UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended January 31, 2009
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OR
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to
______________
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Commission
file number 1-2191
BROWN
SHOE COMPANY, INC.
(Exact
name of registrant as specified in its charter)
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New
York
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43-0197190
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification Number)
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8300
Maryland Avenue
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63105
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St.
Louis, Missouri
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(Zip
Code)
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(Address
of principal executive offices)
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(314)
854-4000
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock — par value $0.01 per share
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New
York Stock Exchange
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Chicago
Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
R
No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
£
No
R
Indicate
by checkmark 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
R
No
£
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
£
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer R | Accelerated filer £ | Non-accelerated filer £ | Smaller reporting company £ |
| Do not check if a smaller reporting company) | |||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
£
No
R
The
aggregate market value of the stock held by non-affiliates of the registrant as
of August 2, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $685.3 million.
As of
March 20, 2009, 41,570,018 common shares were outstanding.
Documents
Incorporated by Reference
Portions
of the proxy statement for the annual meeting of shareholders to be held May 28,
2009, are incorporated by reference into Part III.
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INDEX
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PART
I
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Page
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3
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12
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17
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17
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18
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18
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PART
II
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19
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21
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22
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44
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44
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44
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||
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45
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||
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46
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47
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48
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49
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50
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51
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89
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||
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90
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90
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90
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90
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90
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PART
III
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91
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91
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91
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92
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92
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PART
IV
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93
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PART
I
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BUSINESS
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Brown
Shoe Company, Inc., founded in 1878 and incorporated in 1913, operates in the
footwear industry. Current activities include the operation of retail shoe
stores and e-commerce websites as well as the sourcing and marketing of footwear
for women, men and children. Our business is seasonal in nature due to consumer
spending patterns, with higher back-to-school and Easter and Christmas holiday
season sales. Traditionally, the third fiscal quarter accounts for a substantial
portion of our earnings for the year.
During
2008, categories of our consolidated footwear sales were approximately 62%
women’s, 26% men’s and 12% children’s. This composition has remained relatively
constant over the past few years. Approximately 69% of 2008 footwear sales
represented retail sales, including sales through our e-commerce websites,
compared to 67% in 2007 and 62% in 2006, with the remaining 31%, 33% and 38% in
the respective years representing wholesale sales. See Note 8 to the
consolidated financial statements for additional information regarding our
business segments and financial information by geographic area.
We had
approximately 12,400 full-time and part-time employees as of January 31, 2009.
We employed approximately 80 employees engaged in the warehousing of footwear in
the United States under a union contract, which expires in June 2010. In Canada,
we employed approximately 20 warehousing employees under a union contract, which
expires in October 2010.
Unless
the context otherwise requires, “we”, “us”, “our”, “the Company” or “Brown Shoe”
refers to Brown Shoe Company, Inc. and its subsidiaries.
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RETAIL
OPERATIONS
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Our
retail operations at January 31, 2009 included 1,444 retail shoe stores in the
United States, Canada, China and Guam. The number of our retail footwear stores
at the end of each of the last three fiscal years was as follows:
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2008
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2007
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2006
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||
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Famous
Footwear
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Family
footwear stores that feature a wide selection of brand-name, value-priced
footwear; located in shopping centers, outlet malls and regional malls in
the United States and Guam; primarily includes stores operated under the
Famous Footwear and Factory Brand Shoes names
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1,138
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1,074
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999
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Specialty
Retail
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||||
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Stores
selling women's footwear, primarily Naturalizer, located mostly in
regional malls, shopping centers, outlet malls and premier street
locations in the United States, Canada and China (through our
majority-owned subsidiary, B&H Footwear Limited); includes stores
operated under the Naturalizer, Brown Shoe Closet, F.X. LaSalle, Franco
Sarto and Via Spiga names
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306
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284
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290
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Total
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1,444
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1,358
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1,289
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With many
organizations operating retail shoe stores and departments, we compete in a
highly fragmented market. Competitors include local, regional and national shoe
store chains, department stores, discount stores, mass merchandisers, numerous
independent retail operators of various sizes and internet retailers. Quality of
products and services, store location, merchandise selection and availability of
brands, pricing, advertising and customer service are all factors that impact
retail competition.
Famous
Footwear
Famous
Footwear, with 1,138 stores at the end of 2008 and net sales of $1.320 billion
in 2008, is America’s largest footwear chain selling branded value-priced
footwear for the entire family, based on the number of stores it operates and
sales volume compiled by the Company from published information of its direct
competitors. Its target customers are women who buy brand-name fashionable shoes
at value prices for themselves and their families. In addition to our retail
footwear stores, we operate a FamousFootwear.com site as a Famous Footwear
e-tailing store.
Famous
Footwear stores feature a wide selection of value-priced brand-name, athletic,
casual and dress shoes for the entire family. Brands carried include, among
others, Nike, Skechers, New Balance, DC, adidas, Converse, Dr. Scholl’s, Steve
Madden, Naturalizer, LifeStride, Mudd, K-Swiss, Puma, Connie, Aerosoles, Vans,
Timberland, Buster Brown, Rockport and Reebok. We work closely with our vendors
to provide our customers with fresh product and, in some cases, product
exclusively designed for and available only in our stores. Retail price points
typically range from $27 for shoes to $79 for boots.
Famous
Footwear sells various Company owned and licensed products. Such products are
sold to Famous Footwear by our Wholesale Operations segment at a profit and
represent approximately 15% of Famous Footwear net sales.
Famous
Footwear stores are located in strip shopping centers, as well as outlet and
regional malls in all 50 states and Guam. The breakdown by venue is as follows
at the end of each of the last three fiscal years:
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2008
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2007
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2006
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Strip
centers
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759
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694
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610
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Outlet
malls
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197
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193
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197
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Regional
malls
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182
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187
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192
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Total
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1,138
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1,074
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999
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The
stores open at the end of 2008 and 2007 averaged approximately 7,000 square
feet. Total square footage at the end of 2008 increased 5.8% to 7.9 million
square feet compared to the end of 2007. We currently intend to open
approximately 55 stores and close approximately 35 stores in 2009, which
includes the relocation of 10 stores. New stores typically experience an initial
start-up period characterized by lower sales and operating earnings than what is
generally achieved by more mature stores or the division as a whole. While the
duration of this start-up period may vary by type of store, economic environment
and geographic location, new stores typically reach a normal level of
profitability within approximately four years.
Sales per
square foot were $168 in 2008, which was down 7.0% from $180 in 2007,
principally as a result of our same-store sales decrease of 4.7% and lower sales
per square foot in our newer stores compared to our mature stores. Same-store
sales changes are calculated by comparing the sales in stores that have been
open at least 13 months.
Famous
Footwear relies on merchandise allocation systems and processes that utilize
allocation criteria, customer segmentation and inventory data in an effort to
ensure stores are adequately stocked with products and to differentiate the
needs of each store based on location, customer segmentation and other factors.
With two distribution centers, located in Sun Prairie, Wisconsin and Lebanon,
Tennessee, Famous Footwear’s distribution systems allow for merchandise to be
delivered to each store weekly or on a more frequent basis. Famous Footwear also
utilizes third-party-owned regional pooled distribution sites across the
country. During 2008, we entered into an operating lease for a new west coast
distribution center for our retail operations. We believe this distribution
center, which is currently under construction and is expected to be operational
in time for our back-to-school season in 2009, will provide us with increased
operating and freight efficiencies. Famous Footwear’s in-store point-of-sale
systems provide detailed sales transaction data to the corporate offices in St.
Louis, Missouri for daily analysis and update of the perpetual inventory and
product allocation systems. These systems also are used for training employees
and communicating between the stores and the main office.
Famous
Footwear’s marketing programs include radio and television advertising,
newspaper, database marketing and in-store signage, all of which are designed to
further develop and reinforce the Famous Footwear concept with the consumer.
Marketing and advertising programs are tailored on a region-by-region basis to
reach target customers. We execute certain advertising campaigns to correspond
to regional differences such as the important back-to-school season, which
begins at various times throughout the country. In 2008, we spent approximately
$48 million to advertise and market Famous Footwear to our target customer and
her family, a portion of which is recovered from suppliers. In addition, Famous
Footwear has a customer loyalty program (“Rewards”), which targets and rewards
frequent customers with product discounts and previews as well as other
promotions. In 2008, more than half of our Famous Footwear net sales were
generated by our Rewards members.
Specialty
Retail
Our
Specialty Retail segment, composed of 306 stores, includes the following retail
concepts and our Shoes.com and other e-commerce businesses, with the exception
of FamousFootwear.com, which is included in Famous Footwear.
Naturalizer
The
Naturalizer retail stores are complementary to and a showcase for our
Naturalizer brand of women’s shoes. These stores are designed and merchandised
to appeal to the Naturalizer customer, who is style and comfort-conscious and
who seeks quality and value in her footwear selections. The Naturalizer stores
offer a selection of women’s footwear styles, including casual, dress, sandals
and boots, primarily under the Naturalizer brand. Retail price points typically
range from $59 for shoes to $169 for boots.
At the end of 2008, we operated 134 Naturalizer stores in the United States and 118 stores in Canada. Of the total 252 stores, approximately 66% are located in regional malls, with a few stores having street locations, and average approximately 1,200 square feet in size. The other 34% of stores are located in outlet malls and average approximately 2,500 square feet in size. Total square footage at the end of 2008 was 411,000 compared to 412,000 in 2007. In 2008, we opened seven stores and closed eight in the United States and Canada, primarily in regional malls. In 2007, we closed a total of 20 Naturalizer stores while opening nine. We currently plan to open five Naturalizer stores and close ten stores in 2009, which includes the relocation of one store.
At the
end of 2008, through our majority-owned subsidiary, B&H Footwear Limited
(“B&H Footwear”), we also operated 19 stores in several of China’s largest
cities. We currently plan to open approximately nine stores in China in 2009. In
addition, our joint venture partner, Hongguo International Holdings Limited
(“Hongguo”), operated 43 stores at the end of 2008 and plans to open
approximately 20 stores in 2009. Naturalizer footwear is distributed through
these stores operated by B&H Footwear and Hongguo. See Note 2 to the
consolidated financial statements for additional information about B&H
Footwear Limited.
Marketing
programs for the Naturalizer stores have complemented our Naturalizer brand
advertising, building on the brand’s consumer recognition and reinforcing the
brand’s focus on effortless style, comfort and quality. Naturalizer utilizes a
database-marketing program, which targets frequent customers through catalogs
and other mailings that display the brand’s product offerings. Customers can
purchase the product in these catalogs from our stores, via the internet at
Naturalizer.com or by telephone through our Consumer Services call
center.
Other
Store Concepts
Our
Specialty Retail segment also includes other store concepts that sell other
premium brands. These include retail stores operated under the Brown Shoe
Closet, F.X. LaSalle, Franco Sarto and Via Spiga names.
At the
end of 2008, we operated 17 Brown Shoe Closet retail stores located in United
States outlet malls, averaging 2,200 square feet. These multi-branded outlet
stores carry Brown Shoe better brands, including Etienne Aigner, Franco Sarto,
Carlos by Carlos Santana, Nickels Soft and Natural Sport, with price points
ranging from $49 to $89 for shoes and up to $130 for boots. We currently plan to
open one new Brown Shoe Closet store and close two stores in 2009.
At the
end of 2008, we operated 15 F.X. LaSalle retail stores, primarily in the
Montreal, Canada market, that sell better-grade women’s and men’s branded and
private-label footwear. This footwear, partially imported from Italy, retails at
Canadian dollar price points ranging from $100 to $250 per pair. These stores
average approximately 2,200 square feet. We plan to close one F.X. LaSalle store
in 2009.
At the
end of 2008, we operated two Franco Sarto concept stores, one in San Francisco,
California and one near Chicago, Illinois. The store sells primarily Franco
Sarto product, including various accessories, at price points ranging from $69
for shoes to $199 for boots.
At the
end of 2008, we operated one Via Spiga concept store in Manhattan’s Soho
neighborhood in New York City, New York. The store sells primarily Via Spiga
product, including women’s footwear and accessories and men’s footwear with
footwear price points ranging from $175 for shoes to $425 for
boots.
E-Commerce
We own
Shoes.com, Inc., a pure play internet e-tailing company. Shoes.com offers a
diverse selection of footwear and accessories to women, men and children that
includes Company-branded and licensed footwear as well as footwear purchased
from outside suppliers and certain merchandise sold in Famous Footwear
stores.
We also
operate FamousFootwear.com and Naturalizer.com, which offer substantially the
same product selection to consumers as sold in their respective domestic retail
stores. Additional sites such as ShoeSteal.com, ViaSpiga.com, FrancoSarto.com,
DrSchollsShoes.com, LifeStride.com, CarlosShoes.com and SkateStyles.com function
as retail outlets for the online consumer and serve as additional brand-building
vehicles for the Company.
These
e-commerce sites utilize our information systems and distribution network,
although most of our orders are dispersed through the distribution network of
third-party providers. Information on these sites does not constitute part of
this report.
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WHOLESALE
OPERATIONS
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Our
Wholesale Operations segment designs, sources and markets branded and nonbranded
casual, dress and athletic footwear for women, men and children at a variety of
price points through two operating units, the Authority Alliance and Partnership
Alliance. Our Authority Alliance primarily includes sales of the Naturalizer,
Franco Sarto, Etienne Aigner, Via Spiga, Nickels Soft and Sam Edelman brands.
Our Partnership Alliance primarily includes sales of our Dr. Scholl’s,
Children’s and Specialty Athletic, private label, LifeStride, Carlos by Carlos
Santana and Fergie/Fergalicious by Fergie brands. Certain of our branded
footwear products are developed pursuant to licensing agreements. Our footwear
is distributed to over 2,000 retailers, including mass merchandisers, national
chains, department stores, independent retailers, catalogs and online retailers
throughout the United States and Canada as well as approximately 35 other
countries. The most significant wholesale customers include many of the nation’s
largest retailers, including mass merchandisers such as Wal-Mart, Target and
Collective Brands (including Payless ShoeSource); national chains such as Retail
Ventures (including DSW), TJX Corporation, Ross Stores and Kohl’s; and
department stores such as Macy’s, Bon-Ton, Dillard’s, Belk, Nordstrom and Lord
and Taylor. The loss of any one or more of our significant customers could have
a material adverse effect on our Wholesale Operations. We also sell product to a
variety of international retail customers and distributors. The vast majority of
our wholesale customers also sell shoes purchased from competing footwear
suppliers. Those competing footwear suppliers own and license brands, many of
which are well known and marketed aggressively. Moreover, many of our wholesale
customers are increasing the amount of products that carry private brand names
that they source directly from factories or through agents. In 2008, Wholesale
Operations sold its customers approximately 64 million pairs of
shoes.
Our sales
force solicits wholesale orders for shoes and is generally responsible for
managing our relationships with wholesale customers. We generally accept orders
as a result of these sales efforts before the shoes are sourced, with delivery
generally within three to four months thereafter. We sell footwear to wholesale
customers on both a first-cost and landed basis. First-cost sales are those in
which we obtain title to footwear from our overseas suppliers and typically
relinquish title to customers at a designated overseas port. Many of these
customers then import this product into the United States. Landed sales are
those in which we obtain title to the footwear from our overseas suppliers and
maintain title until the footwear clears United States customs and is shipped to
our wholesale customers. Landed sales generally carry a higher margin rate than
first-cost sales as a result of the brand equity associated with the branded
product along with the additional warehousing and logistics services provided to
customers and the risks associated with inventory ownership. We carry
inventories of certain high-volume styles, particularly in the Naturalizer,
Franco Sarto, LifeStride, Via Spiga, Etienne Aigner, Carlos by Carlos Santana
and Dr. Scholl’s lines, to allow prompt shipment on reorders.
Portfolio
of Brands
Our
Wholesale Operations segment offers retailers a portfolio of brands, each
targeted to a specific customer segment within the marketplace. Our brands are
differentiated by style point of view, design level, material costs and quality,
consumer-focused marketing and price points. We own approximately half of our
major brands and license other brands through short-term and long-term
agreements. Products sold under license agreements accounted for Wholesale
Operations’ sales of approximately 49% in 2008, 45% in 2007 and 44% in
2006.
Naturalizer:
Introduced
in 1927, Naturalizer is one of the nation’s leading women’s footwear brands
offering effortless style with uncompromising comfort and fit for our consumer.
Naturalizer footwear is sold primarily in department stores, national chains and
our Naturalizer and Famous Footwear retail stores. Naturalizer’s
Beautiful feels so good
TM
positioning is based on delivering footwear that helps women feel naturally
beautiful and comfortable everyday. In 2008, Naturalizer introduced the
N5 Comfort Elements
TM
,
which consists of five specific design features in our Naturalizer shoes that
deliver the all day comfort our consumer desires. Suggested retail price points
range from $59 for shoes to $169 for boots. The brand holds the No. 1 market
share position in the
moderate
zone within the
women’s fashion footwear category for U.S. department stores, national chains,
shoe chains and athletic specialty chains combined, as reported by the NPD
Group/NPD Fashionworld Point-of-Sale (hereafter “NPD Group, Inc.”) at the end of
2008. NPD Group, Inc. reports statistical data obtained from retailers, but NPD
Group, Inc. does not guarantee the accuracy and completeness of its information.
All retail shoe outlets have not been surveyed, but we believe that the
principal retailers have been included. Although we have not independently
verified its data, we believe NPD Group, Inc. data to be generally
reliable.
Franco Sarto
:
The Franco Sarto brand has a loyal,
career-focused consumer who is as passionate about the brand’s Italian-inspired
style, fit and quality as she is about the man behind the design. Franco Sarto’s
personal appearances in select retail venues generate lines of consumers anxious
to meet the designer himself. Through licensed relationships, Franco Sarto has
expanded its offering into other categories including handbags and eyewear. The
brand is sold in the
better
zone of major national chains, department stores and independent
retailers, at suggested retail price points from $79 for shoes to $199 for
boots. Franco Sarto ranked No. 3 in market share position in the
better
zone within the
women’s fashion footwear category for U.S. department stores, national chains,
shoe chains and athletic specialty chains combined, according to NPD Group, Inc.
at the end of 2008. Our license to sell Franco Sarto product is a long-term
agreement that expires in December 2012, with an extension option through
December 2019.
Etienne Aigner:
Etienne
Aigner, known for its timeless style and designer heritage, appeals to a target
customer who seeks classic footwear styling. It is sold in the
better
zone of national
chains, department stores and our Famous Footwear retail stores at price points
ranging from $69 for shoes to $179 for boots. Etienne Aigner holds the No. 9
market share position in the
better
zone within the
women’s fashion footwear category for U.S. department stores, national chains,
shoe chains and athletic specialty chains combined, according to NPD Group, Inc.
at the end of 2008.
The Etienne Aigner name
is licensed under an agreement that expires in December 2017, with an extension
option through December 2022.
Via Spiga:
Via
Spiga provides chic, sophisticated footwear for the cosmopolitan woman who wants
to make a fashion statement every day. The brand is sold in the
bridge/designer
zone in
premier department stores and upscale boutiques. Via Spiga designs fashion
footwear that is true to its Italian heritage with attention to detail and
quality. Through licensed relationships, Via Spiga has expanded its offering
into other categories including outerwear, men’s footwear, eyewear, handbags,
hosiery and belts, growing the brand’s reputation as a true fashion brand. This
brand sells at suggested retail price points from $175 for shoes to $425 for
boots. The brand holds the No. 6 market share position in the
bridge/designer
zone within
the women’s fashion footwear category for U.S. department stores, national
chains, shoe chains and athletic specialty chains combined, according to NPD
Group, Inc. at the end of 2008.
Sam Edelman:
In 2007, we
announced our agreement to invest in Edelman Shoe, Inc. Sam’s eponymous brand is
designed for women who radiate fashion, style and chic sophistication.
Innovative and fresh, his creations exude the energy of luxury shoes without the
high-end price tag. The brand is sold primarily through department stores and
independent retailers at suggested retail price points ranging from $79 for
sandals, flats and heels to $395 for boots. Sam Edelman holds the No. 7
market share position in the
bridge/designer
zone within
the women’s fashion footwear category for U.S. department stores, national
chains, shoe chains and athletic specialty chains combined, according to NPD
Group, Inc. at the end of 2008. Inspired by her own life experiences, Libby’s
namesake Libby Edelman brand translates
runway to reality
for women
whose passion for fashion blends seamlessly with their real lives as career
woman, wife and mother. Debuting in spring 2009 at Famous Footwear, Libby
Edelman price points range from $49 to $69 per pair.
Dr. Scholl’s:
We
have a long-term license agreement, which is renewable through 2014 for the
United States and Canada and 2009 for Latin America, to market the Dr. Scholl’s
brand of affordable casual, athletic, work and dress shoes for women, men and
children. This footwear features Dr. Scholl’s insole technology and is primarily
distributed through mass merchandisers and our Famous Footwear retail stores at
suggested retail price points of $20 for sandals to $100 for boots. We also sell
the
Original Dr.
Scholl’s
line of women’s fashion footwear under this license. Original
Dr. Scholl’s footwear offers
hip comfort
for the fashion
consumer with cool, casual styling and comfort technology. It is sold through
national chains, our Famous Footwear and Naturalizer retail stores and
department stores at suggested retail prices ranging from $39 for sandals to $69
for boots. Original Dr. Scholl’s holds the No. 11 market share position in the
comfort
zone within the
women’s fashion footwear category for U.S. department stores, national chains,
shoe chains and athletic specialty chains combined, according to NPD Group, Inc.
at the end of 2008.
Buster Brown:
As
our heritage children’s brand, Buster Brown was launched in 1904 and is sold
primarily through mass merchandisers and our Famous Footwear stores. We leverage
the strength and recognition of the Buster Brown name by marketing children’s
footwear under the Buster Brown & Co. umbrella. This product features
numerous popular characters from children’s movies and television shows,
including Fisher Price characters, Barbie, Disney characters and Nickelodeon
characters under license agreements. The terms of the license agreements vary.
We sell these products to mass merchandisers including Payless ShoeSource,
Wal-Mart and Target as well as our Famous Footwear retail stores. The Buster
Brown & Co. umbrella provides customers with the assurance that these
licensed products contain the quality that they are accustomed to receiving from
the Buster Brown brand.
LifeStride:
A
leading entry-level price point women’s brand, LifeStride footwear offers
feminine, fashionable styling at value pricing. The brand is sold in national
chains, department stores and our Famous Footwear retail stores. The LifeStride
target consumer seeks
great
fashion-at-a-price
. Suggested retail price points range from $49 for
sandals to $89 for boots. LifeStride ranked No. 3 in market share position in
the
moderate
zone
within the women’s fashion footwear category for U.S. department stores,
national chains, shoe chains and athletic specialty chains combined, according
to NPD Group, Inc. at the end of 2008.
Carlos by Carlos
Santana:
In 2001, we launched the Carlos by Carlos Santana
collection of women’s footwear to the
better
zone at major
department stores, national chains and our Famous Footwear and Naturalizer
retail stores. Marketed under a license agreement with legendary musician,
Carlos Santana, which runs through December 2011, with an extension option
through December 2016, this brand targets trend-conscious consumers with hot,
fashionable shoes inspired by the passion and energy of Santana’s music.
Suggested retail price points range from $79 for shoes to $199 for boots. Carlos
by Carlos Santana holds the No. 13 market share position in the
better
zone within the
women’s fashion footwear category for U.S. department stores, national chains,
shoe chains and athletic specialty chains combined, according to NPD Group, Inc.
at the end of 2008.
Fergie/Fergalicious by Fergie:
In 2008, we announced a collaboration with entertainment superstar
Fergie, a three-time Grammy Award winner with four number one singles, including
three from her six million-selling debut solo album
The Dutchess
. We have created
two namesake footwear lines to fully capture the multifaceted aspects of
Fergie's life as an award-winning singer, songwriter and actress. Fergie
footwear captures the multi-platinum artist's confident, individual style in a
line of sophisticated, sexy footwear with a glam rock influence. The brand will
launch in spring 2009 at better department stores, boutiques, independent
retailers and on-line at retail price points of $69 for sandals to $249 for
boots. Fergalicious by Fergie shoes have a fun, funky attitude inspired by her
pop rock persona. Fergalicious by Fergie will also launch in spring 2009 and
will be available at Famous Footwear, FamousFootwear.com and other national
chains at retail price points of $39 for sandals to $79 for boots.
Marketing
We
continue to build on the heritage and recognition of our wholesale brands to
create differentiation and consumer loyalty. Marketing teams are responsible for
the development and implementation of marketing programs for each brand, both
for us and for our retail partners. In 2008, we spent approximately $20 million
in advertising and marketing support, including cooperative advertising,
in-store promotions and events, consumer print advertising, public relations and
internet advertising with our wholesale customers. We continually focus on
enhancing the effectiveness of these marketing efforts through market research,
product development and marketing communications that collectively address the
ever-changing lives and needs of our consumers.
Backlog
At
January 31, 2009, our Wholesale Operations had a backlog of unfilled orders of
approximately $200 million compared to $238 million on February 2, 2008. Most
orders are for delivery within the next 90 to 120 days, and although orders are
subject to cancellation, we have not experienced significant cancellations in
the past. The backlog at any particular time is affected by a number of factors,
including seasonality, the continuing trend among customers to reduce the
lead-time on their orders and, in some cases, the timing of licensed product
movie releases. Accordingly, a comparison of backlog from period to period is
not necessarily meaningful and may not be indicative of eventual actual
shipments or the growth rate of sales from one period to the next.
Brands
and Licensed Products
The
following is a listing of our brands and licensed products:
|
Women’s
|
Men’s
and Athletic
|
Children’s
|
|
AirStep
|
Basswood
|
Barbie
(9)
|
|
Basswood
|
Big
Country
|
Backyardigans
(10)
|
|
Carlos
by Carlos Santana
(2)
|
Dr.
Scholl’s
(4)
|
Buster
Brown
|
|
Connie
|
Francois
Xavier Collection
|
Cars
(11)
|
|
Dr.
Scholl’s
(4)
|
F.X.
LaSalle
|
Disney
Standard Characters
(11)
|
|
EA
by Etienne Aigner
(5)
|
FX
|
Dr.
Scholl’s
(4)
|
|
Etienne
Aigner
(5)
|
Regal
|
Fergalicious
by Fergie
(1)
|
|
Eurosole
|
Studio
Via Spiga
|
Firstkiss
(7)
|
|
Eurostep
|
TX
Traction
|
Fisher
Price
(9)
|
|
Fanfares
|
Zodiac
American Original
|
Go
Diego Go
(8)
|
|
Firstkiss
(7)
|
Handy
Manny
(11)
|
|
|
Fergie
(1)
|
Polly
Pocket
(9)
|
|
|
Fergalicious
by Fergie
(1)
|
Power
Rangers
(11)
|
|
|
Franco
Sarto
(6)
|
That’s
So Raven
(11)
|
|
|
Francois
Xavier Collection
|
Toe
Zone
(12)
|
|
|
F.X.
LaSalle
|
Wall-E
(11)
|
|
|
FX
|
Winnie
The Pooh
(11)
|
|
|
Gretta
(3)
|
Zodiac
American Original
|
|
|
HOTKISS
(7)
|
||
|
Libby
Edelman
|
||
|
LifeStride
|
||
|
LS
Studio
|
||
|
Maserati
|
||
|
Natural
Soul
|
||
|
Naturalizer
|
||
|
Naturalizer
Sport
|
||
|
Natural
Sport
|
||
|
Nickels
|
||
|
Nickels
Soft
|
||
|
Opale
|
||
|
Original
Dr. Scholl’s
(4)
|
||
|
Paloma
|
||
|
Reba
McEntire
(13)
|
||
|
Sam
Edelman
|
||
|
Samuel
|
||
|
SE
Boutique
|
||
|
Signature
Naturalizer
|
||
|
Studio
Paulo
|
||
|
TX
Traction
|
||
|
Vera
Wang
(14)
|
||
|
Via
Spiga
|
||
|
V
Via Spiga
|
||
|
VS
|
||
|
VS
by Via Spiga
|
||
|
Zodiac
|
||
|
Zodiac
American Original
|
||
|
Zodiac
USA
|
||
As
denoted, these brands are used with permission from and, in most cases, are
registered trademarks of:
|
(1)
Krystal Ball Entertainment, Inc.
|
(8)
MTV Networks
|
|
|
(2)
Cadestanza LLC
|
(9)
Mattel, Inc.
|
|
|
(3)
Gretta Enterprises, Inc.
|
(10)
Nelvana, Inc.
|
|
|
(4)
Schering-Plough Healthcare Products, Inc.
|
(11)
Disney Enterprises, Inc. (license expired on March 31,
2009)
|
|
|
(5)
Etienne Aigner, Inc.
|
(12)
Sole Concepts, Inc.
|
|
|
(6)
Fashion Shoe Licensing LLC
|
(13)
RebaWear LLC
|
|
|
(7)
Hot Kiss, Inc.
|
(14)
Vera Wang Licensing LLC
|
All other
brands are owned by and, in most cases, are registered trademarks of Brown Shoe
Company, Inc. or its consolidated subsidiaries.
Brown
Shoe Sourcing Operations
Brown
Shoe Sourcing Operations source the majority of our footwear for our Wholesale
Operations and Specialty Retail segments and a portion of the footwear sold by
Famous Footwear. The sourcing operations, which in 2008 sourced 63 million pairs
of shoes, have developed a global sourcing capability through its relationships
with third-party independent footwear manufacturers. The majority of our
footwear sourced is provided by approximately 100 manufacturers. In certain
countries we utilize agents to facilitate and manage the development, production
and shipment of product. Management attributes its ability to achieve consistent
quality, competitive prices and on-time delivery to the breadth of our
established relationships. While we do not have any significant contractual
commitments with our suppliers, we do enter into sourcing agreements with
certain independent sourcing agents.
We have
sourcing offices in China, Hong Kong, Macau and Italy and through an agent
partnership in Brazil and the Dominican Republic. Our structure enables us to
source footwear at various price levels from significant shoe manufacturing
regions of the world.
In 2008,
98% of the footwear we sourced was from manufacturing facilities in China. The
following table provides an overview of our foreign sourcing in
2008:
|
Country
|
Millions
of Pairs
|
|
China
|
61.9
|
|
Brazil
|
1.3
|
|
All
other
|
0.2
|
|
Total
|
63.4
|
We
monitor the quality of the components of all of our footwear prior to production
and inspect prototypes of every footwear style. We also perform random in-line
quality control checks during production and before footwear leaves the
manufacturing facility.
In our
Dongguan, China and our Putien, China offices, we operate a total of four sample
making facilities with unique and diverse capabilities, including footwear for
women, men and children, providing superior speed, control and execution in
product development.
We
maintain design teams for our brands in select fashion locations, including New
York and Italy. These teams, which include independent designers, are
responsible for the creation and development of new product styles. Our
designers monitor trends in apparel and footwear fashion and work closely with
retailers to identify consumer footwear preferences. Our design teams create
collections of footwear and work closely with our product development and
sourcing offices to translate our designs into new footwear styles.
|
AVAILABLE
INFORMATION
|
Our
internet address is www.brownshoe.com. Our internet address is included in this
annual report on Form 10-K as an inactive textual reference only. The
information contained on our site is not incorporated by reference into this
annual report on Form 10-K and should not be considered part of this report. We
file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (“SEC”). We make
available free of charge our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished, as required by Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, through our internet site as soon as reasonably practicable after we
electronically file such material with or furnish it to the SEC. You may access
these SEC filings via the hyperlink to a third-party SEC filings site that we
provide on our site.
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
The
following is a list of the names and ages of the executive officers of the
Company and of the offices held by each person. There is no family relationship
between any of the named persons. The terms of the following executive officers
will expire in May 2009.
|
Name
|
Age
|
Current
Position
|
|
Ronald
A. Fromm
|
58
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
Diane
M. Sullivan
|
53
|
President
and Chief Operating Officer
|
|
Joseph
W. Wood
|
61
|
President,
Brown Shoe Retail
|
|
Gary
M. Rich
|
58
|
President,
Brown Wholesale (Partnership Alliance)
|
|
Richard
M. Ausick
|
55
|
President,
Brown Wholesale (Authority Alliance)
|
|
Douglas
W. Koch
|
57
|
Senior
Vice President and Chief Talent Officer
|
|
Mark
E. Hood
|
56
|
Senior
Vice President and Chief Financial Officer
|
|
Joseph
Caro
|
46
|
Senior
Vice President and Chief Information Officer
|
|
Michael
I. Oberlander
|
40
|
Senior
Vice President, General Counsel and Corporate
Secretary
|
The
period of service of each officer in the positions listed and other business
experience are set forth below.
Ronald A. Fromm,
Chairman of
the Board of Directors and Chief Executive Officer of the Company since January
2004. Chairman of the Board of Directors, President and Chief Executive Officer
of the Company from January 1999 to December 2003. President of the Company’s
branded division from April 1998 to January 1999. Executive Vice President,
Famous Footwear from September 1992 to March 1998.
Diane M. Sullivan,
President
and Chief Operating Officer since March 2006. President from January 2004 to
March 2006. Vice Chairman of the Footwear Group of Phillips-Van Heusen from
September 2001 to December 2003. Series of management positions with Stride Rite
Corporation from April 1995 to September 2001, most recently as President and
Chief Operating Officer.
Joseph W. Wood,
President,
Brown Shoe Retail since August 2006, President, Famous Footwear from January
2002 to August 2006. Executive Vice President - Merchandise for Finish Line
chain of athletic footwear stores from April 2000 to December 2001. Senior Vice
President - Merchandise and Marketing for Finish Line from March 1995 to April
2000.
Gary M. Rich,
President,
Brown Wholesale (Partnership Alliance) since August 2000. President, Brown
Pagoda from March 1993 to August 2000.
Richard M. Ausick
, President,
Brown Wholesale (Authority Alliance) since July 2006. Senior Vice President and
Chief Merchandising Officer of Famous Footwear from January 2002 to July 2006.
Senior Vice President and General Merchandise Manager for Shopko Stores from
1989 to 2002.
Douglas W. Koch,
Senior Vice
President and Chief Talent Officer since May 2005. Senior Vice President, Human
Resources from March 2002 to May 2005. Senior Vice President, Human Resources at
Famous Footwear from October 2000 to March 2002.
Mark E. Hood,
Senior Vice
President and Chief Financial Officer since November 2006. Senior Vice President
and Chief Financial Officer of Panera Bread Company from April 2003 to May 2006.
Senior Vice President, Finance and Administration of Panera Bread Company from
August 2002 to April 2003. Chief Financial Officer of U.S. Loyalty Corporation
from August 2000 to April 2002.
Joseph Caro,
Senior Vice
President and Chief Information Officer since November 2007. Senior Vice
President and Chief Technology Officer of the CitiFinancial International
division of Citigroup, Inc. from December 2005 to July 2007. Vice President -
Internet Technology Solutions for MasterCard Incorporated from February 2000 to
December 2005.
Michael I. Oberlander,
Senior
Vice President, General Counsel and Corporate Secretary since March 2006. Vice
President, General Counsel and Corporate Secretary from July 2001 to March 2006.
Vice President and General Counsel from September 2000 to July 2001. Attorney,
Bryan Cave LLP from 1993 to September 2000.
|
RISK
FACTORS
|
Certain
statements in this Form 10-K, as well as other statements made by us from time
to time, contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ
materially. The considerations listed below represent certain important factors
we believe could cause such results to differ. These considerations are not
intended to represent a complete list of the general or specific risks that may
affect the Company. It should be recognized that other risk factors (including
those described in Item 7,
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
) may be significant,
presently or in the future, and the risks set forth below may affect us to a
greater extent than indicated. We disclaim any intent or obligation to update
these forward-looking statements.
Current
economic conditions may adversely impact demand for our products, reduce access
to credit and cause our customers and others with which we do business to suffer
financial hardship, all of which could adversely impact our business, results of
operations, financial condition and cash flows.
Worldwide
economic conditions have recently deteriorated in many countries and regions,
including the United States, and may remain depressed for the foreseeable
future. Consumer spending is affected by many factors, including, among others,
general business conditions, interest rates, inflation, consumer debt levels,
the availability of consumer credit, currency exchange rates, taxation, gasoline
prices, real estate values, foreclosure rates, unemployment trends and other
matters that influence consumer confidence and spending. Many of these factors
are outside of our control and may have a negative impact on our sales and
margins. Our customers’ purchases, including our products, could decline during
periods when disposable income is lower, when prices increase in response to
rising costs or in periods of actual or perceived unfavorable economic
conditions. If we encounter increases in our product costs, these may not be
offset by comparable rises in the income of consumers of our products. These
consumers may choose to purchase fewer of our products or lower-priced products
of our competitors in response to higher prices for our products, or may choose
not to purchase our products at prices that reflect our price increases that
become effective from time to time. If any of these events occur, or if
unfavorable economic conditions continue to challenge the consumer environment,
our business, results of operations, financial condition and cash flows could be
adversely affected.
In
addition, economic conditions, including decreased access to credit, may result
in financial difficulties leading to restructurings, bankruptcies, liquidations
and other unfavorable events for our customers, product suppliers, insurers,
logistics and other service providers and financial institutions which are
counterparties to our credit facilities and derivatives transactions. Our
customers may experience diminished liquidity that could result in an increase
in our credit risk, or our customers may encounter an inability to obtain credit
to finance purchases of our products. If third parties on which we rely for
goods or services are unable to overcome difficulties resulting from the
deterioration in worldwide economic conditions and provide us with the materials
and services we need, or if counterparties to our credit facilities or
derivatives transactions do not perform their obligations, our business, results
of operations, financial condition and liquidity could be adversely affected.
For example, we have experienced some disruption in product sourcing as a result
of certain unforeseen factory closures in 2008. While the financial consequences
to the Company of these closures were not material, the impact of many closures
of major facilities may have an adverse effect on product sourcing. We attempt
to mitigate this risk in a variety of ways, including diversification among
factories, but such risk to our business and results of operations cannot be
completely eliminated.
We
face risks relating to competition.
Competition
is intense in the footwear industry. Certain of our competitors are larger and
have greater financial, marketing and technological resources than we do. Our
success depends upon our ability to remain competitive in the areas of style,
price, quality, location and service, among others, and in part on our ability
to anticipate and respond to changing merchandise and fashion trends and
consumer preferences and demands in a timely manner. The industry has also been
impacted by retailers aggressively competing on the basis of price. Accordingly,
there has been competitive pressure on us to keep our selling prices low. If we
are unable to respond effectively to these competitive pressures, our business
and results of operations may be adversely affected.
We
face risks related to the maintenance of proper inventory levels.
We place
orders with manufacturers for some of our products prior to the time we receive
all of our customers’ orders. We do this to minimize purchasing costs, the time
necessary to fill customer orders and the risk of non-delivery. We also maintain
an inventory of certain products that we anticipate will be in greater demand.
We may fail to gauge the fashion tastes of consumers or differentiate our retail
and wholesale offerings. However, the current global economic slowdown makes it
increasingly difficult for us and our customers to accurately forecast product
demand trends, and we may be unable to sell the products we have ordered in
advance from manufacturers or that we have in our inventory. Inventory levels in
excess of customer demand may result in inventory write-downs, and the sale of
excess inventory at discounted prices could significantly impair the brand image
and have a material adverse effect on our operating results and financial
condition. Conversely, if we underestimate consumer demand for our products or
if our manufacturers fail to supply the quality products that we require at the
time we need them, we may experience inventory shortages. Inventory shortages
might delay shipments to customers, negatively impact retailer and distributor
relationships, negatively impact our sales results and diminish brand
awareness.
We
face risks relating to changes in consumer preferences.
The
footwear industry is subject to rapidly changing consumer demands and fashion
trends. Accordingly, our success in both our wholesale and retail operations
depends in large part on our ability to anticipate, understand and react to
changing consumer demands. Our products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty and are subject
to rapid change. The success of our products, merchandising strategies and
marketing strategies and programs will also depend on a favorable reception by
our customers. Furthermore, consumer preferences and purchasing patterns may be
influenced by consumers’ disposable income, which could impact the success of
our operations.
We
rely on foreign sources of production.
General
We rely
almost entirely on foreign sourcing for our footwear products. We source
footwear products from independent third-party manufacturing facilities located
in China and, to a lesser extent, Brazil and other countries. Typically, we are
a major customer of these third-party manufacturing facilities. However, there
is substantial competition in the footwear industry for quality footwear
manufacturers. Accordingly, our future results will partly depend on maintaining
close working relationships with our principal manufacturers.
As is
common in the industry, we do not have any long-term contracts with our
independent third-party foreign manufacturers. We cannot ensure that we will not
experience difficulties with such manufacturers, including reduction in the
availability of production capacity, failure to meet production deadlines,
increases in manufacturing costs or failure to meet our quality standards.
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, work stoppages, political instability, expropriation,
nationalization, foreign currency fluctuations, changing economic conditions,
the imposition of tariffs, import and export controls and other non-tariff
barriers and changes in governmental policies.
We
require our third-party foreign manufacturers to meet our standards and
footwear-industry standards for working conditions and other matters, including
compliance with applicable labor, environmental and other laws, before we place
orders with them to manufacture products for us. A failure by any of our
third-party manufacturers to adhere to these standards or laws could cause us to
incur additional costs for our products and could cause negative publicity and
harm our business and reputation. We also require our third-party foreign
manufacturers to meet our and industry standards for product safety, including
compliance with applicable laws and standards with respect to lead content in
paint and other child safety issues. A failure by any of our third-party
manufacturers to adhere to product safety standards could lead to a product
recall, which could result in critical media coverage and harm our business and
reputation and could cause us to incur additional costs.
We cannot
predict whether additional United States or foreign customs quotas, duties,
taxes or other changes or restrictions will be imposed upon the importation of
foreign produced products in the future or what effect such actions could have
on our business, financial condition or results of operations.
Furthermore,
our products depend on the availability of leather and other raw materials. Any
significant shortage of quantities or increases in the cost of leather or other
materials or resources used to produce our products could have a material
adverse effect on our business and results of operations.
We rely
heavily on manufacturing facilities located in China. Historically, the trade
relationship between the United States and China has not had a material adverse
effect on our business, financial condition or results of operations. There have
been, however, and may in the future be, threats to the trade relationships
between the United States and China. There can be no assurance that the trade
relationship between the United States and China will not worsen, and if it does
worsen, that our financial condition or results of operations will not be
materially adversely affected thereby.
We cannot
predict the effect that changes in the economic and political conditions in the
United States and China could have on the economics of doing business with
Chinese manufacturers. For example, manufacturing capacity in China may shift
from footwear to other industries with manufacturing margins that are perceived
to be higher. Currently, many footwear manufacturers in China are facing labor
shortages as migrant workers seek better wages and working conditions in other
industries and vocations. If this trend continues, our current manufacturers’
operations could be adversely affected, and we may experience difficulties or
delays in sourcing our footwear as well as higher footwear costs.
Although
we believe we could find alternative manufacturing sources for those products we
currently source from China through independent third-party manufacturing
facilities in other countries, the loss of a substantial portion of our Chinese
manufacturing capacity would have a material adverse effect on the Company. For
example, alternative manufacturers may have higher prices, less favorable
payment terms, less manufacturing capacity, lower quality standards or increased
lead times for delivery. If we are unable to provide products consistent with
our standards or the manufacture of our footwear is delayed or becomes more
expensive, this could result in our customers canceling orders, refusing to
accept deliveries or demanding reductions in purchase prices, any of which could
have a material adverse effect on our business and results of operations. In
addition, the occurrence of a natural disaster such as an earthquake or
hurricane or the outbreak of a pandemic disease in China could severely
interfere with the manufacture of our products and have a material adverse
effect on the Company.
Currency
Although
we purchase most products from foreign manufacturers in United States dollars
and otherwise engage in foreign currency hedging transactions, we cannot ensure
that we will not experience cost variations with respect to exchange rate
changes. For example, although we purchase footwear made in China using United
States dollars, recently Chinese manufacturers have been increasing their United
States dollar prices to compensate for the appreciation of the Chinese currency
against the United States dollar. Also, if we continue to grow internationally
and increase our net sales in currencies other than the United
States dollar, our exposure to foreign currencies will
increase.
We
face risks relating to customer concentration.
Our
wholesale customers include mass merchandisers, national chains, department
stores, independent retailers, catalogs and online retailers. Several of our
customers operate multiple department store divisions. Furthermore, we often
sell multiple types of licensed, branded and private-label footwear to these
same mass merchandisers, national chains, department stores, independent
retailers, catalogs and online retailers. While we believe purchasing decisions
in many cases are made independently by the buyers and merchandisers of each of
the customers, a decision by our customers who operate multiple mass
merchandisers, national chains, department stores, independent retailers,
catalogs and/or online retailers or any other significant customer to decrease
the amount of footwear products purchased from us could have a material adverse
effect on our business, financial condition or results of
operations.
The
retail industry has experienced increased consolidation. As this trend
continues, our customers will likely seek more favorable terms for their
purchases of our products, which could limit our ability to raise prices or
achieve our profit goals. In turn, we may not be able to recoup raw material or
other cost increases. Sales on terms less favorable to us than our current terms
will have an adverse effect on our profitability. Consolidation could lead to a
decrease in the number of stores that carry our products and could expose us to
greater concentration of accounts receivable risk. In addition, retailers are
deciding to source more of their products directly from manufacturers overseas
and reducing their reliance on wholesalers. If retailers continue to increase
their direct sourcing of footwear from overseas, this could have a material
adverse effect on our business and results of operations.
We
are dependent on our information technology systems.
Our
computer network and systems are essential to all aspects of our operations. If
there were to be a major disruption of our information technology operations, we
have emergency back-up facility arrangements and procedures in place. However,
if a disruption is of a nature that delays or prohibits implementation of
back-up arrangements, it could have a material adverse effect on our results of
operations.
To support our growth strategy while streamlining and transforming day-to-day operations for our integrated business model, we are converting select existing internally-developed and certain other third-party applications to an integrated enterprise resource planning (“ERP”) information technology system provided by third-party vendors. These information technology initiatives began during the summer of 2008 and will likely continue through 2011. We believe the phased implementation may disrupt not only our information systems, but also a significant portion of our general office operations. While we believe the implementation of these systems will provide significant opportunity for us, such a major undertaking carries various risks and uncertainties that could cause actual results to differ materially. These include (i) changes in the estimated costs and anticipated benefits of strategic business transformation; (ii) potential disruption to our business and operations as we implement the ERP applications; (iii) the timing and uncertainty of activities related to software implementation and business transformation; (iv) the new software system’s ability to enable our successful execution of our growth strategy; and (v) the additional risk of unforeseen issues, interruptions and costs. If we are unable to successfully implement these information technology initiatives, it may have an adverse effect on our capital resources, financial condition, results of operations and liquidity.
We
may fail to protect the integrity and security of customer and associate
information.
We
routinely possess sensitive customer and associate information and, while we
have taken reasonable and appropriate steps to protect that information, if our
security procedures and controls were compromised, it could harm our business,
reputation, results of operations and financial condition and may increase the
costs we incur to protect against such information security breaches, such as
increased investment in technology, the costs of compliance with consumer
protection laws and costs resulting from consumer fraud.
We
may be unable to retain senior management and to recruit and retain other key
associates.
Our
success depends on the ability to attract, retain and motivate qualified
management, administrative, product development and sales personnel to support
existing operations and future growth. Competition for qualified personnel in
the footwear industry is intense, and we compete for these individuals with
other companies that in many cases have substantial financial and other
resources. The loss of the services of any members of senior management or the
inability to attract and retain other qualified personnel could have a material
adverse effect on our business, results of operations and financial condition.
We may also encounter disruption to our business and operations as we implement
changes associated with our voluntary severance program and the relocation of
our Famous Footwear division headquarters from Madison, Wisconsin to St. Louis,
Missouri.
We
face risks relating to our licensed and owned intellectual
property.
Licenses
The
success of our Wholesale Operations segment has to date been due, in part, to
our ability to attract and retain licensors which have strong, well-recognized
brands and trademarks. Our license agreements are generally for an initial term
of two to four years, subject to renewal, but even where we have longer-term
licenses or have an option to renew a license, such agreements are dependent
upon our achieving certain results in marketing the licensed products. While we
believe we will generally be able to decide whether to renew our existing
licenses and obtain new licenses in the future, there can be no assurance we
will be able to renew our current licenses or obtain new licenses. In addition,
certain of our license agreements are not exclusive, and new or existing
competitors may obtain similar licenses.
Many of
our license agreements require minimum royalty payments. Our ability to generate
sufficient sales and profitability to cover these minimum royalty requirements
is not guaranteed, and if sales of such products are not sufficient to generate
these minimum payments, it could have a material adverse effect on our business
and results of operations.
Trademarks
We
believe that our trademarks and trade names are important to our business and
are generally sufficient to permit us to carry on our business as presently
conducted and planned. We cannot, however, know whether we will be able to
secure protection for our intellectual property in the future or if that
protection will be adequate for future operations. Furthermore, we face the risk
of ineffective protection of intellectual property rights in jurisdictions where
we source and distribute our products. We also cannot be certain that our
activities do not infringe on the proprietary rights of others. If we are
compelled to prosecute infringing parties, defend our intellectual property or
defend ourselves from intellectual property claims made by others, we may face
significant expenses and liability.
Our
Famous Footwear and Specialty Retail segments operate footwear stores. We lease
all of these stores. Accordingly, the success of our operations, in part, is
dependent on our ability to secure affordable, long-term leases in desirable
locations and to secure renewals of such leases. Although we believe that our
current leases can be renewed on acceptable terms, no assurance can be given
that we will be able to successfully negotiate lease renewals on existing stores
or to obtain acceptable terms for new stores in desirable locations, and the
failure to do so could have an adverse effect on our ability to grow our
business and our financial condition and results of operations.
We
are dependent on major branded suppliers.
Our
Famous Footwear retail chain purchases a substantial portion of its footwear
products from major branded suppliers. While we believe our relationships with
our current suppliers are good, the loss of any of our major suppliers or
product developed exclusively for Famous Footwear could have a material adverse
effect on our business, financial condition and results of operations. As is
common in the industry, we do not have any long-term contracts with our
suppliers. In addition, the success of our financial performance is dependent on
the ability of Famous Footwear to obtain products from its suppliers on a timely
basis and on acceptable terms.
We
cannot assure the successful implementation of our growth strategy.
Domestic
Our
growth strategy includes continued expansion of our Famous Footwear store base,
continued growth in the distribution of our portfolio of owned and licensed
brands, continued launching of new brands, continued development of our
e-commerce business and potential acquisitions. There can be no assurance that
we will be able to successfully implement any or all of these strategies, which
could lead to a decline in our results of operations.
International
Our
growth strategy includes the expansion of our brands internationally and the
continued growth of our international sales. For example, we own a 51% equity
stake in B&H Footwear Limited (“B&H Footwear”), a joint venture that
began marketing Naturalizer footwear in China in fall 2007. In addition, B&H
Footwear sells Naturalizer footwear on a wholesale basis to our joint venture
partner, Hongguo International Holdings Limited (“Hongguo”). Hongguo then sells
Naturalizer products through retail stores in China. Our international
operations are subject to the many unique risks of doing business abroad,
including, among other things, the ability to obtain and retain international
rights to our licenses and trademarks. There can be no assurance that we will be
able to successfully implement any or all of these strategies, which could lead
to a decline in our results of operations.
We
may face transitional challenges with acquisitions.
Periodically,
we pursue acquisitions of other companies or businesses. Although we review the
records of acquisition candidates, such an in-depth review of the records may
not reveal existing or potential problems. As a result, we may not become
familiar enough with the business to fully assess its strengths and weaknesses,
and accordingly, we may assume adverse operating conditions and/or unanticipated
liabilities, and the business may not perform as well as expected. We face the
risk that the returns on acquisitions will not support the expenditures or
indebtedness incurred to acquire such businesses. We also face the risk that we
will not be able to integrate acquisitions into our existing operations
effectively without substantial expense, delay or other operational or financial
problems. Integration may be hindered by, among other things, differing
procedures, including internal controls, business practices and technology
systems. We may need to allocate more management resources to integration than
we planned, which may adversely affect our ability to pursue other profitable
activities.
We
are subject to periodic litigation and other regulatory
proceedings.
We are a
defendant from time to time in lawsuits and regulatory actions (including
environmental matters) relating to our business. Due to the inherent
uncertainties of litigation and regulatory proceedings, we cannot accurately
predict the ultimate outcome of any such proceedings. An unfavorable outcome
could have a material adverse impact on our business, financial condition and
results of operations. In addition, regardless of the outcome of any litigation
or regulatory proceedings, such proceedings are expensive and will require that
we devote substantial resources and executive time to defend the Company. See
Item 3,
Legal
Proceedings
, for further discussion of pending matters.
We
self-insure a significant portion of our expected losses under our workers’
compensation, employment practices, health, disability, general, auto and
property liability programs. The liabilities associated with the risks that are
retained by us are estimated by considering our historical claims experience and
data from actuarial sources. The estimated accruals for these liabilities could
be affected if claims differ from the assumptions used and historical trends.
Unanticipated changes in the estimates underlying our reserves for these losses,
such as claims experience, inflation and regulatory changes could have a
material adverse effect on our financial condition and results of
operations.
We
face risks that our quarterly sales and earnings may fluctuate, which may result
in volatility in our stock price.
Our
quarterly sales and earnings can vary due to a number of factors, many of which
are beyond our control. Accordingly, we may not be able to accurately predict
our quarterly sales and earnings. In our wholesale business, sales of footwear
are dependent on orders from our major customers and they may change delivery
schedules, change the mix of products they order or cancel orders without
penalty. In addition, our wholesale customers set the delivery schedule for
shipments of our products, which could cause shifts of sales between quarters.
Our Famous Footwear retail business is seasonally weighted to the back-to-school
season, which falls into our fiscal third quarter. In addition, our annualized
tax rate is based on projections of our domestic and international operating
results for the year, which we review and revise as necessary each quarter. As a
result of these specific and other general factors, our operating results will
vary from quarter to quarter, and the results for any particular quarter may not
be indicative of results for the full year. Any shortfall in sales or earnings
from the levels expected by investors or securities analysts could cause a
decrease in the trading price of our stock.
We
could be required to provide additional funding for our pension plans as a
result of the negative impact of current market returns on the return on plan
assets for our pension plans.
As a
result of disruptions in the domestic and international financial markets, our
pension plans had a decrease in asset values during the year ended January 31,
2009. We are unable to predict the severity or the duration of the current
disruptions in the financial markets and the adverse economic conditions in the
United States, Europe and Asia. We are not required to make any mandatory
contributions to our plans in 2009. Nevertheless, the funded status of these
plans, and the related cost reflected in our financial statements, are affected
by various factors that are subject to an inherent degree of uncertainty,
particularly in the current economic environment. Under the Pension Protection
Act of 2006 (the “Pension Protection Act”), continued losses of asset values may
necessitate increased funding of the plans in the future to meet minimum federal
government requirements. The continued downward pressure on the asset values of
these plans may require us to fund obligations earlier than we had originally
planned, which would have a negative impact on our cash flows from
operations.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
PROPERTIES
|
We own
our principal executive, sales and administrative offices in Clayton (“St.
Louis”), Missouri. During 2008, we relocated our Famous Footwear division
headquarters from Madison, Wisconsin, where they previously operated from a
leased office space, to our principal offices in St. Louis, Missouri. In 2009,
we subleased a portion of the vacated office space in Madison, while we continue
to actively market the remaining Madison space to prospective third parties. Our
Canada wholesale division operates from an owned building in Perth, Ontario and
from leased office space in Laval, Quebec. Our Wholesale Operations Authority
Alliance operates from leased office space in New York, New York, where we also
maintain a showroom for our wholesale brands.
Our
retail footwear operations are conducted throughout the United States, Canada,
China and Guam and involve the operation of 1,444 shoe stores, including 133 in
Canada and 19 in China. All store locations are leased, with over one-half
having renewal options. Famous Footwear operates a leased 750,000 square-foot
distribution center, including a mezzanine level, in Sun Prairie, Wisconsin and
a leased 800,000 square-foot distribution center, including mezzanine levels, in
Lebanon, Tennessee. We also operate an owned 150,000 square-foot distribution
facility in Perth, Ontario. In 2008, we leased a new 350,000 square-foot
distribution center in Tejon Ranch, California. We will begin using this
facility in 2009 to gain better efficiencies in distribution
activities.
Most of
the footwear sold through our domestic wholesale divisions is processed through
one of four main distribution centers, two Company-owned distribution centers in
Sikeston, Missouri and Fredericktown, Missouri, which have 720,000 and 465,000
square feet, including mezzanine levels, respectively, one leased facility in
Sikeston, Missouri, which has 110,000 square feet, and one third-party facility
in Chino, California. Some domestic distribution activities are handled by
third-party providers.
We lease office space in China, Hong Kong, Macau, Taiwan and Italy and four sample-making facilities in Dongguan, China and Putien, China.
We own a
vacant manufacturing facility in Stirling, Ontario, a vacant office building in
Perth, Ontario, a building in Denver, Colorado, which is leased to a
third-party, and undeveloped land in Colorado and New York. See Item 3,
Legal Proceedings
, for
further discussion of certain of these properties.
|
LEGAL
PROCEEDINGS
|
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.
We are
involved in environmental remediation and ongoing compliance activities at
several sites. We are remediating, under the oversight of Colorado authorities,
contamination at and beneath our owned facility in Colorado (also known as the
“Redfield” site) and groundwater and indoor air in residential neighborhoods
adjacent to and near the property, which have been affected by solvents
previously used at the site and surrounding facilities. See Note 17 to the
consolidated financial statements for additional information related to the
Redfield matter.
In March
2000, a class action lawsuit was filed in Colorado State Court (District Court
for the City and County of Denver) related to the Redfield site described above
against one of our subsidiaries, a prior operator at the site and two
individuals (the Antolovich class action). Plaintiffs, certain current and
former residents living in an area adjacent to the Redfield site, alleged claims
for trespass, nuisance, strict liability, unjust enrichment, negligence and
exemplary damages arising from the alleged release of solvents contaminating the
groundwater and indoor air in certain areas adjacent to and near the site. In
December 2003, the jury hearing the claims returned a verdict finding us
negligent and awarded the class plaintiffs $1.0 million in damages. We recorded
this award along with the estimated cost of associated pretrial interest on the
award and estimated costs related to sanctions imposed by the court resulting
from pretrial discovery disputes between the parties. The plaintiffs filed an
appeal of the December 2003 jury verdict and in August 2007, the Colorado Court
of Appeals rejected the plaintiffs attempt to obtain a new trial by affirming
the trial court judgment. The Court also denied a cross-appeal by us seeking a
reversal of a portion of the pretrial interest awarded to plaintiffs, and we
paid an additional $0.8 million in April 2008 for the remainder of the pretrial
interest owing on the judgment. The Court also reversed the trial court’s
award of costs to us and remanded the case to the trial court for a
determination of whether plaintiffs are entitled to recover their costs related
to the trial. The plaintiffs subsequently filed a petition with the Supreme
Court of Colorado seeking review of the Court of Appeal’s decision denying them
a new trial, which the Supreme Court denied on May 19, 2008, effectively ending
plaintiffs’ attempts to obtain a retrial. The cost of further proceedings in
this matter may vary.
In
connection with the Redfield environmental remediation and class action
litigation discussed above, we sued a number of our insurers seeking recovery of
defense costs, indemnity and other damages related to the former operations and
the remediation at the site. During 2006, we reached agreements with certain of
those insurers to resolve the coverage claims arising out of the Redfield site
and recorded income related to these recoveries of $7.3 million ($4.4 million on
an after-tax basis), net of related legal fees, as a reduction of restructuring
and other special charges, net. Prior to a trial of that action, during the
first quarter of 2008, we reached settlements with all insurers remaining in the
case for total insurance recoveries, net of associated fees and costs, of $10.2
million ($6.2 million on an after-tax basis), as a reduction of restructuring
and other special charges, net. As a result of these settlements, all claims
among the parties have been dismissed. In addition, we filed a contribution
action in Colorado State Court against the Colorado Department of Transportation
(“CDOT”), which owns and operates a facility adjacent to the Redfield site. On
April 14, 2008, the Supreme Court of Colorado reversed the trial court’s and
Court of Appeal’s rulings, which had rejected CDOT’s attempts to have our cost
recovery suit dismissed on legal grounds. As a result, only one claim related to
a small ancillary part of our remediation efforts was allowed to go forward, and
we have since reached an agreement to settle for a minimal payment by CDOT, and
the case has been dismissed. We believe any further exposure beyond our reserve
levels are minimal, if any.
While we
currently do not operate manufacturing facilities, prior operations included
numerous manufacturing and other facilities for which we may have responsibility
under various environmental laws to address conditions that may be identified in
the future.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No matter
was submitted to a vote of shareholders during the fourth quarter of
2008.
|
PART
II
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
common stock is listed on the New York Stock Exchange (the “NYSE”) and the
Chicago Stock Exchange under the trading symbol “BWS.” As of January 31, 2009,
we had approximately 3,900 shareholders of record. The following table sets
forth for each fiscal quarter during 2008 and 2007 the high and low sales prices
per share of our common stock as reported on the NYSE and the dividends paid per
share, all of which have been adjusted to reflect our three-for-two stock split,
effected in the form of a dividend on April 2, 2007.
|
2008
|
2007
|
|||||||||||||||||
|
Low
|
High
|
Dividends
Paid
|
Low
|
High
|
Dividends
Paid
|
|||||||||||||
|
1
st
Quarter
|
$11.89
|
$17.65
|
$0.07
|
$26.46
|
$37.68
|
$0.07
|
||||||||||||
|
2
nd
Quarter
|
12.06
|
17.60
|
0.07
|
19.92
|
33.00
|
0.07
|
||||||||||||
|
3
rd
Quarter
|
6.99
|
18.44
|
0.07
|
18.09
|
23.19
|
0.07
|
||||||||||||
|
4
th
Quarter
|
4.34
|
10.94
|
0.07
|
11.91
|
18.29
|
0.07
|
||||||||||||
Restrictions
on the Payment of Dividends
Our
revolving credit agreement and Senior Notes limit the amount of dividends that
can be declared and paid. However, we do not believe this limitation materially
restricts the Board of Directors’ ability to declare or our ability to pay
regular quarterly dividends to our common stockholders.
In
addition to this limitation, the declaration and payment of dividends and the
amount of dividends will depend on our results of operations, financial
conditions, future prospects and other factors deemed relevant by our Board of
Directors, however, we presently expect that dividends will continue to be
paid.
Issuer
Purchases of Equity Securities
The
following table represents issuer purchases of equity securities.
|
Fiscal
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly Announced Program
|
Maximum
Number of Shares that May Yet Be Purchased Under the Program
(1)
|
|||||||
|
November
2, 2008 – November 29, 2008
|
11,316
|
(2)
|
$
|
6.37
|
(2)
|
–
|
2,500,000
|
||||
|
November
30, 2008 – January 3, 2009
|
–
|
–
|
–
|
2,500,000
|
|||||||
|
January
4, 2009 – January 31, 2009
|
–
|
–
|
–
|
2,500,000
|
|||||||
|
Total
|
11,316
|
(2)
|
$
|
6.37
|
(2)
|
–
|
2,500,000
|
||||
|
|
(1)
|
In
January 2008, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to 2.5 million shares of our outstanding
common stock. We can utilize the repurchase program to repurchase shares
on the open market or in private transactions from time to time, depending
on market conditions. The repurchase program does not have an expiration
date. No shares were repurchased under the 2008 Program; therefore, there
were 2.5 million shares authorized to be purchased under the 2008 program
as of January 31, 2009.
|
|
|
(2)
|
Includes
10,000 shares purchased by an affiliated purchaser in an open market
transaction. Also includes 1,316 shares that were tendered by employees
related to certain share-based awards. These shares were tendered in
satisfaction of the exercise price of stock options and/or to satisfy
minimum tax withholding amounts for non-qualified stock options,
restricted stock and stock performance awards. Accordingly, these share
purchases are not considered a part of our publicly announced stock
repurchase programs.
|
Stock
Performance Graph
The
following performance graph compares the cumulative total return on our common
stock with the cumulative total return of the following
indices: (i) the S&P
©
600
SmallCap Stock Index and (ii) a peer group of companies believed to be
engaged in similar businesses. Our peer group consists of Genesco Inc.,
Collective Brands, Inc. (formerly Payless ShoeSource, Inc.), Shoe Carnival,
Inc., DSW Inc., Skechers U.S.A., Inc., Steven Madden, Ltd., The Timberland
Company and Wolverine World Wide, Inc. In August 2007, Payless ShoeSource, Inc.
changed its name to Collective Brands, Inc. and acquired The Stride Rite
Corporation. The results of The Stride Rite Corporation are included within the
graph through the date of acquisition. Our fiscal year ends on the Saturday
nearest to each January 31; accordingly, share prices are as of the last
business day in each fiscal year. The graph assumes that the value of the
investment in our common stock and each index was $100 at January 31, 2004. The
graph also assumes that all dividends were reinvested and that investments were
held through January 31, 2009. These indices are included for comparative
purposes only and do not necessarily reflect management’s opinion that such
indices are an appropriate measure of the relative performance of the stock
involved and are not intended to forecast or be indicative of possible future
performance of the common stock.
|
1/31/2004
|
1/29/2005
|
1/28/2006
|
2/3/2007
|
2/2/2008
|
1/31/2009
|
|||||||
|
Brown
Shoe Company, Inc.
|
$
|
100
|
$
|
80
|
$
|
122
|
$
|
226
|
$
|
110
|
$
|
31
|
|
S&P
©
600 SmallCap Stock Index
|
100
|
114
|
138
|
153
|
144
|
89
|
||||||
|
Peer
Group
|
100
|
125
|
165
|
213
|
136
|
83
|
||||||
|
SELECTED
FINANCIAL DATA
|
The
selected financial data set forth below should be read in conjunction with the
consolidated financial statements and notes thereto and the other information
contained elsewhere in this report.
|
($
thousands, except per share amounts)
|
2008
(52
Weeks)
|
2007
(52
Weeks)
|
2006
(53
Weeks
)
|
2005
(52
Weeks)
|
2004
(52
Weeks)
|
||||||||||
|
Operations:
|
|||||||||||||||
|
Net
sales
|
$
|
2,276,362
|
$
|
2,359,909
|
$
|
2,470,930
|
$
|
2,292,057
|
$
|
1,941,804
|
|||||
|
Cost
of goods sold
|
1,394,126
|
1,416,510
|
1,500,037
|
1,393,753
|
1,157,437
|
||||||||||
|
Gross
profit
|
882,236
|
943,399
|
970,893
|
898,304
|
784,367
|
||||||||||
|
Selling
and administrative expenses
|
851,893
|
827,350
|
854,053
|
794,078
|
710,130
|
||||||||||
|
Impairment
of goodwill and intangible assets
|
149,150
|
–
|
–
|
–
|
–
|
||||||||||
|
Restructuring
and other special charges, net
|
54,278
|
19,000
|
8,145
|
14,654
|
9,708
|
||||||||||
|
Equity
in net loss of nonconsolidated affiliate
|
216
|
439
|
–
|
–
|
–
|
||||||||||
|
Operating
(loss) earnings
|
(173,301
|
)
|
96,610
|
108,695
|
89,572
|
64,529
|
|||||||||
|
Interest
expense
|
(17,105
|
)
|
(16,232
|
)
|
(17,892
|
)
|
(19,641
|
)
|
(9,109
|
)
|
|||||
|
Interest
income
|
1,800
|
3,434
|
2,610
|
1,348
|
929
|
||||||||||
|
(Loss)
earnings before income taxes and minority interests
|
(188,606
|
)
|
83,812
|
93,413
|
71,279
|
56,349
|
|||||||||
|
Income
tax benefit (provision)
|
53,793
|
(23,483
|
)
|
(27,719
|
)
|
(30,147
|
)
|
(12,982
|
)
|
||||||
|
Minority
interests in net loss (earnings) of consolidated
subsidiaries
|
1,575
|
98
|
14
|
(132
|
)
|
(62
|
)
|
||||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
60,427
|
$
|
65,708
|
$
|
41,000
|
$
|
43,305
|
||||
|
Operations:
|
|||||||||||||||
|
Return
on net sales
|
(5.9)%
|
2.6%
|
2.7%
|
1.8%
|
2.2%
|
||||||||||
|
Return
on beginning shareholders’ equity
|
(23.9)%
|
11.5%
|
15.1%
|
10.5%
|
12.4%
|
||||||||||
|
Return
on average invested capital
(1)
|
(18.3)%
|
8.4%
|
9.9%
|
6.3%
|
8.6%
|
||||||||||
|
Dividends
paid
|
$
|
11,855
|
$
|
12,312
|
$
|
9,147
|
$
|
7,353
|
$
|
7,266
|
|||||
|
Purchases
of property and equipment
(2)
|
$
|
60,417
|
$
|
41,355
|
$
|
60,725
|
$
|
36,800
|
$
|
46,227
|
|||||
|
Depreciation
and amortization
(3)
|
$
|
56,510
|
$
|
52,148
|
$
|
50,943
|
$
|
49,266
|
$
|
40,106
|
|||||
|
Per
Common Share:
|
|||||||||||||||
|
Basic
(loss) earnings
|
$
|
(3.21
|
)
|
$
|
1.40
|
$
|
1.56
|
$
|
1.00
|
$
|
1.07
|
||||
|
Diluted
(loss) earnings
|
(3.21
|
)
|
1.37
|
1.51
|
0.96
|
1.02
|
|||||||||
|
Dividends
paid
|
0.28
|
0.28
|
0.21
|
0.18
|
0.18
|
||||||||||
|
Ending
shareholders’ equity
|
9.31
|
13.35
|
12.10
|
10.45
|
9.53
|
||||||||||
|
Financial
Position:
|
|||||||||||||||
|
Receivables,
net
|
$
|
84,252
|
$
|
116,873
|
$
|
132,224
|
$
|
158,103
|
$
|
97,503
|
|||||
|
Inventories,
net
|
466,002
|
435,682
|
420,520
|
414,295
|
421,450
|
||||||||||
|
Working
capital
|
279,297
|
333,142
|
303,844
|
267,351
|
281,324
|
||||||||||
|
Property
and equipment, net
|
157,451
|
141,964
|
138,164
|
116,555
|
114,394
|
||||||||||
|
Total
assets
|
1,026,031
|
1,099,841
|
1,099,057
|
1,027,293
|
846,134
|
||||||||||
|
Average
net assets
(4)
|
496,979
|
496,996
|
428,118
|
415,738
|
428,844
|
||||||||||
|
Borrowings
under revolving credit agreement
|
112,500
|
15,000
|
1,000
|
50,000
|
92,000
|
||||||||||
|
Long-term
debt
|
150,000
|
150,000
|
150,000
|
150,000
|
50,000
|
||||||||||
|
Shareholders’
equity
|
394,104
|
558,577
|
523,645
|
434,210
|
391,303
|
||||||||||
|
Average
common shares outstanding – basic
|
41,525
|
43,223
|
42,225
|
40,890
|
40,310
|
||||||||||
|
Average
common shares outstanding – diluted
|
41,525
|
44,141
|
43,639
|
42,524
|
42,319
|
||||||||||
All data
presented reflects the fiscal year ended on the Saturday nearest to January 31.
Certain prior period amounts have been reclassified to conform to current period
presentation. These reclassifications did not affect net earnings. See Item 7,
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
, for additional
information related to the selected financial data above.
|
(1)
|
Return
on average invested capital is calculated by dividing net earnings for the
period by the average of each month-end invested capital balance during
the year. Invested capital is defined as total shareholders’ equity plus
long-term debt and borrowings under the revolving credit
agreement.
|
||
|
(2)
|
Purchases
of property and equipment exclude costs of acquiring Bennett Footwear
Group of $22.7 million in 2006 and $206.0 million in 2005.
|
||
|
(3)
|
Depreciation
and amortization includes depreciation of property and equipment and
amortization of capitalized software, intangibles and debt issuance costs.
The amortization of debt issuance costs is reflected within interest
expense in our consolidated statement of earnings and totaled $1.6 million
in 2008, $1.5 million in 2007, $1.5 million in 2006, $1.1 million in 2005
and $0.9 million in 2004.
|
||
|
(4)
|
Average
net assets are calculated as the average of each month-end net asset
balance during the year. Net assets are calculated as the sum of working
capital, property and equipment, net and capitalized software,
net.
|
||
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
OVERVIEW
|
Business
Overview
We are a
footwear company with both wholesale and retail operations and have annual
revenues of nearly $2.3 billion. We are a fashion footwear marketer, offering
the consumer a portfolio of great footwear stores and well-known footwear
brands. As both a wholesaler and a retailer, we have a perspective on the
marketplace that enables us to serve consumers from different vantage
points.
Our goal
is to be the leading footwear marketer, while winning loyal customers with
compelling brands. We are a consumer-driven enterprise. To successfully provide
consumers with the product they want, we leverage our partnerships with our
customers and suppliers. We also believe that a combination of talent
acquisition, thoughtful planning and rigorous execution are keys to our success
in optimizing our business and brand portfolio.
Retail
In our
retail businesses, we believe differentiation is a key to our success. Our focus
is on meeting the needs of a well-defined consumer. We aim to provide
trend-right, brand-name fashion and athletic footwear at a great price for our
customer and her entire family by providing fun-to-shop stores, innovative
marketing and some exclusive products. We believe this differentiates us from
our competitors. We test innovative ideas in our stores to improve the
customer’s shopping experience and to further differentiate our retail chains.
Our retail segments include Famous Footwear and Specialty Retail. Famous
Footwear is the nation’s largest footwear chain selling branded value-priced
footwear for the entire family with over 1,100 stores. Our Specialty Retail
segment operates over 300 retail stores in the United States and Canada,
primarily under the Naturalizer name, as well as several stores in China and our
e-commerce subsidiary, Shoes.com.
The
footwear industry is subject to changing consumer demands and fashion trends,
and our success depends in large part on our ability to anticipate, understand
and react to these changing consumer demands. The success of our retail stores
is also driven by the relative strength of consumer spending, primarily in the
United States. The level of consumers’ disposable income impacts consumer
preferences and purchasing patterns. Another long-term success factor for our
retail business is locating our stores in locations desirable to our target
consumer.
Wholesale
In our
wholesale business, we believe our key success factor is building our brands and
strengthening the consumers’ preference for them. We offer retailers a portfolio
of brands, each designed and targeted to a specific customer segment within the
marketplace. We own approximately one-half of our major brands and license the
others. Brand strength and preference are built by developing fresh product
assortments and innovative marketing campaigns. We are also able to showcase
many of our brands in our retail stores, leveraging our wholesale and retail
platforms.
Our major
brands, both owned and licensed, include Naturalizer, Dr. Scholl’s, Franco
Sarto, Buster Brown, LifeStride, Etienne Aigner, Via Spiga, Carlos by Carlos
Santana, Nickels Soft, Sam Edelman and Fergie/Fergalicious by
Fergie.
Our
wholesale business model focuses on maximizing the sell-through of our product
to the final consumer rather than maximizing sell-ins to our retail customers.
This business model focuses on a continuous flow of smaller quantities of new
goods versus large preseason sell-ins, thereby minimizing markdowns and
allowances. We have seen success with this consumer-driven approach and believe
it has improved the performance of many of our brands and believe additional
opportunities exist to capitalize on this business model.
Financial
Highlights
Overall,
2008 proved to be one of the most difficult business environments in our
history. Worldwide economic conditions continued to slow considerably in many
countries and regions, including the United States, during the year. Our retail
and wholesale businesses continue to be affected by reductions in consumer
spending and the challenging economic climate. As a result of the deterioration
of general economic conditions, recent industry trends and the resulting decline
in our share price and capitalization, we recorded an impairment of our goodwill
and intangible assets during 2008. We anticipate that business will remain
difficult through 2009; therefore, we remain focused on managing effectively the
fundamentals that we control, including: managing inventory, tightening control
over expenses and continually evaluating our planned capital expenditures. But,
we have been in business for 130 years and have experienced many challenging
economic environments. We have taken advantage of this downturn to further
certain strategic initiatives in an effort to better position our business for
the time when the consumer returns, including the continued investment in brands
and other portions of our business that are generating strong returns and
driving our future growth. For instance, we made additional investments in
Shoes.com, Inc. and Edelman Shoe, Inc. during 2008. We made significant progress
during the year on a number of key initiatives, including our headquarters
consolidation and information technology initiatives, which are described
further below. We also recently announced certain expense and capital
containment initiatives designed to strengthen our financial performance and
better position us for the future.
The
following is a summary of the financial highlights for 2008:
|
·
|
Consolidated
net sales declined 3.5%, to $2.276 billion in 2008, as compared to $2.360
billion last year. Net sales of our Wholesale Operations and Specialty
Retail segments decreased by $79.7 million and $10.7 million,
respectively, which was partially offset by an increase in net sales of
our Famous Footwear segment of $6.8
million.
|
|
·
|
Our
consolidated operating loss was $173.3 million in 2008, compared to
operating earnings of $96.6 million last
year.
|
|
·
|
Our
consolidated net loss was $133.2 million, or $3.21 per diluted share, in
2008, compared to net earnings of $60.4 million, or $1.37 per diluted
share last year.
|
There
were a number of items that impacted our 2008 and 2007 operating results that
should be considered in evaluating our results on a year-to-year basis. These
events were:
|
·
|
Impairment
of goodwill and intangible assets – We incurred charges of $149.2 million
($119.2 million on an after-tax basis, or $2.87 per diluted share) during
2008, as a result of the deterioration of general economic conditions,
recent industry trends and the resulting decline in our share price and
market capitalization, with no corresponding impairment charges last year.
See the
Recent
Developments
section that follows and Note 1 and Note 10 to the
consolidated financial statements for additional information related to
impairment of goodwill and intangible
assets.
|
|
·
|
Expense
and capital containment initiatives – We incurred charges of $30.9 million
($19.1 million on an after-tax basis, or $0.46 per diluted share) during
2008, related to our expense and capital containment initiatives, with no
corresponding charges last year. These costs include employee-related
costs for severance, including health care benefits and enhanced pension
benefits, as well as facility and other costs. See the
Recent Developments
section that follows and Note 5 to the consolidated financial statements
for additional information related to these
charges.
|
|
·
|
Headquarters
consolidation – We incurred charges of $29.8 million ($18.2 million on an
after-tax basis, or $0.44 per diluted share) during 2008, related to the
relocation and transition of our Famous Footwear division headquarters,
with no corresponding charges last year. These costs include
employee-related costs for relocation, severance, recruiting and
retention, as well as facility and other costs. See the
Recent Developments
section that follows and Note 5 to the consolidated financial statements
for additional information related to these
charges.
|
|
·
|
Information
technology initiatives – We incurred charges of $3.7 million ($2.4 million
on an after-tax basis, or $0.06 per diluted share) during 2008, related to
our integrated enterprise resource planning (“ERP”) information technology
system that will replace select existing internally developed and certain
other third-party applications, with no corresponding charges last year.
See the
Recent
Developments
section that follows and Note 5 to the consolidated
financial statements for additional information related to these
charges.
|
|
·
|
Environmental
insurance recoveries and charges – We recorded income related to insurance
recoveries, net of associated fees and costs, of $10.2 million ($6.2
million on an after-tax basis, or $0.15 per diluted share) as a reduction
of restructuring and other special charges, net during 2008, with no
corresponding recoveries last year. See Note 5 and Note 17 to the
consolidated financial statements for additional information related to
these recoveries.
|
|
·
|
Share-based
incentive plans – As a result of our lower operating results, our
share-based compensation expense was lower by $5.8 million in 2008, as
compared to last year. The lower expense primarily reflects lower expected
payout percentages on our stock performance
plans.
|
|
·
|
Earnings
Enhancement Plan – Last year, we incurred charges related to our Earnings
Enhancement Plan initiatives of $19.0 million ($12.4 million on an
after-tax basis, or $0.28 per diluted share), with no corresponding
charges during 2008. The plan was designed to increase earnings through
cost reductions, efficiency initiatives and the reallocation of resources.
See Note 5 to the consolidated financial statements for additional
information related to the program and these
charges.
|
Following
is a summary of our operating results in 2008 by segment. See Note 8 to the
consolidated financial statements for additional information regarding our
business segments and financial information by geographic area.
|
·
|
Our
Famous Footwear segment’s net sales increased 0.5%, to $1.320 billion in
2008, compared to $1.313 billion last year. A higher store count led to
the increase in overall net sales, but declines in customer traffic led to
a same-store sales decline of 4.7%. Operating earnings decreased 68.0% to
$27.0 million in 2008, as compared to $84.1 million last year, driven by
higher retail facilities charges resulting from our higher store count as
well as higher selling costs. We also recorded $3.8 million in charges
related to our expense and capital containment initiatives in 2008 and
$3.5 million in charges related to the impairment of goodwill, with no
corresponding charges in 2007. In addition, we experienced a lower gross
profit rate as a result of our increased promotional activity. As a
percent of net sales, operating earnings decreased to 2.0% in 2008, as
compared to 6.4% last year.
|
|
·
|
Our
Wholesale Operations segment’s net sales decreased 10.2%, to $703.8
million in 2008, as compared to $783.5 million last year. The challenging
retail environment softened demand for many of our brands. A lower mix of
department store sales, a higher mix of sales of lower-margin licensed
brands as compared to our owned brands and increased markdown and
allowance provisions led to a lower gross profit rate. We incurred an
operating loss of $108.1 million in 2008, as compared to operating
earnings of $67.5 million last year, as a result of $129.1 million of
charges incurred related to the impairment of goodwill and intangible
assets and $14.4 million of charges recorded in connection with our
expense and capital containment initiatives in 2008, with no corresponding
charges in 2007. These increases were partially offset by the
nonrecurrence of $4.2 million in charges related to our Earnings
Enhancement Plan in 2007. We also experienced a decline in net sales and
our gross profit rate.
|
|
·
|
Our
Specialty Retail segment’s net sales decreased 4.1%, to $252.5 million in
2008, compared to $263.2 million last year. We experienced a same-store
sales decline of 3.4% in our retail stores, lower net sales at Shoes.com
and a decline in the Canadian dollar exchange rate. Our operating loss
increased to $30.5 million in 2008, compared to $8.2 million last year due
to primarily to $16.6 million in charges related to the impairment of
goodwill, with no corresponding charges in 2007. In addition, we
experienced a decline in net sales and gross profit rate, partially offset
by lower expenses due primarily to the nonrecurrence of charges associated
with the relocation of our Shoes.com administrative office from Los
Angeles, California to St. Louis, Missouri last year and lower marketing
and selling costs. In addition, we recorded $0.6 million of charges
related to our expense and capital containment initiatives in 2008, with
no corresponding charges in 2007.
|
Our
debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt
obligations and shareholders’ equity, increased to 40.0% at January 31, 2009,
compared to 22.8% at February 2, 2008, primarily due to a decline in
shareholders’ equity as a result of our net loss in 2008 and our $97.5 million
increase in debt obligations at the end of 2008. Our current ratio, the
relationship of current assets to current liabilities, was 1.69 to 1 at January
31, 2009, compared to 2.10 to 1 at February 2, 2008. Inventories at year end
were $466.0 million, up from $435.7 million last year, primarily due to the
increase in the number of retail stores during 2008.
Impairment
of Goodwill and Intangible Assets
As a
result of the difficult market conditions and industry trends, and the resulting
decline in the market price of our common stock at the end of 2008, we
determined that an impairment indicator was present related to our goodwill and
intangible assets. Under the requirements of Statement of Financial Accounting
Standards No. 142,
Goodwill
and Other Intangible Assets
(“SFAS No. 142”), an interim test for
impairment must be performed whenever impairment indicators are present. We
performed this interim impairment testing as of January 31, 2009, and determined
that the fair values, estimated using discounted cash flow analyses (reconciled
to our market capitalization for goodwill), related to our recorded goodwill and
a portion of our intangible assets were less than their carrying
values.
During
the fourth quarter of 2008, we recorded non-cash impairment charges for goodwill
and intangible assets of $149.2 million ($119.2 million on an after-tax basis,
or $2.87 per diluted share). Our Wholesale Operations, Specialty Retail and
Famous Footwear segments incurred charges of $120.8 million, $16.6 million and
$3.5 million, respectively, related to the impairment of goodwill and our
Wholesale Operations segment incurred $8.2 million in impairment charges for
intangible assets. The non-cash goodwill and intangible asset impairment charges
did not have an adverse effect on the covenant calculations under our debt
agreements or our overall compliance with the covenants of our debt agreements.
See Note 1 and Note 10 to the consolidated financial statements for additional
information related to impairment of goodwill and intangible
assets.
Second
Amended and Restated Credit Agreement
On
January 21, 2009, we entered into a Second Amended and Restated Credit Agreement
(the “Credit Agreement”) with our lenders, replacing our former $350.0 million
credit facility, which was set to expire on July 21, 2009. The Credit Agreement
provides for revolving credit in an aggregate amount of up to $380.0 million,
subject to the calculated borrowing base restrictions. The Credit Agreement is
for a term of five years, expiring on January 21, 2014. We believe that
borrowing capacity under our Credit Agreement will be adequate to meet our
expected operational needs and capital expenditure plans for the foreseeable
future.
Expense
and Capital Containment Initiatives
During
the fourth quarter of 2008, we announced expense and capital containment
initiatives in an effort to proactively position us for continued challenges in
the retail environment. These initiatives included a voluntary separation
program, changes in compensation structure, further rationalization of operating
expenses and the closing of certain functions at our Fredericktown, Missouri
distribution center. The workforce reduction program will affect our domestic
and international workforce in business areas across the enterprise. Associate
separations began in February 2009, with final dates of employment determined on
an individual basis. We previously announced our intent to work with public and
private partners over the next few years on the redevelopment of our 12-acre
property in St. Louis, Missouri into a mixed-use project with office, retail and
residential facilities, including a new, more efficient headquarters for the
Brown Shoe of the future. Due to the current economic conditions, we have
indefinitely paused our redevelopment plans. We do not have any ongoing
expenditure requirements associated with our headquarters redevelopment
initiative.
These
expense and capital containment initiatives are expected to yield annual
savings in the range of $28 million to $31 million. The total costs to implement
these initiatives, as recorded in the fourth quarter of 2008, are estimated to
be $30.9 million ($19.1 million on an after-tax basis, or $0.46 per diluted
share). These costs include employee-related costs for severance, including
health care benefits and enhanced pension benefits, as well as facility and
other costs. These estimates are subject to change and differences may arise
between these estimates and actual costs. See Note 5 to the consolidated
financial statements for additional information related to these
charges.
Headquarters
Consolidation
During
the first quarter of 2008, we announced plans to relocate our Famous Footwear
division headquarters from Madison, Wisconsin to St. Louis, Missouri. The
relocation of the division is intended to foster collaboration, increase our
speed to market and strengthen our connection with consumers. The total costs to
implement the transition, as recorded in 2008, are estimated to be $29.8 million
($18.2 million on an after-tax basis, or $0.44 per diluted share). These costs
include employee-related costs for relocation, severance, recruiting and
retention, as well as facility and other costs. See Note 5 to the consolidated
financial statements for additional information related to these
charges.
Under
various state economic development programs, we are collaborating with public
partners to receive eligible incentives related to training and job creation.
During 2008, we recognized $1.6 million, net of federal tax of $0.9 million,
related to state tax incentives for these initiatives.
During
the fourth quarter of 2008, we invested $3.6 million in Shoes.com, Inc.
(“Shoes.com”), acquiring 6.2% of the common stock, bringing our total equity
interest to 100%. See Note 2 to the consolidated financial statements for
additional information related to our business combinations and
investments.
Investment
in Edelman Shoe, Inc.
On
November 3, 2008, we invested an additional $4.1 million in Edelman Shoe, Inc.
(“Edelman Shoe”), acquiring 7.5% of the outstanding stock, bringing our total
equity interest to 50%. We have an option to buy the remaining interest in the
future. The Sam Edelman brand was launched in 2004 and is sold in department
stores and independent and specialty stores across the country. Edelman Shoe is
a variable interest entity for which we are the primary beneficiary; therefore,
our consolidated financial statements include the accounts of Edelman Shoe
beginning in the fourth quarter of 2008. Prior to consolidation, we accounted
for the investment in accordance with the equity method. See Note 2 to the
consolidated financial statements for additional information related to our
business combinations and investments.
Information
Technology Initiatives
During
the second quarter of 2008, we announced plans to implement an integrated ERP
information technology system provided by third-party vendors. We will utilize
an industry specific ERP information technology system solution to support our
supply chain. The ERP information technology system will replace select existing
internally developed and certain other third-party applications, and is expected
to support our growth strategy while streamlining and transforming day-to-day
operations for our integrated business model. We anticipate the implementation
will enhance our profitability and deliver increased shareholder value through
improved management and execution of our business operations, financial systems,
supply chain efficiency and planning and employee productivity. The phased
implementation began during the second quarter of 2008 and is expected to
continue through 2011. We incurred charges of $3.7 million ($2.4 million on an
after-tax basis, or $0.06 per diluted share) during 2008 related to our
implementation of these initiatives.
West
Coast Distribution Center
During
2008, we entered into an operating lease for a new west coast distribution
center for our retail operations. We believe this distribution center, which is
currently under construction and is expected to be operational in time for our
back-to-school season in 2009, will provide us with increased operating and
freight efficiencies.
Outlook
for 2009
Looking
ahead, we expect that 2009 will continue to be a difficult economic environment.
Accordingly, we expect that our retail business will experience negative
same-store sales during 2009. For our wholesale business, we expect a decline in
sales of our existing brands and continued decline in sales from our private
label business, partially offset by growth in our new brands, such as Sam
Edelman, Libby Edelman, Fergie and Fergalicious as well as increased penetration
by Dr. Scholl’s in the national chains channel. We believe that our brands are
well positioned in the marketplace and that our continued focus on our liquidity
and capital management, inventory management, expense disciplines and investment
in brands and other portions of our business that are expected to drive our
future growth and provide the foundation for future success.
Following are the consolidated results and the results by segment for 2008, 2007 and 2006:
|
CONSOLIDATED
RESULTS
|
||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||
|
($
millions)
|
%
of
Net
Sales
|
%
of
Net
Sales
|
%
of
Net
Sales
|
|||||||||||||
|
Net
sales
|
$
|
2,276.4
|
100.0%
|
$
|
2,359.9
|
100.0%
|
$
|
2,470.9
|
100.0%
|
|||||||
|
Cost
of goods sold
|
1,394.2
|
61.2%
|
1,416.5
|
60.0%
|
1,500.0
|
60.7%
|
||||||||||
|
Gross
profit
|
882.2
|
38.8%
|
943.4
|
40.0%
|
970.9
|
39.3%
|
||||||||||
|
Selling
and administrative expenses
|
851.8
|
37.4%
|
827.4
|
35.1%
|
854.1
|
34.6%
|
||||||||||
|
Impairment
of goodwill and intangible assets
|
149.2
|
6.6%
|
–
|
–
|
–
|
–
|
||||||||||
|
Restructuring
and other special charges, net
|
54.3
|
2.4%
|
19.0
|
0.8%
|
8.1
|
0.3%
|
||||||||||
|
Equity
in net loss of nonconsolidated affiliate
|
0.2
|
0.0%
|
0.4
|
0.0%
|
–
|
–
|
||||||||||
|
Operating
(loss) earnings
|
(173.3
|
)
|
(7.6)%
|
96.6
|
4.1%
|
108.7
|
4.4%
|
|||||||||
|
Interest
expense
|
(17.1
|
)
|
(0.8)%
|
(16.2
|
)
|
(0.6)%
|
(17.9
|
)
|
(0.7)%
|
|||||||
|
Interest
income
|
1.8
|
0.1%
|
3.4
|
0.1%
|
2.6
|
0.1%
|
||||||||||
|
(Loss)
earnings before income taxes and minority
interests
|
(188.6
|
)
|
(8.3)%
|
83.8
|
3.6%
|
93.4
|
3.8%
|
|||||||||
|
Income
tax benefit (provision)
|
53.8
|
2.3%
|
(23.5
|
)
|
(1.0)%
|
(27.7
|
)
|
(1.1)%
|
||||||||
|
Minority
interests in net loss of consolidated
subsidiaries
|
1.6
|
0.1%
|
0.1
|
0.0%
|
–
|
–
|
||||||||||
|
Net
(loss) earnings
|
$
|
(133.2
|
)
|
(5.9)%
|
$
|
60.4
|
2.6%
|
$
|
65.7
|
2.7%
|
||||||
Net
Sales
Net sales
decreased $83.5 million, or 3.5%, to $2.276 billion in 2008, as compared to
$2.360 billion last year. All segments were impacted by the challenging consumer
environment. The largest decline came from our Wholesale Operations segment,
which reported a $79.7 million decline, as our retail partners experienced the
same business environment and sought to manage their inventories and open to buy
more tightly. The net sales of our Specialty Retail segment declined by $10.7
million, due to a same-store sales decline of 3.4% in our retail stores, lower
net sales at Shoes.com and a decline in the Canadian dollar exchange rate,
partially offset by a higher store count. Our Famous Footwear segment’s net
sales increased by $6.8 million, reflecting a higher store count, while
experiencing a same-store sales decline of 4.7%.
Net sales
decreased $111.0 million, or 4.5%, to $2.360 billion in 2007, as compared to
$2.471 billion in 2006. Although we experienced growth in net sales from our
retail segments, the decline in our Wholesale Operations segment’s net sales
more than offset the retail increase. The decline in our Wholesale Operations
segment’s sales of $147.3 million reflects declines in most of our major brands,
driven by the weak consumer environment, our reduced emphasis on sales of
private label product and the discontinuance of the Bass license at the end of
2006. Famous Footwear’s net sales increased by $31.0 million, reflecting a
higher store count in 2007, partially offset by the impact of an additional week
of sales in 2006 (due to 2006 being a 53-week fiscal period) and a same-store
sales decline of 0.6%. Our Specialty Retail segment’s net sales improved by $5.3
million, due to both growth in our Shoes.com business and the strengthening of
the Canadian dollar, partially offset by a lower store count compared to 2006,
the impact of the 53
rd
week in
2006 and a same-store sales decline of 0.9% in our retail stores.
Gross
Profit
Gross
profit decreased $61.2 million, or 6.5%, to $882.2 million in 2008, as compared
to $943.4 million last year as a result of lower net sales and a decline in our
gross profit rate. As a percent of net sales, our gross profit decreased to
38.8% in 2008, from 40.0% last year. In our Wholesale Operations segment, we
recognized increased markdowns and higher allowances. In addition, we
experienced a sales shift from department store to the lower-margin national
chains channel and a higher mix of lower-margin licensed brands as compared to
our owned brands. Increased promotional activity in our retail segments and
higher markdowns in our retail inventory also contributed to the decline in
gross profit rate.
Gross
profit decreased $27.5 million, or 2.8%, to $943.4 million in 2007, as compared
to $970.9 million in 2006. As a percent of net sales, our gross profit increased
to 40.0% in 2007, from 39.3% in 2006. The increase in gross profit as a
percentage of net sales in 2007 was driven by both higher margin rates in our
Wholesale Operations segment and a greater mix of retail sales, which carry a
higher gross profit rate. Our Wholesale Operations segment experienced a higher
gross profit rate as a result of a greater mix of higher margin branded product
sales, as we reduced our emphasis on lower margin private label product sales
and discontinued the lower margin Bass business in 2006.
We record
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 increased $24.4 million, or 3.0%, to $851.8 million
in 2008 compared to last year and decreased $26.7 million, or 3.1%, to $827.4
million in 2007 compared to 2006. As a percent of net sales, selling and
administrative expenses was 37.4% in 2008, compared to 35.1% in 2007 and 34.6%
in 2006.
Selling
and administrative expenses increased $24.4 million in 2008 compared to last
year as a result of higher retail facilities costs due to higher store counts in
our retail segments, partially offset by lower share-based compensation expense
of $5.8 million primarily reflecting lower expected payout percentages on our
stock performance plans and lower legal fees. As a percentage of net sales,
selling and administrative expenses increased to 37.4% in 2008 from 35.1% last
year. This increase is due to the impact of the factors listed above and the
de-leveraging of the expense base from lower sales volume.
Selling
and administrative expenses decreased $26.7 million in 2007, as compared to 2006
as a result of numerous factors, including higher retail facilities and selling
costs due to a higher store count and higher sales at Famous Footwear, as well
as the following major components:
|
·
|
Cash-based
employee incentive plan – We recognized total expense of $1.2 million for
cash-based employee incentive plan costs in 2007 compared to $26.6 million
in 2006, resulting in a decrease in expenses of $25.4
million.
|
|
·
|
Earnings
Enhancement Plan savings – We experienced a decrease in costs of
approximately $16 million as a result of lower costs resulting from the
benefits of our Earnings Enhancement Plan (approximately $21 million
during 2007 versus approximately $5 million during
2006).
|
|
·
|
Executive
early retirement agreement – During 2006, we incurred charges related to
an executive early retirement agreement of $3.7 million, with no
corresponding charges during 2007.
|
As a
percentage of net sales, selling and administrative expenses have increased to
35.1% in 2007 from 34.6% in 2006. This increase is due to the impact of the
factors listed above and the de-leveraging of the expense base from lower sales
volume.
Impairment
of Goodwill and Intangible Assets
We
incurred charges related to the impairment of our goodwill and intangible assets
of $149.2 million during 2008, as a result of the deterioration of general
economic conditions, recent industry trends and the resulting decline in our
share price and market capitalization, with no corresponding charges in 2007 or
2006. See Note 1 and Note 10 to the consolidated financial statements for
additional information related to impairment of goodwill and intangible
assets.
Restructuring
and Other Special Charges, Net
Restructuring
and other special charges, net increased $35.3 million to $54.3 million during
2008, as compared to $19.0 million last year as a result of several factors, as
follows (see Note 5 to the consolidated financial statements for additional
information related to these charges and recoveries):
|
·
|
Expense
and capital containment initiatives – We incurred charges of $30.9 million
during 2008, related to our expense and capital containment initiatives,
with no corresponding charges last year. These costs include
employee-related costs for severance, including health care benefits and
enhanced pension benefits, as well as facility and other costs. See
further discussion of these initiatives under
Recent
Developments
.
|
|
·
|
Headquarters
consolidation – We incurred charges of $29.8 million during 2008, related
to the relocation and transition of our Famous Footwear division
headquarters, with no corresponding charges last year. These costs include
employee-related costs for relocation, severance, recruiting and
retention, as well as facility and other
costs.
|
|
·
|
Earnings
Enhancement Plan – Last year, we incurred charges related to our Earnings
Enhancement Plan initiatives of $19.0 million, with no corresponding
charges during 2008. The plan was designed to increase earnings through
cost reductions, efficiency initiatives and the reallocation of
resources.
|
|
·
|
Environmental
insurance recoveries and charges – We recorded income related to insurance
recoveries, net of associated fees and costs, of $10.2 million, as a
reduction of restructuring and other special charges, net during 2008,
with no corresponding recoveries last
year.
|
|
·
|
Information
technology initiatives – We incurred charges of $3.7 million during 2008,
related to our integrated ERP information technology system that will
replace select existing internally developed and certain other third-party
applications, with no corresponding charges last
year.
|
As a
percent of net sales, restructuring and other special charges, net increased to
2.4% in 2008, from 0.8% last year, reflecting the above named factors and the
de-leveraging of our expense base over lower net sales volume.
Restructuring
and other special charges, net increased $10.9 million to $19.0 million during
2007, as compared to $8.1 million in 2006 as a result of several factors, as
follows:
|
·
|
Earnings
Enhancement Plan – We incurred additional charges of $13.0 million related
to our Earnings Enhancement Plan in 2007 compared to 2006 ($19.0 million
during 2007, compared to $6.0 million during
2006).
|
|
·
|
Exit
of the Bass business – During 2006, we incurred charges related to the
exit of our Bass business of $3.8 million, with no corresponding charges
during 2007.
|
|
·
|
Environmental
insurance recoveries and charges – We recorded income related to insurance
recoveries, net of costs to complete the Redfield on-site remediation of
$1.6 million, as a reduction of restructuring and other special charges,
net during 2006, with no corresponding recoveries in
2007.
|
As a
percent of net sales, restructuring and other special charges, net increased to
0.8% in 2007, from 0.3% in 2006, reflecting the above named factors and the
de-leveraging of our expense base over lower net sales volume.
Operating
(Loss) Earnings
We
reported an operating loss of $173.3 million in 2008, as compared to operating
earnings of $96.6 million last year due to the impairment of goodwill and
intangible assets, an increase in restructuring and other special charges, net
and an increase in selling and administrative expenses as well as a decline in
net sales and gross profit rate as discussed above.
Operating
earnings decreased $12.1 million, or 11.1%, to $96.6 million in 2007, as
compared to $108.7 million in 2006. As a percent of net sales, operating
earnings declined to 4.1% in 2007, from 4.4% in 2006, due to the factors
above.
Interest
Expense
Interest
expense increased $0.9 million to $17.1 million in 2008, as compared to last
year and decreased $1.7 million to $16.2 million in 2007 compared to
2006.
The
increase in interest expense in 2008 reflects higher average borrowings under
our revolving credit agreement, partially offset by lower rates on our
borrowings under our revolving credit agreement.
The
decrease in interest expense in 2007 was driven by lower average borrowings
under our revolving credit agreement.
Income
Tax Benefit (Provision)
Our
consolidated effective tax rates in 2008, 2007 and 2006 were 28.5%, 28.0% and
29.7%, respectively.
Our
consolidated effective tax rate is generally below the federal statutory rate of
35% because our foreign earnings are subject to lower statutory tax
rates.
In 2008,
we incurred a pre-tax loss in our domestic operations, which are generally
subject to a normal combined tax rate of 35% to 39%. However, we recorded
pre-tax earnings in foreign jurisdictions, which generally have very low tax
rates. This combination of a domestic loss and foreign earnings, the impairment
of goodwill and intangible assets, some of which is not deductible for tax
purposes, and the recognition of certain state tax incentives, resulted in an
overall effective tax benefit rate of 28.5% in 2008.
We recognized $1.6 million, net of $0.9 million federal tax impact, of income for state tax incentives related to our headquarters consolidation initiatives during 2008, with no corresponding income during 2007 or 2006. See Note 7 to the consolidated financial statements for additional information regarding our tax rates.
Net
(Loss) Earnings
We
reported a net loss of $133.2 million in 2008, compared to net earnings of $60.4
million in 2007 as a result of the reasons noted above.
Net
earnings decreased $5.3 million, or 8.0%, to $60.4 million in 2007, as compared
to $65.7 million in 2006 due to the factors discussed above.
Geographic
Results
We have
both domestic and foreign operations. Domestic operations include the wholesale
distribution of footwear to numerous retail customers and the nationwide
operation of the Famous Footwear and Specialty Retail chains of footwear stores.
Foreign operations primarily consist of wholesale operations in the Far East and
retailing operations in Canada and China. In addition, we license certain of our
trademarks to third parties who distribute and/or operate retail locations
internationally. The Far East operations include first-cost transactions, where
footwear is sold at foreign ports to customers who then import the footwear into
the United States and other countries. The breakdown of domestic and foreign net
sales and (loss) earnings before income taxes and minority interests was as
follows:
|
2008
|
2007
|
2006
|
||||||||||||
|
($
millions)
|
Net
Sales
|
(Loss)
Earnings
Before
I
ncome
Taxes
and
Minority
Interests
|
Net
Sales
|
Earnings
Before
Income
Taxes
and
Minority
Interests
|
Net
Sales
|
Earnings
Before
Income
Taxes
and
Minority
Interests
|
||||||||
|
Domestic
|
$1,916.5
|
($217.2
|
)
|
$1,967.7
|
$38.7
|
$1,996.7
|
$51.3
|
|||||||
|
Foreign
|
359.9
|
28.6
|
392.2
|
45.1
|
474.2
|
42.1
|
||||||||
|
$2,276.4
|
($188.6
|
)
|
$2,359.9
|
$83.8
|
$2,470.9
|
$93.4
|
||||||||
The
pretax profitability on foreign sales is higher than on domestic sales because
of a lower cost structure and the inclusion in domestic earnings of the
unallocated corporate administrative and other costs.
We
incurred domestic losses before income taxes and minority interests in 2008 as a
result of the weak consumer environment and the impact of higher domestic costs
in 2008 primarily related to the impairment of goodwill and intangible assets
and higher restructuring and other special charges, net in 2008.
In 2007,
domestic earnings were lower and foreign earnings were higher than in 2006. The
relative mix of domestic earnings before income taxes and minority interests
decreased in 2007 as compared to 2006. Domestic earnings were lower in 2007 as a
result of the weak consumer environment and the impact of higher domestic costs
in 2007 related to our Earnings Enhancement Plan.
|
FAMOUS
FOOTWEAR
|
|||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||
|
($
millions, except sales per square foot)
|
%
of
Net
Sales
|
%
of
Net
Sales
|
%
of
Net
Sales
|
||||||||||
|
Operating
Results
|
|||||||||||||
|
Net
sales
|
$
|
1,320.0
|
100.0%
|
$
|
1,313.2
|
100.0%
|
$
|
1,282.2
|
100.0%
|
||||
|
Cost
of goods sold
|
748.4
|
56.7%
|
727.8
|
55.4%
|
704.3
|
54.9%
|
|||||||
|
Gross
profit
|
571.6
|
43.3%
|
585.4
|
44.6%
|
577.9
|
45.1%
|
|||||||
|
Selling
and administrative expenses
|
537.3
|
40.7%
|
501.3
|
38.2%
|
488.1
|
38.1%
|
|||||||
|
Impairment
of goodwill and intangible assets
|
3.5
|
0.3%
|
–
|
–
|
–
|
–
|
|||||||
|
Restructuring
and other special charges, net
|
3.8
|
0.3%
|
–
|
–
|
–
|
–
|
|||||||
|
Operating
earnings
|
$
|
27.0
|
2.0%
|
$
|
84.1
|
6.4%
|
$
|
89.8
|
7.0%
|
||||
|
Key
Metrics
|
|||||||||||||
|
Same-store
sales % change (on a 52-week basis)
|
(4.7)%
|
(0.6)%
|
3.4%
|
||||||||||
|
Same-store
sales $ change (on a 52-week basis)
|
$
|
(60.3
|
)
|
$
|
(7.5
|
)
|
$
|
38.6
|
|||||
|
Sales
impact of 53
rd
week
|
$
|
–
|
$
|
(18.7
|
)
|
$
|
18.7
|
||||||
|
Sales
change from new and closed stores, net
|
$
|
67.1
|
$
|
57.2
|
$
|
37.7
|
|||||||
|
Sales
per square foot, excluding e-commerce
(on
a 52-week basis)
|
$
|
168
|
$
|
180
|
$
|
185
|
|||||||
|
Square
footage (thousand sq. ft.)
|
7,894
|
7,459
|
6,940
|
||||||||||
|
Stores
opened
|
89
|
110
|
92
|
||||||||||
|
Stores
closed
|
25
|
35
|
46
|
||||||||||
|
Ending
stores
|
1,138
|
1,074
|
999
|
||||||||||
Net
Sales
Net sales
increased $6.8 million, or 0.5%, to $1.320 billion in 2008, as compared to
$1.313 billion last year. During 2008, we opened 89 new stores and closed 25,
resulting in 1,138 stores and total square footage of 7.9 million at the end of
2008, as compared to 1,074 stores and total square footage of 7.5 million at the
end of last year. During 2008, net new stores provided $67.1 million in net
sales, but declines in customer traffic and lower conversion rates led to a
same-store sales decline of 4.7%, or $60.3 million. As a result of the
same-store sales decline and lower sales per square foot in our newer stores
compared to our mature stores, sales per square foot decreased 7.0% to $168, as
compared to $180 last year. Our customer loyalty program, Rewards, continues to
gain momentum, as approximately 60% of our net sales were made to our Rewards
members in 2008, as compared to 54% in 2007 and 45% in 2006.
Net sales
increased $31.0 million, or 2.4%, to $1.313 billion in 2007, as compared to
$1.282 billion in 2006 due to a higher store count, partially offset by the
impact of the 53
rd
week in
2006 and a decline in same-store sales. Our 2006 fiscal year included 53 weeks,
while both our 2008 and 2007 fiscal years had 52 weeks. Same-store sales
decreased 0.6%, reflecting the overall weak consumer environment resulting in a
decrease in customer traffic count. During 2007, net new stores provided $57.2
million in net sales and same-store sales decreased $7.5 million. We opened 110
new stores and closed 35 in 2007, increasing total square footage by 7.5% to 7.5
million. As a result of the same-store sales decline and lower sales per square
foot in our newer stores compared to our mature stores, sales per square foot
decreased 2.7% to $180 during 2007.
Same-store
sales changes are calculated by comparing the sales in stores that have been
open at least 13 months. This method avoids the distorting effect that grand
opening sales have in the first month of operation. 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 thereby excluded from
the same-store sales calculation.
Gross
profit decreased $13.8 million, or 2.4%, to $571.6 million in 2008, as compared
to $585.4 million last year. The decrease was due to a decline in gross profit
rate, primarily as a result of increased promotional activity and higher
markdowns as we sought to manage inventory and maintain market share during the
year. As a percent of net sales, our gross profit rate was 43.3% in 2008, down
from 44.6% last year.
Gross
profit increased $7.5 million, or 1.3%, to $585.4 million in 2007, as compared
to $577.9 million in 2006, reflecting a higher store count compared to the prior
year. As a percent of net sales, our gross profit rate was 44.6% in 2007, down
from 45.1% in 2006. The decrease in rate primarily reflects an increase in
promotional activity and higher markdowns to sell through inventory,
particularly in the second half of 2007. In addition, we recognized $1.2 million
of income related to gift card breakage (i.e., gift cards sold where the
likelihood of redemption by the customer is remote) in 2006 after realigning our
corporate structure. Income from gift card breakage increased our gross profit
rate by ten basis points in 2006.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $36.0 million, or 7.2%, to $537.3 million
during 2008, as compared to $501.3 million last year. The increase was primarily
attributable to the higher store count and higher sales volume, resulting in
higher retail facilities and selling costs as well as higher marketing costs. As
a percent of net sales, selling and administrative expenses increased to 40.7%
in 2008, from 38.2% last year, reflecting the higher costs noted
above.
Selling
and administrative expenses increased $13.2 million, or 2.7%, to $501.3 million
during 2007, as compared to $488.1 million in 2006. As a percent of net sales,
selling and administrative expenses increased slightly to 38.2% in 2007, from
38.1% in 2006. The increase in expenses was primarily attributable to higher
retail facilities and direct selling costs as a result of our higher store count
and higher marketing expenses. These increases were partially offset by lower
cash-based employee incentive costs in 2007.
Impairment
of Goodwill and Intangible Assets
We
incurred charges related to the impairment of our goodwill of $3.5 million
during 2008, as a result of the deterioration of general economic conditions,
recent industry trends and the resulting decline in our share price and market
capitalization, with no corresponding charges in 2007 or 2006. See Note 1 and
Note 10 to the consolidated financial statements for additional information
related to impairment of goodwill and intangible assets.
Restructuring
and Other Special Charges, Net
Restructuring
and other special charges, net increased to $3.8 million in 2008, with no
corresponding charges in 2007 or 2006. The increase was attributable to expense
and capital containment initiative costs of $3.8 million in 2008. As a percent
of net sales, restructuring and other special charges, net increased to 0.3% in
2008.
Operating
Earnings
Operating
earnings decreased $57.1 million, or 68.0%, to $27.0 million for 2008, as
compared to $84.1 million last year. The decline was driven by the increase in
selling and administrative expenses, restructuring and other special charges,
net and impairment of goodwill as well as a decrease in the gross profit rate,
as described above. As a percent of net sales, operating earnings declined to
2.0% in 2008, as compared to 6.4% last year.
Operating
earnings decreased $5.7 million, or 6.3%, to $84.1 million for 2007, as compared
to $89.8 million in 2006. The decline was driven by the decrease in the gross
profit rate and higher retail facilities and direct selling expense, partially
offset by lower cash-based incentive compensation expense, as described above.
As a percent of net sales, operating earnings declined to 6.4% in 2007, as
compared to 7.0% in 2006.
|
WHOLESALE
OPERATIONS
|
|
2008
|
2007
|
2006
|
|||||||||||||
|
($
millions)
|
%
of
Net
Sales
|
%
of
Net
Sales
|
%
of
Net
Sales
|
||||||||||||
|
Operating
Results
|
|||||||||||||||
|
Net
sales
|
$
|
703.8
|
100.0%
|
$
|
783.5
|
100.0%
|
$
|
930.8
|
100.0%
|
||||||
|
Cost
of goods sold
|
497.9
|
70.7%
|
543.3
|
69.3%
|
657.0
|
70.6%
|
|||||||||
|
Gross
profit
|
205.9
|
29.3%
|
240.2
|
30.7%
|
273.8
|
29.4%
|
|||||||||
|
Selling
and administrative expenses
|
170.3
|
24.2%
|
168.1
|
21.5%
|
195.4
|
21.0%
|
|||||||||
|
Impairment
of goodwill and intangible assets
|
129.1
|
18.4%
|
–
|
–
|
–
|
–
|
|||||||||
|
Restructuring
and other special charges, net
|
14.4
|
2.1%
|
4.2
|
0.5%
|
7.4
|
0.8%
|
|||||||||
|
Equity
in net loss of nonconsolidated affiliate
|
0.2
|
0.0%
|
0.4
|
0.1%
|
–
|
–
|
|||||||||
|
Operating
(loss) earnings
|
$
|
(108.1
|
)
|
(15.4)%
|
$
|
67.5
|
8.6%
|
$
|
71.0
|
7.6%
|
|||||
|
Key
Metrics
|
|||||||||||||||
|
Unfilled
order position at year-end
|
$
|
200.2
|
$
|
238.1
|
$
|
214.4
|
|||||||||
Net
Sales
Net sales
decreased $79.7 million, or 10.2%, to $703.8 million in 2008, as compared to
$783.5 million last year. The challenging retail environment softened demand for
many of our brands as our retail partners sought to manage their inventories and
open to buy more tightly. We experienced sales declines from most of our major
brands, including our Women’s Specialty (composed of private brands and private
label business), Dr. Scholl’s, Naturalizer, LifeStride, Nickels Soft and Via
Spiga divisions. These declines were partially offset by sales growth in our Sam
Edelman (first consolidated in the fourth quarter of 2008), Etienne Aigner,
Children’s and Specialty Athletic and International divisions. By channel of
distribution, we experienced sales declines from mass merchandisers and
department stores, partially offset by an increase in sales to national
chains.
Net sales
decreased $147.3 million, or 15.8%, to $783.5 million in 2007, as compared to
$930.8 million in 2006, reflecting declines in most of our major brands due to
several factors, including a weaker consumer environment, our reduced emphasis
on lower margin private label product sales and our decision to exit the Bass
business at the end of 2006. We achieved sales gains in our Dr. Scholl’s,
Etienne Aigner and Nickels Soft brands; however, sales declined in our Via
Spiga, LifeStride, Naturalizer, Carlos by Carlos Santana, Franco Sarto and
Children’s brands.
Gross
Profit
Gross
profit decreased $34.3 million, or 14.3%, to $205.9 million in 2008, as compared
to $240.2 million last year. As a percent of net sales, our gross profit rate
decreased to 29.3% in 2008, from 30.7% last year. The lower gross profit rate
reflects increased markdowns, as we attempted to maintain fresh inventory, and
higher allowance provisions as a percent of sales to our department store
customers. The segment also experienced a change in sales mix from department
store to the lower-margin national chains channel and a higher mix of sales of
lower-margin licensed brands as compared to our owned brands.
Gross
profit decreased $33.6 million, or 12.3%, to $240.2 million in 2007, as compared
to $273.8 million in 2006 as a result of the lower sales volume. However, as a
percent of net sales, our gross profit rate increased to 30.7% in 2007, from
29.4% in 2006, due to a greater mix of branded product sales, lower inventory
markdowns and our exit of the lower-margin Bass business at the end of 2006. In
addition, we continued to benefit from the shift in our business model to focus
on more frequent deliveries of smaller quantities of new goods versus large
preseason sell-ins, thereby minimizing markdowns and allowances.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $2.2 million, or 1.4%, to $170.3 million
during 2008, as compared to $168.1 million last year, due primarily to higher
marketing costs. As a percent of net sales, selling and administrative expenses
increased to 24.2% in 2008, from 21.5% last year, reflecting the above named
factors and the de-leveraging of our expense base over lower net sales
volume.
Selling and administrative expenses decreased $27.3 million, or 13.9%, to $168.1 million during 2007, as compared to $195.4 million in 2006. The decline was a result of lower cash-based employee incentive plan expenses of $12.1 million as well as reductions in selling, marketing, warehousing and distribution costs. As a percent of net sales, selling and administrative expenses increased to 21.5% in 2007, from 21.0% in 2006, reflecting the above named factors and the de-leveraging of our expense base over lower sales volume.
Selling and administrative expenses decreased $27.3 million, or 13.9%, to $168.1 million during 2007, as compared to $195.4 million in 2006. The decline was a result of lower cash-based employee incentive plan expenses of $12.1 million as well as reductions in selling, marketing, warehousing and distribution costs. As a percent of net sales, selling and administrative expenses increased to 21.5% in 2007, from 21.0% in 2006, reflecting the above named factors and the de-leveraging of our expense base over lower sales volume.
Impairment
of Goodwill and Intangible Assets
We
incurred charges related to the impairment of our goodwill and intangible assets
of $129.1 million during 2008, as a result of the deterioration of general
economic conditions, recent industry trends and the resulting decline in our
share price and market capitalization, with no corresponding charges in 2007 or
2006. See Note 1 and Note 10 to the consolidated financial statements for
additional information related to impairment of goodwill and intangible
assets.
Restructuring
and Other Special Charges, Net
Restructuring
and other special charges, net increased $10.2 million to $14.4 million in 2008,
as compared to $4.2 million last year. The increase was attributable to expense
and capital containment initiative costs of $14.4 million in 2008, with no
corresponding charges incurred last year. These increases were partially offset
by $4.2 million in charges related to our Earnings Enhancement Plan in 2007. As
a percent of net sales, restructuring and other special charges, net increased
to 2.1% in 2008, from 0.5% last year, reflecting the above named factors and the
de-leveraging of our expense base over lower net sales volume.
Restructuring
and other special charges, net decreased $3.2 million to $4.2 million in 2007,
as compared to $7.4 million in 2006. The decline was a result of the
nonrecurrence of Bass exit costs incurred in 2006 of $3.8 million, partially
offset by an increase of $0.6 million in expenses related to our Earnings
Enhancement Plan in 2007 ($4.2 million in 2007, as compared to $3.6 million in
2006). As a percent of net sales, restructuring and other special charges, net
decreased to 0.5% in 2008, from 0.8% last year, reflecting the above named
factors.
Equity
in Net Loss of Nonconsolidated Affiliate
During
2007, since the time of our initial investment in Edelman Shoe, Inc. (“Edelman
Shoe”), we recorded our portion of Edelman Shoe’s operating results into our
financial statements based upon the equity method of accounting, as equity in
net loss of nonconsolidated affiliate. We continued to record the results of
Edelman Shoe using the equity method until November 3, 2008, when we purchased
additional shares of Edelman Shoe. Since that date, the results of Edelman Shoe
are fully consolidated into our financial statements, with any minority interest
reflected in the line titled
minority interest in net loss of
consolidated subsidiaries
on our consolidated statement of
earnings.
Operating
(Loss) Earnings
Wholesale
Operations reported an operating loss of $108.1 million as compared to operating
earnings of $67.5 million last year, reflecting an increase in impairment of
goodwill and intangible assets, restructuring and other special charges, net and
selling and administrative expenses as well as lower sales and gross profit rate
as described above.
Operating
earnings decreased $3.5 million, or 4.8%, to $67.5 million for 2007, as compared
to $71.0 million for 2006, as our higher gross profit rate and lower cash-based
incentive costs did not offset the impact of our lower sales volume. As a
percent of net sales, operating earnings increased to 8.6%, as compared to 7.6%
in 2006.
|
SPECIALTY
RETAIL
|
||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||
|
($
millions, except sales per square foot)
|
%
of
Net
Sales
|
%
of
Net
Sales
|
%
of
Net
Sales
|
|||||||||||||||
|
Operating
Results
|
||||||||||||||||||
|
Net
sales
|
$
|
252.5
|
100.0%
|
$
|
263.2
|
100.0%
|
$
|
257.9
|
100.0%
|
|||||||||
|
Cost
of goods sold
|
147.8
|
58.5%
|
145.4
|
55.3%
|
138.7
|
53.8%
|
||||||||||||
|
Gross
profit
|
104.7
|
41.5%
|
117.8
|
44.7%
|
119.2
|
46.2%
|
||||||||||||
|
Selling
and administrative expenses
|
118.0
|
46.8%
|
122.2
|
46.4%
|
122.2
|
47.4%
|
||||||||||||
|
Impairment
of goodwill and intangible assets
|
16.6
|
6.6%
|
–
|
–
|
–
|
–
|
||||||||||||
|
Restructuring
and other special charges, net
|
0.6
|
0.2%
|
3.8
|
1.4%
|
0.8
|
0.3%
|
||||||||||||
|
Operating
loss
|
$
|
(30.5
|
)
|
(12.1)%
|
$
|
(8.2
|
)
|
(3.1)%
|
$
|
(3.8
|
)
|
(1.5)%
|
||||||
|
Key
Metrics
|
||||||||||||||||||
|
Same-store
sales % change
(on
a 52-week basis)
|
(3.4)%
|
(0.9)%
|
2.1%
|
|||||||||||||||
|
Same-store
sales $ change
(on
a 52-week basis)
|
$
|
(6.0
|
)
|
$
|
(1.7
|
)
|
$
|
3.2
|
||||||||||
|
Sales
impact of 53
rd
week
|
$
|
–
|
$
|
(3.8
|
)
|
$
|
3.8
|
|||||||||||
|
Sales
change from new and closed stores, net
|
$
|
3.1
|
$
|
(12.0
|
)
|
$
|
(20.3
|
)
|
||||||||||
|
Impact
of changes in Canadian
exchange
rate on sales
|
$
|
(3.4
|
)
|
$
|
6.2
|
$
|
4.1
|
|||||||||||
|
Sales
change of e-commerce subsidiary
(on
a 52-week basis)
|
$
|
(4.4
|
)
|
$
|
16.6
|
$
|
27.1
|
|||||||||||
|
Sales
per square foot, excluding e-commerce
(on
a 52-week basis)
|
$
|
348
|
$
|
358
|
$
|
351
|
||||||||||||
|
Square
footage (thousand sq. ft.)
|
487
|
468
|
488
|
|||||||||||||||
|
Stores
opened
|
31
|
14
|
4
|
|||||||||||||||
|
Stores
closed
|
9
|
20
|
28
|
|||||||||||||||
|
Ending
stores
|
306
|
284
|
290
|
|||||||||||||||
Net
Sales
Net sales
decreased $10.7 million, or 4.1%, to $252.5 million in 2008, as compared to
$263.2 million last year. A same-store sales decline of 3.4% in our retail
stores, lower net sales at Shoes.com and a decline in the Canadian dollar
exchange rate, partially offset by a higher store count led to an overall
decrease in our level of net sales. The net sales of Shoes.com decreased $4.4
million, or 5.5%, to $74.2 million in 2008, as compared to $78.6 million last
year, reflecting the challenging consumer environment and site performance
issues experienced early in 2008 from our system platform conversion. We opened
31 new stores (including 15 new Naturalizer stores in China) and closed nine
during 2008 (including one Naturalizer store in China), resulting in a total of
306 stores (including 19 Naturalizer stores in China) and total square footage
of 487,000 at the end of 2008, as compared to 284 stores (including five
Naturalizer stores in China) and total square footage of 468,000 at the end of
last year. As a result of the same-store sales and Canadian dollar exchange rate
declines, sales per square foot decreased 2.8% to $348, as compared to $358 last
year.
Net sales
increased $5.3 million, or 2.0%, to $263.2 million in 2007, as compared to 2006,
primarily due to growth in net sales of Shoes.com and the strengthening of the
Canadian dollar exchange rate. These factors were partially offset by a lower
store count compared to last year, the impact of the 53
rd
week in
2006 and a same-store sales decline of 0.9% in our retail stores. Net sales of
Shoes.com increased $16.6 million, or 26.8%, on a 52-week basis, to $78.6
million in 2007. During 2007, we opened 14 new stores (including five
Naturalizer stores in China) and closed 20, decreasing total square footage by
4.1% to 468,000. As a result of closing underperforming stores and strengthening
of the Canadian dollar, sales per square foot increased 2.0%, to $358 during
2007.
Gross
profit decreased $13.1 million, or 11.1%, to $104.7 million in 2008, as compared
to $117.8 million last year, reflecting lower net sales and gross profit rate.
As a percent of net sales, our gross profit decreased to 41.5% in 2008, from
44.7% last year. Increased promotional activity and higher markdowns in our
retail stores resulted in a decrease in our overall gross profit
rate.
Gross
profit decreased $1.4 million, or 1.2%, to $117.8 million in 2007, as compared
to $119.2 million in 2006, due to the lower gross profit rate. As a percent of
net sales, our gross profit decreased to 44.7% in 2007, from 46.2% in 2006, as a
result of higher markdowns taken at Shoes.com to clear inventory, partially
offset by a higher gross profit rate in our stores.
Selling
and Administrative Expenses
Selling
and administrative expenses decreased $4.2 million, or 3.3%, to $118.0 million
during 2008, as compared to $122.2 million last year. This decline reflects a
reduction in marketing costs and a decrease in selling costs due to lower net
sales. An increase in retail facility costs resulting from the higher store
count and higher store pre-opening costs partially offset these declines. As a
percent of net sales, selling and administrative expenses increased to 46.8% in
2008, as compared to 46.4% last year as a result of the decline in net
sales.
Selling
and administrative expenses of $122.2 million during 2007 were flat compared to
2006. We experienced higher expenses at Shoes.com to support its sales growth,
partially offset by a decrease of $1.3 million in cash-based employee incentive
costs as well as lower retail facility costs and store payroll due to the lower
store count in 2007 compared to 2006. Offsetting the impact of the store closing
charges, a strengthening Canadian exchange rate had the effect of increasing
expenses on a United States dollar basis by $2.7 million. As a percent of net
sales, selling and administrative expenses decreased to 46.4% in 2007, as
compared to 47.4% in 2006.
Impairment
of Goodwill and Intangible Assets
We
incurred charges related to the impairment of our goodwill of $16.6 million
during 2008, as a result of the deterioration of general economic conditions,
recent industry trends and the resulting decline in our share price and market
capitalization, with no corresponding charges in 2007 or 2006. See Note 1 and
Note 10 to the consolidated financial statements for additional information
related to impairment of goodwill and intangible assets.
Restructuring
and Other Special Charges, Net
Restructuring
and other special charges, net decreased $3.2 million to $0.6 million in 2008,
as compared to $3.8 million last year. The decrease was attributable to the
nonrecurrence of costs related to our Earnings Enhancement Plan of $3.8 million,
partially offset by expense and capital containment initiative costs of $0.6
million in 2008. As a percent of net sales, restructuring and other special
charges, net decreased to 0.2% in 2008, from 1.4% last year, reflecting the
above named factors.
Restructuring
and other special charges, net increased $3.0 million to $3.8 million in 2007,
as compared to $0.8 million in 2006, resulting from an increase in Earning
Enhancement Plan costs of $3.0 million ($3.8 million in 2007 as compared to $0.8
million in 2006). As a percent of net sales, restructuring and other special
charges, net increased to 1.4% in 2007, from 0.3% in 2006, reflecting the above
named factors.
Operating
Loss
Specialty
Retail reported an operating loss of $30.5 million in 2008, as compared to an
operating loss of $8.2 million last year due primarily to an increase in
impairment of goodwill as well as a decline in net sales and gross profit
rate.
Specialty
Retail reported an operating loss of $8.2 million in 2007, as compared to an
operating loss of $3.8 million in 2006, primarily as a result of higher expenses
experienced at Shoes.com to support its sales growth, a lower gross profit rate
and higher costs associated with our Earnings Enhancement Plan in
2007.
|
OTHER
|
The Other
segment includes unallocated corporate administrative and other costs and
recoveries. The segment reported costs of $61.7 million, $46.9 million and $48.3
million in 2008, 2007 and 2006, respectively.
There were several factors impacting the $14.8 million increase in costs from 2007 to 2008, as follows:
|
·
|
Headquarters
consolidation – We incurred charges of $29.8 million during 2008, related
to the relocation and transition of our Famous Footwear division
headquarters, with no corresponding charges last
year.
|
|
·
|
Expense
and capital containment initiatives – We incurred charges of $12.1 million
during 2008, related to our expense and capital containment initiatives,
with no corresponding charges last year. See further discussion of these
initiatives under
Recent
Developments
.
|
|
·
|
Earnings
Enhancement Plan – Last year, we incurred charges related to our Earnings
Enhancement Plan initiatives of $11.0 million, with no corresponding
charges during 2008.
|
|
·
|
Environmental
insurance recoveries and charges – We recorded income related to insurance
recoveries, net of associated fees and costs, of $10.2 million, as a
reduction of restructuring and other special charges, net during 2008,
with no corresponding recoveries last
year.
|
|
·
|
Information
technology initiatives – We incurred charges of $3.7 million during 2008,
related to our integrated ERP information technology system that will
replace select existing internally developed and certain other third-party
applications, with no corresponding charges last
year.
|
|
·
|
Share-based
incentive plans – As a result of our lower operating results, our
share-based compensation expense was lower by $2.8 million in 2008, as
compared to last year. The lower expense primarily reflects lower expected
payout percentages on our stock performance
plans.
|
|
·
|
Lower
expenses related to lower legal fees and an increase in capitalized
salaries in connection with our capitalized
software.
|
There
were several factors impacting the $1.4 million decrease in costs from 2006 to
2007, as follows:
|
·
|
Earnings
Enhancement Plan – We incurred higher costs related to our Earnings
Enhancement Plan of $9.4 million ($11.0 million during 2007 versus $1.6
million during 2006).
|
|
·
|
Cash-based
employee incentive plan – Annual incentive costs were $4.9 million lower
than last year ($1.2 million during 2007 versus $6.1 million during
2006).
|
|
·
|
Executive
retirement agreement – During 2006, we incurred a charge of $3.7 million
related to an executive early retirement agreement, with no corresponding
charge in 2007.
|
|
·
|
Environmental
insurance recoveries and charges – During 2006, we recognized income of
$1.6 million related to an insurance recovery for our Redfield site, net
of environmental charges.
|
|
·
|
Credit
card settlement – In 2007, we recognized $1.2 million of income related to
a settlement with credit card companies as a reduction of selling and
administrative expenses.
|
|
·
|
Lower
expenses related to share-based director and employee compensation
(related to a lower stock price) and lower legal
fees.
|
|
RESTRUCTURING
AND OTHER SPECIAL CHARGES, NET
|
During
2008, we recorded restructuring and other special charges, net of $54.3 million,
including $30.9 million in charges related to our expense and capital
containment initiatives, $29.8 million in charges associated with our
headquarters consolidation and $3.7 million in charges related to our
information technology initiatives, partially offset by $10.2 million of income
related to insurance recoveries, net of associated fees and costs. See the
Recent Developments
section
and Note 5 to the consolidated financial statements for additional information
related to these charges and recoveries.
During
2007, we recorded restructuring and other special charges, net of $19.0 million
related to our Earnings Enhancement Plan. See Note 5 to the consolidated
financial statements for additional information related to these
charges.
During
2006, we recorded restructuring and other special charges, net of $8.1 million,
including $6.0 million in charges associated with our Earnings Enhancement Plan
and $3.8 million in charges related to the expiration of the Bass license,
partially offset by $1.6 million in income related to insurance recoveries, net
of associated fees and costs. In addition, we recorded $0.3 million in charges
associated with our Earnings Enhancement Plan as a component of cost of goods
sold. See Note 5 to the consolidated financial statements for additional
information related to these charges and recoveries.
|
IMPACT
OF INFLATION AND CHANGING PRICES
|
The
effects of inflation on our business and results of operations have been minor
over the last three years. Inflation can have a long-term impact on our business
because increasing costs of materials and labor may impact our ability to
maintain satisfactory margins. For example, our products are manufactured in
other countries and a decline in the value of the U.S. dollar and the impact of
labor shortages in China may result in higher manufacturing costs. Similarly,
any potential significant shortage of quantities or increases in the cost of the
materials that are used in our manufacturing process, such as leather and other
materials or resources, could have a material adverse effect on our business and
results of operations. In addition, inflation often is accompanied by higher
interest rates, which could have a negative impact on consumer spending, in
which case our margins could decrease. Moreover, increases in inflation may not
be matched by rises in income, which also could have a negative impact on
consumer spending. If we incur increased costs that are unable to be recovered
through price increases, or if consumer spending continues to decrease
generally, our business, results of operations, financial condition and cash
flows may be adversely affected. In an effort to mitigate the impact of these
incremental costs on our operating results, we have been able to pass on a
portion of the recent increases in costs to our consumers.
Further
discussion of the risks related to inflation and changing prices is included in
Item 1A under the caption
Risk
Factors
.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
Borrowings
|
($
millions)
|
January
31, 2009
|
February
2, 2008
|
Increase/
(Decrease)
|
||||||
|
Borrowings
under revolving credit agreement
|
$
|
112.5
|
$
|
15.0
|
$
|
97.5
|
|||
|
Senior
notes
|
150.0
|
150.0
|
–
|
||||||
|
Total
debt
|
$
|
262.5
|
$
|
165.0
|
$
|
97.5
|
|||
Total
debt obligations increased $97.5 million, or 59.1%, to $262.5 million at the end
of 2008, as compared to $165.0 million at the end of last year, due primarily to
a rise in borrowings under our revolving credit agreement primarily as a result
of our net loss during 2008. Interest expense in 2008 was $17.1 million, as
compared to $16.2 million in 2007 and $17.9 million in 2006. Our ratio of
debt-to-capital increased to 40.0% at the end of 2008, compared to 22.8% at the
end of 2007, primarily due to a decline in shareholders’ equity as a result of
our net loss in 2008 and our $97.5 million increase in debt obligations at the
end of 2008.
Credit
Agreement
On
January 21, 2009, Brown Shoe Company, Inc. and certain of our subsidiaries (the
“Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the
“Credit Agreement”) dated as of January 21, 2009. The Credit Agreement replaces
the Amended and Restated Credit Agreement, dated July 21, 2004 (the “Former
Credit Agreement”), which was scheduled to expire on July 21, 2009. The
Credit Agreement matures on January 21, 2014. The Credit Agreement provides for
revolving credit in an aggregate amount of up to $380.0 million, subject to the
calculated borrowing base restrictions. 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
receivables and inventories, as defined, less applicable reserves. Under the
Credit Agreement, the Loan Parties’ obligations are secured by a first priority
security interest in receivables, inventories and certain other
collateral.
Interest
on borrowings is at variable rates based on the London Inter-Bank Offer Rate
(“LIBOR”) rate or the prime rate, as defined in the Credit Agreement. The
interest rate and fees for letters of credit varies based upon the level of
excess availability
under the Credit Agreement. There is an unused line fee payable on the
excess availability under the facility and a letter of credit fee payable
on the outstanding exposure 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) 17.5% of the lesser of (x) the borrowing base or (y) the total
commitments and (ii) $25.0 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.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 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, with which we were in compliance as of January 31, 2009.
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, judgment defaults and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if the excess availability falls below the greater of (i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $25.0 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, with which we were in compliance as of January 31, 2009.
At
January 31, 2009, we had $112.5 million in borrowings outstanding and $13.4
million in letters of credit outstanding under the Credit Agreement. Total
additional borrowing availability was $254.1 million at the end of
2008.
We
believe that borrowing capacity under our Credit Agreement will be adequate to
meet our expected operational needs, capital expenditure plans and provide
liquidity for potential acquisitions for the foreseeable future. The Credit
Agreement provides the Company with greater access to credit than existed under
our Former Credit Agreement and extends this availability for five
years.
Senior
Notes
In April
2005, we issued $150.0 million of 8.75% senior notes due in 2012 (“Senior
Notes”). The Senior Notes are guaranteed on a senior unsecured basis by each of
the subsidiaries of Brown Shoe Company, Inc. that is an obligor under the Credit
Agreement. Interest on the Senior Notes is payable on May 1 and November 1 of
each year. The Senior Notes mature on May 1, 2012, but are callable any time on
or after May 1, 2009, at specified redemption prices plus accrued and unpaid
interest. The Senior Notes also contain certain other covenants and restrictions
which limit certain activities including, among other things, levels of
indebtedness, payments of dividends, the guarantee or pledge of our assets,
certain investments, common stock repurchases, mergers and acquisitions and
sales of assets. As of January 31, 2009, we were in compliance with all
covenants relating to the Senior Notes.
Working
Capital and Cash Flow
|
($
millions)
|
January
31, 2009
|
February
2, 2008
|
Increase/
(Decrease)
|
||||||
|
Working
capital
|
$
|
279.3
|
$
|
333.1
|
$
|
(53.8
|
)
|
||
|
Current
ratio
|
1.69:1
|
2.10:1
|
|||||||
|
2008
|
2007
|
Increase/
(Decrease)
|
|||||||
|
Net
cash provided by operating activities
|
$
|
34.3
|
$
|
86.3
|
$
|
(52.0
|
)
|
||
|
Net
cash used for investing activities
|
(81.1
|
)
|
(58.7
|
)
|
(22.4
|
)
|
|||
|
Net
cash provided by (used for) financing activities
|
79.0
|
(23.8
|
)
|
102.8
|
|||||
|
Effect
of exchange rate changes on cash
|
(5.1
|
)
|
2.3
|
(7.4
|
)
|
||||
|
Increase
in cash and cash equivalents
|
$
|
27.1
|
$
|
6.1
|
$
|
21.0
|
|||
Working
capital at January 31, 2009, was $279.3 million, which was $53.8 million lower
than at February 2, 2008. Our current ratio, representing the relationship of
current assets to current liabilities, decreased from 2.10 to 1 at February 2,
2008, to 1.69 to 1 at January 31, 2009. The decrease in working capital is
primarily the result of significantly higher borrowings under our revolving
credit agreement in 2008 as compared to 2007. We used cash provided by operating
activities and financing activities, in part, to fund investing activities
described below. At January 31, 2009, we had $86.9 million of cash and cash
equivalents, most of which represented cash and cash equivalents of our Canadian
and other foreign subsidiaries.
Reasons for the major variances in cash provided (used) in the table above are as follows:
Cash
provided by operating activities was lower by $52.0 million, reflecting several
factors:
|
·
|
Lower
net earnings, including the impact of costs associated with our
headquarters consolidation,
|
|
·
|
A
larger increase in our inventory balance due to operating 86 more retail
stores, slower sales and the timing and amount of purchases,
and
|
|
·
|
A
larger decrease in trade accounts payable due to the timing and amount of
our purchases and payments to
vendors,
|
Partially
offset by,
|
·
|
An
increase in 2008 in accrued expenses primarily due to additional severance
costs accrued in 2008 related to our voluntary severance program and our
relocation of the Famous Footwear division headquarters from Madison,
Wisconsin to St. Louis, Missouri, compared to a decline last year as a
result of lower cash-based employee incentive plan liabilities,
and
|
|
·
|
A
larger decrease in our receivables balance due to the timing of receipts
and a decline in sales.
|
Cash used
for investing activities was higher by $22.4 million as a result of increased
purchases of property and equipment and capitalized software during 2008, as
compared to last year, primarily related to our logistics network, information
technology initiatives and the consolidation of our headquarters. The increase
in cash used for purchases of property and equipment and capitalized software
was partially offset by a decline in the investment in Edelman Shoe, Inc., $4.1
million in 2008 compared to $7.1 million in 2007. In 2009, we expect purchases
of property and equipment and capitalized software of approximately $60 million
to $65 million, primarily for information technology initiatives, logistics
network, new stores and store remodeling as well as our general
infrastructure.
The
increase in cash provided by financing activities of $102.8 million reflects
higher borrowings under the revolving credit agreement and the nonrecurrence of
the acquisition of treasury stock in 2008, partially offset by a reduction in
proceeds from stock option exercises and related tax benefits on share-based
incentive plans and debt issuance costs incurred during the current year in
connection with our new revolving credit agreement, as compared to last
year.
We paid
dividends totaling $0.28 per share in 2008, $0.28 per share in 2007 and $0.21
per share in 2006. The 2008 dividends marked the 86
th
year of
consecutive quarterly dividends.
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
|
Certain
accounting issues require management estimates and judgments for the preparation
of financial statements. Our most significant policies requiring the use of
estimates and judgments are listed below.
Revenue
Recognition
Retail
sales, recognized at the point of sale, are net of returns and exclude sales
tax. Wholesale sales and sales through our internet sites are recorded, net of
returns, allowances and discounts, when the merchandise has been shipped and
title and risk of loss have passed to the customer. Retail items sold through
our internet sites are made pursuant to a sales agreement that provides for
transfer of both title and risk of loss upon our delivery to the carrier.
Reserves for projected merchandise returns, discounts and allowances are carried
based on historical experience and current expectations. Revenue is recognized
on license fees related to our owned brand names, where we are licensor, when
the related sales of the licensee are made.
Gift
Cards
We sell
gift cards to our customers in our retail stores and through our internet sites.
Our gift cards do not have expiration dates or inactivity fees. We recognize
revenue from gift cards when (i) the gift card is redeemed by the customer or
(ii) the likelihood of the gift card being redeemed by the customer is remote
(“gift card breakage”) and we determine that we do not have a legal obligation
to remit the value of unredeemed gift cards to the relevant jurisdictions. We
determine our gift card breakage rate based upon historical redemption patterns.
We recognize gift card breakage at our Famous Footwear division during the
24-month period following the sale of the gift card, according to our historical
redemption pattern. Gift card breakage income is included in net sales in the
consolidated statements of earnings. At this time, we only recognize
breakage income for our Famous Footwear division. We will recognize gift card
breakage at our other divisions once adequate historical data have been
accumulated. We recognized $0.4 million, $0.4 million and $1.2 million of gift
card breakage in 2008, 2007 and 2006, respectively.
Inventories
are our most significant asset, representing 45% of total assets at the end of
2008. We value inventories at the lower of cost or market, with 89% of
consolidated inventories using the last-in, first-out (“LIFO”) method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations are based on management’s estimates of expected year-end
inventory levels and costs and are subject to the final year-end LIFO inventory
valuation.
We apply
judgment in valuing our inventories by assessing the net realizable value of our
inventories based on current selling prices. At our Famous Footwear division, we
recognize markdowns when it becomes evident that inventory items will be sold at
retail prices less than cost, plus the cost to sell the product. This policy
causes gross profit rates at Famous Footwear to be lower than the initial markup
during periods when permanent price reductions are taken to clear product. At
our other divisions, we generally provide markdown reserves to reduce the
carrying values of inventories to a level where, upon sale of the product, we
will realize our normal gross profit rate. We believe these policies reflect the
difference in operating models between Famous Footwear and our other divisions.
Famous Footwear continually runs promotional events to drive seasonal sales to
clear seasonal inventories. The other divisions rely on permanent price
reductions to clear slower-moving inventory.
Income
Taxes
We
provide taxes for the effects of timing differences between financial and tax
reporting. These differences relate principally to employee benefit plans,
accrued expenses, bad debt reserves, depreciation and inventory.
We
evaluate our foreign investment opportunities and plans, as well as our foreign
working capital needs, to determine the level of investment required and,
accordingly, determine the level of foreign earnings that we consider
indefinitely reinvested. Based upon that evaluation, earnings of our foreign
subsidiaries that are not otherwise subject to United States taxation, except
for our Canadian subsidiary, are considered to be indefinitely reinvested, and
accordingly, deferred taxes have not been provided. If changes occur in future
investment opportunities and plans, those changes will be reflected when known
and may result in providing residual United States deferred taxes on unremitted
foreign earnings.
At
January 31, 2009, we have net operating loss carryforwards at certain of our
subsidiaries. We evaluate these carryforwards for realization based upon their
expiration dates and our expectations of future taxable income. As deemed
appropriate, valuation reserves are recorded to adjust the recorded value of
these carryforwards to the expected realizable value.
Goodwill
and Intangible Assets
Goodwill
and intangible assets deemed to have indefinite lives are not amortized but are
subject to annual impairment tests. Future impairment charges on our intangible
assets may be required if the fair value becomes less than book value. The
determination of the fair value is highly subjective, as it is determined
largely by projections of future profitability and cash flows. This evaluation
utilizes discounted cash flow analysis and analyses of historical and forecasted
operating results. We perform impairment tests during the fourth quarter of each
fiscal year, unless events indicate an interim test is required. We recorded
impairment charges in the fourth quarter of 2008 for goodwill and intangible
assets, which reduced the carrying amount of goodwill to zero. Other intangible
assets are amortized over their useful lives and are reviewed for impairment if
and when impairment indicators are present. See Note 1 and Note 10 to the
consolidated financial statements for additional information related to the
impairment of goodwill and intangible assets.
Self-Insurance
We are
self-insured and/or retain high deductibles for a significant portion of our
workers’ compensation, employment practices, group health and disability and
general, auto and property liability insurance. We purchase varying levels of
insurance for losses in excess of our deductibles or self-insured retentions for
these categories of loss. At January 31, 2009 and February 2, 2008,
self-insurance reserves were $11.1 million and $11.5 million, respectively. We
utilize (i) estimates from third-party actuaries and claims adjusters, (ii)
statistical analyses of historical data for our industry and our Company and
(iii) our own estimates to determine required self-insurance reserves. Our
reserves and assumptions are reviewed, monitored and adjusted when warranted by
changing circumstances. Actual experience may vary from estimates and result in
adjustments to our self-insurance liabilities.
Store
Closing and Impairment Charges
We
regularly analyze the results of all of our stores and assess the viability of
underperforming stores to determine whether they should be closed or whether
their long-lived assets have been impaired. We perform asset impairment tests at
least annually, on a store-by-store basis. After allowing for an appropriate
start-up period, unusual nonrecurring events or favorable trends, we write down
to fair value the fixed assets of stores indicated as impaired.
We are
the defendant in several claims and lawsuits arising in the ordinary course of
business. We do not believe any of these ordinary course of business proceedings
will have a material adverse effect on our consolidated financial position or
results of operations. We accrue our best estimate of the cost of resolution of
these claims. Legal defense costs of such claims are recognized in the period in
which we incur the costs. See Note 17 to the consolidated financial statements
for a further description of commitments and contingencies.
We are
audited periodically by domestic and foreign tax authorities and tax assessments
may arise several years after tax returns have been filed. Beginning in 2007,
tax liabilities are recorded when, in management’s judgment, a tax position does
not meet the more likely than not threshold for recognition as prescribed by
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”). For tax positions that meet the more likely than not
threshold, a tax liability may be recorded depending on management’s assessment
of how the tax position will ultimately be settled. Prior to 2007, tax
liabilities had been recorded when, in management’s judgment, it was not
probable that the Company’s tax position would ultimately be sustained. In
evaluating issues raised in such audits and other uncertain tax positions, we
provide reserves for exposures as appropriate.
Environmental
Matters
We are
involved in environmental remediation and ongoing compliance activities at
several sites. We are remediating, under the oversight of Colorado authorities,
contamination at and beneath our owned facility in Colorado (also known as the
“Redfield” site) and groundwater and indoor air in residential neighborhoods
adjacent to and near the property, which have been affected by solvents
previously used at the site and surrounding facilities. In addition, various
federal and state authorities have identified the Company as a potentially
responsible party for remediation at certain landfills. While we currently do
not operate manufacturing facilities in the United States, prior operations
included numerous manufacturing and other facilities for which we may have
responsibility under various environmental laws to address conditions that may
be identified in the future. See Note 17 to the consolidated financial
statements for a further description of specific properties.
Environmental
expenditures relating to an existing condition caused by past operations and
which do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable and the costs can be reasonably estimated and are evaluated
independently of any future claims recovery. Generally, the timing of these
accruals coincides with completion of a feasibility study or the Company’s
commitment to a formal plan of action. Costs of future expenditures for
environmental remediation obligations are discounted to their present value in
those situations requiring only continuing maintenance and monitoring based upon
a schedule of fixed payments
.
Share-based
Compensation
The
Company accounts for share-based compensation in accordance with the fair value
recognition provisions of SFAS No. 123(R),
Share-based Payment
, which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the consolidated financial statements based
on their fair values. The fair value of stock options is calculated by using the
Black-Scholes option pricing formula that requires estimates for expected
volatility, expected dividends, the risk-free interest rate and the term of the
option. If any of the assumptions used in the Black-Scholes model change
significantly, share-based compensation expense may differ materially in the
future from that recorded in the current period. See additional information
related to share-based compensation in Note 15.
Retirement
and Other Benefit Plans
The
Company sponsors pension plans in both the United States and Canada. Our
domestic pension plans cover substantially all United States employees and our
Canadian pension plans cover certain employees based on plan specifications. In
addition, we maintain an unfunded Supplemental Executive Retirement Plan
(“SERP”) and sponsor unfunded defined benefit postretirement life insurance
plans that cover both salaried and hourly employees who had become eligible for
benefits by January 1, 1995.
We
determine our expense and obligations for retirement and other benefit plans
based on assumptions related to discount rates, expected long-term rates of
return on invested plan assets, expected salary increases and certain
employee-related factors, such as turnover, retirement age and mortality among
others. Our assumptions reflect our historical experiences and our best judgment
regarding future expectation. Additional information related to our assumptions
is as follows:
|
·
|
Expected
long-term rate of return – The expected long-term rate of return on plan
assets is based on historical and projected rates of return for current
and planned asset classes in the plan’s investment portfolio. Assumed
projected rates of return for each asset class were selected after
analyzing experience and future expectations of the returns. The overall
expected rate of return for the portfolio was developed based on the
target allocation for each asset class. The weighted-average expected rate
of return on plan assets used to determine our pension expense for 2008
was 8.75%. A decrease of 50 basis points in the weighted-average expected
rate of return on plan assets would impact pension expense by
approximately $1.1 million. The actual return on plan assets in a given
year may differ from the expected long-term rate of return and the
resulting gain or loss is deferred and recognized into the plans’ expense
over time.
|
|
·
|
Discount
rate – Discount rates used to measure the present value of our benefit
obligations for our pension and other postretirement benefit plans are
based on a yield curve constructed from a subset of high quality bonds for
which the timing and amount of cash outflows approximate the estimated
payouts of the plans. The weighted-average discount rate selected to
measure the present value of our benefit obligations under our pension and
other postretirement benefit plans were both 6.50%. A decrease of 50 basis
points in the weighted-average discount rate would have impacted the
projected benefit obligation of the pension and other postretirement
benefit plans by approximately $12.9 million and $0.1 million,
respectively.
|
See Note
6 to the consolidated financial statements for additional information related to
our retirement and other benefit plans.
Impact
of Prospective Accounting Pronouncements
Recent
accounting pronouncements and their impact on the Company are described in Note
1 to the consolidated financial statements.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
At
January 31, 2009, we were contingently liable for remaining lease commitments of
approximately $1.6 million in the aggregate, which relate to former retail
chains that were sold in prior years. These obligations will continue to decline
over the next several years as leases expire. In order for us to incur any
liability related to these lease commitments, the current owners would have to
default.
|
CONTRACTUAL
OBLIGATIONS
|
The table
below sets forth our significant future obligations by time period. Further
information on these commitments is provided in the notes to our consolidated
financial statements, which are cross-referenced in this table. Our obligations
outstanding as of January 31, 2009, include the following:
|
Payments
Due by Period
|
|||||||||||
|
($
millions)
|
Total
|
Less
Than
1
Year
|
1-3
Years
|
3-5
Years
|
More
Than
5
Years
|
||||||
|
Borrowings
under revolving credit agreement
(1)
|
$
|
112.5
|
$
|
112.5
|
$
|
–
|
$
|
–
|
$
|
–
|
|
|
Long-term
debt
(2)
|
150.0
|
–
|
–
|
150.0
|
–
|
||||||
|
Interest
on long-term debt
(2)
|
42.7
|
13.1
|
26.2
|
3.4
|
–
|
||||||
|
Operating
lease commitments
(6)
(Note 12)
|
831.9
|
164.7
|
266.9
|
171.4
|
228.9
|
||||||
|
Minimum
license commitments
|
41.3
|
11.5
|
9.1
|
6.3
|
14.4
|
||||||
|
Purchase
obligations
(3)
|
407.2
|
396.7
|
9.8
|
0.7
|
–
|
||||||
|
Obligations
related to restructuring initiatives (Note 5)
|
21.5
|
19.5
|
2.0
|
–
|
–
|
||||||
|
Other
(4)
|
23.6
|
3.7
|
2.4
|
10.8
|
6.7
|
||||||
|
Total
(5)
|
$
|
1,630.7
|
$
|
721.7
|
$
|
316.4
|
$
|
342.6
|
$
|
250.0
|
|
|
(1)
|
Interest
on borrowings is at variable rates based on the LIBOR rate or the prime
rate, as defined in the Credit Agreement. The interest rate and fees
for letters of credit varies based upon the level of
excess
availability
under the Credit Agreement. There is an unused
line fee payable on the excess availability under the facility and a
letter of credit fee payable on the outstanding exposure under
letters of credit. Interest obligations, which are variable in
nature, are not included in the table above. See Note 11 to the
consolidated financial statements.
|
||||||||||
|
(2)
|
Interest
obligations in future periods have been reflected based on our $150.0
million in Senior Notes and a fixed interest rate (8.75%) as of fiscal
year ended January 31, 2009. See Note 11 to the consolidated financial
statements.
|
||||||||||
|
(3)
|
Purchase
obligations include agreements to purchase goods or services that specify
all significant terms, including quantity and price
provisions.
|
||||||||||
|
(4)
|
Other
includes obligations for our supplemental executive retirement plan and
other postretirement benefits (Note 6).
|
||||||||||
|
(5)
|
Excludes
liabilities of $1.3 million, established pursuant to the provisions of FIN
48 due to their uncertain nature in timing of payments.
|
||||||||||
|
(6)
|
A
majority of our retail operating leases contain provisions which allow us
to modify amounts payable under the lease or terminate the lease in
certain circumstances, such as experiencing actual sales volume below a
defined threshold and/or co-tenancy provisions associated with the
facility. The contractual obligations presented in the table above reflect
the total lease obligation, irrespective of the Company’s ability to
reduce or terminate rental payments in the future, as
noted.
|
||||||||||
|
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 AND FORWARD-LOOKING STATEMENTS
|
This
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from those
projected, as they are subject to various risks and uncertainties. These risks
and uncertainties include, without limitation, the risks detailed in Item 1A
under the caption
Risk
Factors
and those described in other documents and reports filed from
time to time with the Securities and Exchange Commission, press releases and
other communications. We do not undertake any obligation or plan to update these
forward-looking statements, even though our situation may change.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
|
FOREIGN
CURRENCY EXCHANGE RATES
|
The
market risk inherent in our financial instruments and positions represents the
potential loss arising from adverse changes in foreign currency exchange rates
and interest rates. To address these risks, we enter into various hedging
transactions to the extent described below. All decisions on hedging
transactions are authorized and executed pursuant to our policies and
procedures, which do not allow the use of financial instruments for trading
purposes. We also are exposed to credit-related losses in the event of
nonperformance by counterparties to these financial instruments. Counterparties
to these agreements, however, are major international financial institutions,
and we believe the risk of loss due to nonperformance is minimal.
A
description of our accounting policies for derivative financial instruments is
included in Notes 1 and 13 to the consolidated financial
statements.
In
addition, we are exposed to translation risk because some of our foreign
operations are in local currency and must be translated into United States
dollars. As currency exchange rates fluctuate, translation of our financial
statements of foreign businesses into United States dollars affects the
comparability of financial results between years.
|
INTEREST
RATES
|
Our
financing arrangements include $112.5 million of outstanding variable rate debt
under the Credit Agreement at January 31, 2009. We also have $150.0 million in
Senior Notes, which bear interest at a fixed rate of 8.75%. Changes in interest
rates impact fixed and variable rate debt differently. For fixed rate debt, a
change in interest rates will only impact the fair value of the debt, whereas a
change in the interest rates on variable rate debt will impact interest expense
and cash flows.
At
January 31, 2009, the fair value of our long-term debt is estimated at
approximately $116.3 million, based upon the pricing of our Senior Notes at that
time. Market risk is viewed as the potential change in fair value of our debt
resulting from a hypothetical 10% adverse change in interest rates and would be
$6.0 million for our long-term debt at January 31, 2009.
Information
appearing under the caption
Financial Instruments and Risk
Management
in Note 13 to the consolidated financial statements is
incorporated herein by reference.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, our principal executive officer
and principal financial officer have concluded that the Company’s internal
control over financial reporting was effective as of January 31, 2009. The
effectiveness of our internal control over financial reporting as of January 31,
2009, has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included
herein.
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
The
Board of Directors and Shareholders of Brown Shoe Company, Inc.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Brown Shoe Company, Inc., maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2009,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Brown Shoe
Company, Inc. as of January 31, 2009, and February 2, 2008, and the related
consolidated statements of earnings, shareholders’ equity, and cash flows for
each of the three years in the period ended January 31, 2009, and our report
dated March 23, 2009, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
St.
Louis, Missouri
March 23,
2009
The
Board of Directors and Shareholders of Brown Shoe Company, Inc.
We have
audited the accompanying consolidated balance sheets of Brown Shoe Company, Inc.
(the Company) as of January 31, 2009, and February 2, 2008, and the related
consolidated statements of earnings, shareholders’ equity, and cash flows for
each of the three years in the period ended January 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Brown Shoe Company,
Inc. at January 31, 2009 and February 2, 2008, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 6 to the consolidated financial statements, on February 3,
2007, the Company changed its method of accounting for defined benefit and other
postretirement plans in connection with the required adoption of Statement of
Financial Accounting Standards No. 158. As discussed in Note 7 to the
consolidated financial statements, on February 4, 2007, the Company changed its
method of accounting for uncertain tax positions in connection with the required
adoption of Financial Accounting Standards Board Interpretation No. 48. As
discussed in Note 6 to the consolidated financial statements, in the fourth
quarter of fiscal 2008, the Company adopted the measurement date provisions of
Statement of Financial Accounting Standards No. 158.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Brown Shoe Company, Inc.’s internal control
over financial reporting as of January 31, 2009, based on criteria established
in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated March 23, 2009, expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
St.
Louis, Missouri
March 23,
2009
|
($
thousands, except number of shares and per share amounts)
|
January
31,
2009
|
February
2,
2008
|
||||
|
ASSETS
|
||||||
|
Current
assets
|
||||||
|
Cash
and cash equivalents
|
$
|
86,900
|
$
|
59,801
|
||
|
Receivables,
net of allowances of $12,878 in 2008 and $13,844 in 2007
|
84,252
|
116,873
|
||||
|
Inventories,
net of adjustment to last-in, first-out cost of $9,437 in 2008 and $9,552
in 2007
|
466,002
|
435,682
|
||||
|
Deferred
income taxes
|
19,888
|
–
|
||||
|
Prepaid expenses and other current assets
|
24,401
|
24,701
|
||||
|
Total
current assets
|
681,443
|
637,057
|
||||
|
Prepaid
pension costs
|
44,016
|
70,584
|
||||
|
Deferred
income taxes
|
17,681
|
–
|
||||
|
Investment
in nonconsolidated affiliate
|
–
|
6,641
|
||||
|
Property
and equipment, net
|
157,451
|
141,964
|
||||
|
Goodwill
and intangible assets, net
|
84,000
|
217,382
|
||||
|
Other
assets
|
41,440
|
26,213
|
||||
|
Total
assets
|
$
|
1,026,031
|
$
|
1,099,841
|
||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||
|
Current
liabilities
|
||||||
|
Borrowings
under revolving credit agreement
|
$
|
112,500
|
$
|
15,000
|
||
|
Trade
accounts payable
|
152,339
|
172,947
|
||||
|
Employee
compensation and benefits
|
59,064
|
39,204
|
||||
|
Deferred
income taxes
|
–
|
3,010
|
||||
|
Other
accrued expenses
|
78,243
|
72,859
|
||||
|
Income
taxes
|
–
|
895
|
||||
|
Total
current liabilities
|
402,146
|
303,915
|
||||
|
Other
liabilities
|
||||||
|
Long-term
debt
|
150,000
|
150,000
|
||||
|
Deferred
rent
|
41,714
|
41,415
|
||||
|
Deferred
income taxes
|
–
|
11,534
|
||||
|
Other
liabilities
|
29,957
|
32,313
|
||||
|
Total
other liabilities
|
221,671
|
235,262
|
||||
|
Minority
interests
|
8,110
|
2,087
|
||||
|
Shareholders’
equity
|
||||||
|
Preferred
stock, $1.00 par value, 1,000,000 shares authorized; no shares
outstanding
|
–
|
–
|
||||
|
Common
stock, $0.01 par value, 100,000,000 shares authorized; 42,323,224 and
41,832,656 shares outstanding, net of 3,763,571 and 4,254,139 treasury
shares in 2008 and 2007, respectively
|
423
|
418
|
||||
|
Additional
paid-in capital
|
147,702
|
145,690
|
||||
|
Accumulated
other comprehensive (loss) income
|
(5,781
|
)
|
15,598
|
|||
|
Retained
earnings
|
251,760
|
396,871
|
||||
|
Total
shareholders’ equity
|
394,104
|
558,577
|
||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,026,031
|
$
|
1,099,841
|
||
|
($
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
||||||
|
Net
sales
|
$
|
2,276,362
|
$
|
2,359,909
|
$
|
2,470,930
|
|||
|
Cost
of goods sold
|
1,394,126
|
1,416,510
|
1,500,037
|
||||||
|
Gross
profit
|
882,236
|
943,399
|
970,893
|
||||||
|
Selling
and administrative expenses
|
851,893
|
827,350
|
854,053
|
||||||
|
Impairment
of goodwill and intangible assets
|
149,150
|
–
|
–
|
||||||
|
Restructuring
and other special charges, net
|
54,278
|
19,000
|
8,145
|
||||||
|
Equity
in net loss of nonconsolidated affiliate
|
216
|
439
|
–
|
||||||
|
Operating
(loss) earnings
|
(173,301
|
)
|
96,610
|
108,695
|
|||||
|
Interest
expense
|
(17,105
|
)
|
(16,232
|
)
|
(17,892
|
)
|
|||
|
Interest
income
|
1,800
|
3,434
|
2,610
|
||||||
|
(Loss)
earnings before income taxes and minority interests
|
(188,606
|
)
|
83,812
|
93,413
|
|||||
|
Income
tax benefit (provision)
|
53,793
|
(23,483
|
)
|
(27,719
|
)
|
||||
|
Minority
interests in net loss of consolidated subsidiaries
|
1,575
|
98
|
14
|
||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
60,427
|
$
|
65,708
|
||
|
Basic
(loss) earnings per common share
|
$
|
(3.21
|
)
|
$
|
1.40
|
$
|
1.56
|
||
|
Diluted
(loss) earnings per common share
|
$
|
(3.21
|
)
|
$
|
1.37
|
$
|
1.51
|
||
See notes
to consolidated financial statements.
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Operating
Activities
|
|||||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
60,427
|
$
|
65,708
|
||
|
Adjustments
to reconcile net (loss) earnings to net cash provided by
operating
activities:
|
|||||||||
|
Depreciation
|
39,937
|
36,130
|
35,147
|
||||||
|
Amortization
of capitalized software
|
7,812
|
7,694
|
7,439
|
||||||
|
Amortization
of intangibles
|
7,124
|
6,844
|
6,848
|
||||||
|
Amortization
of debt issuance costs
|
1,637
|
1,480
|
1,509
|
||||||
|
Share-based
compensation expense
|
2,601
|
8,391
|
9,721
|
||||||
|
Loss
on disposal of facilities and equipment
|
1,065
|
1,101
|
1,908
|
||||||
|
Impairment
charges for facilities and equipment
|
2,657
|
2,065
|
1,922
|
||||||
|
Impairment
of goodwill and intangible assets
|
149,150
|
–
|
–
|
||||||
|
Deferred
rent
|
249
|
3,390
|
1,806
|
||||||
|
Deferred
income taxes
|
(51,248
|
)
|
(4,072
|
)
|
(906
|
)
|
|||
|
Provision
for doubtful accounts
|
548
|
18
|
737
|
||||||
|
Minority
interests
|
(1,575
|
)
|
(98
|
)
|
(14
|
)
|
|||
|
Foreign
currency transaction losses (gains)
|
131
|
(194
|
)
|
79
|
|||||
|
Undistributed
loss of nonconsolidated affiliate
|
216
|
439
|
–
|
||||||
|
Changes
in operating assets and liabilities:
|
|||||||||
|
Receivables
|
35,644
|
16,065
|
25,310
|
||||||
|
Inventories
|
(29,196
|
)
|
(12,506
|
)
|
(6,667
|
)
|
|||
|
Prepaid
expenses and other current assets
|
106
|
7,145
|
(19,379
|
)
|
|||||
|
Trade
accounts payable
|
(27,213
|
)
|
(13,323
|
)
|
12,759
|
||||
|
Accrued
expenses
|
25,386
|
(35,445
|
)
|
15,043
|
|||||
|
Income
taxes
|
(834
|
)
|
(533
|
)
|
(2,398
|
)
|
|||
|
Other,
net
|
3,377
|
1,242
|
(4,103
|
)
|
|||||
|
Net
cash provided by operating activities
|
34,336
|
86,260
|
152,469
|
||||||
|
Investing
Activities
|
|||||||||
|
Purchases
of property and equipment
|
(60,417
|
)
|
(41,355
|
)
|
(60,725
|
)
|
|||
|
Capitalized
software
|
(16,327
|
)
|
(5,770
|
)
|
(10,080
|
)
|
|||
|
Cash
recognized on initial consolidation
|
3,337
|
2,205
|
–
|
||||||
|
Investment
in nonconsolidated affiliate
|
–
|
(7,080
|
)
|
–
|
|||||
|
Investments
in consolidated companies
|
(7,683
|
)
|
(3,916
|
)
|
–
|
||||
|
Acquisition
cost
|
–
|
(2,750
|
)
|
(22,700
|
)
|
||||
|
Net
cash used for investing activities
|
(81,090
|
)
|
(58,666
|
)
|
(93,505
|
)
|
|||
|
Financing
Activities
|
|||||||||
|
Proceeds
from borrowings under revolving credit agreement
|
655,500
|
151,000
|
79,000
|
||||||
|
Payments
on borrowings under revolving credit agreement
|
(558,000
|
)
|
(137,000
|
)
|
(128,000
|
)
|
|||
|
Debt
issuance costs
|
(7,500
|
)
|
–
|
–
|
|||||
|
Acquisition
of treasury stock
|
–
|
(41,090
|
)
|
–
|
|||||
|
Proceeds
from stock options exercised
|
313
|
9,209
|
10,560
|
||||||
|
Tax
benefit related to share-based plans
|
498
|
6,421
|
7,947
|
||||||
|
Dividends
paid
|
(11,855
|
)
|
(12,312
|
)
|
(9,147
|
)
|
|||
|
Net
cash provided by (used for) financing activities
|
78,956
|
(23,772
|
)
|
(39,640
|
)
|
||||
|
Effect
of exchange rate changes on cash
|
(5,103
|
)
|
2,318
|
49
|
|||||
|
Increase
in cash and cash equivalents
|
27,099
|
6,140
|
19,373
|
||||||
|
Cash
and cash equivalents at beginning of year
|
59,801
|
53,661
|
34,288
|
||||||
|
Cash
and cash equivalents at end of year
|
$
|
86,900
|
$
|
59,801
|
$
|
53,661
|
|||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||
| ( $ thousands, except number of shares and per |
Common
Stock
|
Paid-In
|
Comprehensive
|
Retained
|
Shareholders’
|
|||||||||||||||||||
|
share
amounts)
|
Shares
|
Dollars
|
Capital
|
Income
(Loss)
|
Earnings
|
Equity
|
||||||||||||||||||
|
BALANCE
JANUARY 28, 2006
|
41,566,423 | $ | 416 | $ | 138,027 | $ | 2,822 | $ | 292,945 | $ | 434,210 | |||||||||||||
|
Net
earnings
|
65,708 | 65,708 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(1,504 | ) | (1,504 |
)
|
||||||||||||||||||||
|
Unrealized
gains on derivative instruments,
net
of tax provision of $457
|
1,435 | 1,435 | ||||||||||||||||||||||
|
Pension
and other postretirement benefits
adjustments,
net of tax benefit of $8
|
(12 | ) | (12 |
)
|
||||||||||||||||||||
|
Comprehensive
income
|
65,627 | |||||||||||||||||||||||
|
Adjustment for
initial application of SFAS No. 158, net of deferred tax liability of
$5,893 (Note 6)
|
9,140 | 9,140 | ||||||||||||||||||||||
|
Dividends
($0.213 per share)
|
(9,147 | ) | (9,147 |
)
|
||||||||||||||||||||
|
Stock
issued under employee benefit
and
restricted stock plans
|
1,702,286 | 17 | 6,130 | 6,147 | ||||||||||||||||||||
|
Tax
benefit related to share-based plans
|
7,947 | 7,947 | ||||||||||||||||||||||
|
Share-based
compensation expense
|
9,721 | 9,721 | ||||||||||||||||||||||
|
BALANCE
FEBRUARY 3, 2007
|
43,268,709 | $ | 433 | $ | 161,825 | $ | 11,881 | $ | 349,506 | $ | 523,645 | |||||||||||||
|
Net
earnings
|
60,427 | 60,427 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
8,777 | 8,777 | ||||||||||||||||||||||
|
Unrealized
losses on derivative instruments,
net
of tax benefit of $440
|
(876 | ) | (876 | ) | ||||||||||||||||||||
|
Pension
and other postretirement benefits
adjustments,
net of tax benefit of $2,482
|
(4,184 | ) | (4,184 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
64,144 | |||||||||||||||||||||||
|
Cumulative
effect of adoption of FIN 48 (Note 7)
|
(750 | ) | (750 | ) | ||||||||||||||||||||
|
Dividends
($0.28 per share)
|
(12,312 | ) | (12,312 | ) | ||||||||||||||||||||
|
Stock
issued under employee benefit
and
restricted stock plans
|
973,922 | 9 | 10,119 | 10,128 | ||||||||||||||||||||
|
Acquisition
of treasury stock
|
(2,409,975 | ) | (24 | ) | (41,066 | ) | (41,090 | ) | ||||||||||||||||
|
Tax
benefit related to share-based plans
|
6,421 | 6,421 | ||||||||||||||||||||||
|
Share-based
compensation expense
|
8,391 | 8,391 | ||||||||||||||||||||||
|
BALANCE
FEBRUARY 2, 2008
|
41,832,656 | $ | 418 | $ | 145,690 | $ | 15,598 | $ | 396,871 | $ | 558,577 | |||||||||||||
|
Net
loss
|
(133,238 | ) | (133,238 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(10,544 | ) | (10,544 | ) | ||||||||||||||||||||
|
Unrealized
gains on derivative instruments,
net
of tax provision of $189
|
398 | 398 | ||||||||||||||||||||||
|
Pension
and other postretirement benefits
adjustments,
net of tax benefit of $7,150
|
(11,233 | ) | (11,233 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
(154,617 | ) | ||||||||||||||||||||||
|
Dividends
($0.28 per share)
|
(11,855 | ) | (11,855 | ) | ||||||||||||||||||||
|
Adjustment
for adoption of SFAS No. 158, net of
deferred
tax liability of $14 (Note 6)
|
(18 | ) | (18 | ) | ||||||||||||||||||||
|
Stock issued under
employee benefit and restricted stock plans
|
490,568 | 5 | (1,087 | ) | (1,082 | ) | ||||||||||||||||||
|
Tax
benefit related to share-based plans
|
498 | 498 | ||||||||||||||||||||||
|
Share-based
compensation expense
|
2,601 | 2,601 | ||||||||||||||||||||||
|
BALANCE
JANUARY 31, 2009
|
42,323,224 | $ | 423 | $ | 147,702 | $ | (5,781 | ) | $ | 251,760 | $ | 394,104 | ||||||||||||
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
Brown
Shoe Company, Inc. (the “Company”), founded in 1878 and incorporated in 1913, is
a footwear retailer and wholesaler. The Company’s shares trade under the “BWS”
symbol on the New York and Chicago Stock Exchanges.
The
Company provides a broad offering of licensed, branded and private-label casual,
dress and athletic footwear products to women, men and children. Footwear is
sold at a variety of price points through multiple distribution channels both
domestically and internationally. The Company currently operates 1,444 retail
shoe stores in the United States, Canada, China and Guam primarily under the
Famous Footwear and Naturalizer names. In addition, through its Wholesale
Operations segment, the Company designs, sources and markets footwear to retail
stores domestically and internationally, including mass merchandisers, national
chains, department stores, independent retailers, catalogs and online retailers.
In 2008, approximately 69% of the Company’s net sales were at retail, compared
to 67% in 2007 and 62% in 2006. See Note 8 for additional information regarding
the Company’s business segments.
Our
business is seasonal in nature due to consumer spending patterns, with higher
back-to-school, Easter and Christmas holiday season sales. Traditionally, the
third fiscal quarter accounts for a substantial portion of our earnings for the
year.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries as well as a variable interest
entity for which we are the primary beneficiary, after the elimination of
intercompany accounts and transactions.
Under
FASB Interpretation No. 46,
Consolidation of Variable Interest
Entities
(“FIN 46”), if an entity is determined to be a variable interest
entity (“VIE”), it must be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that absorbs the majority of the entity's expected
losses, receives a majority of the entity's expected residual returns or
both.
Accounting
Period
The
Company’s fiscal year is the 52 or 53-week period ending the Saturday nearest to
January 31. Fiscal years 2008, 2007 and 2006 ended on January 31, 2009, February
2, 2008 and February 3, 2007, respectively. Fiscal years 2008 and 2007 included
52 weeks and fiscal year 2006 included 53 weeks. The impact of having the
53
rd
week in fiscal year 2006 was to increase net sales at our retail divisions by
approximately $22.5 million. The earnings impact of the 53
rd
week
was immaterial to fiscal year 2006.
Basis
of Presentation
Reclassifications
Certain
prior period amounts on the consolidated financial statements have been
reclassified to conform to current period presentation. These reclassifications
did not affect net earnings.
Stock
Split
On March
7, 2007, the Company’s Board of Directors authorized a three-for-two split of
its common stock, to be effected in the form of a dividend of one share of stock
for every two shares outstanding. The dividend was paid on April 2, 2007 to
shareholders of record on March 19, 2007. All share and per share data provided
herein gives effect to this stock split, applied retroactively.
Change
in Par Value
Effective
May 31, 2007, the par value of the Company’s common stock was reduced from $3.75
per share to $0.01 per share. All relevant share data provided herein gives
effect to this change, applied retroactively.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The
Company considers all highly liquid investments with maturities of three months
or less when purchased to be cash equivalents.
Receivables
The
Company evaluates the collectability of selected accounts receivable on a
case-by-case basis and makes adjustments to the bad debt reserve for expected
losses. The Company considers factors such as ability to pay, bankruptcy, credit
ratings and payment history. For all other accounts, the Company estimates
reserves for bad debts based on experience and past due status of the accounts.
If circumstances related to customers change, estimates of recoverability would
be further adjusted. During 2008 and 2006, the Company recognized provision for
doubtful accounts of $0.5 million and $0.7 million, respectively. The Company’s
provision for doubtful accounts was immaterial in 2007. Certain additional
reserves and allowances are carried as a reduction of gross receivables to
reflect co-op advertising and other allowances to be granted to customers, as
well as anticipated reserves for products to be returned.
Inventories
All
inventories are valued at the lower of cost or market, with 89% of consolidated
inventories using the last-in, first-out (“LIFO”) method. An actual valuation of
inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations are based on management’s estimates of expected year-end inventory
levels and costs and are subject to the final year-end LIFO inventory valuation.
If the first-in, first-out (“FIFO”) method had been used, consolidated
inventories would have been $9.4 million and $9.6 million higher at both January
31, 2009 and February 2, 2008, respectively. Substantially all inventory is
finished goods.
The costs
of inventory, inbound freight and duties, markdowns, shrinkage and royalty
expense are reflected in cost of goods sold. Costs of warehousing and
distribution are reflected in selling and administrative expenses and are
expensed as incurred. Such warehousing and distribution costs totaled $60.2
million, $58.6 million and $64.4 million in 2008, 2007 and 2006, respectively.
Costs of overseas sourcing offices and other inventory procurement costs are
reflected in selling and administrative expense and are expensed as incurred.
Such sourcing and procurement costs totaled $21.9 million, $24.0 million and
$25.9 million in 2008, 2007 and 2006, respectively.
Markdowns
are recorded to reflect expected adjustments to sales prices. In determining
markdowns, management considers current and recently recorded sales prices, the
length of time the product is held in inventory and quantities of various
product styles contained in inventory, among other factors. The ultimate amount
realized from the sale of certain products could differ from management
estimates.
Computer
Software Costs
The
Company capitalizes in other assets certain costs, including internal payroll
costs, incurred in connection with the development or acquisition of software
for internal use. Other assets on the consolidated balance sheets include $30.1
million and $21.7 million of unamortized computer software costs as of January
31, 2009 and February 2, 2008, respectively.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation of property and equipment is
provided over the estimated useful lives of the assets or the remaining lease
terms, where applicable, using the straight-line method.
Interest
Capitalized
Interest
Interest
costs applicable to major asset additions are capitalized during the
construction or development period and amortized over the lives of the related
assets, including $0.2 million in 2008, with no corresponding amounts
capitalized in 2007 or 2006.
Interest
Expense
Interest
expense includes interest for borrowing under both our Senior Notes and our
Credit Agreement. Interest expense includes fees paid under the Credit Agreement
for the unused portion of our line of credit. Interest expense also includes the
amortization of deferred debt issuance costs as well as the accretion of certain
discounted noncurrent liabilities.
Goodwill
and Intangible Assets
Goodwill
and intangible assets deemed to have indefinite lives are not amortized but are
subject to annual impairment tests using a discounted cash flow approach. The
Company performs impairment tests during the fourth quarter of each fiscal year,
unless events indicate an interim test is required. Other intangible assets are
amortized over their useful lives and are reviewed for impairment if and when
impairment indicators are present.
During the fourth quarter of 2008, the Company recorded a non-cash impairment charge for goodwill and intangible assets of $149.2 million ($119.2 million on an after-tax basis, or $2.87 per diluted share) as a result of a substantial decrease in its share price and market capitalization, reflecting the difficult market conditions and industry trends of recent months. See Note 10 for additional information related to the impairment of goodwill and intangible assets.
Self-Insurance
Reserves
The
Company is self-insured and/or retains high deductibles for a significant
portion of its workers’ compensation, employment practices, group health and
disability and general, auto and property liability insurance. Liabilities
associated with the risks that are retained by the Company are estimated by
considering historical claims experience, trends of the Company and the industry
and other actuarial assumptions. The estimated accruals for these liabilities
could be affected if development of costs on claims differ from these
assumptions and historical trends. Based on information known at January 31,
2009, the Company believes it has provided adequate reserves for its
self-insurance exposure. As of January 31, 2009 and February 2, 2008,
self-insurance reserves were $11.1 million and $11.5 million,
respectively.
Revenue
Recognition
Retail
sales, recognized at the point of sale, are net of returns and exclude sales
tax. Wholesale sales and sales through the Company’s internet sites are
recorded, net of returns, allowances and discounts, when the merchandise has
been shipped and title and risk of loss have passed to the customer. Retail
items sold through the Company’s internet sites are made pursuant to a sales
agreement that provides for transfer of both title and risk of loss upon
delivery to the carrier. Reserves for projected merchandise returns, discounts
and allowances are determined based on historical experience and current
expectations. Revenue is recognized on license fees related to Company-owned
brand names, where the Company is licensor, when the related sales of the
licensee are made.
Gift
Cards
The
Company sells gift cards to its customers in its retail stores and through its
internet sites. The Company’s gift cards do not have expiration dates or
inactivity fees. The Company recognizes revenue from gift cards when (i) the
gift card is redeemed by the customer or (ii) the likelihood of the gift card
being redeemed by the customer is remote (“gift card breakage”) and the Company
determines that it does not have a legal obligation to remit the value of
unredeemed gift cards to the relevant jurisdictions. The Company determines its
gift card breakage rate based upon historical redemption patterns. The Company
recognizes gift card breakage at its Famous Footwear division during the
24-month period following the sale of the gift card, according to the Company’s
historical redemption pattern. Gift card breakage income is included in net
sales in the consolidated statements of earnings and the liability established
upon the sale of a gift card is included in other accrued expenses within the
consolidated balance sheets. At this time, the Company only recognizes breakage
income for its Famous Footwear division. The Company will recognize gift card
breakage at its other divisions once adequate historical data has been
accumulated.
Loyalty
Program
The
Company maintains a customer loyalty program (“Rewards”) for Famous Footwear
stores in which customers earn points towards savings certificates for
qualifying purchases. Upon reaching specified point values, customers are issued
a savings certificate, which they may redeem for purchases at Famous Footwear
stores. In addition to the savings certificates, the Company also offers
exclusive member mailings that offer additional incentives to purchase.
Generally, savings certificates earned must be redeemed no later than 12 to 14
weeks from the date of issuance. The value of points and rewards earned by
Famous Footwear’s Rewards program members are recorded as a reduction of net
sales, and a liability is established within other accrued expenses at the time
the points are earned based on historical conversion and redemption rates.
Approximately 60% of net sales in our Famous Footwear segment were made to our
Rewards members in 2008 compared to 54% in 2007 and 45% in 2006.
Store
Closing and Impairment Charges
The costs
of closing stores, including lease termination costs, property and equipment
write-offs and severance, as applicable, are recorded when the store is closed
or when a binding agreement is reached with the landlord to close the
store.
Asset impairment tests are performed at least annually, on a store-by-store basis. After allowing for an appropriate start-up period, unusual nonrecurring events or unfavorable trends, property and equipment at stores indicated as impaired are written down to fair value using a discounted cash flow technique. The Company recorded asset impairment charges primarily related to underperforming retail stores of $2.7 million during 2008, of which $1.8 million related to the Famous Footwear segment, $0.5 million related to the Specialty Retail segment and $0.4 million related to the Wholesale Operations segment. During 2007, the Company recorded asset impairment charges of $2.1 million, of which $1.2 million related to the Famous Footwear segment and $0.9 million related to the Specialty Retail segment. During 2006, the Company recorded asset impairment charges of $1.9 million, of which $1.0 million related to the Specialty Retail segment and $0.9 million related to the Famous Footwear segment. Impairment charges are recorded within selling and administrative expenses on the consolidated statements of earnings.
Advertising
and Marketing Expense
All
advertising and marketing costs are expensed at the time the event occurs or the
promotion first appears in media or in the store, except for direct response
advertising that relates primarily to the production and distribution of the
Company’s catalogs. Direct response advertising costs are amortized over the
expected future revenue stream, which is two months from the date catalogs are
mailed.
In
addition, the Company participates in co-op advertising programs with certain of
its wholesale customers. For those co-op advertising programs where the Company
has validated the fair value of the advertising received, co-op advertising
costs are reflected as advertising expense. Otherwise, co-op advertising costs
are reflected as a reduction of net sales.
Total
advertising and marketing expense was $73.4 million, $71.8 million and $72.0
million in 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, these
costs were offset by co-op advertising allowances recovered by the Company’s
retail divisions of $5.4 million, $6.9 million and $6.6 million, respectively.
Total co-op advertising costs reflected as a reduction of net sales were $7.5
million, $7.5 million and $9.4 million for 2008, 2007 and 2006, respectively.
Total advertising costs attributable to future periods that are deferred and
recognized as a component of prepaid expenses and other current assets were $0.9
million and $1.2 million at January 31, 2009 and February 2, 2008,
respectively.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the consolidated financial
statement carrying amounts and the tax bases of its assets and liabilities. The
Company establishes valuation allowances if it believes that it is more likely
than not that some or all of its deferred tax assets will not be realized. The
Company does not recognize a tax benefit unless it concludes that it is more
likely than not that the benefit will be sustained on audit by the taxing
authority based solely on the technical merits of the associated tax position.
If the recognition threshold is met, the Company recognizes a tax benefit
measured at the largest amount of the tax benefit that, in its judgment, is
greater than 50 percent likely to be realized. The Company records interest and
penalties related to unrecognized tax positions within the income tax benefit
(provision) balance on our consolidated statements of earnings.
Operating
Leases
The
Company leases its store premises under operating leases. Many leases entered
into by the Company include options under which the Company may extend the lease
term beyond the initial commitment period, subject to terms agreed to at lease
inception. Some leases also include early termination options which can be
exercised under specific conditions.
Contingent
Rentals
Many of
the leases covering retail stores require contingent rentals in addition to the
minimum monthly rental charge, based on retail sales volume. The Company records
expense for contingent rentals during the period in which the retail sales
volume exceeds the respective targets.
Construction
Allowances Received From Landlords
At the
time its retail facilities are initially leased, the Company often receives
consideration from landlords, to be applied against the cost of leasehold
improvements necessary to open the store. The Company treats these construction
allowances as a lease incentive, as defined by Financial Accounting Standards
Board (“FASB”) Technical Bulletin 88-1. The allowances are recorded as a
deferred rent obligation upon receipt and amortized to income over the lease
term as a reduction of rent expense. The allowances are reflected as a component
of other accrued expenses and deferred rent on the consolidated balance
sheets.
Straight-Line
Rents and Rent Holidays
The
Company records rent expense on a straight-line basis over the lease term for
all of its leased facilities, in accordance with SFAS No. 13,
Accounting for Leases
. For
leases that have predetermined fixed escalations of the minimum rentals, the
Company recognizes the related rental expense on a straight-line basis and
records the difference between the recognized rental expense and amounts payable
under the lease as deferred rent. At the time its retail facilities are leased,
the Company is frequently not charged rent for a specified period of time,
typically 45 to 60 days, while the store is being prepared for opening. This
rent-free period is referred to as a rent holiday. In accordance with FASB
Technical Bulletin 85-3,
Accounting for Operating Leases With
Scheduled Rent Increases
, the Company recognizes rent expense within
selling and administrative expenses over the lease term, including any rent
holiday.
Pre-opening
Costs
Pre-opening
costs associated with opening retail stores, including payroll, supplies and
facility costs, are expensed as incurred.
Earnings
per Share
Basic
earnings per common share is computed using the weighted-average number of
common shares outstanding during the year. Diluted earnings per common share is
computed using the weighted-average number of common shares and potential
dilutive securities outstanding during the period. Potential dilutive securities
consist of outstanding stock options and unvested restricted stock
awards.
Comprehensive
Income
Comprehensive
income includes the effect of foreign currency translation adjustments,
unrealized gains or losses from derivatives used for hedging activities and
pension and other postretirement benefits adjustments.
Foreign
Currency Translation
For the
Company’s international subsidiaries, the local currency is the functional
currency. Assets and liabilities of these subsidiaries are translated into
United States dollars at the fiscal year-end exchange rate. Consolidated
statements of earnings amounts are translated at average exchange rates for the
period. The cumulative translation adjustments resulting from changes in
exchange rates are included in the consolidated balance sheets as a component of
accumulated other comprehensive income in shareholders’ equity. Transaction
gains and losses are included in the consolidated statements of
earnings.
Derivative
Financial Instruments
The
Company follows SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended. SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
consolidated balance sheets and to measure those instruments at fair value. The
Company evaluates its exposure to volatility in foreign currency rates and may
enter into derivative transactions as it deems necessary. These derivative
instruments are viewed as risk management tools and are not used for trading or
speculative purposes. See additional information related to derivative
instruments in Note 13.
Share-based
Compensation
The
Company has share-based incentive compensation plans, under which certain
officers, employees and members of the Board of Directors are participants, and
may be granted stock option, restricted stock and stock performance awards. The
Company accounts for share-based compensation in accordance with the fair value
recognition provisions of SFAS No. 123(R),
Share-based Payment
, which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the consolidated financial statements based
on their fair values. The fair value of stock options is calculated by using the
Black-Scholes option pricing formula that requires estimates for expected
volatility, expected dividends, the risk-free interest rate and the term of the
option. If any of the assumptions used in the Black-Scholes model change
significantly, share-based compensation expense may differ materially in the
future from that recorded in the current period. See additional information
related to share-based compensation in Note 15.
Impact
of New and Prospective Accounting Pronouncements
FASB
Statement No. 157, Fair Value Measurement
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157,
Fair Value
Measurement
(“SFAS No. 157”). This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (“GAAP”) and expands disclosures about fair value
measurements. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position No. 157-2,
Effective Date of FASB Statement No.
157
(“FSP No. 157-2”), which amends SFAS No. 157 by delaying its
effective date by one year for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The Company adopted the
provisions of SFAS No. 157, as amended, for financial assets and financial
liabilities at the beginning of 2008. Although the adoption of SFAS No. 157 did
not impact the Company’s financial condition, results of operations or cash
flows, additional disclosures related to fair value measurements are required.
The Company is currently assessing the impact of SFAS No. 157 for non-financial
assets and non-financial liabilities, to be adopted in 2009, on its consolidated
financial statements. See Note 13 to the consolidated financial statements for
additional information related to our fair value measurements.
SFAS No.
157 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 SFAS No. 157, the
hierarchy is broken down into three levels based on the reliability of the
inputs as follows:
|
·
|
Level
1 – Quoted prices in active markets that are unadjusted and accessible at
the measurement date for identical, unrestricted assets or
liabilities;
|
|
·
|
Level
2 – Quoted prices for identical assets and liabilities in markets that are
not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are
observable, either directly or
indirectly;
|
|
·
|
Level
3 – Prices or valuations that require inputs that are both significant to
the fair value measurement and
unobservable.
|
In
determining fair value in accordance with SFAS No. 157, 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 asset or liability within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement. 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 for
all financial assets and liabilities measured at fair value within Note
13.
FASB
Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans
In
September 2006, the FASB issued SFAS No. 158,
Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)
(“SFAS No. 158”), which requires a company to
recognize on its balance sheet an asset for a defined benefit postretirement
plan’s overfunded status or a liability for a plan’s underfunded status. As
required by SFAS No. 158, the Company adopted the balance sheet recognition
provisions at the end of 2006 as described in the Company’s 2006 Form 10-K. SFAS
No. 158 also requires that a plan’s assets and obligations be measured as of the
end of the employer’s fiscal year for determination of funded status for fiscal
years ending after December 15, 2008. The Company’s plans previously had
measurement dates that did not coincide with its fiscal year end and thus the
Company was required to change its measurement dates in 2008. The impact of the
transition to fiscal year end measurement dates resulted in an immaterial amount
of net periodic benefit cost being recognized as an adjustment to retained
earnings in the fourth quarter of 2008. Additionally, other changes in the fair
value of plan assets and benefit obligations during the transition period were
recorded as a component of other comprehensive income during the fourth quarter
of 2008. See Note 6 to the consolidated financial statements for additional
information.
FASB
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(“SFAS No. 159”). This statement permits
entities to choose to measure certain financial instruments and other items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities using different measurement
techniques. SFAS No. 159 requires additional disclosures related to the fair
value measurements included in the entity’s financial statements. This statement
is effective for the Company’s fiscal year 2008 financial statements. The
Company has elected not to apply the fair value option to any of its financial
instruments.
FASB
Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS No. 162”). This Statement identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP. SFAS No. 162 became effective on November
15, 2008, but did not have a material impact on the Company’s consolidated
financial statements.
FASB
FSP FIN 46(R)-8, Disclosures About Variable Interest Entities
In
December 2008, the FASB issued FSP FIN 46(R)-8,
Disclosures about Variable Interest
Entities
(“FSP FIN 46(R)-8”). FSP FIN 46(R)-8 requires enhanced
disclosures about a company’s involvement in variable interest entities (“VIE”).
The enhanced disclosures required by this FSP are intended to provide users of
financial statements with a greater understanding of: (a) the significant
judgments and assumptions made by a company in determining whether it must
consolidate a VIE and/or disclose information about its involvement with a VIE;
(b) the nature of restrictions on a consolidated VIE’s assets reported by a
company in its balance sheet, including the carrying amounts of such assets;
(c) the nature of, and changes in, the risks associated with a company’s
involvement with a VIE; (d) how a company’s involvement with a VIE affects
the company’s financial position, financial performance, and cash flows. This
statement is effective prospectively for reporting periods, interim and annual,
ending after December 15, 2008. Accordingly, the Company adopted FSP FIN
46(R)-8 during 2008. See Note 2 to the consolidated financial statements for
additional information.
FASB
Statement No. 141(R), Business Combinations
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, a replacement
of FASB Statement No. 141
(“SFAS No. 141(R)”), which significantly
changes the principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring
goodwill acquired in a business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This statement is effective
prospectively, except for certain retrospective adjustments to deferred tax
balances, for fiscal years beginning after December 15, 2008. Accordingly,
the Company will record and disclose business combinations under SFAS No. 141(R)
beginning in 2009.
FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(“SFAS
No. 160”). This statement establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Minority interests will be recharacterized as noncontrolling
interests and classified as a component of shareholders’ equity separate from
the parent’s equity. In addition, SFAS No. 160 establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This statement is effective prospectively, except for
certain retrospective disclosure requirements, for fiscal years beginning after
December 15, 2008. Accordingly, the Company will adopt SFAS No. 160 in
2009. The presentation and disclosure requirements of this standard must be
applied retrospectively for all periods presented and will impact how the
Company presents and discloses noncontrolling interests and income from
noncontrolling interests in our consolidated financial statements.
FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133
(“SFAS No. 161”). This statement requires enhanced disclosures about
an entity’s derivative and hedging activities and thereby seeks to improve the
transparency of financial reporting. Entities are required to provide enhanced
disclosures relating to: (a) how and why an entity uses derivative instruments;
(b) how derivative instruments and related hedged items are accounted for under
SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
, and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company will adopt SFAS No. 161 in 2009.
FASB
Staff Position Emerging Issues Task Force No. 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force No. 03-6-1,
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
(“FSP EITF No. 03-6-1”), which addresses whether instruments
granted in share-based payment awards are participating securities prior to
vesting and, therefore, must be included in the earnings allocation in
calculating earnings per share under the two-class method described in SFAS No.
128,
Earnings Per
Share
. Under FSP EITF No. 03-6-1, unvested share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents should
be treated as participating securities in computing earnings per share. FSP EITF
No. 03-6-1 is effective for fiscal years beginning after December 15, 2008 and
for interim periods within those years, and shall be applied retrospectively to
all prior periods. The adoption of FSP EITF No. 03-6-1 is not expected to have a
material impact on the Company’s consolidated financial statements.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). FSP 132(R)-1 requires enhanced disclosures about the plan assets of a Company’s defined benefit pension and other postretirement plans. The enhanced disclosures required by this FSP are intended to provide users of financial statements with a greater understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. This requirement is effective for financial statements issued for fiscal years ending after December 15, 2009, with early application permitted. The Company will adopt FSP 132(R)-1 in 2009.
|
2.
|
BUSINESS
COMBINATIONS AND INVESTMENTS
|
Edelman
Shoe, Inc.
In August
2007, the Company invested cash of $7.1 million in Edelman Shoe, Inc. (“Edelman
Shoe”), acquiring 42.5% of the outstanding stock. On November 3, 2008, the
Company invested an additional $4.1 million of cash in Edelman Shoe, acquiring
7.5% of the outstanding stock, bringing the Company’s total equity interest to
50%. The Company has an option to buy the remaining interest in the
future.
The Sam
Edelman brand was launched in 2004 and is sold in department stores and
independent and specialty stores across the country. The Company believes the
investment in Edelman Shoe complements its portfolio of wholesale footwear
brands by adding owned brands that sell primarily in the bridge/designer
footwear price zones.
Edelman Shoe is a variable
interest entity (“VIE”) for which the Company is the primary beneficiary;
therefore, the Company’s consolidated financial statements include the accounts
of Edelman Shoe beginning November 3, 2008. Prior to consolidation, the Company
accounted for the investment in accordance with the equity method.
As a
part of our qualitative and quantitative analyses, we determined that Edelman
Shoe is a VIE in accordance with FIN 46. In addition, we determined that the
Company is the primary beneficiary as it absorbs the majority of the entity's
expected losses. Our variable interests in Edelman Shoe include the equity
investments described above and amounts payable from Edelman Shoe to the
Company. At January 31, 2009, Edelman Shoe had total assets of approximately
$12.2 million and total liabilities of approximately $10.7 million. From the
date of consolidation until the end of 2008, Edelman Shoe had total net sales of
approximately $2.3 million.
The total
purchase price, net of the Company’s share of losses since the initial
investment, was $10.5 million, including associated fees and expenses. The total
cost to acquire Edelman Shoe has been allocated to the assets acquired and
liabilities assumed according to estimated fair values. The allocation resulted
in acquired goodwill of $3.8 million and an intangible asset related to a
trademark of $16.8 million.
As
indicated above, the Company allocated $16.8 million to an intangible asset,
which represents an owned trademark that is subject to amortization using a life
of 15 years. At January 31, 2009, this intangible asset had accumulated
amortization of $0.3 million. For each of the next five succeeding fiscal years,
annual amortization expense will be approximately $1.1 million. The total of our
goodwill and intangible asset amounts was allocated to the Wholesale Operations
segment.
Unaudited
consolidated statements of earnings on a pro-forma basis, assuming these
acquisitions had occurred at the beginning of the year, and the detail of
estimated fair values of assets and liabilities as of the acquisition date are
not presented as the acquisitions were immaterial to our consolidated statements
of earnings.
Shoes.com,
Inc.
During
2007, the Company invested $3.9 million in Shoes.com, bringing its total equity
interest to 93.8%. Shoes.com became a wholly-owned subsidiary of the Company in
January 2009 when the Company acquired the remaining outstanding shares for $3.6
million.
B&H
Footwear Limited
In June 2007, the Company entered into
a joint venture agreement with a subsidiary of Hongguo International Holdings
Limited (“Hongguo”) to begin marketing Naturalizer footwear in China in fall
2007. The Company is a 51% owner of the joint venture, B&H Footwear Limited
(“B&H Footwear”), with Hongguo owning the other 49%. In January 2009, the
Company and Hongguo each invested an additional $0.5 million in B&H
Footwear, allowing the ownership percentages to remain unchanged. B&H
Footwear, through its wholly-owned subsidiary Dongguan B&H Footwear Company
Limited, operates from the Company’s Dongguan, China offices, where the Company
currently maintains its sourcing operation. B&H Footwear began operations in
2007 and distributes the Naturalizer brand in department store shops and
free-standing stores in several of China’s largest cities. In addition, B&H
Footwear sells Naturalizer footwear to Hongguo on a wholesale basis. Hongguo
then sells Naturalizer products through retail stores in China.
As of January 31, 2009, B&H
Footwear operated 19 stores in China, and Hongguo operated 43 stores. The
Company’s consolidated financial statements include the accounts of B&H
Footwear. See Note 16 for additional information on related party
transactions.
|
3.
|
EARNINGS
PER SHARE
|
The
following table sets forth the computation of basic and diluted (loss) earnings
per common share:
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
||||||
|
NUMERATOR
|
|||||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
60,427
|
$
|
65,708
|
||
|
DENOMINATOR
|
|||||||||
|
Denominator
for basic (loss) earnings per common share
|
41,525
|
43,223
|
42,225
|
||||||
|
Dilutive
effect of unvested restricted stock and stock options
|
–
|
918
|
1,414
|
||||||
|
Denominator
for diluted (loss) earnings per common share
|
41,525
|
44,141
|
43,639
|
||||||
|
Basic
(loss) earnings per common share
|
$
|
(3.21
|
)
|
$
|
1.40
|
$
|
1.56
|
||
|
Diluted
(loss) earnings per common share
|
$
|
(3.21
|
)
|
$
|
1.37
|
$
|
1.51
|
||
Due to
the Company’s net loss, the denominator for diluted earnings per share is the
same as the denominator for basic earnings per share. Options to purchase
194,243 and 15,000 shares of common stock in 2007 and 2006, respectively, were
not included in the denominator for diluted earnings per common share because
their effect would be antidilutive.
|
4.
|
COMPREHENSIVE
INCOME
|
Comprehensive
income includes changes in shareholders’ equity related to foreign currency
translation adjustments, unrealized gains or losses from derivatives used for
hedging activities and pension and other postretirement benefits
adjustments.
The
following table sets forth the reconciliation from net (loss) earnings to
comprehensive (loss) income for the periods ended January 31, 2009, February 2,
2008 and February 3, 2007:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
60,427
|
$
|
65,708
|
||
|
Other
comprehensive (loss) income, net of tax:
|
|||||||||
|
Foreign
currency translation adjustment
|
(10,544
|
)
|
8,777
|
(1,504
|
)
|
||||
|
Pension
and other postretirement benefits adjustments
|
(11,233
|
)
|
(4,184
|
)
|
(12
|
)
|
|||
|
Unrealized
gains (losses) on derivative instruments
|
409
|
(518
|
)
|
647
|
|||||
|
Net
(loss) gain from derivatives reclassified into earnings
|
(11
|
)
|
(358
|
)
|
788
|
||||
|
(21,379
|
)
|
3,717
|
(81
|
)
|
|||||
|
Comprehensive
(loss) income
|
$
|
(154,617
|
)
|
$
|
64,144
|
$
|
65,627
|
||
The
following table sets forth the balance in accumulated other comprehensive (loss)
income for the Company at January 31, 2009, February 2, 2008 and February 3,
2007:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Foreign
currency translation gains
|
$
|
720
|
$
|
11,264
|
$
|
2,487
|
|||
|
Unrealized
gains (losses) on derivative instruments
|
268
|
(130
|
)
|
746
|
|||||
|
Pension
and other postretirement benefits
|
(6,769
|
)
|
4,464
|
8,648
|
|||||
|
Accumulated
other comprehensive (loss) income
|
$
|
(5,781
|
)
|
$
|
15,598
|
$
|
11,881
|
||
See
additional information related to derivative instruments in Note 13 and
additional information related to pension and other postretirement benefits in
Note 6.
|
5.
|
RESTRUCTURING
AND OTHER SPECIAL CHARGES, NET
|
Expense
and Capital Containment Initiatives
During
the fourth quarter of 2008, the Company announced expense and capital
containment initiatives in an effort to proactively position itself for
continued challenges in the retail environment. These initiatives included a
voluntary separation program, changes in compensation structure, further
rationalization of operating expenses and the closing of certain functions at
its Fredericktown, Missouri distribution center. The total costs to implement
these initiatives, as recorded in the fourth quarter of 2008, are estimated to
be $30.9 million ($19.1 million on an after-tax basis, or $0.46 per diluted
share). These costs include employee-related costs for severance, including
health care benefits and enhanced pension benefits, as well as facility and
other costs. These estimates are subject to change and differences may arise
between these estimates and actual costs.
The
following is a summary of the charges and settlements by category of
costs:
|
($
millions)
|
Employee
Severance
|
Facility
|
Other
|
Total
|
|||||||||||
|
Original
charges and reserve balance
|
$
|
24.7
|
$
|
6.0
|
$
|
0.2
|
$
|
30.9
|
|||||||
|
Amounts
settled in 2008
|
(5.3
|
)
|
(2.7
|
)
|
–
|
(8.0
|
)
|
||||||||
|
Reserve
balance at January 31, 2009
|
$
|
19.4
|
$
|
3.3
|
$
|
0.2
|
$
|
22.9
|
|||||||
Of the
$30.9 million in costs recorded during 2008, $14.4 million was recorded in the
Wholesale Operations segment, $12.1 million was recorded in the Other segment,
$3.8 million was recorded in the Famous Footwear segment and $0.6 million was
recorded in the Specialty Retail segment. All of the costs recorded during 2008
were reflected as a component of restructuring and other special charges, net. A
tax benefit of $11.8 million was associated with the costs recorded during 2008.
The write-off of assets of $0.5 million, included in facility costs, are noncash
items.
Headquarters
Consolidation
During
the first quarter of 2008, the Company announced plans to relocate its Famous
Footwear division headquarters from Madison, Wisconsin to St. Louis, Missouri.
The relocation of the division is intended to foster collaboration, increase the
Company’s speed to market and strengthen its connection with consumers. The
total costs to implement the transition are estimated to be $29.8 million ($18.2
million on an after-tax basis, or $0.44 per diluted share) and were recorded in
2008. These costs include employee-related costs for relocation, severance,
recruiting and retention, as well as facility and other costs.
The
following is a summary of the charges and settlements by category of
costs:
|
($
millions)
|
Employee
Severance
|
Employee
Relocation
|
Employee
Recruiting
|
Facility
|
Other
|
Total
|
||||||||||||
|
Original
charges and reserve balance
|
$
|
6.6
|
$
|
8.3
|
$
|
4.6
|
$
|
9.2
|
$
|
1.1
|
$
|
29.8
|
||||||
|
Amounts
settled in 2008
|
(4.7
|
)
|
(6.2
|
)
|
(4.3
|
)
|
(3.6
|
)
|
(1.0
|
)
|
(19.8
|
)
|
||||||
|
Reserve
balance at January 31, 2009
|
$
|
1.9
|
$
|
2.1
|
$
|
0.3
|
$
|
5.6
|
$
|
0.1
|
$
|
10.0
|
||||||
All of
the costs recorded during 2008 were reflected within the Other segment as a
component of restructuring and other special charges, net. During 2008, a tax
benefit of $11.6 million was associated with the costs recorded. The write-off
of assets of $3.4 million, included in facility costs, are noncash
items.
Information
Technology Initiatives
During
the second quarter of 2008, the Company announced plans to implement an
integrated ERP information technology system provided by third-party vendors.
The Company will utilize an industry specific ERP information technology system
solution to support its supply chain. The ERP information technology system will
replace select existing internally developed and certain other third-party
applications, and is expected to support the Company’s growth strategy while
streamlining and transforming day-to-day operations for its integrated business
model. The Company anticipates the implementation will enhance its profitability
and deliver increased shareholder value through improved management and
execution of its business operations, financial systems, supply chain efficiency
and planning and employee productivity. The phased implementation began during
the second quarter of 2008 and is expected to continue through 2011. The Company
incurred charges of $3.7 million ($2.4 million on an after-tax basis, or $0.06
per diluted share) during 2008 within the Other segment related to its
implementation of these initiatives, with no corresponding charges during 2007
or 2006.
During
2006, the Company reached agreements with certain insurance carriers to recover
environmental remediation costs associated with its facility in Denver, Colorado
(the “Redfield” facility). The Company recorded income related to these
recoveries, net of legal expenses, of $7.3 million ($4.4 million on an after-tax
basis, or $0.10 per diluted share) in 2006. Subsequent to the initial recovery,
the Company continued to pursue recovery of additional remediation costs from
other insurance carriers and the Colorado Department of Transportation. In
addition, based on the results of ongoing testing and the study of remediation
alternatives by the Company’s environmental consultants, in 2006, the Company
submitted to the Colorado authorities a supplement to its former remediation
plan, setting forth a long-term remediation plan for the Redfield site and
extended the time period that it expects to perform certain remediation
activities. The Company recorded a charge of $5.6 million ($3.4 million on an
after-tax basis, or $0.08 per diluted share) in 2006, the majority of which
represented the estimated discounted costs to complete the on-site remediation.
The Company recorded the combined impact of these environmental insurance
recoveries and charges in 2006 within its Other segment of $1.6 million ($1.0
million on an after-tax basis, or $0.02 per diluted share), with no
corresponding recoveries or charges in 2007.
During
2008, the Company reached additional agreements with certain insurance carriers
to recover costs associated with its facility in Denver, Colorado. As a result
of these settlements, all claims among the parties were dismissed. The Company
recorded income within its Other segment related to these recoveries, net of
associated fees and costs, of $10.2 million ($6.2 million on an after-tax basis,
or $0.15 per diluted share).
See Note
17 to the condensed consolidated financial statements for additional information
related to these recoveries.
Earnings
Enhancement Plan
During
2006, the Company initiated an Earnings Enhancement Plan designed to increase
earnings through cost reductions, efficiency initiatives and the reallocation of
resources. Key elements of the plan include: (i) restructuring administrative
and support areas; (ii) redesigning logistics and distribution platforms; (iii)
reorganizing to eliminate operational redundancies; (iv) realigning strategic
priorities; and (v) refining the supply chain process and enhancing inventory
utilization. The Company incurred no charges during 2008, but incurred charges
of $19.0 million ($12.4 million on an after-tax basis, or $0.28 per diluted
share) and $6.3 million ($3.9 million on an after-tax basis, or $0.09 per
diluted share) during 2007 and 2006, respectively.
The
following is a summary of the charges and settlements by category of
costs:
|
($
millions)
|
Employee
Severance
|
Facility
& Lease
Exits
|
Inventory
Markdowns
|
Asset
Write-Offs
|
Consulting
Services
|
Other
|
Total
|
||||||||||||||
|
Original
charges
and
reserve balance
|
$
|
3.5
|
$
|
(0.1
|
)
|
$
|
0.3
|
$
|
1.2
|
$
|
1.3
|
$
|
0.1
|
$
|
6.3
|
||||||
|
Amounts
settled in 2006
|
(1.1
|
)
|
(0.2
|
)
|
(0.3
|
)
|
(1.2
|
)
|
(1.1
|
)
|
(0.1
|
)
|
(4.0
|
)
|
|||||||
|
Reserve
balance at February 3, 2007
|
$
|
2.4
|
$
|
(0.3
|
)
|
$
|
–
|
$
|
–
|
$
|
0.2
|
$
|
–
|
$
|
2.3
|
||||||
|
Additional
charges in 2007
|
8.2
|
2.6
|
–
|
0.3
|
6.3
|
1.6
|
19.0
|
||||||||||||||
|
Amounts
settled in 2007
|
(8.7
|
)
|
(1.9
|
)
|
–
|
(0.3
|
)
|
(5.8
|
)
|
(0.9
|
)
|
(17.6
|
)
|
||||||||
|
Reserve
balance at February 2, 2008
|
$
|
1.9
|
$
|
0.4
|
$
|
–
|
$
|
–
|
$
|
0.7
|
$
|
0.7
|
$
|
3.7
|
|||||||
|
Amounts
settled in 2008
|
(1.4
|
)
|
(0.4
|
)
|
–
|
–
|
(0.7
|
)
|
(0.7
|
)
|
(3.2
|
)
|
|||||||||
|
Reserve
balance at
January
31, 2009
|
$
|
0.5
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
0.5
|
|||||||
The
following is a summary of the charges by segment:
|
($
millions)
|
Famous
Footwear
|
Wholesale
Operations
|
Specialty
Retail
|
Other
|
Total
|
||||||||||||||||
|
Charges
in 2006
|
$
|
–
|
$
|
3.6
|
$
|
1.1
|
$
|
1.6
|
$
|
6.3
|
|||||||||||
|
Charges
in 2007
|
–
|
4.2
|
3.8
|
11.0
|
19.0
|
||||||||||||||||
|
Cumulative
charges to date
|
$
|
–
|
$
|
7.8
|
$
|
4.9
|
$
|
12.6
|
$
|
25.3
|
|||||||||||
Of the
costs recorded during 2007 and the cumulative costs recorded to date, $19.0
million and $25.0 million, respectively, were reflected as a component of
restructuring and other special charges, net. During 2006, $0.3 million were
reflected as a component of cost of goods sold, resulting in total cumulative
costs recorded to date of $25.3 million. A tax benefit of $6.6 million and $9.0
million were associated with the costs recorded during 2007 and the cumulative
costs recorded to date, respectively. Inventory markdowns and the write-off of
assets are noncash items.
Bass
License Withdrawal
As a
result of the poor financial performance of the Bass brand, the Company
announced in 2006 that it would not renew the Bass license when it expired at
the end of 2006. As a result, the Company incurred costs within the Wholesale
Operations segment associated with the expiration of the Bass license of $3.8
million ($2.3 million on an after-tax basis, or $0.05 per diluted share) during
2006.
Charges
and recoveries related to our environmental insurance recoveries and charges,
Earnings Enhancement Plan and Bass license withdrawal were previously reported
as components of selling and administrative expenses and cost of goods sold. The
charges and recoveries previously reported as selling and administrative
expenses are now reported as restructuring and other special charges, net to
conform to the current period presentation.
|
6.
|
RETIREMENT
AND OTHER BENEFIT PLANS
|
The
Company sponsors pension plans in both the United States and Canada. The
Company’s domestic pension plans cover substantially all United States
employees. Under the domestic plans, salaried, management and certain hourly
employees’ pension benefits are based on the employee’s highest consecutive five
years of compensation during the ten years before retirement; hourly employees’
and union members’ benefits are based on stated amounts for each year of
service. The Company’s Canadian pension plans cover certain employees based on
plan specifications. Under the Canadian plans, employees’ pension benefits are
based on the employee’s highest consecutive five years of compensation during
the ten years before retirement. The Company’s funding policy for all plans is
to make the minimum annual contributions required by applicable
regulations.
The
Company also maintains an unfunded Supplemental Executive Retirement Plan
(“SERP”). As of January 31, 2009, the projected benefit obligation of this plan
was $12.1 million, and the accumulated benefit obligation was $11.6
million.
In
addition to providing pension benefits, the Company sponsors unfunded defined
benefit postretirement life insurance plans that cover both salaried and hourly
employees who had become eligible for benefits by January 1, 1995. The life
insurance plans provide coverage ranging from $1,000 to $38,000 for qualifying
retired employees.
On
February 3, 2007, the Company adopted the balance sheet recognition provisions
of SFAS No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans
.
The Company adopted the year-end measurement date in 2008. The impact of the
transition to fiscal year end measurement dates resulted in an immaterial amount
of net periodic benefit cost being recognized as an adjustment to retained
earnings in the fourth quarter of 2008. Since the Company’s primary defined
benefit pension plan is in an overfunded position, prepaid pension costs had
been recognized on the Company’s balance sheet under SFAS No. 87,
Employers’ Accounting for Pensions
(“SFAS No. 87”), and such asset increased as a result of the adoption of
SFAS No. 158 in 2006. The liability for the Company’s SERP plan, which is
unfunded, increased as a result of the adoption of SFAS No. 158. Additionally,
SFAS No. 87 required the recognition of an additional minimum liability (“AML”)
if the market value of plan assets was less than the accumulated benefit
obligation at the measurement date. The AML was eliminated upon the adoption of
SFAS No. 158. The Company used January 31 as the measurement date for its
pension and postretirement plans in 2008. Prior to the adoption of the
measurement date provision under SFAS No. 158 in 2008, the Company used December
31. Year end asset and obligation amounts are disclosed as of the plan
measurement dates.
Benefit
Obligations
The
following table sets forth changes in benefit obligations, including all
domestic and Canadian plans:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||
|
($
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||
|
Benefit
obligation at beginning of year
|
$
|
185,171
|
$
|
176,713
|
$
|
4,295
|
$
|
4,294
|
||||
|
Effect
of eliminating the early measurement date
|
723
|
–
|
21
|
–
|
||||||||
|
Service
cost
|
7,970
|
8,083
|
–
|
–
|
||||||||
|
Interest
cost
|
10,935
|
10,637
|
257
|
257
|
||||||||
|
Plan
participants’ contribution
|
9
|
13
|
53
|
42
|
||||||||
|
Plan
amendments
|
(1,549
|
)
|
1,186
|
–
|
–
|
|||||||
|
Actuarial
(gain) loss
|
(14,178
|
)
|
3,187
|
(914
|
)
|
12
|
||||||
|
Benefits
paid
|
(10,364
|
)
|
(15,557
|
)
|
(170
|
)
|
(310
|
)
|
||||
|
Special
termination benefits
|
5,407
|
–
|
–
|
–
|
||||||||
|
Settlement
gain
|
(1,223
|
)
|
–
|
–
|
–
|
|||||||
|
Curtailment
loss
|
–
|
(247
|
)
|
–
|
–
|
|||||||
|
Foreign
exchange rate changes
|
(1,034
|
)
|
1,156
|
–
|
–
|
|||||||
|
Benefit
obligation at end of year
|
$
|
181,867
|
$
|
185,171
|
$
|
3,542
|
$
|
4,295
|
||||
The
accumulated benefit obligation for the United States pension plans was $170.7
million and $160.5 million as of January 31, 2009 and February 2, 2008,
respectively. The accumulated benefit obligation for the Canadian pension plans
was $3.5 million and $6.0 million as of January 31, 2009 and February 2, 2008,
respectively.
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
||||||||||||||||
|
Weighted-Average
Assumptions
Used
to Determine Benefit Obligations, End of Year
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.50%
|
6.00%
|
6.50%
|
6.00%
|
|||||||||||||
|
Rate
of compensation increase
|
4.25%
|
4.25%
|
N/A
|
N/A
|
|||||||||||||
Plan
Assets
The
following table sets forth changes in the fair value of plan assets, including
all domestic and Canadian plans:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||
|
($
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$
|
240,969
|
$
|
236,374
|
$
|
–
|
$
|
–
|
||||
|
Effect
of eliminating the early measurement date
|
716
|
–
|
–
|
–
|
||||||||
|
Actual
return on plan assets
|
(17,160
|
)
|
13,383
|
–
|
–
|
|||||||
|
Employer
contributions
|
1,917
|
5,472
|
117
|
268
|
||||||||
|
Plan
participants’ contributions
|
9
|
12
|
53
|
42
|
||||||||
|
Benefits
paid
|
(10,364
|
)
|
(15,557
|
)
|
(170
|
)
|
(310
|
)
|
||||
|
Settlements
|
(1,223
|
)
|
–
|
–
|
–
|
|||||||
|
Foreign
exchange rate changes
|
(1,159
|
)
|
1,285
|
–
|
–
|
|||||||
|
Fair
value of plan assets at end of year
|
$
|
213,705
|
$
|
240,969
|
$
|
–
|
$
|
–
|
||||
Employer
contributions and benefits paid in the above table include both those amounts
contributed directly to and paid directly from plan assets and those amounts
paid directly to plan participants.
The asset allocation for the Brown Shoe Company, Inc. Retirement Plan at the end of 2008 and 2007 and the target allocation for 2009, by asset category, are as follows:
|
Target
Allocation
for 2009
|
Percentage
of Plan
Assets
at Year-End
|
|||||
|
2008
|
2007
|
|||||
|
Asset
Category
|
||||||
|
Domestic
equities
|
60%
|
35%
|
57%
|
|||
|
Debt
securities
|
30%
|
51%
|
32%
|
|||
|
Foreign
equities
|
10%
|
14%
|
11%
|
|||
|
Total
|
100%
|
100%
|
100%
|
|||
Domestic
equities do not include any Company stock at January 31, 2009 or February 2,
2008. Plan assets are valued at fair value based on quoted market
values.
Pension
assets are managed in accordance with the prudent investor standards of ERISA.
The plan’s investment objective is to earn a competitive total return on assets,
while also ensuring plan assets are adequately managed to provide for future
pension obligations. This results in the protection of plan surplus and is
accomplished by matching the duration of the projected benefit obligation using
leveraged fixed income instruments and, while maintaining a 70% overall (United
States and international) equity commitment, managing an equity overlay
strategy. The overlay strategy is intended to protect the managed equity
portfolios against adverse stock market environments. The Company delegates
investment management to specialists in each asset class and regularly monitors
manager performance and compliance with investment guidelines.
Assets of
the Canadian pension plans, which total approximately $4.0 million at January
31, 2009, were invested 54% in equity funds, 44% in bond funds and 2% in money
market funds. The Canadian pension plans did not include any Company stock as of
January 31, 2009 or February 2, 2008.
Funded
Status
The over
funded status as of January 31, 2009 and February 2, 2008 for pension benefits
was $31.8 million and $55.8 million, respectively. The under funded status as of
January 31, 2009 and February 2, 2008 for other postretirement benefits was $3.5
million and $4.3 million, respectively.
Amounts
recognized in the consolidated balance sheets consist of:
|
Pension
Benefits
|
Other
Postretirement
Benefits
|
|||||||||||
|
($
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||
|
Prepaid
pension costs (noncurrent asset)
|
$
|
44,016
|
$
|
70,584
|
$
|
-
|
$
|
-
|
||||
|
Accrued
benefit liabilities (current liability)
|
(2,507
|
)
|
(1,592
|
)
|
(1,170
|
)
|
(460
|
)
|
||||
|
Accrued
benefit liabilities (noncurrent liability)
|
(9,671
|
)
|
(13,194
|
)
|
(2,372
|
)
|
(3,835
|
)
|
||||
|
Net
amount recognized at end of year
|
$
|
31,838
|
$
|
55,798
|
$
|
(3,542
|
)
|
$
|
(4,295
|
)
|
||
The
projected benefit obligation, the accumulated benefit obligation and the fair
value of plan assets for pension plans with a projected benefit obligation in
excess of plan assets and for pension plans with an accumulated benefit
obligation in excess of plan assets, which includes only the Company’s SERP,
were as follows:
|
Projected
Benefit
Obligation
Exceeds
the
Fair Value
of
Plan Assets
|
Accumulated
Benefit
Obligation
Exceeds
the
Fair Value
of
Plan Assets
|
|||||||||||
|
($
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||
|
End
of Year
|
||||||||||||
|
Projected
benefit obligation
|
$
|
12,077
|
$
|
14,786
|
$
|
12,077
|
$
|
14,786
|
||||
|
Accumulated
benefit obligation
|
11,642
|
11,818
|
11,642
|
11,818
|
||||||||
|
Fair
value of plan assets
|
-
|
-
|
-
|
-
|
||||||||
The
accumulated postretirement benefit obligation exceeds assets for all of the
Company’s other postretirement benefit plans.
The amounts in accumulated other comprehensive loss (income) that have not yet been recognized as components of net periodic benefits cost (income) at January 31, 2009 and February 2, 2008, and the expected amortization of the January 31, 2009 amounts as components of net periodic benefit cost (income) for the year ended January 30, 2010, are as follows:
|
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||
|
($
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||
|
Components
of accumulated other comprehensive (income) loss, net of
tax:
|
||||||||||||
|
Net
actuarial loss (gain)
|
$
|
7,637
|
$
|
(4,880
|
)
|
$
|
(686
|
)
|
$
|
(128
|
)
|
|
|
Net
prior service cost
|
(68
|
)
|
862
|
-
|
-
|
|||||||
|
Net
transition asset
|
(114
|
)
|
(318
|
)
|
-
|
-
|
||||||
|
$
|
7,455
|
$
|
(4,336
|
)
|
$
|
(686
|
)
|
$
|
(128
|
)
|
||
|
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||
|
($
thousands)
|
2009
|
2009
|
||||||||||
|
Expected
amortization, net of tax:
|
||||||||||||
|
Amortization
of net actuarial losses (gains)
|
$
|
67
|
$
|
(52
|
)
|
|||||||
|
Amortization
of net prior service cost
|
(12
|
)
|
-
|
|||||||||
|
Amortization
of net transition asset
|
77
|
-
|
||||||||||
|
$
|
132
|
$
|
(52
|
)
|
||||||||
Net
Periodic Benefit Cost
Net
periodic benefit cost (income) for 2008, 2007 and 2006 for all domestic and
Canadian plans included the following components:
|
Pension
Benefits
|
Other
Postretirement Benefits
|
||||||||||||||||||
|
($
thousands)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||
|
Service
cost
|
$
|
7,970
|
$
|
8,083
|
$
|
7,864
|
$
|
–
|
$
|
–
|
$
|
–
|
|||||||
|
Interest
cost
|
10,935
|
10,637
|
10,162
|
257
|
257
|
251
|
|||||||||||||
|
Expected
return on assets
|
(18,762
|
)
|
(17,919
|
)
|
(17,167
|
)
|
–
|
–
|
–
|
||||||||||
|
Amortization
of:
|
|||||||||||||||||||
|
Actuarial
loss (gain)
|
246
|
413
|
542
|
(9
|
)
|
(10
|
)
|
(10
|
)
|
||||||||||
|
Prior
service cost
|
(23
|
)
|
364
|
348
|
–
|
–
|
–
|
||||||||||||
|
Net
transition asset
|
(161
|
)
|
(191
|
)
|
(176
|
)
|
–
|
–
|
–
|
||||||||||
|
Special
termination benefits
|
5,407
|
–
|
1,470
|
–
|
–
|
–
|
|||||||||||||
|
Settlement
cost
|
449
|
1,200
|
82
|
–
|
–
|
–
|
|||||||||||||
|
Total
net periodic benefit cost
|
$
|
6,061
|
$
|
2,587
|
$
|
3,125
|
$
|
248
|
$
|
247
|
$
|
241
|
|||||||
|
Pension
Benefits
|
Other
Postretirement Benefits
|
|||||||||||
|
Weighted-Average
Assumptions Used to Determine Net Cost
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||
|
Discount
rate
|
6.00%
|
6.00%
|
6.00%
|
6.00%
|
6.00%
|
6.00%
|
||||||
|
Rate
of compensation increase
|
4.25%
|
4.00%
|
4.00%
|
N/A
|
N/A
|
N/A
|
||||||
|
Expected
return on plan assets
|
8.75%
|
9.00%
|
9.00%
|
N/A
|
N/A
|
N/A
|
||||||
|
Health
care cost trend on covered charges
|
N/A
|
N/A
|
N/A
|
8.00%
|
8.00%
|
8.00%
|
||||||
The prior
service cost is amortized on a straight-line basis over the average future
service of active plan participants benefiting under the plan at the time of
each plan amendment. The net actuarial loss (gain) subject to amortization is
amortized on a straight-line basis over the average future service of active
plan participants as of the measurement date. The net transition asset is
amortized over the estimated service life.
The
expected long-term rate of return on plan assets is based on historical and
projected rates of return for current and planned asset classes in the plan’s
investment portfolio. Assumed projected rates of return for each asset class
were selected after analyzing experience and future expectations of the returns.
The overall expected rate of return for the portfolio was developed based on the
target allocation for each asset class.
Expected
Cash Flows
Information
about expected cash flows for all pension and postretirement benefit plans
follows:
|
Pension
Benefits
|
|||||||||||||
|
($
thousands)
|
Funded
Plans
|
SERP
|
Total
|
Other
Postretirement
Benefits
|
|||||||||
|
Employer
Contributions
|
|||||||||||||
|
2009
expected contributions to plan trusts
|
$
|
13
|
$
|
–
|
$
|
13
|
$
|
–
|
|||||
|
2009
expected contributions to plan participants
|
–
|
2,507
|
2,507
|
1,170
|
|||||||||
|
2009
refund of assets (e.g. surplus) to employer
|
138
|
–
|
138
|
–
|
|||||||||
|
Expected
Benefit Payments
|
|||||||||||||
|
2009
|
$
|
6,641
|
$
|
2,507
|
$
|
9,148
|
$
|
1,170
|
|||||
|
2010
|
8,953
|
247
|
9,200
|
364
|
|||||||||
|
2011
|
8,742
|
1,452
|
10,194
|
350
|
|||||||||
|
2012
|
9,160
|
1,176
|
10,336
|
334
|
|||||||||
|
2013
|
9,546
|
8,995
|
18,541
|
318
|
|||||||||
|
2014
– 2018
|
53,957
|
5,371
|
59,328
|
1,306
|
|||||||||
Defined
Contribution Plans
The
Company’s domestic defined contribution 401(k) plan covers salaried and certain
hourly employees. Company contributions represent a partial matching of employee
contributions, generally up to a maximum of 3.5% of the employee’s salary and
bonus. The Company’s expense for this plan was $3.3 million, $3.2 million and
$3.5 million in 2008, 2007 and 2006, respectively.
The
Company’s Canadian defined contribution plan covers certain salaried and hourly
employees. The Company makes contributions for all eligible employees, ranging
from 3% to 5% of the employee’s salary. In addition, eligible employees may
voluntarily contribute to the plan. The Company’s expense for this plan was $0.3
million in 2008 and $0.2 million in both 2007 and 2006.
Deferred
Compensation Plan
In 2007,
the Company established a non-qualified deferred compensation plan (the
“Deferred Compensation Plan”) for the benefit of certain management employees.
The investment funds selected by 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 our 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”). In accordance with the provisions of EITF No. 97-14,
Accounting for Deferred
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested
(“EITF 97-14”), the liabilities of the Deferred Compensation
Plan of $0.5 million in 2008 and an immaterial amount in 2007 are presented in
accrued expenses in the accompanying consolidated balance sheets. The assets
held by the trust of $0.5 million in 2008 and an immaterial amount in 2007 are
classified as trading securities within prepaid expenses and other current
assets, with changes in the deferred compensation charged to selling and
administrative expenses.
|
7.
|
INCOME
TAXES
|
The
components of (loss) earnings before income taxes and minority interests
consisted of domestic (loss) earnings before income taxes and minority interests
of $(217.2) million, $38.7 million and $51.3 million in 2008, 2007 and 2006,
respectively, and foreign earnings before income taxes and minority interests of
$28.6 million, $45.1 million and $42.1 million in 2008, 2007 and 2006,
respectively.
The
components of income tax (benefit) provision on (loss) earnings were as
follows:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Federal
|
|||||||||
|
Current
|
$
|
(1,174
|
)
|
$
|
18,169
|
$
|
25,787
|
||
|
Deferred
|
(43,336
|
)
|
(642
|
)
|
(4,822
|
)
|
|||
|
(44,510
|
)
|
17,527
|
20,965
|
||||||
|
State
|
|||||||||
|
Current
|
(1,308
|
)
|
4,108
|
4,407
|
|||||
|
Deferred
|
(7,912
|
)
|
(273
|
)
|
(1,447
|
)
|
|||
|
(9,220
|
)
|
3,835
|
2,960
|
||||||
|
Foreign
|
(63
|
)
|
2,121
|
3,794
|
|||||
|
Total
income tax (benefit) provision
|
$
|
(53,793
|
)
|
$
|
23,483
|
$
|
27,719
|
||
The
Company made federal, state and foreign tax payments, net of refunds, of $(1.4)
million, $22.7 million and $24.8 million in 2008, 2007 and 2006,
respectively.
The
differences between the tax (benefit) expense reflected in the consolidated
financial statements and the amounts calculated at the federal statutory income
tax rate of 35% were as follows:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Income
taxes at statutory rate
|
$
|
(66,012
|
)
|
$
|
29,334
|
$
|
32,695
|
||
|
State
income taxes, net of federal tax benefit
|
(4,411
|
)
|
2,669
|
1,924
|
|||||
|
State
income tax credits, net of federal tax expense
|
(1,582
|
)
|
–
|
–
|
|||||
|
Tax
impact of nondeductible stock option expense
|
708
|
1,169
|
1,149
|
||||||
|
Tax
impact of nondeductible goodwill impairment
|
24,883
|
–
|
–
|
||||||
|
Foreign
earnings taxed at lower rates
|
(10,195
|
)
|
(11,130
|
)
|
(9,004
|
)
|
|||
|
Other
|
2,816
|
1,441
|
955
|
||||||
|
Total
income tax (benefit) provision
|
$
|
(53,793
|
)
|
$
|
23,483
|
$
|
27,719
|
||
The other
category of income tax (benefit) provision principally represents the impact of
expenses that are not deductible for federal income tax purposes.
Significant components of the Company’s deferred income tax assets and liabilities were as follows:
|
($
thousands)
|
January
31, 2009
|
February
2, 2008
|
||||
|
Deferred
Tax Assets
|
||||||
|
Employee
benefits, compensation and insurance
|
$
|
19,341
|
$
|
15,132
|
||
|
Accrued
expenses
|
7,760
|
8,313
|
||||
|
Depreciation
|
6,469
|
6,975
|
||||
|
Postretirement
and postemployment benefit plans
|
2,009
|
2,401
|
||||
|
Deferred
rent
|
10,903
|
10,088
|
||||
|
Accounts
receivable reserves
|
2,700
|
2,838
|
||||
|
Net
operating loss (“NOL”) carryforward / carryback
|
29,503
|
4,653
|
||||
|
Inventory
capitalization and inventory reserves
|
2,922
|
2,526
|
||||
|
Other
|
3,002
|
3,855
|
||||
|
Total
deferred tax assets, before valuation allowance
|
84,609
|
56,781
|
||||
|
Valuation
allowance
|
(6,723
|
)
|
(3,236
|
)
|
||
|
Total
deferred tax assets, net of valuation allowance
|
77,886
|
53,545
|
||||
|
Deferred
Tax Liabilities
|
||||||
|
Retirement
plans
|
(13,265
|
)
|
(21,522
|
)
|
||
|
LIFO
inventory valuation
|
(28,163
|
)
|
(23,761
|
)
|
||
|
Goodwill
and intangible assets
|
1,925
|
(22,000
|
)
|
|||
|
Other
|
(814
|
)
|
(806
|
)
|
||
|
Total
deferred tax liabilities
|
(40,317
|
)
|
(68,089
|
)
|
||
|
Net
deferred tax asset (liability)
|
$
|
37,569
|
$
|
(14,544
|
)
|
|
At the
end of 2008, the Company had a net operating loss carryforward with a tax value
of $1.7 million, related to Shoes.com, which expires in 2019, and various state
net operating loss carryforwards with tax values totaling $6.0 million. A
valuation allowance of $6.2 million has been established related to these
operating loss carryforwards. The Company also has a valuation allowance of $0.5
million related to share-based compensation. The majority of the remaining net
operating loss will be carried back and the Company anticipates receiving a
refund during 2009.
As of
January 31, 2009, no deferred taxes have been provided on the accumulated
unremitted earnings of the Company’s foreign subsidiaries that are not subject
to United States income tax. At January 31, 2009, the Company had $84.1 million
of cash and cash equivalents at its Canadian and other foreign
subsidiaries.
The
Company periodically evaluates its foreign investment opportunities and plans,
as well as its foreign working capital needs, to determine the level of
investment required and, accordingly, determine the level of foreign earnings
that is considered indefinitely reinvested. Based upon that evaluation, earnings
of the Company’s foreign subsidiaries that are not otherwise subject to United
States taxation, except for the Company’s Canadian subsidiary, are considered to
be indefinitely reinvested, and accordingly, deferred taxes have not been
provided. If changes occur in future investment opportunities and plans, those
changes will be reflected when known and may result in providing residual United
States deferred taxes on unremitted foreign earnings. If our unremitted foreign
earnings were not considered indefinitely reinvested as of January 31, 2009,
additional deferred taxes of approximately $21.0 million would have been
provided.
Uncertain
Tax Positions
In
June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
(“FIN 48”)
.
FIN 48 established a single
model to address accounting for uncertain tax positions. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
The
Company adopted the provisions of FIN 48 on February 4, 2007. At February 4,
2007, the Company had $1.0 million of unrecognized tax benefits, relating to
various state tax issues, and $0.2 million of estimated interest and penalties.
A charge of $0.8 million, net of federal income tax benefit of $0.4 million, was
recorded against retained earnings as a cumulative effect adjustment at February
4, 2007.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
($
thousands)
|
|||
|
Balance
at February 4, 2007
|
$
|
961
|
|
|
Additions
for tax positions of prior years
|
22
|
||
|
Reductions
for tax positions of prior years due to a lapse in the statute of
limitations
|
(60
|
)
|
|
|
Balance
at February 2, 2008
|
923
|
||
|
Additions
for tax positions of prior years
|
619
|
||
|
Reductions
for tax positions of prior years due to a lapse in the statute of
limitations
|
(149
|
)
|
|
|
Balance
at January 31, 2009
|
$
|
1,393
|
|
If the
unrecognized tax benefits were to be recognized in full, the net amount that
would be reflected in the income statement tax provision, thereby impacting the
effective tax rate, would be $1.3 million at January 31, 2009 and $0.8 million
at both February 2, 2008 and February 4, 2007.
Estimated
interest and penalties related to the underpayment of income taxes were
classified as a component of the income tax (benefit) provision in the
consolidated statements of earnings and was $0.1 million for both 2008 and 2007.
Accrued interest and penalties were $0.4 million and $0.3 million as of January
31, 2009 and February 2, 2008, respectively.
The
Company has settled examinations by both the Internal Revenue Service and the
Canada Revenue Agency of tax years through January 28, 2006 (fiscal year 2005).
The Company also files tax returns in various foreign jurisdictions and numerous
states, for which various tax years are subject to examination.
The Company does not
expect any significant changes to its liability for unrecognized tax benefits
during the next twelve months.
|
8.
|
BUSINESS
SEGMENT INFORMATION
|
The
Company’s reportable segments include Famous Footwear, Wholesale Operations,
Specialty Retail and Other.
Famous
Footwear, which represents the Company’s largest division, operated 1,138 stores
at the end of 2008, primarily selling branded footwear for the entire
family.
Wholesale
Operations source and market licensed, branded and private-label footwear
primarily to mass merchandisers, national chains and department stores as well
as Company-owned Famous Footwear and Specialty Retail stores.
The
Specialty Retail operations include 154 stores in the United States, 133 stores
in Canada and 19 stores in China at the end of 2008, selling primarily
Naturalizer brand footwear in regional malls and outlet centers as well as other
e-commerce businesses.
The Other
segment includes corporate assets and administrative and other expenses which
are not allocated to the operating units.
The
Company’s reportable segments are operating units that market to different
customers and are each managed separately as they distribute their products on a
retail or wholesale basis. An operating segment’s performance is evaluated and
resources are allocated based on operating (loss) earnings. Operating (loss)
earnings represent gross profit less selling and administrative expenses,
impairment of goodwill and intangible assets, restructuring and other special
charges, net and equity in net loss of nonconsolidated affiliate. The accounting
policies of the reportable segments are the same as those described in Note 1.
Intersegment sales are generally recorded at a profit to the selling division.
All intersegment earnings related to inventory on hand at the purchasing
division are eliminated against the earnings of the selling
segment.
|
($
thousands)
|
Famous
Footwear
|
Wholesale
Operations
|
Specialty
Retail
|
Other
|
Total
|
||||||||||
|
Fiscal
2008
|
|||||||||||||||
|
External
sales
|
$
|
1,319,978
|
$
|
703,841
|
$
|
252,543
|
$
|
-
|
$
|
2,276,362
|
|||||
|
Intersegment
sales
|
2,252
|
167,164
|
-
|
-
|
169,416
|
||||||||||
|
Equity
in net loss of nonconsolidated
affiliate
(1)
|
-
|
216
|
-
|
-
|
216
|
||||||||||
|
Depreciation
and amortization
|
30,806
|
10,365
|
4,913
|
10,426
|
56,510
|
||||||||||
|
Operating
earnings (loss)
|
26,955
|
(108,065
|
)
|
(30,530
|
)
|
(61,661
|
)
|
(173,301
|
)
|
||||||
|
Operating
segment assets
|
448,472
|
340,318
|
71,115
|
166,126
|
1,026,031
|
||||||||||
|
Purchases
of property and equipment
|
48,512
|
1,328
|
5,714
|
4,863
|
60,417
|
||||||||||
|
Fiscal
2007
|
|||||||||||||||
|
External
sales
|
$
|
1,313,165
|
$
|
783,533
|
$
|
263,211
|
$
|
-
|
$
|
2,359,909
|
|||||
|
Intersegment
sales
|
2,558
|
155,707
|
-
|
-
|
158,265
|
||||||||||
|
Equity
in net loss of nonconsolidated
affiliate
(1)
|
-
|
439
|
-
|
-
|
439
|
||||||||||
|
Depreciation
and amortization
|
31,289
|
9,219
|
4,681
|
6,959
|
52,148
|
||||||||||
|
Operating
earnings (loss)
|
84,138
|
67,544
|
(8,180
|
)
|
(46,892
|
)
|
96,610
|
||||||||
|
Operating
segment assets
|
412,248
|
455,129
|
83,920
|
148,544
|
1,099,841
|
||||||||||
|
Investment
in nonconsolidated
affiliate
(1)
|
-
|
6,641
|
-
|
-
|
6,641
|
||||||||||
|
Purchases
of property and equipment
|
31,204
|
3,344
|
5,967
|
840
|
41,355
|
||||||||||
|
Fiscal
2006
|
|||||||||||||||
|
External
sales
|
$
|
1,282,211
|
$
|
930,790
|
$
|
257,929
|
$
|
-
|
$
|
2,470,930
|
|||||
|
Intersegment
sales
|
4,003
|
175,442
|
-
|
-
|
179,445
|
||||||||||
|
Depreciation
and amortization
|
29,911
|
9,277
|
5,056
|
6,699
|
50,943
|
||||||||||
|
Operating
earnings (loss)
|
89,834
|
70,962
|
(3,808
|
)
|
(48,293
|
)
|
108,695
|
||||||||
|
Operating
segment assets
|
411,432
|
465,887
|
78,242
|
143,496
|
1,099,057
|
||||||||||
|
Purchases
of property and equipment
|
37,260
|
4,983
|
4,966
|
13,516
|
60,725
|
||||||||||
|
(1)
Related to the
operating results of Edelman Shoe, Inc., which was accounted for under the
equity method until the fourth quarter of 2008. See Note 2 to the
consolidated financial statements for additional information related to
Edelman Shoe,
Inc.
|
|||||||||||||||
Following
is a reconciliation of operating (loss) earnings to (loss) earnings before
income taxes and minority interests:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Operating
earnings
|
$
|
(173,301
|
)
|
$
|
96,610
|
$
|
108,695
|
||
|
Interest
expense
|
(17,105
|
)
|
(16,232
|
)
|
(17,892
|
)
|
|||
|
Interest
income
|
1,800
|
3,434
|
2,610
|
||||||
|
(Loss)
earnings before income taxes and minority interests
|
$
|
(188,606
|
)
|
$
|
83,812
|
$
|
93,413
|
||
In 2008,
the impact of impairment of goodwill and intangible assets and restructuring and
other special charges, net included in operating (loss) earnings was as
follows:
|
·
|
Wholesale
Operations – $129.1 million of charges related to the Company’s impairment
of goodwill and intangible assets and $14.4 million of charges related to
the Company’s expense and capital containment
initiatives.
|
|
·
|
Other
– $29.8 million of charges related to the Company’s headquarters
consolidation, $12.1 million of charges related to the Company’s expense
and capital containment initiatives and $3.7 million of charges related to
the Company’s information technology initiatives, partially offset by
$10.2 million of income related to the environmental insurance recoveries,
net of associated fees and costs.
|
|
·
|
Specialty
Retail – $16.6 million of charges related to the Company’s impairment of
goodwill and $0.6 million of charges related to the Company’s expense and
capital containment initiatives.
|
|
·
|
Famous
Footwear – $3.8 million of charges related to the Company’s expense and
capital containment initiatives and $3.5 million of charges related to the
Company’s impairment of goodwill.
|
In 2007, the impact of restructuring and other special charges, net included in operating earnings (loss) was as follows:
|
·
|
Other
– $11.0 million of charges related to the Company’s Earnings Enhancement
Plan.
|
|
·
|
Wholesale
Operations – $4.2 million of charges related to the Company’s Earnings
Enhancement Plan.
|
|
·
|
Specialty
Retail – $3.8 million of charges related to the Company’s Earnings
Enhancement Plan.
|
In 2006,
the impact of restructuring and other special charges, net included in operating
earnings (loss) was as follows:
|
·
|
Wholesale
Operations – $3.6 million of charges related to the Company’s Earnings
Enhancement Plan and $3.8 million related to Bass exit
costs.
|
|
·
|
Other
– $1.6 million of charges related to the Company’s Earnings Enhancement
Plan and $1.6 million of income related to insurance recoveries, net of
associated fees and costs.
|
|
·
|
Specialty
Retail – $1.1 million of charges related to the Company’s Earnings
Enhancement Plan.
|
For
geographic purposes, the domestic operations include the wholesale distribution
of licensed, branded and private-label footwear to a variety of retail customers
and nationwide operation of our retail chains, including Famous Footwear and
Specialty Retail.
The
Company’s foreign operations primarily consist of wholesale distribution
operations in the Far East and retail operations in Canada, China and Guam. The
Far East operations include
first-cost
transactions,
where footwear is sold at foreign ports to customers who then import the
footwear into the United States and other countries.
A summary
of the Company’s net sales and long-lived assets by geographic area were as
follows:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Net
Sales
|
|||||||||
|
United
States
|
$
|
1,916,522
|
$
|
1,967,717
|
$
|
1,996,666
|
|||
|
Far
East
|
283,122
|
313,194
|
384,671
|
||||||
|
Canada
|
76,718
|
78,983
|
89,881
|
||||||
|
Latin
America, Europe and other
|
-
|
54
|
-
|
||||||
|
Inter-area
sales
|
-
|
(39
|
)
|
(288
|
)
|
||||
|
$
|
2,276,362
|
$
|
2,359,909
|
$
|
2,470,930
|
||||
|
Long-Lived
Assets
|
|||||||||
|
United
States
|
$
|
333,134
|
$
|
430,334
|
$
|
431,905
|
|||
|
Far
East
|
4,331
|
14,753
|
13,609
|
||||||
|
Canada
|
6,878
|
17,475
|
14,906
|
||||||
|
Latin
America, Europe and other
|
245
|
222
|
277
|
||||||
|
$
|
344,588
|
$
|
462,784
|
$
|
460,697
|
||||
Long-lived
assets consisted primarily of property and equipment, goodwill and intangible
assets, prepaid pension costs, investment in nonconsolidated affiliate and other
noncurrent assets.
|
9.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following:
|
($
thousands)
|
January
31, 2009
|
February
2, 2008
|
||||
|
Land
and buildings
|
$
|
43,116
|
$
|
42,598
|
||
|
Leasehold
improvements
|
174,965
|
175,536
|
||||
|
Technology
equipment
|
39,837
|
39,963
|
||||
|
Machinery
and equipment
|
22,198
|
22,549
|
||||
|
Furniture
and fixtures
|
106,040
|
100,777
|
||||
|
Construction
in progress
|
30,479
|
6,921
|
||||
|
416,635
|
388,344
|
|||||
|
Allowances
for depreciation
|
(259,184
|
)
|
(246,380
|
)
|
||
|
$
|
157,451
|
$
|
141,964
|
|||
Useful
lives of property and equipment are as follows:
|
Buildings
|
15-30
years
|
|
Leasehold
improvements
|
5-20
years
|
|
Technology
equipment
|
3-10
years
|
|
Machinery
and equipment
|
8-20
years
|
|
Furniture
and fixtures
|
3-10
years
|
Selling
and administrative expenses include charges for impairment, primarily for
leasehold improvements and fixtures in our retail stores, of $2.7 million, $2.1
million and $1.9 million in 2008, 2007 and 2006, respectively. Fair value was
based on estimated future cash flows to be generated by retail stores,
discounted at a market rate of interest.
|
10.
|
GOODWILL
AND INTANGIBLE ASSETS
|
As of
January 31, 2009, the Company had intangible assets of $84.0 million (net of
$30.4 million accumulated amortization) and no goodwill. Intangible assets of
$13.7 million, primarily related to trademarks, are not subject to amortization.
Amortization expense related to intangible assets was $7.1 million and $6.8
million in 2008 and 2007, respectively. The Company estimates the following
amortization expense related to intangible assets: $6.8 million in 2009, $6.7
million in 2010, $6.6 million in 2011 and $6.4 million in 2012 and
2013.
As of
February 2, 2008, the Company had goodwill of $134.6 million and intangible
assets of $82.8 million (net of $35.8 million accumulated amortization).
Intangible assets of $10.7 million related to a trademark acquired in the
Bennett Footwear Holdings, LLC (“Bennett”) acquisition and other intangible
assets of $3.1 million are not subject to amortization.
Goodwill
and intangible assets were attributable to the Company's operating segments as
follows:
|
($
thousands)
|
January
31, 2009
|
February
2, 2008
|
||||
|
Famous
Footwear
|
$
|
2,800
|
$
|
6,279
|
||
|
Wholesale
Operations
|
81,000
|
196,541
|
||||
|
Specialty
Retail
|
200
|
14,562
|
||||
|
$
|
84,000
|
$
|
217,382
|
|||
Famous
Footwear
The
impairment of goodwill, as described below, resulted in a decline in goodwill
and intangible assets for the Famous Footwear segment.
Wholesale
Operations
The
impairment of goodwill and intangible assets, as described below, resulted in a
decline in goodwill and intangible assets for the Wholesale Operations segment.
In connection with the consolidation of Edelman Shoe as described in Note 2, the
Company acquired goodwill of $3.8 million and an intangible asset related to an
owned trademark of $16.8 million. The owned trademark is subject to amortization
over its estimated useful life of 15 years. At January 31, 2009, the intangible
asset that is subject to amortization had accumulated amortization of $0.3
million. For each of the next five succeeding fiscal years, annual amortization
expense will be approximately $1.1 million. The total of our goodwill and
intangible asset amounts for Edelman Shoe has been allocated to the Wholesale
Operations segment. In addition, the intangible assets of our Wholesale
Operations segment reflect amortization of our licensed and owned
trademarks.
Specialty
Retail
The
goodwill and intangible asset balance at our Specialty Retail segment was
impacted by the Company’s additional investment in Shoes.com of $3.6 million
during the fourth quarter of 2008, the goodwill impairment charge (described
below), changes in the Canadian dollar exchange rate and
amortization.
Impairment
Charges
Goodwill
Impairment
As a
result of the difficult market conditions and industry trends, and the resulting
decline in the market price of the Company’s common stock at the end of 2008,
the Company determined that an impairment indicator was present related to its
goodwill. Under the requirements of Statement of Financial Accounting Standards
No. 142,
Goodwill and Other
Intangible Assets
(“SFAS No. 142”), an interim test for impairment must
be performed whenever impairment indicators are present. The Company performed
this interim impairment testing as of January 31, 2009, and determined that the
fair values, estimated using discounted cash flow analyses and reconciled to our
market capitalization, related to its recorded goodwill were less than their
carrying values. For purposes of the goodwill impairment calculations, we
assumed discount rates of 16.0% to 18.0% based on the reporting unit. Based on
this testing, the Company concluded that its entire goodwill balance of $140.9
million was impaired. As a result, the Company recorded a non-cash goodwill
impairment charge of $140.9 million in 2008.
Intangible
Asset Impairment
The
Company also determined that an impairment indicator was present related to an
intangible asset for the Company’s private label customer relationships, due to
the recent declines experienced in this business. This intangible asset was
acquired during the Bennett acquisition during 2005. The Company determined that
the fair value of the intangible asset was lower than the carrying value by $8.2
million. The fair value was determined using a discounted cash flow analysis and
a discount rte of 14% was used in the calculation. As a result, the Company
recorded a non-cash impairment charge of $8.2 million in 2008.
In total,
during the fourth quarter of 2008, the Company recorded non-cash impairment
charges for goodwill and intangible assets of $149.2 million ($119.2 million on
an after-tax basis, or $2.87 per diluted share). The Company’s Wholesale
Operations, Specialty Retail and Famous Footwear segments incurred charges of
$120.8 million, $16.6 million and $3.5 million, respectively, related to the
impairment of goodwill and its Wholesale Operations segment incurred $8.2
million in impairment charges for intangible assets. For the Wholesale
Operations segment, the goodwill impaired primarily related to goodwill
associated with the acquisition of Bennett. The goodwill impaired for our
Specialty Retail and Famous Footwear segments were primarily related to goodwill
associated with the acquisition of Shoes.com and goodwill associated with the
acquisition of retail stores, respectively.
The
non-cash goodwill and intangible assets impairment charges did not have an
adverse effect on the covenant calculations under the Company’s debt agreements
or its overall compliance with the covenants of its debt agreements. The
impairment of goodwill and intangible assets resulted in a reduction of goodwill
and intangible assets, net on the consolidated balance sheet and the impairment
amount was separately disclosed as impairment of goodwill and intangible assets
within the consolidated statement of earnings and statement of cash
flows.
As a
result of annual impairment testing, the Company did not record any impairment
charges during 2007 related to goodwill or intangible assets.
|
11.
|
LONG-TERM
AND SHORT-TERM FINANCING
ARRANGEMENTS
|
Credit
Agreement
On
January 21, 2009, the Company and certain of its subsidiaries (the “Loan
Parties”) entered into a Second Amended and Restated Credit Agreement (the
“Credit Agreement”) dated as of January 21, 2009. The Credit Agreement replaces
the Amended and Restated Credit Agreement, dated July 21, 2004 (the “Former
Credit Agreement”), which was scheduled to expire on July 21, 2009. The
Credit Agreement matures on January 21, 2014. The Credit Agreement provides for
revolving credit in an aggregate amount of up to $380.0 million, subject to the
calculated borrowing base restrictions. 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
receivables and inventories, less applicable reserves. Under the Credit
Agreement, the Loan Parties’ obligations are secured by a first priority
security interest in receivables, inventories and certain other
collateral.
Interest
on borrowings is at variable rates based on the London Inter-Bank Offer Rate
(“LIBOR”) rate or the prime rate, as defined in the Credit Agreement. The
interest rate and fees for letters of credit varies based upon the level of
excess availability
under the Credit Agreement. There is an unused line fee payable on the
excess availability under the facility and a letter of credit fee payable
on the outstanding exposure under letters of credit.
The
Credit Agreement limits the Company’s 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) 17.5% of the lesser of (x) the borrowing base or (y)
the total commitments and (ii) $25.0 million for three consecutive business
days, or an event of default occurs, the lenders may assume dominion and control
over the Company’s 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.
The
Credit Agreement contains customary events of default, including, without
limitation, payment defaults, breaches of representations and warranties,
covenant defaults, cross-defaults to similar obligations, certain events of
bankruptcy and insolvency, judgment defaults and the failure of any guaranty or
security document supporting the agreement to be in full force and
effect. In addition, if the excess availability falls below the greater of
(i) 17.5% of the lesser of (x) the borrowing base or (y) the total commitments
and (ii) $25.0 million and the fixed charge coverage ratio is less than 1.0 to
1.0, the Company would be in default under the Credit Agreement. The Credit
Agreement also contains certain other covenants and restrictions, with which the
Company was in compliance as of January 31, 2009.
At
January 31, 2009, the Company had $112.5 million in borrowings outstanding and
$13.4 million in letters of credit outstanding under the Credit Agreement. Total
additional borrowing availability was $254.1 million at the end of
2008.
The
maximum amount of borrowings under either the Credit Agreement or Former Credit
Agreement at the end of any month was $112.5 million in 2008 and $28.0 million
in 2007. The average daily borrowings during the year were $29.0 million in 2008
and $4.5 million in 2007. The weighted-average interest rates approximated 4.3%
in 2008 and 7.9% in 2007.
Senior
Notes
In April
2005, the Company issued $150.0 million of 8.75% senior notes due in 2012
(“Senior Notes”). The Senior Notes are guaranteed on a senior unsecured basis by
each of the subsidiaries of Brown Shoe Company, Inc. that is an obligor under
the Credit Agreement. Interest on the Senior Notes is payable on May 1 and
November 1 of each year. The Senior Notes mature on May 1, 2012, but are
callable any time on or after May 1, 2009, at specified redemption prices plus
accrued and unpaid interest. The Senior Notes also contain certain other
covenants and restrictions which 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 January 31, 2009, the Company was in
compliance with all covenants relating to the Senior Notes.
Cash
payments of interest for 2008, 2007 and 2006 were $15.0 million, $14.4 million
and $16.2 million, respectively.
|
12.
|
LEASES
|
The
Company leases all of its retail locations and certain office locations,
distribution centers and equipment. The minimum lease terms for the Company’s
retail stores generally range from five to ten years. The term of the leases for
the office facilities and distribution centers averages approximately 12 years.
Over one-half of the retail store leases are subject to renewal options for
varying periods. The office and distribution centers have renewal options of 10
to 20 years. In addition to minimum rental payments, certain of the retail store
leases require contingent payments based on sales levels. A majority of our
retail operating leases contain provisions which allow the Company to modify
amounts payable under the lease or terminate the lease in certain circumstances,
such as experiencing actual sales volume below a defined threshold and/or
co-tenancy provisions associated with the facility.
Rent
expense for operating leases was:
|
($
thousands)
|
2008
|
2007
|
2006
|
||||||
|
Minimum
rents
|
$
|
153,273
|
$
|
139,146
|
$
|
132,643
|
|||
|
Contingent
rents
|
446
|
798
|
844
|
||||||
|
$
|
153,719
|
$
|
139,944
|
$
|
133,487
|
||||
Future
minimum payments under noncancelable operating leases with an initial term of
one year or more were as follows at January 31, 2009:
|
13.
|
FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT
|
The fair
values of cash and cash equivalents, receivables and trade accounts payable
approximate their carrying values due to the short-term nature of these
instruments.
The
Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. The financial institutions are
located throughout the world, and the Company’s policy is designed to limit
exposure to any one institution or geographic region. The Company’s periodic
evaluations of the relative credit standing of these financial institutions are
considered in the Company’s investment strategy.
The
Company’s Wholesale Operations segment sells to mass merchandisers, national
chains and department stores primarily in the United States, Canada and China.
Receivables arising from these sales are not collateralized; however, a portion
is covered by documentary letters of credit. Credit risk is affected by
conditions or occurrences within the economy and the retail industry. The
Company maintains an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers and historical
trends.
The
carrying amounts and fair values of the Company’s other financial instruments
subject to fair value disclosures are as follows as of January 31, 2009 and
February 2, 2008:
|
January
31, 2009
|
February
2, 2008
|
|||||||||||
|
($
thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||
|
Borrowings
under revolving credit agreement
|
$
|
112,500
|
112,500
|
$
|
15,000
|
$
|
15,000
|
|||||
|
Senior
Notes
|
150,000
|
116,250
|
150,000
|
153,375
|
||||||||
The fair
value of borrowings under the revolving credit agreement approximate their
carrying value due to the short-term nature and the fair value of the Company’s
Senior Notes was based upon quoted prices as of the end of the respective
period.
The
Company periodically has cash equivalents consisting of short-term money market
funds backed by U.S. Treasury securities. The primary objective of our
short-term investment activities is to preserve our capital for the purpose of
funding operations and we do not enter into short-term investments 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).
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 derivatives, designated as cash flow hedges, are used
primarily to hedge the variability of cash flows paid for certain operating
expenses and procurement of footwear from foreign countries. The term of the
instruments is generally less than one year. As such, the unrealized gains or
losses associated with these instruments are deferred and recognized in other
comprehensive (loss) income until such time as the hedged item affects earnings.
Continuous monitoring of the outstanding instruments is performed, and if some
portion of the instruments is deemed ineffective, the changes in fair value are
immediately recognized in earnings. During 2008 and 2007, ineffective hedges
were not material. Unrealized gains and losses on these instruments are included
in other assets or other accrued expenses, as applicable, on the consolidated
balance sheets. Gains and losses on these instruments are reclassified to net
sales, cost of goods sold or selling and administrative expenses, consistent
with the recognition in net (loss) earnings and classification of the underlying
hedged transaction. The Company is exposed to credit-related losses in the event
of nonperformance by counterparties to these financial instruments.
Counterparties to these agreements are, however, major international financial
institutions with an investment grade or better credit rating, and the risk of
loss due to nonperformance is believed to be minimal. These foreign exchange
contracts are measured at fair value using quoted forward foreign exchange
prices from counterparties corroborated by market-based pricing (Level
2).
The
Company’s outstanding derivative financial instruments related to foreign
exchange risk consisted of the following:
|
(U.S.
$ thousands)
|
January
31, 2009
|
February
2, 2008
|
||||
|
Deliverable
Financial Instruments
|
||||||
|
United
States dollars (purchased by our Canadian division
with
Canadian dollars)
|
$
|
12,700
|
$
|
12,200
|
||
|
Euro
|
4,200
|
2,600
|
||||
|
Non-deliverable
Financial Instruments
|
||||||
|
Chinese
yuan
|
10,900
|
7,500
|
||||
|
Japanese
yen
|
1,700
|
1,100
|
||||
|
New
Taiwanese dollars
|
1,300
|
800
|
||||
|
Other
currencies
|
500
|
300
|
||||
|
$
|
31,300
|
$
|
24,500
|
|||
Unrealized
gains (losses) related to these instruments were $0.3 million and $(0.1) million
on an after-tax basis at January 31, 2009 and February 2, 2008, respectively. We
expect to reclassify this unrealized gain from other comprehensive income to net
earnings in 2009.
|
14.
|
COMMON
STOCK REPURCHASES
|
Stock
Repurchase Programs
During
December 2007, the Company repurchased 2.4 million shares of its common stock
for $41.1 million, at an average price of $17.05 per share under the 2000 stock
repurchase program (“2000 Program”) which was approved by the Board of Directors
in May 2000. There were no shares repurchased under the 2000 Program in
2006.
In
January 2008, the Board of Directors approved a stock repurchase program (“2008
Program”) authorizing the repurchase of up to 2.5 million shares of the
Company’s outstanding common stock. The Company can utilize the repurchase
program to repurchase shares on the open market or in private transactions from
time to time, depending on market conditions. The repurchase program does not
have an expiration date. There have been no shares repurchased under the 2008
Program.
During
2008 and 2007, 100,457 shares and 79,021 shares, respectively, were tendered by
employees related to certain share-based awards. These shares were tendered in
satisfaction of the exercise price of stock options and/or to satisfy minimum
tax withholding amounts for non-qualified stock options, restricted stock and
stock performance awards. Accordingly, these share repurchases are not
considered a part of our publicly announced stock repurchase
programs.
|
15.
|
SHARE-BASED
PLANS
|
The
Company has share-based incentive compensation plans, under which certain
officers, employees and members of the Board of Directors are participants, and
may be granted stock option, restricted stock and stock performance
awards.
Statement
of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment
(“SFAS
No. 123(R)”), requires companies to recognize compensation expense in an amount
equal to the fair value of all share-based payments granted to employees over
the requisite service period for each award. In certain limited circumstances,
the Company’s incentive compensation plan provides for accelerated vesting of
the awards, such as in the event of a change in control, qualified retirement,
death or disability. The Company has a policy of issuing treasury shares in
satisfaction of share-based awards.
Share-based
compensation expense of $2.6 million, $8.4 million and $9.7 million was
recognized in 2008, 2007 and 2006, respectively, as a component of selling and
administrative expenses. The following table details the share-based
compensation expense by plan and the total related income tax benefit for 2008,
2007 and 2006:
The
Company issued 490,568, 973,922 and 1,702,286 shares of common stock in 2008,
2007 and 2006, respectively, for stock options exercised, stock performance
awards and restricted stock grants. There were no significant modifications to
any share-based awards in 2008, 2007 or 2006.
Stock
Options
Stock
options are granted to employees at exercise prices equal to the quoted market
price of the Company’s stock at the date of grant. Stock options generally vest
over four years and have a term of ten years. Compensation cost for all stock
options is recognized over the requisite service period for each award. No
dividends are paid on unexercised options. Expense for stock options is
recognized on a straight-line basis separately for each vesting portion of the
stock option award.
The
Company granted 103,500, 200,743 and 324,750 stock options during 2008, 2007 and
2006, respectively. Fair values of options granted in 2008, 2007 and 2006 were
estimated using the Black-Scholes option-pricing model, based on the following
assumptions:
|
2008
|
2007
|
2006
|
|||||||
|
Dividend
yield
|
2.2%
|
0.9%
|
1.0%
|
||||||
|
Expected
volatility
|
39.7%
|
39.9%
|
42.4%
|
||||||
|
Risk-free
interest rate
|
3.0%
|
4.4%
|
4.7%
|
||||||
|
Expected
term (in years)
|
7
|
7
|
7
|
||||||
Dividend
yields are based on historical dividend yields. Expected volatilities are based
on historical volatilities of the Company’s common stock. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant
for periods corresponding with the expected term of the options. The expected
term of options represents the weighted-average period of time that options
granted are expected to be outstanding, giving consideration to vesting
schedules and the Company’s historical exercise patterns.
Summarized
information about stock options outstanding and exercisable at January 31, 2009
is as follows:
|
Outstanding
|
Exercisable
|
|||||||||||||
|
Exercise
Price Range
|
Number
of
Options
|
Weighted-
Average
Remaining
Life
(Years)
|
Weighted-
Average
Exercise
Price
|
Number
of
Options
|
Weighted-
Average
Exercise
Price
|
|||||||||
|
$4.68
– $9.99
|
425,900
|
2
|
$
|
7.40
|
410,900
|
$
|
7.48
|
|||||||
|
$10.00
– $14.99
|
643,964
|
6
|
13.94
|
492,919
|
13.65
|
|||||||||
|
$15.00
– $19.99
|
563,803
|
6
|
16.85
|
468,647
|
17.11
|
|||||||||
|
$20.00
– $24.99
|
230,468
|
7
|
21.63
|
109,709
|
21.68
|
|||||||||
|
$25.00
– $29.99
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
$30.00
– $35.25
|
155,619
|
8
|
35.02
|
42,926
|
34.84
|
|||||||||
|
2,019,754
|
5
|
$
|
15.88
|
1,525,101
|
$
|
14.23
|
||||||||
The
weighted-average remaining contractual term of stock options outstanding and
currently exercisable at January 31, 2009 was 5.3 years and 4.6 years,
respectively. The aggregate intrinsic value of stock options outstanding and
currently exercisable at January 31, 2009 were both zero. Intrinsic value for
stock options is calculated based on the exercise price of the underlying awards
as compared to the quoted price of the Company’s common stock as of the
reporting date.
The
following table summarizes stock option activity for 2008 under the current and
prior plans:
|
Number
of Options
|
Weighted-Average
Exercise
Price
|
|||||
|
Outstanding
at February 2, 2008
|
2,083,388
|
$
|
16.22
|
|||
|
Granted
|
103,500
|
14.52
|
||||
|
Exercised
|
(31,924
|
)
|
12.83
|
|||
|
Forfeited
|
(57,915
|
)
|
24.15
|
|||
|
Canceled
or expired
|
(77,295
|
)
|
18.37
|
|||
|
Outstanding
at January 31, 2009
|
2,019,754
|
$
|
15.88
|
|||
|
Exercisable
at January 31, 2009
|
1,525,101
|
$
|
14.23
|
|||
The
intrinsic value of stock options exercised was $0.1 million, $19.9 million and
$32.5 million for 2008, 2007 and 2006, respectively. The amount of cash received
from the exercise of stock options was $0.3 million, $9.2 million and $10.6
million for 2008, 2007 and 2006, respectively. In addition, 4,960, 40,659 and
209,786 shares were tendered by employees in satisfaction of the exercise price
of stock options during 2008, 2007 and 2006, respectively. The tax benefit
associated with stock options exercised was $0.4 million, $5.8 million and $7.5
million for 2008, 2007 and 2006, respectively, which was reflected as an
increase to additional paid-in capital.
The
following table summarizes nonvested stock option activity for 2008 under the
current and prior plans:
|
Number
of
Nonvested
Options
|
Weighted-Average
Grant
Date
Fair
Value
|
|||||
|
Nonvested
at February 2, 2008
|
856,067
|
$
|
9.52
|
|||
|
Granted
|
103,500
|
5.30
|
||||
|
Vested
|
(406,999
|
)
|
8.51
|
|||
|
Forfeited
|
(57,915
|
)
|
10.96
|
|||
|
Nonvested
at January 31, 2009
|
494,653
|
$
|
9.31
|
|||
The
weighted-average fair value of stock options granted for 2008, 2007 and 2006 was
$5.30, $14.84 and $10.37, respectively. The total grant date fair value of stock
options vested during 2008, 2007 and 2006 was $3.5 million, $4.3 million and
$3.4 million, respectively. As of January 31, 2009, the total remaining
unrecognized compensation cost related to nonvested stock options amounted to
$1.2 million, which will be amortized over the weighted-average remaining
requisite service period of 2.1 years.
Restricted
Stock
Under the
Company’s incentive compensation plans, restricted stock of the Company may be
granted at no cost to certain officers, key employees and directors. Plan
participants are entitled to cash dividends and voting rights for their
respective shares. Restrictions limit the sale or transfer of these shares
during the requisite service period, which ranges from one to eight years.
Expense for restricted stock grants is recognized on a straight-line basis
separately for each vesting portion of the stock award based upon fair value of
the award on the date of grant. The fair value of the restricted stock grants is
the quoted market price for the Company’s common stock on the date of
grant.
The
following table summarizes restricted stock activity for the year ended January
31, 2009:
|
Number
of
Nonvested
Restricted
Shares
|
Weighted-Average
Grant
Date
Fair
Value
|
||||||||
|
Nonvested
at February 2, 2008
|
496,183
|
$
|
20.97
|
||||||
|
Granted
|
362,500
|
15.07
|
|||||||
|
Vested
|
(36,841
|
)
|
10.34
|
||||||
|
Forfeited
|
(50,689
|
)
|
20.04
|
||||||
|
Nonvested
at January 31, 2009
|
771,153
|
$
|
18.76
|
||||||
For the
years ended January 31, 2009, February 2, 2008 and February 3, 2007, restricted
shares granted were 362,500, 103,750 and 292,875, respectively. Restricted
shares forfeited during 2008, 2007 and 2006 were 50,689, 35,998 and 57,938,
respectively. The weighted-average fair value of restricted stock awards granted
for the years ended January 31, 2009, February 2, 2008 and February 3, 2007 was
$15.07, $32.55 and $21.83, respectively. The total grant date fair value of
restricted stock awards vested during the years ended January 31, 2009, February
2, 2008 and February 3, 2007 was $0.4 million, $1.3 million and $0.8 million,
respectively. As of January 31, 2009, the total remaining unrecognized
compensation cost related to nonvested restricted stock grants amounted to $7.4
million, which will be amortized over the weighted-average remaining requisite
service period of 2.7 years.
The
Company recognized $0.1 million, $0.6 million and $0.4 million in 2008, 2007 and
2006, respectively, of excess tax benefits related to restricted stock vesting
and dividends, which was reflected as an increase to additional paid-in
capital.
Stock
Performance Awards
Under the
Company’s incentive compensation plans, common stock 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 stock
performance awards at a target number of shares, which cliff vest generally over
a three-year service period. At the end of the three-year period, the employee
will be given an amount of shares between 0% and 200% of the targeted award,
depending on the achievement of specified financial goals for the three-year
period. A portion of the award may be paid in cash, and accordingly, is
reflected as a noncurrent liability.
Expense
for stock performance awards is recognized based upon the fair value of the
awards on the date of grant and the anticipated number of shares to be awarded,
on a straight-line basis over the three-year service period. The fair value of
the stock performance awards is the quoted market price for the Company’s common
stock on the date of grant. The Company had nonvested outstanding stock
performance awards for 281,250 shares at a target level, as of January 31, 2009,
which may result in the issuance of up to 562,500 shares at the end of the
service periods.
The
following table summarizes stock performance activity for the year ended January
31, 2009:
|
Number
of
Nonvested
Stock Performance Awards at Target Level
|
Number
of
Nonvested
Stock Performance Awards
at
Maximum Level
|
Weighted-Average
Grant
Date
Fair
Value
|
|||||||
|
Nonvested
at February 2, 2008
|
363,833
|
727,666
|
$
|
27.12
|
|||||
|
Granted
|
148,500
|
297,000
|
15.43
|
||||||
|
Vested
|
-
|
-
|
-
|
||||||
|
Expired
|
(198,750
|
)
|
(397,500
|
)
|
21.04
|
||||
|
Forfeited
|
(32,333
|
)
|
(64,666
|
)
|
29.74
|
||||
|
Nonvested
at January 31, 2009
|
281,250
|
562,500
|
$
|
24.94
|
|||||
The
weighted-average fair value of stock performance awards granted for 2008, 2007
and 2006 was $15.43, $35.05 and $21.55, respectively. In 2008 and 2006, no stock
performance awards vested and in 2007, 167,625 stock performance awards vested.
As of January 31, 2009, the total remaining unrecognized compensation cost
related to nonvested stock performance awards was zero, based on the anticipated
number of shares to be awarded. During 2008, the Company reversed $3.2 million
of previously recognized expense for stock performance awards as the probability
of meeting the minimum financial goals was no longer considered
likely.
|
16.
|
RELATED
PARTY TRANSACTIONS
|
Hongguo
International Holdings
The
Company entered into a joint venture agreement with a subsidiary of Hongguo
International Holdings Limited (“Hongguo”) to begin marketing Naturalizer
footwear in China in fall 2007. The Company is a 51% owner of the joint venture
(“B&H Footwear”), with Hongguo owning the other 49%. B&H Footwear began
operations in 2007 and distributes the Naturalizer brand in department store
shops and free-standing stores in several of China’s largest cities. In
addition, B&H Footwear sells Naturalizer footwear to Hongguo on a wholesale
basis. Hongguo then sells Naturalizer products through retail stores in China.
During 2008 and 2007, the Company, through its consolidated subsidiary, B&H
Footwear, sold $4.5 million and $2.7 million, respectively, of Naturalizer
footwear on a wholesale basis to Hongguo. See Note 2 to the consolidated
financial statements for additional information related to the joint
venture.
Edelman
Shoe, Inc.
During
2007, the Company acquired a 42.5% equity interest in Edelman Shoe, Inc.
(“Edelman Shoe”), which is a privately held company operated by Sam and Libby
Edelman. On November 3, 2008, the Company invested an additional $4.1 million of
cash in Edelman Shoe, acquiring 7.5% of the outstanding stock, bringing the
Company’s total equity interest to 50%. A consolidated subsidiary of the Company
sold footwear to Edelman Shoe on a wholesale basis, which was then sold by
Edelman Shoe to department stores and independent specialty stores across the
country. During 2008 and 2007, this consolidated subsidiary of the
Company sold $11.3 million and $0.9 million, respectively, of footwear on a
wholesale basis to Edelman Shoe, prior to consolidation on November 3, 2008.
Beginning in the fourth quarter of 2008, Edelman Shoe is included within the
Company’s consolidated financial statements. Accordingly, all intercompany sales
activity is eliminated. See Note 2 to the consolidated financial statements for
additional information related to the investment in Edelman Shoe.
OgilvyOne
LLC
Prior to
2008, the Company used OgilvyOne LLC (“Ogilvy”) to provide certain marketing and
consulting services. A member of the Company’s Board of Directors, Carla C.
Hendra, is an officer of Ogilvy North America and OgilvyOne N.A., both of which
are affiliates of Ogilvy. Charges of $1.0 million and $0.7 million were incurred
during 2007 and 2006, respectively, with no charges incurred during 2008 with
Ogilvy.
|
17.
|
COMMITMENTS
AND CONTINGENCIES
|
Environmental
Remediation
While the
Company currently does not operate manufacturing facilities, 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.
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. Based on the results of ongoing testing and the
study of remediation alternatives by the Company’s environmental consultants,
the Company submitted, in 2006, to the Colorado authorities a supplement to its
former remediation plan, setting forth a long-term remediation plan and
extending the time period the Company expects to perform certain remediation
activities. Accordingly, a charge of $5.6 million was recorded in 2006, the
majority of which represented the estimated discounted costs to complete the
on-site remediation. The liability for the on-site remediation, $5.0 million,
was discounted at 4.8%. On an undiscounted basis, the on-site remediation
liability would be $16.8 million. The Company expects to spend approximately
$0.2 million in each of the next five years and $15.8 million in the aggregate
thereafter related to the on-site remediation.
The cumulative expenditures for both on-site and off-site remediations through January 31, 2009 are $21.0 million. As discussed further below, the Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at January 31, 2009, is $8.5 million, of which $1.2 million is accrued within other accrued expenses and $7.3 million is accrued within other noncurrent liabilities. Of the total $8.5 million reserve, $5.0 million is for on-site remediation and $3.5 million is for off-site remediation. In addition to the accretion of interest expense, the Company recorded an expense of $1.2 million in 2008 and $5.6 million in 2006 related to the on-site and off-site remediations, with no charges incurred during 2007.
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 over the next 15 years. The Company has an accrued
liability of $1.9 million at January 31, 2009, related to these sites, which has
been discounted at 6.4%. On an undiscounted basis, this liability would be $2.9
million. The Company expects to spend approximately $0.2 million in each of the
next five years and $1.9 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 had an accrued liability of $10.5
million as of January 31, 2009, to complete the cleanup, maintenance and
monitoring at all sites. Of the $10.5 million liability, $1.4 million is
included in other accrued expenses and $9.1 million is included in other
noncurrent liabilities. 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
In March
2000, a class action lawsuit was filed in Colorado State Court (District Court
for the City and County of Denver) related to the Redfield site described above.
Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust
enrichment, negligence and exemplary damages arising from the alleged release of
solvents contaminating the groundwater and indoor air in the areas adjacent to
and near the site. In December 2003, the jury hearing the claims returned a
verdict finding the Company’s subsidiary negligent and awarded the class
plaintiffs $1.0 million in damages. The Company recorded this award along with
estimated pretrial interest on the award and estimated costs related to
sanctions imposed by the court related to a pretrial discovery dispute between
the parties. The total pretax charge recorded for these matters in 2003 was $3.1
million. The Company recorded an additional $0.6 million in expense in 2004,
related to pretrial interest, to reflect the trial court’s ruling extending the
time period for which prejudgment interest applied. The plaintiffs filed an
appeal of the December 2003 jury verdict, and in August 2007, the Colorado Court
of Appeals rejected the plaintiffs’ attempt to obtain a new trial by affirming
the trial court judgment. The Court also denied a cross-appeal by the
Company seeking a reversal of a portion of the pretrial interest awarded to
plaintiffs, and the Company paid an additional $0.8 million in April 2008 for
the remainder of the pretrial interest owing on the judgment. The Court
also reversed the trial court’s award of costs to the Company and remanded the
case to the trial court for a determination of whether plaintiffs are entitled
to recover their costs related to the trial. The plaintiffs subsequently filed a
petition with the Supreme Court of Colorado seeking review of the Court of
Appeal’s decision denying them a new trial, which the Supreme Court denied on
May 19, 2008, effectively ending plaintiffs’ attempts to obtain a retrial. The
cost of further proceedings in this matter may vary.
In
connection with the Redfield environmental remediation and class action
litigation discussed above, the Company sued a number of its insurers seeking
recovery of defense costs, indemnity and other damages related to the former
operations and the remediation at the site. During 2006, the Company reached
agreements with certain of those insurers to resolve the coverage claims arising
out of the Redfield site and recorded income related to these recoveries of $7.3
million, net of related legal fees, as a reduction of restructuring and other
special charges, net. Prior to a trial of that action, during the first quarter
of 2008, the Company reached settlements with all insurers remaining in the case
for total insurance recoveries, net of associated fees and costs, of $10.2
million, as a reduction of restructuring and other special charges, net. As a
result of these settlements, all claims among the parties have been dismissed.
In addition, the Company filed a contribution action in Colorado State Court
against the Colorado Department of Transportation (“CDOT”), which owns and
operates a facility adjacent to the Redfield site. On April 14, 2008, the
Supreme Court of Colorado reversed the trial court’s and Court of Appeal’s
rulings, which had rejected CDOT’s attempts to have the Company’s cost recovery
suit dismissed on legal grounds. As a result, only one claim related to a small
ancillary part of the Company’s remediation efforts was allowed to go forward,
and the Company has since reached an agreement to settle for a minimal payment
by CDOT, and the case has been dismissed. The Company believes any further
exposure beyond our reserve levels are minimal, if any.
The Company also 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 will not have a material adverse effect on the Company’s results of operations or financial position. All legal costs associated with litigation are expensed as incurred.
Other
In 2004,
the Company was notified of the insolvency of an insurance company that insured
the Company for workers’ compensation and casualty losses from 1973 to 1989.
That company is now in liquidation. Certain claims from that time period are
still outstanding, for which the Company has an accrued liability of $2.7
million as of January 31, 2009. While management believes it has an appropriate
reserve for this matter, the ultimate outcome and cost to the Company may
vary.
At
January 31, 2009, the Company was contingently liable for remaining lease
commitments of approximately $1.6 million in the aggregate, which relate to
former retail chains that were sold in prior years. These obligations will
continue to decline over the next several years as leases expire. In order for
the Company to incur any liability related to these lease commitments, the
current owners would have to default.
|
18.
|
FINANCIAL
INFORMATION FOR THE COMPANY AND ITS
SUBSIDIARIES
|
On April
22, 2005, Brown Shoe Company, Inc. issued Senior Notes to finance a portion of
the purchase price of Bennett. The notes are fully and unconditionally and
jointly and severally guaranteed by all existing and future subsidiaries of
Brown Shoe Company, Inc. that are guarantors under its existing Amended and
Restated Credit Agreement. The following table presents the condensed
consolidating financial information for each of Brown Shoe Company, Inc.
(“Parent”), the Guarantors and subsidiaries of the Parent that are not
Guarantors (the “Non-Guarantors”), together with consolidating eliminations, as
of and for the periods indicated.
The
condensed consolidating financial statements have been prepared using the equity
method of accounting in accordance with the requirements for presentation of
such information. Management believes that the information, presented in lieu of
complete financial statements for each of the Guarantors, provides meaningful
information to allow investors to determine the nature of the assets held by,
and the operations and cash flows of, each of the consolidated
groups.
|
CONDENSED
CONSOLIDATING BALANCE SHEET
AS
OF JANUARY 31, 2009
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Assets
|
|||||||||||||||
|
Current
assets
|
|||||||||||||||
|
Cash
and cash equivalents
|
$
|
–
|
$
|
22,834
|
$
|
64,066
|
$
|
–
|
$
|
86,900
|
|||||
|
Receivables
|
43,705
|
4,417
|
36,130
|
–
|
84,252
|
||||||||||
|
Inventories
|
91,669
|
362,299
|
12,034
|
–
|
466,002
|
||||||||||
|
Deferred
income taxes
|
22,556
|
(2,867
|
)
|
199
|
–
|
19,888
|
|||||||||
|
Prepaid
expenses and other current assets
|
7,254
|
15,782
|
1,365
|
–
|
24,401
|
||||||||||
|
Total
current assets
|
165,184
|
402,465
|
113,794
|
–
|
681,443
|
||||||||||
|
Other
assets
|
78,531
|
9,951
|
14,655
|
–
|
103,137
|
||||||||||
|
Intangible
assets, net
|
64,480
|
3,000
|
16,520
|
–
|
84,000
|
||||||||||
|
Property
and equipment, net
|
31,102
|
122,310
|
4,039
|
–
|
157,451
|
||||||||||
|
Investment
in subsidiaries
|
647,979
|
68,062
|
–
|
(716,041
|
)
|
–
|
|||||||||
|
Total
assets
|
$
|
987,276
|
$
|
605,788
|
$
|
149,008
|
$
|
(716,041
|
)
|
$
|
1,026,031
|
||||
|
Liabilities
and Shareholders’ Equity
|
|||||||||||||||
|
Current
liabilities
|
|||||||||||||||
|
Borrowings
under revolving credit agreement
|
$
|
112,500
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
112,500
|
|||||
|
Trade
accounts payable
|
30,948
|
88,109
|
33,282
|
–
|
152,339
|
||||||||||
|
Accrued
expenses
|
76,629
|
55,144
|
5,534
|
–
|
137,307
|
||||||||||
|
Total
current liabilities
|
220,077
|
143,253
|
38,816
|
–
|
402,146
|
||||||||||
|
Other
liabilities
|
|||||||||||||||
|
Long-term
debt
|
150,000
|
–
|
–
|
–
|
150,000
|
||||||||||
|
Other
liabilities
|
23,263
|
41,854
|
6,554
|
–
|
71,671
|
||||||||||
|
Intercompany
payable (receivable)
|
199,832
|
(227,298
|
)
|
27,466
|
–
|
–
|
|||||||||
|
Total
other liabilities
|
373,095
|
(185,444
|
)
|
34,020
|
–
|
221,671
|
|||||||||
|
Minority
interests
|
–
|
–
|
8,110
|
–
|
8,110
|
||||||||||
|
Shareholders’
equity
|
394,104
|
647,979
|
68,062
|
(716,041
|
)
|
394,104
|
|||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
987,276
|
$
|
605,788
|
$
|
149,008
|
$
|
(716,041
|
)
|
$
|
1,026,031
|
||||
|
CONDENSED
CONSOLIDATING STATEMENT OF EARNINGS
FOR
THE FISCAL YEAR ENDED JANUARY 31,
2009
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
sales
|
$
|
569,026
|
$
|
1,594,761
|
$
|
285,138
|
$
|
(172,563
|
)
|
$
|
2,276,362
|
||||
|
Cost
of goods sold
|
431,128
|
896,663
|
238,898
|
(172,563
|
)
|
1,394,126
|
|||||||||
|
Gross
profit
|
137,898
|
698,098
|
46,240
|
–
|
882,236
|
||||||||||
|
Selling
and administrative expenses
|
156,863
|
676,710
|
18,320
|
–
|
851,893
|
||||||||||
|
Impairment
of goodwill and intangible assets
|
115,006
|
30,309
|
3,835
|
–
|
149,150
|
||||||||||
|
Restructuring
and other special charges, net
|
49,890
|
4,388
|
–
|
–
|
54,278
|
||||||||||
|
Equity
in net loss of nonconsolidated affiliate
|
–
|
–
|
216
|
–
|
216
|
||||||||||
|
Equity
in (earnings) loss of subsidiaries
|
(5,385)
|
(26,307
|
)
|
–
|
31,692
|
–
|
|||||||||
|
Operating
(loss) earnings
|
(178,476
|
)
|
12,998
|
23,869
|
(31,692
|
)
|
(173,301
|
)
|
|||||||
|
Interest
expense
|
(17,007
|
)
|
–
|
(98
|
)
|
–
|
(17,105
|
)
|
|||||||
|
Interest
income
|
80
|
669
|
1,051
|
–
|
1,800
|
||||||||||
|
Intercompany
interest income (expense)
|
5,753
|
(6,677
|
)
|
924
|
–
|
–
|
|||||||||
|
(Loss)
earnings before income taxes and minority
interests
|
(189,650
|
)
|
6,990
|
25,746
|
(31,692
|
)
|
(188,606
|
)
|
|||||||
|
Income
tax benefit (provision)
|
56,412
|
(1,605
|
)
|
(1,014
|
)
|
–
|
53,793
|
||||||||
|
Minority
interests in net loss of consolidated subsidiaries
|
–
|
–
|
1,575
|
–
|
1,575
|
||||||||||
|
Net
(loss) earnings
|
$
|
(133,238
|
)
|
$
|
5,385
|
$
|
26,307
|
$
|
(31,692
|
)
|
$
|
(133,238
|
)
|
||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR
THE FISCAL YEAR ENDED JANUARY 31,
2009
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
cash (used for) provided by operating activities
|
$
|
(22,725
|
)
|
$
|
41,416
|
$
|
15,645
|
$
|
–
|
$
|
34,336
|
||||
|
Investing
activities
|
|||||||||||||||
|
Purchases
of property and equipment
|
(5,095
|
)
|
(54,229
|
)
|
(1,093
|
)
|
–
|
(60,417
|
)
|
||||||
|
Capitalized
software
|
(13,073
|
)
|
(3,172
|
)
|
(82
|
)
|
–
|
(16,327
|
)
|
||||||
|
Cash
recognized on initial consolidation
|
–
|
–
|
3,337
|
–
|
3,337
|
||||||||||
|
Investments
in consolidated companies
|
–
|
–
|
(7,683
|
)
|
–
|
(7,683
|
)
|
||||||||
|
Net
cash used for investing activities
|
(18,168
|
)
|
(57,401
|
)
|
(5,521
|
)
|
–
|
(81,090
|
)
|
||||||
|
Financing
activities
|
|||||||||||||||
|
Proceeds
from borrowings under revolving credit
agreement
|
655,500
|
–
|
–
|
–
|
655,500
|
||||||||||
|
Payments
on borrowings under revolving credit
agreement
|
(558,000
|
)
|
–
|
–
|
–
|
(558,000
|
)
|
||||||||
|
Debt
issuance costs
|
(7,500
|
)
|
–
|
–
|
–
|
(7,500
|
)
|
||||||||
|
Proceeds
from stock options exercised
|
313
|
–
|
–
|
–
|
313
|
||||||||||
|
Tax
benefit related to share-based plans
|
498
|
–
|
–
|
–
|
498
|
||||||||||
|
Dividends
(paid) received
|
(11,855
|
)
|
7,105
|
(7,105
|
)
|
–
|
(11,855
|
)
|
|||||||
|
Intercompany
financing
|
(38,063
|
)
|
12,800
|
25,263
|
–
|
–
|
|||||||||
|
Net
cash provided by financing activities
|
40,893
|
19,905
|
18,158
|
–
|
78,956
|
||||||||||
|
Effect
of exchange rate changes on cash
|
–
|
(5,103
|
)
|
–
|
–
|
(5,103
|
)
|
||||||||
|
(Decrease)
increase in cash and cash equivalents
|
–
|
(1,183
|
)
|
28,282
|
–
|
27,099
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
–
|
24,017
|
35,784
|
–
|
59,801
|
||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
–
|
$
|
22,834
|
$
|
64,066
|
$
|
–
|
$
|
86,900
|
|||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
AS
OF FEBRUARY 2, 2008
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Assets
|
|||||||||||||||
|
Current
assets
|
|||||||||||||||
|
Cash
and cash equivalents
|
$
|
–
|
$
|
24,017
|
$
|
35,784
|
$
|
–
|
$
|
59,801
|
|||||
|
Receivables
|
59,186
|
5,835
|
51,852
|
–
|
116,873
|
||||||||||
|
Inventories
|
80,009
|
353,951
|
1,722
|
–
|
435,682
|
||||||||||
|
Prepaid
expenses and other current assets
|
18,578
|
5,803
|
320
|
–
|
24,701
|
||||||||||
|
Total
current assets
|
157,773
|
389,606
|
89,678
|
–
|
637,057
|
||||||||||
|
Other
assets
|
87,118
|
(1,302
|
)
|
10,981
|
–
|
96,797
|
|||||||||
|
Investment
in nonconsolidated affiliate
|
–
|
–
|
6,641
|
–
|
6,641
|
||||||||||
|
Goodwill
and intangible assets, net
|
186,330
|
31,052
|
–
|
–
|
217,382
|
||||||||||
|
Property
and equipment, net
|
29,887
|
108,055
|
4,022
|
–
|
141,964
|
||||||||||
|
Investment
in subsidiaries
|
656,032
|
68,286
|
7,498
|
(731,816
|
)
|
–
|
|||||||||
|
Total
assets
|
$
|
1,117,140
|
$
|
595,697
|
$
|
118,820
|
$
|
(731,816
|
)
|
$
|
1,099,841
|
||||
|
Liabilities
and Shareholders’ Equity
|
|||||||||||||||
|
Current
liabilities
|
|||||||||||||||
|
Borrowings
under revolving credit agreement
|
$
|
15,000
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
15,000
|
|||||
|
Trade
accounts payable
|
33,883
|
94,702
|
44,362
|
–
|
172,947
|
||||||||||
|
Accrued
expenses
|
62,264
|
58,666
|
(5,857
|
)
|
–
|
115,073
|
|||||||||
|
Income
taxes
|
850
|
523
|
(478
|
)
|
–
|
895
|
|||||||||
|
Total
current liabilities
|
111,997
|
153,891
|
38,027
|
–
|
303,915
|
||||||||||
|
Other
liabilities
|
|||||||||||||||
|
Long-term
debt
|
150,000
|
–
|
–
|
–
|
150,000
|
||||||||||
|
Other
liabilities
|
58,674
|
26,180
|
408
|
–
|
85,262
|
||||||||||
|
Intercompany
payable (receivable)
|
237,892
|
(240,096
|
)
|
2,204
|
–
|
–
|
|||||||||
|
Total
other liabilities
|
446,566
|
(213,916
|
)
|
2,612
|
–
|
235,262
|
|||||||||
|
Minority
interests
|
–
|
–
|
2,087
|
–
|
2,087
|
||||||||||
|
Shareholders’
equity
|
558,577
|
655,722
|
76,094
|
(731,816
|
)
|
558,577
|
|||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,117,140
|
$
|
595,697
|
$
|
118,820
|
$
|
(731,816
|
)
|
$
|
1,099,841
|
||||
|
CONDENSED
CONSOLIDATING STATEMENT OF EARNINGS
FOR
THE FISCAL YEAR ENDED FEBRUARY 2,
2008
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
sales
|
$
|
608,825
|
$
|
1,548,957
|
$
|
368,405
|
$
|
(166,278
|
)
|
$
|
2,359,909
|
||||
|
Cost
of goods sold
|
446,461
|
839,183
|
297,144
|
(166,278
|
)
|
1,416,510
|
|||||||||
|
Gross
profit
|
162,364
|
709,774
|
71,261
|
–
|
943,399
|
||||||||||
|
Selling
and administrative expenses
|
171,204
|
617,767
|
38,379
|
–
|
827,350
|
||||||||||
|
Restructuring
and other special charges, net
|
15,156
|
3,844
|
–
|
–
|
19,000
|
||||||||||
|
Equity
in net loss of nonconsolidated affiliate
|
–
|
–
|
439
|
–
|
439
|
||||||||||
|
Equity
in (earnings) loss of subsidiaries
|
(84,497
|
)
|
(38,513
|
)
|
–
|
123,010
|
–
|
||||||||
|
Operating
earnings (loss)
|
60,501
|
126,676
|
32,443
|
(123,010
|
)
|
96,610
|
|||||||||
|
Interest
expense
|
(16,231
|
)
|
(1
|
)
|
–
|
–
|
(16,232
|
)
|
|||||||
|
Interest
income
|
961
|
941
|
1,532
|
–
|
3,434
|
||||||||||
|
Intercompany
interest income (expense)
|
5,252
|
(7,010
|
)
|
1,758
|
–
|
–
|
|||||||||
|
Earnings
(loss) before income taxes and minority
interests
|
50,483
|
120,606
|
35,733
|
(123,010
|
)
|
83,812
|
|||||||||
|
Income
tax benefit (provision)
|
9,944
|
(32,110
|
)
|
(1,317
|
)
|
–
|
(23,483
|
)
|
|||||||
|
Minority
interests in net (earnings) loss of consolidated
subsidiaries
|
–
|
(338
|
)
|
436
|
–
|
98
|
|||||||||
|
Net
earnings (loss)
|
$
|
60,427
|
$
|
88,158
|
$
|
34,852
|
$
|
(123,010
|
)
|
$
|
60,427
|
||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR
THE FISCAL YEAR ENDED FEBRUARY 2,
2008
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
cash (used for) provided by operating activities
|
$
|
(20,699
|
)
|
$
|
81,524
|
$
|
26,971
|
$
|
(1,536
|
)
|
$
|
86,260
|
|||
|
Investing
activities
|
|||||||||||||||
|
Purchases
of property and equipment
|
(2,542
|
)
|
(37,344
|
)
|
(1,469
|
)
|
–
|
(41,355
|
)
|
||||||
|
Capitalized
software
|
(4,592
|
)
|
(1,178
|
)
|
–
|
–
|
(5,770
|
)
|
|||||||
|
Investment
in nonconsolidated affiliate
|
–
|
–
|
(7,080
|
)
|
–
|
(7,080
|
)
|
||||||||
|
Investment
in consolidated company
|
–
|
–
|
(3,916
|
)
|
–
|
(3,916
|
)
|
||||||||
|
Cash
recognized on initial consolidation
|
–
|
–
|
2,205
|
–
|
2,205
|
||||||||||
|
Acquisition
cost
|
–
|
(2,750
|
)
|
–
|
–
|
(2,750
|
)
|
||||||||
|
Net
cash used for investing activities
|
(7,134
|
)
|
(41,272
|
)
|
(10,260
|
)
|
–
|
(58,666
|
)
|
||||||
|
Financing
activities
|
|||||||||||||||
|
Proceeds
from borrowings under revolving credit
agreement
|
151,000
|
–
|
–
|
–
|
151,000
|
||||||||||
|
Payments
on borrowings under revolving credit
agreement
|
(137,000
|
)
|
–
|
–
|
–
|
(137,000
|
)
|
||||||||
|
Acquisition
of treasury stock
|
(41,090
|
)
|
–
|
–
|
–
|
(41,090
|
)
|
||||||||
|
Proceeds
from stock options exercised
|
9,209
|
–
|
–
|
–
|
9,209
|
||||||||||
|
Tax
benefit related to share-based plans
|
6,421
|
–
|
–
|
–
|
6,421
|
||||||||||
|
Dividends
(paid) received
|
(12,312
|
)
|
30,007
|
(30,007
|
)
|
–
|
(12,312
|
)
|
|||||||
|
Intercompany
financing
|
51,605
|
(63,670
|
)
|
10,529
|
1,536
|
–
|
|||||||||
|
Net
cash provided by (used for) financing activities
|
27,833
|
(33,663
|
)
|
(19,478
|
)
|
1,536
|
(23,772
|
)
|
|||||||
|
Effect
of exchange rate changes on cash
|
–
|
2,318
|
–
|
–
|
2,318
|
||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
–
|
8,907
|
(2,767
|
)
|
–
|
6,140
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
–
|
15,110
|
38,551
|
–
|
53,661
|
||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
–
|
$
|
24,017
|
$
|
35,784
|
$
|
–
|
$
|
59,801
|
|||||
|
CONDENSED
CONSOLIDATING STATEMENT OF EARNINGS
FOR
THE FISCAL YEAR ENDED FEBRUARY 3,
2007
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
sales
|
$
|
687,902
|
$
|
1,523,907
|
$
|
447,630
|
$
|
(188,509
|
)
|
$
|
2,470,930
|
||||
|
Cost
of goods sold
|
507,431
|
816,224
|
364,891
|
(188,509
|
)
|
1,500,037
|
|||||||||
|
Gross
profit
|
180,471
|
707,683
|
82,739
|
–
|
970,893
|
||||||||||
|
Selling
and administrative expenses
|
192,802
|
615,165
|
46,086
|
–
|
854,053
|
||||||||||
|
Restructuring
and other special charges, net
|
7,360
|
785
|
–
|
–
|
8,145
|
||||||||||
|
Equity
in (earnings) loss of subsidiaries
|
(86,663
|
)
|
(34,167
|
)
|
–
|
120,830
|
–
|
||||||||
|
Operating
earnings (loss)
|
66,972
|
125,900
|
36,653
|
(120,830
|
)
|
108,695
|
|||||||||
|
Interest
expense
|
(17,842
|
)
|
(9
|
)
|
(41)
|
–
|
(17,892
|
)
|
|||||||
|
Interest
income
|
918
|
567
|
1,125
|
–
|
2,610
|
||||||||||
|
Intercompany
interest income (expense)
|
5,047
|
(6,731
|
)
|
1,684
|
–
|
–
|
|||||||||
|
Earnings
(loss) before income taxes and minority
interests
|
55,095
|
119,727
|
39,421
|
(120,830
|
)
|
93,413
|
|||||||||
|
Income
tax benefit (provision)
|
10,613
|
(33,785
|
)
|
(4,547
|
)
|
–
|
(27,719
|
)
|
|||||||
|
Minority
interests in net loss of consolidated
subsidiaries
|
–
|
–
|
14
|
–
|
14
|
||||||||||
|
Net
earnings (loss)
|
$
|
65,708
|
$
|
85,942
|
$
|
34,888
|
$
|
(120,830
|
)
|
$
|
65,708
|
||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR
THE FISCAL YEAR ENDED FEBRUARY 3,
2007
|
|
($
thousands)
|
Parent
|
Guarantors
|
Non-Guarantors
|
Eliminations
|
Total
|
||||||||||
|
Net
cash provided by operating activities
|
$
|
40,231
|
$
|
83,411
|
$
|
28,618
|
$
|
209
|
$
|
152,469
|
|||||
|
Investing
activities
|
|||||||||||||||
|
Acquisition
cost
|
(22,700
|
)
|
–
|
–
|
–
|
(22,700
|
)
|
||||||||
|
Purchases
of property and equipment
|
(18,212
|
)
|
(42,063
|
)
|
(450
|
)
|
–
|
(60,725
|
)
|
||||||
|
Capitalized
software
|
(5,935
|
)
|
(3,959
|
)
|
(186
|
)
|
–
|
(10,080
|
)
|
||||||
|
Net
cash used for investing activities
|
(46,847
|
)
|
(46,022
|
)
|
(636
|
)
|
–
|
(93,505
|
)
|
||||||
|
Financing
activities
|
|||||||||||||||
|
Proceeds
from borrowings under revolving credit agreement
|
79,000
|
–
|
–
|
–
|
79,000
|
||||||||||
|
Payments
on borrowings under revolving credit agreement
|
(128,000
|
)
|
–
|
–
|
–
|
(128,000
|
)
|
||||||||
|
Proceeds
from stock options exercised
|
10,560
|
–
|
–
|
–
|
10,560
|
||||||||||
|
Tax
benefit related to share-based plans
|
7,947
|
–
|
–
|
–
|
7,947
|
||||||||||
|
Dividends
paid
|
(9,147
|
)
|
–
|
–
|
–
|
(9,147
|
)
|
||||||||
|
Intercompany
financing
|
32,919
|
(36,543
|
)
|
3,833
|
(209
|
)
|
–
|
||||||||
|
Net
cash (used for) provided by financing activities
|
(6,721
|
)
|
(36,543
|
)
|
3,833
|
(209
|
)
|
(39,640
|
)
|
||||||
|
Effect
of exchange rate changes on cash
|
–
|
128
|
(79
|
)
|
–
|
49
|
|||||||||
|
(Decrease)
increase in cash and cash equivalents
|
(13,337
|
)
|
974
|
31,736
|
–
|
19,373
|
|||||||||
|
Cash
and cash equivalents at beginning of year
|
13,337
|
14,566
|
6,385
|
–
|
34,288
|
||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
–
|
$
|
15,540
|
$
|
38,121
|
$
|
–
|
$
|
53,661
|
|||||
|
19.
|
QUARTERLY
FINANCIAL DATA (Unaudited)
|
Quarterly
financial results (unaudited) for the years 2008 and 2007 are as
follows:
|
Quarters
|
|||||||||
|
($
thousands, except per share amounts)
|
First
Quarter
(13
weeks)
|
Second
Quarter
(13
weeks)
|
Third
Quarter
(13
weeks)
|
Fourth
Quarter
(13
weeks)
|
|||||
|
2008
|
|||||||||
|
Net
sales
|
$554,491
|
$569,219
|
$631,657
|
$520,995
|
|||||
|
Gross
profit
|
216,462
|
223,497
|
248,491
|
193,786
|
|||||
|
Net
earnings (loss)
|
7,195
|
2,217
|
10,398
|
(153,048
|
)
|
||||
|
Per
share of common stock:
|
|||||||||
|
Earnings
(loss) - basic
|
0.17
|
0.05
|
0.25
|
(3.68
|
)
|
||||
|
Earnings
(loss) - diluted
|
0.17
|
0.05
|
0.25
|
(3.68
|
)
|
||||
|
Dividends
paid
|
0.07
|
0.07
|
0.07
|
0.07
|
|||||
|
Market
value:
|
|||||||||
|
High
|
17.65
|
17.60
|
18.44
|
10.94
|
|||||
|
Low
|
11.89
|
12.06
|
6.99
|
4.34
|
|||||
|
Quarters
|
|||||||
|
($
thousands, except per share amounts)
|
First
Quarter
(13
weeks)
|
Second
Quarter
(13
weeks)
|
Third
Quarter
(13
weeks)
|
Fourth
Quarter
(13
weeks)
|
|||
|
2007
|
|||||||
|
Net
sales
|
$566,348
|
$576,571
|
$645,546
|
$571,444
|
|||
|
Gross
profit
|
229,803
|
230,994
|
259,841
|
222,761
|
|||
|
Net
earnings
|
9,636
|
9,830
|
27,009
|
13,952
|
|||
|
Per
share of common stock:
|
|||||||
|
Earnings
- basic
|
0.22
|
0.23
|
0.62
|
0.33
|
|||
|
Earnings
- diluted
|
0.22
|
0.22
|
0.61
|
0.33
|
|||
|
Dividends
paid
|
0.07
|
0.07
|
0.07
|
0.07
|
|||
|
Market
value:
|
|||||||
|
High
|
37.68
|
33.00
|
23.19
|
18.29
|
|||
|
Low
|
26.46
|
19.92
|
18.09
|
11.91
|
|||
The
fourth quarter of 2008 includes charges of:
|
·
|
$149.2
million ($119.2 million on an after-tax basis) related to our impairment
of goodwill and intangible assets,
|
|
·
|
$30.9
million ($19.1 million on an after-tax basis) related to our expense and
capital containment initiatives,
|
|
·
|
$2.8
million ($1.7 million on an after-tax basis) related to the relocation and
transition of our Famous Footwear division headquarters
and
|
|
·
|
$2.3
million ($1.5 million on an after-tax basis) related our information
technology initiatives.
|
The
fourth quarter of 2007 includes charges of $3.7 million ($2.6 million on an
after-tax basis) related to our Earnings Enhancement Plan.
|
(A)
|
Accounts
written off, net of recoveries, discounts and allowances
taken.
|
|
(B)
|
Adjustment
upon disposal of related
inventories.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
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 the objectives of the control system are met.
Furthermore, 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 that 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 January 31, 2009, 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.
Management’s
assessment of the effectiveness of internal control over financial reporting as
of January 31, 2009 can be found in Item 8 of this report. The effectiveness of
internal control over financial reporting as of January 31, 2009, was audited by
Ernst & Young LLP, an independent registered public accounting firm, as
stated in their report, which can also be found in Item 8 of this
report.
Based on
the evaluation of internal control over financial reporting, the Chief Executive
Officer and Chief Financial Officer have concluded that there have been no
changes in the Company’s internal controls over financial reporting or in other
factors during the quarter ended January 31, 2009, that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
|
OTHER
INFORMATION
|
None.
|
PART
III
|
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
regarding Directors of the Company is set forth under the caption
Election of Six Directors
in
the Proxy Statement for the Annual Meeting of Shareholders to be held May 28,
2009, which information is incorporated herein by reference.
Information
regarding Executive Officers of the Registrant is set forth under the caption
Executive Officers of the
Registrant
which can be found in Item 1 of this report, which information
is incorporated herein by reference.
Information
regarding Section 16 Beneficial Ownership Reporting Compliance is set forth
under the caption
Section 16
Beneficial Ownership Reporting Compliance
in the Proxy Statement for the
Annual Meeting of Shareholders to be held May 28, 2009, which information is
incorporated herein by reference.
Information
regarding the Audit Committee and the Audit Committee financial expert is set
forth under the captions
Board
Meetings and Committees
and
Audit Committee
,
respectively, in the Proxy Statement for the Annual Meeting of Shareholders to
be held May 28, 2009, which information is incorporated herein by
reference.
Information
regarding the Corporate Governance Guidelines, Code of Business Conduct and Code
of Ethics is set forth under the caption
Corporate Governance
in the
Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2009,
which information is incorporated herein by reference.
|
EXECUTIVE
COMPENSATION
|
Information
regarding Executive Compensation is set forth under the section titled
Executive Compensation
and
under the caption
Compensation
of Non-Employee Directors
in the Proxy Statement for the Annual Meeting
of Shareholders to be held May 28, 2009 which information is incorporated herein
by reference.
Information
regarding the Compensation Committee Report is set forth under the caption
Report of the Compensation
Committee
in the Proxy Statement for the Annual Meeting of Shareholders
to be held May 28, 2009, which information is incorporated herein by
reference.
Information
regarding Compensation Committee Interlocks and Insider Participation is set
forth under the caption
Compensation Committee Interlocks
and Insider Participation
in the Proxy Statement for the Annual Meeting
of Shareholders to be held May 28, 2009, which information is incorporated
herein by reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
regarding Company Stock Ownership by Directors, Officers and Principal Holders
of Our Stock is set forth under the caption
Stock Ownership by Directors,
Executive Officers and 5% Shareholders
in the Proxy Statement for the
Annual Meeting of Shareholders to be held May 28, 2009, which information is
incorporated herein by reference.
Equity
Compensation Plan Information
The
following table sets forth aggregate information regarding the Company’s equity
compensation plans as of January 31, 2009:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||
|
Equity
compensation plans approved by security holders
|
2,582,254
|
(1)
|
$15.88
|
(1)
|
2,551,385
|
(2)
|
||
|
Equity
compensation plans not approved by security holders
|
–
|
–
|
30,000
|
(3)
|
||||
|
Total
|
2,582,254
|
$15.88
|
2,581,385
|
|||||
|
(1)
|
Column
(a) includes the following:
(i)
2,019,754
outstanding stock options (includes vested and nonvested
options)
(ii)
562,500
rights to receive common shares subject to nonvested performance share
awards at the maximum award level. The target amount of shares to be
awarded under these performance share awards is 281,250, and depending on
the achievement of certain objectives at the end of 2009 and 2010, these
awards may be payable anywhere from zero to a maximum 562,500 shares.
Although these awards are reflected at the maximum 200% award level in the
table above (562,500 shares), our current expectation is that no shares
will be issued upon satisfaction of these awards.
Performance
share rights described in (ii) above were disregarded for purposes of
computing the weighted-average exercise price in column (b). This table
excludes restricted stock units granted to independent directors and
independent directors’ deferred compensation units, which are payable only
in cash.
|
|||||||
|
(2)
|
Represents
our remaining share awards available for grant based upon the plan
provisions, which reflects our practice to reserve shares for outstanding
awards. Per our current practice, the number of securities available for
grant has been reduced for stock option grants and performance share
awards payable in stock. Performance share awards are reserved based on
the maximum payout level.
|
|||||||
|
(3)
|
Represents
our remaining shares available for grant for our director share plan,
whereby non-employee directors can elect to receive their annual retainer
and meeting fees in whole shares of our stock in lieu of
cash.
|
|||||||
Information
regarding share-based plans is set forth in Note 15 to the consolidated
financial statements and is hereby incorporated by reference.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
regarding Certain Relationships and Related Transactions is set forth under the
caption
Related Party
Transactions
in the Proxy Statement for the Annual Meeting of
Shareholders to be held May 28, 2009, which information is incorporated herein
by reference.
Information
regarding Director Independence is set forth under the caption
Director Independence
in the
Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2009,
which information is incorporated herein by reference.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information
regarding our Principal Accountant Fees and Services is set forth under the
caption
Fees Paid to
Independent Registered Public Accountants
in the Proxy Statement for the
Annual Meeting of Shareholders to be held May 28, 2009, which information is
incorporated herein by reference.
|
PART
IV
|
| ITEM 15 | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | |||
|
(a)
|
(1)
and (2) The list of financial statements and Financial Statement Schedules
required by this item is included in the Index on page 2 under
Financial Statements and
Supplementary Data
. All other schedules specified under Regulation
S-X have been omitted because they are not applicable, because they are
not required or because the information required is included in the
financial statements or notes thereto.
|
|||
|
(3)
Exhibits
|
||||
|
Certain
instruments defining the rights of holders of long-term debt securities of
the Company are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K,
and the Company hereby undertakes to furnish to the SEC, upon request,
copies of any such instruments.
|
||||
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Restated
Certificate of Incorporation of the Company incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 5, 2007 and filed June 5,
2007.
|
|
|
3.2
|
Bylaws
of the Company as amended through October 2 2008, incorporated herein by
reference to Exhibit 3.1 to the Company’s Form 8-K dated October 8, 2008
and filed October 8, 2008.
|
|
|
4.1a
|
Indenture
for the 8.75% Senior Notes due 2012 dated April 22, 2005 among Brown Shoe
Company, Inc., the subsidiary guarantors set forth therein, and SunTrust
Bank, as trustee, including the form of Global Note attached thereto,
incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated
April 26, 2005.
|
|
|
4.1b
|
Supplemental
Indenture for 8.75% Senior Notes, dated October 24, 2007, incorporated
herein by reference to Exhibit 4.1b to the Company’s For m 10-K dated
February 2, 2008 and filed March 28, 2008.
|
|
|
10.1
|
Second
Amended and Restated Credit Agreement, dated as of January 21, 2009, among
Brown Shoe Company, Inc., as lead borrower for itself and on behalf of
certain of its subsidiaries, and Bank of America, N.A., as lead issuing
bank, administrative agent and collateral agent, Wells Fargo Retail
Finance, LLC, as syndication agent, Bank of America, N.A. and JPMorgan
Chase Bank, N.A., as co-documentation agents, and the other
financial institutions party thereto, as lenders, incorporate herein by
reference to Exhibit 10.1 to the Company’s Form 8-K dated January 22, 2009
and filed January 22, 2009.
|
|
|
†
|
10.2*
|
|
|
10.3*
|
Summary
of compensatory arrangements for the named executive officers of Brown
Shoe Company, Inc., incorporated herein by reference to Item 5.02 and
Exhibit 10.1 to the Company’s Form 8-K dated March 4, 2009 and filed March
10, 2009.
|
|
|
10.4a*
|
Incentive
and Stock Compensation Plan of 1999, incorporated herein by reference to
Exhibit 2 to the Company's definitive proxy statement dated April 26, 1999
and filed April 26, 1999.
|
|
|
10.4b*
|
Amendment
to Incentive and Stock Compensation Plan of 1999, dated May 27, 1999,
incorporated herein by reference to Exhibit 10(e)(i) to the Company's Form
10-K for the year ended January 29, 2000 and filed April 19,
2000.
|
|
|
10.4c*
|
First
Amendment to the Incentive and Stock Compensation Plan of 1999, dated
January 7, 2000, incorporated herein by reference to Exhibit 10(e)(ii) to
the Company's Form 10-K for the year ended January 29, 2000 and filed
April 19, 2000.
|
|
|
10.5a*
|
Brown
Shoe Company, Inc. Incentive and Stock Compensation Plan of 2002, as
Amended and Restated as of May 22, 2008, incorporated by reference to
Exhibit A to the Company’s definitive proxy statement dated April 11, 2008
and filed April 11, 2008.
|
|
|
†
|
10.5b(1)*
|
|
|
10.5b(2)*
|
Form
of Incentive Stock Option Award Agreement (for grants prior to May 2008)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated by reference to Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended July 31, 2004 and
filed September 8, 2004.
|
|
|
†
|
10.5c(1)*
|
|
|
10.5c(2)*
|
Form
of Non-Qualified Stock Option Award Agreement for awards issued prior to
May 2008 under the Brown Shoe Company, Inc. Incentive and Stock
Compensation Plan of 2002, incorporated by reference to Exhibit 10.3 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31,
2004 and filed September 8, 2004.
|
|
|
†
|
10.5d(1)*
|
|
|
10.5d(2)*
|
Form
of Restricted Stock Agreement (for employee grants in 2006 and 2007) under
the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of
2002, incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K
dated March 8, 2006 and filed March 8, 2006.
|
|
|
10.5d(3)*
|
Form
of Restricted Stock Agreement (for employee grants in 2002 through 2005)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated herein by reference to Exhibit 10.5 to the Company’s
Form 10-Q for quarter ended July 31, 2004 and filed September 8,
2004.
|
|
|
†
|
10.5e*
|
|
10.5f(1)*
|
Form
of Performance Award Agreement (for grants commencing March 2009) under
the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of
2002, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K
dated March 23, 2009 and filed March 27, 2009.
|
|
|
10.5f(2)*
|
Form
of Performance Unit Award Agreement (for 2008-2010 performance period)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated by reference to Exhibit 10.1e to the Company’s Form
10-Q for the quarter ended August 2, 2008 and filed September 10,
2008.
|
|
|
10.5f(3)*
|
Amendment
to Performance Unit Award Agreement (for 2008-2010 performance period)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated by reference to Exhibit 10.4 to the Company’s Form
8-K dated March 4, 2009 and filed March 10, 2009.
|
|
|
10.5g(1)*
|
Form
of Performance Share Award Agreement (for 2007-2009 performance period)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated by reference to Exhibit 10.5f to the Company’s Form
10-K dated January 28, 2006 and filed April 10, 2006.
|
|
|
10.5g(2)*
|
Amendment
to Performance Share Award Agreement (for 2007-2009 performance period)
under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan
of 2002, incorporated by reference to Exhibit 10.6 to the Company’s Form
8-K dated March 4, 2009 and filed March 10, 2009.
|
|
|
10.6a*
|
Form
of Non-Employee Director Restricted Stock Unit Agreement between the
Company and each of its Non-Employee Directors (for grants in
2008), incorporated by reference to Exhibit 10.2 to the Company’s
Form 10-Q for the quarter ended August 2, 2008 and filed September 10,
2008.
|
|
|
10.6b*
|
Form
of Non-Employee Director Restricted Stock Unit Agreement between the
Company and each of its Non-Employee Directors (for grants prior to 2008),
incorporated by reference to Exhibit 10(u) to the Company’s Form 10-K
dated January 29, 2005 and filed April 1, 2005.
|
|
|
10.7*
|
Brown
Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors,
as amended and restated as of January 1, 2009, incorporated herein by
reference to Exhibit 10.2a to the Company’s Form 10-Q for the quarter
ended November 1, 2008 and filed December 9, 2008.
|
|
|
10.8*
|
Brown
Shoe Company, Inc. Supplemental Executive Retirement Plan (SERP),
conformed and restated as of December 2, 2008, incorporated herein by
reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended
November 1, 2008 and filed December 9, 2008.
|
|
|
10.9*
|
Brown
Shoe Company, Inc. Deferred Compensation Plan, incorporated by reference
to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed
December 11, 2007.
|
|
|
10.10*
|
Brown
Shoe Company, Inc. Non-Employee Director Share Plan (2009), incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q for the Quarter
ended November 1, 2008 and filed December 9, 2008.
|
|
|
10.11*
|
Severance
Agreement, effective April 1, 2006, between the Company and Ronald A.
Fromm, incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 8-K dated April 6, 2006.
|
|
|
10.12*
|
Severance
Agreement, effective April 1, 2006, between the Company and Joseph W.
Wood, incorporated herein by reference to Exhibit 10.2 to the Company's
Form 8-K dated April 6, 2006.
|
|
|
10.14*
|
Severance
Agreement, effective April 1, 2006, between the Company and Richard M.
Ausick, incorporated herein by reference to Exhibit 10.12 to the Company’s
Form 10-K dated February 2, 2008 and filed March 28,
2008.
|
|
|
10.15*
|
Severance
Agreement, effective April 1, 2006, between the Company and Diane M.
Sullivan, incorporated herein by reference to Exhibit 10.5 to the
Company's Form 8-K dated April 6, 2006.
|
|
|
10.16*
|
Severance
Agreement, effective October 30, 2006, between the Company and Mark E.
Hood, incorporated herein by reference to Exhibit 10.6 to the Company’s
Form 8-K dated October 30, 2006.
|
|
|
†
|
21
|
|
|
†
|
23
|
|
|
†
|
24
|
|
|
†
|
31.1
|
|
|
†
|
31.2
|
|
|
†
|
32.1
|
|
(b)
|
Exhibits:
|
|
See
Item 15(a)(3) above. On request, copies of any exhibit will be furnished
to shareholders upon payment of the Company’s reasonable expenses incurred
in furnishing such exhibits.
|
|
|
(c)
|
Financial
Statement Schedules:
|
|
See
Item 8 above.
|
* Denotes
management contract or compensatory plan arrangements.
†
Denotes
exhibit is filed with this Form 10-K.
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
BROWN
SHOE COMPANY, INC.
|
|
|
By:
|
/s/
Mark E. Hood
|
|
Mark
E. Hood
|
|
|
Senior
Vice President and Chief Financial
Officer
|
|
Date:
March 31, 2009
Know all
men by these presents, that each person whose signature appears below
constitutes and appoints Ronald A. Fromm, Mark E. Hood, and Michael I.
Oberlander his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant, on the dates
and in the capacities indicated.
|
Signatures
|
Date
|
Title
|
||
|
/s/
Ronald A. Fromm
|
March
31, 2009
|
Chairman
of the Board of Directors and Chief Executive Officer on behalf of the
Company and as Principal Executive Officer
|
||
|
Ronald
A. Fromm
|
||||
|
/s/
Mark E. Hood
|
March
31, 2009
|
Senior
Vice President and Chief Financial Officer on behalf of the Company and as
Principal Financial Officer and Principal Accounting
Officer
|
||
|
Mark
E. Hood
|
||||
|
/s/
Diane M. Sullivan
|
March
31, 2009
|
Director,
President and Chief Operating Officer
|
||
|
Diane
M. Sullivan
|
||||
|
/s/
Mario L. Baeza
|
March
26, 2009
|
Director
|
||
|
Mario
L. Baeza
|
||||
|
/s/
Joseph L. Bower
|
March
19, 2009
|
Director
|
||
|
Joseph
L. Bower
|
||||
|
/s/
Julie C. Esrey
|
March
23, 2009
|
Director
|
||
|
Julie
C. Esrey
|
||||
|
/s/
Carla C. Hendra
|
March
27, 2009
|
Director
|
||
|
Carla
C. Hendra
|
||||
|
/s/
Ward M. Klein
|
March
24, 2009
|
Director
|
||
|
Ward
M. Klein
|
||||
|
/s/
Steven W. Korn
|
March
22, 2009
|
Director
|
||
|
Steven
W. Korn
|
||||
|
/s/
Patricia G. McGinnis
|
March
24, 2009
|
Director
|
||
|
Patricia
G. McGinnis
|
||||
|
/s/
W. Patrick McGinnis
|
March
23, 2009
|
Director
|
||
|
W.
Patrick McGinnis
|
||||
|
/s/
Michael F. Neidorff
|
March
20, 2009
|
Director
|
||
|
Michael
F. Neidorff
|
||||
|
/s/
Hal J. Upbin
|
March
23, 2009
|
Director
|
||
|
Hal
J. Upbin
|
||||
|
/s/
Harold B. Wright
|
March
19, 2009
|
Director
|
||
|
Harold
B. Wright
|