or non-financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 

 

Measurement of Fair Value 

The Company measures fair value as an exit price, the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date, using the procedures described below for all financial and non-financial assets and liabilities measured at fair value. 

 

Money Market Funds 

The Company has cash equivalents consisting of short-term money market funds backed by U.S. Treasury securities. The primary objective of these investing activities is to preserve the Company’s capital for the purpose of funding operations. The Company does not enter into money market funds for trading or speculative purposes. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 

 

Deferred Compensation Plan Assets and Liabilities 

The Company maintains a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees. The investment funds offered to the participant generally correspond to the funds offered in the Company’s 401(k) plan, and the account balance fluctuates with the investment returns on those funds. The Deferred Compensation Plan permits the deferral of up to 50% of base salary and 100% of compensation received under the Company’s annual incentive plan. The deferrals are held in a separate trust, which has been established by the Company to administer the Deferred Compensation Plan. The assets of the trust are subject to the claims of the Company’s creditors in the event that the Company becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (i.e., a “Rabbi Trust”). The liabilities of the Deferred Compensation Plan are presented in other accrued expenses and the assets held by the trust are classified as trading securities within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Changes in deferred compensation plan assets and liabilities are charged to selling and administrative expenses. The fair value is based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). 

 

Deferred Compensation Plan for Non-Employee Directors  

Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs that is equal to the number of shares of the Company’s common stock which the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are presented in selling and administrative expenses in the Company’s condensed consolidated statement of earnings. The fair value of each PSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1). 

 

Restricted Stock Units for Non-Employee Directors

Under the Company’s incentive compensation plans, cash-equivalent restricted stock units (“RSUs”) of the Company may be granted at no cost to non-employee directors. The RSUs are subject to a vesting requirement (usually one year), earn dividend-equivalent

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units, and are settled in cash on the date the director terminates service or such earlier date as a director may elect, subject to restrictions, based on the then current fair value of the Company’s common stock. The fair value of each RSU is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to restricted stock units for non-employee directors is disclosed in Note 9 to the condensed consolidated financial statements.

 

Performance Share Units

Under the Company’s incentive compensation plans, common stock or cash may be awarded at the end of the performance period at no cost to certain officers and key employees if certain financial goals are met. Under the plan, employees are granted performance share awards at a target number of shares or units, which generally vest over a three-year service period. At the end of the vesting period, the employee will have earned an amount of shares or units between 0% and 200% of the targeted award, depending on the achievement of specified financial goals for the service period. Each of the Company’s current unvested performance share awards utilize performance share units, which are settled in cash, rather than common stock. The fair value of each performance share unit is based on an unadjusted quoted market price of the Company’s common stock in an active market with sufficient volume and frequency on each measurement date (Level 1).  Additional information related to performance share units is disclosed in Note 9 to the condensed consolidated financial statements.

 

Derivative Financial Instruments 

The Company uses derivative financial instruments, primarily foreign exchange contracts, to reduce its exposure to market risks from changes in foreign exchange rates. These foreign exchange contracts are measured at fair value using quoted forward foreign exchange prices from counterparties corroborated by market-based pricing (Level 2). Additional information related to the Company’s derivative financial instruments are disclosed within Note 11 to the condensed consolidated financial statements. 

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at May 3, 2014, May 4, 2013, and February 1, 2014. The Company did not have any transfers between Level 1 and Level 2 during 2013 or the thirteen weeks ended May 3, 2014.   

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Impairment Charges 

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset, or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurements and Disclosures. Long-lived assets held and used with a carrying amount of $79.0 million were assessed for indicators of impairment and written down to their fair value, resulting in impairment charges of $0.3 million for the thirteen weeks ended May 3, 2014.  Of the $0.3 million impairment charge included in selling and administrative expenses, $0.2 million related to the Famous Footwear segment and $0.1 million related to the Specialty Retail segment. 

 

During the first quarter of 2013, the Company recognized an impairment charge of $4.7 million ($4.7 million after tax, $0.11 per diluted share) related to certain supply chain and sourcing assets, which represented the excess net asset value over the estimated fair value of the assets less costs to sell. The fair value of net assets was estimated based on the anticipated sales proceeds. This was considered a Level 2 input as the assets were not sold on an active market. The impairment charge was recorded as impairment of assets held for sale in the condensed consolidated statement of earnings and was included in the Wholesale Operations segment. These assets were sold in the second quarter of 2013, and the Company recognized an additional loss on sale of $0.6 million. See Note 5 to the condensed consolidated financial statements for additional information. 

 

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During the second quarter of 2013, the Company sold ASG. The assets of ASG were determined to be held for sale at May 4, 2013, and an impairment charge of $12.6 million was recorded in the first quarter of 2013 within disposition/impairment of discontinued operations, net of tax in the condensed consolidated statement of earnings. The Company recognized a gain on disposition of $1.0 million in the second quarter of 2013. ASG was previously included within the Wholesale Operations segment. The fair value of assets was estimated based on the anticipated sales proceeds less costs to sell. This was considered a Level 2 input as the assets were not sold on an active market. See Note 3 and Note 5 to the condensed consolidated financial statements for additional information. 

 

Fair Value of the Company’s Other Financial Instruments 

The fair values of cash and cash equivalents (excluding money market funds discussed above), receivables, trade accounts payable, and borrowings under the revolving credit agreement approximate their carrying values due to the short-term nature of these instruments.

 

The fair value of the Company’s Senior Notes was based upon quoted prices in an inactive market as of the end of the respective periods (Level 2).

 

 

 

 

The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors. The Company’s consolidated effective tax rates from continuing operations were 34.1%  and 51.9% for the thirteen weeks ended May 3, 2014 and May 4, 2013,  respectively.  The decrease in the Company’s effective tax rate this quarter was due to the non-deductible nature of the $4.7 million impairment charge in the first quarter of 2013, as further described in Note 5 to the condensed consolidated financial statements.

  

 

 

 

C. banner International Holdings Limited

The Company has a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”, formerly known as Hongguo International Holdings Limited) to market Naturalizer footwear in China. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI owning the other 49%. B&H Footwear sells Naturalizer footwear to a retail affiliate of CBI on a wholesale basis, which in turn sells the Naturalizer products through department store shops and free-standing stores in China.  During 2013, B&H Footwear transferred the operation of 25 retail stores in China to CBI.  B&H Footwear continues to sell footwear to CBI on a wholesale basis. During the thirteen weeks ended May 3, 2014, the Company, through its consolidated subsidiary, B&H Footwear, sold $2.0 million of Naturalizer footwear on a wholesale basis to CBI, with $1.0  million in corresponding sales during the thirteen weeks ended May 4, 2013.

 

 

 

Environmental Remediation 

Prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. The Company is involved in environmental remediation and ongoing compliance activities at several sites and has been notified that it is or may be a potentially responsible party at several other sites.

 

Redfield

The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. Off-site groundwater concentrations have been reducing over time since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain

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groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $15.7 million as of May 3, 2014. The Company expects to spend approximately $0.2 million in each of the next five years and $14.7 million in the aggregate thereafter related to the on-site remediation.

 

The cumulative expenditures for both on-site and off-site remediation through May 3, 2014 were $26.2 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at May 3, 2014 is $9.6 million, of which $8.6 million is recorded within other liabilities and $1.0 million is recorded within other accrued expenses. Of the total $9.6 million reserve, $4.9 million is for on-site remediation and $4.7 million is for off-site remediation.

 

Other

The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring through 2024. The Company has an accrued liability of $1.4 million at May 3, 2014 related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.0 million. The Company expects to spend approximately $0.2 million in each of the next five years and $1.0 million in the aggregate thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.

 

Based on information currently available, the Company has an accrued liability of $11.0 million as of May 3, 2014 to complete the cleanup, maintenance and monitoring at all sites. Of the $11.0 million liability, $9.9 million is recorded in other liabilities and $1.1 million is recorded in other accrued expenses. The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

 

Litigation

The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending is not expected to have a material adverse effect on the Company’s results of operations or financial position. Legal costs associated with litigation are generally expensed as incurred.

 

 

 

Brown Shoe Company, Inc. issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under its existing agreement. The following table presents the consolidating financial information for each of Brown Shoe Company, Inc. (“Parent”), the Guarantors, and subsidiaries of the Parent that are not Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated. The Guarantors are 100% owned by the Parent. On May 14, 2013, during the second quarter of 2013, ASG was sold and ceased to be a borrower under the Credit Agreement. ASG is included as a “Guarantor” in the financial statements through the sale date. The proceeds from the sale were utilized to pay down the Company’s revolving credit facility. See Note 3 to the condensed consolidated financial statements for further information on the sale of ASG.

   

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operations and cash flows of, each of the consolidated groups. 

 

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The financial results of our first quarter 2014 exceeded our expectations, especially given the weather-related headwinds we faced in February and March.  The results reflect solid performance within our Wholesale Operations and Famous Footwear segments. Our Wholesale Operations segment reported improvements in net sales and gross profit of 5.6% and 7.3%, respectively, while the Famous Footwear segment experienced a 2.0% increase in gross profit.

  

The following is a summary of the financial highlights for the first quarter of 2014:   

 

 

 

 

The following items impacted our first quarter 2014 and 2013 results and should be considered in evaluating the comparability of our results:

 

 

 

Our debt-to-capital ratio, as defined herein, decreased to 28.8% at May 3, 2014, compared to 39.1% at May 4, 2013 and 30.1% at February 1, 2014.  The improvement from May 4, 2013 reflects our cash provided by operating activities as well as lower borrowings under our revolving credit agreement.  As of May 3, 2014, we had no outstanding borrowings under the revolving credit agreement. Our current ratio, as defined herein, was 2.05 to 1 at May 3, 2014, compared to 1.83 to 1 at May 4, 2013 and 2.05 to 1 at February 1, 2014. The improvement in the current ratio from May 4, 2013 to May 3, 2014 was also driven by our cash provided by operating activities and lower borrowings under our revolving credit agreement.

 

Outlook for the Remainder of 2014 

Based on our first quarter results, we are optimistic about the remainder of the year. We expect consolidated net sales to be between $2.58 billion and $2.60 billion.  We also expect to earn $1.47 to $1.57 per diluted share in 2014.    

 

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Following are the consolidated results and the results by segment: 

 

 

 

Net Sales 

Net sales increased $2.5 million, or 0.4%, to $591.2 million for the first quarter of 2014, compared to $588.7 million for the first quarter of 2013. Net sales at our Wholesale Operations and Famous Footwear segments increased while net sales at our Specialty Retail segment decreased. Our Wholesale Operations segment reported a $10.2 million increase in net sales, driven by strong sales of our Vince, Via Spiga, Franco Sarto, and Sam Edelman brands, partially offset by a decrease in our Carlos Santana brand. Our Famous Footwear segment reported a $2.3 million increase in net sales, reflecting a same-store sales increase of 1.3%, partially offset by a lower store count. Despite weaker customer traffic patterns during the quarter, Famous Footwear experienced an improved customer conversion rate, higher average unit retail prices, and an increase in pairs per transaction. Strong growth in canvas styles, women’s boots, athletics, and accessories contributed to the increase in net sales. Net sales of our Specialty Retail segment decreased $10.0 million due to a lower store count, lower sales from our e-commerce subsidiary, a decrease in same-store sales of 5.6%, and a lower Canadian dollar exchange rate.

 

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net reflects the change in net sales due to stores that have been opened or closed during the period and are therefore excluded from the same-store sales calculation. E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation.

 

Gross Profit 

Gross profit increased $2.3 million, or 1.0%, to $242.3 million for the first quarter of 2014, compared to $240.0 million for the first quarter of 2013, reflecting higher sales in our Wholesale Operations and Famous Footwear segments, partially offset by lower sales in our Specialty Retail segment.  As a percentage of net sales, gross profit improved to 41.0% for the first quarter of 2014, compared to 40.8% for the first quarter of 2013.  The higher gross profit rate was driven in part by our Famous Footwear segment, which reported a gross profit rate of 45.6% for the first quarter of 2014, compared to 45.0% for the first quarter of 2013. The increase in our Famous Footwear gross profit rate was driven primarily by lower inventory markdowns and lower product costs.  Our Wholesale Operations gross profit rate also increased to 32.3% in the first quarter of 2014, compared to 31.8% in the first quarter of 2013.  The increase was driven by margin improvement from several of our wholesale brands as well as lower royalty expense due to the acquisition of the Franco Sarto trademarks, partially offset by the reduced gross profit impact from lower retail sales of our wholesale brands in the first quarter of 2014.  Retail and Wholesale Operations net sales were 68% and 32%, respectively, in the first quarter of 2014, compared to 69% and 31% in the first quarter of 2013. Gross profit rates in our retail businesses are higher, on average, than in our wholesale business. 

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We classify certain warehousing, distribution, sourcing, and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies. 

 

Selling and Administrative Expenses 

Selling and administrative expenses decreased $0.2 million, or 0.1%, to $213.6 million for the first quarter of 2014, compared to $213.8 million in the first quarter of 2013. There were offsetting factors impacting this decrease.  We incurred lower facility and employee expenses in our Specialty Retail segment and lower warehouse expenses in our Wholesale Operations segment.  These decreases were partially offset by an increase in marketing, store rent and depreciation expenses, and variable store employee compensation in our Famous Footwear segment.  As a percentage of net sales, selling and administrative expenses decreased to 36.1% for the first quarter of 2014 from 36.3% for the first quarter of 2013, reflecting better leveraging of our expense base over higher net sales.

 

Restructuring and Other Special Charges, Net 

We recorded no restructuring and other special charges, net for the first quarter of 2014 compared to $0.5 million for the first quarter of 2013, related to our portfolio realignment efforts, as further discussed in Note 5 to the condensed consolidated financial statements.    

 

Impairment of Assets Held for Sale

During the first quarter of 2013, we recorded an impairment charge of $4.7 million to adjust certain sourcing and supply chain assets held for sale to their estimated fair value, as further discussed in Note 5 to the condensed consolidated financial statements.  There was no corresponding charge during the first quarter of 2014.

 

Operating Earnings 

Operating earnings increased $7.7 million, or 37.1%, to $28.7 million for the first quarter of 2014, compared to $21.0 million for the first quarter of 2013, driven by higher net sales and a decrease in impairment of assets held for sale and restructuring and other special charges, net, as described above.  As a percentage of net sales, operating earnings improved to 4.9% for the first quarter of 2014, compared to 3.6% for the first quarter of 2013.

 

Interest Expense 

Interest expense decreased $0.5 million, or 7.3%, to $5.3 million for the first quarter of 2014, compared to $5.8 million for the first quarter of 2013, primarily reflecting lower average borrowings under our revolving credit agreement. 

 

Income Tax Provision 

Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate from continuing operations was 34.1%  for the first quarter of 2014, compared to our first quarter of 2013 rate of 51.9%. The effective tax rate was higher in the first quarter of 2013 due to the non-deductible nature of the $4.7 million impairment charge discussed above. 

 

Net Earnings from Continuing Operations 

We reported net earnings from continuing operations of $15.5 million in the first quarter of 2014, compared to $7.3 million in the first quarter of 2013, as a result of the factors described above. 

 

Net Loss from Discontinued Operations 

We reported net loss from discontinued operations of $18.2 million in the first quarter of 2013, with no corresponding net loss during the first quarter of 2014. The net loss in 2013 was primarily attributable to a non-cash impairment charge related to the sale of our Avia and Nevados brands of $12.6 million during the first quarter of 2013, reflecting the estimated fair value of those assets, which were subsequently sold during the second quarter of 2013.  The net loss was also attributable to losses from our Vera Wang and Etienne Aigner brands which were classified as discontinued operations in the first quarter of 2013, partially offset by earnings from ASG as further described in Note 3 to the condensed consolidated financial statements. 

 

Net Earnings (Loss) Attributable to Brown Shoe Company, Inc. 

We reported net earnings attributable to Brown Shoe Company, Inc. of $15.4 million during the first quarter of 2014,  compared to a net loss of $10.8 million during the first quarter of 2013, as a result of the factors described above.  

 

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Net Sales 

Net sales increased $2.3 million, or 0.7%, to $354.6 million for the first quarter of 2014, compared to $352.3 million for the first quarter of 2013. Same-store sales, including e-commerce, increased 1.3% during the first quarter of 2014.   Despite an overall decline in customer traffic impacted by the cold weather during the first two months of the quarter, Famous Footwear reported an improved customer conversion rate, higher average unit retail prices, and an increase in pairs per transaction. We experienced sales growth in  canvas styles, women’s boots, athletics, and accessories.  During the first quarter of 2014, we opened 11 new stores and closed 21 stores, resulting in 1,034 stores and total square footage of 7.0 million at the end of the first quarter of 2014, compared to 1,054 stores and total square footage of 7.2 million at the end of the first quarter of 2013. Sales per square foot, excluding e-commerce, increased 3.7% to $49 in the first quarter of 2014, compared to $48 in the first quarter of last year.  On a trailing twelve month basis, sales per square foot, excluding e-commerce, increased 4.0% to $209 for the twelve months ended May 3, 2014, compared to $201 for the twelve months ended May 4, 2013.  Members of our customer loyalty program, Rewards, continue to account for a majority of the segment’s sales, with approximately 72% of our net sales made to members of our Rewards program in the first quarter of 2014,  compared to approximately 68% in the first quarter of 2013. 

 

Gross Profit 

Gross profit increased $3.1 million, or 2.0%, to $161.8 million for the first quarter of 2014, compared to $158.7 million for the first quarter of 2013, due primarily to the growth in net sales. As a percentage of net sales, our gross profit was 45.6% for the first quarter of 2014, compared to the gross profit rate of 45.0% for the first quarter of 2013.  The increase in our gross profit rate was primarily driven by lower inventory markdowns and lower product costs.

 

Selling and Administrative Expenses 

Selling and administrative expenses increased $4.2 million, or 3.3%, to $133.9 million for the first quarter of 2014, compared to $129.7 million for the first quarter of 2013.  The increase was primarily attributable to higher marketing expenses, store rent and depreciation expenses, and variable store employee compensation.  As a percentage of net sales, selling and administrative expenses increased to 37.7% for the first quarter of 2014, compared to 36.8% for the first quarter of 2013. 

 

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Operating Earnings  

Operating earnings decreased $1.1 million, or 4.0%, to $27.9 million for the first quarter of 2014, compared to $29.0 million for the first quarter of 2013. The decrease was due to higher selling and administrative expenses, partially offset by higher net sales and gross profit rate, as described above. As a percentage of net sales, operating earnings decreased to 7.9% for the first quarter of 2014, compared to 8.2% for the first quarter of 2013. 

 

 

Net Sales 

Net sales increased $10.2 million, or 5.6%, to $191.8 million for the first quarter of 2014, compared to $181.6 million for the first quarter of 2013. The increase reflects strength in many of our brands including Vince, Via Spiga, Franco Sarto, and Sam Edelman, partially offset by a decrease in our Carlos Santana brand.   Our Vince brand has experienced strong growth since it launched in the fall of 2012.  The Via Spiga brand has experienced a strong turnaround as the new spring product resonated well with consumers. Our unfilled order position increased $53.7 million, or 17.1%, from $314.9 million as of May 4, 2013 to $368.6 million as of May 3, 2014 primarily due to growth in our Sam Edelman, Franco Sarto, Naturalizer, and Vince brands.

 

Gross Profit 

Gross profit increased $4.2 million, or 7.3%, to $62.0 million for the first quarter of 2014, compared to $57.8 million for the first quarter of 2013, reflecting the increase in net sales volume. As a percentage of net sales, our gross profit increased to 32.3% for the first quarter of 2014 from 31.8% for the first quarter of 2013.  The increase in our Wholesale Operations gross profit rate was driven by margin improvement from several of our wholesale brands as well as lower royalty expense due to the acquisition of the Franco Sarto trademarks, as discussed above, partially offset by the reduced gross profit impact from lower sales of our wholesale brands through our retail divisions in the first quarter of 2014.

 

Selling and Administrative Expenses 

Selling and administrative expenses decreased $1.3 million, or 2.6%, to $48.2 million for the first quarter of 2014, compared to $49.5 million for the first quarter of 2013, driven in part by lower warehouse expenses during the quarter. As a percentage of net sales, selling and administrative expenses decreased to 25.1% for the first quarter of 2014, compared to 27.3% for the first quarter of 2013, reflecting better leveraging of our expense base over higher net sales. 

 

Restructuring and Other Special Charges, Net 

We incurred no restructuring and other special charges during the first quarter of 2014, compared to $0.5 million during the first quarter of 2013. Our portfolio realignment efforts included the exit of certain brands, the sale and closure of sourcing and supply chain assets, and other changes to our infrastructure, as further discussed in Note 5 to the condensed consolidated financial statements. 

 

Impairment of Assets Held for Sale

During the first quarter of 2013, we recorded an impairment charge of $4.7 million to adjust certain sourcing and supply chain assets held for sale to their estimated fair value, as further discussed in Note 5 to the condensed consolidated financial statements.  There was no corresponding charge during the first quarter of 2014.

 

Operating Earnings 

Operating earnings increased $10.7 million to $13.8 million for the first quarter of 2014, compared to $3.1 million for the first quarter of 2013. The increase was primarily driven by higher net sales and gross profit rate and decreases in impairment of assets held for sale

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and restructuring and other special charges. As a percentage of net sales, operating earnings increased to 7.2% for the first quarter of 2014, compared to 1.7% in the first quarter of 2013. 

 

 

 

Net Sales 

Net sales decreased $10.0 million, or 18.3%, to $44.8 million for the first quarter of 2014, compared to $54.8 million for the first quarter of 2013. The decrease in net sales reflects a lower store count due in part to the transfer of our China retail operations to C. banner International Holdings Limited as further discussed in Note 14 to the condensed consolidated financial statements, a $3.6 million decrease in net sales at our e-commerce subsidiary, a decrease in same-store sales of 5.6%, and a lower Canadian dollar exchange rate. We opened one new retail store and closed eight stores during the first quarter of 2014, resulting in a total of 172 stores and total square footage of 0.3 million at the end of the first quarter of 2014, compared to 215 stores (including 25 Naturalizer stores in China) and total square footage of 0.3 million at the end of the first quarter of 2013.  During 2013, all Naturalizer stores in China were either closed or transferred to our joint venture partner.  Sales per square foot, excluding e-commerce, was $84 for the first quarter of 2014, compared to $91 for the first quarter of 2013.   On a trailing twelve month basis, sales per square foot, excluding e-commerce, decreased 1.7% to $391 for the twelve months ended May 3, 2014 compared to $397 for the twelve months ended May 4, 2013.

  

Gross Profit 

Gross profit decreased $5.0 million, or 21.2%, to $18.5 million for the first quarter of 2014, compared to $23.5 million for the first quarter of 2013, driven by the decrease in net sales and a lower gross profit rate. As a percentage of net sales, our gross profit decreased to 41.4% for the first quarter of 2014 from 43.0% for the first quarter of 2013. The decrease in our gross profit rate was driven primarily by higher inventory markdowns and an unfavorable mix of lower margin product.

 

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Selling and Administrative Expenses 

Selling and administrative expenses decreased $2.6 million, or 10.6%, to $22.2 million for the first quarter of 2014, compared to $24.8 million for the first quarter of 2013,  reflecting lower facility and employee expenses as a result of our lower store count. As a percentage of net sales, selling and administrative expenses increased to 49.6% for the first quarter of 2014 from 45.4% for the first quarter of 2013, reflecting the de-leveraging of the expense base over lower net sales. 

 

Operating Loss

Specialty Retail reported an operating loss of $3.7 million for the first quarter of 2014, compared to an operating loss of $1.3 million for the first quarter of 2013.  The increase in our operating loss was primarily driven by lower net sales, partially offset by lower selling and administrative expenses, as discussed above. 

 

 

 

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $9.2 million for the first quarter of 2014, compared to costs of $9.9 million for the first quarter of 2013.

 

 

 

Borrowings 

 

 

Total debt obligations decreased $65.8 million to $199.1 million at May 3, 2014, compared to $264.9 million at May 4, 2013, and decreased $6.9 million from $206.0 million at February 1, 2014 due to lower borrowings under our revolving credit agreement, resulting from our strong cash provided by operating activities over the respective periods, partially offset by the $65 million acquisition of the Franco Sarto trademarks in the first quarter of 2014. As a result of the lower average borrowings under our revolving credit agreement, interest expense for the first quarter of 2014 decreased $0.5 million to $5.3 million, compared to $5.8 million for the first quarter of 2013.

 

Credit Agreement 

On January 7, 2011, Brown Shoe Company, Inc. and certain of our subsidiaries (the “Loan Parties”) entered into a Third Amended and Restated Credit Agreement, which was further amended on February 17, 2011 (as so amended, the “Credit Agreement”). The Credit Agreement matures on January 7, 2016 and provides for a revolving credit facility in an aggregate amount of up to $530.0 million, subject to the calculated borrowing base restrictions, and provides for an increase at our option of up to $150.0 million from time to time during the term of the Credit Agreement (the “general purpose accordion feature”) subject to satisfaction of certain conditions and the willingness of existing or new lenders to assume the increase. 

 

Borrowing availability under the Credit Agreement is limited to the lesser of the total commitments and the borrowing base, which is based on stated percentages of the sum of eligible accounts receivable and inventory, as defined, less applicable reserves. Under the Credit Agreement, the Loan Parties’ obligations are secured by a first-priority security interest in all accounts receivable, inventory, and certain other collateral. 

 

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit. 

  

The Credit Agreement limits our ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 15.0% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over our cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days. 

  

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The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect and a change of control event. In addition, if the excess availability falls below the greater of (i) 12.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, we would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. We were in compliance with all covenants and restrictions under the Credit Agreement as of May 3, 2014 in all material respects. 

 

At May 3, 2014, we had no borrowings outstanding and $6.4 million in letters of credit outstanding under the Credit Agreement. Total borrowing availability was $491.5 million at May 3, 2014.  While we had no borrowings outstanding under the Credit Agreement as of May 3, 2014, we anticipate using the facility as we purchase inventory for our fall selling season.

 

$200 Million Senior Notes Due 2019 

On May 11, 2011, we issued $200.0 million aggregate principal amount of 7.125% Senior Notes due 2019 (the “2019 Senior Notes”). We used a portion of the net proceeds to call and redeem the outstanding 8.75% senior notes due in 2012. We used the remaining net proceeds for general corporate purposes, including repaying amounts outstanding under the Credit Agreement. 

 

The 2019 Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under the Credit Agreement. Interest on the 2019 Senior Notes is payable on May 15 and November 15 of each year. The 2019 Senior Notes mature on May 15, 2019. Prior to May 15, 2014, we had the option to redeem some or all of the 2019 Senior Notes at a redemption price equal to the sum of the principal amount of the 2019 Senior Notes to be redeemed, plus accrued and unpaid interest, plus a “make whole” premium.  Effective May 15, 2014, we may redeem all or a part of the 2019 Senior Notes at the redemption prices (expressed as a percentage of principal amount) set forth below plus accrued and unpaid interest, if redeemed during the 12-month period beginning on May 15 of the years indicated below:

 

 

The 2019 Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions, and sales of assets. As of May 3, 2014, we were in compliance with all covenants and restrictions relating to the 2019 Senior Notes in all material respects.

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Working Capital and Cash Flow

 

 

Reasons for the major variances in cash provided (used) in the table above are as follows: 

 

Cash provided by operating activities was $10.5 million higher in the first quarter of 2014 as compared to the first quarter of 2013, reflecting the following factors: 

 

 

Cash used for investing activities was $66.8 million higher for the first quarter of 2014, as compared to the comparable period in 2013 due to the $65 million acquisition of the Franco Sarto trademarks and a $1.5 million decrease in net proceeds from the sale of subsidiaries. We expect purchases of property and equipment and capitalized software of approximately $53 million to $57 million in 2014. 

 

Cash used for financing activities was $33.0 million lower for the first quarter of 2014 as compared to the comparable period in 2013 primarily due to lower net repayments under our Credit Agreement, as our borrowings under the Credit Agreement were reduced more significantly during the first quarter of 2013.

 

A summary of key financial data and ratios at the dates indicated is as follows: 

 

 

 

Working capital at May 3, 2014, was $355.7 million, which was $50.0 million lower than at February 1, 2014 and $28.6 million higher than at May 4, 2013. Our current ratio was 2.05 to 1 as of May 3, 2014, consistent with February 1, 2014, and 1.83 to 1 at May 4, 2013. The improvement in the current ratio from May 4, 2013 to May 3, 2014 was driven by our cash provided by operating activities and lower borrowings under our revolving credit agreement. Our debt-to-capital ratio was 28.8% as of May 3, 2014, compared to 30.1% as of February 1, 2014 and 39.1% as of May 4, 2013. The decrease in our debt-to-capital ratio from February 1, 2014 and May 4, 2013 is primarily due to lower borrowings under our revolving credit agreement.

 

At May 3, 2014, we had $36.7 million of cash and cash equivalents, substantially all of which represents cash and cash equivalents of our foreign subsidiaries. In accordance with Internal Revenue Service guidelines limiting the length of time that our parent company

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can borrow funds from foreign subsidiaries, Brown Shoe Company, Inc. utilizes the cash and cash equivalents of its foreign subsidiaries to manage the liquidity needs of the consolidated company and minimize interest expense on a consolidated basis.  

 

As further discussed in Note 7 to the condensed consolidated financial statements, on February 3, 2014, we purchased the Franco Sarto trademarks for $65.0 million.

 

We declared and paid dividends of $0.07 per share in both the first quarter of 2014 and the first quarter of 2013. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions, and other factors deemed relevant by our Board of Directors; however, we presently expect that dividends will continue to be paid. 

 

 

 

Our contractual obligations primarily consist of purchase obligations, operating lease commitments, long-term debt, interest on long-term debt, minimum license commitments,  borrowings under our revolving credit agreement, obligations for our supplemental executive retirement plan and other postretirement benefits, and obligations related to our restructuring initiatives.  

 

Except for changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, borrowings under and repayments of our revolving credit agreement and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to our contractual obligations identified in our Annual Report on Form 10-K for the year ended February 1, 2014.   

 

 

 

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. The adoption of new accounting pronouncements is described in Note 2 to the condensed consolidated financial statements. For further information, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended February 1, 2014. 

 

 

 

Recently issued accounting pronouncements and their impact on the Company are described in Note 2 to the condensed consolidated financial statements. 

 

 

This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) rapidly changing fashion trends and purchasing patterns; (iii) intense competition within the footwear industry; (iv) the ability to accurately forecast sales and manage inventory levels; (v) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China, where Brown Shoe Company relies heavily on manufacturing facilities for a significant amount of their inventory; (vi) cybersecurity threats or other major disruption to the Company’s information technology systems; (vii) customer concentration and increased consolidation in the retail industry; (viii) a disruption in the Company’s distribution centers; (ix) foreign currency fluctuations; (x) additional duties, quotas, tariffs or other trade restrictions; (xi) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues;  (xii) the ability to recruit and retain senior management and other key associates; (xiii) the ability to attract, retain, and maintain good relationships with licensors and protect intellectual property rights; (xiv) the ability to secure/exit leases on favorable terms; and (xv) the ability to maintain relationships with current suppliers. The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended February 1, 2014, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

 

 

 

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended February 1, 2014.  

 

 

 

Evaluation of Disclosure Controls and Procedures 

It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls, and internal control reviews by our internal auditors. 

 

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of May 3, 2014, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level. 

 

There were no significant changes to internal control over financial reporting during the quarter ended May 3, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  

 

 

 

 

 

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred. 

 

Information regarding Legal Proceedings is set forth within Note 15 to the condensed consolidated financial statements and incorporated by reference herein. 

 

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No material changes have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended February 1, 2014. 

 

 

 

The following table provides information relating to our repurchases of common stock during the first quarter of 2014:

 

 

 

 

 

 

None. 

 

 

 

Not applicable. 

 

 

 

None. 

 

 

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† Denotes exhibit is filed with this Form 10-Q. 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

 

 

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