10-K 1 bws-0131201510kfy.htm 10-K bws-0131201510KFY


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
 
 
R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 31, 2015
 
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
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 R    No £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £    No R

Indicate by 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 R    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  R     No £

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   R

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 R
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 R            

The aggregate market value of the stock held by non-affiliates of the registrant as of August 1, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,190.5 million.

As of February 27, 2015, 43,722,334 common shares were outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III.




INTRODUCTION
This Annual Report on Form 10-K is a document that U.S. public companies file with the Securities and Exchange Commission ("SEC") 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 2015.

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 March 31, 2015, unless otherwise specified.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this report, and from time to time throughout the year, we share our expectations for the 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 explains some of the important reasons that actual results may be materially different from those that we anticipate.





y


















2



INDEX
 

 
 
 
PART I
 
Page
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
PART II
 
   
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
 
 
 
 
 
 
 
 
Item 9
Item 9A
 
   Evaluation of Disclosure Controls and Procedures
 
Item 9B
 
 
 
PART III
 
   
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
PART IV
 
   
Item 15
 
 
 






3



                                                                    
 

PART I

 
 
ITEM 1
BUSINESS
Brown Shoe Company, Inc., founded in 1878 and incorporated in 1913, is a global footwear retailer and wholesaler with annual net sales of $2.6 billion. 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 business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas 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 2014 and 2013 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 2014, categories of our consolidated net sales were approximately 64% women’s footwear, 22% men’s footwear, 9% children’s footwear and 5% accessories. This composition has remained relatively constant over the past few years. Approximately 67% of footwear sales in 2014 represented retail sales, including sales through our e-commerce websites, compared to 70% in 2013 and 71% in 2012, while the remaining 33%, 30% and 29% in the respective years represented wholesale sales.

Employees
We had approximately 11,000 full-time and part-time employees as of January 31, 2015. In the United States, there are no employees subject to union contracts. In Canada, we employ approximately 20 warehouse employees under a union contract, which expires in October 2017.

Competition
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 e-commerce businesses. 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.

In addition, 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, source directly from factories or through agents. The wholesale footwear business has low barriers to entry, which further intensifies competition. Some competitors have also successfully branded their trademarks as lifestyle brands, resulting in a greater competitive advantage to those companies.

Segments
During the fourth quarter of 2014, we reorganized our operations into two reportable segments, Famous Footwear and Brand Portfolio. The Company’s reportable segments are described in more detail below. Historical financial results have been restated to reflect the segment reorganization. Refer to Note 7 to the consolidated financial statements for additional information regarding our business segments and financial information by geographic area.

 
FAMOUS FOOTWEAR
Our Famous Footwear segment includes our Famous Footwear stores, as well as Famous.com and Shoes.com. Our Shoes.com subsidiary was sold in December 2014 as further discussed in Note 2 to the consolidated financial statements. Famous Footwear is one of America’s leading family branded footwear retailers with 1,038 stores at the end of 2014 and net sales for the segment of $1.6 billion in 2014. Our target consumers are women who buy brand-name fashionable shoes at a value for themselves and their families.

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, Bearpaw, Converse, Vans, New Balance, adidas, Asics, Sperry and Sof Sole, as well as company-owned and licensed brands including, among others, LifeStride, Dr. Scholl’s, Fergalicious, Naturalizer and Carlos. Our company-owned and licensed products are sold to our Famous Footwear segment by our Brand Portfolio segment at a profit and represent approximately 12% of the Famous Footwear segment's net sales. 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 $25 for shoes up to $335 for boots.

4




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:
 
 
2014

2013

2012

Strip centers
 
696

711

726

Outlet malls
 
183

172

167

Regional malls
 
159

161

162

Total
 
1,038

1,044

1,055


Stores open at the end of 2014 averaged approximately 6,700 square feet compared to 6,800 square feet in 2013. Total square footage at the end of 2014 decreased 1.4% to 7.0 million square feet compared to 7.1 million at the end of 2013. We expect to open approximately 50 new stores and close approximately 50 stores in 2015. 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 $215 in 2014, up from $207 in 2013. Same-store sales increased 1.5% during 2014. 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 uses 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 the corporate office.

Famous Footwear’s marketing programs include national television, digital marketing and social networking, print, cinema, in-store advertisements 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 2014, we spent approximately $54.5 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 2014, approximately 73% 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 2014, we grew our mobile application and had more than 710,000 members enrolled by the end of the year. In 2015, 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.

As part of our omni-channel approach to reach consumers, we also operate Famous.com. Famous.com offers an expanded product assortment beyond what is sold in Famous Footwear stores with a variety of delivery options.

Until December 2014, we owned and operated Shoes.com, Inc., a pure-play Internet retailing company. Shoes.com offered a diverse selection of footwear and accessories for women, men and children, including footwear purchased from third-party suppliers and Brown Shoe Company. As further discussed in Note 2 to the consolidated financial statements, we sold Shoes.com in December 2014 and recognized a gain on sale of $4.7 million.

BRAND PORTFOLIO
Our Brand Portfolio segment offers retailers and consumers a portfolio of leading brands from our healthy living and contemporary fashion platforms by designing, sourcing and marketing branded footwear for women and men at a variety of price points. Certain of our branded footwear products are sold under brand names that are owned by the Company, and others are developed pursuant to licensing agreements.

5



Our Brand Portfolio segment sells footwear on a wholesale basis to retailers. The segment also sells footwear through our branded retail stores and e-commerce businesses.

Portfolio of Brands
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 throughout the United States and Canada, primarily at Naturalizer retail stores, national chains, department stores, online retailers, catalog retailers and independent retailers. Naturalizer retail stores offer a selection of women’s footwear styles, including casual, dress, sandals and boots, primarily under the Naturalizer brand. At the end of 2014, we operated 80 Naturalizer stores in the United States (including a store in Guam) and 89 Naturalizer stores in Canada. Of the 169 Naturalizer stores, approximately 51% are concept stores located in regional malls, with a few stores having street locations, and average approximately 1,200 square feet in size. The other 49% of stores are located in outlet malls and average approximately 2,300 square feet in size. Total square footage at the end of 2014 was 297,000 compared to 308,000 in 2013. In 2014, we closed 11 stores in the United States and Canada, primarily in outlet malls, and we opened six stores, primarily in outlet malls. We expect to open one store and close 10 stores in 2015.

Naturalizer footwear is also distributed through approximately 40 retail and wholesale partners in 60 countries around the world. On an international basis, the brand is primarily distributed through branded concept stores and shop-in-shops. Naturalizer footwear is also distributed in China through stores operated by our joint venture partner, C. banner International Holdings Limited (“CBI”). CBI operated 107 stores at the end of 2014 and expects to add approximately 20 stores in 2015. Through our majority-owned subsidiary, B&H Footwear Company Limited (“B&H Footwear”), we sell footwear to CBI on a wholesale basis, as further discussed in Note 16 to the consolidated financial statements. Suggested retail price points range from $79 for shoes to $209 for boots.

Dr. Scholl’s:  Dr. Scholl’s is an authentic brand of innovative footwear designed with an 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. This footwear reaches consumers at a wide range of distribution channels: mass merchandisers, national chains, online and catalogs, specialty and independent retailers, department stores and our Famous Footwear retail stores. Suggested price points range from $25 to $200.  We have a long-term license agreement with MSD Consumer Care, Inc. to sell Dr. Scholl’s, which is renewable through December 2026 for the United States and Canada and December 2017 for Latin America. During 2014, we closed our remaining four Dr. Scholl's stores to focus on wholesale distribution and e-commerce sales for this brand.

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 offers comfortable footwear that dresses up or down at the right value.  The brand is sold in department stores, national chains, online and in our Famous Footwear retail stores. Suggested retail price points range from $50 to $100. 

Ryka: For over 25 years, Ryka has been innovating athletic footwear exclusively for women by 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 products. The brand is distributed through department stores, national chains, online retailers and our Famous Footwear retail stores at suggested 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 Edelman 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 in 2014, the brand expanded its retail presence to include a store in Beverly Hills. Additional stores are expected to open in 2015. 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.

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. We had a license agreement to sell Franco Sarto footwear, which was to expire in 2019. In February 2014, we purchased the Franco Sarto trademarks for $65.0 million, terminating this license agreement, as further discussed in Note 9 to the consolidated financial statements.

6




Via Spiga:  Via Spiga is named after the main street in one of the most famed shopping districts in Milan, Italy. For over 25 years, Via Spiga has maintained its rich Italian heritage through its use of luxurious materials and beautiful detailing, providing chic, sophisticated footwear for the cosmopolitan woman who wants to make a fashion statement every day. The brand is primarily sold in premier department stores, upscale boutiques and online. This brand sells at suggested retail price points from $155 for shoes to $425 for boots.

Fergie and Fergalicious by Fergie: We have created two namesake footwear lines in collaboration with entertainment superstar Fergie (Fergie Duhamel, formerly Stacy Ferguson) to fully capture the artist’s confident, individual style in a line of sophisticated, sexy footwear with a glam rock influence. The Fergie brand is currently being sold at department stores, boutiques, independent retailers and online at suggested retail price points of $69 for shoes to $225 for boots. Fergalicious by Fergie is available at Famous Footwear and other national chains at suggested 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 2016.

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 2017 with extension options through December 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 of her lifestyle needs. Suggested price points range from $150 for shoes to $595 for boots. We have a license agreement with Vince, LLC 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 was launched to consumers in 2014 and will be expanding into new categories in 2015.

Wholesale
Our footwear is distributed to over 2,500 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 operations). The most significant wholesale customers include Famous Footwear and many of the nation’s largest retailers including national chains such as TJX Corporation (including TJ Maxx and Marshalls), DSW, Nordstrom Rack and Ross; department stores such as Nordstrom, Macy’s, Bloomingdales and Belk; mass merchandisers such as Walmart and Target; independent retailers such as QVC and Home Shopping Network; and online retailers, such as Amazon and Zappos.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 our Brand Portfolio segment and the Company.

Our Brand Portfolio segment sold approximately 47 million pairs of shoes on a wholesale basis during 2014. We sell footwear to wholesale customers on both a landed and a 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 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.

Products sold under license agreements accounted for Brand Portfolio’s net sales of approximately 26% in 2014, 38% in 2013 and 45% in 2012. Brown Shoe Company also receives royalty revenues for licensing owned brands, including certain brands listed above, to third parties.

Retail
Our Brand Portfolio segment also includes retail stores for certain of the brands, including Naturalizer, Sam Edelman and Dr. Scholl’s. The number of our Brand Portfolio retail stores at the end of the last three fiscal years was as follows:

7



 
 
2014

 
2013

 
2012

Naturalizer
 
169

 
174

 
216

Sam Edelman
 
2

 
1

 
2

Dr. Scholl’s
 

 
4

 
4

Total
 
171

 
179

 
222


During 2015, we expect to open one Naturalizer store and close 11 stores. We also plan to open six Sam Edelman stores, as we expand our retail presence for this brand. Our remaining four Dr. Scholl’s stores were closed in 2014, as we shifted our brand focus toward wholesale distribution and e-commerce sales.

In connection with our omni-channel approach to reach consumers, we also operate Naturalizer.com, Naturalizer.ca, SamEdelman.com, and DrSchollsShoes.com, which offer substantially the same product selection to consumers as is sold in their respective retail stores. Additional websites such as Ryka.com, LifeStride.com, ViaSpiga.com, Vince.com, CarlosShoes.com and FergieShoes.com serve as additional brand-building channels for us.

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.

Marketing
We continue to build on the recognition of our portfolio of 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 2014, we spent approximately $22.3 million in advertising and marketing support for our Brand Portfolio segment, including print, consumer media advertising, production, tradeshows, digital marketing and social media, public relations and in-store displays and fixtures. 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 2014, the marketing teams were instrumental in the development and execution of new product launches, including branding, positioning and marketing to both the consumer and trade audiences.

Sourcing and Product Development Operations
Our sourcing and product development operations source and develop footwear for our Brand Portfolio segment and also a portion of the footwear sold by our Famous Footwear segment. We have sourcing and product development offices in China, Hong Kong, Vietnam, Italy, Macau, Ethiopia, St. Louis and New York.

Sourcing Operations
In 2014, the sourcing operations sourced approximately 48 million pairs of shoes through a global network of third-party independent footwear manufacturers. The majority of our footwear sourced is provided by approximately 35 manufacturers operating approximately 56 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 and Putian, China offices, and we also perform random quality control checks during production and before any footwear leaves the manufacturing facilities.

In 2014, approximately 85% of the footwear we sourced was from manufacturing facilities in China. The following table provides an overview of our foreign sourcing in 2014:
Country
Millions of Pairs

China
40.3

Vietnam
4.8

Other
2.4

Total
47.5


Product Development Operations
In our Dongguan, China office, we operate a sample-making facility that allows us to 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

8



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 January 31, 2015, our Brand Portfolio segment had a backlog of unfilled wholesale orders of approximately $284.6 million compared to $273.9 million on February 1, 2014. 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 SEC. We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished, as required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, through our Internet 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 2015 or upon their respective successors being chosen and qualified.

 
 
 
 
 
 
Name
Age
Current Position
Diane M. Sullivan
59
Chief Executive Officer, President and Chairman of the Board of Directors
Richard M. Ausick
61
Division President – Retail
Daniel R. Friedman
54
Division President – Global Supply Chain
Kenneth H. Hannah
46
Senior Vice President and Chief Financial Officer
Daniel L. Karpel
44
Senior Vice President and Chief Accounting Officer
Douglas W. Koch
63
Senior Vice President and Chief Talent and Strategy Officer
John R. Mazurk
61
Division President – Healthy Living Brands
Michael I. Oberlander
46
Senior Vice President, General Counsel and Corporate Secretary
John W. Schmidt
54
Division President – Contemporary Fashion Brands
Mark A. Schmitt
51
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.

9




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.

Kenneth H. Hannah, Senior Vice President and Chief Financial Officer since February 2015. Executive Vice President and Chief Financial Officer of JC Penney Company, Inc. from May 2012 to March 2014.  Executive Vice President and President–Solar Energy of MEMC Electronic Materials, Inc. and had previously served as Executive Vice President and President–Solar Materials from 2009 to 2012. Senior Vice President and Chief Financial Officer of MEMC Electronic Materials, Inc. from 2006 to 2009.

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 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 and other factors.
Worldwide economic conditions continue to be uncertain. Consumer confidence and spending are strongly influenced by general economic conditions and other factors, 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, weather conditions, 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.

10



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. 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.

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 (including delays at foreign and domestic ports) and costs (including customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions or other trade restrictions), 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.

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

11



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 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.

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, e-commerce 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 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 use 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 Brand Portfolio segments and serve the wholesale

12



operations of our Brand Portfolio 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.

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.

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.

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 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 retail business depends on our ability to secure affordable and desirable leased locations without creating a competitive concentration of stores.
The success of the retail business within our Famous Footwear and Brand Portfolio segments depends, in part, on our ability to secure affordable, long-term leases in desirable locations for our leased retail footwear stores 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 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.

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,

13



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.

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 our Famous Footwear segment 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 our Famous Footwear stores 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.

14




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 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.

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.

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 Fourth Amended and Restated Credit Agreement (the “Credit Agreement”), which matures on December 18, 2019, 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 $600.0 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.


15



 
 
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 operations, included in both our Famous Footwear and Brand Portfolio segments, are conducted throughout the United States, Canada and Guam and involve the operation of 1,209 shoe stores, including 95 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.

Through our Brand Portfolio segment, we lease office space in New York, New York, where we maintain showrooms for our wholesale brands, as well as Bentonville, Arkansas; Doral, Florida and Dallas, Texas. Our primary Canadian operations are conducted from an owned building in Perth, Ontario and from leased office space in Laval, Quebec. We lease office space in China, Hong Kong, Macau, and Italy and a sample-making facility in Dongguan, China. The footwear sold through our domestic wholesale business is processed through a third-party facility in either Chino, California or Clifton, New Jersey.

We also 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.

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. We are involved in environmental remediation and ongoing compliance activities at several sites and have been notified that we are or may be a potentially responsible party at several other 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.

During 2014, we signed a settlement agreement to resolve a putative class action lawsuit involving wage and hour claims in California for an amount not to exceed $1.5 million. If approved by the court, under the settlement we will pay a minimum of $1.0 million in attorneys' fees, costs of administering the settlement and settlement payments to class members who submit claims. The ultimate amount paid to resolve the case may exceed that amount depending on the number of valid claims submitted. In the event that the settlement is not consummated, the parties will continue to litigate whether the action should proceed as a class action with a hearing scheduled for the second quarter of 2015. The reserve for this matter as of January 31, 2015 is $1.5 million.

Refer to Note 17 to the consolidated financial statements for additional information related to the Redfield matter and other legal proceedings.

 
 
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

16



Our common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “BWS.” As of January 31, 2015, we had approximately 3,840 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 2014 and 2013.


 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
2013
 


 


 
Dividend

 


 


 
Dividend

 
Low

 
High

 
Paid

 
Low

 
High

 
Paid

1st Quarter
$
22.30

 
$
28.73

 
$
0.07

 
$
15.24

 
$
18.48

 
$
0.07

2nd Quarter
23.14

 
29.65

 
0.07

 
16.62

 
24.78

 
0.07

3rd Quarter
25.30

 
32.31

 
0.07

 
21.26

 
24.25

 
0.07

4th Quarter
26.39

 
33.67

 
0.07

 
22.23

 
28.70

 
0.07


Restrictions on the Payment of Dividends
Our Fourth 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 condition, 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


Total Number

 

 
Shared Purchased

 
of Shares that May


of Shares

 
Average Price

 
as Part of Publicly

 
Yet Be Purchased

Fiscal Period
Purchased

 
Paid per Share

 
Announced Program

 
Under the Program (1)

November 2, 2014 - November 29, 2014

(2) 
$

 

 
2,500,000

November 30, 2014 - January 3, 2015

(2) 

 

 
2,500,000

January 4, 2015 - January 31, 2015

(2) 

 

 
2,500,000

Total

(2) 
$

 

 
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 2014; therefore, there were 2.5 million shares authorized to be purchased under the program as of January 31, 2015. 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.

17



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, 2010. The graph also assumes that all dividends were reinvested and that investments were held through January 31, 2015. 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.

*$100 invested on 1/30/10 in stock or index, including reinvestment of dividends. Index calculated on month-end basis.

 
1/30/2010

 
1/29/2011

 
1/28/2012

 
2/2/2013

 
2/1/2014

 
1/31/2015

Brown Shoe Company, Inc.
$
100.00

 
$
105.99

 
$
83.34

 
$
150.66

 
$
210.65

 
$
255.05

Peer Group
100.00

 
119.45

 
158.48

 
194.46

 
230.96

 
262.62

S&P(C) SmallCap 600 Stock Index
100.00

 
130.06

 
141.60

 
164.30

 
208.71

 
221.56


 
 
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.




18



 
 
2014

 
2013

 
2012

 
2011

 
2010

($ thousands, except per share amounts)
 
(52 Weeks)

 
(52 Weeks)

 
(53 Weeks)

 
(52 Weeks)

 
(52 Weeks)

Operations:
 

 

 

 

 

Net sales
 
$
2,571,709

 
$
2,513,113

 
$
2,477,796

 
$
2,434,766

 
$
2,457,673

Cost of goods sold
 
1,531,609

 
1,498,825

 
1,489,221

 
1,470,270

 
1,462,386

Gross profit
 
1,040,100

 
1,014,288

 
988,575

 
964,496

 
995,287

Selling and administrative expenses
 
910,682

 
909,749

 
891,666

 
910,293

 
918,029

Restructuring and other special charges, net
 
3,484

 
1,262

 
22,431

 
23,671

 
7,914

Impairment of assets held for sale
 

 
4,660

 

 

 

Operating earnings
 
125,934

 
98,617

 
74,478

 
30,532

 
69,344

Interest expense
 
(20,445
)
 
(21,254
)
 
(22,973
)
 
(25,428
)
 
(19,037
)
Loss on early extinguishment of debt
 
(420
)
 

 

 
(1,003
)
 

Interest income
 
379

 
377

 
322

 
569

 
203

Gain on sale of subsidiary
 
4,679

 

 

 

 

Earnings before income taxes from continuing operations
 
110,127

 
77,740

 
51,827

 
4,670

 
50,510

Income tax (provision) benefit
 
(27,184
)
 
(23,758
)
 
(16,656
)
 
1,421

 
(15,106
)
Net earnings from continuing operations
 
82,943

 
53,982

 
35,171

 
6,091

 
35,404

Discontinued operations:
 


 


 


 


 


(Loss) earnings from discontinued operations, net of tax
 

 
(4,574
)
 
(4,437
)
 
4,334

 
1,656

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

Net earnings
 
82,943

 
37,896

 
27,204

 
24,390

 
37,060

Net earnings (loss) attributable to noncontrolling interests
 
93

 
(177
)
 
(287
)
 
(199
)
 
(173
)
Net earnings attributable to Brown Shoe Company, Inc.
 
$
82,850

 
$
38,073

 
$
27,491

 
$
24,589

 
$
37,233

Operations:
 

 

 

 

 

Return on net sales
 
3.2
%
 
1.5
%
 
1.1
%
 
1.0
%
 
1.5
%
Return on beginning Brown Shoe Company, Inc. shareholders' equity
 
17.4
%
 
9.0
%
 
6.7
%
 
5.9
%
 
9.3
%
Return on average invested capital (1)
 
11.5
%
 
9.6
%
 
6.5
%
 
2.6
%
 
7.2
%
Dividends paid
 
$
12,237

 
$
12,105

 
$
12,011

 
$
12,076

 
$
12,254

Purchases of property and equipment
 
$
44,952

 
$
43,968

 
$
55,801

 
$
27,857

 
$
30,781

Capitalized software
 
$
5,086

 
$
5,235

 
$
7,928

 
$
10,707

 
$
24,046

Depreciation and amortization (2)
 
$
54,015

 
$
57,842

 
$
57,344

 
$
61,449

 
$
52,517

Per Common Share:
 


 


 


 


 


Basic earnings (loss) per common share:
 


 


 


 


 


  From continuing operations
 
$
1.90

 
$
1.25

 
$
0.83

 
$
0.15

 
$
0.81

  From discontinued operations
 

 
(0.37
)
 
(0.19
)
 
0.42

 
0.04

Basic earnings per common share attributable to Brown Shoe Company, Inc. shareholders
 
1.90

 
0.88

 
0.64

 
0.57

 
0.85

Diluted earnings (loss) per common share:
 


 


 


 


 


  From continuing operations
 
1.89

 
1.25

 
0.83

 
0.14

 
0.81

  From discontinued operations
 

 
(0.37
)
 
(0.19
)
 
0.42

 
0.04

Diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders
 
1.89

 
0.88

 
0.64

 
0.56

 
0.85

Dividends paid
 
0.28

 
0.28

 
0.28

 
0.28

 
0.28

Ending Brown Shoe Company, Inc. shareholders’ equity
 
12.36

 
10.99

 
9.91

 
9.83

 
9.45


19



 
 
2014

 
2013

 
2012

 
2011

 
2010

($ thousands, except per share amounts)
 
(52 Weeks)

 
(52 Weeks)

 
(53 Weeks)

 
(52 Weeks)

 
(52 Weeks)

Financial Position:
 


 


 


 


 


Receivables, net
 
$
136,646

 
$
129,217

 
$
111,392

 
$
130,485

 
$
108,302

Inventories, net
 
543,103

 
547,531

 
503,688

 
518,893

 
516,318

Working capital
 
393,813

 
405,694

 
303,319

 
236,017

 
289,557

Property and equipment, net
 
149,743

 
143,560

 
144,856

 
130,244

 
135,632

Total assets
 
1,216,812

 
1,149,403

 
1,173,973

 
1,227,476

 
1,148,043

Borrowings under our revolving credit agreement
 

 
7,000

 
105,000

 
201,000

 
198,000

Long-term debt
 
199,197

 
199,010

 
198,823

 
198,633

 
150,000

Brown Shoe Company, Inc. shareholders’ equity
 
540,910

 
476,699

 
425,129

 
412,669

 
415,080

Average common shares outstanding – basic
 
42,071

 
41,356

 
40,659

 
41,126

 
42,156

Average common shares outstanding – diluted
 
42,274

 
41,653

 
40,794

 
41,668

 
42,487


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. Refer to 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 and debt discount is reflected within interest expense in our consolidated statement of earnings and totaled $2.4 million in 2014, $2.5 million in 2013, $2.6 million in 2012, $2.3 million in 2011 and $2.2 million in 2010.

 
 
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 $2.6 billion whose shoes are worn by people of all ages, from all walks of life. 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 portfolio of brands. Our business strategy is focused on continuing to evolve our portfolio of brands, driving profit growth to achieve our financial targets, investing in avenues of growth while refocusing our resources, and remaining consumer centric.

Famous Footwear
Our Famous Footwear segment includes our Famous Footwear stores as well as Famous.com and Shoes.com. As further discussed in Note 2 to the consolidated financial statements, Shoes.com was sold on December 12, 2014. Famous Footwear is one of America’s leading family branded footwear retailers with 1,038 stores at the end of 2014 and net sales for the segment of $1.6 billion in 2014. Our focus for the Famous Footwear segment 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.

Brand Portfolio
Our Brand Portfolio segment 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. The segment is comprised of the Naturalizer, Sam Edelman, Dr. Scholl's, Franco Sarto, LifeStride, Vince, Via Spiga, Fergie, Ryka and Carlos brands. Through these brands, and brand families, we offer our customers a diversified selection of footwear, each designed and targeted to a specific consumer segment within the marketplace. We are able to showcase many of our brands in our retail stores and online, leveraging our wholesale and retail platforms, sharing consumer insights across our businesses and testing new and innovative products. Our Brand Portfolio segment operates 171 retail stores in the United States and Canada, primarily for our Naturalizer brand. This segment also includes our e-commerce businesses that sell our branded footwear.
 

20



Financial Highlights
We delivered another successful year in 2014, with operating earnings of $125.9 million, as we continued to execute our strategic initiatives. The net sales increase of 2.3% was primarily driven by our Brand Portfolio segment, but we also achieved record-breaking net sales at our Famous Footwear segment of $1,589.3 million.

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

Consolidated net sales increased $58.6 million, or 2.3%, to $2,571.7 million in 2014, compared to $2,513.1 million last year. The growth was primarily driven by our Brand Portfolio segment, which reported a net sales increase of $57.9 million and, to a lesser extent, growth in our Famous Footwear segment net sales of $0.7 million, as these sales were impacted by the disposition of Shoes.com in December 2014.
Consolidated operating earnings were $125.9 million in 2014, compared to $98.6 million last year.
Consolidated net earnings attributable to Brown Shoe Company, Inc. were $82.9 million, or $1.89 per diluted share, in 2014, compared to $38.1 million, or $0.88 per diluted share, last year.

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

Sale of Shoes.com and related restructuring – During 2014, we sold our e-commerce subsidiary, Shoes.com, for a pre-tax gain of $4.7 million. In addition, we incurred related severance and other restructuring charges of $1.5 million. We also recognized tax benefits of $6.6 million associated with the disposition of Shoes.com. These tax benefits were driven in part by the utilization of operating and capital loss carryforwards that previously were not anticipated to be utilized, and therefore, fully reserved on our consolidated balance sheet. In total, the disposition of Shoes.com, inclusive of the related severance and other restructuring charges, improved net earnings by $9.8 million (or $0.23 per diluted share). Refer to Note 2 to the consolidated financial statements for further discussion.
Portfolio realignment – Our portfolio realignment initiatives included the sale of the Avia and Nevados brands acquired with American Sporting Goods Corporation; 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) related to our portfolio realignment initiatives during 2013, with no corresponding costs in 2014. Refer to Notes 2 and 4 to the consolidated financial statements for additional information. 
Incentive plans – Our selling and administrative expenses increased $4.4 million during 2014, compared to last year, due to higher anticipated payments under our cash and stock-based incentive plans.

Organizational change – During 2014, we incurred costs of $1.9 million ($1.2 million after-tax, or $0.03 per diluted share) related to a management change at our corporate headquarters, with no corresponding costs in 2013. Refer to Note 4 to the consolidated financial statements for further discussion.

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 2014 and 2013 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.

Our debt-to-capital ratio, as defined in the Liquidity and Capital Resources – Working Capital and Cash Flow section, decreased to 26.9% as of January 31, 2015, compared to 30.1% at February 1, 2014, primarily due to higher shareholders' equity resulting from our 2014 net earnings and a $7.0 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 1.99 to 1 at January 31, 2015, compared to 2.05 to 1 at February 1, 2014.
 
Outlook for 2015
Despite a challenging retail environment, west coast port delays and evolving shifts in consumer behavior, we continued to deliver steady improvement towards our long-term financial goals. We plan to follow up our strong year in 2014 with additional growth in 2015. We expect same-store sales at Famous Footwear will grow in the low single-digit percentage range in 2015, with net sales consistent with 2014 due to the sale of Shoes.com. Our Brand Portfolio net sales are expected to increase in the mid-single-digit percentage range.

Following are the consolidated results and the results by segment for 2014, 2013 and 2012:


21



Consolidated Results

 
2014
 
2013
 
2012

 


% of

 


% of

 


% of

($ millions)
 


 Net Sales

 


Net Sales

 


Net Sales

Net sales
 
$
2,571.7

100.0
 %
 
$
2,513.1

100.0
 %
 
$
2,477.8

100.0
 %
Cost of goods sold
 
1,531.6

59.6
 %
 
1,498.8

59.6
 %
 
1,489.2

60.1
 %
Gross profit
 
1,040.1

40.4
 %
 
1,014.3

40.4
 %
 
988.6

39.9
 %
Selling and administrative expenses
 
910.7

35.4
 %
 
909.7

36.2
 %
 
891.7

36.0
 %
Restructuring and other special charges, net
 
3.5

0.1
 %
 
1.3

0.1
 %
 
22.4

0.9
 %
Impairment of assets held for sale
 

 %
 
4.7

0.2
 %
 

 %
Operating earnings
 
125.9

4.9
 %
 
98.6

3.9
 %
 
74.5

3.0
 %
Interest expense
 
(20.5
)
(0.8
)%
 
(21.3
)
(0.8
)%
 
(23.0
)
(0.9
)%
Loss on early extinguishment of debt
 
(0.4
)
(0.0
 )%
 

 %
 

 %
Interest income
 
0.4

0.0
 %
 
0.4

0.0
 %
 
0.3

0.0
 %
Gain on sale of subsidiary
 
4.7

0.2
 %
 

 %
 

 %
Earnings before income taxes from continuing operations
 
110.1

4.3
 %
 
77.7

3.1
 %
 
51.8

2.1
 %
Income tax provision
 
(27.2
)
(1.1
)%
 
(23.7
)
(0.9
)%
 
(16.6
)
(0.7
)%
Net earnings from continuing operations
 
82.9

3.2
 %
 
54.0

2.2
 %
 
35.2

1.4
 %
Discontinued operations:
 
 


 




 




Loss from discontinued operations, net of tax
 

 %
 
(4.6
)
(0.2
)%
 
(4.5
)
(0.2
)%
Disposition/impairment of discontinued operations, net of tax
 

 %
 
(11.5
)
(0.5
)%
 
(3.5
)
(0.1
)%
Net loss from discontinued operations
 

 %
 
(16.1
)
(0.7
)%
 
(8.0
)
(0.3
)%
Net earnings
 
82.9

3.2
 %
 
37.9

1.5
 %
 
27.2

1.1
 %
Net loss attributable to noncontrolling interests
 
0.1

 %
 
(0.2
)
(0.0
 )%
 
(0.3
)
(0.0
 )%
Net earnings attributable to Brown Shoe Company, Inc.
 
$
82.8

3.2
 %
 
38.1

1.5
 %
 
27.5

1.1
 %

Net Sales
Net sales increased $58.6 million, or 2.3%, to $2,571.7 million in 2014, compared to $2,513.1 million last year, primarily driven by our Brand Portfolio segment, which reported a $57.9 million, or 6.3%, increase in net sales. The increase reflects strong performance from many of our brands, despite a 3.6% decrease in same-store sales at our branded retail stores. Our Brand Portfolio net sales were also impacted by a lower store count and a lower Canadian dollar exchange rate. Our Famous Footwear segment reported a $0.7 million increase in net sales, reflecting a 1.5% increase in same-store sales at our Famous Footwear retail stores, partially offset by the disposition of Shoes.com and a lower store count.

Net sales increased $35.3 million, or 1.4%, to $2,513.1 million in 2013, compared to $2,477.8 million in 2012. Both our Brand Portfolio and Famous Footwear segments experienced increases in net sales during 2013 compared to 2012. Our Brand Portfolio segment reported a $30.0 million, or 3.4%, increase in net sales, reflecting strong performance from many of our brands and a 1.6% increase in same-store sales at our branded retail stores. Our Famous Footwear segment reported a $5.4 million increase in net sales, reflecting a 2.9% same-store sales increase.

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

Gross Profit
Gross profit increased $25.8 million, or 2.5%, to $1,040.1 million in 2014, compared to $1,014.3 million last year. As a percentage of net sales, our gross profit rate remained consistent at 40.4%. The gross profit rate reflects improvement in both our Brand Portfolio and Famous Footwear segments, partially offset by a higher consolidated mix of wholesale versus retail sales and a lower volume of branded sales through our branded retail stores. Gross profit rates on retail sales are higher than wholesale sales. In aggregate, retail and wholesale net sales were 67% and 33%, respectively, in 2014 compared to 70% and 30% in 2013.

22




Gross profit increased $25.7 million, or 2.6%, to $1,014.3 million in 2013, compared to $988.6 million in 2012 resulting from higher gross profit at both our Brand Portfolio and Famous Footwear segments. As a percentage of net sales, our gross profit rate increased to 40.4% in 2013, from 39.9% in 2012. 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, and a more profitable brand mix at our Brand Portfolio segment. In aggregate, retail and wholesale net sales were 70% and 30%, respectively, in 2013 compared to 71% and 29% in 2012.

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 $1.0 million, or 0.1% to $910.7 million in 2014, compared to $909.7 million last year. As a percentage of net sales, selling and administrative expenses decreased to 35.4% in 2014 from 36.2% last year, reflecting better leveraging of our expense base over higher net sales.

Selling and administrative expenses increased $18.0 million, or 2.0%, to $909.7 million in 2013, compared to $891.7 million in 2012 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% in 2012.

Restructuring and Other Special Charges, Net
Restructuring and other special charges, net, increased $2.2 million to $3.5 million during 2014, compared to $1.3 million last year as a result of the following items, as further described in Note 4 to the consolidated financial statements:

Disposition of Shoes.com – We incurred charges of $1.5 million in 2014, primarily severance, related to the sale of Shoes.com, with no corresponding costs in 2013.
Organizational changes – We incurred costs of $1.9 million in 2014 related to a corporate management change, with no corresponding costs in 2013.
Portfolio realignment – We incurred charges of $1.3 million in 2013, with no corresponding costs in 2014.
As a percentage of net sales, restructuring and other special charges, net, were 0.1% in 2014, consistent with 2013, reflecting the above named factors.

Restructuring and other special charges, net, decreased $21.1 million to $1.3 million during 2013, compared to $22.4 million in 2012 as a result of the following items:

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 of $2.3 million in 2012 related to a corporate management change, with no corresponding costs in 2013.
As a percentage of net sales, restructuring and other special charges, net decreased from 0.9% in 2012 to 0.1% in 2013.
Impairment of Assets Held for Sale
In 2013, we sold certain of our supply chain and sourcing assets as part of our portfolio realignment efforts. In anticipation of the sale, we recognized an impairment charge of $4.7 million in 2013 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 $27.3 million, or 27.7%, to $125.9 million in 2014, compared to $98.6 million last year, driven by higher sales and resulting gross profit. In addition, operating earnings in 2014 benefited from the impact of no impairment of assets held for sale in 2014, partially offset by higher restructuring and other special charges and higher selling and administrative expenses, as discussed above.

Operating earnings increased $24.1 million, or 32.4%, to $98.6 million in 2013, compared to $74.5 million in 2012 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.


23



Interest Expense
Interest expense decreased $0.8 million, or 3.8%, to $20.5 million in 2014 compared to $21.3 million last year, and decreased $1.7 million, or 7.5%, in 2013 compared to $23.0 million in 2012. The decrease in interest expense in both periods was primarily due to lower average borrowings under our Credit Agreement.

Loss on Early Extinguishment of Debt
During 2014, we amended our revolving credit agreement, resulting in certain debt extinguishment costs for unamortized debt issuance costs of $0.4 million. We did not incur such costs in 2013 or 2012.

Gain on Sale of Subsidiary
In 2014, we sold our e-commerce subsidiary, Shoes.com. We recognized a pre-tax gain upon on the sale of the subsidiary of $4.7 million, representing the difference in the net proceeds less costs to sell, as compared to the carrying value of the net assets. Refer to Note 2 to the consolidated financial statements for further discussion.

Income Tax Provision
Our consolidated effective tax rate on continuing operations was a provision of 24.7% in 2014 compared to 30.6% in 2013 and 32.1% in 2012. In 2014, 2013 and 2012, we recognized pre-tax earnings in both our domestic operations and foreign jurisdictions. 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.
Our overall effective tax rate was less than the domestic statutory rate due to the mix of earnings in lower rate international jurisdictions.

In 2014, our effective tax rate was impacted by several factors. In connection with the disposition of Shoes.com, we recognized a pre-tax gain, net of related restructuring costs, of $3.1 million, while recognizing an associated tax benefit of $6.6 million. This tax benefit was driven in part by the utilization of operating and capital loss carryforwards that were previously not anticipated to be utilized and were therefore fully reserved on our consolidated balance sheet. In addition, we recognized a tax expense of $1.0 million related to a dividend received from an international subsidiary. If the impacts of the Shoes.com disposition and the tax on the dividend had been excluded, our full fiscal year 2014 effective tax rate would have been 30.6%, consistent with last year.

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 $82.9 million in 2014, compared to $54.0 million in 2013 and $35.2 million in 2012, as a result of the factors described above.

Net Loss from Discontinued Operations
Our discontinued operations included 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. We reported a net loss from discontinued operations of $16.1 million in 2013 and $8.0 million in 2012.

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

During 2012, we 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).

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 $82.8 million in 2014, compared to $38.1 million last year and $27.5 million in 2012.

Geographic Results
We have both domestic and foreign operations. Domestic operations include the nationwide operation of our Famous Footwear and other branded 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

24



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:

2014
 
2013
 
2012


Earnings Before

 

Earnings Before

 

Earnings Before

($ millions)
Net Sales

Income Taxes

 
Net Sales

Income Taxes

 
Net Sales

Income Taxes

Domestic
$
2,318.5

$
70.8

 
$
2,258.6

$
40.9

 
$
2,251.1

$
23.8

Foreign
253.2

39.3

 
254.5

36.8

 
226.7

28.0


$
2,571.7

$
110.1

 
$
2,513.1

$
77.7

 
$
2,477.8

$
51.8


The pre-tax profitability on foreign sales is higher than on domestic sales because of a lower cost structure and the inclusion in domestic earnings of the unallocated corporate administrative and other costs.

We recognized earnings before income taxes both domestically and in foreign jurisdictions in 2014, 2013 and 2012. Our domestic earnings in 2014 reflected increases in net sales and gross profit and continued leverage of our selling and administrative expenses. Our domestic earnings in 2013 reflected increases in net sales and gross profit, and a decrease in restructuring and other special charges, net, partially offset by an increase in selling and administrative expenses. Our domestic earnings in 2012 reflected increases in net sales at our Famous Footwear segment, an increase in gross profit and a decrease in selling and administrative expenses.


25



Famous Footwear

 
2014
 
2013
 
2012

 

% of

 

% of

 

% of

($ millions)
 

 Net Sales

 

Net Sales

 

Net Sales

Net sales
 
$
1,589.3

100.0
%
 
$
1,588.6

100.0
%
 
$
1,583.2

100.0
%
Cost of goods sold
 
883.2

55.6
%
 
887.4

55.9
%
 
893.8

56.5
%
Gross profit
 
706.1

44.4
%
 
701.2

44.1
%
 
689.4

43.5
%
Selling and administrative expenses
 
600.7

37.7
%
 
595.8

37.5
%
 
587.4

37.1
%
Restructuring and other special charges, net
 
0.8

0.1
%
 


 
7.8

0.5
%
Operating earnings
 
$
104.6

6.6
%
 
$
105.4

6.6
%
 
$
94.2

5.9
%

 




 




 




Key Metrics
 


 


 


Same-store sales % change (on a 52-week basis)
 
1.5
%

 
2.9
%

 
4.5
%

Same-store sales $ change (on a 52-week basis)
 
$
22.4


 
$
41.1


 
$
62.2



Sales change from 53rd week
 
$


 
$
(19.1
)

 
$
19.1


Sales change from new and closed stores, net (on a 52-week basis)
 
$
(6.1
)

 
$
(9.8
)

 
$
(22.3
)

Impact of changes in Canadian exchange rate on sales
 
$
(0.3
)
 
 
$

 
 
$

 
Sales change of Shoes.com (1)
 
$
(15.3
)
 
 
$
(6.8
)
 
 
$
(5.7
)
 

 



 



 



Sales per square foot, excluding e-commerce (on a 52-week basis)
 
$
215



 
$
207



 
$
199



Square footage (thousands sq. ft.)
 
6,958



 
7,059



 
7,205




 




 




 




Stores opened
 
50



 
51



 
55



Stores closed
 
56



 
62



 
89



Ending stores
 
1,038



 
1,044



 
1,055



(1) As further discussed in Note 2 to the consolidated financial statements, Shoes.com was sold in December 2014. 
Net Sales
Net sales increased $0.7 million to $1,589.3 million in 2014 compared to $1,588.6 million last year. During 2014, same-store sales increased 1.5%, or $22.4 million, reflecting an improved conversion rate and higher average retail prices, partially offset by a decrease in customer traffic. We also saw strong growth from canvas and athletic shoes and boots. As a result of the same-store sales increase, sales per square foot, excluding e-commerce, increased 3.5% to $215, compared to $207 last year. Net sales of Shoes.com decreased $15.3 million, or 25.2%, to $45.7 million in 2014 compared to $61.0 million last year. The decrease was due, in part, to the disposal of this subsidiary in December 2014, as further discussed in Note 2 to the consolidated financial statements. Net sales were also impacted by a lower store count and a lower Canadian dollar exchange rate. In 2014, we expanded our efforts to connect with and engage our customers to build a strong brand preference for our Famous Footwear stores and Famous.com through our loyalty program, Rewards. As a result, approximately 73% of our net sales were to Rewards members in 2014, compared to 70% in 2013 and 66% in 2012.

Net sales increased $5.4 million, or 0.3%, to $1,588.6 million in 2013 compared to $1,583.2 million in 2012. During 2013, same-store sales increased 2.9%, or $41.1 million, reflecting an improved conversion rate and higher average retail prices, partially offset by a decrease in customer traffic. In addition, we saw strong growth from canvas shoes and boots. As a result of the same-store sales increases, sales per square foot, excluding e-commerce, increased 4.1% to $207, compared to $199 in 2012. The inclusion of the 53rd week in 2012 impacted net sales comparison negatively by $19.1 million in 2013 as compared to 2012. Net closed stores reduced net sales by $9.8 million, which reflects the relocation of certain stores and the closure of underperforming stores. On a 52-week basis, net sales of Shoes.com decreased $6.8 million, or 9.7%, to $61.0 million in 2013 compared to $67.8 million in 2012.


26



Gross Profit
Gross profit increased $4.9 million, or 0.7%, to $706.1 million in 2014 compared to $701.2 million last year due to higher net sales and a higher gross profit rate. As a percentage of net sales, our gross profit rate increased to 44.4% in 2014 compared to 44.1% last year. The increase in our gross profit rate was driven by lower freight and a better mix of higher margin products.

Gross profit increased $11.8 million, or 1.7%, to $701.2 million in 2013 compared to $689.4 million in 2012 due to higher net sales and gross profit rate. As a percentage of net sales, our gross profit rate increased to 44.1% in 2013 compared to 43.5% in 2012. The increase in our gross profit rate was driven by higher product margins in our boots and athletics categories.

Selling and Administrative Expenses
Selling and administrative expenses increased $4.9 million, or 0.8%, to $600.7 million during 2014 compared to $595.8 million last year. The increase was primarily attributable to higher store rent, depreciation expense and other facilities costs and higher variable store employee and benefit costs, partially offset by lower marketing expenses and a decrease in expected payouts under our cash and stock-based incentive plans. As a percentage of net sales, selling and administrative expenses increased to 37.7% in 2014 from 37.5% last year.

Selling and administrative expenses increased $8.4 million, or 1.4%, to $595.8 million during 2013 compared to $587.4 million in 2012. The increase was primarily attributable to higher store depreciation expense and other facilities costs, higher marketing expenses, and higher variable store employee and benefit costs, as well as an increase in expected payouts under both cash and stock-based incentive plans, partially offset by the impact of the incremental week of expenses associated with the 53rd week in 2012. As a percentage of net sales, selling and administrative expenses increased to 37.5% in 2013 from 37.1% in 2012.

Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges of $0.8 million during 2014 related to the disposition of Shoes.com, as further discussed in Note 2 to the consolidated financial statements. We incurred restructuring and other special charges, net of $7.8 million in 2012 as a result of our portfolio realignment initiatives, with no corresponding costs in 2013. The restructuring and other special charges in 2012 included closing or relocating underperforming or poorly aligned stores and closing our Sun Prairie, Wisconsin distribution center.

Operating Earnings
Operating earnings decreased $0.8 million, or 0.8% to $104.6 million for 2014, compared to $105.4 million last year. As a percentage of net sales, our operating earnings of 6.6% were consistent with last year.

Operating earnings increased $11.2 million, or 11.8%, to $105.4 million for 2013, compared to $94.2 million in 2012. The increase is the result of higher net sales, an increase in gross profit rate, and a decrease in restructuring and other special charges, net, partially offset by higher selling and administrative expenses, as described above. As a percentage of net sales, operating earnings increased to 6.6% in 2013 compared to 5.9% in 2012.


27



Brand Portfolio

 
2014
 
2013
 
2012

 


% of

 


% of

 


% of

($ millions)
 


Net Sales

 


Net Sales

 


Net Sales

Net sales
 
$
982.5

100.0
%
 
$
924.6

100.0
%
 
$
894.6

100.0
%
Cost of goods sold
 
648.5

66.0
%
 
611.5

66.1
%
 
595.4

66.6
%
Gross profit
 
334.0

34.0
%
 
313.1

33.9
%
 
299.2

33.4
%
Selling and administrative expenses
 
260.3

26.5
%
 
267.3

29.0
%
 
266.3

29.7
%
Restructuring and other special charges, net
 
0.3

0.0
%
 
1.2

0.1
%
 
11.6

1.3
%
Impairment of assets held for sale
 


 
4.7

0.5
%
 


Operating earnings
 
$
73.4

7.5
%
 
$
39.9

4.3
%
 
$
21.3

2.4
%

 




 




 




Key Metrics
 



 




 




Wholesale/retail sales mix (%)
 
86%/14%

 
 
83%/17%

 
 
81%/19%

 
Change in wholesale net sales ($)
 
$
77.8

 
 
$
38.9

 
 
$
2.1

 
Unfilled order position at year-end
 
$
284.6

 
 
$
273.9

 
 
$
274.9

 
 
 
 
 
 
 
 
 
 
 
Same-store sales % change (on a 52-week basis)
 
(3.6
)%

 
1.6
%

 
0.6
%

Same-store sales $ change (on a 52-week basis)
 
$
(4.8
)

 
$
2.2


 
$
0.8


Sales change from 53rd week
 
$


 
$
(2.1
)

 
$
2.1



Sales change from new and closed stores, net (on a 52-week basis)
 
$
(11.3
)

 
$
(6.6
)

 
$
(14.9
)

Impact of changes in Canadian exchange rate on retail sales
 
$
(3.8
)
 
 
$
(2.4
)
 
 
$
(0.4
)
 

 



 



 



Sales per square foot, excluding e-commerce (on a 52-week basis)
 
$
377


 
$
397


 
$
396


Square footage (thousands sq. ft.)
 
302



 
319



 
346




 




 




 




Stores opened
 
7



 
11



 
29



Stores closed
 
15



 
54



 
41



Ending stores
 
171



 
179



 
222




Net Sales
Net sales increased $57.9 million, or 6.3%, to $982.5 million in 2014 compared to $924.6 million last year. The increase reflects strong performance from many of our brands, including Sam Edelman, Vince, Via Spiga and Franco Sarto, partially offset by a decrease in Naturalizer. Our branded retail stores experienced a decline in same-store sales of 3.6%. In addition, our retail sales were impacted by a lower store count and a lower Canadian dollar exchange rate. We opened seven stores and closed 15 stores during 2014, resulting in a total of 171 stores at the end of 2014, compared to 179 stores at the end of last year. Sales per square foot, excluding e-commerce, decreased 5.1% to $377 compared to $397 last year. Our unfilled order position for our wholesale sales increased $10.7 million, or 3.9%, to $284.6 million at the end of 2014, as compared to $273.9 million at the end of last year.
 
Net sales increased $30.0 million, or 3.4%, to $924.6 million in 2013 compared to $894.6 million in 2012. The increase reflects strong performance from many of our brands, including Sam Edelman, Franco Sarto, LifeStride, and Vince, partially offset by decreases in Via Spiga, Fergie, and Ryka. Our branded retail stores experienced an increase in same-store sales of 1.6%. These increases were partially offset by our lower store count, a lower Canadian dollar exchange rate and the impact of the 53rd week in 2012. We opened 11 stores and closed 54 stores during 2013, resulting in a total of 179 stores at the end of 2013 compared to 222 stores at the end of 2012. During 2013, closed stores included 28 Naturalizer stores in China that were either closed or transferred to our joint venture partner. Sales per square foot, excluding e-commerce, increased 0.4% to $397 compared to $396 in 2012. Our unfilled order position for our wholesale sales decreased $1.0 million, or 0.4%, to $273.9 million at the end of 2013, as compared to $274.9 million at the end of 2012.

28




Gross Profit
Gross profit increased $20.9 million, or 6.7%, to $334.0 million in 2014 compared to $313.1 million last year reflecting higher sales and a higher gross profit rate. Our gross profit rate increased slightly to 34.0% in 2014 as compared to 33.9% last year primarily resulting from higher wholesale margins for many of our brands, including the impact of lower royalty expense from the acquisition of the Franco Sarto trademarks in the first quarter of 2014, and an improved sales mix of higher margin footwear, partially offset by higher inventory markdowns to clear inventory at our branded retail stores.

Gross profit increased $13.9 million, or 4.7%, to $313.1 million in 2013 compared to $299.2 million in 2012 reflecting an improved sales mix of higher margin footwear, lower inventory markdowns and lower royalty expense, partially offset by a lower mix of retail versus wholesale sales. Gross profit rates on retail sales are generally higher than on wholesale sales. Our gross profit rate increased to 33.9% in 2013 compared to 33.4% in 2012.

Selling and Administrative Expenses
Selling and administrative expenses decreased $7.0 million, or 2.6%, to $260.3 million during 2014 compared to $267.3 million last year, primarily due to lower warehouse expenses, our lower branded retail store count and a lower Canadian dollar exchange rate, partially offset by an increase in anticipated payments under our cash and stock-based incentive plans and higher marketing expenses. As a percentage of net sales, selling and administrative expenses decreased to 26.5% in 2014 from 29.0% last year, reflecting the above named factors.

Selling and administrative expenses increased $1.0 million, or 0.4%, to $267.3 million during 2013 compared to $266.3 million in 2012, due to an increase in anticipated payments under our cash and stock-based incentive plans and higher warehouse expenses, partially offset by a lower branded retail store count, lower marketing expenses and the lower Canadian dollar exchange rate. As a percentage of net sales, selling and administrative expenses decreased to 29.0% in 2013 from 29.7% in 2012, reflecting the above named factors.

Restructuring and Other Special Charges, Net
Restructuring and other special charges decreased $0.9 million, or 77.3%, to $0.3 million in 2014, compared to $1.2 million last year as a result of our portfolio realignment initiatives, which were substantially complete in early 2013. Expenses related to our portfolio realignment initiative declined $10.4 million in 2013 to $1.2 million, from $11.6 million in 2012. Refer to Notes 2 and 4 to the consolidated financial statements for additional information related to these charges and recoveries.

Impairment of Assets Held for Sale
During 2013, we sold certain of our supply chain and sourcing assets. In conjunction with the sale, we recognized an impairment charge of $4.7 million, representing the difference between the fair value of the assets, less costs to sell, and the carrying value of the assets.

Operating Earnings
Operating earnings increased $33.5 million, or 83.9%, to $73.4 million in 2014 compared to $39.9 million last year. The increase was primarily driven by higher net sales and lower selling and administrative expenses. As a percentage of net sales, operating earnings increased to 7.5% in 2014 compared to 4.3% last year.

Operating earnings increased $18.6 million, or 87.7%, to $39.9 million in 2013, compared to $21.3 million in 2012. The increase was primarily driven by higher net sales and corresponding gross profit rate and lower restructuring and other special charges, net. As a percentage of net sales, operating earnings increased to 4.3% in 2013 compared to 2.4% in 2012.

 
OTHER
The Other category includes unallocated corporate administrative and other costs and recoveries. Costs of $52.1 million, $46.7 million, and $41.0 million were incurred in 2014, 2013, and 2012, respectively.

The $5.4 million increase in costs in 2014 compared to 2013 was primarily a result of higher anticipated payments under our cash and stock-based incentive plans and higher consulting fees.

The $5.7 million increase in costs in 2013 compared to 2012 was primarily a result of an increase in selling and administrative expenses due to higher consulting fees and higher anticipated payments under our cash and stock-based incentive plans.

 
RESTRUCTURING AND OTHER INITIATIVES

29



During 2014, we incurred costs associated with the disposal of Shoes.com of $1.5 million, with no corresponding costs in 2013 or 2012. During 2014 and 2012, we incurred costs of $1.9 million and $2.3 million related to management changes at our corporate headquarters, with no corresponding costs in 2013. During 2013 and 2012, we recorded portfolio realignment initiative costs of $30.7 million, and $29.9 million, respectively, with no corresponding costs in 2014. During 2012, we incurred acquisition and integration-related costs of $0.7 million with no corresponding costs in 2014 or 2013. See the Financial Highlights section above and Note 2 and Note 4 to the consolidated financial statements for additional information related to these charges.

 
IMPACT OF INFLATION AND CHANGING PRICES
While we have felt the effects of inflation on our business and results of operations, it has not had a significant impact on our business over the last three years. Inflation can have a long-term impact on our business because increasing costs of materials and labor may impact our ability to maintain satisfactory profit rates. For example, our products are manufactured in other countries, and a decline in the value of the U.S. dollar and the impact of labor shortages in China may result in higher manufacturing costs. Similarly, any potential significant shortage of quantities or increases in the cost of the materials that are used in our manufacturing process, such as leather and other materials or resources, could have a material negative impact on our business and results of operations. In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on consumer spending, in which case our net sales and profit rates could decrease. Moreover, increases in inflation may not be matched by increases in income, which also could have a negative impact on consumer spending. If we incur increased costs that are unable to be recovered through price increases, or if consumer spending decreases generally, our business, results of operations, financial condition, and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we expect to pass on some portion of cost increases to our consumers and adjust our business model, as appropriate, to minimize the impact of higher costs. Further discussion of the potential impact of inflation and changing prices is included in Item 1A, Risk Factors.

 
LIQUIDITY AND CAPITAL RESOURCES
Borrowings


($ millions)
January 31, 2015

 
February 1, 2014

 
(Decrease) Increase

Borrowings under Credit Agreement
$

 
$
7.0

 
$
(7.0
)
Long-term debt - Senior Notes
199.2

 
199.0

 
0.2

Total debt
$
199.2

 
$
206.0

 
$
(6.8
)

Total debt obligations decreased $6.8 million, or 3.3%, to $199.2 million at the end of 2014 compared to $206.0 million at the end of last year due to a decrease in borrowings under our revolving credit agreement. Interest expense in 2014 was $20.5 million compared to $21.3 million in 2013 and $23.0 million in 2012.

Credit Agreement
On December 18, 2014, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Fourth Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement matures on December 18, 2019 and provides for a revolving credit facility in an aggregate amount of up to $600.0 million, subject to the calculated borrowing base restrictions, and provides for an increase at the Company’s option by up to $150.0 million from time to time during the term of the Credit Agreement, subject to satisfaction of certain conditions and the willingness of existing or new lenders to assume the increase. Under the Credit Agreement, the Loan Parties' obligations are secured by a first priority security interest in all accounts receivable, inventory and certain other collateral. The Credit Agreement amended and restated the Third Amended and Restated Credit Agreement, dated as of January 7, 2011 (the "Former Credit Agreement").

Interest on borrowings is at variable rates based on the London Interbank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
 
We were in compliance with all covenants and restrictions under the Credit Agreement as of January 31, 2015. Refer to further discussion regarding the Credit Agreement in Note 10 to the consolidated financial statements.

At January 31, 2015, we had no borrowings and $6.3 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $525.6 million at January 31, 2015.

30




$200 Million Senior Notes Due 2019
On May 11, 2011, we closed on an offering (the “Offering”) of $200.0 million aggregate principal amount of 7.125% Senior Notes due 2019 (the “2019 Senior Notes”). We used a portion of the net proceeds to call and redeem our outstanding 8.75% senior notes due in 2012 (the “2012 Senior Notes”). We used the remaining net proceeds for general corporate purposes, including repaying amounts outstanding under the Former Credit Agreement. The 2019 Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under the Credit Agreement. Interest on the 2019 Senior Notes is payable on May 15 and November 15 of each year. The 2019 Senior Notes mature on May 15, 2019. We may redeem all or a part of the 2019 Senior Notes at the redemption prices (expressed as a percentage of principal) set forth below plus accrued and unpaid interest, if redeemed during the 12-month period beginning on May 15 of the years indicated below:

Year
Percentage

2015
103.563
%
2016
101.781
%
2017 and thereafter
100.000
%

The 2019 Senior Notes also contain certain other covenants and restrictions that limit certain activities including, among other things, levels of indebtedness, payments of dividends, the guarantee or pledge of assets, certain investments, common stock repurchases, mergers and acquisitions and sales of assets. As of January 31, 2015, we were in compliance with all covenants and restrictions relating to the 2019 Senior Notes.

Loss on Early Extinguishment of Debt
During 2014, we incurred a loss of $0.4 million on the early extinguishment of the revolving credit agreement prior to maturity.

Working Capital and Cash Flow

 
January 31, 2015

 
February 1, 2014

 
Decrease

Working capital ($ millions) (1)
 
$393.8
 
$405.7
 
$(11.9)
Debt-to-capital ratio (2)
 
26.9
%
 
30.1
%
 
(3.2
)%
Current ratio (3)
 
1.99:1

 
2.05:1

 


(1)
Working capital has been computed as total current assets less total current liabilities.
(2)
Debt-to-capital has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the Credit Agreement. Total capitalization is defined as total debt and total equity.
(3)
The current ratio has been computed by dividing total current assets by total current liabilities.



2014

 
2013

 
Increase (Decrease)
in Cash and Cash Equivalents

Net cash provided by operating activities
$
118.8

 
$
104.0

 
$
14.8

Net cash (used for) provided by investing activities
(112.0
)
 
20.1

 
(132.1
)
Net cash used for financing activities
(20.5
)
 
(105.8
)
 
85.3

Effect of exchange rate changes on cash and cash equivalents
(1.4
)
 
(4.0
)
 
2.6

(Decrease) increase in cash and cash equivalents
$
(15.1
)
 
$
14.3

 
$
(29.4
)

Working capital at January 31, 2015, was $393.8 million, which was $11.9 million lower than at February 1, 2014. Our current ratio decreased to 1.99 to 1 at January 31, 2015, from 2.05 to 1 at February 1, 2014. The decrease in working capital is driven by several factors, including a lower cash balance, an increase in the current deferred income tax liability and an increase in employee compensation and benefits, partially offset by an increase in prepaid expenses and other current assets, lower accounts payable and lower borrowings under our revolving credit agreement. Our lower balance for the revolving credit agreement is primarily due to our operating cash flows in 2014. Our ratio of debt-to-capital decreased to 26.9% as of January 31, 2015, compared to 30.1% at February 1, 2014, reflecting higher shareholders' equity due to our 2014 net earnings and a $6.8 million decrease in total debt obligations. At January 31, 2015, we had $67.4 million of cash and cash equivalents, most of which represented cash and cash equivalents of our foreign subsidiaries.

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

31




Cash provided by operating activities was $14.8 million higher in 2014 than last year, reflecting the following factors:

A smaller increase in inventories in 2014 compared to 2013 reflecting our continued focus on inventory management;
A larger increase in accrued expenses and other liabilities in 2014 compared to 2013 primarily due to an increase in incentive accruals under our cash incentive plans; partially offset by
An increase in prepaid expenses and other current and noncurrent assets in 2014 as compared to a decrease in 2013 primarily due to an increase in prepaid rent in 2014 as a result of the timing of payments compared to last year.
A decrease in trade accounts payable in 2014 as compared to an increase in 2013 due to the timing of purchases and payments to vendors.

Cash used for investing activities was $132.1 million higher in 2014 than last year, primarily due to the $65.1 million acquisition of the Franco Sarto trademarks in the first quarter of 2014, the $7.0 million minority investment in Jack Erwin, Inc. in August 2014, and the $69.3 million of net proceeds from the sale of American Sporting Goods Corporation in 2013, partially offset by the net proceeds from the sale of Shoes.com in 2014. In 2015, we expect purchases of property and equipment and capitalized software of approximately $75 million, with approximately $22 million allocated for expansion and modernization of our distribution centers.

Cash used for financing activities was $85.3 million lower in 2014 than last year, primarily due to a $91.0 million decrease in net repayments of borrowings under our Former Credit Agreement and Credit Agreement, partially offset by debt issuance costs incurred in 2014 associated with the Credit Agreement and a decrease in the tax benefit related to the share-based plans.

We paid dividends of $0.28 per share in each of 2014, 2013 and 2012. The 2014 dividends marked the 92nd year of consecutive quarterly dividends. On March 12, 2015, the Board of Directors declared a quarterly dividend of $0.07 per share, payable April 1, 2015, to shareholders of record on March 23, 2015, marking the 369th consecutive quarterly dividend to be paid by the Company. The declaration and payment of any future dividend is at the discretion of the Board of Directors and will depend on our results of operations, financial condition, business conditions and other factors deemed relevant by our Board of Directors. However, we presently expect that dividends will continue to be paid.

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are listed below.

Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales and sales through our Internet sites are recorded, net of returns, allowances and discounts, generally when the merchandise has been shipped and title and risk of loss have passed to the customer. Retail items sold through our Internet sites are made pursuant to a sales agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier. Reserves for projected merchandise returns, discounts and allowances are carried based on historical experience and current expectations. Revenue is recognized on license fees related to our owned brand names, where we are the licensor, when the related sales of the licensee are made.

Inventories
Inventories are our most significant asset, representing approximately 45% of total assets at the end of 2014. We value inventories at the lower of cost or market with 95% of consolidated inventories using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current selling prices. At our Famous Footwear segment, we recognize markdowns when it becomes evident that inventory items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes the gross profit rate at our Famous Footwear segment to be lower than the initial markup during periods when permanent price reductions are taken to clear product. At our other divisions, we generally provide markdown reserves to reduce the carrying values of inventories to a level where, upon sale of the product, we will realize our normal gross profit rate. We believe these policies reflect the difference in operating models between our Famous Footwear segment and our Brand Portfolio segment. Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The Brand Portfolio segment generally relies on permanent price reductions to clear slower-moving inventory.

32




We perform physical inventory counts or cycle counts on all merchandise inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts based on historical results. Inventory shrinkage is included as a component of cost of goods sold.

Income Taxes
We record deferred taxes for the effects of timing differences between financial and tax reporting. These differences relate principally to employee benefit plans, accrued expenses, bad debt reserves, depreciation and amortization and inventory.

We evaluate our foreign investment opportunities and plans, as well as our foreign working capital needs, to determine the level of investment required and, accordingly, determine the level of foreign earnings that we consider indefinitely reinvested. Based upon that evaluation, earnings of our foreign subsidiaries that are not otherwise subject to United States taxation, except for our Canadian subsidiary, are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.

At January 31, 2015, we have net operating loss and other carryforwards at certain of our subsidiaries. We evaluate these carryforwards for realization based upon their expiration dates and our expectations of future taxable income. As deemed appropriate, valuation reserves are recorded to adjust the recorded value of these carryforwards to the expected realizable value.

We are audited periodically by domestic and foreign tax authorities and tax assessments may arise several years after tax returns have been filed. Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more-likely-than-not threshold for recognition. For tax positions that meet the more-likely-than-not threshold, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled. In evaluating issues raised in such audits and other uncertain tax positions, we provide reserves for exposures as appropriate.

Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. We adopted the provisions of Accounting Standards Codification (“ASC”), Intangibles-Goodwill and Other (ASC Topic 350) Testing Goodwill for Impairment, which permits, but does not require, a company to qualitatively assess indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment screen or discounted cash flow analysis, management performs the next step, which compares the fair value of the reporting unit to the recorded value of the tangible and intangible assets of the reporting units. Goodwill is considered impaired if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit.

We elected to bypass the optional qualitative assessment for the goodwill impairment test performed as of the first day of the fourth quarter of 2014 and therefore, we reviewed goodwill for impairment utilizing a discounted cash flow analysis. A fair-value-based test is applied at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the fair value of our reporting units to the carrying value of those reporting units. This test requires significant assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair value of goodwill is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expense, capital expenditures, depreciation, amortization and working capital requirements are based on our internal projections. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit directly resulting from the use of its assets in its operations. We also considered assumptions that market participants may use. Both the estimates of the fair value of our reporting units and the allocation of the estimated fair value of the reporting units are based on the best information available to us as of the date of the assessment.

An adjustment to goodwill will be recorded for any goodwill that is determined to be impaired. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the fair values of recognized assets and liabilities of the reporting unit. We perform impairment tests during the fourth quarter of each fiscal year unless events indicate an interim test is required. The goodwill impairment testing and other indefinite-lived intangible asset impairment reviews were performed as of the first day of our fourth fiscal quarter and resulted in no impairment charges.

During 2012, we terminated the Etienne Aigner license agreement, due to a dispute with the licensor and recognized an impairment charge of $5.8 million, to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. 


33



Other intangible assets are amortized over their useful lives and are reviewed for impairment if and when impairment indicators are present. Refer to Note 9 to the consolidated financial statements for additional information related to the impairment of goodwill and intangible assets.

Store Closing and Impairment Charges
We regularly analyze the results of all of our stores and assess the viability of underperforming stores to determine whether events or circumstances exist that indicate the stores should be closed or whether the carrying amount of their long-lived assets may not be recoverable. After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, we write down to fair value the fixed assets of stores indicated as impaired.

Litigation Contingencies
We are the defendant in several claims and lawsuits arising in the ordinary course of business. We do not believe any of these ordinary- course-of-business proceedings will have a material adverse effect on our consolidated financial position or results of operations. We accrue our best estimate of the cost of resolution of these claims. Legal defense costs of such claims are recognized in the period in which we incur the costs. See Note 17 to the consolidated financial statements for a further description of commitments and contingencies.

Environmental Matters
We are involved in environmental remediation and ongoing compliance activities at several sites. We are remediating, under the oversight of Colorado authorities, the groundwater and indoor air at our Redfield site and residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the facility. In addition, various federal and state authorities have identified us as a potentially responsible party for remediation at certain landfills. While we currently do not operate manufacturing facilities in the United States, prior operations included numerous manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be identified in the future. See Note 17 to the consolidated financial statements for a further description of specific properties.

Environmental expenditures relating to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or our commitment to a formal plan of action, and our estimates of cost are subject to change as new information becomes available. Costs of future expenditures for environmental remediation obligations are discounted to their present value in those situations requiring only continuing maintenance and monitoring based upon a schedule of fixed payments.

Share-based Compensation
We account for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation, and ASC 505, Equity, which require all share-based payments to employees and members of the Board of Directors, including grants of employee stock options, to be recognized as expense in the consolidated financial statements based on their fair values. The fair value of stock options is calculated by using the Black-Scholes option pricing formula that requires estimates for expected volatility, expected dividends, the risk-free interest rate, and the term of the option. Stock options generally vest over four years, with 25% vesting annually, and expense is recognized on a straight-line basis separately for each vesting portion of the stock option award. Expense for stock performance awards is recognized based upon the fair value of the awards on the date of grant and the anticipated number of shares or units to be awarded on a straight-line basis over the respective term of the award, or individual vesting portion of an award. If any of the assumptions used in the Black-Scholes model or the anticipated number of shares to be awarded change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. See additional information related to share-based compensation in Note 15 to the consolidated financial statements.

Retirement and Other Benefit Plans
We sponsor pension plans in both the United States and Canada. Our domestic pension plans cover substantially all United States employees, and our Canadian pension plans cover certain employees based on plan specifications. In addition, we maintain an unfunded Supplemental Executive Retirement Plan (“SERP”) and sponsor unfunded defined benefit postretirement life insurance plans that cover both salaried and hourly employees who had become eligible for benefits by January 1, 1995.

We determine our expense and obligations for retirement and other benefit plans based on assumptions related to discount rates, expected long-term rates of return on invested plan assets, expected salary increases and certain employee-related factors, such as turnover, retirement age and mortality, among others. Our assumptions reflect our historical experience and our best judgment regarding future expectations. Additional information related to our assumptions is as follows:


34



Expected long-term rate of return – The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plan’s investment portfolio. Assumed projected rates of return for each asset class were selected after analyzing experience and future expectations of the returns. The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class. The weighted-average expected rate of return on plan assets used to determine our pension expense for 2014 was 8.25%. A decrease of 50 basis points in the weighted-average expected rate of return on plan assets would increase pension expense by approximately $1.5 million. The actual return on plan assets in a given year may differ from the expected long-term rate of return, and the resulting gain or loss is deferred and recognized into the plans’ expense over time.

Discount rate – Discount rates used to measure the present value of our benefit obligations for our pension and other postretirement benefit plans are based on a hypothetical bond portfolio constructed from a subset of high-quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plans. The weighted-average discount rate selected to measure the present value of our benefit obligations under our pension and other postretirement benefit plans was 3.9% for each. A decrease of 50 basis points in the weighted-average discount rate would have increased the projected benefit obligation of the pension and other postretirement benefit plans by approximately $33.8 million and $0.1 million, respectively.

Mortality table – At February 1, 2014, the domestic defined benefit pension plan mortality assumption was based on the RP-2000 mortality table using mortality improvement scale AA. In October 2014, the Society of Actuaries issued an updated set of mortality tables and improvement scale collectively known as RP-2014 and MP-2014, respectively. We have reviewed the findings and recommendations of these reports with our actuary and our actuary performed a mortality study based on our plan's participant population. Based on the results of that study, we have elected to use the Society of Actuaries' RP-2014 Bottom Quartile tables, projected using generational scale MP-2014 to better reflect anticipated future experience. Actuarial losses, related to the change in mortality tables, increased the pension plan liability by approximately $18.4 million as of January 31, 2015.

Refer to Note 5 to the consolidated financial statements for additional information related to our retirement and other benefit plans.

Impact of Prospective Accounting Pronouncements
Recent accounting pronouncements and their impact on the Company are described in Note 1 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as of January 31, 2015.

 
CONTRACTUAL OBLIGATIONS
The table below sets forth our significant future obligations by time period. Further information on certain of these commitments is provided in the notes to our consolidated financial statements, which are cross-referenced in this table. Our obligations outstanding as of January 31, 2015 include the following:


Payments Due by Period



Less Than

1-3

3-5

More Than

($ millions)
Total

1 Year

Years

Years

5 Years

Long-term debt (1)
$
200.0

$

$

$
200.0

$

Interest on long-term debt (1)
64.1

14.3

28.5

21.3


Operating lease commitments (2)
675.9

153.3

224.7

127.9

170.0

Minimum license commitments
26.2

7.8

15.1

2.1

1.2

Purchase obligations (3)
673.8

666.1

6.8

0.9


Obligations related to restructuring initiatives (4)
1.6

1.6




Other (5)
16.3

4.5

4.3

1.7

5.8

Total (6) (7)
$
1,657.9

$
847.6

$
279.4

$
353.9

$
177.0



35



 
 
(1)
Interest obligations in future periods have been reflected based on our $200.0 million principal value of Senior Notes and a fixed interest rate of 7.125% as of fiscal year ended January 31, 2015. Refer to Note 10 to the consolidated financial statements.
(2)
A majority of our retail operating leases contain provisions that allow us to modify amounts payable under the lease or terminate the lease in certain circumstances, such as experiencing actual sales volume below a defined threshold and/or co-tenancy provisions associated with the facility. The contractual obligations presented in the table above reflect the total lease obligation, irrespective of our ability to reduce or terminate rental payments in the future, as noted. Refer to Note 11 to the consolidated financial statements.
(3)
Purchase obligations include agreements to purchase assets, goods or services that specify all significant terms, including quantity and price provisions.
(4)
Refer to Note 4 to the consolidated financial statements for further information related to these obligations.
(5)
Includes obligations for our supplemental executive retirement plan and other postretirement benefits, as discussed in Note 5 to the consolidated financial statements, and other contractual obligations.
(6)
Excludes liabilities of $1.0 million, established pursuant to the provisions of ASC 740, Income Taxes