10-K 1 c707-20140201x10k.htm 10-K 95c1b8e9c7a6411

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended February 1, 2014

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from  ____________ to ______________

 

Commission file number 1-2191

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BROWN SHOE COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New York

43-0197190

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

 

8300 Maryland Avenue

63105

St. Louis, Missouri

(Zip Code)

(Address of principal executive offices)

 

 

(314) 854-4000

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock — par value $0.01 per share

New York Stock Exchange

 

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     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  

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes       No

 

Indicate by 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer    

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

 

The aggregate market value of the stock held by non-affiliates of the registrant as of August 2, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,008.2 million.

 

As of February 28, 2014,  43,395,755 common shares were outstanding.

 

Documents Incorporated by Reference

 

Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

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INTRODUCTION

This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission on an annual basis. Part II of the Form 10-K contains the business information and financial statements that many companies include in the financial sections of their annual reports. The other sections of this Form 10-K include further information about our business that we believe will be of interest to investors. We hope investors will find it useful to have all of this information in a single document.

 

The SEC allows us to report information in the Form 10-K by “incorporating by reference” from another part of the Form 10-K or from the proxy statement. You will see that information is “incorporated by reference” in various parts of our Form 10-K. The proxy statement will be available on our website after it is filed with the SEC in April 2014.  

 

Unless the context otherwise requires, “we,” “us,” “our,” “the Company” or “Brown Shoe Company” refers to Brown Shoe Company, Inc. and its subsidiaries.

 

Information in this Form 10-K is current as of April 1, 2014, unless otherwise specified.

 

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS 

In this report, and from time to time throughout the year, we share our expectations for our company’s future performance. These forward-looking statements include statements about our business plans; the potential development, regulatory approval and public acceptance of our products; our expected financial performance, including sales performance, and the anticipated effect of our strategic actions; the anticipated benefits of acquisitions; the outcome of contingencies, such as litigation; domestic or international economic, political and market conditions; and other factors that could affect our future results of operations or financial position, including, without limitation, statements under the captions “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance.

 

Our forward-looking statements represent our estimates and expectations at the time that we make them. However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so. In the interests of our investors, and in accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Part I. Item 1A. Risk Factors below explain some of the important reasons that actual results may be materially different from those that we anticipate.

 

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INDEX

 

 

 

 

 

PART I

 

Page

Item 1

Business

Item 1A

Risk Factors

11 

Item 1B

Unresolved Staff Comments

17 

Item 2

Properties

17 

Item 3

Legal Proceedings

17 

Item 4

Mine Safety Disclosures

17 

 

 

 

PART II

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17 

Item 6

Selected Financial Data

20 

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

40 

Item 8

Financial Statements and Supplementary Data

40 

 

   Management’s Report on Internal Control Over Financial Reporting

40 

 

   Report of Independent Registered Public Accounting Firm

41 

 

   Report of Independent Registered Public Accounting Firm

42 

 

   Consolidated Balance Sheets

43 

 

   Consolidated Statements of Earnings

44 

 

   Consolidated Statements of Comprehensive Income

45 

 

   Consolidated Statements of Cash Flows

46 

 

   Consolidated Statements of Shareholders’ Equity

47 

 

   Notes to Consolidated Financial Statements

48 

 

   Schedule II – Valuation and Qualifying Accounts

99 

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

99 

Item 9A

Controls and Procedures

99 

 

   Evaluation of Disclosure Controls and Procedures

99 

 

   Internal Control Over Financial Reporting

100 

Item 9B

Other Information

100 

 

 

 

PART III

 

Item 10

Directors, Executive Officers and Corporate Governance

100 

Item 11

Executive Compensation

101 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

101 

Item 13

Certain Relationships and Related Transactions, and Director Independence

101 

Item 14

Principal Accounting Fees and Services

102 

 

 

 

PART IV

 

Item 15

Exhibits and Financial Statement Schedules

102 

 

 

 

 

 

 

 

 

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PART I

 

 

 

ITEM 1

BUSINESS

Brown Shoe Company, Inc., founded in 1878 and incorporated in 1913, is a global footwear retailer and wholesaler. Current activities include the operation of retail shoe stores and e-commerce websites as well as the design, sourcing, and marketing of footwear for women and men. Our mission is to inspire people to feel good and live better...feet first! We are a global footwear company with annual net sales of $2.5 billion that puts consumers and their needs first by targeting family, healthy living, and contemporary fashion platforms. Our business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas and Easter holiday season sales. Traditionally, the third fiscal quarter accounts for a substantial portion of our earnings for the year.

 

Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks. Both our 2013 and 2011 fiscal years had 52 weeks, while our 2012 fiscal year included 53 weeks. The difference in the number of weeks included in our fiscal years can affect annual comparisons.

 

During 2013, categories of our consolidated net sales were approximately 63% women’s footwear, 23% men’s footwear, 9% children’s footwear, and 5% accessories. This composition has remained relatively constant over the past few years. Approximately 70% of footwear sales in 2013 represented retail sales, including sales through our e-commerce websites, compared to 71% in 2012 and 70% in 2011, while the remaining 30%, 29%, and 30% in the respective years represented wholesale sales. See Note 7 to the consolidated financial statements for additional information regarding our business segments and financial information by geographic area.

 

We had approximately 11,200 full-time and part-time employees as of February 1, 2014. In the United States, there are no employees subject to union contracts.  In Canada, we employ approximately 20 warehousing employees under a union contract, which expires in October 2016.

 

 

RETAIL OPERATIONS

Our retail operations at February 1, 2014 included 1,223 retail shoe stores in the United States, Canada, and Guam. The number of our retail footwear stores at the end of each of the last three fiscal years was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 
2012 
2011 

Famous Footwear

 

1,044 
1,055 
1,089 

Specialty Retail

 

179 
222 
234 

Total

 

1,223 
1,277 
1,323 

 

During 2013, Famous Footwear opened 51 stores and closed 62 stores. During 2013, Specialty Retail opened 11 stores and closed 54 stores.

 

With many companies operating retail shoe stores and shoe 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, trend-right merchandise selection and availability of brands, pricing, advertising, and consumer service are all factors that impact retail competition.

 

Famous Footwear

Our family platform includes Famous Footwear, which is one of America’s leading family branded footwear retailers based on 1,044 stores at the end of 2013, net sales of $1.5 billion in 2013, and published information on our direct competitors. Our target consumers are women who buy brand-name fashionable shoes at a value for themselves and their families. In addition to our retail footwear stores, we operate Famous.com. Our omni-channel strategy provides our consumer numerous shopping experiences, access to a wider range of products, and a variety of delivery options.

 

Famous Footwear stores feature a wide selection of brand-name, athletic, casual, and dress shoes for the entire family. Brands carried include, among others, Nike, Skechers, New Balance, Converse, adidas, Vans, Sperry, Asics, DC, BOC by Born, Sof Sole, Bearpaw, and Steve Madden, as well as company-owned brands including, among others, LifeStride, Dr. Scholl’s, Fergalicious, Naturalizer, and Carlos. We work closely with our vendors to provide our consumers with fresh product and, in some cases, product exclusively designed for and available only in our stores. Famous Footwear’s average retail price is approximately $40 for footwear with retail price points typically ranging from $22 for shoes up to $190 for boots. 

 

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Famous Footwear sells various Brown Shoe Company owned and licensed products. Such products are sold to Famous Footwear by our Wholesale Operations segment at a profit and represent approximately 14% 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, Guam, and Canada. The breakdown by venue at the end of each of the last three fiscal years is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 
2012 
2011 

Strip centers

 

711 
726 
744 

Outlet malls

 

172 
167 
169 

Regional malls

 

161 
162 
176 

Total

 

1,044 
1,055 
1,089 

 

Stores open at the end of 2013 and 2012 averaged approximately 6,800 square feet. Total square footage at the end of 2013 decreased 2.0% to 7.1 million square feet compared to 7.2 million at the end of 2012. We expect to open 50 to 55 new stores and close approximately 50 stores in 2014. 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 $207 in 2013, up from $199 in 2012. Same-store sales increased 2.9% during 2013 on a 52-week basis. Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation. E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation. 

 

Famous Footwear relies on merchandise allocation systems and processes that use allocation criteria, consumer segmentation, and inventory data in an effort to ensure stores are adequately stocked with product and to differentiate the needs of each store based on location, consumer segmentation, and other factors. Famous Footwear’s distribution systems allow for merchandise to be delivered to each store weekly, or on a more frequent basis, as needed. Famous Footwear also utilizes regional third-party pooled distribution sites across the country. Famous Footwear’s in-store point-of-sale systems provide detailed sales transaction data to our corporate office for daily update and analysis in the perpetual inventory and merchandise allocation systems. Certain of these systems also are used for training employees and communication between the stores and corporate office.

 

Famous Footwear’s marketing programs include national television, print, digital marketing and social networking, in-store advertisements, cinema, billboards, and radio, all of which are designed to further develop and reinforce the Famous Footwear concept and strengthen our connection with consumers. We believe the success of our campaigns is attributable to highlighting key categories and tailoring the timing of such messaging to adapt to seasonal shopping patterns. In 2013, we spent approximately $57.6 million to advertise and market Famous Footwear to our target consumers, a portion of which was recovered from suppliers. Famous Footwear has a robust loyalty program (“Rewards”), which informs and rewards frequent consumers with product previews, earned incentives based upon purchase continuity, and other periodic promotional offers. In 2013, approximately 70% of our Famous Footwear net sales were generated by our Rewards members. During the year, we expanded our efforts to connect with and engage our consumers to build a strong brand preference for Famous Footwear through our loyalty program. In 2013, we introduced our mobile application across multiple platforms and had more than 250,000 members enrolled by the end of the year. In 2014, we will continue to seek new and expand existing channels for consumers to connect with Famous Footwear to drive our fans from the digital world into profitable and loyal consumers in our omni-channel selling environments.

 

Specialty Retail

Our Specialty Retail segment, composed of 179 stores as of February 1, 2014, includes the following retail concepts, Shoes.com, and our other e-commerce businesses, with the exception of Famous.com, which is included in the Famous Footwear segment.

 

Naturalizer

Naturalizer retail stores are a showcase for our Naturalizer brand of women’s shoes. These stores are designed and merchandised to appeal to the Naturalizer consumer, who is style and comfort conscious and 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 $69 for shoes to $199 for boots. The majority of products sold in our retail stores are purchased from our Wholesale Operations segment at a customary gross profit rate.

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At the end of 2013, we operated 87 Naturalizer stores in the United States (including a store in Guam) and 87 Naturalizer stores in Canada. Of the total 174 stores, approximately 50% are located in regional malls, with a few stores having street locations, and average approximately 1,200 square feet in size. The other 50% of stores are located in outlet malls and average approximately 2,300 square feet in size. Total square footage at the end of 2013 was 308,000 compared to 332,000 in 2012. In 2013, we closed 25 stores in the United States and Canada, primarily in regional malls, and we opened nine stores, primarily in outlet malls. We expect to open six stores and close 10 stores in 2014.

 

Naturalizer footwear is also distributed in China through stores operated by our joint venture partner, C. banner International Holdings Limited (“CBI”) (formerly Hongguo International Holdings Limited).  CBI operated 95 stores at the end of 2013 and expects to add approximately 10 stores in 2014.  During 2013, through our majority-owned subsidiary, B&H Footwear Company Limited (“B&H Footwear”), we also operated 28 stores in China.  As further discussed in Note 16 to the consolidated financial statements, during 2013, B&H Footwear transferred the operation of all retail stores in China to CBI and currently operates no retail stores.  B&H Footwear continues to sell footwear to CBI on a wholesale basis. 

 

Marketing programs for our Naturalizer stores have complemented our Naturalizer brand advertising by building on the brand’s consumer recognition and value proposition, and reinforcing the brand’s focus on effortless style, comfort, and quality. Naturalizer utilizes a database-marketing program, which targets frequent consumers through catalogs and other mailings that display the brand’s product offerings. Consumers can purchase the products in these catalogs from our stores, online at Naturalizer.com and Naturalizer.ca, or by phone.

 

E-Commerce/Direct-To-Consumer

We own and operate Shoes.com, Inc., a pure-play internet retailing company. Shoes.com offers a diverse selection of footwear and accessories for women, men, and children, including footwear purchased from third-party suppliers and Brown Shoe Company.

 

In connection with our omni-channel approach to reach consumers, we also operate Famous.com (included in our Famous Footwear segment), Naturalizer.com, Naturalizer.ca, DrSchollsShoes.com and SamEdelman.com, which offer substantially the same product selection to consumers as sold in their respective retail stores, except Famous.com which offers an expanded assortment as a result of the vendor drop ship program. Additional websites such as Ryka.com, LifeStride.com, ViaSpiga.com, Vince.com, CarlosShoes.com, and FergieShoes.com function as retail outlets for the online consumer and serve as additional brand-building vehicles for us.  In addition, the Company has also begun operating an e-commerce business in China. Those operations are focused on selling Naturalizer footwear within China through third-party online sites, with plans to add more Company-branded product in the future. 

 

References to our website addresses do not constitute incorporation by reference of the information contained on the websites and the information contained on the websites is not part of this report.

 

Other Store Concepts

At the end of 2013, our Specialty Retail segment also included a total of five retail stores operated under the Dr. Scholl’s and Sam Edelman names. During 2014, we plan to open several additional Sam Edelman stores as we expand our retail presence for this brand, and close four Dr. Scholl’s stores.

 

WHOLESALE OPERATIONS

Our Wholesale Operations segment designs, sources, and markets branded footwear for women and men at a variety of price points. Certain of our branded footwear products are developed pursuant to licensing agreements. We also receive royalty revenues for licensing owned brands to third parties. Our footwear is distributed to over 3,000 retailers, including national chains, department stores, mass merchandisers, independent retailers, online retailers, and catalogs throughout the United States and Canada as well as approximately 60 other countries (including sales to our retail segments). The most significant wholesale customers include Famous Footwear and many of the nation’s largest retailers: national chains such as DSW, TJX Corporation (including TJ Maxx and Marshalls), Ross Stores, Nordstrom Rack, and Kohl’s; department stores such as Macy’s, Nordstrom, Bon-Ton, Belk, and Dillard’s; mass merchandisers such as Walmart and Target; independent retailers such as QVC and Home Shopping Network; and online retailers, such as Zappos.com, Amazon.com, and Famous.com. We also sell product to a variety of international retail customers and distributors. The loss of any one or more of our significant customers could have a material negative impact on Wholesale Operations and the Company.

 

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. Many retailers, who are our wholesale customers, are increasing the amount of private brand-name footwear that they source directly from factories or through agents. The wholesale footwear business has low barriers to entry, which further intensifies competition. In addition, some competitors have successfully branded their trademarks as lifestyle brands, resulting in a greater competitive advantage to those companies.

 

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In 2013, our Wholesale Operations segment sold approximately 48 million pairs of shoes. We sell footwear to wholesale customers on both a landed and first-cost basis. 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 profit rate than first-cost sales as a result of the brand equity associated with the product along with the additional customs, warehousing, and logistics services provided to customers and the risks associated with inventory ownership. To allow for the prompt shipment on reorders, we carry inventories of certain high-volume styles. 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.

 

Marketing

We continue to build on the 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 2013, we spent approximately $15.2 million in advertising and marketing support, including tradeshows, consumer media advertising, production, in-store displays and fixtures, cooperative advertising, and public relations with our wholesale customers. The marketing teams are also responsible for driving the development of branding and content for our brand websites. 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. In 2013, the marketing teams were instrumental in the development and execution of new product launches, including target consumer identification, branding, positioning, and marketing to both the consumer and trade audiences. We intend to continue the growth of our social media presence as we believe increasing our focus on social media will help drive us into the next generation of marketing, allowing us to connect even more intimately with consumers.

 

Portfolio of Brands

Wholesale Operations offers retailers a portfolio of leading brands from our healthy living and contemporary fashion platforms. The following is a listing of our principal brands and licensed products:

 

Healthy Living

Naturalizer:  Introduced in 1927, Naturalizer has become a global family of comfort lifestyle footwear brands meeting the needs of women across the marketplace with uncompromising comfort, fit, and style. Our flagship Naturalizer brand is sold primarily at Naturalizer retail stores, national chains, department stores, online retailers, catalog retailers, and independent retailers. The brand is distributed in 60 countries around the world. Suggested retail price points range from $69 for shoes to $199 for boots. Naturalizer held the No. 3 market share position in the moderate zone within the women’s fashion footwear category across NPD tracked point-of-sale channels at the end of 2013, according to The NPD Group/Retail Tracking Service. Natural Soul by Naturalizer provides women with uncompromising value and is sold primarily in national chains, our Naturalizer outlet stores, and Famous Footwear retail stores. At the end of 2013, the brand held the No. 7 market share position in the moderate zone within the women’s fashion footwear category across NPD tracked point-of-sale channels, according to The NPD Group/Retail Tracking Service. Suggested retail price points range from $69 for shoes to $109 for boots.

 

Dr. Scholl’s:   Dr. Scholl’s is an authentic brand of innovative footwear designed with uncomplicated, playful style for a healthier life. Dr. Scholl’s delivers proprietary comfort technology across all distribution tiers. Dr. Scholl’s crafts unique styles that offer men and women the freedom to live active lives of discovery and play with ease, inspires them with designs that express their youthful spirit, and champions an optimistic lifestyle of relaxed confidence and spontaneity. This footwear reaches consumers at a wide range of distribution channels: mass merchandisers, national chains, online and catalogs, specialty and independent retailers, and department stores and our Famous Footwear retail stores. Suggested price points range from $25 to $150. Dr. Scholl’s held the No. 7 market share position in the comfort zone within the women’s fashion footwear category across NPD tracked point-of-sale channels (defined as department stores, national chains, athletic specialty/sporting goods, and shoe chains) at the end of 2013, according to The NPD Group/Retail Tracking Service. We have a long-term license agreement with MSD Consumer Care, Inc. to sell Dr. Scholl’s, which is renewable through 2026 for the United States and Canada and December 2014 for Latin America.

 

LifeStride:  For more than 70 years, LifeStride has created quality footwear for women who value style and comfort. Offering work-to-weekend styles, LifeStride is both versatile and comfortable for all-day wear. LifeStride’s rich history and attention to comfort create delight at first sight with trend-right styling, feminine details, and great value. With the introduction of SoftSystem® comfort technology, LifeStride offers comfortable footwear that dresses up or down at the right value.  The brand is sold in department stores, national chains, online, and our Famous Footwear retail stores. Suggested retail price points range from $50 to $100. LifeStride ranked No. 1 in market share position in the moderate zone within the women’s fashion footwear category across NPD tracked point-of-sale channels at the end of 2013, according to The NPD Group/Retail Tracking Service.

 

Ryka:  For over 25 years, Ryka has been innovating athletic footwear exclusively for women and providing women with more than just a downsized version of a men’s athletic shoe.  The brand’s commitment goes beyond footwear design to include apparel and fitness

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products, so all women can lead an active, inspired and balanced life. The brand is distributed through department stores, national chains, online retailers, and our Famous Footwear retail stores at retail price points from $50 to $85. 

 

Contemporary Fashion

Sam Edelman: Since its inception in 2004, designer Sam Edelman’s brand has quickly emerged as a favorite among celebrities and fashionistas around the globe. Sam captures the imagination of women with on-trend styling and unique materials. In 2012, the brand opened its flagship store in New York City and during 2014, the brand plans to expand its retail presence with additional stores. Sam Edelman footwear is sold primarily through department stores, independent retailers, and online at suggested retail price points starting at $65 for sandals, $90 for flats, $100 for heels, and $200 for boots. In addition, we have license agreements to sell apparel and accessories under the Sam Edelman brand. The contemporary apparel collection will consist of distinctive, fashion-forward tops, sweaters, bottoms, dresses and jackets with a similar design aesthetic to Sam Edelman footwear and will launch to consumers in the fall of 2014.  Sam Edelman held the No. 2 market share position in the bridge/designer zone within the women’s fashion footwear category across NPD tracked point-of-sale channels at the end of 2013, according to The NPD Group/Retail Tracking Service.

 

Franco Sarto:  The Franco Sarto brand has a loyal, career-focused consumer who is passionate about the brand’s modern Italian-inspired style, fit, and quality. The brand is sold in major national chains, department stores, and independent retailers at suggested retail price points from $79 for shoes to $225 for boots. Franco Sarto ranked No. 4 in market share position in the better zone within the women’s fashion footwear category across NPD tracked point-of-sale channels at the end of 2013, according to The NPD Group/Retail Tracking Service. We had a license agreement to sell Franco Sarto footwear that was to expire in 2019.  As further discussed in Note 19 to the consolidated financial statements, in February 2014, we purchased the Franco Sarto trademarks for $65.0 million, terminating this license agreement.

 

Via Spiga:  Via Spiga provides chic, sophisticated footwear for the cosmopolitan woman who wants to make a fashion statement every day. The brand is primarily sold in the bridge/designer zone in premier department stores, upscale boutiques, and online. This brand sells at suggested retail price points from $155 for shoes to $425 for boots. The brand held the No. 7 market share position in the bridge/designer zone within the women’s fashion footwear category across NPD tracked point-of-sale channels at the end of 2013, according to The NPD Group/Retail Tracking Service.

 

Fergie and Fergalicious by Fergie:  We have created two namesake footwear lines in collaboration with entertainment superstar Fergie (Stacy Ferguson) to fully capture the multifaceted aspects of Fergie’s life as an award-winning singer, songwriter, and actress. Fergie footwear portrays the artist’s confident, individual style in a line of sophisticated, sexy footwear with a glam rock influence. The brand launched in the spring of 2009 and is currently being sold at better department stores, boutiques, independent retailers, and online at retail price points of $69 for shoes to $225 for boots. Fergalicious by Fergie shoes have a fun, funky attitude inspired by her pop rock persona. Fergalicious by Fergie also launched in the spring of 2009 and is available at Famous Footwear, Famous.com, and other national chains at retail price points of $40 for shoes to $100 for boots. We have a license agreement with Krystal Ball Productions to sell Fergie/Fergalicious footwear that expires in December 2014. 

 

Carlos by Carlos Santana:  The Carlos by Carlos Santana collection of women’s footwear is sold at major department stores, national chains, our Famous Footwear stores, and online. Marketed under a license agreement with legendary musician Carlos Santana, 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 $89 for shoes to $225 for boots. We have a license from Santana Tesoro, LLC to sell Carlos by Carlos Santana footwear that expires in December 2014 with extension options through 2020.

 

Vince:  The Vince shoe collection launched in the fall of 2012 at premier department stores and upscale boutiques. Vince delivers contemporary casual footwear that a sophisticated, modern woman wears effortlessly, serving as a functional luxury basic for all her lifestyle needs. Suggested price points range from $150 for shoes to $595 for boots. We have a license agreement with Kellwood Company to sell Vince footwear that expires in December 2015, with an extension option through 2020.  To expand the Vince shoe collection beyond women’s footwear, Vince men’s footwear will launch to consumers in the second quarter of 2014. 

 

Products sold under license agreements accounted for Wholesale Operations’ net sales of approximately 47% in 2013, 49% in 2012, and 38% in 2011. Brown Shoe Company also receives royalty revenues for licensing owned brands, including brands listed above, to third parties.

 

Portfolio Realignment

During 2013, we substantially completed our portfolio realignment initiatives that began in 2011. These portfolio realignment initiatives included selling the Avia, Nevados, and AND 1 brands acquired with American Sporting Goods Corporation; exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; the sale and closure of sourcing and supply chain assets; closing two U.S. distribution centers; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang

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license in accordance with agreement terms; and other infrastructure changes.  Refer to Note 2 and Note 4 to the consolidated financial statements for further discussion.

 

Brown Shoe Company Sourcing and Product Development Operations

Brown Shoe Company sourcing and product development operations source and develop footwear for our Wholesale Operations and Specialty Retail segments and also a portion of the footwear sold by our Famous Footwear segment. We have sourcing and product development offices in China, Hong Kong, Italy, Macau, St. Louis, and New York.

 

Sourcing Operations

In 2013, the sourcing operations sourced approximately 47 million pairs of shoes through a global network of third-party independent footwear manufacturers. The majority of our footwear sourced is provided by approximately 49 manufacturers operating approximately 61 manufacturing facilities.

 

In certain countries, we use agents to facilitate and manage the development, production, and shipment of product. We attribute our ability to achieve consistent quality, competitive prices, and on-time delivery to the breadth of these established relationships. While we generally do not have significant contractual commitments with our suppliers, we do enter into sourcing agreements with certain independent sourcing agents.

 

Prior to production, we monitor the quality of all of our footwear components and also inspect the prototypes of each footwear style. We have leading lab testing facilities in our Dongguan, China office, which provide high quality footwear for our consumers. We also perform random quality control checks during production and before any footwear leaves the manufacturing facilities.

 

In 2013, approximately 91% of the footwear we sourced was from manufacturing facilities in China. The following table provides an overview of our foreign sourcing in 2013:

 

 

 

 

 

Country

Millions of Pairs

China

42.3 

All other

4.2 

Total

46.5 

 

Product Development Operations

In our Dongguan, China office, we operate a total of two sample-making facilities. By operating these facilities, we have greater control over our product development in terms of accuracy, execution, and time to market.

 

We maintain design teams for our brands in St. Louis, New York, and China as well as other select fashion locations, including 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 convert our designs into new footwear styles.

 

Our long range plans include further expansion into new markets outside of China, developing more progressive processes to improve factory capacity and material planning, and continuing to understand ways to drive excellence in product value and execution in a rapidly changing manufacturing landscape.

 

Backlog

At February 1, 2014, our Wholesale Operations segment had a backlog of unfilled orders of approximately $273.9 million compared to $274.9 million on February 2, 2013. 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 capacity shifts in China. 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.

 

 

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 website 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

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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 website 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 website that we provide on our website.

 

 

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 2014 or upon their respective successors being chosen and qualified.

 

 

 

 

 

 

 

 

 

Name

Age

Current Position

Diane M. Sullivan

58

Chief Executive Officer, President and Chairman of the Board of Directors

Richard M. Ausick

60

Division President – Retail

Daniel R. Friedman

53

Division President – Global Supply Chain

Russell C. Hammer

57

Senior Vice President and Chief Financial Officer

Daniel L. Karpel

43

Senior Vice President and Chief Accounting Officer

Douglas W. Koch

62

Senior Vice President and Chief Talent and Strategy Officer

John R. Mazurk

60

Division President – Healthy Living Brands

Michael I. Oberlander

45

Senior Vice President, General Counsel and Corporate Secretary

John W. Schmidt

53

Division President – Contemporary Fashion Brands

Mark A. Schmitt

50

Senior Vice President, Chief Information Officer, Logistics and Customer Care

 

The period of service of each officer in the positions listed and other business experience are set forth below.

 

Diane M. Sullivan, Chairman of the Board of Directors since February 2014. Chief Executive Officer and President since May 2011. President and Chief Operating Officer from March 2006 to May 2011. President from January 2004 to March 2006.

 

Richard M. Ausick, Division President – Retail since January 2011. Division President – Famous Footwear from January 2010 to January 2011. Division President, Brown Shoe Wholesale from July 2006 to January 2010. Senior Vice President and Chief Merchandising Officer of Famous Footwear from January 2002 to July 2006.

 

Daniel R. Friedman, Division President – Global Supply Chain since January 2010. Senior Vice President, Product Development and Sourcing from July 2006 to January 2010. Managing Director at Camuto Group, Inc. from 2002 to July 2006.

 

Russell C. Hammer, Senior Vice President and Chief Financial Officer since June 2012. Chief Financial Officer of Orbitz from January 2011 to June 2012. Chief Financial Officer of Crocs from January 2008 to December 2010.

 

Daniel L. Karpel, Senior Vice President and Chief Accounting Officer since September 2013. Senior Vice President, Finance from June 2008 to September 2013. Vice President and Controller of Kellwood Company from 2006 to June 2008.

 

Douglas W. Koch, Senior Vice President and Chief Talent and Strategy Officer since January 2011. Senior Vice President and Chief Talent Officer from May 2005 to January 2011. Senior Vice President, Human Resources from March 2002 to May 2005.

 

John R. Mazurk, Division President – Healthy Living Brands since May 2012. Senior Vice President, Consumer and Retail Business Development from January 2010 to May 2012. Senior Vice President and General Manager, Naturalizer from 2008 to 2010. Senior Vice President Specialty Retail from 2004 to 2008, and Senior Vice President, Stores for Famous Footwear from 2002 to 2004.

 

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.

 

John W. Schmidt, Division President – Contemporary Fashion Brands since January 2011. Senior Vice President, Better and Image Brands from January 2010 to January 2011. Senior Vice President and General Manager, Better and Image Brands from March 2008

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until January 2010. Various positions, including Vice President, President, Group President of Wholesale Footwear for Nine West Group from September 1998 to February 2008.

 

Mark A. Schmitt, Senior Vice President, Chief Information Officer, Logistics and Customer Care since February 2013.  Senior Vice President and Chief Information Officer from January 2012 through February 2013. Senior Director of Management Information Systems for Express Scripts from 2010 through 2011. Various management information systems positions including Group Director with Anheuser-Busch InBev from 1996 to 2009.

 

 

 

ITEM 1A

RISK FACTORS

 

Consumer demand for our products may be adversely impacted by economic conditions. 

Worldwide economic conditions continue to be uncertain. Consumer confidence and spending are strongly influenced by general economic conditions, including fiscal policy, changing tax and regulatory environment, interest rates, inflation, consumer debt levels, the availability of consumer credit, the liquidity of consumers’ assets, health care costs, currency exchange rates, taxation, energy costs, real estate values, foreclosure rates, unemployment trends, and the economic consequences of military action or terrorist activities. Negative economic conditions generally decrease disposable income and, consequently, consumer purchases of discretionary items like our products. Negative trends in economic conditions also drive up the cost of our products, which may require us to increase our product prices. These increases in our product costs, and possibly prices, may not be offset by comparable increases in consumer disposable income. As a result, our customers may choose to purchase fewer of our products or purchase the lower-priced products of our competitors, and our business, results of operations, financial condition, and cash flows could be adversely affected. 

If we are unable to anticipate and respond to consumer preferences and fashion trends and successfully apply new technology, we may not be able to maintain or increase our net sales and earnings.

The footwear industry is subject to rapidly changing consumer demands and fashion trends. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Accordingly, the success of both our wholesale and retail operations depends largely on our ability to anticipate, understand and react to changing consumer demands and preferences. If we fail to successfully anticipate and respond to changes in consumer demand and fashion trends, develop new products and designs, and implement effective, responsive merchandising and marketing strategies and programs, we could experience lower sales, excess inventories and lower gross margins, any of which could have an adverse effect on our results of operations and financial condition.

 

We operate in a highly competitive industry.

Competition is intense in the footwear industry. Certain of our competitors are larger and have greater financial, marketing, and technological resources than we do; others are able to offer footwear on a lateral basis alongside their apparel products; and others have successfully branded their trademarks as lifestyle brands, resulting in greater competitive advantages to those competitors. Low barriers to entry into this industry further intensify competition by allowing new companies to easily enter the markets in which we compete.  Some of our suppliers further compound these competitive pressures by allowing consumers to purchase their products directly through supplier-maintained Internet sites and retail stores. In addition, retailers aggressively compete on the basis of price, which puts competitive pressure on us to keep our wholesale prices low.

 

We believe that our ability to compete successfully in the footwear industry depends on a number of factors, including style, price, performance, quality, location, and service, as well as the strength of our brand names. We remain competitive by increasing awareness of our brands, improving the efficiency of our supply chain and enhancing the style, comfort, fashion and perceived value of our products. However, our competitors may implement more effective marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, distribution partners and manufacturers, or respond more quickly to changes in consumer preferences than us. As a result, we may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced gross margins, loss of market share, and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of our products, which could adversely impact our financial results.

 

 

Our operating results depend on preparing accurate sales forecasts and properly managing our inventory levels. 

Using sales forecasts, we place orders with manufacturers for some of our products prior to the time we receive all of our customers’ orders 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. At the retail level, we place orders for product many months in advance of our key selling seasons. Adverse economic conditions and rapidly changing consumer preferences can make it difficult for us and our retail customers to accurately forecast product trends in order to match production with demand. If we fail to accurately assess consumer fashion tastes and the impact of economic factors on consumer spending or to effectively differentiate our retail and wholesale offerings, our inventory levels may exceed customer demand, resulting in inventory write-downs, higher carrying costs, lower gross margins, or the sale of excess inventory at discounted prices, which could significantly impair our financial results. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require in a

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timely manner, we may experience inventory shortages. Inventory shortages may delay shipments to customers (and possibly require us to offer discounts or costly expedited shipping), negatively impact retailer and distributor relationships, adversely impact our sales results, and diminish brand awareness and loyalty.

 

We rely on foreign sources of production, which subjects our business to risks associated with international trade. 

We rely on foreign sourcing for our footwear products through third-party manufacturing facilities primarily located in China. As is common in the industry, we do not have any long-term contracts with our third-party foreign manufacturers. Foreign sourcing is subject to numerous risks, including trade relations, work stoppages, disease outbreaks, transportation delays and costs, political instability, foreign currency fluctuations, variable economic conditions, expropriation, nationalization, natural disasters, terrorist acts and military conflict, and changes in governmental regulations (including the U.S. Foreign Corrupt Practices Act and climate change legislation).  At the same time, potential changes in Chinese manufacturing preferences, including, but not limited to the following, pose additional risk and uncertainty:

 

 

 

 

 

 

 

 

Manufacturing capacity in China may shift from footwear to other industries with manufacturing margins that are perceived to be higher.

 

 

Growth in domestic footwear consumption in China could lead to a significant decrease in factory space available for the manufacture of footwear to be exported.

 

 

Some footwear manufacturers in China continue to face labor shortages as migrant workers seek better wages and working conditions in other industries and locations.

 

As a result of these risks, there can be no assurance that we will not experience reductions in the available production capacity, increases in our manufacturing costs, late deliveries, or terminations of our supplier relationships. Furthermore these risks are compounded by the lack of diversification in the geographic location of our foreign sourcing and manufacturing. With almost all of our supply originating in China, a substantial portion of our supply could be at risk in the event of any significant negative development related to China. 

 

Although we believe we could find alternative manufacturing sources for the products that we currently source from China through other third-party manufacturing facilities in China or other countries, we may not be able to locate alternative manufacturers on terms as favorable as our current terms, including pricing, payment terms, manufacturing capacity, quality standards, and lead times for delivery. In addition, there is substantial competition in the footwear industry for quality footwear manufacturers. Accordingly, our future results will partly depend on our ability to maintain positive working relationships with, and offer competitive terms to, our foreign manufacturers. If supply issues cause us to be unable to provide products consistent with our standards or manufacture our footwear in a cost and time efficient manner, our customers may cancel orders, refuse to accept deliveries or demand reductions in purchase prices, any of which could have a material adverse effect on our business and results of operations.

 

A cybersecurity breach may adversely affect our sales and reputation. 

We routinely possess sensitive consumer and associate information. We also provide certain customer and employee data to third parties for analysis, benefit distribution, or compliance purposes. While we  believe we have taken reasonable and appropriate steps to protect that information, hackers and data thieves operate sophisticated, large scale attacks that could breach our information systems, despite ongoing security measures. In addition, we are required to comply with increasingly complex regulations designed to protect our business and personal data. Any breach of our network security, a third-party’s network security or failure to comply with applicable regulations may result in (a) the loss of valuable business data and/or our consumers’ or associates’ personal information, (b) increased costs associated with implementing additional protections and processes, (c) a disruption of our business and a loss of sales, (d) negative media attention, (e) damage to our consumer and associate relationships and reputation, and (f) fines or lawsuits.  

 

We are reliant upon our information technology systems, and any major disruption of these systems could adversely impact our ability to effectively operate our business. 

Our computer network and systems are essential to all aspects of our operations, including design, pricing, production, forecasting, ordering, manufacturing, transportation, sales, and distribution. Our ability to manage and maintain our inventory and to deliver products in a timely manner depends on these systems. If any of these systems fails to operate as expected, we experience problems with transitioning to upgraded or replacement systems, a breach in security occurs, or a natural disaster interrupts system functions, we may experience delays in product fulfillment and reduced efficiency in our operations or be required to expend significant capital to correct the problem, which may have an adverse effect on our results of operations and financial condition.

 

Customer concentration and other trends in customer behavior may lead to a reduction in or loss of sales. 

Our wholesale customers include national chains, department stores, mass merchandisers, independent retailers, online retailers, and catalogs. Several of our customers operate multiple department store divisions. Furthermore, we often sell multiple types of branded, licensed, and private-label footwear to these same customers. While we believe purchasing decisions in many cases are made

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independently by the buyers and merchandisers of each of the customers, a decision by a 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.

 

In addition, with the growing trend toward retail trade consolidation, we and our wholesale customers increasingly depend upon a reduced number of key retailers whose bargaining strength is growing. This consolidation may result in the following adverse consequences:

 

·

Our wholesale customers may seek more favorable terms for their purchases of our products, which could limit our ability to raise prices, recoup cost increases, or achieve our profit goals.

·

The number of stores that carry our products could decline, thereby exposing us to a greater concentration of accounts receivable risk and negatively impacting our brand visibility.

 

We also face the following risks with respect to our customers:

 

·

Our customers could develop in-house brands or utilize a higher mix of private-label footwear products, which would negatively impact our sales.

·

As we sell our products to customers and extend credit based on an evaluation of each customer’s financial condition, the financial difficulties of a customer could cause us to stop doing business with that customer, reduce our business with that customer, or be unable to collect from that customer.

·

If any of our major wholesale customers experiences a significant downturn in its business or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us.

·

Retailers are directly sourcing more of their products directly from manufacturers overseas and reducing their reliance on wholesalers, which could have a material adverse effect on our business and results of operations.

 

A disruption in the effective functioning of our distribution centers could adversely affect our ability to deliver inventory on a timely basis.

We currently utilize several distribution centers, which are leased or third-party managed. These distribution centers serve as the source of replenishment of inventory for our footwear stores operated by our Famous Footwear and Specialty Retail segments and serve our Wholesale Operations segment. We may be unable to successfully manage, negotiate, or renew our third-party distribution center agreements, or we may experience complications with respect to our distribution centers, such as substantial damage to, or destruction of, such facilities due to natural disasters or ineffective information technology systems. In such an event, our other distribution centers may not be able to support the resulting additional distribution demands and we may be unable to locate alternative persons or entities capable of fulfilling our distribution needs, resulting in an adverse effect on our ability to deliver inventory on a timely basis.

Foreign currency fluctuations may result in higher costs and decreased gross profits.

Although we purchase most of our 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. Currency exchange rate fluctuations may also adversely impact third parties who manufacture the Company’s products by making their purchases of raw materials or other production costs more expensive and more difficult to finance, resulting in higher prices and lower margins for the Company, its distributors, and licensees.

 

Additional duties, quotas, tariffs and other trade restrictions may be imposed on our foreign sourced products, adversely affecting our sales and profitability.  

Our foreign sourced products are subject to duties collected by customs authorities when imported to the United States or other countries. We cannot predict whether additional customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions may be imposed on the importation of our products in the future. Such additional charges may result in increases in the cost of our products and may adversely affect our sales and profitability.

 

Our business, sales and brand value could be harmed by violations of labor, trade or other laws. 

 

We focus on doing business with those suppliers who share our commitment to responsible business practices and the principles set forth in our Production Code of Conduct (the “PCOC”). By requiring our suppliers to comply with the PCOC, we encourage our suppliers to promote best practices and work toward continual improvement throughout their production operations. The PCOC sets forth standards for working conditions and other matters, including compliance with applicable labor practices, workplace environment, and compliance with laws. Although we promote ethical business practices, we do not control our suppliers or their labor practices. A failure by any of our suppliers to adhere to these standards or laws could cause us to incur additional costs for our products, could cause negative publicity, and harm our business and reputation. We also require our suppliers to meet our standards for product safety, including compliance with applicable laws and standards with respect to safety issues, including lead content in paint. Failure by any of

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our suppliers to adhere to product safety standards could lead to a product recall, which could result in critical media coverage, harm our business and reputation, and cause us to incur additional costs.

 

In addition, if we, or our suppliers or foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, classification, marketing or valuation of our imported products, fraudulent visas, or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.

 

Our success depends on our ability to retain senior management and recruit and retain other key associates. 

Our success depends on our ability to attract, retain and motivate qualified management, administrative, product development, and sales personnel to support existing operations and future growth. In addition, our ability to successfully integrate acquired businesses often depends on our ability to retain incumbent personnel, many of whom possess valuable institutional knowledge and operating experience. Competition for qualified personnel in the footwear industry is intense, and we compete for these individuals with other companies that in many cases have superior financial and other resources. The loss of the services of any member of our senior management, the inability to attract and retain other qualified personnel, or the inability to effectively transition senior management positions could adversely affect the sales, design and production of our products as well as the implementation of our strategic initiatives.

 

Our reputation and competitive position are dependent on our ability to license well-recognized brands, license our own brands under successful licensing arrangements, and protect our intellectual property rights. 

 

Licenses – Company as Licensee

Although we own most of our wholesale brands, we also rely on our ability to attract, retain, and maintain good relationships with licensors that have strong, well-recognized brands and trademarks. Our license agreements are generally for an initial term of two to four years, subject to renewal, and there can be no assurance that we will be able to renew these licenses. Even our longer-term or renewable licenses are typically dependent upon our ability to market and sell the licensed products at specified levels, and the failure to meet such levels may result in the termination or non-renewal of such licenses. Furthermore, many of our license agreements require minimum royalty payments, and if we are unable to generate sufficient sales and profitability to cover these minimum royalty requirements, we may be required to make additional payments to the licensors that could have a material adverse effect on our business and results of operations. In addition, because certain of our license agreements are non-exclusive, new or existing competitors may obtain licenses with overlapping product or geographic terms, resulting in increased competition for a particular market.

 

Licenses – Company as Licensor

We have entered into numerous license agreements with respect to the brands and trademarks that we own. While we have significant control over our licensees’ products and advertising, we generally cannot control their operational and financial issues. If our licensees are not able to meet annual sales and royalty goals, obtain financing, manage their supply chain, control quality, and maintain positive relationships with their customers, our business, results of operations, and financial position may be adversely affected. While we would likely have the ability to terminate an underperforming license, it may be difficult and costly to locate an acceptable substitute distributor or licensee, and we may experience a disruption in our sales and brand visibility. In addition, although many of our license agreements prohibit the licensees from entering into licensing arrangements with certain of our competitors, they are generally not prohibited from offering, under other brands, the types of products covered by their license agreements with us.

 

Trademarks 

We believe that our trademarks and trade names are important to our success and competitive position because our distinctive marks create a market for our products and distinguish our products from other products. We cannot, however, guarantee that we will be able to secure protection for our intellectual property in the future or that such 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, some of which do not protect intellectual property rights to the same extent as the United States. If we are unsuccessful in challenging a party’s products on the basis of infringement of our intellectual property rights, continued sales of these products could adversely affect our sales, devalue our brands, and result in a shift in consumer preference away from our products. We may face significant expenses and liability in connection with the protection of our intellectual property rights, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected. 

 

Our retail business depends on our ability to secure affordable and desirable leased locations without creating a competitive concentration of stores. 

Our Famous Footwear and Specialty Retail segments operate leased retail footwear stores. Accordingly, the success of our retail business depends, in part, on our ability to secure affordable, long-term leases in desirable locations and to secure renewals of such leases. No assurance can be given that we will be able to successfully negotiate lease renewals for existing stores or obtain acceptable

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terms for new stores in desirable locations. In addition, opening new Famous Footwear stores in our existing markets may result in reduced net sales in existing stores as our stores become more concentrated in the markets we serve. As a result, the number of consumers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced.

 

If we are unable to maintain working relationships with our major branded suppliers, our business, results of operations, financial condition, and cash flows may be adversely impacted. 

Our Famous Footwear segment purchases a substantial portion of its footwear products from major branded suppliers. 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 our suppliers on a timely basis and on acceptable terms. 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. In addition, negative trends in global economic conditions may adversely impact our suppliers. If these third parties do not perform their obligations or are unable to provide us with the materials and services we need at prices and terms that are acceptable to us, our ability to meet our consumers’ demand could be adversely affected.

 

Our quarterly sales and earnings may fluctuate, and securities analysts may not accurately estimate our financial results, which may result in volatility in, or a decline in, our stock price. 

Our quarterly sales and earnings can vary due to a number of factors, many of which are beyond our control, including the following:

 

·

Our Famous Footwear retail business is seasonally weighted to the back-to-school season, which falls in our third fiscal quarter. As a result, the success of our back-to-school offering, which is affected by our ability to anticipate consumer demand and fashion trends, could have a disproportionate impact on our full year results.

·

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.

·

Our wholesale customers set the delivery schedule for shipments of our products, which could cause shifts of sales between quarters.

·

Our estimated annual 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.

·

Our earnings are also sensitive to a number of factors that are beyond our control, including manufacturing and transportation costs, changes in product sales mix, geographic sales trends, weather conditions, consumer sentiment, and currency exchange rate fluctuations.

 

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 common stock.

 

In addition, various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.

 

Changes in tax laws, policies, and treaties could result in higher taxes, lower profitability, and increased volatility in our financial results. 

Our financial results are significantly impacted by our effective tax rates, for both domestic and international operations. Our effective income tax rate could be adversely affected by factors such as changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in permitted deductions, changes in tax laws, interpretations, policies and treaties, the outcome of income tax audits in various jurisdictions, and any repatriation of earnings from our international operations. The occurrence of such events may result in higher taxes, lower profitability, and increased volatility in our financial results.

 

Transitional challenges with business acquisitions or divestitures could result in the inability to achieve our strategic and operating goals. 

Periodically, we pursue acquisitions of other companies or businesses and divestitures of businesses.  In either case, we may not achieve our strategic and operating goals through such activity.  For example, although we review the records of acquisition candidates, the review may not reveal all existing or potential problems. As a result, we may not accurately assess the value of the business and may, accordingly, ultimately assume unknown adverse operating conditions and/or unanticipated liabilities. In addition, the acquired 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 or launch such businesses. We also face the risk that we will not be able to integrate acquisitions into our existing

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operations effectively. Integration of new businesses 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. In addition, divesting a business may impede progress toward strategic and operating goals.  In connection with a divestiture, we may not successfully divest a business without substantial interruption, expense, delay, or other operational or financial problems, which may adversely affect our financial condition and results of operations.

 

Our business, results of operations, financial condition, and cash flows could be adversely affected by the failure of financial institutions to fulfill their commitments under our Credit Agreement. 

Our Third Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on January 7, 2016, is provided by a syndicate of financial institutions, with each institution agreeing severally (and not jointly) to make revolving credit loans to us in an aggregate amount of up to $530.0 million in accordance with the terms of the Credit Agreement. In addition, the Credit Agreement provides for up to an additional $150.0 million of optional availability pursuant to a provision commonly referred to as an “accordion feature.” If one or more of the financial institutions participating in the senior secured revolving credit facility were to default on its obligation to fund its commitment, the portion of the facility provided by such defaulting financial institution might not be available to us.

 

If we are unable to maintain our credit rating, our ability to access capital and interest rates may be negatively impacted. 

The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. Any negative ratings actions could constrain the capital available to our company or our industry and could limit our access to long-term funding or cause such access to be available at a higher borrowing cost for our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest expense will likely increase, which could adversely affect our financial condition and results of operations.

 

We are subject to periodic litigation and other regulatory proceedings, which could result in the unexpected expenditure of time and resources. 

We are a defendant from time to time in lawsuits and regulatory actions (including environmental matters) relating to our business and to our past operations. 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, thereby diverting management’s attention and resources that are needed to successfully run our business. See Item 3, Legal Proceedings, for further discussion of pending matters.

 

Rising insurance costs could adversely affect our results of operations, financial condition, and cash flows. 

We self-insure a significant portion of our expected losses under our workers’ compensation, employment practices, health, disability, cyber risk, general liability, automobile, and property programs, among others. 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.

 

Comprehensive health care reform legislation provisions have become effective which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions, and annual lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Possible adverse effects of the health reform legislation include increased costs, exposure to expanded liability, and requirements for us to revise ways in which we conduct business.

 

We are subject to the SEC’s “conflict minerals” disclosure obligations.

The Company is subject to recently adopted SEC disclosure obligations relating to its use of tantalum, tin, tungsten, and gold (commonly referred to as conflict minerals) sourced from the Democratic Republic of Congo and adjoining countries. Some of these conflict minerals are present in our products. The disclosure obligations are complex, and there is little formal guidance with respect to their application. The first reports under the disclosure obligations are required to be filed with the SEC no later than June 2, 2014 relating to the Company's activities during 2013.   Although we expect to be able to file the required reports on time, in preparing to do so, we are dependent upon the implementation of new systems and processes and information supplied by our suppliers of products that contain, or potentially contain, conflict minerals. To the extent that the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the SEC's requirements, we could face both reputational and SEC enforcement risks as well as significant costs related to the compliance process.

16

 


 

 

 

ITEM 1B

 UNRESOLVED STAFF COMMENTS

There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.

 

 

 

ITEM 2

PROPERTIES

We own our principal executive, sales and administrative offices located in Clayton (“St. Louis”), Missouri.

 

Our retail footwear operations are conducted throughout the United States, Canada, and Guam and involve the operation of 1,223 shoe stores, including 88 in Canada. All store locations are leased, with approximately 54% of them having renewal options. Famous Footwear operates a leased 800,000 square-foot distribution center, including mezzanine levels, in Lebanon, Tennessee, and a leased 380,000 square-foot distribution center, including a mezzanine level, in Bakersfield, California. We also operate an owned 150,000 square-foot distribution facility in Perth, Ontario.

 

Our Wholesale Operations segment leases office space in New York, New York, where we also maintain showrooms for our wholesale brands, as well as Bentonville, Arkansas and Doral, Florida. Our Canada wholesale division operates from an owned building in Perth, Ontario and from leased office space in Laval, Quebec. We also lease office space in China, Hong Kong, Macau, and Italy, and two sample-making facilities in Dongguan, China. The footwear sold through our domestic Wholesale Operations is processed through a third-party facility in Chino, California.

 

We own an office building in Perth, Ontario, which is leased to a third party; 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.

 

 

 

ITEM 3

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 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.

 

Our 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.

 

 

 

ITEM 4

MINE SAFETY DISCLOSURES

Not applicable.

 

 

PART II

 

 

 

ITEM 5

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 (“NYSE”) under the trading symbol “BWS.” As of February 1, 2014, we had approximately 3,929 shareholders of record. The following table sets forth the high and low sales prices per share of our common stock as reported on the NYSE and the dividends paid per share for each fiscal quarter during 2013 and 2012. 

17

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

Dividends

 

 

 

Low

 

 

High

 

 

Paid

 

 

Low

 

 

High

 

 

Paid

 

1st Quarter

$

15.24 

 

$

18.48 

 

 

$
0.07 

 

$

8.49 

 

$

11.30 

 

 

$
0.07 

 

2nd Quarter

 

16.62 

 

 

24.78 

 

 

0.07 

 

 

8.28 

 

 

14.24 

 

 

0.07 

 

3rd Quarter

 

21.26 

 

 

24.25 

 

 

0.07 

 

 

13.22 

 

 

16.88 

 

 

0.07 

 

4th Quarter

 

22.23 

 

 

28.70 

 

 

0.07 

 

 

14.76 

 

 

19.64 

 

 

0.07 

 

 

Restrictions on the Payment of Dividends

Our Third Amended and Restated Credit Agreement (the “Credit Agreement”) and the indenture governing our 7.125% senior notes due in 2019 (the “2019 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.

 

Issuer Purchases of Equity Securities

The following table represents issuer purchases of equity securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number of

 

 

 

Total Number

Average

 

Shares Purchased

 

Share that May Yet

 

 

 

of Shares

Price Paid

 

as Part of Publicly

 

Be Purchased Under

 

Fiscal Period

 

Purchased

per Share

 

Announced Program

 

the Program (1)

 

November 3, 2013 – November 30, 2013

 

12,807 

 (2)

24.50 

 

–  

 

 

2,500,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 1, 2013 – January 4, 2014

 

–  

 

 

– 

 

–  

 

 

2,500,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 5, 2014 – February 1, 2014

 

13,899 

 (2)

 

25.98 

 

–  

 

 

2,500,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

26,706 

 (2)

$

25.27 

 

–  

 

 

2,500,000 

 

 

(1)On August 25, 2011, 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. Under this plan, no shares were repurchased during 2013; therefore, there were 2.5 million shares authorized to be purchased under the program as of February 1, 2014. Repurchases of common stock are limited under our debt agreements.

(2)Reflects 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 program.

 

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© SmallCap 600 Stock Index and (ii) a peer group of companies believed to be engaged in similar businesses. Our peer group consists of DSW, Inc., Genesco, Inc., Shoe Carnival, Inc., Skechers U.S.A., Inc., Steven Madden, Ltd., and Wolverine World Wide, Inc.

 

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, 2009. The graph also assumes that all dividends were reinvested and that investments were held through February 1, 2014. 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.

 

18

 


 

Picture 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/31/2009

1/30/2010

1/29/2011

1/28/2012

2/2/2013

2/1/2014

Brown Shoe Company, Inc.

$

100.00 

$

274.48 

$

290.92 

$

228.75 

$

413.53 

$

578.19 

Peer Group

 

100.00 

 

138.97 

 

181.95 

 

195.59 

 

225.82 

 

290.04 

S&P© SmallCap 600 Stock Index

 

100.00 

 

189.51 

 

228.04 

 

301.08 

 

365.79 

 

433.54 

19

 


 

 

 

ITEM 6

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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 

 

2012 

 

2011 

 

2010 

 

2009 

 

($ thousands, except per share amounts)

(52 Weeks)

 

(53 Weeks)

 

(52 Weeks)

 

(52 Weeks)

 

(52 Weeks)

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

2,513,113 

 

$

2,477,796 

 

$

2,434,766 

 

$

2,457,673 

 

$

2,208,387 

 

Cost of goods sold

 

1,498,825 

 

 

1,489,221 

 

 

1,470,270 

 

 

1,462,386 

 

 

1,311,248 

 

Gross profit

 

1,014,288 

 

 

988,575 

 

 

964,496 

 

 

995,287 

 

 

897,139 

 

Selling and administrative expenses

 

909,749 

 

 

891,666 

 

 

910,293 

 

 

918,029 

 

 

854,285 

 

Restructuring and other special charges, net

 

1,262 

 

 

22,431 

 

 

23,671 

 

 

7,914 

 

 

11,923 

 

Impairment of assets held for sale(3)

 

4,660 

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

Operating earnings

 

98,617 

 

 

74,478 

 

 

30,532 

 

 

69,344 

 

 

30,931 

 

Interest expense

 

(21,254)

 

 

(22,973)

 

 

(25,428)

 

 

(19,037)

 

 

(19,695)

 

Loss on early extinguishment of debt

 

–  

 

 

–  

 

 

(1,003)

 

 

–  

 

 

–  

 

Interest income

 

377 

 

 

322 

 

 

569 

 

 

203 

 

 

374 

 

Earnings before income taxes from continuing operations

 

77,740 

 

 

51,827 

 

 

4,670 

 

 

50,510 

 

 

11,610 

 

Income tax (provision) benefit

 

(23,758)

 

 

(16,656)

 

 

1,421 

 

 

(15,106)

 

 

(1,223)

 

Net earnings from continuing operations

 

53,982 

 

 

35,171 

 

 

6,091 

 

 

35,404 

 

 

10,387 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from discontinued operations, net of tax

 

(4,574)

 

 

(4,437)

 

 

4,334 

 

 

1,656 

 

 

56 

 

Disposition/impairment of discontinued operations, net of tax

 

(11,512)

 

 

(3,530)

 

 

13,965 

 

 

–  

 

 

–  

 

Net (loss) earnings from discontinued operations

 

(16,086)

 

 

(7,967)

 

 

18,299 

 

 

1,656 

 

 

56 

 

Net earnings

 

37,896 

 

 

27,204 

 

 

24,390 

 

 

37,060 

 

 

10,443 

 

Net (loss) earnings attributable to noncontrolling interests

 

(177)

 

 

(287)

 

 

(199)

 

 

(173)

 

 

943 

 

Net earnings attributable to Brown Shoe Company, Inc.

$

38,073 

 

$

27,491 

 

$

24,589 

 

$

37,233 

 

$

9,500 

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on net sales

 

1.5% 

 

 

1.1% 

 

 

1.0% 

 

 

1.5% 

 

 

0.4% 

 

Return on beginning Brown Shoe Company, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  shareholders’ equity

 

9.0% 

 

 

6.7% 

 

 

5.9% 

 

 

9.3% 

 

 

2.4% 

 

Return on average invested capital(1)

 

9.6% 

 

 

6.5% 

 

 

2.6% 

 

 

7.2% 

 

 

3.7% 

 

Dividends paid

$

12,105 

 

$

12,011 

 

$

12,076 

 

$

12,254 

 

$

12,009 

 

Purchases of property and equipment

$

43,968 

 

$

55,801 

 

$

27,857 

 

$

30,781 

 

$

24,880 

 

Capitalized software

$

5,235 

 

$

7,928 

 

$

10,707 

 

$

24,046 

 

$

25,098 

 

Depreciation and amortization(2)

$

57,842 

 

$

57,344 

 

$

61,449 

 

$

52,517 

 

$

53,295 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 From continuing operations

$

1.25 

 

$

0.83 

 

$

0.15 

 

$

0.81 

 

$

0.22 

 

 From discontinued operations

 

(0.37)

 

 

(0.19)

 

 

0.42 

 

 

0.04 

 

 

–  

 

Basic earnings per common share attributable to Brown

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Shoe Company, Inc. shareholders

 

0.88 

 

 

0.64 

 

 

0.57 

 

 

0.85 

 

 

0.22 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 From continuing operations

 

1.25 

 

 

0.83 

 

 

0.14 

 

 

0.81 

 

 

0.22 

 

20

 


 

 From discontinued operations

 

(0.37)

 

 

(0.19)

 

 

0.42 

 

 

0.04 

 

 

–  

 

Diluted earnings per common share attributable to Brown

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Shoe Company, Inc. shareholders

 

0.88 

 

 

0.64 

 

 

0.56 

 

 

0.85 

 

 

0.22 

 

Dividends paid

 

0.28 

 

 

0.28 

 

 

0.28 

 

 

0.28 

 

 

0.28 

 

Ending Brown Shoe Company, Inc. shareholders’ equity

 

10.99 

 

 

9.91 

 

 

9.83 

 

 

9.45 

 

 

9.38 

 

Financial Position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables, net

$

129,217 

 

$

111,392 

 

$

130,485 

 

$

108,302 

 

$

79,478 

 

Inventories, net

 

547,531 

 

 

503,688 

 

 

518,893 

 

 

516,318 

 

 

451,166 

 

Working capital

 

405,694 

 

 

303,319 

 

 

236,017 

 

 

289,557 

 

 

289,055 

 

Property and equipment, net

 

143,560 

 

 

144,856 

 

 

130,244 

 

 

135,632 

 

 

141,561 

 

Total assets

 

1,149,403 

 

 

1,173,973 

 

 

1,227,476 

 

 

1,148,043 

 

 

1,040,150 

 

Borrowings under our revolving credit agreement

 

7,000 

 

 

105,000 

 

 

201,000 

 

 

198,000 

 

 

94,500 

 

Long-term debt

 

199,010 

 

 

198,823 

 

 

198,633 

 

 

150,000 

 

 

150,000 

 

Brown Shoe Company, Inc. shareholders’ equity

 

476,699 

 

 

425,129 

 

 

412,669 

 

 

415,080 

 

 

402,171 

 

Average common shares outstanding – basic

 

41,356 

 

 

40,659 

 

 

41,126 

 

 

42,156 

 

 

41,585 

 

Average common shares outstanding – diluted

 

41,653 

 

 

40,794 

 

 

41,668 

 

 

42,487 

 

 

41,649 

 

 

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 attributable to Brown Shoe Company, Inc. 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 operating earnings for the period, adjusted for income taxes at the applicable effective rate, by the average of each month-end invested capital balance during the year. Invested capital is defined as Brown Shoe Company, Inc. shareholders’ equity plus long-term debt and borrowings under the Credit Agreement.

(2)

Depreciation and amortization includes depreciation of property and equipment and amortization of capitalized software, intangibles, and debt issuance costs and debt discount.   The amortization of debt issuance costs is reflected within interest expense in our consolidated statement of earnings and totaled $2.5 million in 2013, $2.6 million in 2012, $2.3 million in 2011, and $2.2 million in both 2010 and 2009.

(3)

During 2013, we recognized a non-cash impairment charge related to certain supply chain and sourcing assets held for sale of $4.7 million.

 

 

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Business Overview

We are a global footwear company, with annual net sales of $2.5 billion, that puts consumers and their needs first, by targeting family, healthy living, and contemporary fashion platforms. Our mission is to inspire people to feel good and live better...feet first! We offer the consumer a powerful portfolio of footwear stores and global footwear brands. As both a retailer and a wholesaler, we have a perspective on the marketplace that enables us to serve consumers from different vantage points. We believe our diversified business model provides us with synergies by spanning consumer segments, categories, and distribution channels. A combination of talent acquisition, thoughtful planning, and rigorous execution is key to our success in optimizing our business and brand portfolio.

 

Retail

In our retail business, our focus is on meeting the needs of a well-defined consumer by providing an assortment of trend-right, brand-name fashion and athletic footwear at a great price coupled with engaging marketing programs and exclusive products. Our family platform includes Famous Footwear, which is one of America’s leading family branded footwear retailers with 1,044 stores. Our Specialty Retail segment operates 179 retail stores in the United States and Canada, primarily under the Naturalizer name. Our Specialty Retail segment also includes Shoes.com and our other e-commerce businesses, with the exception of Famous.com, which is included in our Famous Footwear segment.

 

Wholesale

Our wholesale business is consumer-focused and we believe our success is dependent upon our ability to strengthen consumers’ preference for our brands by offering compelling style, quality, differentiated brand promises, and innovative marketing campaigns. Our healthy living and contemporary fashion platforms are comprised of the Dr. Scholl’s, Naturalizer, Sam Edelman, Franco Sarto, LifeStride, Via Spiga, Ryka, Fergie, Carlos, and Vince brands. Through these brands we offer our customers a diversified portfolio, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail

21

 


 

stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses, and testing new and innovative products.

 

Financial Highlights

Brown Shoe Company delivered a successful 2013.  Our portfolio realignment initiatives over the past couple of years helped drive our strong performance in 2013. We reported year-over-year operating earnings growth of 32.4%, while delivering a 2.9% increase in Famous Footwear same-store sales. We achieved record-breaking sales and operating profit at Famous Footwear and Wholesale Operations continued to build momentum with sales growth of 5.3%. We also strengthened our balance sheet during the year by reducing short-term borrowings by $98.0 million.

 

The following is a summary of the financial highlights for 2013:

 

·

Consolidated net sales increased $35.3 million, or 1.4%, to $2,513.1 million in 2013, compared to $2,477.8 million last year. Net sales of our Wholesale Operations and Famous Footwear segments increased $38.8 million and $13.2 million, respectively, while we experienced a decrease in our Specialty Retail segment of $16.6 million.

·

Consolidated operating earnings were $98.6 million in 2013, compared to $74.5 million last year.

·

Consolidated net earnings attributable to Brown Shoe Company, Inc. were $38.1 million, or $0.88 per diluted share, in 2013, compared to $27.5 million, or $0.64 per diluted share, last year.

·

Our accounting period is based upon a traditional retail calendar, which ends on the Saturday nearest January 31. Periodically, this results in a fiscal year that includes 53 weeks. Our 2013 and 2011 fiscal years included 52 weeks, while our 2012 fiscal year had 53 weeks. The difference in the number of weeks included in our fiscal years can affect annual comparisons. The inclusion of the 53rd week resulted in an increase to net sales in our retail divisions of $21.2 million in 2012 with an immaterial impact on net earnings.

 

The following items should be considered in evaluating the comparability of our results:

·

Portfolio realignment – Our portfolio realignment initiatives included the sale of the Avia, Nevados, and AND 1 brands acquired with American Sporting Goods Corporation; exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; the sale and closure of certain sourcing and supply chain assets; closing or relocating numerous underperforming or poorly aligned retail stores; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang license; and other infrastructure changes. We incurred costs of $30.7 million ($23.4 million after-tax, or $0.53 per diluted share) during 2013 compared to $29.9 million ($19.3 million after-tax, or $0.45 per diluted share) related to our portfolio realignment initiatives during 2012 and $19.2 million ($12.0 million after-tax, or $0.28 per diluted share) during 2011. Also in 2011, we sold The Basketball Marketing Company, Inc. (“TBMC”) for a gain of $20.6 million ($14.0 million after-tax, or $0.32 per diluted share). A portion of these charges were recorded as a component of discontinued operations. See Notes 2 and 4 to the consolidated financial statements for additional information. 

·

Incentive plans – Our selling and administrative expenses increased $5.1 million during 2013, compared to last year, due to higher anticipated payments under our cash and stock-based incentive plans. Our selling and administrative expenses were $17.6 million higher during 2012 compared to 2011 due to higher anticipated payments under our cash and stock-based incentive plans.

·

Organizational change – During 2012, we incurred costs of $2.3 million ($1.4 million after-tax, or $0.03 per diluted share) related to an organizational change made at our corporate headquarters, with no corresponding costs in 2013 or 2011. See Note 4 to the consolidated financial statements for additional information related to this change.

 

Our debt-to-capital ratio, as defined in the Liquidity and Capital Resources – Working Capital and Cash Flow section, decreased to 30.1% as of February 1, 2014, compared to 41.6% at February 2, 2013, primarily due to our $98.0 million decrease in borrowings under our revolving credit agreement. Our current ratio, as defined in the Liquidity and Capital Resources – Working Capital and Cash Flow section, was 2.05 to 1 at February 1, 2014, compared to 1.64 to 1 at February 2, 2013. Inventories at February 1, 2014 increased to $547.5 million, from $503.7 million at February 2, 2013, primarily as a result of early purchases of inventory for our spring selling season as well as lower than anticipated sales during the fourth quarter of 2013 for Famous Footwear.

 

Outlook for 2014

The Company executed on our strategy in 2013 and improved our operating performance, delivering steady improvement towards our long-term financial goals to drive sustainable profitability. For 2014, we expect to continue to deliver towards our long-term goals, while balancing our realistic outlook in terms of the economy, the consumer, and the weather. We expect same-store sales at Famous Footwear will grow in the low single-digit percentage range in 2014 and that our Wholesale Operations and net sales will increase in the low to mid-single-digit percentage range in 2014 while Specialty Retail net sales will decrease in the low single-digit percentage range. 

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Following are the consolidated results and the results by segment for 2013, 2012, and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED RESULTS

 

 

 

2013

 

2012

 

2011

 

 

 

 

% of

 

 

 

% of

 

 

 

 

% of

 

($ millions)

 

 

Net Sales

 

 

 

Net Sales

 

 

 

 

Net Sales

 

Net sales

$

2,513.1 

 

100.0% 

 

$

2,477.8 

 

100.0% 

 

$

2,434.8 

 

100.0% 

 

Cost of goods sold

 

1,498.8 

 

59.6% 

 

 

1,489.2 

 

60.1% 

 

 

1,470.3 

 

60.4% 

 

Gross profit

 

1,014.3 

 

40.4% 

 

 

988.6 

 

39.9% 

 

 

964.5 

 

 

39.6% 

 

Selling and administrative expenses

 

909.7 

 

36.2% 

 

 

891.7 

 

36.0% 

 

 

910.3 

 

 

37.4% 

 

Restructuring and other special charges, net

 

1.3 

 

0.1% 

 

 

22.4 

 

0.9% 

 

 

23.7 

 

 

1.0% 

 

Impairment of assets held for sale

 

4.7 

 

0.2% 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

Operating earnings

 

98.6 

 

3.9% 

 

 

74.5 

 

3.0% 

 

 

30.5 

 

1.2% 

 

Interest expense

 

(21.3)

 

(0.8)%

 

 

(23.0)

 

(0.9)%

 

 

(25.4)

 

(1.0)%

 

Interest income

 

0.4 

 

0.0% 

 

 

0.3 

 

0.0% 

 

 

0.6 

 

0.0% 

 

Loss on early extinguishment of debt

 

–  

 

–  

 

 

–  

 

–  

 

 

(1.0)

 

(0.0)%

 

Earnings before income taxes from continuing operations

 

77.7 

 

3.1% 

 

 

51.8 

 

2.1% 

 

 

4.7 

 

0.2% 

 

Income tax (provision) benefit

 

(23.7)

 

(0.9)%

 

 

(16.6)

 

(0.7)%

 

 

1.4 

 

0.0% 

 

Net earnings from continuing operations

 

54.0 

 

2.2% 

 

 

35.2 

 

1.4% 

 

 

6.1 

 

0.2% 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from discontinued operations, net of tax

 

(4.6)

 

(0.2)%

 

 

(4.5)

 

(0.2)%

 

 

4.3 

 

0.2% 

 

Disposition/impairment of discontinued operations, net of tax

 

(11.5)

 

(0.5)%

 

 

(3.5)

 

(0.1)%

 

 

14.0 

 

 

0.6% 

 

Net (loss) earnings from discontinued operations

 

(16.1)

 

(0.7)%

 

 

(8.0)

 

(0.3)%

 

 

18.3 

 

0.8% 

 

Net earnings

 

37.9 

 

1.5% 

 

 

27.2 

 

1.1% 

 

 

24.4 

 

1.0% 

 

Net loss attributable to noncontrolling interests

 

(0.2)

 

(0.0)%

 

 

(0.3)

 

(0.0)%

 

 

(0.2)

 

(0.0)%

 

Net earnings attributable to Brown Shoe Company, Inc.

$

38.1 

 

1.5% 

 

$

27.5 

 

1.1% 

 

$

24.6 

 

1.0% 

 

Net Sales

Net sales increased $35.3 million, or 1.4%, to $2,513.1 million in 2013, compared to $2,477.8 million last year. Wholesale Operations and Famous Footwear experienced increases in net sales during 2013 compared to last year, partially offset by a decrease in Specialty Retail net sales during 2013. Our Wholesale Operations segment reported a $38.8 million, or 5.3%, increase in net sales, reflecting strong performance from many of our brands. Our Famous Footwear segment reported a $13.2 million increase in net sales, reflecting a 2.9% same-store sales increase. The net sales of our Specialty Retail segment decreased $16.6 million, or 7.0%, primarily due to lower net sales at Shoes.com, a lower store count, and the impact of the 53rd week in 2012, partially offset by the impact of foreign currency exchange rates and a same-store sales increase of 1.6%.

 

Net sales increased $43.0 million, or 1.8%, to $2,477.8 million in 2012, compared to $2,434.8 million in 2011. Famous Footwear and Wholesale Operations experienced increases in net sales during 2012 compared to 2011, partially offset by a decrease in Specialty Retail net sales during 2012. Our Famous Footwear segment reported a $58.0 million increase in net sales, reflecting a 4.5% same-store sales increase. Our Wholesale Operations segment reported a $2.1 million increase in net sales. The net sales of our Specialty Retail segment decreased $17.1 million, primarily due to a lower store count and lower net sales at Shoes.com, partially offset by the impact of the 53rd week in 2012 and a same-store sales increase of 0.6%.

 

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales

23

 


 

calculation. E-commerce sales for those websites that function as an extension of a retail chain are included in the same-store sales calculation. 

 

Gross Profit

Gross profit increased $25.7 million, or 2.6%, to $1,014.3 million in 2013, compared to $988.6 million last year resulting from higher gross profit at our Wholesale Operations and Famous Footwear segments. As a percentage of net sales, our gross profit rate increased to 40.4% in 2013, from 39.9% last year. The increase in gross profit rate was primarily due to lower inventory markdowns, lower freight expenses, and higher average unit retail prices at Famous Footwear, a more profitable brand mix at our Wholesale Operations segment, and a better sales mix of higher-margin footwear at our Specialty Retail segment.  Retail and wholesale net sales were 70% and 30%, respectively, in 2013 compared to 71% and 29% in 2012. Gross profit rates in our retail businesses are higher than in wholesale.

 

Gross profit increased $24.1 million, or 2.5%, to $988.6 million in 2012, compared to $964.5 million in 2011 resulting from higher gross profit rates at our Famous Footwear and Specialty Retail segments. As a percentage of net sales, our gross profit rate increased to 39.9% in 2012, from 39.6% in 2011. The increase in gross profit rate was primarily due to lower inventory markdowns at our Famous Footwear segment. Our Specialty Retail segment experienced a higher gross profit rate driven by an increased sales mix of higher-margin footwear. Our Wholesale Operations gross profit rate decreased due to higher inventory markdowns. Retail and wholesale net sales were 71% and 29%, respectively, in 2012 compared to 70% and 30% in 2011.

 

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

 

Selling and Administrative Expenses

Selling and administrative expenses increased $18.0 million, or 2.0%, to $909.7 million in 2013 compared to $891.7 million last year and decreased $18.6 million, or 2.0%, in 2012 compared to $910.3 million in 2011.

 

Selling and administrative expenses increased $18.0 million in 2013 compared to last year primarily due to an increase in expected payouts under our cash and stock-based incentive plans, higher salaries and employee benefits expenses, and higher marketing expenses, partially offset by the impact of the 53rd week in 2012. As a percentage of net sales, selling and administrative expenses increased to 36.2% in 2013 from 36.0% last year.

 

Selling and administrative expenses decreased $18.6 million, or 2.0%, to $891.7 million in 2012 compared to $910.3 million in 2011 primarily due to our portfolio realignment actions, partially offset by new store and other investments, higher cash and stock-based incentive costs, and the impact of the 53rd week in fiscal 2012.  As a percentage of net sales, selling and administrative expenses decreased to 36.0% in 2012 from 37.4% in 2011.

 

Restructuring and Other Special Charges, Net

Restructuring and other special charges, net, decreased $21.1 million to $1.3 million during 2013, compared to $22.4 million last year as a result of the following items (see Note 4 to the consolidated financial statements for additional information related to these charges and recoveries):

 

·

Portfolio realignment – We incurred charges of $1.3 million in 2013 as compared to $20.1 million during 2012 related to our portfolio realignment initiatives.

·

Organizational changes – We incurred costs related to corporate organizational changes of $2.3 million in 2012 with no corresponding costs in 2013. 

As a percentage of net sales, restructuring and other special charges, net, decreased to 0.1% in 2013 from 0.9% in 2012 reflecting the above named factors.

 

Restructuring and other special charges, net, decreased $1.3 million to $22.4 million during 2012, compared to $23.7 million in 2011 as a result of the following items (see Note 4 to the consolidated financial statements for additional information related to these charges and recoveries):

 

·

Portfolio realignment – We incurred charges of $20.1 million in 2012 as compared to $17.2 million during 2011 related to our portfolio realignment initiatives.

·

Organizational changes – We incurred costs of $2.3 million 2012, related to corporate organizational changes, with no corresponding costs in 2011.

24

 


 

·

ASG acquisition and integration-related costs We incurred $6.5 million during 2011 related to the acquisition and integration of American Sporting Goods Corporation.

As a percentage of net sales, restructuring and other special charges, net decreased slightly from 1.0% in 2011 to 0.9% in 2012.

 

Impairment of Assets Held for Sale

During the second quarter of 2013, the Company sold certain of its supply chain and sourcing assets as part of its portfolio realignment efforts. In anticipation of this transaction, the Company recognized an impairment charge in the first quarter of 2013 of $4.7 million to adjust the assets to their estimated fair value.  Refer to Note 4 to the consolidated financial statements for additional information.

 

Operating Earnings

Operating earnings increased $24.1 million, or 32.4%, to $98.6 million in 2013, compared to $74.5 million last year, driven by higher gross profit and a decrease in restructuring and other special charges, net, partially offset by higher selling and administrative expenses and an impairment charge, as discussed above.

 

Operating earnings increased $44.0 million, or 144.3%, to $74.5 million in 2012, compared to $30.5 million in 2011 due to higher gross profit and lower selling and administrative expenses, as discussed above.

 

Interest Expense

Interest expense decreased $1.7 million, or 7.5%, to $21.3 million in 2013 compared to $23.0 million last year, and decreased $2.4 million, or 9.7%, in 2012 compared to $25.4 million in 2011. The decrease in interest expense in both periods was due to lower average borrowings under our Credit Agreement. 

 

Loss on Early Extinguishment of Debt

During 2011, we redeemed our senior notes due in 2012. We incurred certain debt extinguishment costs to retire these notes prior to maturity totaling $1.0 million, including $0.6 million of non-cash charges related to unamortized debt issuance costs and $0.4 million of cash paid for tender premiums. We did not incur such costs in 2013 or 2012.

 

Income Tax (Provision) Benefit

Our consolidated effective tax rate on continuing operations was a provision of 30.6% in 2013 compared to 32.1% in 2012 and a benefit of 30.4% in 2011. 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 2013 and 2012, we recognized pre-tax earnings in both our domestic operations and foreign jurisdictions. Our overall effective tax rate was less than the domestic statutory rate due to the mix of earnings in lower rate international jurisdictions. These factors resulted in an overall effective tax provision rate of 30.6% in 2013 and 32.1% in 2012.

 

In 2011, we incurred a pre-tax loss in our domestic operations and pre-tax earnings in foreign jurisdictions. Our domestic effective tax rate was less than the statutory rate due to the impact of non-deductible permanent items applied to the domestic loss and the impact of the earnings mix between domestic and international tax jurisdictions. These factors resulted in an overall effective tax benefit rate of 30.4% in 2011.

 

Refer to Note 6 to the consolidated financial statements for additional information regarding our tax rates.

 

Net Earnings from Continuing Operations

We reported net earnings from continuing operations of $54.0 million in 2013 compared to $35.2 million in 2012 and $6.1 million in 2011, as a result of the factors described above.

 

Net (Loss) Earnings from Discontinued Operations

The Company’s discontinued operations include the operations and sale of our Avia and Nevados brands acquired during the 2011 acquisition of American Sporting Goods Corporation, as well as the operations and impairment of our Etienne Aigner and Vera Wang brands. In addition, in 2011, discontinued operations included the operations and sale of TBMC, which was also acquired in the American Sporting Goods Corporation acquisition. TBMC marketed and sold footwear bearing the AND 1 brand name. We reported a net loss from discontinued operations of $16.1 million in 2013, compared to a net loss of $8.0 million in 2012 and net earnings of $18.3 million in 2011.

 

During 2013, we sold the Avia and Nevados brands that were acquired with the American Sporting Goods Corporation acquisition.  In conjunction with the sale, we recorded a net charge related to the impairment and disposition of those brands of $11.5 million,

25

 


 

representing the difference in the fair value, less costs to sell, as compared to the carrying value of the net assets sold.  During 2013, the Company also communicated its intention not to renew the Vera Wang license agreement. 

 

During 2012, the Company terminated the Etienne Aigner license agreement due to a dispute with the licensor resulting in a non-cash impairment charge of $5.8 million ($3.5 million on an after-tax basis, or $0.08 per diluted share). 

 

During 2011, in conjunction with the sale of TBMC, we recorded a gain on sale of the subsidiary of $20.6 million ($14.0 million on an after-tax basis, or $0.32 per diluted share).

 

Refer to Note 2 to the consolidated financial statements for further discussion regarding discontinued operations.

 

Net Earnings Attributable to Brown Shoe Company, Inc.

We reported net earnings attributable to Brown Shoe Company, Inc. of $38.1 million in 2013, compared to $27.5 million last year, and $24.6 million in 2011.

 

Geographic Results

We have both domestic and foreign operations. Domestic operations include the nationwide operation of our Famous Footwear and Specialty Retail footwear stores, the wholesale distribution of footwear to numerous retail customers, and the operation of our e-commerce websites. Foreign operations primarily consist of wholesale operations in the Far East and Canada, retailing operations in Canada, and the operation of our international e-commerce websites. 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 earnings before income taxes was as follows: