CAL 10-Q Quarterly Report July 28, 2012

CALERES INC

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10-Q 1 bws10q2q.htm FORM 10-Q bws10q2q.htm

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 July 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 August 24, 2012, 42,865,489 common shares were outstanding.

PART I

FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	(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 1

Basis 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 loss attributable to Brown Shoe Company, Inc.

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

Note 2

Impact 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 prior fair value guidance. This standard 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 prior comprehensive income guidance. This standard 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 prior goodwill 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 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 3

Acquisitions 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 second quarter of 2011 and $2.4 million ($2.1 million on an after-tax basis, or $0.04 per diluted share) during the first half of 2011. The integration costs incurred in the first half of 2012 are included in the Wholesale Operations segment. The acquisition and integration costs incurred in the first half of 2011 were included in the Other segment. All costs were recorded as a component of restructuring and other special charges, net. In addition, 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 $1.5 million ($0.9 million on an after-tax basis, or $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 second quarter of 2011 results as if the acquisition had been completed as of the beginning of 2010:


	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 half 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 include: i) the elimination of the non-cash cost of goods sold impact related to the inventory fair value adjustment of $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 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 July 28, 2012 and July 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 loss from continuing operations	$	(2,714	)	$	(5,451	)	$	(1,086	)	$	(2,103	)
Net loss attributable to noncontrolling interests		179			159			246			206
Net earnings allocated to participating securities		–			–			–			–
Net loss from continuing operations		(2,535	)		(5,292	)		(840	)		(1,897	)

Net earnings from discontinued operations		–			683			–			976
Net earnings allocated to participating securities		–			–			–			–
Net earnings from discontinued operations		–			683			–			976
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 (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		–			–			–			–
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 (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	)

Due to the net loss attributable to Brown Shoe Company, Inc. for the thirteen weeks and twenty-six weeks ended July 28, 2012 and July 30, 2011, the denominator for diluted loss per common share attributable to Brown Shoe Company, Inc. shareholders is the same as the denominator for basic loss per common share attributable to Brown Shoe Company, Inc. shareholders.

Note 5

Restructuring and Other Special Charges, Net

Acquisition and Integration Related Costs

In the first half of 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 2012 costs are included in the Wholesale Operations segment as a component of restructuring and other special charges, net. All of the 2011 costs were included in the Other segment as a component of restructuring and other special charges, net. As of July 28, 2012, there is a remaining liability of $0.8 million related to severance.

Portfolio Realignment

In 2011, the Company began its portfolio realignment efforts. The Company's portfolio realignment efforts include 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; closing or relocating numerous underperforming or poorly aligned retail stores; 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 its portfolio realignment activities of $12.4 million ($8.0 million after-tax, or $0.19 per diluted share). These costs are reflected on the condensed consolidated statement of earnings as $5.8 million in impairment of intangible assets, $5.2 million in restructuring and other special charges, net, and $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 $16.0 million in restructuring and other special charges, net, $7.3 million is included in the Famous Footwear segment, $4.6 million is included in the Wholesale Operations segment, $3.3 million is included in the Specialty Retail segment and $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 $2.6 million in cost of goods sold, $2.4 million is included in the Wholesale Operations segment and $0.2 is included in the Specialty Retail segment. There were no portfolio realignment costs for the first half of 2011.

The Company believes its portfolio realignment will result in total expense of approximately $50 million, of which $43.7 million was recorded as of July 28, 2012. The Company expects approximately half of the $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
Original charges and reserve balance	$	8.9		$	6.1		$	1.4		$	2.8		$	19.2
Amounts settled in 2011		(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
Additional charges in first quarter 2012		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	)
Reserve balance at April 28, 2012	$	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 6

Business Segment Information

Applicable business segment information is as follows for the periods ended July 28, 2012 and July 30, 2011:


($ thousands)	Famous Footwear		Wholesale Operations			Specialty Retail			Other			Total

Thirteen Weeks Ended July 28, 2012
External sales	$	350,318	$	194,966		$	53,995		$	–		$	599,279
Intersegment sales		466		55,941			–			–			56,407
Operating earnings (loss)		20,539		(2,548	)		(5,795	)		(10,911	)		1,285
Operating segment assets		512,892		552,691			48,568			140,023			1,254,174

Thirteen Weeks Ended July 30, 2011
External sales	$	344,930	$	215,117		$	60,543		$	–		$	620,590
Intersegment sales		400		54,426			–			–			54,826
Operating earnings (loss)		7,495		2,925			(3,012	)		(8,406	)		(998	)
Operating segment assets		527,195		629,116			54,262			140,350			1,350,923

Twenty-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, 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 July 28, 2012, operating earnings (loss) included portfolio realignment costs of $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 $24.4 million, $12.8 million is included in the Wholesale Operations segment, $7.3 million is included in the Famous Footwear segment, $3.5 million is included in the Specialty Retail segment and $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 July 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 $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 $0.7 million and $2.4 million, respectively.

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


	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands )	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
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	)

Note 7

Goodwill and Intangible Assets

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


($ thousands)	July 28, 2012			July 30, 2011		January 28, 2012

Intangible Assets
Famous Footwear	$	2,800		$	2,800		$	2,800
Wholesale Operations		142,003			162,975			155,003
Specialty Retail		200			200			200
Total intangible assets		145,003			165,975			158,003
Accumulated amortization		(53,533	)		(52,922	)		(57,017	)
Total intangible assets, net		91,470			113,053			100,986
Goodwill
Wholesale Operations		39,604			61,246			39,604
Total goodwill		39,604			61,246			39,604
Goodwill and intangible assets, net	$	131,074		$	174,299		$	140,590

Intangible assets, primarily owned trademarks, of $42.5 million as of July 28, 2012, July 30, 2011 and January 28, 2012 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 July 28, 2012. Amortization expense related to intangible assets was $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 July 28, 2012 and July 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 July 30, 2011 to January 28, 2012 and July 28, 2012 is primarily related to the Company's sale of TBMC on October 25, 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 8

Shareholders’ Equity

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the twenty-six weeks ended July 28, 2012:


($ thousands)	Brown Shoe Company, Inc. Shareholders’ Equity			Noncontrolling Interests			Total Equity
Equity at January 28, 2012	$	412,669		$	1,047		$	413,716
Net loss		(840	)		(246	)		(1,086	)
Other comprehensive income		(878	)		(4	)		(882	)
Dividends paid		(6,005	)		–			(6,005	)
Issuance of common stock under share-based plans, net		(2,058	)		–			(2,058	)
Tax benefit related to share-based plans		738			–			738
Share-based compensation expense		3,275			–			3,275
Equity at July 28, 2012	$	406,901		$	797		$	407,698

Share-Based Compensation

During the second quarter of 2012, the Company granted 108,700 restricted shares to certain employees with a weighted-average grant date fair value of $11.68. Of the 108,700 restricted shares granted, 67,350 shares vest in equal installments over four years. The remaining 41,350 restricted shares vest in four years. Share-based compensation expense is recognized on a straight-line basis separately for each vesting portion of the restricted stock award.

The Company also granted 16,700 restricted shares to non-employee directors with a weighted-average grant date fair value of $11.91 during the second quarter of 2012. The restricted shares granted to non-employee directors during the second quarter of 2012 vest in one year and share-based compensation expense will be recognized on a straight-line basis over the one-year period.

The Company granted 11,250 performance share units during the second quarter of 2012 with a weighted-average grant date fair value of $11.73 per unit. Vesting of performance-based units is dependent upon the financial performance of the Company and the attainment of certain financial goals over the next three years. Performance share units are payable in cash based on the Company’s stock price upon payout. The performance share units may pay out at a maximum of 200% of the target number of units. Share-based compensation expense is being recognized ratably over the three-year service period based upon the anticipated number of units to be earned and the fair value of the performance share units, as remeasured at the end of each period.

The Company recognized share-based compensation expense of $1.8 million and $1.3 million during the thirteen weeks and $3.3 million and $3.0 million during the twenty-six weeks ended July 28, 2012 and July 30, 2011, respectively. The Company issued 154,527 shares of common stock during the thirteen weeks ended July 28, 2012, for restricted stock grants, 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 thirteen and twenty-six weeks ended July 28, 2012, the Company cancelled restricted stock awards of 81,000 and 114,500 shares, respectively, as a result of forfeitures.

The Company also granted 68,398 restricted stock units to non-employee directors with a weighted-average grant date fair value of $11.93 during the second quarter of 2012. Of the 68,398 restricted stock units granted, 1,598 of the restricted stock units vested and compensation expense was fully 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 9

Retirement 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
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
Service cost	$	2,844		$	2,398		$	–		$	–
Interest cost		3,180			3,150			36			44
Expected return on assets		(6,261	)		(5,191	)		–			–
Amortization of:
Actuarial loss (gain)		45			108			(23	)		(25	)
Prior service expense (income)		4			(3	)		–			–
Net transition asset		(11	)		(12	)		–			–
Total net periodic benefit (income) cost	$	(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 10

Long-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, 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 July 28, 2012.

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

Year	Percentage
2014	105.344%
2015	103.563%
2016	101.781%
2017 and thereafter	100.000%

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

Note 11

Risk 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 August 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 July 28, 2012 and July 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 July 28, 2012, July 30, 2011 and January 28, 2012, the Company had forward contracts maturing at various dates through August 2013, July 2012 and February 2013, respectively. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency.


	Contract Amount
(U.S. $ equivalent in thousands)	July 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)		19,937		19,002		19,002
Euro		6,626		6,027		7,293
Japanese yen		1,392		1,219		1,365
New Taiwanese dollars		884		1,163		830
Great Britain pounds sterling		210		–		2,947
Other currencies		1,335		1,180		1,107
Total financial instruments	$	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 July 28, 2012, July 30, 2011 and January 28, 2012 are as follows:


	Asset Derivatives			Liability Derivatives
($ in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value

Foreign exchange forward contracts:

July 28, 2012	Prepaid expenses and other current assets	$	78	Other accrued expenses	$	1,151

July 30, 2011	Prepaid expenses and other current assets	$	120	Other accrued expenses	$	773

January 28, 2012	Prepaid expenses and other current assets	$	839	Other accrued expenses	$	633

For the thirteen weeks ended July 28, 2012 and July 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 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

Net sales	$	(34	)	$	(14	)	$	(52	)	$	47

Cost of goods sold		(531	)		86			158			35

Selling and administrative expenses		(252	)		(19	)		(194	)		(65	)

Interest expense		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 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

Net sales	$	(99	)	$	145

Cost of goods sold		335			90

Selling and administrative expenses		232			(169	)

Interest expense		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 13 months. Additional information related to the Company’s derivative financial instruments are disclosed within Note 12 to the condensed consolidated financial statements.

Note 12

Fair 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 July 28, 2012, July 30, 2011 and January 28, 2012. The Company did not have any transfers between Level 1 and Level 2 during 2011 or the twenty-six weeks ended July 28, 2012.


				Fair Value Measurements
($ thousands)		Total			Level 1			Level 2			Level 3
Asset (Liability)
As of July 28, 2012:
Cash equivalents – money market funds	$	36,340		$	36,340		$	–		$	–
Non-qualified deferred compensation plan assets		1,225			1,225			–			–
Non-qualified deferred compensation plan liabilities		(1,225	)		(1,225	)		–			–
Deferred compensation plan liabilities for non-employee directors		(908	)		(908	)		–			–
Derivative financial instruments, net		(1,073	)		–			(1,073	)		–
As of July 30, 2011:
Cash equivalents – money market funds	$	19,810		$	19,810		$	–		$	–
Non-qualified deferred compensation plan assets		1,846			1,846			–			–
Non-qualified deferred compensation plan liabilities		(1,846	)		(1,846	)		–			–
Deferred compensation plan liabilities for non-employee directors		(636	)		(636	)		–			–
Derivative financial instruments, net		(653	)		–			(653	)		–
As of January 28, 2012:
Cash equivalents – money market funds	$	5,063		$	5,063		$	–		$	–
Non-qualified deferred compensation plan assets		1,081			1,081			–			–
Non-qualified deferred compensation plan liabilities		(1,081	)		(1081	)		–			–
Deferred compensation plan liabilities for non-employee directors		(620	)		(620	)		–			–
Derivative financial instruments, net		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 $43.9 million were assessed for impairment and written down to their fair value, resulting in an impairment charge of $0.4 million for the thirteen weeks ended July 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 $3.1 million impairment charge, $2.0 million related to the Famous Footwear segment and $1.1 million related to the Specialty Retail segment. Of the $2.0 million related to the Famous Footwear segment, $1.3 million is included in restructuring and other special charges, net, and $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.

July 28, 2012

July 30, 2011

January 28, 2012

($ thousands)

Carrying

Amount

Fair

Value

Carrying Amount

Fair

Value

Carrying

Amount

Fair

Value

Senior Notes

$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 13

Income 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 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, the Company incurred certain costs in international divisions related to the portfolio realignment efforts that are not expected to result in a tax benefit.

Note 14

Related 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 July 28, 2012, the Company, through its consolidated subsidiary, B&H Footwear, sold $1.1 million and $2.6 million of Naturalizer footwear on a wholesale basis to Hongguo, with $0.6 million and $1.9 million in corresponding sales during the thirteen weeks and twenty-six weeks ended July 30, 2011, respectively.

Note 15

Commitments 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 July 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 July 28, 2012 are $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 July 28, 2012, was $7.7 million, of which $0.7 million is included in other accrued expenses and $7.0 million is included in other liabilities. Of the total $7.7 million reserve, $4.9 million is for on-site remediation and $2.8 million is for off-site remediation. During the thirteen weeks and twenty-six weeks ended July 28, 2012 and July 30, 2011, other than the accretion of interest 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 July 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 $9.3 million as of July 28, 2012 to complete the cleanup, maintenance and monitoring at all sites. Of the $9.3 million liability, $0.9 million is included in other accrued expenses and $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 July 28, 2012. While management believes it has an appropriate reserve for this matter, the ultimate outcome and cost to the Company may vary.

At July 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 16

Financial 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.

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 JULY 28, 2012

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	166,415		$	438,617		$	47,146		$	(52,899	)	$	599,279
Cost of goods sold		132,317			247,914			38,133			(52,899	)		365,465
Gross profit		34,098			190,703			9,013			–			233,814
Selling and administrative expenses		44,636			172,585			2,040			–			219,261
Restructuring and other special charges, net		4,612			2,879			–			–			7,491
Impairment of intangible assets		5,777			–			–			–			5,777
Equity in (earnings) loss of subsidiaries		(13,900	)		(6,601	)		–			20,501			–
Operating (loss) earnings		(7,027	)		21,840			6,973			(20,501	)		1,285
Interest expense		(5,758	)		–			–			–			(5,758	)
Interest income		–			63			14			–			77
Intercompany interest income (expense)		3,120			(3,227	)		107			–			–
(Loss) earnings before income taxes		(9,665	)		18,676			7,094			(20,501	)		(4,396	)
Income tax benefit (provision)		7,130			(4,776	)		(672	)		–			1,682
Net (loss) earnings		(2,535	)		13,900			6,422			(20,501	)		(2,714	)
Net loss attributable to noncontrolling interests		–			–			(179	)		–			(179	)
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(2,535	)	$	13,900		$	6,601		$	(20,501	)	$	(2,535	)

Comprehensive (loss) income	$	(3,083	)	$	12,969		$	6,427		$	(20,501	)	$	(4,188	)
Comprehensive loss attributable to noncontrolling interests		–			–			(185	)		–			(185	)
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 TWENTY-SIX WEEKS ENDED JULY 28, 2012

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations		Total
Net cash provided by operating activities	$	31,083		$	71,866		$	16,411		$	–	$	119,360

Investing activities
Purchases of property and equipment		(1,525	)		(21,738	)		(883	)		–		(24,146	)
Capitalized software		(2,953	)		–			(3	)		–		(2,956	)
Net cash used for investing activities		(4,478	)		(21,738	)		(886	)		–		(27,102	)

Financing activities
Borrowings under revolving credit agreement		334,000			–			–			–		334,000
Repayments under revolving credit agreement		(419,000	)		–			–			–		(419,000	)
Dividends paid		(6,005	)		–			–			–		(6,005	)
Issuance of common stock under share-based plans, net		(2,058	)		–			–			–		(2,058	)
Tax benefit related to share-based plans		738			–			–			–		738
Intercompany financing		70,106			(53,482	)		(16,624	)		–		–
Net cash used for financing activities		(22,219	)		(53,482	)		(16,624	)		–		(92,325	)
Effect of exchange rate changes on cash and cash equivalents		–			(218	)		–			–		(218	)
Increase (decrease) in cash and cash equivalents		4,386			(3,572	)		(1,099	)		–		(285	)
Cash and cash equivalents at beginning of period		(4,386	)		34,332			17,736			–		47,682
Cash and cash equivalents at end of period	$	–		$	30,760		$	16,637		$	–	$	47,397

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JANUARY 28, 2012

($ thousands)	Parent			Guarantors			Non- Guarantors		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	(4,386	)	$	34,332		$	17,736	$	–		$	47,682
Receivables		78,129			24,082			51,811		–			154,022
Inventories		129,776			418,264			13,757		–			561,797
Prepaid expenses and other current assets		35,625			14,685			1,327		–			51,637
Total current assets		239,144			491,363			84,631		–			815,138
Other assets		115,515			23,844			918		–			140,277
Goodwill and intangible assets, net		47,765			16,160			76,665		–			140,590
Property and equipment, net		23,621			97,887			9,963		–			131,471
Investment in subsidiaries		813,602			68,057			–		(881,659	)		–
Total assets	$	1,239,647		$	697,311		$	172,177	$	(881,659	)	$	1,227,476

Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	201,000		$	–		$	–	$	–		$	201,000
Trade accounts payable		49,238			92,431			48,942		–			190,611
Other accrued expenses		60,079			65,676			7,214		–			132,969
Total current liabilities		310,317			158,107			56,156		–			524,580
Other liabilities:
Long-term debt		198,633			–			–		–			198,633
Other liabilities		29,702			46,717			14,128		–			90,547
Intercompany payable (receivable)		288,326			(321,115	)		32,789		–			–
Total other liabilities		516,661			(274,398	)		46,917		–			289,180
Equity
Brown Shoe Company, Inc. shareholders’ equity		412,669			813,602			68,057		(881,659	)		412,669
Noncontrolling interests		–			–			1,047		–			1,047
Total equity		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

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 STATEMENT OF COMPREHENSIVE INCOME

FOR THE THIRTEEN WEEKS ENDED JULY 30, 2011

($ 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

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2011

($ thousands)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net cash (used for) provided by operating activities	$	(15,888	)	$	42,063		$	17,233		$	55		$	43,463

Investing activities
Purchases of property and equipment		(1,204	)		(12,717	)		(762	)		–			(14,683	)
Capitalized software		(6,898	)		(200	)		–			–			(7,098	)
Acquisition cost		–			–			(156,636	)		–			(156,636	)
Cash recognized on initial consolidation		–			3,121			–			–			3,121
Net cash used for investing activities		(8,102	)		(9,796	)		(157,398	)		–			(175,296	)

Financing activities
Borrowings under revolving credit agreement		965,500			–			–			–			965,500
Repayments under revolving credit agreement		(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		(6,197	)		–			–			–			(6,197	)
Debt issuance costs		(5,828	)		–			–			–			(5,828	)
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		(453	)		–			–			–			(453	)
Intercompany financing		(42,357	)		(29,875	)		72,287			(55	)		–
Net cash provided by (used for) financing activities		23,990			(29,875	)		72,287			(55	)		66,347
Effect of exchange rate changes on cash and cash equivalents		–			1,491			–			–			1,491

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
Cash and cash equivalents at end of period	$	–		$	30,978		$	31,575		$	–		$	62,553

ITEM 2

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

OVERVIEW

Our second quarter 2012 results reflect the positive effects of our portfolio realignment efforts. While sales decreased due to the exit of brands and closure of stores, we experienced an increase in gross profit and a decrease in selling and administrative expenses. We have also utilized our 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 second quarter of 2012:

Consolidated net sales decreased $21.3 million, or 3.4%, to $599.3 million for the second quarter of 2012, compared to $620.6 million for the second quarter of last year. Net sales of our Wholesale Operations and Specialty Retail segments decreased by $20.2 million and $6.5 million, respectively, while our Famous Footwear segment net sales increased by $5.4 million.

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

·	Consolidated net loss attributable to Brown Shoe Company, Inc. was $2.5 million, or $0.06 per diluted share, in the second quarter of 2012, compared to $4.6 million, or $0.11 per diluted share, in the second quarter of last year.

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

Portfolio realignment – We incurred costs of $12.4 million ($8.0 million after-tax, or $0.19 per diluted share) related to our portfolio realignment efforts during the second quarter of 2012, with no corresponding costs in the same period of 2011. Our 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; closing or relocating numerous underperforming or poorly aligned retail stores; 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.

Organizational change – During the second quarter of 2012, we 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 made at our corporate headquarters, with no corresponding costs in the prior year. See Note 5 to the condensed consolidated financial statements for additional information related to these 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 $1.5 million ($0.9 million on an after-tax basis, or $0.02 per diluted share) during the second 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 second 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 43.6% at July 28, 2012, compared to 53.4% at July 30, 2011, primarily due to the $134.0 million decrease in borrowings under our revolving credit agreement as 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 reflecting our $85.0 million decrease in borrowings under our revolving credit agreement, driven by strong cash provided by operating activities. Our current ratio, as defined herein, was 1.52 to 1 at July 28, 2012, compared to 1.31 to 1 at July 30, 2011 and 1.55 to 1 at January 28, 2012. Inventories at July 28, 2012 were $621.1 million, down from $627.9 million at the end of the second quarter of last year, driven by the sale of TBMC, effective inventory 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. We expect to earn $0.34 to $0.44 per diluted share in 2012, which includes pre-tax costs of approximately $34 million, or $0.51 per diluted share, related to our portfolio realignment efforts, organizational changes and ASG integration costs.

Following are the consolidated results and the results by segment:

CONSOLIDATED RESULTS

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 28, 2012				July 30, 2011				July 28, 2012				July 30, 2011
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Net sales	$	599.3		100.0%	$	620.6		100.0%	$	1,225.7		100.0%	$	1,240.1		100.0%
Cost of goods sold		365.5		61.0%		387.0		62.4%		752.8		61.4%		758.5		61.2%
Gross profit		233.8		39.0%		233.6		37.6%		472.9		38.6%		481.6		38.8%
Selling and administrative expenses		219.3		36.5%		233.9		37.7%		438.2		35.8%		468.1		37.7%
Restructuring and other special charges, net		7.4		1.3%		0.7		0.1%		18.9		1.5%		2.4		0.2%
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		(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		0.0%		0.2		0.0%		0.2		0.0%
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		–		–		0.7		0.1%		–		–		1.0		0.1%
Net earnings from discontinued operations		–		–		0.7		0.1%		–		–		1.0		0.1%
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 decreased $21.3 million, or 3.4%, to $599.3 million for the second quarter of 2012, compared to $620.6 million for the second quarter 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 $20.2 million decrease in net sales, primarily attributable to lower sales of our exited brands and Dr. Scholl’s Shoes and Avia divisions, partially offset by increases in our contemporary fashion brands (defined as Sam Edelman, Franco Sarto, Via Spiga, Vera Wang, Fergie, Carlos and Vince divisions) and LifeStride division. The net sales of our Specialty Retail segment decreased $6.5 million, primarily reflecting a lower store count, a decrease in sales at Shoes.com, a decrease in the Canadian dollar exchange rate and 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 increase of 3.2% during the first half of 2012. Famous Footwear experienced a higher average retail price and an improvement in customer traffic levels. Sales of women’s sandals and 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 increased $0.2 million, or 0.1%, to $233.8 million for the second quarter of 2012, compared to $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 half of 2012, compared to $481.6 million for the first half of last year, primarily reflecting lower net sales in the first half of 2012 as compared to the prior year. As a percent of net sales, our gross profit decreased to 38.6% for the first half of 2012 from 38.8% for the first half of last year. The reduction in gross profit rate was primarily due to higher inventory markdowns in our 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 $14.6 million, or 6.3%, to $219.3 million for the second quarter of 2012, compared to $233.9 million in the second quarter 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 36.5% for the second quarter of 2012 from 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 half of last year, reflecting the factors discussed above.

Restructuring and Other Special Charges, Net

We recorded restructuring and other special charges, net of $7.4 million for the second quarter of 2012, related to our portfolio realignment efforts and organizational changes. We recorded restructuring and other special charges, net, of $0.7 million for the second 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. 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 increased $2.3 million to $1.3 million for the second quarter of 2012, compared to a 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 half 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, a decrease in gross profit rate and impairment of intangible assets, partially offset by lower selling and administrative expenses, as described above.

Interest Expense

Interest expense decreased $0.8 million, or 11.7%, to $5.8 million for the second quarter of 2012, compared to $6.6 million for the second 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 Benefit

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 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, 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, we incurred certain costs in our international divisions related to our portfolio realignment efforts that are not expected to result in a tax benefit.

Net Loss from Continuing Operations

We reported a net loss from continuing operations of $2.7 million in the second quarter of 2012 compared to $5.5 million in the second 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 half of 2011 operations of TBMC are reported as discontinued operations.

Net Loss Attributable to Brown Shoe Company, Inc.

We reported a net loss attributable to Brown Shoe Company, Inc. of $2.5 million and $0.8 million during the second quarter and first half of 2012, respectively, compared to $4.6 million and $0.9 million during the second quarter and first half of last year, respectively, as a result of the factors described above.

FAMOUS FOOTWEAR

	Thirteen Weeks Ended								Twenty-six Weeks Ended
	July 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
Operating Results
Net sales	$	350.3		100.0%	$	344.9		100.0%	$	697.4		100.0%	$	687.7		100.0%
Cost of goods sold		193.4		55.2%		195.9		56.8%		385.3		55.3%		382.1		55.6%
Gross profit		156.9		44.8%		149.0		43.2%		312.1		44.7%		305.6		44.4%
Selling and administrative expenses		136.1		38.8%		141.5		41.0%		266.0		38.0%		279.3		40.6%
Restructuring and other special charges, net		0.3		0.1%		–		–		7.3		1.1%		–		–
Operating earnings	$	20.5		5.9%	$	7.5		2.2%	$	38.8		5.6%	$	26.3		3.8%

Key Metrics
Same-store sales % change		3.9%				0.2%				3.2%				(1.9)%
Same-store sales $ change	$	12.7			$	0.6			$	20.9			$	(13.0	)
Sales change from new and closed stores, net	$	(7.3	)		$	(3.0	)		$	(11.2	)		$	(8.8	)

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)	$	191			$	186			$	191			$	186
Square footage (thousand sq. ft.)		7,234				7,667				7,234				7,667

Stores opened		14				12				25				26
Stores closed		26				8				60				20
Ending stores		1,054				1,116				1,054				1,116

Net Sales

Net sales increased $5.4 million, or 1.6%, to $350.3 million for the second quarter of 2012, compared to $344.9 million for the second quarter of last year. Same-store sales, including e-commerce, increased 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 half of 2012, reflecting an increase in average retail price and customer traffic levels, partially offset by a decrease in pairs per transaction and conversion. Women’s sandals and women’s casual footwear were large contributors to the increase in net sales. Sales per square foot, excluding e-commerce, increased 5.6% to $93, compared to $88 in the first half of last year.

Gross Profit

Gross profit increased $7.9 million, or 5.3%, to $156.9 million for the second quarter of 2012, compared to $149.0 million for the second 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 $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 half of 2012, compared to 44.4% for the first half of last year. The increase in our gross profit rate was primarily driven by lower markdowns.

Selling and Administrative Expenses

Selling and administrative expenses decreased $5.4 million, or 3.8%, to $136.1 million for the second quarter of 2012, compared to $141.5 million for the second quarter of last year. The decrease was primarily attributable to lower retail 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 38.0% for the first half of 2012, compared to 40.6% for first half of last year.

Restructuring and Other Special Charges, Net

We incurred restructuring and other special charges, net of $0.3 million and $7.3 million for the second quarter and first half 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 increased $12.5 million, or 47.8%, to $38.8 million for the first half of 2012, compared to $26.3 million in the first half of last year primarily due to a decrease in selling and administrative expenses and an increase in gross profit, partially offset by restructuring and other special charges, net, as described above. As a percent of net sales, operating earnings increased to 5.6% in the first half of 2012, compared to 3.8% in the first half of last year.

WHOLESALE OPERATIONS

	Thirteen Weeks Ended							Twenty-six Weeks Ended
	July 28, 2012				July 30, 2011			July 28, 2012				July 30, 2011
($ millions)				% of Net Sales			% of Net Sales				% of Net Sales			% of Net Sales
Operating Results
Net sales	$	195.0		100.0%	$	215.2	100.0%	$	418.2		100.0%	$	432.1	100.0%
Cost of goods sold		139.4		71.5%		154.8	71.9%		301.9		72.2%		305.7	70.8%
Gross profit		55.6		28.5%		60.4	28.1%		116.3		27.8%		126.4	29.2%
Selling and administrative expenses		50.2		25.7%		57.5	26.7%		105.8		25.2%		117.5	27.1%
Restructuring and other special charges, net		2.1		1.1%		–	–		5.3		1.3%		–	–
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	$	308.2			$	341.1

Net Sales

Net sales decreased $20.2 million, or 9.4%, to $195.0 million for the second quarter of 2012, compared to $215.2 million for the second quarter of last year. The decrease was primarily attributable to lower sales of our exited brands and our Dr. Scholl’s Shoes and Avia divisions, partially offset by increases in our contemporary fashion brands and LifeStride division. Our unfilled order position decreased $32.9 million, or 9.7%, to $308.2 million as of July 28, 2012, as compared to $341.1 million as of July 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 our Dr. Scholl’s Shoes, Avia and Naturalizer divisions, partially offset by increases in our contemporary fashion brands.

Gross Profit

Gross profit decreased $4.8 million, or 8.0%, to $55.6 million for the second quarter of 2012, compared to $60.4 million for the second 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 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 27.8% for the first half of 2012 from 29.2% for the first half of last year, reflecting higher markdowns.

Selling and Administrative Expenses

Selling and administrative expenses decreased $7.3 million, or 12.6%, to $50.2 million for the second quarter of 2012, compared to $57.5 million for the second quarter 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 25.7% for the second quarter of 2012, compared to 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 half 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 $2.1 million and $5.3 million during the second quarter and first half 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 a distribution center and the closure of certain facilities in China. We did not incur corresponding charges in the Wholesale Operations segment during the first half 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 $5.4 million to a loss of $2.5 million for the second quarter of 2012, compared to earnings of $2.9 million for the second 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. As a percent of net sales, operating loss is 1.3% for the second quarter of 2012, compared to 1.4% for operating earnings in the second 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 Ended								Twenty-six Weeks Ended
	July 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
Operating Results
Net sales	$	54.0		100.0%	$	60.5		100.0%	$	110.1		100.0%	$	120.3		100.0%
Cost of goods sold		32.7		60.5%		36.3		60.0%		65.6		59.6%		70.7		58.8%
Gross profit		21.3		39.5%		24.2		40.0%		44.5		40.4%		49.6		41.2%
Selling and administrative expenses		24.5		45.4%		27.2		45.0%		50.5		45.9%		56.4		46.8%
Restructuring and other special charges, net		2.6		4.8%		–		–		3.3		3.0%		–		–
Operating loss	$	(5.8	)	(10.7)%	$	(3.0	)	(5.0)%	$	(9.3	)	(8.5)%	$	(6.8	)	(5.6)%

Key Metrics
Same-store sales % change		(1.5)%				5.2%				0.5%				2.1%
Same-store sales $ change	$	(0.6	)		$	2.1			$	0.4			$	1.7
Sales change from new and closed stores, net	$	(4.2	)		$	(2.4	)		$	(7.7	)		$	(4.4	)
Impact of changes in Canadian exchange rate on sales	$	(0.8	)		$	1.5			$	(1.2	)		$	2.4
Sales change of e-commerce subsidiary	$	(0.9	)		$	(0.5	)		$	(1.7	)		$	–

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)	$	393			$	393			$	393			$	393
Square footage (thousand sq. ft.)		358				397				358				397

Stores opened		6				4				12				7
Stores closed		9				11				22				21
Ending stores		224				245				224				245

Net Sales

Net sales decreased $6.5 million, or 10.8%, to $54.0 million for the second quarter of 2012, compared to $60.5 million for the second quarter of last year. The decrease in net sales primarily reflects our lower store count and a decline in the Canadian dollar exchange rate. Overall, our same-store sales, including applicable e-commerce sites, decreased 1.5% as we experienced a reduction in average retail price, customer conversion and customer traffic. Shoes.com experienced a decrease in net sales of $0.9 million. We opened six new retail stores and closed nine during the second quarter of 2012, resulting in a total of 224 stores (including 20 Naturalizer stores in China) and total square footage of 0.4 million at the end of the second quarter of 2012, compared to 245 stores (including 16 Naturalizer stores in China) and total square footage of 0.4 million at the end of the second quarter of last year. As a result of these factors, sales per square foot, excluding e-commerce, decreased 3.9% to $99 for the second quarter of 2012, compared to $103 for the second quarter of last year.

Net sales decreased $10.2 million, or 8.5%, to $110.1 million for the first half 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 $2.9 million, or 11.8%, to $21.3 million for the second quarter of 2012, compared to $24.2 million for the second quarter 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 39.5% for the second quarter of 2012 from 40.0% for the second quarter of last year. The decrease in our overall rate was primarily driven by higher freight 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 $2.7 million, or 9.7%, to $24.5 million for the second quarter of 2012, compared to $27.2 million for the second 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 to our 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 45.9% for the first half of 2012, compared to 46.8% 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 $2.6 million and $3.3 million during the second quarter and first half of 2012, respectively, as a result of our portfolio realignment efforts, which included costs to close our FX LaSalle and Via Spiga retail stores. We did not incur corresponding charges in the second quarter of last year.

Operating Loss

Specialty Retail reported an operating loss of $5.8 million for the second quarter of 2012, compared to an operating loss of $3.0 million for the second quarter 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.

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 $10.9 million for the second quarter of 2012, compared to costs of $8.4 million for the second quarter of last year.

Factors impacting the $2.5 million increase are as follows:

·	Organizational change – We incurred costs of $2.3 million during the second quarter of 2012, related to a corporate organizational change, with no corresponding costs in the second quarter of 2011.

·	Incentive compensation – Our selling and administrative expenses were higher by $1.0 million during the second quarter 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 $0.2 million during the second quarter of 2012, related to our portfolio realignment efforts, with no corresponding costs in the second 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 )	July 28, 2012		July 30, 2011		January 28, 2012
Borrowings under revolving credit agreement	$	116.0	$	250.0	$	201.0
Senior notes		198.7		198.5		198.6
Total debt	$	314.7	$	448.5	$	399.6

Total debt obligations decreased $133.8 million to $314.7 million at July 28, 2012, compared to $448.5 million at July 30, 2011, and decreased $84.9 million from $399.6 million at January 28, 2012 due to lower borrowings under our revolving credit agreement, resulting 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 second quarter of 2012 decreased $0.8 million to $5.8 million, compared to $6.6 million for the second 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, 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.

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 July 28, 2012.

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

Year	Percentage
2014	105.344%
2015	103.563%
2016	101.781%
2017 and thereafter	100.000%

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 July 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


	Twenty-six Weeks Ended
($ millions)	July 28, 2012			July 30, 2011			Increase/ (Decrease)
Net cash provided by operating activities	$	119.3		$	43.5		$	75.8
Net cash used for investing activities		(27.1	)		(175.3	)		148.2
Net cash (used for) provided by financing activities		(92.3	)		66.3			(158.6	)
Effect of exchange rate changes on cash and cash equivalents		(0.2	)		1.5			(1.7	)
Decrease in cash and cash equivalents	$	(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 $75.8 million higher in the first half of 2012 as compared to 2011, reflecting the following factors:

An increase in accrued expenses and other liabilities in the first half of 2012 as compared to a large decrease in the first half of last year. Accrued expenses increased in 2012 primarily due to reserves for portfolio realignment activities. In 2011, accrued expenses declined in the first half as a result of payments under our incentive plans; and

·	A decrease in accounts receivable in the first half of 2012 as compared to an increase in the first half of last year, due to improved customer collections and lower wholesale sales in the second quarter; partially offset by

·	A smaller increase in trade accounts payable in the first half of 2012 compared to last year.

Cash used for investing activities was lower by $148.2 million primarily due to the non-recurrence of our acquisition of ASG on 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 $63 million, primarily related to remodeled and new stores, information technology initiatives and general infrastructure.

Cash used for financing activities was higher by $158.6 million primarily due to repayments, net of borrowings, under our revolving credit 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:


		July 28, 2012	July 30, 2011	January 28, 2012
Working capital ($ millions ) (1)		$ 292.9	$ 212.9	$ 290.6

Current ratio (2)		1.52:1	1.31:1	1.55:1

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.
(2)	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 shareholders’ equity.

Working capital at July 28, 2012, was $292.9 million, which is $2.3 million higher than at January 28, 2012 and $80.0 million higher than at July 30, 2011. Our current ratio decreased to 1.52 to 1 as of July 28, 2012 compared to 1.55 to 1 at January 28, 2012 and increased compared to 1.31 to 1 at July 30, 2011. The change in these metrics when compared to January 28, 2012 was primarily attributable to lower borrowings under our revolving credit agreement and an increase in inventories, partially offset by an increase in trade accounts payable. The increase compared to July 30, 2011 was primarily attributable to lower borrowings under our revolving credit agreement, due in part to our third quarter 2011 sale of TBMC. Our debt-to-capital ratio was 43.6% as of July 28, 2012, compared to 49.1% as of January 28, 2012 and 53.4% as of July 30, 2011. The decrease in our debt-to-capital ratio from January 28, 2012 was primarily due to the $85.0 million decrease in borrowings under our revolving credit agreement resulting from cash provided by operating activities in the first half of 2012, partially offset by an increase in trade accounts payable. As compared to July 30, 2011, the decrease is primarily due to the $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 July 28, 2012, we had $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 second quarter of 2012 and the second 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 July 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 maintain 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 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 3

QUANTITATIVE 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 4

CONTROLS 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 July 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 July 28, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. 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 1A

RISK 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 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information relating to our repurchases of common stock during the second 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)

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 second quarter of 2012; therefore, there were 2.5 million shares authorized to be purchased under the program as of July 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 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5

OTHER INFORMATION

None.

ITEM 6

EXHIBITS

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 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: September 5, 2012		/s/ Russell C. Hammer
		Russell C. Hammer Senior Vice President and Chief Financial Officer on behalf of the Registrant and as the Principal Financial Officer and Principal Accounting Officer

TABLE OF CONTENTS

Part I Item 1 Financial Statements Note 1 Basis Of Presentation Note 2 Impact Of New and Prospective Accounting Pronouncements Note 3 Acquisitions and Divestitures Note 4 (loss) Earnings Per Share Note 5 Restructuring and Other Special Charges, Net Note 6 Business Segment Information Note 7 Goodwill and Intangible Assets Note 8 Shareholders Equity Note 9 Retirement and Other Benefit Plans Note 10 Long-term and Short-term Financing Arrangements Note 11 Risk Management and Derivatives Note 12 Fair Value Measurements Note 13 Income Taxes Note 14 Related Party Transactions Note 15 Commitments and Contingencies Note 16 Financial Information For The Company and Its Subsidiaries Item 2 Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk Item 4 Controls and Procedures Part II Other Information Part II Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Mine Safety Disclosures Item 5 Other Information Item 6 Exhibits

CAL 10-Q Quarter ended July 28, 2012