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


FORM 10-Q
(Mark One)
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended AprilJuly 28, 2012
  
[  ]
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
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
  
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
 
(314) 854-4000
(Registrant's telephone number, including area code)
 
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 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £
(Do not check if a smaller reporting company) 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes  £     No R

As of May 25,August 24, 2012, 42,859,12042,865,489  common shares were outstanding.
 
 
 
 
PART IFINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 (Unaudited)   
($ thousands)April 28, 2012 April 30, 2011 January 28, 2012 
Assets         
Current assets         
   Cash and cash equivalents$39,792 $54,229 $47,682 
   Receivables 139,488  144,484  154,022 
   Inventories 512,819  534,725  561,797 
   Prepaid expenses and other current assets 46,051  57,468  51,637 
Total current assets 738,150  790,906  815,138 
          
Other assets 138,178  135,103  140,277 
Goodwill and intangible assets, net 138,697  173,162  140,590 
Property and equipment 430,098  430,274  436,683 
   Allowance for depreciation (304,301) (288,876) (305,212)
Net property and equipment 125,797  141,398  131,471 
Total assets$1,140,822 $1,240,569 $1,227,476 
 
Liabilities and Equity
        
Current liabilities         
   Borrowings under revolving credit agreement$124,000 $288,000 $201,000 
   Trade accounts payable 182,380  171,386  190,611 
   Other accrued expenses 135,484  132,806  132,969 
Total current liabilities 441,864  592,192  524,580 
          
Other liabilities         
   Long-term debt 198,680  150,000  198,633 
   Deferred rent 29,746  34,127  32,361 
   Other liabilities 57,538  44,438  58,186 
Total other liabilities 285,964  228,565  289,180 
          
Equity         
   Common stock 428  443  420 
   Additional paid-in capital 115,912  135,568  115,869 
   Accumulated other comprehensive income 10,233  8,197  9,637 
   Retained earnings 285,439  274,814  286,743 
      Total Brown Shoe Company, Inc. shareholders’ equity 412,012  419,022  412,669 
   Noncontrolling interests 982  790  1,047 
Total equity 412,994  419,812  413,716 
Total liabilities and equity$1,140,822 $1,240,569 $1,227,476 
See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

  (Unaudited) 
  Thirteen Weeks Ended 
($ thousands, except per share amounts)
 
April 28,
 2012
 
April 30,
 2011
 
Net sales $626,441 $619,555 
Cost of goods sold  387,377  371,591 
Gross profit  239,064  247,964 
Selling and administrative expenses  218,914  234,140 
Restructuring and other special charges, net  11,455  1,744 
Operating earnings  8,695  12,080 
Interest expense  (6,157) (6,698)
Interest income  83  85 
Earnings before income taxes from continuing operations  2,621  5,467 
Income tax provision  (993) (2,119)
Net earnings from continuing operations  1,628  3,348 
Discontinued operations:       
   Earnings from operations of subsidiary, net of tax of $0 and $215, respectively  –  293 
Net earnings from discontinued operations  –  293 
Net earnings  1,628  3,641 
Net loss attributable to noncontrolling interests  (67) (47)
Net earnings attributable to Brown Shoe Company, Inc. $1,695 $3,688 
      
Basic earnings per common share:       
   From continuing operations $0.04 $0.08 
   From discontinued operations  –  – 
Basic earnings per common share attributable to Brown Shoe Company, Inc. shareholders $0.04 $0.08 
        
Diluted earnings per common share:       
   From continuing operations $0.04 $0.08 
   From discontinued operations  –  – 
Diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders $0.04 $0.08 
      
Dividends per common share $0.07 $0.07 
See notes to condensed consolidated financial statements.


BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  (Unaudited) 
  Thirteen Weeks Ended 
($ thousands, except per share amounts)
 
April 28,
 2012
 
April 30,
 2011
 
Net earnings $1,628 $3,641 
Other comprehensive income, net of tax:       
   Foreign currency translation adjustment  988  2,259 
   Unrealized losses on derivative financial instruments, net of tax of $136 and $51, respectively  (383) (209)
   Net (income) loss from derivatives reclassified into earnings, net of tax of $9 and $5, respectively  (9) 14 
Other comprehensive income, net of tax  596  2,064 
Comprehensive income  2,224  5,705 
Comprehensive loss attributable to noncontrolling interests  (65) (39)
Comprehensive income attributable to Brown Shoe Company, Inc. $2,289 $5,744 
See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited) 
 Thirteen Weeks Ended 
($ thousands)
April 28,
2012
 
April 30,
2011
 
     
Operating Activities      
Net earnings$1,628 $3,641 
Adjustments to reconcile net earnings to net cash provided by operating  activities:      
   Depreciation 8,104  8,921 
   Amortization of capitalized software 3,283  3,327 
   Amortization of intangibles 1,893  2,066 
   Amortization of debt issuance costs 629  599 
   Share-based compensation expense 1,444  1,663 
   Tax (benefit) deficiency related to share-based plans (753) 431 
   Loss on disposal of facilities and equipment 456  308 
   Impairment charges for facilities and equipment 2,756  543 
   Deferred rent (2,615) (551)
   Provision for doubtful accounts 950  335 
   Changes in operating assets and liabilities, net of acquired business:      
      Receivables 13,587  (9,628)
      Inventories 49,251  39,362 
      Prepaid expenses and other current and noncurrent assets 6,377  268 
      Trade accounts payable (8,268) (9,155)
      Accrued expenses and other liabilities 1,900  (37,348)
   Other, net (724) (1,125)
Net cash provided by operating activities 79,898  3,657 
       
Investing Activities      
Purchases of property and equipment (5,622) (7,067)
Capitalized software (1,386) (2,640)
Acquisition cost –  (156,636)
Cash recognized on initial consolidation –  3,121 
Net cash used for investing activities (7,008) (163,222)
       
Financing Activities      
Borrowings under revolving credit agreement 165,000  759,500 
Repayments under revolving credit agreement (242,000) (669,500)
Dividends paid (2,999) (3,104)
Debt issuance costs –  (1,234)
Issuance of common stock under share-based plans (2,148) 484 
Tax benefit (deficiency) related to share-based plans 753  (431)
Net cash (used for) provided by financing activities (81,394) 85,715 
Effect of exchange rate changes on cash and cash equivalents 614  1,531 
Decrease in cash and cash equivalents (7,890) (72,319)
Cash and cash equivalents at beginning of period 47,682  126,548 
Cash and cash equivalents at end of period$39,792 $54,229 
 (Unaudited)   
($ thousands)July 28, 2012 July 30, 2011 January 28, 2012 
Assets         
Current assets         
   Cash and cash equivalents$47,397 $62,553 $47,682 
   Receivables 134,016  158,595  154,022 
   Inventories 621,067  627,929  561,797 
   Prepaid expenses and other current assets 49,500  49,360  51,637 
Total current assets 851,980  898,437  815,138 
          
Other assets 136,396  139,109  140,277 
Goodwill and intangible assets, net 131,074  174,299  140,590 
Property and equipment 431,856  435,624  436,683 
   Allowance for depreciation (297,132) (296,546) (305,212)
Net property and equipment 134,724  139,078  131,471 
Total assets$1,254,174 $1,350,923 $1,227,476 
          
 
Liabilities and Equity
        
Current liabilities         
   Borrowings under revolving credit agreement$116,000 $250,000 $201,000 
   Trade accounts payable 294,255  295,826  190,611 
   Other accrued expenses 148,838  139,698  132,969 
Total current liabilities 559,093  685,524  524,580 
          
Other liabilities         
   Long-term debt 198,726  198,540  198,633 
   Deferred rent 29,371  33,445  32,361 
   Other liabilities 59,286  42,692  58,186 
Total other liabilities 287,383  274,677  289,180 
          
Equity         
   Common stock 429  423  420 
   Additional paid-in capital 117,815  114,712  115,869 
   Accumulated other comprehensive income 8,759  7,830  9,637 
   Retained earnings 279,898  267,112  286,743 
      Total Brown Shoe Company, Inc. shareholders’ equity 406,901  390,077  412,669 
   Noncontrolling interests 797  645  1,047 
Total equity 407,698  390,722  413,716 
Total liabilities and equity$1,254,174 $1,350,923 $1,227,476 
See notes to condensed consolidated financial statements.
 
 
 

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 (Unaudited) (Unaudited) 
 Thirteen Weeks Ended Twenty-six Weeks Ended 
($ thousands, except per share amounts)
July 28,
 2012
 
July 30,
 2011
 
July 28,
 2012
 
July 30,
 2011
 
Net sales$599,279 $620,590 $1,225,720 $1,240,145 
Cost of goods sold 365,465  386,985  752,842  758,576 
Gross profit 233,814  233,605  472,878  481,569 
Selling and administrative expenses 219,261  233,914  438,175  468,054 
Restructuring and other special charges, net 7,491  689  18,946  2,433 
Impairment of intangible assets 5,777  –  5,777  – 
Operating earnings (loss) 1,285  (998) 9,980  11,082 
Interest expense (5,758) (6,520) (11,915) (13,218)
Loss on early extinguishment of debt –  (1,003) –  (1,003)
Interest income 77  65  160  150 
Loss before income taxes from continuing operations (4,396) (8,456) (1,775) (2,989)
Income tax benefit 1,682  3,005  689  886 
Net loss from continuing operations (2,714) (5,451) (1,086) (2,103)
Discontinued operations:            
    Earnings from operations of subsidiary, net of tax of $0, $475, $0 and $690, respectively –  683  –  976 
Net earnings from discontinued operations –  683  –  976 
Net loss (2,714) (4,768) (1,086) (1,127)
Net loss attributable to noncontrolling interests (179) (159) (246) (206)
Net loss attributable to Brown Shoe Company, Inc.$(2,535)$(4,609)$(840)$(921)
             
Basic (loss) earnings per common share:            
     From continuing operations  $(0.06)  $(0.13) $(0.02)  $(0.04)
     From discontinued operations –  0.02  –  0.02 
Basic loss per common share attributable  to Brown Shoe Company, Inc. shareholders$(0.06) $(0.11)$(0.02)$(0.02)
             
Diluted (loss) earnings per common share:            
     From continuing operations  $(0.06) $(0.13)  $(0.02)  $(0.04)
     From discontinued operations –  0.02  –  0.02 
Diluted loss per common share attributable to Brown Shoe Company, Inc. shareholders$(0.06)  $(0.11)$(0.02)$(0.02)
         
Dividends per common share$0.07   $0.07 $0.14 $0.14 
See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited) (Unaudited) 
 Thirteen Weeks Ended Twenty-six Weeks Ended 
($ thousands)
July 28,
 2012
 
July 30,
 2011
 
July 28,
 2012
 
July 30,
 2011
 
Net loss$(2,714)$(4,768)$(1,086)$(1,127)
Other comprehensive (loss) income, net of tax:            
Foreign currency translation adjustment (1,000) (353) (12) 1,898 
Unrealized losses on derivative financial instruments, net of tax of $308 and $50 in the thirteen weeks and $444 and $101 in the twenty-six weeks ended July 28, 2012 and July 30, 2011, respectively (507) (27) (890) (236)
Net loss from derivatives reclassified into earnings, net of tax of $20 and $3 in the thirteen weeks and $11 and $9 in the twenty-six weeks ended July 28, 2012 and July 30, 2011, respectively 33  14  24  27 
Other comprehensive (loss) income, net of tax (1,474) (366)  (878) 1,689 
Comprehensive (loss) income (4,188) (5,134) (1,964) 562 
Comprehensive loss attributable to noncontrolling interest��(185) (145) (250) (184)
Comprehensive (loss) income attributable to Brown Shoe Company, Inc.$(4,003)$(4,989)$(1,714)$746 
See notes to condensed consolidated financial statements.

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited) 
 Twenty-six Weeks Ended 
($ thousands)
July 28,
2012
 
July 30,
2011
 
     
Operating Activities      
Net loss$(1,086)$(1,127)
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation 16,429  18,565 
Amortization of capitalized software 6,559  6,657 
Amortization of intangibles 3,738  4,206 
Amortization of debt issuance costs 1,256  1,163 
Loss on early extinguishment of debt –  1,003 
Share-based compensation expense 3,275  3,007 
Tax (benefit) deficiency related to share-based plans (738) 453 
Loss on disposal of facilities and equipment 1,358  454 
Impairment charges for facilities and equipment 3,131  746 
Impairment of intangible assets 5,777  – 
Deferred rent (2,990) (1,233)
Provision for doubtful accounts 1,008  422 
Changes in operating assets and liabilities, net of acquired business:      
Receivables 18,997  (23,921)
Inventories (59,363) (56,405)
Prepaid expenses and other current and noncurrent assets 2,864  9,247 
Trade accounts payable 103,668  115,236 
Accrued expenses and other liabilities 16,961  (33,999)
Other, net (1,484) (1,011)
Net cash provided by operating activities 119,360  43,463 
       
Investing Activities      
Purchases of property and equipment (24,146) (14,683)
Capitalized software (2,956) (7,098)
Acquisition cost –  (156,636)
Cash recognized on initial consolidation –  3,121 
Net cash used for investing activities (27,102) (175,296)
       
Financing Activities      
Borrowings under revolving credit agreement 334,000  965,500 
Repayments under revolving credit agreement (419,000) (913,500)
Proceeds from issuance of 2019 Senior Notes –  198,540 
Redemption of 2012 Senior Notes –  (150,000)
Dividends paid (6,005) (6,197)
Debt issuance costs –  (5,828)
Acquisition of treasury stock –  (22,408)
Issuance of common stock under share-based plans, net (2,058) 693 
Tax benefit (deficiency) related to share-based plans 738  (453)
Net cash (used for) provided by financing activities (92,325) 66,347 
Effect of exchange rate changes on cash and cash equivalents (218) 1,491 
Decrease in cash and cash equivalents (285) (63,995)
Cash and cash equivalents at beginning of period 47,682  126,548 
Cash and cash equivalents at end of period$47,397 $62,553 
See notes to condensed consolidated financial statements.
BROWN SHOE COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

Note 1Basis of Presentation

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

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

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

For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended January 28, 2012.


Note 2Impact of New and Prospective Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement, which amends currentprior fair value guidance. This accounting updatestandard requires additional disclosures related to fair value measurements. The Company adopted the standard on January 29, 2012 and it did not have an impact on the Company’s condensed consolidated financial statements, although changes in related disclosures were required.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220) Presentation of Comprehensive Income, which amends currentprior comprehensive income guidance. This accounting updatestandard eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income that contains two sections, net earnings and other comprehensive income, or in two separate but consecutive statements. The Company adopted the standard on January 29, 2012 and it did not have an impact on the Company’s condensed consolidated balance sheets, results of operations or cash flows as it only requires a change in the format of the current presentation and related disclosures.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (ASC Topic 350) Testing Goodwill for Impairment, which amends currentprior goodwill impairment testing guidance. This accounting updatestandard will allow companies the option to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after considering the totality of events and circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount, performing the two-step impairment test is unnecessary. The Company adopted the standard on January 29, 2012 and it did not have an impact on the Company’s condensed consolidated financial statements.


In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (ASC Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which amends prior indefinite-lived intangible asset impairment testing guidance. This standard will allow companies the option to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired. If, after considering the totality of events and circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is not impaired, then calculating the fair value is unnecessary. ASU 2012-02 will be effective for public companies during the interim and annual periods beginning after September 15, 2012 with early adoption permitted. The Company plans on adopting this standard during the third quarter of 2012. The adoption of ASU 2012-02 will not have an impact on the Company’s condensed consolidated financial statements.
Note 3Acquisitions and Divestitures

American Sporting Goods Corporation
On February 17, 2011, the Company entered into a Stock Purchase Agreement with American Sporting Goods Corporation (“ASG”) and ASG’s stockholders, pursuant to which a subsidiary of the Company acquired all of the outstanding capital stock of ASG from the ASG stockholders on that date. The aggregate purchase price for ASG was $156.6 million in cash, including debt assumed by the Company of $11.6 million. The cost to acquire ASG was allocated to the assets acquired and liabilities assumed according to estimated fair values. The allocation resulted in acquired goodwill of $61.2 million and intangible assets related to trade names, licensing agreements and customer relationships of $46.7 million. The goodwill and intangible assets were allocated to the Wholesale Operations segment.

The Company incurred no integration costs in the second quarter of 2012 and $0.7 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) during the first half of 2012 and acquisition and integration costs of $0.7 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) in the firstsecond quarter of 20122011 and acquisition costs of $1.7$2.4 million (on both a pre-tax and($2.1 million on an after-tax basis, or $0.04 per diluted share) induring the first quarterhalf of 2011. The integration costs incurred in the first quarterhalf of 2012 are included in the Wholesale Operations segmentsegment. The acquisition and theintegration costs incurred in the first quarterhalf of 2011 were included in the Other segment. All costs were recorded as a component of restructuring and other special charges, net. In addition, during the first quarter of 2011, the Wholesale Operations segment recognized an increase in cost of goods sold related to the impact of the inventory fair value adjustment in connection with the acquisition of ASG of $2.7$1.5 million ($1.60.9 million on an after-tax basis, or $0.04$0.02 per diluted share). during the second quarter of 2011 and $4.2 million ($2.5 million on an after-tax basis, or $0.05 per diluted share) during the first half of 2011.

The results of ASG have been included in the Company’s financial statements since February 17, 2011 and are consolidated within the Wholesale Operations segment. The following table illustrates the unaudited pro forma effect on the firstsecond quarter of 2011 results as if the acquisition had been completed as of the beginning of 2010:

  Thirteen Weeks
Ended
($ thousands, except per share amounts)  April 30, 2011
Net sales  $626,312
Net earnings attributable to Brown Shoe Company, Inc.6,609
Basic earnings per common share attributable to Brown Shoe Company, Inc. shareholders0.15
Diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders0.15
      
 
Thirteen
Weeks Ended
  
Twenty-six
Weeks Ended
 
($ thousands, except per share amounts)
  July 30, 2011    July 30,  2011 
Net sales  $620,590    $1,246,902 
Net (loss) earnings attributable to Brown Shoe Company, Inc. (3,823)  2,786 
Basic (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders (0.09)  0.06 
Diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders (0.09)  0.06 

The pro forma net sales for the second quarter and first quarterhalf of 2011 exclude the discontinued operations of The Basketball Marketing Company, Inc. (“TBMC”), which was sold during the third quarter of 2011. The primary adjustments to the pro forma disclosures above for the first quarter of 2011 include: i) the elimination of the non-cash cost of goods sold impact related to the inventory fair value adjustment of $2.7 million;$1.5 million in the second quarter of 2011 and $4.2 million in the first half of 2011; and ii) the elimination of $1.7 million of expenses related to the acquisition.acquisition in the first half of 2011.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results would have been had we completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods.

The Basketball Marketing Company, Inc.
On October 25, 2011, the Company sold TBMC for $55.4 million, which resulted in a pre-tax gain of $20.6 million. TBMC was acquired in the Company’s February 17, 2011 acquisition of ASG. Accordingly, the Company reduced goodwill by $21.6 million, intangible assets by $8.0 million and other net assets by $5.2 million and the results of TBMC are reflected in the condensed consolidated statement of earnings as discontinued operations.


 
 
 


Note 4(Loss) Earnings Per Share

The Company uses the two-class method to compute basic and diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders. In periods of net loss, no effect is given to the Company’s participating securities since they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders for the periods ended AprilJuly 28, 2012 and AprilJuly 30, 2011:

  Thirteen Weeks Ended      
(in thousands, except per share amounts)
  April 28,
2012
  April 30,
2011
  
     Thirteen Weeks Ended Twenty-six Weeks Ended 
($ thousands, except per share amounts)
July 28,
 2012
 
July 30,
 2011
 
July 28,
 2012
 
July 30,
 2011
 
NUMERATOR                
Net earnings from continuing operations  $1,628 $3,348  
Net loss from continuing operations$(2,714)$(5,451)$(1,086)$(2,103)
Net loss attributable to noncontrolling interests 67 47   179 159  246 206 
Net earnings allocated to participating securities (155) (138)  – –  – – 
Net earnings from continuing operations 1,540 3,257  
Net loss from continuing operations (2,535) (5,292) (840) (1,897)
                
Net earnings from discontinued operations – 293   – 683  – 976 
Net earnings allocated to participating securities – (11)  – –  – – 
Net earnings from discontinued operations – 282   – 683  – 976 
Net earnings attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities  $1,540 $3,539  
Net loss attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities$(2,535)$(4,609)$(840)$(921)
              
DENOMINATOR                
Denominator for basic continuing and discontinued earnings per common share attributable to Brown Shoe Company, Inc. shareholders 40,422 42,475  
Denominator for basic continuing and discontinued (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders 40,687 41,852  40,555 42,164 
Dilutive effect of share-based awards 322 531   – –  – – 
Denominator for diluted continuing and discontinued earnings per common share attributable to Brown Shoe Company, Inc. shareholders 40,744 43,006  
Denominator for diluted continuing and discontinued (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders 40,687 41,852  40,555 42,164 
              
Basic earnings per common share:      
Basic (loss) earnings per common share:          
From continuing operations  $0.04 $0.08  $(0.06)$(0.13)$(0.02)$(0.04)
From discontinued operations – –   – 0.02  – 0.02 
Basic earnings per common share attributable to Brown Shoe Company, Inc. shareholders  $0.04 $0.08  
Basic loss per common share attributable to Brown Shoe Company, Inc. shareholders$(0.06)$(0.11)$(0.02)$(0.02)
                
Diluted earnings per common share:      
Diluted (loss) earnings per common share:          
From continuing operations  $0.04 $0.08  $(0.06)$(0.13)$(0.02)$(0.04)
From discontinued operations – –   – 0.02  – 0.02 
Diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders  $0.04 $0.08  
Diluted loss per common share attributable to Brown Shoe Company, Inc. shareholders$(0.06)$(0.11)$(0.02)$(0.02)

OptionsDue to purchase 1,345,256 and 1,350,570 shares of common stockthe net loss attributable to Brown Shoe Company, Inc. for the thirteen weeks and twenty-six weeks ended AprilJuly 28, 2012 and AprilJuly 30, 2011, respectively, were not included in the denominator for diluted earningsloss per common share attributable to Brown Shoe Company, Inc. shareholders becauseis the effect would be antidilutive.same as the denominator for basic loss per common share attributable to Brown Shoe Company, Inc. shareholders. 


Note 5Restructuring and Other Special Charges, Net

Acquisition and Integration Related Costs
DuringIn the first quarterhalf of 2011, the Company acquired ASG and incurred related costs of $1.7 million (on both a pre-tax and after-tax basis, or $0.04 per diluted share). In 2012, the Company incurred integration costs related to ASG of $0.7 million ($0.4 million on an after-tax basis, or $0.01 per diluted share)., with no charges during the second quarter of 2012. During the second quarter and the first half of 2011, the Company incurred acquisition and integration costs of $0.7 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) and $2.4 million ($2.1 million on an after-tax basis, or $0.04 per diluted share), respectively. All of the first quarter of 2012 costs are included in the Wholesale Operations segment as a component of restructuring and other special charges, net. All of the first quarter of 2011 costs were included in the Other segment as a component of restructuring and other special charges, net. As of AprilJuly 28, 2012, there is a remaining reserve balanceliability of $1.9$0.8 million related to severance. See Note 3 to the condensed consolidated financial statements for further information.

 
 
 
Portfolio Realignment
In 2011, the Company began its portfolio realignment efforts. The Company's portfolio realignment efforts began that were designed to make the Company somewhat smaller but stronger and more profitable in the future. The first phase of the portfolio realignment includesinclude selling the AND 1 division (TBMC, which was acquired with ASG); exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; closing two U.S. distribution centers and a factory in China;centers; closing or relocating numerous underperforming or poorly aligned retail storesstores; closing a factory in China; and other infrastructure changes. The termination of the Etienne Aigner license agreement is also considered part of the Company’s portfolio realignment efforts. Effective July 12, 2012, the Company terminated the Etienne Aigner license agreement (“former license agreement”), due to a dispute with the licensor. The term of the former license agreement extended through 2018. The former license agreement would have required guaranteed minimum royalty payments to the licensor of an additional $20.9 million between July 12, 2012 and contract expiration in 2018. The licensor has disputed the basis on which the Company terminated the former license agreement. In conjunction with the termination, in the second quarter of 2012, the Company recognized an impairment charge of $5.8 million to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. The Company also recognized additional charges of $1.3 million in the second quarter of 2012, for markdowns and other costs related to the termination of the former license agreement. These portfolio realignment efforts began in 2011 and will continue through 2012.

During the second quarter of 2012, the Company incurred costs related to theseits portfolio realignment activities of $12.1$12.4 million ($7.98.0 million after-tax, or $0.18$0.19 per diluted share). These costs are reflected on the condensed consolidated statement of earnings as $10.8$5.8 million in impairment of intangible assets, $5.2 million in restructuring and other special charges, net, and $1.3$1.4 million in cost of goods sold. The intangible impairment of $5.8 million was recorded in the Wholesale Operations segment. Of the $5.2 million in restructuring and other special charges, net, $2.6 million is included in the Specialty Retail segment, $2.1 million is included in the Wholesale Operations segment, $0.3 million is included in the Famous Footwear segment and $0.2 million is included in the Other segment. The $1.4 million in cost of goods sold is included in the Wholesale Operations segment. There were no portfolio realignment costs recognized in the second quarter of 2011.

During the first half of 2012, the Company incurred costs related to its portfolio realignment activities of $24.4 million ($15.8 million after-tax, or $0.37 per diluted share). These costs are reflected on the condensed consolidated statement of earnings as $16.0 million in restructuring and other special charges, net, $5.8 million in impairment of intangible assets and $2.6 million in cost of goods sold. Of the $10.8$16.0 million in restructuring and other special charges, net, $7.0$7.3 million is included in the Famous Footwear segment, $2.5$4.6 million is included in the Wholesale Operations segment, $0.8$3.3 million is included in the Specialty Retail segment and $0.5$0.8 million is included in the Other segment. The intangible impairment of $5.8 million was recorded in the Wholesale Operations segment. Of the $1.3$2.6 million in cost of goods sold, $1.1$2.4 million is included in the Wholesale Operations segment and $0.2 million is included in the Specialty Retail segment. There were no portfolio realignment costs recognized infor the first quarterhalf of 2011.

The Company believes the first phase of theits portfolio realignment will result in total expense of approximately $41$50 million, of which $31.3$43.7 million was recorded as of AprilJuly 28, 2012. The Company expects approximately half of the $41$50 million of expense will relate to severance and other employee-related costs. Inclusive of the TBMC gain, the net expense is expected to be approximately $29 million.

The following is a summary of the charges and settlements by category of costs:
                      
($ millions)Employee 
Markdowns
and Royalty
Shortfalls
 Facility Other Total Employee Markdowns and Royalty Shortfalls Facility Other Total 
Original charges and reserve balance$8.9 $6.1 $1.4 $2.8 $19.2 $8.9 $6.1 $1.4 $2.8 $19.2 
Amounts settled in 2011 (3.1) (4.5) (0.1) (1.5) (9.2) (3.1) (4.5) (0.1) (1.5) (9.2)
Reserve balance at January 28, 2012$5.8 $
1.6
 $1.3 $1.3 $10.0 $5.8 $1.6 $1.3 $1.3 $10.0 
Additional charges in first quarter 2012 3.4  
1.4
 6.0  1.3  12.1  3.4  1.4 6.0  1.3  12.1 
Amounts settled in first quarter 2012 (3.5) (2.2) (2.4) (1.0) (9.1) (3.5) (2.2) (2.4) (1.0) (9.1)
Reserve balance at April 28, 2012$5.7 $0.8 $ 4.9 $1.6 $13.0 $5.7 $0.8 $4.9 $1.6 $13.0 
Additional charges in second quarter 2012 2.0  1.4 2.9  6.1  12.4 
Amounts settled in second quarter 2012 (3.4) (0.8) (2.0) (6.9) (13.1)
Reserve balance at July 28, 2012$4.3 $1.4 $5.8 $0.8 $12.3 
Organizational Change
During the second quarter and first half of 2012, the Company incurred costs of $2.3 million ($1.4 million on an after-tax basis, or $0.03 per diluted share) related to an organizational change at the corporate headquarters.


Note 6Business Segment Information

Applicable business segment information is as follows for the periods ended AprilJuly 28, 2012 and AprilJuly 30, 2011:
                    
($ thousands)
Famous
Footwear
 
Wholesale
Operations
 
Specialty
Retail
 Other Total 
Famous
Footwear
 
Wholesale
Operations
 
Specialty
Retail
 Other Total 
                     
Thirteen Weeks Ended April 28, 2012          
Thirteen Weeks Ended July 28, 2012Thirteen Weeks Ended July 28, 2012          
External sales$347,107 $223,203 $56,131 $– $626,441 $350,318 $194,966 $53,995 $– $599,279 
Intersegment sales 559  51,576  –  –  52,135  466  55,941  –  –  56,407 
Operating earnings (loss) 18,301  1,979  (3,527) (8,058) 8,695  20,539  (2,548) (5,795) (10,911) 1,285 
Operating segment assets 431,820  508,710  56,702  143,590  1,140,822  512,892  552,691  48,568  140,023  1,254,174 
                              
Thirteen Weeks Ended April 30, 2011          
Thirteen Weeks Ended July 30, 2011Thirteen Weeks Ended July 30, 2011          
External sales$342,727 $217,064 $59,764 $– $619,555 $344,930 $215,117 $60,543 $– $620,590 
Intersegment sales 401  41,145  –  –  41,546  400  54,426  –  –  54,826 
Operating earnings (loss) 18,782  6,019  (3,744) (8,977) 12,080  7,495  2,925  (3,012) (8,406) (998)
Operating segment assets 478,255  557,272  63,547  141,495  1,240,569  527,195  629,116  54,262  140,350  1,350,923 
               
Twenty-six Weeks Ended July 28, 2012Twenty-six Weeks Ended July 28, 2012        
External sales$697,425 $418,169 $110,126 $– $1,225,720 
Intersegment sales 1,024  107,517  –  –  108,541 
Operating earnings (loss) 38,840  (569) (9,322) (18,969) 9,980 
               
Twenty-six Weeks Ended July 30, 2011Twenty-six Weeks Ended July 30, 2011        
External sales$687,657 $432,181 $120,307 $– $1,240,145 
Intersegment sales 801  93,926  –  –  94,727 
Operating earnings (loss) 26,277  8,944  (6,756) (17,383) 11,082 

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

During the thirteen weeks ended AprilJuly 28, 2012, operating earnings (loss) included portfolio realignment costs of $12.1$12.4 million and organizational change costs of $2.3 million. Of the $12.4 million, $9.3 million is included in the Wholesale Operations segment, $2.6 million is included in the Specialty Retail segment, $0.3 million is included in the Famous Footwear segment and $0.2 million is included in the Other segment. The $2.3 million of organizational change costs are included in the Other segment. During the twenty-six weeks ended July 28, 2012, operating earnings (loss) included portfolio realignment costs of $24.4 million, organizational change costs of $2.3 million and ASG integration-related costs of $0.7 million. Of the $12.1$24.4 million, $7.0$12.8 million is included in the Wholesale Operations segment, $7.3 million is included in the Famous Footwear segment, $3.6 million is included in the Wholesale Operations segment, $1.0$3.5 million is included in the Specialty Retail segment and $0.5$0.8 million is included in the Other segment. The $2.3 million of organizational change costs are included in the Other segment. The $0.7 million of ASG integration-related costs are included in the Wholesale Operations segment.

During the thirteen weeks and twenty-six weeks ended AprilJuly 30, 2011, operating earnings of the Wholesale Operations segment included an increase in cost of goods sold related to the impact of the inventory fair value adjustment in connection with the acquisition of ASG of $2.7$1.5 million and $4.2 million, respectively, and the operating loss of the Other segment included costs related to the Company’s acquisition and integration of ASG of $1.7 million.$0.7 million and $2.4 million, respectively.
 
Following is a reconciliation of operating earnings (loss) to earningsloss before income taxes from continuing operations:

       
 Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended 
($ thousands)
 
April 28,
2012
 
April 30,
2011
 
July 28,
 2012
 
July 30,
 2011
 
July 28,
 2012
 
July 30,
 2011
 
Operating earnings $8,695 $12,080 
Operating earnings (loss)$1,285 $(998)$9,980 $11,082 
Interest expense  (6,157) (6,698) (5,758) (6,520) (11,915) (13,218)
Loss on early extinguishment of debt – (1,003) – (1,003)
Interest income  83  85  77 65  160 150 
Earnings before income taxes from continuing operations $2,621 $5,467 
Loss before income taxes from continuing operations$(4,396)$(8,456)$(1,775)$(2,989)


Note 7Goodwill and Intangible Assets

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

           
($ thousands)
April 28,
2012
 
April 30,
2011
January 28,
2012
  
July 28,
2012
 
July 30,
2011
January 28,
2012
 
                 
Intangible Assets                 
Famous Footwear$2,800 $2,800 $2,800 $2,800 $2,800 $2,800 
Wholesale Operations 155,003  163,008 155,003  142,003  162,975  155,003 
Specialty Retail 200  200 200   200  200  200 
Total intangible assets 158,003  166,008 158,003   145,003  165,975  158,003 
Accumulated amortization (58,910) (50,782) (57,017)  (53,533) (52,922) (57,017)
Total intangible assets, net 99,093  
115,226
 100,986   91,470  113,053  100,986 
Goodwill                 
Wholesale Operations 39,604  57,936 39,604   39,604  61,246  39,604 
Total goodwill 39,604  57,936 39,604   39,604  61,246  39,604 
Goodwill and intangible assets, net$138,697 $173,162 $140,590  $131,074 $174,299 $140,590 

Intangible assets, primarily owned trademarks, of $42.5 million as of AprilJuly 28, 2012, July 30, 2011 and January 28, 2012 and April 30, 2011 are not subject to amortization. All remaining intangible assets, primarily owned and licensed trademarks, are subject to amortization and have useful lives ranging from four to 20 years as of AprilJuly 28, 2012. Amortization expense related to intangible assets was $1.9$1.8 million and $2.1 million for the thirteen weeks and $3.7 million and $4.2 million for the twenty-six weeks ended AprilJuly 28, 2012 and AprilJuly 30, 2011, respectively.

Effective July 12, 2012, the Company terminated the Etienne Aigner license agreement, due to a dispute with the licensor. In conjunction with the termination, in the second quarter of 2012, the Company recognized an impairment charge of $5.8 million, to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. The intangible asset had an original value of $13.0 million and as of the termination date, the remaining unamortized value of the license trademark was $5.8 million.

The decrease in the goodwill and intangible assets of the Wholesale Operations segment from AprilJuly 30, 2011 to January 28, 2012 and AprilJuly 28, 2012 is primarily related to the Company's sale of TBMC on October 25, 2011.2011 and the impairment of the Etienne Aigner licensed trademark intangible. The Company's sale of TBMC resulted in the elimination of $21.6 million of goodwill and $8.0 of intangible assets.

 
 
 

Note 8Shareholders’ Equity

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the thirteentwenty-six weeks ended AprilJuly 28, 2012:
            
($ thousands)
Brown Shoe
Company, Inc.
Shareholders’ Equity
 
Noncontrolling
Interests
 Total Equity 
Brown Shoe
Company, Inc.
Shareholders’ Equity
 
Noncontrolling
Interests
 Total Equity 
Equity at January 28, 2012$412,669 $1,047 $413,716 $412,669 $1,047 $413,716 
Net earnings (loss) 1,695  (67) 1,628 
Net loss (840) (246) (1,086)
Other comprehensive income 596  2 598  (878) (4) (882)
Dividends paid (2,999) – (2,999) (6,005) – (6,005)
Stock issued under share-based plans (2,148) – (2,148)
Issuance of common stock under share-based plans, net (2,058) – (2,058)
Tax benefit related to share-based plans 753  – 753  738  – 738 
Share-based compensation expense 1,444  – 1,444  3,275  – 3,275 
Other 2  – 2 
Equity at April 28, 2012$412,012 $982 $412,994 
Equity at July 28, 2012$406,901 $797 $407,698 

Share-Based Compensation
During the firstsecond quarter of 2012, the Company granted 26,000 stock options108,700 restricted shares to certain employees with a weighted-average exercise price and grant date fair value of $9.18 and $5.46, respectively. These options$11.68. Of the 108,700 restricted shares granted, 67,350 shares vest in equal installments over four equal increments, 25% vesting over each of the nextyears. The remaining 41,350 restricted shares vest in four years, with a term of ten years. Share-based compensation expense is recognized on a straight-line basis separately for each vesting portion of the restricted stock option award.

The Company also granted 625,50016,700 restricted shares to certain employeesnon-employee directors with a weighted-average grant date fair value of $9.18$11.91 during the firstsecond quarter of 2012. The restricted shares granted to employeesnon-employee directors during the second quarter of 2012 vest in four yearsone year and share-based compensation expense will be recognized on a straight-line basis over the four-yearone-year period.

The Company granted 93,07511,250 performance share awardsunits during the firstsecond quarter of 2012 with a weighted-average grant date fair value of $9.18.$11.73 per unit. Vesting of performance-based awardsunits is dependent upon the financial performance of the Company and the attainment of certain financial goals over the next three years. Performance share awardsunits are payable in cash based on the Company’s stock price upon payout. The performance share awardsunits may pay out at a maximum of 200% of the target number of units. Share-based compensation expense is being recognized ratably over the three-year service period based on the fair value of the award on the date of grant andupon the anticipated number of units to be awarded on a straight-line basis overearned and the three-year servicefair value of the performance share units, as remeasured at the end of each period.

The Company recognized share-based compensation expense of $1.4$1.8 million and $1.7$1.3 million during the first quarter ofthirteen weeks and $3.3 million and $3.0 million during the twenty-six weeks ended July 28, 2012 and the first quarter ofJuly 30, 2011, respectively. The Company issued 1,153,764154,527 shares of common stock during the first quarter ofthirteen weeks ended July 28, 2012, for restricted stock grants, 2009 stock options exercised and directors’ fees. The Company issued 1,308,291 shares of common stock during the twenty-six weeks ended July 28, 2012, for performance share awards, restricted stock grants, stock options exercised and directors’ fees. During the first quarter ofthirteen and twenty-six weeks ended July 28, 2012, the Company cancelled restricted stock awards of 33,50081,000 and 114,500 shares, respectively, as a result of forfeitures.

The Company also granted 1,743 68,398 restricted stock units to non-employee directors with a weighted-average grant date fair value of $9.29$11.93 during the firstsecond quarter of 2012.  AllOf the 68,398 restricted stock units granted, during1,598 of the first quarter of 2012 immediatelyrestricted stock units vested and compensation expense was fully recognized.
recognized during the second quarter of 2012 and 66,800 of the restricted stock units vest in one year and compensation expense will be recognized ratably over the one-year period based upon the fair value of the restricted stock units, as remeasured at the end of each period.
 
 
 


Note 9Retirement and Other Benefit Plans

The following tables set forth the components of net periodic benefit (income) cost for the Company, including domestic and Canadian plans:
                
Pension Benefits Other Postretirement Benefits Pension Benefits Other Postretirement Benefits 
Thirteen Weeks Ended Thirteen Weeks Ended Thirteen Weeks Ended Thirteen Weeks Ended 
($ thousands)
April 28,
2012
 
April 30,
2011
 
April 28,
2012
 
April 30,
2011
 
July 28,
2012
 
July 30,
2011
 
July 28,
2012
 
July 30,
2011
 
Service cost$2,986 $2,060 $– $– $2,844 $2,398 $– $– 
Interest cost 3,184  3,092  40  44  3,180  3,150  36  44 
Expected return on assets (6,279) (5,173) –  –  (6,261) (5,191) –  – 
Amortization of:                        
Actuarial loss (gain) 80  99  (13) (25) 45  108  (23) (25)
Prior service expense (income) 4  (3) –  – 
Net transition asset (11) (11) –  –  (11) (12) –  – 
Total net periodic benefit (income) cost$(40)$67 $27 $19 $(199)$450 $13 $19 

         
 Pension Benefits Other Postretirement Benefits 
 Twenty-six Weeks Ended Twenty-six Weeks Ended 
($ thousands)
July 28,
2012
 
July 30,
2011
 
July 28,
2012
 
July 30,
2011
 
Service cost$5,830 $4,458 $– $– 
Interest cost 6,364  6,242  76  88 
Expected return on assets (12,540) (10,364) –  – 
Amortization of:            
Actuarial loss (gain) 125  207  (36) (50)
Prior service expense (income) 4  (3) –  – 
Net transition asset (22) (23) –  – 
Total net periodic benefit (income) cost$(239)$517 $40 $38 


Note 10Long-Term and Short-Term Financing Arrangements

Credit Agreement
On January 7, 2011, the Company and certain of its subsidiaries (the “Loan Parties”) entered into a Third Amended and Restated Credit Agreement, (“Former Credit Agreement”), which was further amended on February 17, 2011 (as so amended, the “Credit Agreement”). The Credit Agreement matures on January 7, 2016 and provides for a revolving credit facility in an aggregate amount of up to $530.0 million (effective February 17, 2011), 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 (the “general purpose accordion feature”) subject to satisfaction of certain conditions and the willingness of existing or new lenders to assume the increase.

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

Interest on borrowings is at variable rates based on the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
The Credit Agreement limits the Company’s ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 15.0% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over the Company’s cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days.
 
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect and a change of control event. In addition, if the excess availability falls below the greater of (i) 12.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, the Company would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. The Company was in compliance with all covenants and restrictions under the Credit Agreement as of AprilJuly 28, 2012.

At AprilJuly 28, 2012, the Company had $124.0$116.0 million in borrowings outstanding and $8.5$9.0 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $354.3$405.0 million at AprilJuly 28, 2012.

$200 Million Senior Notes Due 2019
On May 11, 2011, the Company closed on an offering (the “Offering”) of $200.0 million aggregate principal amount of 7.125% Senior Notes due 2019 (the “2019 Senior Notes”). The Company used a portion of the net proceeds to call and redeem the outstanding 8.75% senior notes due in 2012 (the “2012 Senior Notes”). The Company used the remaining net proceeds for general corporate purposes, including repaying amounts outstanding under the Credit Agreement.

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

YearPercentage
2014105.344%
2015103.563%
2016101.781%
2017 and thereafter100.000%

In addition, prior to May 15, 2014, the Company may redeem up to 35% of the 2019 Senior Notes with the proceeds from certain equity offerings at a redemption price of 107.125% of the principal amount of the 2019 Senior Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to the redemption date.

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 AprilJuly 28, 2012, the Company was in compliance with all covenants and restrictions relating to the 2019 Senior Notes.


Note 11Risk Management and Derivatives

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

Derivative financial instruments expose the Company to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. The Company does not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with major financial institutions and have varying maturities through MayAugust 2013. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses, intercompany charges, as well as collections and payments. The Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in the condensed consolidated statement of earnings. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in the Company’s condensed consolidated statement of earnings. The amount of hedge ineffectiveness for the thirteen weeks and twenty-six weeks ended AprilJuly 28, 2012 and AprilJuly 30, 2011 was not material.

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

As of AprilJuly 28, 2012, AprilJuly 30, 2011 and January 28, 2012, the Company had forward contracts maturing at various dates through MayAugust 2013, AprilJuly 2012 and February 2013, respectively. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.
          
Contract AmountContract Amount
(U.S. $ equivalent in thousands)April 28, 2012 April 30, 2011 January 28, 2012July 28, 2012 July 30, 2011 January 28, 2012
Financial Instruments               
Chinese yuan$28,403 $15,711 $43,407
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)$21,924 $19,149 $19,002 19,937  19,002  19,002
Chinese yuan 18,831  15,446  43,407
Euro 12,260  5,491  7,293 6,626  6,027  7,293
Japanese yen 1,332  1,341  1,365 1,392  1,219  1,365
New Taiwanese dollars 859  1,043  830 884  1,163  830
Great Britain pounds sterling 202  223  2,947 210  –  2,947
Other currencies 1,340  902  1,107 1,335  1,180  1,107
Total financial instruments$56,748 $43,595 $75,951$58,787 $44,302 $75,951

The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheet as of AprilJuly 28, 2012, AprilJuly 30, 2011 and January 28, 2012 are as follows:
        
Asset Derivatives Liability Derivatives Asset Derivatives Liability Derivatives 
($ in thousands)Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value 
                    
Foreign exchange forward contracts:Foreign exchange forward contracts:         Foreign exchange forward contracts:         
                    
April 28, 2012Prepaid expenses and other current assets $304 Other accrued expenses $958 
July 28, 2012Prepaid expenses and other current assets $78 Other accrued expenses $1,151 
                    
April 30, 2011Prepaid expenses and other current assets $577 Other accrued expenses $1,174 
July 30, 2011Prepaid expenses and other current assets $120 Other accrued expenses $773 
                    
January 28, 2012Prepaid expenses and other current assets $839 Other accrued expenses $633 Prepaid expenses and other current assets $839 Other accrued expenses $633 
                    

 
 
 


For the thirteen weeks ended AprilJuly 28, 2012 and AprilJuly 30, 2011, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:
        
($ in thousands)
Thirteen Weeks Ended
April 28, 2012
 
Thirteen Weeks Ended
April 30, 2011
 
Thirteen Weeks Ended
July 28, 2012
 
Thirteen Weeks Ended
July 30, 2011
 
Foreign exchange forward contracts:
Income Statement Classification
Gains (Losses) - Realized
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
 
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
 
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
 
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
 into Earnings
 
                        
Net sales$56 $– $(55)$42 $(34)$(14)$(52)$47 
                        
Cost of goods sold (345) (8) (401) 26  (531) 86  158  35 
                        
Selling and administrative expenses (220) (10) 206  (49) (252) (19) (194) (65)
                        
Interest expense (10) –  (10) –  2  –  11  – 

     
($ in thousands)
Twenty-six Weeks Ended
July 28, 2012
 
Twenty-six Weeks Ended
July 30, 2011
 
Foreign exchange forward contracts:
Income Statement Classification
Gains (Losses) - Realized
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
 
Gain (Loss)
Recognized in
OCI on
Derivatives
 
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
 
             
Net sales$21 $(14)$(107)$89 
             
Cost of goods sold (876) 78  (243) 61 
             
Selling and administrative expenses (471) (29) 12  (114)
             
Interest expense (8) –  1  – 

During 2011, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statement of earnings was as follows:
    
($ in thousands)Fiscal Year Ended 2011 Fiscal Year Ended January 28, 2012 
Foreign exchange forward contracts:
Income Statement Classification
Gains (Losses) - Realized
Gain (Loss)
Recognized in OCI on
Derivatives
 
Gain (Loss) Reclassified
from Accumulated OCI
into Earnings
 
Gain (Loss)
Recognized in OCI on
Derivatives
 
Gain (Loss) Reclassified
from Accumulated
OCI into Earnings
 
            
Net sales$(99)$145 $(99)$145 
            
Cost of goods sold 335  90  335  90 
            
Selling and administrative expenses 232  (169) 232  (169)
            
Interest expense 14  –  14  – 

All of the gains and losses currently included within accumulated other comprehensive income associated with the Company’s foreign exchange forward contracts are expected to be reclassified into net earnings within the next 1213 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 12 to the condensed consolidated financial statements.


Note 12Fair Value Measurements

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

·Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

·Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

·Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
 


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

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

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

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

Deferred Compensation Plan for Non-Employee Directors
Non-employee directors are eligible to participate in a deferred compensation plan with deferred amounts valued as if invested in the Company’s common stock through the use of phantom stock units (“PSUs”). Under the plan, each participating director’s account is credited with the number of PSUs that is equal to the number of shares of the Company’s common stock which the participant could purchase or receive with the amount of the deferred compensation, based upon the average of the high and low prices of the Company’s common stock on the last trading day of the fiscal quarter when the cash compensation was earned. Dividend equivalents are paid on PSUs at the same rate as dividends on the Company’s common stock and are re-invested in additional PSUs at the next fiscal quarter-end. When the participating director terminates his or her service as a director, the Company will pay the cash value of the deferred compensation to the director (or to the designated beneficiary in the event of death) in annual installments over a five-year or ten-year period, or in a lump sum, at the director’s election. The cash amount payable will be based on the number of PSUs credited to the participating director’s account, valued on the basis of the fair market value at fiscal quarter-end on or following termination of the director’s service and calculated based on the mean of the high and low price of an equivalent number of shares of the Company’s common stock on the last trading day of the fiscal quarter. The plan also provides for earlier payment of a participating director’s account if the board determines that the participant has a demonstrated financial hardship. The accounts of prior participants continue to earn dividend equivalents on the account balance. The liabilities of the plan are based on the fair value of the outstanding PSUs and are presented in other liabilities in the accompanying condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of the PSUs are reported in the Company’s condensed consolidated statement of earnings. The fair value of the liabilities is based on an unadjusted quoted market price for the Company’s common stock in an active market with sufficient volume and frequency (Level 1).

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

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at AprilJuly 28, 2012, AprilJuly 30, 2011 and January 28, 2012. The Company did not have any transfers between Level 1 and Level 2 during 2011 or the thirteentwenty-six weeks ended AprilJuly 28, 2012.

                
   Fair Value Measurements    Fair Value Measurements 
($ thousands) Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Asset (Liability)                        
As of April 28, 2012:
            
As of July 28, 2012:
            
Cash equivalents – money market funds
$29,696 $29,696 $– $– $36,340 $36,340 $– $– 
Non-qualified deferred compensation plan assets
 1,177  1,177  –  –  1,225  1,225  –  – 
Non-qualified deferred compensation plan liabilities
 (1,177) (1,177) –  –  (1,225) (1,225) –  – 
Deferred compensation plan liabilities for non-employee directors
 (610) (610) –  – 
Deferred compensation plan liabilities for non-employee directors (908) (908) –  – 
Derivative financial instruments, net
 (654) –  (654) –  (1,073) –  (1,073) – 
As of April 30, 2011:
            
As of July 30, 2011:
            
Cash equivalents – money market funds
$12,997 $12,997 $– $– $19,810 $19,810 $– $– 
Non-qualified deferred compensation plan assets
 1,890  1,890  –  –  1,846  1,846  –  – 
Non-qualified deferred compensation plan liabilities
 (1,890) (1,890) –  –  (1,846) (1,846) –  – 
Deferred compensation plan liabilities for non-employee directors
 (791) (791) –  – 
Deferred compensation plan liabilities for non-employee directors (636) (636) –  – 
Derivative financial instruments, net
 (597) –  (597) –  (653) –  (653) – 
            
As of January 28, 2012:                        
Cash equivalents – money market funds$5,063 $5,063 $– $– $5,063 $5,063 $– $– 
Non-qualified deferred compensation plan assets 1,081  1,081  –  –  1,081  1,081  –  – 
Non-qualified deferred compensation plan liabilities (1,081) (1081) –  –  (1,081) (1081) –  – 
Deferred compensation plan liabilities for non-employee directors (620) (620) –  –  (620) (620) –  – 
Derivative financial instruments, net 206  –  206  –  206  –  206  – 
            

Impairment Charges
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a negative industry or economic trend. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method. Certain factors, such as estimated store sales and expenses, used for this nonrecurring fair value measurement are considered Level 3 inputs as defined by FASB ASC 820, Fair Value Measurements and Disclosures. Long-lived assets held and used with a carrying amount of $46.7$43.9 million were assessed for impairment and written down to their fair value, resulting in an impairment charge of $2.8$0.4 million for the thirteen weeks ended AprilJuly 28, 2012. The $0.4 million impairment charge was included in selling and administrative expenses for the Famous Footwear segment. Impairment charges were $3.1 million for the twenty-six weeks ended July 28, 2012. Of the $2.8$3.1 million impairment charge, $1.7$2.0 million related to the Famous Footwear segment and $1.1 million related to the Specialty Retail segment. Of the $1.7$2.0 million related to the Famous Footwear segment, $1.3 million is included in restructuring and other special charges, net, and $0.4$0.7 million is included in selling and administrative expenses. Of the $1.1 million related to the Specialty Retail segment, $0.9 million is included in restructuring and other special charges, net, and $0.2 million is included in selling and administrative expenses.

 
 
 

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

          
April 28, 2012 April 30, 2011 January 28, 2012July 28, 2012 July 30, 2011 January 28, 2012
($ thousands)
Carrying
Amount
 
Fair
Value
 Carrying Amount 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 Carrying Amount 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Senior Notes $198,680  $194,000 $150,000 $150,000  $198,633 $190,000  $198,726  $197,000 $198,540 $195,000  $198,633 $190,000 

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


Note 13Income Taxes

The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors. One of the main drivers of this volatility is the relative mix of domestic and international earnings. Domestic earnings generally carry higher tax rates, while international earnings generally carry lower rates. The Company’s consolidated effective tax rate was 37.9%a benefit of 38.3% for the second quarter of 2012, compared to a benefit of 35.5% for the second quarter of last year, reflecting a higher mix of domestic earnings in higher-tax jurisdictions.

For the first half of 2012, the Company’s consolidated effective rate was 38.8%, as compared to 29.6% in the prior year. The higher rate in 2012 is driven by several factors. First, the Company anticipates a greater mix of 2012 earnings in domestic higher-tax jurisdictions, due in part to the exit of certain wholesale brands in late 2011, in conjunction with the portfolio realignment efforts. The exited brands had a disproportionate amount of their sales and earnings in international jurisdictions with lower rates. In addition, during the first quarter of 2012, compared to 38.8% for the first quarter of last year. The first quarter 2012 tax rate is lower than last year primarily due to the non-deductibility ofCompany incurred certain costs in international divisions related to the ASG acquisitionportfolio realignment efforts that are not expected to result in the first quarter of 2011.a tax benefit. 


Note 14Related Party Transactions

Hongguo International Holdings
The Company entered into a joint venture agreement with a subsidiary of Hongguo International Holdings Limited (“Hongguo”) to market Naturalizer footwear in China in 2007. The Company is a 51% owner of the joint venture (“B&H Footwear”), with Hongguo owning the other 49%. B&H Footwear began operations in 2007 and distributes the Naturalizer brand in department store shops and free-standing stores in several of China’s largest cities. In addition, B&H Footwear sells Naturalizer footwear to Hongguo on a wholesale basis. Hongguo then sells Naturalizer products through retail stores in China. During the thirteen weeks and twenty-six weeks ended AprilJuly 28, 2012, the Company, through its consolidated subsidiary, B&H Footwear, sold $1.6$1.1 million and $2.6 million of Naturalizer footwear on a wholesale basis to Hongguo, with $1.3$0.6 million and $1.9 million in corresponding sales during the thirteen weeks and twenty-six weeks ended AprilJuly 30, 2011.2011, respectively.


Note 15Commitments and Contingencies

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

Redfield
The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (the “Redfield site” or, when referring to remediation activities at or under the facility, the “on-site remediation”) and residential neighborhoods adjacent to and near the property (the “off-site remediation”) that have been affected by solvents previously used at the facility. The on-site remediation calls for the operation of a pump and treat system (which prevents migration of contaminated groundwater off the property) as the final remedy for the site, subject to monitoring and periodic review of the on-site conditions and other remedial technologies that may be developed in the future. Off-site groundwater concentrations have been reducing over time, since installation of the pump and treat system in 2000 and injection of clean water beginning in 2003. However, localized areas of contaminated bedrock just beyond the property line continue to impact off-site groundwater. The modified workplan for addressing this condition includes converting the off-site bioremediation system into a monitoring well network and employing different remediation methods in these recalcitrant areas. In accordance with the workplan, a pilot test was conducted of certain groundwater remediation methods and the results of that test were used to develop more detailed plans for remedial activities in the off-site areas, which were approved by the authorities and are being implemented in a phased manner. The results of groundwater monitoring are being used to evaluate the effectiveness of these activities. The Company’s most recent proposed expanded remedy workplan was approved by the Colorado authorities, and the Company is implementing that workplan. The liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $16.1 million as of AprilJuly 28, 2012. The Company expects to spend approximately $0.2 million in each of the next five years and $15.1 million in the aggregate thereafter related to the on-site remediation.

The cumulative expenditures for both on-site and off-site remediation through AprilJuly 28, 2012 are $24.9$25.2 million. The Company has recovered a portion of these expenditures from insurers and other third parties. The reserve for the anticipated future remediation activities at AprilJuly 28, 2012, was $7.6$7.7 million, of which $0.7 million is included in other accrued expenses and $6.9$7.0 million is included in other liabilities. Of the total $7.6$7.7 million reserve, $4.9 million is for on-site remediation and $2.7$2.8 million is for off-site remediation. During the thirteen weeks and twenty-six weeks ended AprilJuly 28, 2012 and AprilJuly 30, 2011, the Company recorded no expense related to either the on-site or off-site remediation, other than the accretion of interest expense.expense, the Company recorded an immaterial amount of expense related to the remediation.

Other
The Company has completed its remediation efforts at its closed New York tannery and two associated landfills. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring through 2024. The Company has an accrued liability of $1.6 million at AprilJuly 28, 2012, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.1 million. The Company expects to spend approximately $0.2 million in each of the next five years and $1.1 million in the aggregate thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other sites. However, the Company does not currently believe that its liability for such sites, if any, would be material.

Based on information currently available, the Company has an accrued liability of $9.2$9.3 million as of AprilJuly 28, 2012 to complete the cleanup, maintenance and monitoring at all sites. Of the $9.2$9.3 million liability, $0.9 million is included in other accrued expenses and $8.3$8.4 million is included in other liabilities. The Company continues to evaluate its estimated costs in conjunction with its environmental consultants and records its best estimate of such liabilities. However, future actions and the associated costs are subject to oversight and approval of various governmental authorities. Accordingly, the ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

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

Other
In 2004, the Company was notified of the insolvency of an insurance company that insured the Company for workers’ compensation and casualty losses from 1973 to 1989. That company is now in liquidation. Certain claims from that time period are still outstanding, for which the Company has an accrued liability of $1.5 million as of AprilJuly 28, 2012. While management believes it has an appropriate reserve for this matter, the ultimate outcome and cost to the Company may vary.

At AprilJuly 28, 2012, the Company was contingently liable for remaining lease commitments of approximately $0.3 million in the aggregate, which relate to former retail locations that it exited in prior years. These obligations will continue to decline over the next several years as leases expire. In order for the Company to incur any liability related to these lease commitments, the current lessees would have to default.


Note 16Financial Information for the Company and its Subsidiaries

Brown Shoe Company, Inc. issued senior notes, which are fully and unconditionally and jointly and severally guaranteed by all of its existing and future subsidiaries that are guarantors under its existing Credit Agreement. See Note 10 to the condensed consolidated financial statements for additional information related to our long-term and short-term financing arrangements. The following table presents the condensed consolidating financial information for each of Brown Shoe Company, Inc. (“Parent”), the guarantors and subsidiaries of the Parent that are not guarantors (the “Non-Guarantors”), together with consolidating eliminations, as of and for the periods indicated.

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

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 28, 2012

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total 
Assets               
Current assets               
Cash and cash equivalents$– $27,450 $12,342 $– $39,792 
Receivables 92,244  22,262  24,982  –  139,488 
Inventories 76,672  422,771  13,376  –  512,819 
Prepaid expenses and other current assets 39,124  5,594  1,333  –  46,051 
Total current assets 208,040  478,077  52,033  –  738,150 
Other assets 117,615  19,698  865  –  138,178 
Goodwill and intangible assets, net 46,448  15,880  76,369  –  138,697 
Property and equipment, net 23,463  92,806  9,528  –  125,797 
Investment in subsidiaries 817,259  63,885  –  (881,144) – 
Total assets$1,212,825 $670,346 $138,795 $(881,144)$1,140,822 
                
Liabilities and Equity             
Current liabilities               
Borrowings under revolving credit agreement$124,000 $– $– $– $124,000 
Trade accounts payable 25,577  122,760  34,043  –  182,380 
Other accrued expenses 54,569  70,745  10,170  –  135,484 
Total current liabilities 204,146  193,505  44,213  –  441,864 
Other liabilities               
Long-term debt 198,680  –  –  –  198,680 
Other liabilities 29,352  44,006  13,926  –  87,284 
Intercompany payable (receivable) 368,635  (384,424) 15,789  –  – 
Total other liabilities 596,667  (340,418) 29,715  –  285,964 
Equity               
     Brown Shoe Company, Inc. shareholders’ equity 412,012  817,259  63,885  (881,144) 412,012 
     Noncontrolling interests –  –  982  –  982 
Total equity 412,012  817,259  64,867  (881,144) 412,994 
Total liabilities and equity$1,212,825 $670,346 $138,795 $(881,144)$1,140,822 


 
 
 


UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 28, 2012

($ thousands)Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Assets               
Current assets               
Cash and cash equivalents$– $30,760 $16,637 $– $47,397 
Receivables 87,314  23,313  23,389  –  134,016 
Inventories 119,174  486,063  15,830  –  621,067 
Prepaid expenses and other current assets 41,360  5,564  2,576  –  49,500 
Total current assets 247,848  545,700  58,432  –  851,980 
Other assets 116,254  19,294  848  –  136,396 
Goodwill and intangible assets, net 39,402  15,600  76,072  –  131,074 
Property and equipment, net 23,470  102,246  9,008  –  134,724 
Investment in subsidiaries 829,881  70,656  –  (900,537) – 
Total assets$1,256,855 $753,496 $144,360 $(900,537)$1,254,174 
                
Liabilities and Equity             
Current liabilities               
Borrowings under revolving credit agreement$116,000 $– $– $– $116,000 
Trade accounts payable 76,872  183,987  33,396  –  294,255 
Other accrued expenses 64,434  75,334  9,070  –  148,838 
Total current liabilities 257,306  259,321  42,466  –  559,093 
Other liabilities               
Long-term debt 198,726  –  –  –  198,726 
Other liabilities 31,338  43,422  13,897  –  88,657 
Intercompany payable (receivable) 362,584  (379,128) 16,544  –  – 
Total other liabilities 592,648  (335,706) 30,441  –  287,383 
Equity               
Brown Shoe Company, Inc. shareholders’ equity 406,901  829,881  70,656  (900,537) 406,901 
Noncontrolling interests –  –  797  –  797 
Total equity 406,901  829,881  71,453  (900,537) 407,698 
Total liabilities and equity$1,256,855 $753,496 $144,360 $(900,537)$1,254,174 

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRILJULY 28, 2012

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net sales$190,755 $437,760 $43,822 $(45,896)$626,441 $166,415 $438,617 $47,146 $(52,899)$599,279 
Cost of goods sold 145,898 249,594 37,781  (45,896) 387,377  132,317 247,914 38,133  (52,899) 365,465 
Gross profit 44,857 188,166 6,041  – 239,064  34,098 190,703 9,013  – 233,814 
Selling and administrative expenses 40,967 168,269 9,678  – 218,914  44,636 172,585 2,040  – 219,261 
Restructuring and other special charges, net 3,662 7,793 –  – 11,455  4,612 2,879 –  – 7,491 
Impairment of intangible assets 5,777 – –  – 5,777 
Equity in (earnings) loss of subsidiaries (1,269) 3,759 –  (2,490) –  (13,900) (6,601) –  20,501 – 
Operating earnings (loss) 1,497 8,345 (3,637) 2,490 8,695 
Operating (loss) earnings (7,027) 21,840 6,973  (20,501) 1,285 
Interest expense (6,156) (1) –  – (6,157) (5,758) – –  – (5,758)
Interest income – 61 22  – 83  – 63 14  – 77 
Intercompany interest income (expense) 3,409 (3,515) 106  – –  3,120 (3,227) 107  – – 
(Loss) earnings before income taxes (1,250) 4,890 (3,509) 2,490 2,621  (9,665) 18,676 7,094  (20,501) (4,396)
Income tax benefit (provision) 2,945 (3,621) (317) – (993) 7,130 (4,776) (672) – 1,682 
Net earnings (loss) 1,695  1,269  (3,826) 2,490  1,628 
Net (loss) earnings (2,535) 13,900 6,422  (20,501) (2,714)
Net loss attributable to noncontrolling interests – – (67) – (67) – – (179) – (179)
Net earnings (loss) attributable to Brown Shoe Company, Inc.$1,695 $1,269 $(3,759)$2,490 $1,695 
Net (loss) earnings attributable to Brown Shoe Company, Inc.$(2,535)$13,900 $6,601 $(20,501)$(2,535)
                        
Comprehensive income (loss)$1,663 $1,898 $(3,827)$2,490 $2,224 
Comprehensive (loss) income$(3,083)$12,969 $6,427 $(20,501)$(4,188)
Comprehensive loss attributable to noncontrolling interests – – (65) – (65) – – (185) – (185)
Comprehensive income (loss) attributable to Brown Shoe Company, Inc.$1,663 $1,898 $(3,762)$2,490 $2,289 
Comprehensive (loss) income attributable to Brown Shoe Company, Inc.$(3,083)$12,969 $6,612 $(20,501)$(4,003)


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWENTY-SIX WEEKS ENDED JULY 28, 2012

($ thousands)Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net sales$357,170 $876,377 $90,968 $(98,795)$1,225,720 
Cost of goods sold 278,215  497,508  75,914  (98,795) 752,842 
Gross profit 78,955  378,869  15,054  –  472,878 
Selling and administrative expenses 85,605  340,853  11,717  –  438,175 
Restructuring and other special charges, net 8,274  10,672  –  –  18,946 
Impairment of intangible assets 5,777  –  –  –  5,777 
Equity in (earnings) loss of subsidiaries (14,821) (2,841) –  17,662  – 
Operating (loss) earnings (5,880) 30,185  3,337  (17,662) 9,980 
Interest expense (11,914) (1) –  –  (11,915)
Interest income 1  124  35  –  160 
Intercompany interest income (expense) 6,528  (6,741) 213  –  – 
(Loss) earnings before income taxes (11,265) 23,567  3,585  (17,662) (1,775)
Income tax benefit (provision) 10,425  (8,746) (990) –  689 
Net (loss) earnings (840) 14,821  2,595  (17,662) (1,086)
Net loss attributable to noncontrolling interests –  –  (246) –  (246)
Net (loss) earnings attributable to Brown Shoe Company, Inc.$(840)$14,821 $2,841 $(17,662)$(840)
                
Comprehensive (loss) income$(1,420)$14,519 $2,599 $(17,662)$(1,964)
Comprehensive loss attributable to noncontrolling interests –  –  (250) –  (250)
Comprehensive (loss) income attributable to Brown Shoe Company, Inc.$(1,420)$14,519 $2,849 $(17,662)$(1,714)


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEENTWENTY-SIX WEEKS ENDED APRILJULY 28, 2012

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net cash provided by operating activities$11,044 $56,717 $12,137 $– $79,898 $31,083 $71,866 $16,411 $– $119,360 
                            
Investing activities                            
Purchases of property and equipment (433) (5,038) (151) –  (5,622) (1,525) (21,738) (883) –  (24,146)
Capitalized software (1,386) –  –  –  (1,386) (2,953) –  (3) –  (2,956)
Net cash used for investing activities (1,819) (5,038) (151) –  (7,008) (4,478) (21,738) (886) –  (27,102)
                            
Financing activities                            
Borrowings under revolving credit agreement 165,000 –  –  –  165,000  334,000 –  –  –  334,000 
Repayments under revolving credit agreement (242,000) –  –  –  (242,000) (419,000) –  –  –  (419,000)
Dividends paid (2,999) –  –  –  (2,999) (6,005) –  –  –  (6,005)
Issuance of common stock under share-based plans (2,148) –  –  –  (2,148)
Issuance of common stock under share-based plans, net (2,058) –  –  –  (2,058)
Tax benefit related to share-based plans 753 –  –  –  753  738 –  –  –  738 
Intercompany financing 76,555 (59,175) (17,380) –  –  70,106 (53,482) (16,624) –  – 
Net cash used for financing activities (4,839) (59,175) (17,380) –  (81,394) (22,219) (53,482) (16,624) –  (92,325)
Effect of exchange rate changes on cash and cash equivalents – 614  –  –  614  – (218) –  –  (218)
Increase (decrease) in cash and cash equivalents 4,386 (6,882) (5,394) –  (7,890) 4,386 (3,572) (1,099) –  (285)
Cash and cash equivalents at beginning of period (4,386) 34,332  17,736  –  47,682  (4,386) 34,332  17,736  –  47,682 
Cash and cash equivalents at end of period$– $27,450 $12,342 $– $39,792 $– $30,760 $16,637 $– $47,397 


 
 
 
 
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 28, 2012

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Assets                            
Current assets:              
Current assets              
Cash and cash equivalents$(4,386)$34,332 $17,736 $– $47,682 $(4,386)$34,332 $17,736 $– $47,682 
Receivables 78,129 24,082  51,811  –  154,022  78,129 24,082  51,811  –  154,022 
Inventories 129,776 418,264  13,757  –  561,797  129,776 418,264  13,757  –  561,797 
Prepaid expenses and other current assets 35,625 14,685  1,327  –  51,637  35,625 14,685  1,327  –  51,637 
Total current assets 239,144 491,363  84,631  –  815,138  239,144 491,363  84,631  –  815,138 
Other assets 115,515 23,844  918  –  140,277  115,515 23,844  918  –  140,277 
Goodwill and intangible assets, net 47,765 16,160  76,665  –  140,590  47,765 16,160  76,665  –  140,590 
Property and equipment, net 23,621 97,887  9,963  –  131,471  23,621 97,887  9,963  –  131,471 
Investment in subsidiaries 813,602 68,057  –  (881,659) –  813,602 68,057  –  (881,659) – 
Total assets$1,239,647 $697,311 $172,177 $(881,659)$1,227,476 $1,239,647 $697,311 $172,177 $(881,659)$1,227,476 
                            
Liabilities and EquityLiabilities and Equity            Liabilities and Equity            
Current liabilities:              
Current liabilities              
Borrowings under revolving credit agreement$201,000 $– $– $– $201,000 $201,000 $– $– $– $201,000 
Trade accounts payable 49,238 92,431  48,942  –  190,611  49,238 92,431  48,942  –  190,611 
Other accrued expenses 60,079 65,676  7,214  –  132,969  60,079 65,676  7,214  –  132,969 
Total current liabilities 310,317 158,107  56,156  –  524,580  310,317 158,107  56,156  –  524,580 
Other liabilities:                            
Long-term debt 198,633 –  –  –  198,633  198,633 –  –  –  198,633 
Other liabilities 29,702 46,717  14,128  –  90,547  29,702 46,717  14,128  –  90,547 
Intercompany payable (receivable) 288,326 (321,115) 32,789  –  –  288,326 (321,115) 32,789  –  – 
Total other liabilities 516,661 (274,398) 46,917  –  289,180  516,661 (274,398) 46,917  –  289,180 
Equity:              
Equity              
Brown Shoe Company, Inc. shareholders’ equity 412,669 813,602  68,057  (881,659) 412,669  412,669 813,602  68,057  (881,659) 412,669 
Noncontrolling interests – –  1,047  –  1,047  – –  1,047  –  1,047 
Total equity 412,669 813,602  69,104  (881,659) 413,716  412,669 813,602  69,104  (881,659) 413,716 
Total liabilities and equity$1,239,647 $697,311 $172,177 $(881,659)$1,227,476 $1,239,647 $697,311 $172,177 $(881,659)$1,227,476 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 30, 2011

($ thousands)Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Assets               
Current assets               
Cash and cash equivalents$– $30,978 $31,575 $– $62,553 
Receivables 82,617  33,965  42,013  –  158,595 
Inventories 118,498  497,631  11,800  –  627,929 
Prepaid expenses and other current assets 26,267  18,671  4,422  –  49,360 
Total current assets 227,382  581,245  89,810  –  898,437 
Other assets 113,277  25,160  672  –  139,109 
Goodwill and intangible assets, net 50,522  16,720  107,057  –  174,299 
Property and equipment, net 24,428  105,738  8,912  –  139,078 
Investment in subsidiaries 615,152  88,654  –  (703,806) – 
Total assets$1,030,761 $817,517 $206,451 $(703,806)$1,350,923 
                
 
Liabilities and Equity
             
Current liabilities               
Borrowings under revolving credit agreement$250,000 $– $– $– $250,000 
Trade accounts payable 67,893  177,936  49,997  –  295,826 
Other accrued expenses 64,506  64,953  10,239  –  139,698 
Total current liabilities 382,399  242,889  60,236  –  685,524 
Other liabilities               
Long-term debt 198,540  –  –  –  198,540 
Other liabilities 16,614  41,863  17,660  –  76,137 
Intercompany payable (receivable) 43,131  (82,387) 39,256  –  – 
Total other liabilities 258,285  (40,524) 56,916  –  274,677 
Equity               
Brown Shoe Company, Inc. shareholders’ equity 390,077  615,152  88,654  (703,806) 390,077 
Noncontrolling interests –  –  645  –  645 
Total equity 390,077  615,152  89,299  (703,806) 390,722 
Total liabilities and equity$1,030,761 $817,517 $206,451 $(703,806)$1,350,923 

 
 
 

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETSTATEMENT OF COMPREHENSIVE INCOME
AS OF APRILFOR THE THIRTEEN WEEKS ENDED JULY 30, 2011

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total 
Assets               
Current assets               
Cash and cash equivalents$– $26,845 $27,384 $– $54,229 
Receivables 86,434  33,374  24,676  –  144,484 
Inventories 81,525  440,402  12,798  –  534,725 
Prepaid expenses and other current assets 31,697  23,805  1,966  –  57,468 
Total current assets 199,656  524,426  66,824  –  790,906 
Other assets 108,765  25,672  666  –  135,103 
Goodwill and intangible assets, net 51,901  17,000  104,261  –  173,162 
Property and equipment, net 24,921  107,013  9,464  –  141,398 
Investment in subsidiaries 609,375  83,801  –  (693,176) – 
Total assets$994,618 $757,912 $181,215 $(693,176)$1,240,569 
                
Liabilities and Equity             
Current liabilities               
Borrowings under revolving credit agreement$288,000 $– $– $– $288,000 
Trade accounts payable 26,016  115,051  30,319  –  171,386 
Other accrued expenses 56,969  67,723  8,114  –  132,806 
Total current liabilities 370,985  182,774  38,433  –  592,192 
Other liabilities               
Long-term debt 150,000  –  –  –  150,000 
Other liabilities 17,434  42,662  18,469  –  78,565 
Intercompany payable (receivable) 37,177  (76,899) 39,722  –  – 
Total other liabilities 204,611  (34,237) 58,191  –  228,565 
Equity               
     Brown Shoe Company, Inc. shareholders’ equity 419,022  609,375  83,801  (693,176) 419,022 
     Noncontrolling interests –  –  790  –  790 
Total equity 419,022  609,375  84,591  (693,176) 419,812 
Total liabilities and equity$994,618 $757,912 $181,215 $(693,176)$1,240,569 
($ thousands)Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net sales$162,265 $448,767 $62,178 $(52,620)$620,590 
Cost of goods sold 128,278  258,419  52,908  (52,620) 386,985 
Gross profit 33,987  190,348  9,270  –  233,605 
Selling and administrative expenses 44,196  184,810  4,908  –  233,914 
Restructuring and other special charges, net 689  –  –  –  689 
Equity in (earnings) loss of subsidiaries (5,873) (4,779) –  10,652  – 
Operating (loss) earnings (5,025) 10,317  4,362  (10,652) (998)
Interest expense (6,517) (10) 7  –  (6,520)
Loss on early extinguishment of debt (1,003) –  –  –  (1,003)
Interest income –  44  21  –  65 
Intercompany interest income (expense) 4,034  (4,137) 103  –  – 
(Loss) earnings before income taxes from continuing operations (8,511) 6,214  4,493  (10,652) (8,456)
Income tax benefit (provision) 3,902  (1,024) 127  –  3,005 
Net (loss) earnings from continuing operations (4,609) 5,190  4,620  (10,652) (5,451)
Discontinued operations:               
Earnings from operations of subsidiary, net of tax –  683  –  –  683 
Net earnings from discontinued operations –  683  –  –  683 
Net (loss) earnings (4,609) 5,873  4,620  (10,652) (4,768)
Net loss attributable to noncontrolling interests –  –  (159) –  (159)
Net (loss) earnings attributable to Brown Shoe Company, Inc.$(4,609)$5,873 $4,779 $(10,652)$(4,609)
                
Comprehensive (loss) income$(4,951)$5,754 $4,715 $(10,652)$(5,134)
Comprehensive loss attributable to noncontrolling interests –  –  (145) –  (145)
Comprehensive (loss) income attributable to Brown Shoe  Company, Inc.$(4,951)$5,754 $4,860 $(10,652)$(4,989)


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2011

($ thousands)Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net sales$331,465 $883,379 $111,247 $(85,946)$1,240,145 
Cost of goods sold 253,321  497,043  94,158  (85,946) 758,576 
Gross profit 78,144  386,336  17,089  –  481,569 
Selling and administrative expenses 87,877  364,982  15,195  –  468,054 
Restructuring and other special charges, net 2,433  –  –  –  2,433 
Equity in (earnings) loss of subsidiaries (11,603) (2,990) –  14,593  – 
Operating (loss) earnings (563) 24,344  1,894  (14,593) 11,082 
Interest expense (13,206) (11) (1) –  (13,218)
Loss on early extinguishment of debt (1,003) –  –  –  (1,003)
Interest income –  99  51  –  150 
Intercompany interest income (expense) 8,254  (8,521) 267  –  – 
(Loss) earnings before income taxes from continuing operations (6,518) 15,911  2,211  (14,593) (2,989)
Income tax benefit (provision) 5,597  (5,284) 573  –  886 
Net (loss) earnings from continuing operations (921) 10,627  2,784  (14,593) (2,103)
Discontinued operations:               
Earnings from operations of subsidiary, net of tax –  976  –  –  976 
Net earnings from discontinued operations –  976  –  –  976 
Net (loss) earnings (921) 11,603  2,784  (14,593) (1,127)
Net loss attributable to noncontrolling interests –  –  (206) –  (206)
Net (loss) earnings attributable to Brown Shoe Company, Inc.$(921)$11,603 $2,990 $(14,593)$(921)
                
Comprehensive (loss) income$(959)$15,522 $592 $(14,593)$562 
Comprehensive loss attributable to noncontrolling interests –  –  (184) –  (184)
Comprehensive (loss) income attributable to Brown Shoe  Company, Inc.$(959)$15,522 $776 $(14,593)$746 

 
 
 

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 30, 2011

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total 
Net sales$169,200 $434,612 $49,069 $(33,326)$619,555 
Cost of goods sold 125,043  238,624  41,250  (33,326) 371,591 
Gross profit 44,157  195,988  7,819  –  247,964 
Selling and administrative expenses 43,682  180,172  10,286  –  234,140 
Restructuring and other special charges, net 1,744  –  –  –  1,744 
Equity in (earnings) loss of subsidiaries (5,805) 1,788  –  4,017  – 
Operating earnings (loss) 4,536  14,028  (2,467) (4,017) 12,080 
Interest expense (6,688) (2) (8) –  (6,698)
Interest income –  55  30  –  85 
Intercompany interest income (expense) 4,220  (4,384) 164  –  – 
Earnings (loss) before income taxes from continuing operations 2,068  9,697  (2,281) (4,017) 5,467 
Income tax benefit (provision) 1,620  (4,185) 446  –  (2,119)
Net earnings (loss) from continuing operations 3,688  5,512  (1,835) (4,017) 3,348 
Discontinued operations:               
  Earnings from operations of subsidiary, net of tax –  293  –  –  293 
Net earnings from discontinued operations –  293  –  –  293 
Net earnings (loss) 3,688  5,805  (1,835) (4,017) 3,641 
Net loss attributable to noncontrolling interests –  –  (47) –  (47)
Net earnings (loss) attributable to Brown Shoe Company, Inc.$3,688 $5,805 $(1,788)$(4,017)$3,688 
                
Comprehensive income (loss)$3,993 $9,851 $(4,122)$(4,017)$5,705 
Comprehensive loss attributable to noncontrolling interests –  –  (39) –  (39)
Comprehensive income (loss) attributable to Brown Shoe Company, Inc.$3,993 $9,851 $(4,083)$(4,017)$5,744 


UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEENTWENTY-SIX WEEKS ENDED APRILJULY 30, 2011

($ thousands)Parent Guarantors Non-Guarantors Eliminations Total Parent Guarantors 
Non-
Guarantors
 Eliminations Total 
Net cash (used for) provided by operating activities$(34,552)$26,118 $12,091 $– $3,657 $(15,888)$42,063 $17,233 $55 $43,463 
                            
Investing activities                            
Purchases of property and equipment (551) (6,184) (332) –  (7,067) (1,204) (12,717) (762) –  (14,683)
Capitalized software (2,554) (86) –  –  (2,640) (6,898) (200) –  –  (7,098)
Acquisition cost – –  (156,636) –  (156,636) – –  (156,636) –  (156,636)
Cash recognized on initial consolidation – 3,121  –  –  3,121  – 3,121  –  –  3,121 
Net cash used for investing activities (3,105) (3,149) (156,968) –  (163,222) (8,102) (9,796) (157,398) –  (175,296)
                            
Financing activities                            
Borrowings under revolving credit agreement 759,500 –  –  –  759,500  965,500 –  –  –  965,500 
Repayments under revolving credit agreement (669,500) –  –  –  (669,500) (913,500) –  –  –  (913,500)
Proceeds from issuance of 2019 Senior Notes 198,540 –  –  –  198,540 
Redemption of 2012 Senior Notes (150,000) –  –  –  (150,000)
Dividends paid (3,104) –  –  –  (3,104) (6,197) –  –  –  (6,197)
Debt issuance costs (1,234) –  –  –  (1,234) (5,828) –  –  –  (5,828)
Issuance of common stock under share-based plans 484 –  –  –  484 
Acquisition of treasury stock (22,408) –  –  –  (22,408)
Issuance of common stock under share-based plans, net 693 –  –  –  693 
Tax deficiency related to share-based plans (431) –  –  –  (431) (453) –  –  –  (453)
Intercompany financing (48,058) (24,750) 72,808  –  –  (42,357) (29,875) 72,287  (55) – 
Net cash provided by (used for) financing activities 37,657 (24,750) 72,808  –  85,715  23,990 (29,875) 72,287  (55) 66,347 
Effect of exchange rate changes on cash and cash equivalents – 1,531  –  –  1,531  – 1,491  –  –  1,491 
Decrease in cash and cash equivalents – (250) (72,069) –  (72,319)
              
Increase (decrease) in cash and cash equivalents – 3,883  (67,878) –  (63,995)
Cash and cash equivalents at beginning of period – 27,095  99,453  –  126,548  – 27,095  99,453  –  126,548 
Cash and cash equivalents at end of period$– $26,845 $27,384 $– $54,229 $– $30,978 $31,575 $– $62,553 

 
 

ITEM 2MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW 

We are pleased withOur second quarter 2012 results reflect the positive effects of our solid start to 2012. During the first quarter of 2012 despite pressure on gross margins, consolidated netportfolio realignment efforts. While sales grew by $6.8 million as compareddecreased due to the same periodexit of brands and closure of stores, we experienced an increase in 2011 while we managedgross profit and a decrease in selling and administrative expenses. This performance was helped by the execution ofWe have also utilized our portfolio realignment efforts that began last year.positive operating cash flow to reduce borrowings under our revolving credit agreement, which lowered our interest expense.

The following is a summary of the financial highlights for the firstsecond quarter of 2012:

·  Consolidated net sales increased $6.8decreased $21.3 million, or 1.1%3.4%, to $626.4$599.3 million for the firstsecond quarter of 2012, compared to $619.6$620.6 million for the firstsecond quarter of last year. Net sales of our Wholesale Operations and Famous FootwearSpecialty Retail segments increaseddecreased by $6.1$20.2 million and $4.4$6.5 million, respectively, while our Specialty RetailFamous Footwear segment decreasednet sales increased by $3.7$5.4 million.

·  Consolidated operating earnings were $8.7$1.3 million in the firstsecond quarter of 2012, compared to $12.1an operating loss of $1.0 million for the firstsecond quarter of last year.

·  Consolidated net earningsloss attributable to Brown Shoe Company, Inc. were $1.7was $2.5 million, or $0.04$0.06 per diluted share, in the firstsecond quarter of 2012, compared to $3.7$4.6 million, or $0.08$0.11 per diluted share, in the firstsecond quarter of last year.

The following items impacted our firstsecond quarter operating results in 2012 and 2011 and should be considered in evaluating the comparability of our results:

·  Portfolio realignment – We incurred costs of $12.1$12.4 million ($7.98.0 million after-tax, or $0.18$0.19 per diluted share) related to our portfolio realignment efforts during the firstsecond quarter of 2012, with no corresponding costs in the same period of 2011. Our portfolio realignment efforts were designed to position us to be somewhat smaller but stronger and more profitable in the future. The first phase of the portfolio realignment includes selling The Basketball Marketing Company, Inc. (“TBMC”) (markets and sells footwear bearing the AND 1 brand name, which was acquired with American Sporting Goods Corporation (“ASG”)); exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; closing two U.S. distribution centers and a factory in China;centers; closing or relocating numerous underperforming or poorly aligned retail storesstores; closing a factory in China; and other infrastructure changes. These efforts began in 2011 and will continue through 2012. Expenses related to the termination of the Etienne Aigner license agreement during the second quarter of 2012 are also considered part of our portfolio realignment efforts. See Note 5 to the condensed consolidated financial statements for additional information related to these efforts.
·  Acquisition and integration-relatedOrganizational change – During the second quarter of 2012, we incurred costs – We incurred $0.7of $2.3 million ($0.41.4 million on an after-tax basis, or $0.01$0.03 per diluted share) in costs during the first quarter of 2012 related to the integration of ASG, which was acquired during the first quarter of 2011. Thesean organizational change made at our corporate headquarters, with no corresponding costs were recorded in the Wholesale Operations segment as restructuring and other special charges, net. We incurred costs of $1.7 million (on both a pre-tax and after-tax basis, or $0.04 per diluted share) during the first quarter of 2011, related to the acquisition of ASG. These costs were recorded in the Other segment as restructuring and other special charges, net.prior year. See Note 3 and Note 5 to the condensed consolidated financial statements for additional information related to these costs.efforts.
·  ERP Stabilization – Our second quarter 2011 results were negatively impacted by our ERP stabilization efforts due to increases in allowances and customer charge backs, margin related to lost sales and incremental stabilization costs related to our ERP platform. We estimate that the impact of these items reduced earnings before income taxes by $4.6 million ($2.8 million on an after-tax basis, or $0.07 per diluted share) in the second quarter of 2011, with no corresponding charges in the second quarter of 2012.
·  Decline in toning footwear business – We recorded a $4.6 million ($2.7 million on an after-tax basis, or $0.06 per diluted share) write-down on our toning inventory during the second quarter of 2011, with minimal charges in the second quarter of 2012.
·  Acquisition-related cost of goods sold adjustment – We incurred costs of $2.7$1.5 million ($1.60.9 million on an after-tax basis, or $0.04$0.02 per diluted share) during the firstsecond quarter of 2011, associated with the non-cash cost of goods sold impact related to the inventory fair value adjustment in connection with the acquisition of ASG, with no corresponding costs in the firstsecond quarter of 2012. These costs were recorded in the Wholesale Operations segment. See Note 3 to the condensed consolidated financial statements for additional information related to these costs.

·  Loss on early extinguishment of debt – During the second quarter of 2011, we incurred expenses of $1.0 million ($0.6 million on an after-tax basis, or $0.02 per diluted share) to extinguish our 2012 Senior Notes prior to maturity. Approximately $0.6 million was non-cash charges related to unamortized debt issuance costs and approximately $0.4 million represents cash paid for tender premiums.
·  Integration costs – We incurred costs of $0.7 million ($0.4 million on an after-tax basis, or $0.01 per diluted share) during the second quarter of 2011, related to the integration of ASG, which we acquired on February 17, 2011, with no corresponding costs during the second quarter of 2012. See Note 3 and Note 5 to the condensed consolidated financial statements for additional information related to these costs.
Our debt-to-capital ratio, as defined herein, decreased to 43.9%43.6% at AprilJuly 28, 2012, compared to 51.1%53.4% at AprilJuly 30, 2011, primarily due to the $164.0$134.0 million decrease in borrowings under our revolving credit agreement resulting primarily fromas a result of both strong cash provided by operating activities and the proceeds from the sale of TBMC. Our debt-to-capital ratio decreased from 49.1% at January 28, 2012 primarily due to the $77.0reflecting our $85.0 million decrease in borrowings under our revolving credit agreement, primarily as a result ofdriven by strong cash provided by operating activities. Our current ratio, as defined herein, was 1.671.52 to 1 at AprilJuly 28, 2012, compared to 1.341.31 to 1 at AprilJuly 30, 2011 and 1.55 to 1 at January 28, 2012. Inventories at AprilJuly 28, 2012 were $512.8$621.1 million, down from $534.7$627.9 million at the end of the firstsecond quarter of last year, primarily due todriven by the decrease in Famous Footwear inventory resulting from a decrease in toning inventory, fewer stores andsale of TBMC, effective inventory management.

management and a lower store count.

Outlook for the Remainder of 2012
We are optimistic about our ability to successfully execute on our remaining portfolio realignment efforts and drive improvement in our ongoing business. Due to better than expected sales and earnings in the first quarter of 2012, we nowWe expect to earn $0.53$0.34 to $0.65$0.44 per diluted share in 2012, which includes pre-tax costs of approximately $20$34 million, or $0.30$0.51 per diluted share, related to our portfolio realignment efforts.efforts, organizational changes and ASG integration costs.

Following are the consolidated results and the results by segment for the thirteen weeks ended April 28, 2012 and April 30, 2011:segment:

CONSOLIDATED RESULTS 

 Thirteen Weeks EndedThirteen Weeks Ended Twenty-six Weeks Ended
 April 28, 2012 April 30, 2011July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
($ millions)    
% of
Net
Sales
    
% of
Net
Sales
  
  % of
Net
Sales
   
    % of
Net
Sales
   
    % of
Net
Sales
   
% of
Net
 Sales
Net sales $626.4 100.0% $619.6 100.0%$599.3 100.0% $620.6 100.0% $1,225.7 100.0% $1,240.1 100.0%
Cost of goods sold  387.3 61.8%  371.6 60.0% 365.5 61.0% 387.0 62.4% 752.8 61.4%  758.5 61.2%
Gross profit  239.1 38.2%  248.0 40.0% 233.8 39.0% 233.6 37.6% 472.9 38.6%  481.6 38.8%
Selling and administrative expenses  218.9 35.0%  234.2 37.8% 219.3 36.5% 233.9 37.7% 438.2 35.8%  468.1 37.7%
Restructuring and other special charges, net  11.5 1.8%  1.7 0.3% 7.4 1.3% 0.7 0.1% 18.9 1.5%  2.4 0.2%
Operating earnings  8.7 1.4%  12.1 1.9%
Impairment of intangible assets 5.8 1.0% – – 5.8 0.5%  – –
Operating earnings (loss) 1.3 0.2% (1.0)(0.2)% 10.0 0.8%  11.1 0.9%
Interest expense  (6.2)(1.0)%  (6.7)(1.1)% (5.8)(0.9)% (6.6)(1.0)% (12.0)(0.9)%  (13.3)(1.0)%
Loss on early extinguishment of debt – – (1.0)(0.2)% – –  (1.0)(0.1)%
Interest income  0.1 0.0%  0.1 0.1% 0.1 0.0% 0.1 0.0% 0.2 0.0%  0.2 0.0%
Earnings before income taxes from continuing operations  2.6 0.4%  5.5 0.9%
Income tax provision  (1.0)(0.1)%  (2.2)(0.4)%
Net earnings from continuing operations  1.6 0.3%  3.3 0.5%
Loss before income taxes from continuing operations (4.4)(0.7)% (8.5)(1.4)% (1.8)(0.1)%  (3.0)(0.2)%
Income tax benefit 1.7 0.2% 3.0 0.5% 0.7 0.0%  0.9 0.0%
Net loss from continuing operations (2.7)(0.5)%  (5.5)(0.9)%  (1.1)(0.1)%  (2.1)(0.2)%
Discontinued operations:                           
Earnings from operations of subsidiary, net of tax  – –  0.3 0.1% – – 0.7 0.1% – –  1.0 0.1%
Net earnings from discontinued operations  – –  0.3 0.1% – – 0.7 0.1% – –  1.0 0.1%
Net earnings  1.6 0.3%  3.6 0.6%
Net loss attributable to noncontrolling interests  (0.1)0.0%  (0.1)0.0%
Net earnings attributable to Brown Shoe Company, Inc. $1.7 0.3% $3.7 0.6%
Net loss (2.7)(0.5)% (4.8)(0.8)% (1.1)(0.1)%  (1.1)(0.1)%
Net loss attributable to noncontrolling interest (0.2)(0.1)% (0.2)(0.1)% (0.3)(0.0)%  (0.2)(0.0)%
Net loss attributable to Brown Shoe Company, Inc.$(2.5)(0.4)% $(4.6)(0.7)% $(0.8)(0.1)% $(0.9)(0.1)%

Net Sales
Net sales increased $6.8decreased $21.3 million, or 1.1%3.4%, to $626.4$599.3 million for the firstsecond quarter of 2012, compared to $619.6$620.6 million for the firstsecond quarter of last year. Net sales of our Wholesale Operations and Famous FootwearSpecialty Retail segments increased,decreased, while net sales of our Specialty RetailFamous Footwear segment decreased.increased. Our Wholesale Operations segment reported a $6.1$20.2 million increasedecrease in net sales, led byprimarily attributable to lower sales growth inof our Franco Sarto, Fergie, Sam Edelmanexited brands and Dr. Scholl’s Shoes and Avia divisions, partially offset by our exited brands and a declineincreases in our Naturalizercontemporary fashion brands (defined as Sam Edelman, Franco Sarto, Via Spiga, Vera Wang, Fergie, Carlos and Vince divisions) and LifeStride division. Our Famous Footwear segment reported a $4.4 million increase in net sales, due to a same-store sales increase of 2.5%, including e-commerce, during the first quarter of 2012, reflecting an increase in average retail price and customer traffic levels, partially offset by a decrease in pairs per transaction and a lower store count. Sales of athletic footwear and sandals were very strong at Famous Footwear in the first quarter of 2012 due in part to warmer weather as compared to the same period last year. The net sales of our Specialty Retail segment decreased $3.7$6.5 million, primarily reflecting a lower store count, decreased customer traffic, lower boota decrease in sales andat Shoes.com, a decrease in the Canadian dollar exchange rate alland a decrease in same-store sales of 1.5%. Our Famous Footwear segment reported a $5.4 million increase in net sales, which reflects a same-store sales increase of 3.9%, during the second quarter of 2012. Famous Footwear experienced a higher average retail price and strong sales of women’s sandals and athletic footwear in the second quarter of 2012 as compared to the same period last year.
Net sales decreased $14.4 million, or 1.2%, to $1,225.7 million for the first half of 2012, compared to $1,240.1 million for the first half of last year. Net sales of our Wholesale Operations and Specialty Retail segments decreased, while net sales of our Famous Footwear segment increased. Our Wholesale Operations segment reported a $13.9 million decrease in net sales primarily attributable to lower sales of our exited brands and Dr. Scholl’s Shoes, Avia and Naturalizer divisions, partially offset by increases in our contemporary fashion brands. The net sales of our Specialty Retail segment decreased $10.2 million, primarily reflecting a lower store count, a decrease in sales at Shoes.com and a decline in the Canadian dollar exchange rate, partially offset by an increase in our same-store sales. Our Famous Footwear segment reported a $9.7 million increase in net sales, which reflects a same-store sales including specialty e-commerce,increase of 2.6%3.2% during the first half of 2012. Famous Footwear experienced a higher average retail price and an increaseimprovement in customer conversiontraffic levels. Sales of women’s sandals and pairs per transaction.women’s casual footwear and sandals were strong in the first half of 2012 as compared to the same period last year.

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

Gross Profit
Gross profit decreased $8.9increased $0.2 million, or 3.6%0.1%, to $239.1$233.8 million for the firstsecond quarter of 2012, compared to $248.0$233.6 million for the second quarter of last year, driven by our Famous Footwear division, which experienced both higher net sales and gross profit rate. As a percent of net sales, our gross profit increased to 39.0% for the second quarter of 2012 from 37.6% for the second quarter of last year. The increase in gross profit rate was primarily due to lower inventory markdowns at Famous Footwear and a reduction in sales of lower margin wholesale brands we are exiting.

Gross profit decreased $8.7 million, or 1.8%, to $472.9 million for the first quarterhalf of 2012, compared to $481.6 million for the first half of last year, resulting fromprimarily reflecting lower gross margin at eachnet sales in the first half of our segments, partially offset by higher consolidated net sales.2012 as compared to the prior year. As a percent of net sales, our gross profit decreased to 38.2%38.6% for the first quarterhalf of 2012 from 40.0%38.8% for the first quarterhalf of last year. The reduction in gross marginprofit rate was primarily due to higher inventory markdowns at both wholesale and retail as we managed the freshness ofin our inventory.Wholesale Operations segment.

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

Selling and Administrative Expenses
Selling and administrative expenses decreased $15.3$14.6 million, or 6.5%6.3%, to $218.9$219.3 million for the firstsecond quarter of 2012, compared to $234.2$233.9 million in the firstsecond quarter of last year. The decrease was primarily related to an improvement in facilities expenses reflecting a decreaselower store count and our portfolio realignment efforts, and a shift in the timing of our marketing facility and selling expenses.efforts. As a percent of net sales, selling and administrative expenses decreased to 35.0%36.5% for the firstsecond quarter of 2012 from 37.8%37.7% for the second quarter of last year, reflecting the factors discussed above.

Selling and administrative expenses decreased $29.9 million, or 6.4%, to $438.2 million for first half of 2012, compared to $468.1 million in the first half of last year. The decrease was primarily related to an improvement in facilities expenses reflecting a lower store count and our portfolio realignment efforts, and a shift in the timing of our marketing efforts. As a percent of net sales, selling and administrative expenses decreased to 35.8% for first half of 2012 from 37.7% for the first quarterhalf of last year, reflecting the factors discussed above.

Restructuring and Other Special Charges, Net
We recorded restructuring and other special charges, net of $11.5$7.4 million for the firstsecond quarter of 2012, related to our portfolio realignment efforts and the integration of ASG.organizational changes. We recorded restructuring and other special charges, net, of $1.7$0.7 million for the firstsecond quarter of last year, related to the integration of ASG. See Note 5 to the condensed consolidated financial statements for additional information.

We recorded restructuring and other special charges, net, of $18.9 million for the first half of 2012, related to our portfolio realignment efforts and organizational changes. We recorded restructuring and other special charges, net, of $2.4 million for the first half of last year, related to the acquisition and integration of ASG, which closed on February 17, 2011.ASG. See Note 5 to the condensed consolidated financial statements for additional information.

Impairment of Intangible Assets
Effective July 12, 2012, the Company terminated the Etienne Aigner license agreement (“former license agreement”), due to a dispute with the licensor. In conjunction with the termination, in the second quarter of 2012, the Company recognized an impairment charge of $5.8 million to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. See Note 5 to the condensed consolidated financial statements for additional information.

Operating Earnings (Loss)
Operating earnings decreased $3.4increased $2.3 million or 28.0%, to $8.7$1.3 million for the firstsecond quarter of 2012, compared to $12.1a loss of $1.0 million for the second quarter of last year, driven by lower selling and administrative expenses, partially offset by an increase in restructuring and other special charges, net, and impairment of intangible assets, as described above.

We reported operating earnings of $10.0 million in the first quarterhalf of 2012, compared to $11.1 million during the first half of last year, primarily driven by an increase in restructuring and other special charges, net, and a decrease in gross margin,profit rate and impairment of intangible assets, partially offset by lower selling and administrative expenses, and an increase in net sales, as described above.

Interest Expense
Interest expense decreased $0.5$0.8 million, or 8.1%11.7%, to $6.2$5.8 million for the firstsecond quarter of 2012, compared to $6.7$6.6 million for the firstsecond quarter of last year, primarily reflecting lower average borrowings under our revolving credit agreement.

Interest expense decreased $1.3 million, or 9.9%, to $12.0 million for the first half of 2012, compared to $13.3 million for the first half of last year, primarily reflecting the same factor noted above for the second quarter of 2012.

Loss on Early Extinguishment of Debt
During the second quarter of 2011, the Company completed a cash tender offer for the 2012 Senior Notes and called for redemption and repaid the remaining notes that were not tendered. The Company incurred a loss on early extinguishment costs to retire the 2012 Senior Notes prior to maturity totaling $1.0 million, of which approximately $0.6 million was non-cash.

Income Tax ProvisionBenefit
Our effective tax rate can vary considerably from period to period, depending on a number of factors. One of the main drivers of this volatility is the relative mix of domestic and international earnings. Domestic earnings generally carry higher tax rates, while international earnings generally carry lower rates. Our consolidated effective tax rate was a provisionbenefit of 37.9%38.3% for the second quarter of 2012, compared to a benefit of 35.5% for the second quarter of last year, reflecting a higher mix of domestic earnings in higher-tax jurisdictions.

For the first half of 2012, our consolidated effective rate was 38.8%, as compared to 29.6% in the prior year. The higher rate in 2012 is driven by several factors. First, we anticipate a greater mix of 2012 earnings in domestic higher-tax jurisdictions, due in part to the exit of certain wholesale brands in late 2011, in conjunction with our portfolio realignment efforts. The exited brands had a disproportionate amount of their sales and earnings in international jurisdictions with lower rates. In addition, during the first quarter of 2012, compared to 38.8% for the first quarter of last year. The first quarter 2012 tax rate is lower than last year primarily due to the non-deductibility ofwe incurred certain costs in our international divisions related to the ASG acquisitionour portfolio realignment efforts that are not expected to result in the first quarter of 2011.a tax benefit. 

Net EarningsLoss from Continuing Operations
We reported a net earningsloss from continuing operations of $1.6$2.7 million in the firstsecond quarter of 2012 compared to $3.3$5.5 million in the firstsecond quarter of last year, as a result of the factors described above.

We reported a net loss from continuing operations of $1.1 million in the second half of 2012 compared to $2.1 million in the second half of last year, as a result of the factors described above.

Net Earnings from Discontinued Operations
During 2011, we sold TBMC, which markets and sells footwear bearing the AND 1 brand name. As such, the second quarter and first quarterhalf of 2011 operations of TBMC are now reported as discontinued operations.

Net EarningsLoss Attributable to Brown Shoe Company, Inc.
We reported a net earningsloss attributable to Brown Shoe Company, Inc. of $1.7$2.5 million and $0.8 million during the second quarter and first quarterhalf of 2012, respectively, compared to $3.7$4.6 million and $0.9 million during the second quarter and first quarterhalf of last year, respectively, as a result of the factors described above.




FAMOUS FOOTWEAR 

 Thirteen Weeks EndedThirteen Weeks Ended Twenty-six Weeks Ended
 April 28, 2012 April 30, 2011July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
($ millions, except sales per square foot)   
% of
Net
Sales
   
% of
Net
 Sales
  
% of
Net
 Sales
    
% of
Net
 Sales
   
     % of
Net
Sales
   
% of
Net
 Sales
Operating Results                             
Net sales $347.1 100.0% $342.7 100.0%$350.3 100.0% $344.9 100.0% $697.4 100.0% $687.7 100.0%
Cost of goods sold  192.0 55.3%  186.1 54.3% 193.4 55.2%  195.9 56.8%  385.3 55.3%  382.1 55.6%
Gross profit  155.1 44.7%  156.6 45.7% 156.9 44.8%  149.0 43.2%  312.1 44.7%  305.6 44.4%
Selling and administrative expenses  129.8 37.4%  137.8 40.2% 136.1 38.8%  141.5 41.0%  266.0 38.0%  279.3 40.6%
Restructuring and other special charges, net  7.0 2.0%  – – 0.3 0.1%  – –  7.3 1.1%  – –
Operating earnings $18.3 5.3% $18.8 5.5%$20.5 5.9% $7.5 2.2% $38.8 5.6% $26.3 3.8%
                             
Key Metrics                             
Same-store sales % change  2.5%    (3.9)%   3.9%    0.2%    3.2%    (1.9)%  
Same-store sales $ change $8.3   $(13.6) $12.7   $0.6   $20.9   $(13.0) 
Sales change from new and closed stores, net $(3.9)  $(5.9) $(7.3)  $(3.0)  $(11.2)  $(8.8) 
                             
Sales per square foot, excluding e-commerce (thirteen weeks ended) $46   $44  
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)$47   $44   $93   $88  
Sales per square foot, excluding e-commerce (trailing twelve-months) $188   $185  $191   $186   $191   $186  
Square footage (thousand sq. ft.)  7,318    7,663   7,234    7,667    7,234    7,667  
                             
Stores opened  11    14   14    12    25    26  
Stores closed  34    12   26    8    60    20  
Ending stores  1,066    1,112   1,054    1,116    1,054    1,116  

Net Sales
Net sales increased $4.4$5.4 million, or 1.3%1.6%, to $347.1$350.3 million for the firstsecond quarter of 2012, compared to $342.7$344.9 million for the firstsecond quarter of last year. Same-store sales, including e-commerce, increased 2.5%3.9% during the second quarter of 2012, primarily due to an increase in our average retail price. Women’s sandals and athletic footwear were large contributors to the increase in net sales. During the second quarter of 2012, we opened 14 new stores and closed 26 stores, resulting in 1,054 stores and total square footage of 7.2 million at the end of the second quarter of 2012, compared to 1,116 stores and total square footage of 7.7 million at the end of the second quarter of last year. Sales per square foot, excluding e-commerce, increased 6.7% to $47 in the second quarter of 2012, compared to $44 in the second quarter of last year. Members of our customer loyalty program, Rewards, continue to account for a majority of the segment’s sales, as approximately 65% of our net sales were made to members of our Rewards program in the second quarter of 2012 compared to approximately 61% in the second quarter of 2011.

Net sales increased $9.7 million, or 1.4%, to $697.4 million for the first half of 2012, compared to $687.7 million for the first half of last year. Same-store sales, including e-commerce, increased 3.2% during the first quarterhalf of 2012, reflecting an increase in average retail price and customer traffic levels, partially offset by a decrease in pairs per transaction and a lower store count. We experienced strong demand for athleticconversion. Women’s sandals and sandalwomen’s casual footwear and lower demand for boots duewere large contributors to unseasonably warm weather. During the first quarter of 2012, we opened 11 new stores and closed 34 stores, resultingincrease in 1,066 stores and total square footage of 7.3 million at the end of the first quarter of 2012, compared to 1,112 stores and total square footage of 7.7 million at the end of the first quarter of last year.net sales. Sales per square foot, excluding e-commerce, increased 4.5%5.6% to $46,$93, compared to $44$88 in the first quarterhalf of last year. Members of our customer loyalty program, Rewards, continue to account for a majority of the segment’s sales, as approximately 62% of our net sales were made to members of our Rewards program in both the first quarter of 2012 and 2011.

Gross Profit
Gross profit decreased $1.5increased $7.9 million, or 1.0%5.3%, to $155.1$156.9 million for the firstsecond quarter of 2012, compared to $156.6$149.0 million for the firstsecond quarter of last year, due primarily to lower markdowns partially related to a decrease in toning inventory. As a percent of net sales, our gross profit was 44.8% for the second quarter of 2012, compared to 43.2% for the second quarter of last year. The increase in our gross profit rate was primarily driven by lower markdowns.

Gross profit increased markdowns and freight.$6.5 million, or 2.1%, to $312.1 million for the first half of 2012, compared to $305.6 million for the first half of last year, due primarily to lower markdowns. As a percent of net sales, our gross profit was 44.7% for the first quarterhalf of 2012, compared to 45.7%44.4% for the first quarterhalf of last year. The decreaseincrease in our gross marginprofit rate was primarily driven by higherlower markdowns.

Selling and Administrative Expenses
Selling and administrative expenses decreased $8.0$5.4 million, or 5.8%3.8%, to $129.8$136.1 million for the firstsecond quarter of 2012, compared to $137.8$141.5 million for the firstsecond quarter of last year. The decrease was primarily attributable to lower marketingretail facility and direct selling costs due to our lower store count as well as lower marketing caused by a shift in the timing of expenditures to later in 2012. As a percent of net sales, selling and administrative expenses decreased to 38.8% for the second quarter of 2012, compared to 41.0% for the second quarter of last year.

Selling and administrative expenses decreased $13.3 million, or 4.8%, to $266.0 million for the first half of 2012, compared to $279.3 million for the first half of last year, primarily due to lower marketing caused by a shift in the timing of expenditures to later in 2012, and lower retail facility and direct selling costs, both due to our lower store count. As a percent of net sales, selling and administrative expenses decreased to 37.4%38.0% for the first quarterhalf of 2012, compared to 40.2%40.6% for the first quarterhalf of last year.

Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges, net of $7.0$0.3 million and $7.3 million for the second quarter and first quarterhalf of 2012, respectively, as a result of our portfolio realignment efforts, which included the closure of a distribution center and the closure or relocation of underperforming stores. We did not incur corresponding charges in the second quarter and first half of last year.

Operating Earnings
Operating earnings increased $13.0 million, or 174.0%, to $20.5 million for the second quarter of 2012, compared to $7.5 million for the second quarter of last year. The increase was primarily due to an increase in gross profit and a decrease in selling and administrative expenses, as described above. As a percent of net sales, operating earnings improved to 5.9% for the second quarter of 2012, compared to 2.2% for the second quarter of last year.

Operating Earnings
Operating earnings decreased $0.5increased $12.5 million, or 2.6%47.8%, to $18.3$38.8 million for the first quarterhalf of 2012, compared to $18.8$26.3 million forin the first quarterhalf of last year. The decrease wasyear primarily due to restructuring and other special charges, net and a decrease in gross profit, all partially offset by a decrease in selling and administrative expenses and an increase in gross profit, partially offset by restructuring and other special charges, net, sales, as described above. As a percent of net sales, operating earnings decreasedincreased to 5.3% for5.6% in the first quarterhalf of 2012, compared to 5.5% for3.8% in the first quarterhalf of last year.


WHOLESALE OPERATIONS 

 Thirteen Weeks EndedThirteen Weeks Ended Twenty-six Weeks Ended
 April 28, 2012 April 30, 2011July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
($ millions)   
% of
Net
Sales
   
% of
Net
 Sales
  
% of
Net
Sales
    
% of
Net
Sales
   
% of
Net
Sales
   
% of
Net
 Sales
Operating Results                            
Net sales $223.2 100.0% $217.1 100.0%$195.0 100.0% $215.2 100.0% $418.2 100.0% $432.1 100.0%
Cost of goods sold  162.4 72.8%  151.1 69.6% 139.4 71.5%  154.8 71.9%  301.9 72.2% 305.7 70.8%
Gross profit  60.8 27.2%  66.0 30.4% 55.6 28.5%  60.4 28.1%  116.3 27.8% 126.4 29.2%
Selling and administrative expenses  55.6 24.9%  60.0 27.6% 50.2 25.7%  57.5 26.7%  105.8 25.2% 117.5 27.1%
Restructuring and other special charges, net  3.2 1.4%  – – 2.1 1.1%  – –  5.3 1.3% – –
Operating earnings $2.0 0.9% $6.0 2.8%
Impairment of intangible assets 5.8 3.0%  – –  5.8 1.4% – –
Operating (loss) earnings$(2.5)(1.3)% $2.9 1.4% $(0.6)(0.1)% $8.9 2.1%
                            
Key Metrics                            
Unfilled order position at end of period $354.8   $434.3  $308.2   $341.1           

Net Sales
Net sales increased $6.1decreased $20.2 million, or 2.8%9.4%, to $223.2$195.0 million for the firstsecond quarter of 2012, compared to $217.1$215.2 million for the firstsecond quarter of last year. The increasedecrease was primarily attributable to lower sales growth inof our Franco Sarto, Fergie, Sam Edelmanexited brands and our Dr. Scholl’s Shoes and Avia divisions, partially offset by increases in our exitedcontemporary fashion brands and a decline in our NaturalizerLifeStride division. Our unfilled order position decreased $79.5$32.9 million, or 18.3%9.7%, to $354.8$308.2 million as of AprilJuly 28, 2012, as compared to $434.3$341.1 million as of AprilJuly 30, 2011 primarily due to the brands that we are exiting, as well as a lower order position for our Avia division. The July 30, 2011 unfilled order position excludes $14.7 million related to TBMC, as its results are reflected in discontinued operations.

Net sales decreased $13.9 million, or 3.2%, to $418.2 million for the first half of 2012, compared to $432.1 million for the first half of last year. The decrease was primarily attributable to lower sales of our exited brands and the sale of TBMC (the subsidiary that marketedour Dr. Scholl’s Shoes, Avia and sold footwear bearing the AND 1 brand name)Naturalizer divisions, partially offset by increases in the third quarter of 2011.our contemporary fashion brands.

Gross Profit
Gross profit decreased $5.2$4.8 million, or 7.9%8.0%, to $60.8$55.6 million for the firstsecond quarter of 2012, compared to $66.0$60.4 million for the firstsecond quarter of last year, primarily due to lower sales volume. As a percent of net sales, our gross profit increased to 28.5% for the second quarter of 2012 from 28.1% for the second quarter of last year, reflecting increased sales in higher inventory markdowns.margin brands and a reduction in sales of lower margin brands we are exiting.

Gross profit decreased $10.1 million, or 8.0%, to $116.3 million for the first half of 2012, compared to $126.4 million for the first half of last year, primarily due to lower sales and a lower gross profit rate. As a percent of net sales, our gross profit decreased to 27.2%27.8% for the first quarterhalf of 2012 from 30.4%29.2% for the first quarterhalf of last year.year, reflecting higher markdowns.

Selling and Administrative Expenses
Selling and administrative expenses decreased $4.4$7.3 million, or 7.3%12.6%, to $55.6$50.2 million for the firstsecond quarter of 2012, compared to $60.0$57.5 million for the firstsecond quarter of last year, due primarily to a decrease in marketing expenses and lower general and administrative expenses due to our portfolio realignment efforts.efforts and a shift in the timing and a decrease of our marketing expenses, partially offset by an increase in anticipated payments under our cash and stock-based incentive plans. As a percent of net sales, selling and administrative expenses decreased to 24.9%25.7% for the firstsecond quarter of 2012, compared to 27.6%26.7% for the second quarter of last year, reflecting the above named factors.

Selling and administrative expenses decreased $11.7 million, or 9.9%, to $105.8 million for the first quarterhalf of 2012, compared to $117.5 million for the first half of last year, due to our portfolio realignment efforts and a shift in the timing and a decrease of our marketing expenses, partially offset by an increase in anticipated payments under our cash and stock-based incentive plans. As a percent of net sales, selling and administrative expenses decreased to 25.2% for the first half of 2012, compared to 27.1% for the first half of last year, reflecting the above named factors.

Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges, net of $3.2$2.1 million and $5.3 million during the second quarter and first quarterhalf of 2012, respectively, as a result of our portfolio realignment and ASG integration-related costs. Our portfolio realignment efforts included the exit of certain brands, the closure of certain facilities in Chinaa distribution center and the closure of a distribution center.certain facilities in China. We did not incur corresponding charges in the Wholesale Operations segment during the first quarterhalf of last year.

Impairment of Intangible Assets
Effective July 12, 2012, the Company terminated the Etienne Aigner license agreement due to a dispute with the licensor. In conjunction with the termination, in the second quarter of 2012, the Company recognized an impairment charge of $5.8 million to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. 

Operating (Loss) Earnings
Operating earnings decreased $4.0$5.4 million or 67.1%, to $2.0a loss of $2.5 million for the firstsecond quarter of 2012, compared to $6.0earnings of $2.9 million for the firstsecond quarter of last year. The decrease was primarily driven by the impairment of intangible assets, a decline in gross profit and an increase in restructuring and other special charges, net, partially offset by the decrease in selling and administrative expenses and the increase in net sales.expenses. As a percent of net sales, operating earnings declined to 0.9%loss is 1.3% for the firstsecond quarter of 2012, compared to 2.8%1.4% for operating earnings in the firstsecond quarter of last year.

Operating earnings decreased $9.5 million to a loss of $0.6 million for the first half of 2012, compared to earnings of $8.9 million for the first half of last year. The decrease was primarily driven by the decline in gross profit, impairment of intangible assets and an increase in restructuring and other special charges, net, partially offset by the decrease in selling and administrative expenses. As a percent of net sales, operating loss is 0.1% for the first half of 2012, compared to 2.1% for operating earnings in the first half of last year.


SPECIALTY RETAIL 

 Thirteen Weeks EndedThirteen Weeks Ended Twenty-six Weeks Ended
 April 28, 2012 April 30, 2011July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
($ millions, except sales per square foot)   
% of
Net
Sales
   
% of
Net
 Sales
   
% of
Net
Sales
   
% of
Net
Sales
   
% of
Net
Sales
   
% of
Net
 Sales
Operating Results                            
Net sales $56.1 100.0% $59.8 100.0%$54.0 100.0% $60.5 100.0% $110.1 100.0% $120.3 100.0%
Cost of goods sold 32.9 58.7%  34.4 57.5% 32.7 60.5%  36.3 60.0%  65.6 59.6%  70.7 58.8%
Gross profit 23.2 41.3%  25.4 42.5% 21.3 39.5%  24.2 40.0%  44.5 40.4%  49.6 41.2%
Selling and administrative expenses 25.9 46.2%  29.1 48.8% 24.5 45.4%  27.2 45.0%  50.5 45.9%  56.4 46.8%
Restructuring and other special charges, net 0.8 1.4%  – – 2.6 4.8%  – –  3.3 3.0%  – –
Operating loss $(3.5)(6.3)% $(3.7)(6.3)%$(5.8)(10.7)% $(3.0)(5.0)% $(9.3)(8.5)% $(6.8)(5.6)%
                            
Key Metrics                            
Same-store sales % changeSame-store sales % change 2.6%    (1.0)%   (1.5)%    5.2%    0.5%    2.1%  
Same-store sales $ change $0.9   $(0.4) $(0.6)  $2.1   $0.4   $1.7  
Sales change from new and closed stores, net $(3.4)  $(2.0) $(4.2)  $(2.4)  $(7.7)  $(4.4) 
Impact of changes in Canadian exchange rate on sales $(0.4)  $0.9  $(0.8)  $1.5   $(1.2)  $2.4  
Sales change for Shoes.com $(0.8)  $0.5  
Sales change of e-commerce subsidiary$(0.9)  $(0.5)  $(1.7)  $–  
                            
Sales per square foot, excluding e-commerce (thirteen weeks ended) $89   $90  
Sales per square foot, excluding e-commerce (thirteen and twenty-six weeks ended)$99   $103   $188   $194  
Sales per square foot, excluding e-commerce (trailing twelve-months) $397   $ 384  $393   $393   $393   $393  
Square footage (thousand sq. ft.) 358    407   358    397    358    397  
                            
Stores opened 6    3   6    4    12    7  
Stores closed 13     10    9    11    22    21  
Ending storesEnding stores 227    252   224    245    224    245  

Net Sales
Net sales decreased $3.7$6.5 million, or 6.1%10.8%, to $56.1$54.0 million for the firstsecond quarter of 2012, compared to $59.8$60.5 million for the firstsecond quarter of last year. The decrease in net sales primarily reflects our lower store count. In addition, we experiencedcount and a decline in customer traffic, a decrease in the Canadian dollar exchange rate and a decrease in Shoes.com net sales. Sales inrate. Overall, our domestic stores were very strong while our Canadian stores reported a decline. Our overall same-store sales, including applicable e-commerce sites, increased 2.6%decreased 1.5% as we experienced an increasea reduction in average retail price, customer conversion and pairs per transaction. The warmer weather improved demand for sandals while reducing demand for boots.customer traffic. Shoes.com experienced a decrease in net sales of $0.9 million. We opened six new retail stores and closed 13 storesnine during the firstsecond quarter of 2012, resulting in a total of 227224 stores (including 2220 Naturalizer stores in China) and total square footage of 0.4 million at the end of the firstsecond quarter of 2012, compared to 252245 stores (including 1516 Naturalizer stores in China) and total square footage of 0.4 million at the end of the firstsecond quarter of last year. As a result of the above namedthese factors, sales per square foot, excluding e-commerce, decreased 1.1%3.9% to $89$99 for the firstsecond quarter of 2012, compared to $90$103 for the second quarter of last year.

Net sales decreased $10.2 million, or 8.5%, to $110.1 million for the first quarterhalf of 2012, compared to $120.3 million for the first half of last year. The decrease in net sales primarily reflects our lower store count and a decline in the Canadian dollar exchange rate, partially offset by an increase in our same-store sales. Overall, our same-store sales, including applicable e-commerce sites, increased 0.5% as we experienced an increase in customer conversion and pairs per transaction, partially offset by a decrease in customer traffic. Shoes.com experienced a decrease in net sales of $1.7 million. As a result of these factors, sales per square foot, excluding e-commerce, decreased 3.1% to $188 for the first half of 2012, compared to $194 for the first half of last year.

Gross Profit
Gross profit decreased $2.2$2.9 million, or 8.7%11.8%, to $23.2$21.3 million for the firstsecond quarter of 2012, compared to $25.4$24.2 million for the firstsecond quarter of last year, primarily reflecting a decline in net sales and gross margin.profit rate. As a percent of net sales, our gross profit decreased to 41.3%39.5% for the firstsecond quarter of 2012 from 42.5%40.0% for the firstsecond quarter of last year. The decrease in our overall rate was primarily driven by higher markdownsfreight and product costs.

Gross profit decreased $5.1 million, or 10.2%, to $44.5 million for the first half of 2012, compared to $49.6 million for the first half of last year, primarily reflecting a decline in net sales and gross profit rate. As a percent of net sales, our gross profit decreased to 40.4% for the first half of 2012 from 41.2% for the first half of last year. The decrease in our overall rate was primarily driven by higher freight and product costs.

Selling and Administrative Expenses
Selling and administrative expenses decreased $3.2$2.7 million, or 11.0%9.7%, to $25.9$24.5 million for the firstsecond quarter of 2012, compared to $29.1$27.2 million for the firstsecond quarter of last year, reflecting lower store payroll and facility expenses, due to a lower store count, and lower marketing expenses. As a percent of net sales, selling and administrative expenses increased to 45.4% for the second quarter of 2012, compared to 45.0% for the second quarter of last year, due primarily to declines inour lower net sales.

Selling and administrative expenses decreased $5.9 million, or 10.4%, to $50.5 million for the first half of 2012, compared to $56.4 million for the first half of last year, reflecting lower store payroll and facility expenses, due to a lower store count, and a decrease in marketing expenses. As a percent of net sales, selling and administrative expenses decreased to 46.2%45.9% for the first quarterhalf of 2012, compared to 48.8%46.8% for the first quarterhalf of last year, reflecting the above named factors.

Restructuring and Other Special Charges, Net
We incurred restructuring and other special charges, net of $0.8$2.6 million and $3.3 million during the second quarter and first quarterhalf of 2012, respectively, as a result of our portfolio realignment efforts, which included costs to close underperformingour FX LaSalle and Via Spiga retail stores. We did not incur corresponding charges in the firstsecond quarter of last year.

Operating Loss
Specialty Retail reported an operating loss of $3.5$5.8 million for the firstsecond quarter of 2012, compared to an operating loss of $3.7$3.0 million for the firstsecond quarter of last year, primarily due to a decline in selling and administrative expenses, partially offset by a lower gross margin, decrease in net salesprofit rate and an increase in restructuring and other special charges, net, partially offset by a decline in selling and administrative expenses, as discussed above.

Specialty Retail reported an operating loss of $9.3 million for the first half of 2012, compared to an operating loss of $6.8 million for the first half of last year, primarily due to a decline in gross profit rate and an increase in restructuring and other special charges, net, partially offset by a decline in selling and administrative expenses, as discussed above.

OTHER SEGMENT 

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $8.1$10.9 million for the firstsecond quarter of 2012, compared to costs of $9.0$8.4 million for the firstsecond quarter of last year.

A couple of factorsFactors impacting the $0.9$2.5 million varianceincrease are as follows:

·  Acquisition-related costsOrganizational change – We incurred costs of $1.7$2.3 million during the firstsecond quarter of 2011,2012, related to the acquisition of ASG,a corporate organizational change, with no corresponding costs in the Other segmentsecond quarter of 2011.
·  Incentive compensation – Our selling and administrative expenses were higher by $1.0 million during the firstsecond quarter of 2012.2012, compared to last year, due to higher anticipated payments under our cash and stock-based incentive plans.
·  Portfolio realignment costs – We incurred costs of $0.5$0.2 million during the firstsecond quarter of 2012, related to our portfolio realignment efforts, with no corresponding costs in the firstsecond quarter of 2011.
·  ERP stabilization – We incurred costs of $1.2 million during the second quarter of 2011, due to continued progress on the stabilization of our ERP platform, with no corresponding costs in the second quarter of 2012.
·  Integration costs – We incurred costs of $0.7 million during the second quarter of 2011, related to the integration of ASG, which closed on February 17, 2011, with no corresponding costs during the second quarter of 2012.

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $19.0 million for the first half of 2012, compared to costs of $17.4 million for the first half of last year.

Factors impacting the $1.6 million increase include:

·  Organizational changes – We incurred costs of $2.3 million during the first half of 2012, related to corporate organizational changes, with no corresponding costs in the first half of 2011.
·  Director compensation – Our expenses related to director compensation increased $1.9 million during the first half of 2012, compared to last year, primarily reflecting the impact of the Company’s higher share price on certain of the directors’ variable share based compensation plans.
·  Incentive compensation – Our selling and administrative expenses were higher by $1.8 million during the first half of 2012, compared to last year, due to higher anticipated payments under our cash and stock-based incentive plans.
·  Portfolio realignment costs – We incurred costs of $0.8 million during the first half of 2012, related to our portfolio realignment efforts, with no corresponding costs in the first half of 2011.
·  ERP stabilization – We incurred costs of $2.5 million during the first half of 2011, due to continued progress on the stabilization of our ERP platform, with no corresponding costs during the first half of 2012.
·  Acquisition and integration costs – We incurred costs of $2.4 million during the first half of 2011, related to the acquisition and integration of ASG, with no corresponding costs in the Other segment during the first half of 2012.


LIQUIDITY AND CAPITAL RESOURCES 

Borrowings

($ millions)
April 28,
2012
 
April 30,
2011
 
January 28,
2012
 
July 28,
2012
 
July 30,
2011
 
January 28,
2012
 
Borrowings under revolving credit agreement$124.0 $288.0 $201.0 $116.0 $250.0 $201.0 
Senior notes 198.7  150.0 198.6  198.7  198.5 198.6 
Total debt$322.7 $438.0 $399.6 $314.7 $448.5 $399.6 

Total debt obligations decreased $115.3$133.8 million to $322.7$314.7 million at AprilJuly 28, 2012, compared to $438.0$448.5 million at AprilJuly 30, 2011, and decreased $76.9$84.9 million from $399.6 million at January 28, 2012 due to lower borrowings under our revolving credit agreement, primarily due toresulting from strong cash provided by operating activities and the proceeds from the sale of TBMC in October 2011. As a result of the lower average borrowings under our revolving credit agreement, interest expense for the firstsecond quarter of 2012 decreased $0.5$0.8 million to $6.2$5.8 million, compared to $6.7$6.6 million for the firstsecond quarter of last year. Interest expense in the first half of 2012 decreased $1.3 million to $12.0 million, compared to $13.3 million in the first half of last year primarily due to the above described factors.

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

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

Interest on borrowings is at variable rates based on the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.
 
The Credit Agreement limits our ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 15.0% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over our cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days.
 
The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect and a change of control event. In addition, if the excess availability falls below the greater of (i) 12.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, we would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. We were in compliance with all covenants and restrictions under the Credit Agreement as of AprilJuly 28, 2012.

At AprilJuly 28, 2012, we had $124.0$116.0 million in borrowings outstanding and $8.5$9.0 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $354.3$405.0 million at AprilJuly 28, 2012.

We believe that borrowing capacity under our Credit Agreement will be adequate to meet our expected operational needs and capital expenditure plans and provide liquidity for potential acquisitions.

$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 the 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 Credit Agreement.

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

YearPercentage
2014105.344%
2015103.563%
2016101.781%
2017 and thereafter100.000%

In addition, prior to May 15, 2014, we may redeem up to 35% of the 2019 Senior Notes with the proceeds from certain equity offerings at a redemption price of 107.125% of the principal amount of the 2019 Senior Notes to be redeemed, plus accrued and unpaid interest thereon, if any, to the redemption date.

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 AprilJuly 28, 2012, we were in compliance with all covenants and restrictions relating to the 2019 Senior Notes.

Sale of TBMC
On October 25, 2011, we sold TBMC to Galaxy International for $55.4 million in cash, which resulted in a pre-tax gain of $20.6 million. TBMC markets and sells footwear bearing the AND 1 brand name and was acquired in our February 17, 2011 acquisition of ASG. We utilized the proceeds from the sale to reduce the outstanding borrowings under our revolving credit agreement. See Note 3 to the condensed consolidated financial statements for additional information.

Working Capital and Cash Flow
        
Thirteen Weeks Ended   Twenty-six Weeks Ended   
($ millions)April 28, 2012 April 30, 2011 
Increase/
(Decrease)
 July 28, 2012 July 30, 2011 
Increase/
(Decrease)
 
Net cash provided by operating activities$79.9 $3.7 $76.2 $119.3 $43.5 $75.8 
Net cash used for investing activities (7.0) (163.2) 156.2  (27.1) (175.3) 148.2 
Net cash (used for) provided by financing activities (81.4) 85.7 (167.1) (92.3) 66.3 (158.6)
Effect of exchange rate changes on cash and cash equivalents 0.6  1.5  (0.9) (0.2) 1.5  (1.7)
Decrease in cash and cash equivalents$(7.9)$(72.3)$64.4 $(0.3)$(64.0)$63.7 

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

Cash provided by operating activities was $76.2$75.8 million higher in the first quarterhalf of 2012 as compared to 2011, reflecting the following factors:
·  An increase in accrued expenses and other liabilities in the first quarterhalf of 2012 as compared to a large decrease in the first quarterhalf of last year, due in part to no incentive plan payoutsyear. Accrued expenses increased in 2012 relatedprimarily due to reserves for portfolio realignment activities. In 2011, accrued expenses declined in the first half as a result of payments under our 2011 incentive plans as compared to payouts in 2011 related to our 2010 incentive plans as well as higher liabilities in 2012 related to our restructuringplans; and other special charges;
·  A decrease in accounts receivable in the first quarterhalf of 2012 as compared to an increase in the first quarterhalf of last year, due to fluctuationsimproved customer collections and lower wholesale sales in sales and the timing of payments; andsecond quarter; partially offset by
·  A larger decreasesmaller increase in inventorytrade accounts payable in the first quarterhalf of 2012 compared to last year.

Cash used for investing activities was lower by $156.2$148.2 million primarily due to the non-recurrence of our acquisition of ASG in the first quarter ofon February 17, 2011. The aggregate purchase price for ASG was $156.6 million in cash, including debt we assumed of $11.6 million. In connection with the acquisition, we also recognized $3.1 million of cash upon the initial consolidation of ASG. See Note 3 of the condensed consolidated financial statements for more information about the ASG acquisition. In 2012, we expect purchases of property and equipment and capitalized software of approximately $58 million to $60$63 million, primarily related to remodeled and new stores, information technology initiatives and general infrastructure.

Cash used for financing activities was higher by $167.1$158.6 million primarily due to repayments, net of borrowings, under our revolving credit agreement.agreement in the first half of both 2012 and 2011 and the refinancing of our senior notes, partially offset by the acquisition of treasury stock in the first half of 2011.

A summary of key financial data and ratios at the dates indicated is as follows:
           
April 28, 2012 April 30, 2011 January 28, 2012 July 28, 2012 July 30, 2011 January 28, 2012
Working capital ($ millions) (1)
Working capital ($ millions) (1)
$ 296.3 $ 198.7 $ 290.6
Working capital ($ millions) (1)
$ 292.9 $ 212.9 $ 290.6
           
Current ratio (2)
Current ratio (2)
1.67:1 1.34:1 1.55:1
Current ratio (2)
1.52:1 1.31:1 1.55:1
           
Debt-to-capital ratio (3)
Debt-to-capital ratio (3)
43.9% 51.1% 49.1%
Debt-to-capital ratio (3)
43.6% 53.4% 49.1%
(1)Working capital has been computed as total current assets less total current liabilities.Working capital has been computed as total current assets less total current liabilities.
(2)The current ratio has been computed by dividing total current assets by total current liabilities.The current ratio has been computed by dividing total current assets by total current liabilities.
(3)The debt-to-capital ratio has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the revolving credit agreement. Total capitalization is defined as total debt and total equity.The debt-to-capital ratio has been computed by dividing total debt by total capitalization. Total debt is defined as long-term debt and borrowings under the revolving credit agreement. Total capitalization is defined as total debt and total shareholders’ equity.

Working capital at AprilJuly 28, 2012, was $296.3$292.9 million, which was $5.7is $2.3 million higher than at January 28, 2012 and $97.6$80.0 million higher than at AprilJuly 30, 2011. Our current ratio increaseddecreased to 1.671.52 to 1 as of AprilJuly 28, 2012 compared to 1.55 to 1 at January 28, 2012 and 1.34increased compared to 1.31 to 1 at AprilJuly 30, 2011. The improvementchange in these metrics when compared to January 28, 2012 was primarily attributable to lower borrowings under our revolving credit agreement.agreement and an increase in inventories, partially offset by an increase in trade accounts payable. The increase compared to AprilJuly 30, 2011 was primarily attributable to lower inventories, lower cash and cash equivalents and lower accounts receivable.borrowings under our revolving credit agreement, due in part to our third quarter 2011 sale of TBMC. Our debt-to-capital ratio was 43.9%43.6% as of AprilJuly 28, 2012, compared to 49.1% as of January 28, 2012 and 51.1%53.4% as of AprilJuly 30, 2011. The decrease in our debt-to-capital ratio from January 28, 2012 was primarily due to the $77.0$85.0 million decrease in borrowings under our revolving credit agreement resulting from cash provided by operating activities in the first quarterhalf of 2012.2012, partially offset by an increase in trade accounts payable. As compared to AprilJuly 30, 2011, the decrease is primarily due to the $164.0$134.0 million decrease in borrowings under our revolving credit agreement resulting from cash provided by operating activities and the proceeds from the sale of TBMC.

At AprilJuly 28, 2012, we had $39.8$47.4 million of cash and cash equivalents, substantially all of which represents cash and cash equivalents of our foreign subsidiaries. In accordance with Internal Revenue Service guidelines limiting the length of time that our parent company can borrow funds from foreign subsidiaries, Brown Shoe Company, Inc. utilizes the cash and cash equivalents of its foreign subsidiaries to manage the liquidity needs of the consolidated company and minimize interest expense on a consolidated basis.

We paid dividends of $0.07 per share in both the firstsecond quarter of 2012 and the firstsecond quarter of last year. 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.


OFF BALANCE SHEET ARRANGEMENTS 

At AprilJuly 28, 2012, we were contingently liable for remaining lease commitments of approximately $0.3 million in the aggregate, which relate to former retail locations that we exited in prior years. These obligations will continue to decline over the next several years as leases expire. In order for us to incur any liability related to these lease commitments, the current lessees would have to default.


CONTRACTUAL OBLIGATIONS 

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

Except for the changes within the normal course of business (primarily changes in purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations, borrowings/payments under our revolving credit agreement and changes in operating lease commitments as a result of new stores, store closures and lease renewals), there have been no other significant changes to our contractual obligations identified in our Annual Report on Form 10-K for the year ended January 28, 2012.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

No material changes have occurred related to critical accounting policies and estimates since the end of the most recent fiscal year. The adoption of new accounting pronouncements is described in Note 2 to the condensed consolidated financial statements. For further information, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 28, 2012.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 

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


FORWARD-LOOKING STATEMENTS 

This Form 10-Q contains certain forward-looking statements and expectations regarding the Company’s future performance and the future performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) intense competition within the footwear industry; (iii) rapidly changing fashion trends and purchasing patterns; (iv) customer concentration and increased consolidation in the retail industry; (v) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China, where ASG has manufacturing facilities and both ASG and Brown Shoe Company rely heavily on third-party manufacturing facilities for a significant amount of their inventory; (vi) Brown Shoe Company’s ability to utilize its new information technology system to successfully execute its strategies, including integrating ASG’s business; (vii) the ability to recruit and retain senior management and other key associates; (viii) the ability to attract, retain and retainmaintain good relationships with licensors and protect intellectual property rights; (ix) the ability to secure/exit leases on favorable terms; (x) the ability to maintain relationships with current suppliers; (xi) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (xii) the ability to source product at a pace consistent with increased demand for footwear; (xiii) the impact of rising prices in a potentially inflationary global environment; and (xiv) the ability of Brown Shoe Company to execute on the first phase of its portfolio realignment. The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption Risk Factors in Item 1A of the Company’s Annual Report on Form 10-K for the year ended January 28, 2012, which information is incorporated by reference herein and updated by the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.


ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended January 28, 2012.


ITEM 4CONTROLS AND PROCEDURES

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

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.  Our disclosure controls and procedures are designed to provide a reasonable level of assurance that their objectives are achieved.  As of AprilJuly 28, 2012, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures were effective at the reasonable assurance level.

There were no significant changes to internal control over financial reporting during the quarter ended AprilJuly 28, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




PART IIOTHER INFORMATION

ITEM 1LEGAL PROCEEDINGS

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

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


ITEM 1ARISK FACTORS

No material changes have occurred related to our risk factors since the end of the most recent fiscal year. For further information, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 28, 2012.





ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to our repurchases of common stock during the firstsecond quarter of 2012:
Fiscal Period 
Total Number
of Shares
Purchased
 Average
Price Paid
per Share
Total Number
of Shares Purchased
as Part of Publicly
Announced Program (1)
 
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program
 (1)
  
          
January 29, 2012 – February 25, 2012 4,421(2)$10.66(2)­–  2,500,000 
            
February 26, 2012 – March 31, 2012 253,035(2) 9.59(2)–  2,500,000 
            
April 1, 2012 – April 28, 2012 –  – –  2,500,000 
            
Total 257,456(2)$9.61(2)–  2,500,000 
Fiscal Period 
Total Number
of Shares
Purchased
 Average
Price Paid
per Share
Total Number
of Shares Purchased
as Part of Publicly
Announced Program (1)
 
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Program
 (1)
  
          
April 29, 2012 – May 26, 2012 – $– ­–  2,500,000 
            
May 27, 2012 – June 30, 2012 10,733(2) 12.28(2)–  2,500,000 
            
July 1, 2012 – July 28, 2012 –  – –  2,500,000 
            
Total 10,733(2)$12.28(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 through the end of the firstsecond quarter of 2012; therefore, there were 2.5 million shares authorized to be purchased under the program as of AprilJuly 28, 2012. Our 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.


ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5OTHER INFORMATION

None.



ITEM 6EXHIBITS

Exhibit
No.
  
3.1 Restated Certificate of Incorporation of Brown Shoe Company, Inc. (the “Company”) incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2007, and filed June 5, 2007.
3.2 Bylaws of the Company as amended through October 6, 2011, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K dated and filed October 11, 2011.
10.1
*†
Form of Performance Award Agreement (for 2012-2014 performance period) under the Brown Shoe Company, Inc. Incentive and Stock Compensation Plan of 2011.
10.2*Severance Agreement, effective June 11, 2012, between the Company and Russell C. Hammer, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K dated and filed May 29, 2012.
31.1†Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
†^
XBRL Instance Document
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
†^
†^
†^
†^
†^
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Definition Linkbase Document
* Denotes management contract or compensatory plan arrangements.
† Denotes exhibit is filed with this Form 10-Q.
^ Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.

 
 
 



SIGNATURES

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

  BROWN SHOE COMPANY, INC.
   
Date: JuneSeptember 5, 2012 /s/ Mark E. HoodRussell C. Hammer
  
Mark E. HoodRussell C. Hammer
Senior Vice President and Chief Financial Officer
on behalf of the Registrant and as the
Principal Financial Officer and Principal Accounting Officer