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 May 4, 2013
[  ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from  _____________  to  _____________

Commission file number: 1-2191

BROWN SHOE COMPANY, INC. (Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization)	43-0197190 (IRS Employer Identification Number)
8300 Maryland Avenue St. Louis, Missouri (Address of principal executive offices)	63105 (Zip Code)
(314) 854-4000 (Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

   Yes  R     No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer £	Accelerated filer R
Non-accelerated filer £	Smaller reporting company £
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

   Yes  £     No R

As of May 31, 2013, 43,150,248 common shares were outstanding.

1

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
	(Unaudited)
($ thousands)		May 4, 2013		April 28, 2012		February 2, 2013
Assets
Current assets
Cash and cash equivalents	$	44,669	$	39,792	$	68,223
Receivables, net		96,734		115,911		111,392
Inventories, net		485,923		475,557		503,688
Prepaid expenses and other current assets		43,167		41,375		42,016
Current assets – held for sale		12,496		–		–
Current assets – discontinued operations		39,159		65,515		47,109
Total current assets		722,148		738,150		772,428
Other assets		115,591		137,479		119,695
Goodwill		16,755		16,755		16,755
Intangible assets, net		64,241		65,220		65,749
Non current assets – discontinued operations		38,673		58,667		51,776
Property and equipment		415,576		426,448		437,745
Allowance for depreciation		(278,277)		(301,897)		(292,889)
Net property and equipment		137,299		124,551		144,856
Total assets	$	1,094,707	$	1,140,822	$	1,171,259
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	66,000	$	124,000	$	105,000
Trade accounts payable		188,948		172,894		213,660
Other accrued expenses		118,632		129,852		137,190
Current liabilities – held for sale		5,306		–		–
Current liabilities – discontinued operations		16,183		15,118		13,259
Total current liabilities		395,069		441,864		469,109
Other liabilities
Long-term debt		198,870		198,680		198,823
Deferred rent		35,631		29,746		33,711
Other liabilities		45,435		47,569		36,719
Non current liabilities – discontinued operations		6,768		9,969		6,996
Total other liabilities		286,704		285,964		276,249
Equity
Common stock		432		428		429
Additional paid-in capital		123,099		115,912		121,593
Accumulated other comprehensive income		225		10,233		884
Retained earnings		288,434		285,439		302,223
Total Brown Shoe Company, Inc. shareholders’ equity		412,190		412,012		425,129
Noncontrolling interests		744		982		772
Total equity		412,934		412,994		425,901
Total liabilities and equity	$	1,094,707	$	1,140,822	$	1,171,259

See notes to condensed consolidated financial statements.

2

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
	(Unaudited)
	Thirteen Weeks Ended
	May 4,		April 28,
($ thousands, except per share amounts)		2013		2012
Net sales	$	588,656	$	598,179
Cost of goods sold		348,640		363,925
Gross profit		240,016		234,254
Selling and administrative expenses		213,879		211,475
Restructuring and other special charges, net		519		10,188
Impairment of assets held for sale		4,660		–
Operating earnings		20,958		12,591
Interest expense		(5,721)		(6,036)
Interest income		68		83
Earnings before income taxes from continuing operations		15,305		6,638
Income tax provision		(7,946)		(2,616)
Net earnings from continuing operations		7,359		4,022
Discontinued operations:
Loss from discontinued operations, net of tax of $3,583 and $1,623, respectively		(5,637)		(2,394)
Impairment charge on net assets of discontinued operations		(12,554)		–
Net loss from discontinued operations		(18,191)		(2,394)
Net (loss) earnings		(10,832)		1,628
Net loss attributable to noncontrolling interests		(70)		(67)
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(10,762)	$	1,695
Basic earnings (loss) per common share:
From continuing operations	$	0.18	$	0.10
From discontinued operations		(0.44)		(0.06)
Basic (loss) earnings per common share attributable  to Brown Shoe Company, Inc. shareholders	$	(0.26)	$	0.04
Diluted earnings (loss) per common share:
From continuing operations	$	0.18	$	0.10
From discontinued operations		(0.44)		(0.06)
Diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.26)	$	0.04
Dividends per common share	$	0.07	$	0.07

See notes to condensed consolidated financial statements.

3

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	(Unaudited)
	Thirteen Weeks Ended
	May 4,		April 28,
($ thousands)		2013		2012
Net (loss) earnings	$	(10,832)	$	1,628
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment		(690)		988
Pension and other post retirement benefits adjustments, net of tax of $85		145		–
Unrealized losses on derivative financial instruments, net of tax of $36 and $136, respectively		(27)		(383)
Net gains from derivatives reclassified into earnings, net of tax of $45 and $9, respectively		(87)		(9)
Other comprehensive (loss) income, net of tax		(659)		596
Comprehensive (loss) income		(11,491)		2,224
Comprehensive loss attributable to noncontrolling interests		(28)		(65)
Comprehensive (loss) income attributable to Brown Shoe Company, Inc.	$	(11,463)	$	2,289

See notes to condensed consolidated financial statements.

4

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	(Unaudited)
	Thirteen Weeks Ended
		May 4,		April 28,
($ thousands)		2013		2012
Operating Activities
Net (loss) earnings	$	(10,832)	$	1,628
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation		8,803		8,104
Amortization of capitalized software		3,276		3,283
Amortization of intangibles		1,726		1,893
Amortization of debt issuance costs		629		629
Share-based compensation expense		1,617		1,444
Tax benefit related to share-based plans		(1,962)		(753)
Loss on disposal of facilities and equipment		68		456
Impairment charges for facilities and equipment		366		2,756
Impairment of assets held for sale		4,660		–
Impairment of net assets of discontinued operations		12,554		–
Deferred rent		1,920		(2,615)
Provision for doubtful accounts		307		950
Changes in operating assets and liabilities:
Receivables		16,363		13,587
Inventories		17,223		49,251
Prepaid expenses and other current and noncurrent assets		653		6,377
Trade accounts payable		(26,561)		(8,268)
Accrued expenses and other liabilities		(1,565)		1,900
Other, net		(3,284)		(724)
Net cash provided by operating activities		25,961		79,898
Investing Activities
Purchases of property and equipment		(7,367)		(5,622)
Capitalized software		(1,040)		(1,386)
Proceeds from sale of assets		1,500		–
Net cash used for investing activities		(6,907)		(7,008)
Financing Activities
Borrowings under revolving credit agreement		383,000		165,000
Repayments under revolving credit agreement		(422,000)		(242,000)
Dividends paid		(3,027)		(2,999)
Issuance of common stock under share-based plans, net		(2,070)		(2,148)
Tax benefit related to share-based plans		1,962		753
Net cash used for financing activities		(42,135)		(81,394)
Effect of exchange rate changes on cash and cash equivalents		(473)		614
Decrease in cash and cash equivalents		(23,554)		(7,890)
Cash and cash equivalents at beginning of period		68,223		47,682
Cash and cash equivalents at end of period	$	44,669	$	39,792

See notes to condensed consolidated financial statements.

5

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,comprehensive income 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) earnings 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 February 2, 2013.

Note 2 Impact of New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net earnings are presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income, but only if the amount is required under U.S. Generally Accepted Accounting Principles ("U.S. GAAP") to be reclassified to net earnings in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net earnings, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This standard is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this guidance on February 3, 2013. See Note 9 to the condensed consolidated financial statements for additional information.

Note 3 Discontinued Operations

American Sporting Goods Corporation – Subsequent Event

On May 14, 2013, Brown Shoe International Corp. (“BSIC”), the sole shareholder of American Sporting Goods Corporation, entered into and simultaneously closed a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among the Company, BSIC, and Galaxy Brand Holdings, Inc. (“Buyer”),  pursuant to which Buyer acquired all of the outstanding capital stock of American Sporting Goods Corporation from BSIC and the Company agreed to provide certain transition services. In connection with the transaction, American Sporting Goods Corporation sold inventory to a third party unaffiliated with Buyer and distributed certain assets to BSIC. The aggregate purchase price for the Stock Purchase Agreement and the provision of such transition services was $74.0 million, subject to working capital adjustments, minus the amount of the pre-closing cash dividend declared by American Sporting Goods Corporation and paid to BSIC representing proceeds from American Sporting Goods Corporation’s sale of inventory.

The Company purchased American Sporting Goods Corporation, comprised of Avia, Nevados, Ryka, AND 1 and other businesses, on February 17, 2011 and subsequently sold AND 1 during fiscal 2011. The Avia and Nevados businesses were sold under the Stock Purchase Agreement and the Company retained and is operating Ryka and other businesses.  In this document “ASG” refers to the subsidiary disposed on May 14, 2013, including the Avia and Nevados brands and excluding the Ryka brand and other retained businesses.

The Company received $60.3 million in cash and a promissory note of $12.0 million at closing, from the sale of stock, the sale of inventory and for the provision of transitional services, less working capital adjustments. The promissory note is due November 14, 2013, earns interest at a 3% annual rate and is secured by a guarantee by ASG and a lien on certain assets of ASG.

The operations of ASGwere considered held for sale as of May 4, 2013 and were classified as discontinued operations. The Company expects to purchase an insignificant amount of footwear from ASG for sale in its retail operations subsequent to the sale. During the first quarters of 2013 and 2012, the Company’s retail operations purchased $1.5 million and $2.8 million, respectively, of Avia and Nevados footwear. As a result of the impending sale, the Company recorded animpairment charge in the first quarter of 2013 of $12.6 million ($12.6 million after-tax, $0.30 per diluted share) representing the difference in the fair value less costs to sell as compared to the net assets to be sold. This impairment charge is reflected in the condensed consolidated statement of earnings as a component of discontinued operations and as a reduction of non current assets – discontinued operations in the condensed consolidated balance sheet. ASG was included in the Wholesale Operations segment.

Loss from discontinued operations in the first quarter of 2013 included $18.3 million of net sales and $1.2 million of earnings before income taxes. In the first quarter of 2012, loss from discontinued operations included $19.4 million of net sales and $2.9 million of loss before income taxes.

Etienne Aigner

During the second quarter of 2012, the Company terminated the Etienne Aigner license agreement due to a dispute with the licensor. On April 29, 2013, an agreement to resolve the dispute was reached, pursuant to which the Company agreed to pay Etienne Aigner $6.5 million. The financial results of Etienne Aigner and the $6.5 million settlement have been reflected as a component of discontinued operations.  

Loss from discontinued operations in the first quarter of 2013 included $0.2 million of net sales and $7.0 million of loss before income taxes. In the first quarter of 2012, loss from discontinued operations included $6.0 million of net sales and $0.2 million of loss before income taxes. These results were included in the Wholesale Operations segment.

Vera Wang

During the first quarter of 2013, the Company communicated its intention not to renew the Vera Wang license agreement. Loss from discontinued operations in the first quarter of 2013 included $2.0 million of net sales and $3.4 million of loss before income taxes. In the first quarter of 2012, loss from discontinued operations included $2.9 million of net sales and $0.9 million of loss before income taxes. These results were included in the Wholesale Operations segment.

6

The detail of ASG, Etienne Aigner and Vera Wang assets and liabilities reported as discontinued operations in the condensed consolidated balance sheet are as follows:

	May 4,		April 28,		February 2,
($ thousands)		2013		2012		2013
Discontinued Assets
Current assets
Receivables, net	$	12,166	$	23,577	$	14,291
Inventories, net		23,250		37,262		29,587
Prepaid expenses and other current assets		3,743		4,676		3,231
Total current assets		39,159		65,515		47,109
Other assets		287		699		419
Goodwill		10,295		22,849		22,849
Intangible assets, net		27,057		33,873		27,275
Property and equipment, net		1,034		1,246		1,233
Total assets	$	77,832	$	124,182	$	98,885
Discontinued Liabilities
Current liabilities
Trade accounts payable	$	4,642	$	9,486	$	9,082
Other accrued expenses		11,541		5,632		4,177
Total current liabilities		16,183		15,118		13,259
Other liabilities		6,768		9,969		6,996
Total liabilities	$	22,951	$	25,087	$	20,255

Note 4 Assets Held For Sale

As part of its portfolio realignment efforts, the Company entered into an agreement to sell certainof its supply chain and sourcing assets (“Sale Agreement”) on April 30, 2013 for $9.0 million, $1.5 million in cash and a $7.5 million promissory note, subject to working capital adjustments. The sale closed during the second quarter of 2013. The promissory note will be paid in installments over two years with the first payment of $3.0 million due no later than 45 days from the closing date with the remaining balance payable in eightquarterly payments of $562,500 plus accrued interest of 5%, compounded monthly, starting no later than three months after the closing date. As part of the Sale Agreement, the Company agreed to purchase a minimum of four million pairs of shoes each year for the next two years at market pricing, which can be fulfilled from any of the facilities owned by the purchaser, many of which the Company has historically used for sourcing. The promissory note and purchase commitment constitute significant continuing involvement, therefore, the supply chain and sourcing assets were not classified as discontinued operations.

The Company classified the related assets and liabilities of the supply chain and sourcing assets as held for sale as of May 4, 2013 on the condensed consolidated balance sheet and recognized an impairment loss of $4.7 million ($4.7 million after-tax, $0.11 per diluted share) representing the fair value less costs to sell compared to the net assets.  This impairment charge is reflected in the condensed consolidated statement of earnings as impairment of assets held for sale and as a reduction of current assets – held for sale in the condensed consolidated balance sheet. The financial results of the supply chain and sourcing assets are included in the Wholesale Operations segment as continuing operations.

7

The detail of assets and liabilities reported as held for sale in the condensed consolidated balance sheet at May 4, 2013 are as follows:

	May 4,
($ thousands)		2013
Assets Held For Sale
Current assets
Cash and cash equivalents	$	3,143
Receivables, net		113
Inventories, net		6,727
Prepaid expenses and other current assets		1,092
Total current assets		11,075
Other assets		196
Property and equipment, net		1,225
Total assets	$	12,496
Liabilities Held For Sale
Current liabilities
Trade accounts payable	$	2,558
Other accrued expenses		2,783
Total current liabilities		5,341
Other liabilities		(35)
Total liabilities	$	5,306

8

Note 5 (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 May 4, 2013 and April 28, 2012:

	Thirteen Weeks Ended
	May 4,		April 28,
($ thousands, except per share amounts)		2013		2012
NUMERATOR
Net earnings from continuing operations	$	7,359	$	4,022
Net loss attributable to noncontrolling interests		70		67
Net earnings allocated to participating securities		–		(155)
Net earnings from continuing operations		7,429		3,934
Net loss from discontinued operations		(18,191)		(2,394)
Net earnings allocated to participating securities		–		–
Net loss from discontinued operations		(18,191)		(2,394)
Net (loss) earnings attributable to Brown Shoe Company, Inc. after allocation of earnings to participating securities	$	(10,762)	$	1,540
DENOMINATOR
Denominator for basic continuing and discontinued earnings per common share attributable to Brown Shoe Company, Inc. shareholders		41,070		40,422
Dilutive effect of share-based awards for continuing operations and discontinued operations		198		322
Denominator for diluted continuing and discontinued earnings per common share attributable to Brown Shoe Company, Inc. shareholders		41,268		40,744
Basic earnings (loss) per common share:
From continuing operations	$	0.18	$	0.10
From discontinued operations		(0.44)		(0.06)
Basic (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.26)	$	0.04
Diluted earnings (loss) per common share:
From continuing operations	$	0.18	$	0.10
From discontinued operations		(0.44)		(0.06)
Diluted (loss) earnings per common share attributable to Brown Shoe Company, Inc. shareholders	$	(0.26)	$	0.04

Options to purchase 432,466 and 1,345,256 shares of common stock for the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively, were not included in the denominator for diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders because the effect would be antidilutive.

Note 6 Portfolio Realignment

Portfolio Realignment 

The Company's portfolio realignment efforts include the sale of ASG; the sale of the AND 1 division; exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; the sale and closure of sourcing and supply chain assets; closing or relocating numerous underperforming or poorly aligned retail stores; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang license in accordance with agreement terms and other infrastructure changes. These portfolio realignment efforts began in 2011 and will continue through 2013. 

During the first quarter of 2013, the Company incurred costs related to these portfolio realignment activities of $28.8 million ($24.6 million after-tax, or $0.58 per diluted share). Of the $28.8 million, $17.2 million ($17.2 million after-tax, or $0.41 per diluted share) was related to non-cash impairment charges and $11.6 million ($7.3 million after-tax, or $0.17 per diluted share) related to business exits and transaction costs. Of the $17.2 million of non-cash impairment charges, $12.5 million was reflected as discontinued operations and $4.7 million was reflected as impairment of assets held for sale in the condensed consolidated statement of earnings. All non-cash impairment charges were recorded in the Wholesale Operations segment. Of the $11.6 million, $11.1 million was included in discontinued operations and $0.5 million in restructuring and other special charges, net, in the condensed consolidating statement of earnings. Of the $11.1 million, $10.0 million was included in the Wholesale Operations segment and the $1.1 million was included in the Other segment. The $0.5 million was recorded in the Wholesale Operations segment.

During the first quarter of 2012, the Company incurred costs related to these portfolio realignment activities of $12.1 million ($7.9 million after-tax, or $0.18 per diluted share). These costs were reflected on the condensed consolidated statement of earnings as $10.2 million in restructuring and other special charges, net, $1.3 million in cost of goods sold and $0.6 million in discontinued operations. Of the $10.2 million in restructuring and other special charges, net, $7.0 million is included in the Famous Footwear segment, $1.9 million is included in the Wholesale Operations segment, $0.8 million is included in the Specialty Retail segment and $0.5 million is included in the Other segment. Of the $1.3 million in cost of goods sold, $1.1 million was included in the Wholesale Operations segment and $0.2 million is included in the Specialty Retail segment. The $0.6 million was recorded in the Wholesale Operations segment.

The Company expects to incur an additional $3 million to $5 million in 2013 related to its portfolio realignment initiatives.

The following is a summary of the charges and settlements by category of costs: 

($ millions)		Employee	Markdowns and Royalty Shortfalls			Facility		Other		Total
Reserve balance at January 28, 2012	$	5.8	$	1.6	$	1.3	$	1.3	$	10.0
Additional charges in 2012		6.0		3.1		11.4		9.4		29.9
Amounts settled in 2012		(10.1)		(4.5)		(9.4)		(10.4)		(34.4)
Reserve balance at February 2, 2013	$	1.7	$	0.2	$	3.3	$	0.3	$	5.5
Additional charges in first quarter 2013		0.4		3.0		0.1		25.3		28.8
Amounts settled in first quarter 2013		(1.0)		(2.8)		(0.8)		(18.2)		(22.8)
Reserve balance at May 4, 2013	$	1.1	$	0.4	$	2.6	$	7.4	$	11.5

Integration Related Costs 

During the first quarter of 2012, the Company incurred integration costs related to ASG of $0.7 million ($0.4 million after-tax, or $0.01 per diluted share). All of the first quarter of 2012 costs were included in the Wholesale Operations segment as a component of discontinued operations.

9

Note 7 Business Segment Information

Applicable business segment information is as follows for the periods ended May 4, 2013 and April 28, 2012:

		Famous		Wholesale		Specialty
($ thousands)		Footwear		Operations		Retail		Other		Total
Thirteen Weeks Ended May 4, 2013
External sales	$	352,279	$	181,625	$	54,752	$	–	$	588,656
Intersegment sales		606		36,729		–		–		37,335
Operating earnings (loss)		29,042		3,107		(1,329)		(9,862)		20,958
Segment assets - continuing operations		450,900		356,903		60,685		135,891		1,004,379
Segment assets - held for sale		–		12,496		–		–		12,496
Thirteen Weeks Ended April 28, 2012
External sales	$	347,107	$	194,941	$	56,131	$	–	$	598,179
Intersegment sales		559		47,868		–		–		48,427
Operating earnings (loss)		18,301		5,875		(3,527)		(8,058)		12,591
Segment assets - continuing operations		431,820		384,528		56,702		143,590		1,016,640

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 May 4, 2013, operating earnings (loss) included portfolio realignment costs of $5.2 million, all of which were recorded in the Wholesale Operations segment.

During the thirteen weeks ended April 28, 2012, operating earnings (loss) included portfolio realignment costs of $11.5 million. Of the $11.5 million, $7.0 million was included in the Famous Footwear segment, $3.0 million was included in the Wholesale Operations segment, $1.0 million was included in the Specialty Retail segment and $0.5 million was included in the Other segment.

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

	Thirteen Weeks Ended
	May 4,		April 28,
($ thousands)		2013		2012
Operating earnings	$	20,958	$	12,591
Interest expense		(5,721)		(6,036)
Interest income		68		83
Earnings before income taxes from continuing operations	$	15,305	$	6,638

10

Note 8 Goodwill and Intangible Assets

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

	May 4,		April 28,		February 2,
($ thousands)		2013		2012		2013
Intangible Assets
Famous Footwear	$	2,800	$	2,800	$	2,800
Wholesale Operations		118,003		113,003		118,003
Specialty Retail		200		200		200
Total intangible assets		121,003		116,003		121,003
Accumulated amortization		(56,762)		(50,783)		(55,254)
Total intangible assets, net		64,241		65,220		65,749
Goodwill
Wholesale Operations		16,755		16,755		16,755
Total goodwill		16,755		16,755		16,755
Goodwill and intangible assets, net	$	80,996	$	81,975	$	82,504

Intangible assets, primarily owned trademarks, of $21.0 million as of May 4, 2013, April 28, 2012 and February 2, 2013 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 May 4, 2013. Amortization expense related to intangible assets was $1.7 million and $1.9 million for the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively.

As more fully described in Note 3, subsequent to the first quarter of 2013, the Company sold ASG. The related assets were classified within discontinued operations in the condensed consolidated balance sheet as of May 4, 2013 and retrospectively for prior periods. The ASG intangible assets classified as discontinued operations totaled $29.0 million as of May 4, 2013, April 28, 2012 and February 2, 2013 along with accumulated amortization of $1.9 million, $1.1 million and $1.7 million, respectively. In addition, goodwill attributable to Avia and Nevados of $22.8 million was classified within discontinued operations in the condensed consolidated balance sheet as of May 4, 2013, April 28, 2012 and February 2, 2013, respectively.

During the first quarter of 2013, the Company recognized an impairment charge of $12.6 million, representing the difference in the fair value less costs to sell as compared to the net assets to be sold. This impairment charge was recognized within discontinued operationsin the condensed consolidated balance sheet and condensed consolidated statement of earnings related to the estimated loss on sale of ASG.

Also in the first quarter of 2013, the Company classified Etienne Aigner and its related assets as discontinued operations with retrospective presentation for prior periods. The Etienne Aigner trademark intangible asset of $13.0 million and accumulated amortization of $7.0 million was classified as discontinued operations in the condensed consolidated balance sheet as of April 28, 2012. The Company recognized an impairment charge of $5.8 million to reduce the Etienne Aigner intangible asset to zero in the second quarter of 2012.

The increase in the intangible assets of the Wholesale Operations segment from April 28, 2012toFebruary 2, 2013andMay 4, 2013 is primarily related to the acquisition of a trademark, partially offset by amortization.

11

Note 9 Shareholders’ Equity and Share-Based Compensation

The following tables set forth the changes in Brown Shoe Company, Inc. shareholders’ equity and noncontrolling interests for the thirteen weeks ended May 4, 2013:

($ thousands)	Brown Shoe Company, Inc. Shareholders’ Equity		Noncontrolling Interests		Total Equity
Equity at February 2, 2013	$	425,129	$	772	$	425,901
Net loss		(10,762)		(70)		(10,832)
Other comprehensive (loss) income		(659)		42		(617)
Dividends declared		(3,027)		–		(3,027)
Issuance of common stock under share-based plans, net		(2,070)		–		(2,070)
Tax benefit related to share-based plans		1,962		–		1,962
Share-based compensation expense		1,617		–		1,617
Equity at May 4, 2013	$	412,190	$	744	$	412,934

Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in accumulated other comprehensive income (loss) by component:

							Accumulated
	Accumulated		Accumulated		Accumulated		Other
	Currency		Derivative		Postretirement		Comprehensive
($ thousands)	Translation		Transactions		Transactions		Income (Loss)
Balance February 2, 2013	$	6,912	$	(81)	$	(5,947)	$	884
Other comprehensive loss before reclassifications		(690)		(27)		–		(717)
Amounts reclassified from accumulated other comprehensive income		–		(87)		145		58
Other comprehensive (loss) income		(690)		(114)		145		(659)
Balance May 4, 2013	$	6,222	$	(195)	$	(5,802)	$	225

The following table sets forth the reclassifications out of accumulated other comprehensive income (loss) and the related tax effect by component:

	Derivative		Postretirement		Tax Benefit
($ thousands)	Transactions		Transactions		(Provision)		Total
Selling and administrative expenses:
Net gains from derivative financial instruments	$	(132)	$	–	$	45	$	(87)
Pension and other postretirement benefits actuarial loss		–		228		(85)		143
Pension benefits prior service expense		–		2		–		2
	$	(132)	$	230	$	(40)	$	58

Share-Based Compensation

During the first quarter of 2013, the Company granted 4,000 stock options to certain employees with a weighted-average exercise price and grant date fair value of $17.00 and $9.46, respectively. These options vest in four equal increments, 25% vesting over each of the next four years, with a term of ten years. Share-based compensation expense is recognized on a straight-line basis separately for each vesting portion of the stock option award.

The Company granted 367,785 restricted shares to certain employees with a weighted-average grant date fair value of $16.99 during the first quarter of 2013. The restricted shares vest in four years and share-based compensation expense will be recognized on a straight-line basis over the four-year period.

The Company granted 70,225 performance share units during the first quarter of 2013 with a weighted-average grant date fair value of $17.00. 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 and during the cumulative three year period. 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 based on the fair value of the award on the date of grant and the anticipated number of units to be awarded in accordance with the vesting schedule of the units over the three-year service period. The performance share units are settled in cash, and as a result, marked to market each period.

The Company recognized share-based compensation expense of $1.6 million and $1.4 million during the first quarter of 2013 and first quarter of 2012, respectively. The Company issued 521,736 shares of common stock during the first quarter of 2013 for restricted stock, 2010 stock performance awards, stock options exercised and directors’ fees. During the first quarter of 2013, the Company cancelled restricted stock awards of 28,000 shares as a result of forfeitures.

The Company also granted 1,307 restricted stock units to non-employee directors with a weighted-average grant date fair value of $15.93 during the first quarter of 2013. All restricted stock units granted during the first quarter of 2013 immediately vested and compensation expense was fully recognized.

Note 10 Retirement and Other Benefit Plans

The following tables set forth the components of net periodic benefit cost (income) for the Company, including domestic and Canadian plans:

	Pension Benefits				Other Postretirement Benefits
	Thirteen Weeks Ended				Thirteen Weeks Ended
	May 4,		April 28,		May 4,		April 28,
($ thousands)		2013		2012		2013		2012
Service cost	$	2,891	$	2,986	$	–	$	–
Interest cost		3,331		3,184		35		40
Expected return on assets		(6,179)		(6,279)		–		–
Amortization of:
Actuarial loss (gain)		248		80		(20)		(13)
Prior service expense		2		–		–		–
Net transition asset		–		(11)		–		–
Total net periodic benefit cost (income)	$	293	$	(40)	$	15	$	27

Note 11 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, subject to the calculated borrowing base restrictions, and provides for an increase at the Company’s option of 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 May 4, 2013.

At May 4, 2013, the Company had $66.0 million in borrowings outstanding and $8.9 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $413.8 million at May 4, 2013.  

On May 14, 2013, subsequent to the end of the first quarter of 2013, ASG was sold and ceased to be a borrower under the Credit Agreement. The proceeds from the sale will be utilized to pay down the revolving credit facility. See Note 3 to the condensed consolidated financial statements for further information on the sale of ASG.

$200 Million Senior Notes Due 2019

On May 11, 2011, the Company issued  $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 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 May 4, 2013, the Company was in compliance with all covenants and restrictions relating to the 2019 Senior Notes.

On May 14, 2013, subsequent to the end of the first quarter of 2013, ASG was sold and ceased to be a guarantor under the 2019 Senior Notes. See Note 3 to the condensed consolidated financial statements for further information on the sale of ASG.

Note 12 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 May 2014. 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 ended May 4, 2013 and April 28, 2012 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 May 4, 2013,  April 28, 2012 and February 2, 2013, the Company had forward contracts maturing at various dates through May 2014,  May 2013 and January 2014, 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)	May 4, 2013		April 28, 2012		February 2, 2013
Financial Instruments
U.S. dollars (purchased by the Company’s Canadian division with Canadian dollars)	$	17,869	$	21,924	$	18,442
Chinese yuan		15,460		18,831		15,544
Euro		6,080		12,260		3,459
Japanese yen		1,500		1,332		1,665
New Taiwanese dollars		679		859		734
Great Britain pounds sterling		–		202		63
Other currencies		728		1,340		729
Total financial instruments	$	42,316	$	56,748	$	40,636

12

The classification and fair values of derivative instruments designated as hedging instruments included within the condensed consolidated balance sheet as of May 4, 2013,  April 28, 2012 and February 2, 2013 are as follows:

	Asset Derivatives			Liability Derivatives
($ thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange forward contracts:
May 4, 2013	Prepaid expenses and other current assets	$	181	Other accrued expenses	$	477
April 28, 2012	Prepaid expenses and other current assets		304	Other accrued expenses		958
February 2, 2013	Prepaid expenses and other current assets		380	Other accrued expenses		373

For the thirteen weeks ended May 4, 2013 and April 28, 2012, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statements of earnings was as follows:

	Thirteen Weeks Ended				Thirteen Weeks Ended
($ thousands)	May 4, 2013				April 28, 2012
Foreign exchange forward contracts: Income Statement Classification Gains (Losses) - Realized		Gain (Loss) Recognized in OCI on Derivatives		Gain (Loss) Reclassified from Accumulated OCI into Earnings		Gain (Loss) Recognized in OCI on Derivatives		Gain (Loss) Reclassified from Accumulated OCI into Earnings
Net sales	$	9	$	54	$	56	$	–
Cost of goods sold		85		21		(345)		(8)
Selling and administrative expenses		(158)		57		(220)		(10)
Interest expense		1		–		(10)		–

During 2012, the effect of derivative instruments in cash flow hedging relationships on the condensed consolidated statement of earnings was as follows:

($ thousands)	Fiscal Year Ended February 2, 2013
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	$	6	$	(27)
Cost of goods sold		(546)		(325)
Selling and administrative expenses		(9)		(16)
Interest expense		(7)		–

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

Note 13 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 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 selling and administrative expenses 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 12 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 May 4, 2013, April 28, 2012 and February 2, 2013. The Company did not have any transfers between Level 1 and Level 2 during 2012 or the thirteen weeks ended May 4, 2013.  

			Fair Value Measurements
($ thousands)		Total		Level 1		Level 2		Level 3
Asset (Liability)
As of May 4, 2013:
Cash equivalents – money market funds	$	6,505	$	6,505	$	–	$	–
Non-qualified deferred compensation plan assets		1,692		1,692		–		–
Non-qualified deferred compensation plan liabilities		(1,692)		(1,692)		–		–
Deferred compensation plan liabilities for non-employee directors		(1,170)		(1,170)		–		–
Derivative financial instruments, net		(296)		–		(296)		–
As of April 28, 2012:
Cash equivalents – money market funds	$	29,696	$	29,696	$	–	$	–
Non-qualified deferred compensation plan assets		1,177		1,177		–		–
Non-qualified deferred compensation plan liabilities		(1,177)		(1,177)		–		–
Deferred compensation plan liabilities for non-employee directors		(610)		(610)		–		–
Derivative financial instruments, net		(654)		–		(654)		–
As of February 2, 2013:
Cash equivalents – money market funds	$	27,223	$	27,223	$	–	$	–
Non-qualified deferred compensation plan assets		1,411		1,411		–		–
Non-qualified deferred compensation plan liabilities		(1,411)		(1,411)		–		–
Deferred compensation plan liabilities for non-employee directors		(1,139)		(1,139)		–		–
Derivative financial instruments, net		7		–		7		–

13

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 $71.5 million were assessed for impairment and written down to their fair value, resulting in impairment charges of  $0.4 million for the thirteen weeks ended May 4, 2013. Of the $0.4 million impairment charge included in selling and administrative expenses, $0.3 million related to the Famous Footwear segment and $0.1 million related to the Specialty Retail segment.

During the first quarter of 2013, the Company entered into an agreement to sell certain of its supply chain and sourcing assets,resulting in an impairment charge of $4.7 million. The impairment charge was recorded in the condensed consolidated statement of earnings in the Wholesale Operations segment. This transaction closed in the second quarter of 2013. The fair value of net assets was estimated based on the anticipated sales proceeds. This is considered a Level 2 input as the assets were not sold on an active market. See Note 4 to the condensed consolidated financial statements for additional information. 

Subsequent to the first quarter of 2013, the Company sold ASG. The assets of ASG were determined to be held for sale at May 4, 2013 and an impairment charge of $12.6 million was recorded within the discontinued operations section of the condensed consolidated statement of earnings and is included within the Wholesale Operations segment. The fair value of assets was estimated based on the anticipated sales proceeds. This is considered a Level 2 input as the assets were not sold on an active market. See Note 3 and Note 6 to the condensed consolidated financial statements for additional information. 

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.

		May 4, 2013				April 28, 2012				February 2, 2013
		Carrying		Fair		Carrying		Fair		Carrying		Fair
($ thousands)		Amount		Value		Amount		Value		Amount		Value
Senior Notes	$	198,870	$	209,000	$	198,680	$	194,000	$	198,823	$	208,000

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 14 Income Taxes

The Company’s effective tax rate can vary considerably from period to period, depending on a number of factors. The Company’s consolidated effective tax rate from continuing operations was 51.9% for the first quarter of 2013, compared to 39.4% for the first quarter of last year. The increase in the Company’s effective tax rate this quarter was due to the non-deductible nature of the $4.7 million impairment charge described in Note 4.

Note 15 Related Party Transactions

C. banner International Holdings Limited

The Company entered into a joint venture agreement with a subsidiary of C. banner International Holdings Limited (“CBI”) (formerly known as Hongguo International Holdings Limited) to market Naturalizer footwear in China. The Company is a 51% owner of the joint venture (“B&H Footwear”), with CBI 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 CBI on a wholesale basis. CBI then sells Naturalizer products through retail stores in China. During the thirteen weeks ended May 4, 2013, the Company, through its consolidated subsidiary, B&H Footwear, sold $1.0 million of Naturalizer footwear on a wholesale basis to CBI, with $1.6 million in corresponding sales during the thirteen weeks ended April 28, 2012.

Note 16 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 liability for the on-site remediation was discounted at 4.8%. On an undiscounted basis, the on-site remediation liability would be $15.9 million as of May 4, 2013. The Company expects to spend approximately $0.2 million in each of the next five years and $14.9 million in the aggregate thereafter related to the on-site remediation.

The cumulative expenditures for both on-site and off-site remediation through May 4, 2013 were $26.1 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 May 4, 2013 is $7.8 million, of which $7.0 million is recorded within other liabilities and $0.8 million is recorded within other accrued expenses. Of the total $7.8 million reserve, $4.8 million is for on-site remediation and $3.0 million is for off-site 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 $1.5 million at May 4, 2013, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $2.0 million. The Company expects to spend approximately $0.2 million in each of the next five years and $1.0 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 $9.4 million as of May 4, 2013, to complete the cleanup, maintenance and monitoring at all sites. Of the $9.4 million liability, $8.4 million is recorded in other liabilities and $1.0 million is recorded in other accrued expenses. 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

Etienne Aigner License Termination

During the second quarter of 2012, the Company terminated the Etienne Aigner 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 disputed the basis on which the Company terminated the former license agreement, which resulted in the parties seeking binding arbitration of their dispute. On October 8, 2012, the Company instituted the arbitration proceedings alleging that the licensor breached the license agreement and was seeking damages. On October 19, 2012, the licensor responded by denying the Company’s allegations, asserting its own claims for breach of the license agreement and sought damages. On April 29, 2013, an agreement to resolve the dispute and dismiss the arbitration proceedings was reached, pursuant to which the Company agreed to pay Etienne Aigner $6.5 million. This settlement charge was recorded as a component of discontinued operations within the condensed consolidated statement of earnings in the first quarter of 2013.

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. Legal costs associated with litigation are generally expensed as incurred.

Note 17 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 agreement. The following table presents the 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 Guarantors are 100% owned by the Parent. On May 14, 2013, subsequent to the end of the first quarter of 2013, ASG was sold and ceased to be a borrower under the Credit Agreement. ASG is included as a “Guarantor” in the financial statements below. The proceeds from the sale will be utilized to pay down the revolving credit facility. See Note 3 to the condensed consolidated financial statements for further information on the sale of ASG.

The 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.

14

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 4, 2013
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Assets
Current assets
Cash and cash equivalents	$	–	$	29,202	$	15,467	$	–	$	44,669
Receivables, net		67,017		6,079		23,638		–		96,734
Inventories, net		79,768		400,139		6,016		–		485,923
Prepaid expenses and other current assets		41,977		1,251		(61)		–		43,167
Current assets - held for sale		–		–		12,496		–		12,496
Current assets - discontinued operations		2,542		36,605		12		–		39,159
Total current assets		191,304		473,276		57,568		–		722,148
Other assets		98,431		16,562		598		–		115,591
Goodwill and intangible assets, net		36,203		19,538		25,255		–		80,996
Non current assets - discontinued operations		–		1,321		37,352		–		38,673
Property and equipment, net		26,484		108,416		2,399		–		137,299
Investment in subsidiaries		759,545		(28,096)		(3,597)		(727,852)		–
Total assets	$	1,111,967	$	591,017	$	119,575	$	(727,852)	$	1,094,707
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	66,000	$	–	$	–	$	–	$	66,000
Trade accounts payable		31,065		129,630		28,253		–		188,948
Other accrued expenses		55,497		59,651		3,484		–		118,632
Current liabilities - held for sale		–		–		5,306		–		5,306
Current liabilities - discontinued operations		11,343		4,796		44		–		16,183
Total current liabilities		163,905		194,077		37,087		–		395,069
Other liabilities
Long-term debt		198,870		–		–		–		198,870
Other liabilities		26,685		50,003		4,378		–		81,066
Non current liabilities - discontinued operations		(1,105)		(2,535)		10,408		–		6,768
Intercompany payable (receivable)		311,422		(410,073)		98,651		–		–
Total other liabilities		535,872		(362,605)		113,437		–		286,704
Equity
Brown Shoe Company, Inc. shareholders’ equity		412,190		759,545		(31,693)		(727,852)		412,190
Noncontrolling interests		–		–		744		–		744
Total equity		412,190		759,545		(30,949)		(727,852)		412,934
Total liabilities and equity	$	1,111,967	$	591,017	$	119,575	$	(727,852)	$	1,094,707

15

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED MAY 4, 2013
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Net sales	$	158,781	$	418,538	$	42,604	$	(31,267)	$	588,656
Cost of goods sold		116,330		229,956		33,621		(31,267)		348,640
Gross profit		42,451		188,582		8,983		–		240,016
Selling and administrative expenses		50,000		159,852		4,027		–		213,879
Restructuring and other special charges, net		519		–		–		–		519
Impairment of assets held for sale		–		–		4,660		–		4,660
Equity in (earnings) loss of subsidiaries		(2,975)		13,174		225		(10,424)		–
Operating (loss) earnings		(5,093)		15,556		71		10,424		20,958
Interest expense		(5,630)		(91)		–		–		(5,721)
Interest income		3		64		1		–		68
Intercompany interest income (expense)		3,454		(3,579)		125		–		–
(Loss) earnings before income taxes from continuing operations		(7,266)		11,950		197		10,424		15,305
Income tax benefit (provision)		3,382		(10,566)		(762)		–		(7,946)
Net (loss) earnings from continuing operations		(3,884)		1,384		(565)		10,424		7,359
Discontinued operations:
(Loss) earnings from discontinued operations, net of tax		(6,948)		1,591		(280)		–		(5,637)
Impairment charge on net assets of discontinued operations		–		–		(12,554)		–		(12,554)
Net (loss) earnings from discontinued operations		(6,948)		1,591		(12,834)		–		(18,191)
Net (loss) earnings		(10,832)		2,975		(13,399)		10,424		(10,832)
Net loss attributable to noncontrolling interests		–		–		(70)		–		(70)
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(10,832)	$	2,975	$	(13,329)	$	10,424	$	(10,762)
Comprehensive (loss) income	$	(11,491)	$	2,411	$	(13,392)	$	10,981	$	(11,491)
Comprehensive loss attributable to noncontrolling interests		–		–		(28)		–		(28)
Comprehensive (loss) income attributable to Brown Shoe Company, Inc.	$	(11,491)	$	2,411	$	(13,364)	$	10,981	$	(11,463)

16

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MAY 4, 2013
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Net cash (used for) provided by operating activities	$	(27,728)	$	44,941	$	8,748	$	–	$	25,961
Investing activities
Purchases of property and equipment		(778)		(6,406)		(183)		–		(7,367)
Capitalized software		(1,040)		–		–		–		(1,040)
Proceeds from sale of assets		1,500		–		–		–		1,500
Net cash used for investing activities		(318)		(6,406)		(183)		–		(6,907)
Financing activities
Borrowings under revolving credit agreement		383,000		–		–		–		383,000
Repayments under revolving credit agreement		(422,000)		–		–		–		(422,000)
Dividends paid		(3,027)		–		–		–		(3,027)
Issuance of common stock under share-based plans, net		(2,070)		–		–		–		(2,070)
Tax benefit related to share-based plans		1,962		–		–		–		1,962
Intercompany financing		70,181		(40,920)		(29,261)		–		–
Net cash provided by (used for) financing activities		28,046		(40,920)		(29,261)		–		(42,135)
Effect of exchange rate changes on cash and cash equivalents		–		(473)		–		–		(473)
Decrease in cash and cash equivalents		–		(2,858)		(20,696)		–		(23,554)
Cash and cash equivalents at beginning of period		–		32,060		36,163		–		68,223
Cash and cash equivalents at end of period	$	–	$	29,202	$	15,467	$	–	$	44,669

17

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 2, 2013
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Assets
Current assets
Cash and cash equivalents	$	–	$	32,060	$	36,163	$	–	$	68,223
Receivables, net		67,571		6,593		37,228		–		111,392
Inventories, net		92,683		394,468		16,537		–		503,688
Prepaid expenses and other current assets		14,523		26,524		969		–		42,016
Current assets - discontinued operations		5,447		41,553		109		–		47,109
Total current assets		180,224		501,198		91,006		–		772,428
Other assets		99,527		19,320		848		–		119,695
Goodwill and intangible assets, net		37,270		19,901		25,333		–		82,504
Non current assets - discontinued operations		–		1,652		50,124		–		51,776
Property and equipment, net		27,931		108,224		8,701		–		144,856
Investment in subsidiaries		765,729		91,136		113,033		(969,898)		–
Total assets	$	1,110,681	$	741,431	$	289,045	$	(969,898)	$	1,171,259
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	105,000	$	–	$	–	$	–	$	105,000
Trade accounts payable		53,350		118,096		42,214		–		213,660
Other accrued expenses		51,751		78,293		7,146		–		137,190
Current liabilities - discontinued operations		3,754		9,396		109		–		13,259
Total current liabilities		213,855		205,785		49,469		–		469,109
Other liabilities
Long-term debt		198,823		–		–		–		198,823
Other liabilities		17,042		48,986		4,402		–		70,430
Non current liabilities - discontinued operations		(1,145)		(2,328)		10,469		–		6,996
Intercompany payable (receivable)		256,977		(389,774)		132,797		–		–
Total other liabilities		471,697		(343,116)		147,668		–		276,249
Equity
Brown Shoe Company, Inc. shareholders’ equity		425,129		878,762		91,136		(969,898)		425,129
Noncontrolling interests		–		–		772		–		772
Total equity		425,129		878,762		91,908		(969,898)		425,901
Total liabilities and equity	$	1,110,681	$	741,431	$	289,045	$	(969,898)	$	1,171,259

18

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 28, 2012
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Assets
Current assets
Cash and cash equivalents	$	–	$	27,450	$	12,342	$	–	$	39,792
Receivables, net		84,634		6,305		24,972		–		115,911
Inventories, net		70,581		391,630		13,346		–		475,557
Prepaid expenses and other current assets		38,498		1,565		1,312		–		41,375
Current assets - discontinued operations		14,327		51,127		61		–		65,515
Total current assets		208,040		478,077		52,033		–		738,150
Other assets		117,615		18,999		865		–		137,479
Goodwill and intangible assets, net		40,467		15,880		25,628		–		81,975
Non current assets - discontinued operations		5,981		1,945		50,741		–		58,667
Property and equipment, net		23,463		91,560		9,528		–		124,551
Investment in subsidiaries		817,259		63,885		–		(881,144)		–
Total assets	$	1,212,825	$	670,346	$	138,795	$	(881,144)	$	1,140,822
Liabilities and Equity
Current liabilities
Borrowings under revolving credit agreement	$	124,000	$	–	$	–	$	–	$	124,000
Trade accounts payable		22,435		116,475		33,984		–		172,894
Other accrued expenses		50,613		69,069		10,170		–		129,852
Current liabilities - discontinued operations		7,098		7,961		59		–		15,118
Total current liabilities		204,146		193,505		44,213		–		441,864
Other liabilities
Long-term debt		198,680		–		–		–		198,680
Other liabilities		29,352		46,997		966		–		77,315
Non current liabilities - discontinued operations		–		(2,991)		12,960		–		9,969
Intercompany payable (receivable)		368,635		(384,424)		15,789		–		–
Total other liabilities		596,667		(340,418)		29,715		–		285,964
Equity
Brown Shoe Company, Inc. shareholders’ equity		412,012		817,259		63,885		(881,144)		412,012
Noncontrolling interests		–		–		982		–		982
Total equity		412,012		817,259		64,867		(881,144)		412,994
Total liabilities and equity	$	1,212,825	$	670,346	$	138,795	$	(881,144)	$	1,140,822

19

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 28, 2012
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Net sales	$	181,844	$	418,409	$	43,822	$	(45,896)	$	598,179
Cost of goods sold		138,064		233,976		37,781		(45,896)		363,925
Gross profit		43,780		184,433		6,041		–		234,254
Selling and administrative expenses		39,210		162,820		9,445		–		211,475
Restructuring and other special charges, net		3,662		6,526		–		–		10,188
Equity in (earnings) loss of subsidiaries		(1,269)		3,759		–		(2,490)		–
Operating earnings (loss)		2,177		11,328		(3,404)		2,490		12,591
Interest expense		(5,940)		(96)		–		–		(6,036)
Interest income		–		61		22		–		83
Intercompany interest income (expense)		3,409		(3,515)		106		–		–
(Loss) earnings before income taxes from continuing operations		(354)		7,778		(3,276)		2,490		6,638
Income tax benefit (provision)		2,506		(4,805)		(317)		–		(2,616)
Net earnings (loss) from continuing operations		2,152		2,973		(3,593)		2,490		4,022
Discontinued operations:
Loss from discontinued operations, net of tax		(457)		(1,704)		(233)		–		(2,394)
Net loss from discontinued operations		(457)		(1,704)		(233)		–		(2,394)
Net earnings (loss)		1,695		1,269		(3,826)		2,490		1,628
Net loss attributable to noncontrolling interests		–		–		(67)		–		(67)
Net earnings (loss) attributable to Brown Shoe Company, Inc.	$	1,695	$	1,269	$	(3,759)	$	2,490	$	1,695
Comprehensive income (loss)	$	1,663	$	1,898	$	(3,827)	$	2,490	$	2,224
Comprehensive loss attributable to noncontrolling interests		–		–		(65)		–		(65)
Comprehensive income (loss) attributable to Brown Shoe Company, Inc.	$	1,663	$	1,898	$	(3,762)	$	2,490	$	2,289

20

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 28, 2012
						Non-
($ thousands)		Parent		Guarantors		Guarantors		Eliminations		Total
Net cash provided by operating activities	$	11,044	$	56,717	$	12,137	$	–	$	79,898
Investing activities
Purchases of property and equipment		(433)		(5,038)		(151)		–		(5,622)
Capitalized software		(1,386)		–		–		–		(1,386)
Net cash used for investing activities		(1,819)		(5,038)		(151)		–		(7,008)
Financing activities
Borrowings under revolving credit agreement		165,000		–		–		–		165,000
Repayments under revolving credit agreement		(242,000)		–		–		–		(242,000)
Dividends paid		(2,999)		–		–		–		(2,999)
Issuance of common stock under share-based plans, net		(2,148)		–		–		–		(2,148)
Tax benefit related to share-based plans		753		–		–		–		753
Intercompany financing		76,555		(59,175)		(17,380)		–		–
Net cash used for financing activities		(4,839)		(59,175)		(17,380)		–		(81,394)
Effect of exchange rate changes on cash and cash equivalents		–		614		–		–		614
Increase (decrease) in cash and cash equivalents		4,386		(6,882)		(5,394)		–		(7,890)
Cash and cash equivalents at beginning of period		(4,386)		34,332		17,736		–		47,682
Cash and cash equivalents at end of period	$	–	$	27,450	$	12,342	$	–	$	39,792

21

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

OVERVIEW

Our first quarter 2013 results reflect an improved gross profit rate within both our wholesale and retail divisions, as well as record first quarter operating earnings for our Famous Footwear segment. Our higher gross profit rate and lower restructuring charges led to an increase in first quarter operating earnings. We have also utilized our strong operating cash flow to reduce borrowings under our revolving credit agreement. 

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

· Consolidated net sales decreased $9.5 million, or 1.6%, to $588.7 million for the first quarter of 2013, compared to $598.2 million for the first quarter of last year. Net sales of our Famous Footwear segment increased by $5.2 million, reflecting an increase in same-store sales of 1.1% in the first quarter of 2013, as compared to an increase of 2.5% in the first quarter of last year. Sales at our Wholesale Operations segment decreased by $13.3 million, primarily reflecting our children’s and women’s specialty exited businesses. Our Specialty Retail segment experienced a decrease in same-store sales of 0.3% in the first quarter of 2013, as compared to an increase of 2.6% in the first quarter of 2012, leading to lower net sales of $1.3 million in the first quarter of 2013. 

· Consolidated operating earnings were $21.0 million in the first quarter of 2013, compared to $12.6 million for the first quarter of last year. 

· Consolidated net loss attributable to Brown Shoe Company, Inc. was $10.8 million, or $0.26 per diluted share, in the first quarter of 2013, compared to earnings of $1.7 million, or $0.04 per diluted share, in the first quarter of last year. This decline primarily reflects higher costs associated with our portfolio realignment initiatives as described below. 

The following items impacted our first quarter results in 2013 and 2012 and should be considered in evaluating the comparability of our results: 

· Portfolio realignment – Our portfolio realignment efforts include the sale of our Avia and Nevados divisions; the sale of AND 1; exiting certain women’s specialty and private label brands; exiting the children’s wholesale business; the sale and closure of certain sourcing and supply chain assets; closing or relocating numerous underperforming or poorly aligned retail stores; the termination of the Etienne Aigner license agreement; the election not to renew the Vera Wang license and other infrastructure changes. In total, we incurred costs of $28.8 million ($24.6 million after-tax, or $0.58 per diluted share), of which $17.2 million were non-cash, related to our portfolio realignment efforts during the first quarter of 2013. Of the $28.8 million of costs, $23.6 million was reflected as discontinued operations and $5.2 million was reflected in continuing operations. During the first quarter of 2012, we incurred costs related to our portfolio realignment efforts of $12.1 million ($7.9 million after-tax, or $0.18 per diluted share). Of these costs, $23.6 million and $0.6 million were reflected in discontinued operations in the first quarter of 2013 and 2012, respectively. These efforts will continue throughout 2013. See Note 3, Note 4 and Note 6 to the condensed consolidated financial statements for additional information. 

· Integration-related costs – We incurred $0.7 million ($0.4 million after-tax, or $0.01 per diluted share) in costs during the first quarter of 2012 related to the integration of American Sporting Goods Corporation. These costs were recorded in the Wholesale Operations segment and are reflected as discontinued operations. We did not incur any integration-related costs in the first quarter of 2013. See Note 6 to the condensed consolidated financial statements for additional information related to these costs.

Our debt-to-capital ratio, as defined herein, decreased to 39.1% at May 4, 2013, compared to 43.9% at April 28, 2012, primarily due to the $58.0 million decrease in borrowings under our revolving credit agreement driven by our strong financial performance and resulting cash provided by operating activities over the last twelve months. Our debt-to-capital ratio decreased from 41.6% at February 2, 2013, reflecting our $39.0 million decrease in borrowings under our revolving credit agreement, driven by our strong cash provided by operating activities. Our current ratio, as defined herein, was 1.83 to 1 at May 4, 2013, compared to 1.67 to 1 at April 28, 2012 and 1.65 to 1 at February 2, 2013. The increase in the current ratio from April 28, 2012 as compared to May 4, 2013, was also primarily driven by the decrease in borrowings under our revolving credit agreement. The increase in the current ratio from February 2, 2013 as compared to May 4, 2013, was primarily driven by a decrease in borrowings under our revolving credit agreement and a decrease in trade accounts payable due to timing of payments, both partially offset by a decrease in cash, inventory and accounts receivable. Inventories at May 4, 2013 were $485.9 million, up from $475.6 million at the end of the first quarter of last year, driven by increases at Famous Footwear and Wholesale Operations.

Outlook for the Remainder of 2013 

We delivered strong financial results in the first quarter driven by record first quarter operating profit at Famous Footwear, reflecting improved consumer conversion resulting from our strategic real estate, inventory and omni-channel efforts. At wholesale, we refined our portfolio with the recent sale of Avia and Nevados. Based on our first quarter results, we now expect to earn $0.63 to $0.70 per diluted share in 2013, which includes pre-tax costs of approximately $32 million to $34 million related to our portfolio realignment efforts. Due to the timing of the back-to-school selling season, our biggest quarter remains the third quarter.

Following are the consolidated results and the results by segment:

CONSOLIDATED RESULTS

	Thirteen Weeks Ended
	May 4, 2013				April 28, 2012
			% of				% of
			Net				Net
($ millions)			Sales				Sales
Net sales	$	588.7	100.0	%	$	598.2	100.0	%
Cost of goods sold		348.7	59.2	%		363.9	60.8	%
Gross profit		240.0	40.8	%		234.3	39.2	%
Selling and administrative expenses		213.8	36.3	%		211.5	35.4	%
Restructuring and other special charges, net		0.5	0.1	%		10.2	1.7	%
Impairment of assets held for sale		4.7	0.8	%		–	–
Operating earnings		21.0	3.6	%		12.6	2.1	%
Interest expense		(5.8)	(1.0)	%		(6.1)	(1.0)	%
Interest income		0.1	0.0	%		0.1	0.0	%
Earnings before income taxes from continuing operations		15.3	2.6	%		6.6	1.1	%
Income tax provision		(8.0)	(1.3)	%		(2.6)	(0.4)	%
Net earnings from continuing operations		7.3	1.3	%		4.0	0.7	%
Discontinued operations:
Loss from discontinued operations, net of tax		(5.6)	(1.0)	%		(2.4)	(0.4)	%
Impairment charge on net assets of discontinued operations, net of tax		(12.6)	(2.1)	%		–	0.0	%
Net loss from discontinued operations		(18.2)	(3.1)	%		(2.4)	(0.4)	%
Net (loss) earnings		(10.9)	(1.8)	%		1.6	0.3	%
Net loss attributable to noncontrolling interests		(0.1)	0.0	%		(0.1)	0.0	%
Net (loss) earnings attributable to Brown Shoe Company, Inc.	$	(10.8)	(1.8)	%	$	1.7	0.3	%

Net Sales 

Net sales decreased $9.5 million, or 1.6%, to $588.7 million for the first quarter of 2013, compared to $598.2 million for the first quarter of last year. Net sales of our Famous Footwear segment increased with 12 fewer stores, while net sales at our Wholesale Operations and Specialty Retail segments decreased. Our Famous Footwear segment reported a $5.2 million increase in net sales, which reflects a same-store sales increase of 1.1% during the first quarter of 2013. Famous Footwear experienced increases in conversion rate, pairs per transaction and average retail price, partially offset by a decrease in customer traffic. Our Wholesale Operations segment reported a $13.3 million decrease in net sales, primarily attributable to lower sales of our children’s and women’s specialty exited businesses and decreases in our Naturalizer, Fergie, Via Spiga and Ryka divisions, partially offset by increases in our Sam Edelman, Dr. Scholl’s Shoes and LifeStride divisions. The net sales of our Specialty Retail segment decreased $1.3 million, due to a lower store count, a decrease in sales at Shoes.com, a lower Canadian dollar exchange rate and a decrease in same-store sales of 0.3%.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation. E-commerce sales for those e-commerce websites that function as an extension of a retail chain are included in the same-store sales calculation. For comparability purposes, same-store sales for the first quarter of 2013 is calculated based on retail sales for weeks 1 through 13 in 2013 as compared to weeks 2 through 14 in 2012. This adjustment is required due to the impact of the 53rd week of sales in the fourth quarter of fiscal 2012. The calculation for the first quarter of 2013 appropriately reflects the change in same-store-sales on a true retail calendar basis. 

Gross Profit 

Gross profit increased $5.7 million, or 2.5%, to $240.0 million for the first quarter of 2013, compared to $234.3 million for the first quarter of last year, driven by our Famous Footwear division, which experienced both higher net sales and an increase in gross profit rate. As a percent of net sales, our gross profit increased to 40.8% for the first quarter of 2013 from 39.2% for the first quarter of last year. The increase in gross profit rate was primarily due to a higher mix of retail sales and an increase in the gross profit rate at our Famous Footwear segment. The increase in our Wholesale Operations gross profit rate was driven by a more profitable brand mix, higher initial margins and lower inventory markdown requirements. Retail and Wholesale Operations net sales were 69% and 31%, respectively, in the first quarter of 2013, compared to 67% and 33% in the first quarter of 2012. Gross profit rates in our retail businesses are higher, on average, than in our wholesale business. 

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

Selling and Administrative Expenses 

Selling and administrative expenses increased $2.3 million, or 1.1%, to $213.8 million for the first quarter of 2013, compared to $211.5 million in the first quarter of last year. The increase was primarily driven by higher marketing expenses, an increase in employee benefit costs and higher warehousing expenses, partially offset by a decrease in rent expense. As a percent of net sales, selling and administrative expenses increased to 36.3% for the first quarter of 2013 from 35.4% for the first quarter of last year. 

Restructuring and Other Special Charges, Net 

We recorded restructuring and other special charges, net, of $0.5 million for the first quarter of 2013, related to our portfolio realignment efforts. We recorded restructuring and other special charges, net, of $10.2 million for the first quarter of last year, related to our portfolio realignment efforts.

Impairment of Assets Held For Sale

During the first quarter of 2013, we recorded an impairment charge of $4.7 million to adjust certain assets held for sale to their estimated fair value. See Note 4 and Note 6 to the condensed consolidated financial statements for additional information. 

Operating Earnings 

Operating earnings increased $8.4 million, or 66.5%, to $21.0 million for the first quarter of 2013, compared to $12.6 million for the first quarter of last year, driven by an increase in gross profit rate and a decrease in restructuring and other special charges, net, partially offset by a decrease in net sales, the impairment of assets held for sale and an increase in selling and administrative expenses, as described above.

Interest Expense 

Interest expense decreased $0.3 million, or 5.2%, to $5.8 million for the first quarter of 2013, compared to $6.1 million for the first quarter of last year, primarily reflecting lower average borrowings under our revolving credit agreement. 

Income Tax Provision 

Our effective tax rate can vary considerably from period to period, depending on a number of factors. Our consolidated effective tax rate from continuing operations was 51.9% for the first quarter of 2013, as compared to our first quarter of 2012 rate of 39.4%. The increase in our effective tax rate in the first quarter of 2013 was primarily due to the non-deductible nature of the $4.7 million impairment charge discussed above. Excluding this impairment, the effective tax rate would have been 39.8%, which is comparable to the effective tax rate for the first quarter of 2012.

Net Earnings from Continuing Operations

We reported net earnings from continuing operations of $7.3 million in the first quarter of 2013, compared to $4.0 million in the first quarter of last year, as a result of the factors described above. 

Net Loss from Discontinued Operations

We reported a net loss from discontinued operations of $18.2 million during the first quarter of 2013, as compared to a net loss of $2.4 million in the first quarter of last year. The decrease is primarily related to a non-cash impairment charge related to the sale of our Avia and Nevados divisions of $12.6 million during the first quarter of 2013, reflecting the estimated fair value of those assets.

Beginning with the first quarter of 2013, the operations of Avia, Nevados, Vera Wang and Etienne Aigner are reflected as discontinued operations with retroactive presentation for prior periods. Our Avia and Nevados divisions were sold subsequent to the quarter end but was classified as discontinued operations as of May 4, 2013. We decided not to renew the Vera Wang license during the first quarter of 2013. The Etienne Aigner license dispute was settled during the quarter.

Net (Loss) Earnings Attributable to Brown Shoe Company, Inc. 

We reported a net loss attributable to Brown Shoe Company, Inc. of $10.8 million during the first quarter of 2013, compared to net earnings $1.7 million during the first quarter of last year, as a result of the factors described above. 

FAMOUS FOOTWEAR

	Thirteen Weeks Ended
	May 4, 2013					April 28, 2012
				% of					% of
($ millions, except sales per square				Net					Net
foot)				Sales					Sales
Operating Results
Net sales	$	352.3		100.0	%	$	347.1		100.0	%
Cost of goods sold		193.6		55.0	%		192.0		55.3	%
Gross profit		158.7		45.0	%		155.1		44.7	%
Selling and administrative expenses		129.7		36.8	%		129.8		37.4	%
Restructuring and other special charges, net		–		–			7.0		2.0	%
Operating earnings	$	29.0		8.2	%	$	18.3		5.3	%
Key Metrics
Same-store sales % change		1.1	%				2.5	%
Same-store sales $ change	$	3.8				$	8.3
Sales change from new and closed stores, net	$	1.4				$	(3.9)
Sales per square foot, excluding e-commerce (thirteen weeks ended)	$	48				$	46
Sales per square foot, excluding e-commerce (trailing twelve-months)	$	201				$	188
Square footage (thousand sq. ft.)		7,176					7,318
Stores opened		12					11
Stores closed		13					34
Ending stores		1,054					1,066

Net Sales 

Net sales increased $5.2 million, or 1.5%, to $352.3 million for the first quarter of 2013, compared to $347.1 million for the first quarter of last year. Although sales during the early portion of the first quarter were impacted by cold, wet weather, the latter half of the quarter experienced much stronger sales volume as spring weather normalized. Same-store sales, including e-commerce, increased 1.1% during the first quarter of 2013, primarily due to increases in our conversion rate, pairs per transaction and average retail price, partially offset by a decrease in customer traffic.  Growth in athletic and canvas shoe styles also contributed to our increase in net sales. During the first quarter of 2013, we opened 12 new stores and closed 13 stores, resulting in 1,054 stores and total square footage of 7.2 million at the end of the first quarter of 2013, compared to 1,066 stores and total square footage of 7.3 million at the end of the first quarter of last year. Sales per square foot, excluding e-commerce, increased 4.1% to $48 in the first quarter of 2013, compared to $46 in the first quarter of last year. Members of our customer loyalty program, Rewards, continue to account for a majority of the segment’s sales, with approximately 68% of our net sales made to members of our Rewards program in the first quarter of 2013 as compared to approximately 62% in the first quarter of 2012. 

Gross Profit 

Gross profit increased $3.6 million, or 2.3%, to $158.7 million for the first quarter of 2013, compared to $155.1 million for the first quarter of last year, due primarily to the increase in net sales. As a percent of net sales, our gross profit was 45.0% for the first quarter of 2013, compared to 44.7% for the first quarter of last year. The increase in our gross profit rate was primarily driven by sales mix and lower freight costs.

Selling and Administrative Expenses 

Selling and administrative expenses are comparable with a decrease of $0.1 million, or 0.2%, to $129.7 million for the first quarter of 2013, compared to $129.8 million for the first quarter of last year. As a percent of net sales, selling and administrative expenses decreased to 36.8% for the first quarter of 2013, compared to 37.4% for the first quarter of last year. 

Restructuring and Other Special Charges, Net 

We did not incur restructuring and other special charges during the first quarter of 2013, but incurred $7.0 million during the first quarter of last year, related to our portfolio realignment efforts, which included the closure of a distribution center and the closure or relocation of underperforming stores. 

Operating Earnings  

Operating earnings increased $10.7 million, or 58.7%, to $29.0 million for the first quarter of 2013, compared to $18.3 million for the first quarter of last year. The increase was due to a reduction in restructuring and other special charges, net, and an increase in net sales and resulting gross profit, as described above. As a percent of net sales, operating earnings improved to 8.2% for the first quarter of 2013, compared to 5.3% for the first quarter of last year. 

WHOLESALE OPERATIONS

	Thirteen Weeks Ended
	May 4, 2013				April 28, 2012
			% of				% of
			Net				Net
($ millions)			Sales				Sales
Operating Results
Net sales	$	181.6	100.0	%	$	194.9	100.0	%
Cost of goods sold		123.8	68.2	%		139.0	71.3	%
Gross profit		57.8	31.8	%		55.9	28.7	%
Selling and administrative expenses		49.5	27.3	%		48.1	24.7	%
Restructuring and other special charges, net		0.5	0.2	%		1.9	1.0	%
Impairment of assets held for sale		4.7	2.6	%		–	–
Operating earnings	$	3.1	1.7	%	$	5.9	3.0	%
Key Metrics
Unfilled order position at end of period	$	314.9			$	295.1

Net Sales

Net sales decreased $13.3 million, or 6.8%, to $181.6 million for the first quarter of 2013, compared to $194.9 million for the first quarter of last year. The decrease was primarily attributable to lower sales of our children’s and women’s specialty exited businesses, and decreases in our Naturalizer, Fergie, Via Spiga and Ryka divisions, partially offset by increases in our Sam Edelman, Dr. Scholl’s Shoes and LifeStride divisions. Our unfilled order position increased $19.8 million, or 6.7%, to $314.9 million as of May 4, 2013, as compared to $295.1 million as of April 28, 2012 primarily due to an increased order position for Sam Edelman. The May 4, 2013and April 28, 2012 unfilled order positions exclude  $25.0 million and $59.7 million, respectively, related to Avia, Nevados, Vera Wang and Etienne Aigner, as their results are reflected in discontinued operations.

Gross Profit 

Gross profit increased $1.9 million, or 3.3%, to $57.8 million for the first quarter of 2013, compared to $55.9 million for the first quarter of last year, primarily driven by a more profitable brand mix, higher initial margins and lower inventory markdown requirements. As a percent of net sales, our gross profit increased to 31.8% for the first quarter of 2013 from 28.7% for the first quarter of last year, reflecting the above named factors.

Selling and Administrative Expenses 

Selling and administrative expenses increased $1.4 million, or 2.9%, to $49.5 million for the first quarter of 2013, compared to $48.1 million for the first quarter of last year, driven in part by an increase in employee benefits. As a percent of net sales, selling and administrative expenses increased to 27.3% for the first quarter of 2013, compared to 24.7% for the first quarter of last year, due primarily to the decrease in net sales. 

Restructuring and Other Special Charges, Net 

We incurred restructuring and other special charges, net, of $0.5 million during the first quarter of 2013, compared to $1.9 million during the first quarter of last year, as we have entered the last phase of our portfolio realignment initiatives. Our portfolio realignment efforts include the sale and closure of sourcing and supply chain assets, the exit of certain brands and other changes to our infrastructure. See Note 4 and Note 6 to the condensed consolidated financial statements for additional information related to these costs.

Impairment of Assets Held For Sale

During the first quarter of 2013, we recorded an impairment charge of $4.7 million to adjust certain assets held for sale to their estimated fair value. See Note 4 and Note 6 to the condensed consolidated financial statements for additional information. 

Operating Earnings 

Operating earnings decreased $2.8 million to $3.1 million for the first quarter of 2013, compared to $5.9 million for the first quarter of last year. The decrease was primarily driven by the impairment charge and an increase in selling and administrative expenses, partially offset by an increase in gross profit rate and a decrease in restructuring and other special charges, net. As a percent of net sales, operating earnings decreased to 1.7% for the first quarter of 2013, compared to 3.0% for operating earnings in the first quarter of last year. 

22

SPECIALTY RETAIL
	Thirteen Weeks Ended
	May 4, 2013					April 28, 2012
				% of					% of
($ millions, except sales per				Net					Net
square foot)				Sales					Sales
Operating Results
Net sales	$	54.8		100.0	%	$	56.1		100.0	%
Cost of goods sold		31.3		57.0	%		32.9		58.7	%
Gross profit		23.5		43.0	%		23.2		41.3	%
Selling and administrative expenses		24.8		45.4	%		25.9		46.2	%
Restructuring and other special charges, net		–		–			0.8		1.4	%
Operating loss	$	(1.3)		(2.4)	%	$	(3.5)		(6.3)	%
Key Metrics
Same-store sales % change		(0.3)	%				2.6	%
Same-store sales $ change	$	(0.1)				$	0.9
Sales change from new and closed stores, net	$	(0.5)				$	(3.4)
Impact of changes in Canadian exchange rate on sales	$	(0.3)				$	(0.4)
Sales change of e-commerce subsidiary	$	(0.4)				$	(0.8)
Sales per square foot, excluding e-commerce (thirteen weeks ended)	$	91				$	89
Sales per square foot, excluding e-commerce (trailing twelve-months)	$	397				$	397
Square footage (thousand sq. ft.)		336					358
Stores opened		2					6
Stores closed		9					13
Ending stores		215					227

Net Sales 

Net sales decreased $1.3 million, or 2.5%, to $54.8 million for the first quarter of 2013, compared to $56.1 million for the first quarter of last year. The decrease in net sales reflects a lower store count, a decrease in sales at Shoes.com, a lower Canadian dollar exchange rate and a decrease in same-store sales of 0.3%. Shoes.com experienced a decrease in net sales of $0.4 million. We opened twonew retail stores and closed nine during the first quarter of 2013, resulting in a total of 215 stores (including 25 Naturalizer stores in China) and total square footage of 0.3 million at the end of the first quarter of 2013, compared to 227 stores (including 22 Naturalizer stores in China) and total square footage of 0.4 million at the end of the first quarter of last year. As a result of these factors, sales per square foot, excluding e-commerce, increased 2.2% to $91 for the first quarter of 2012, compared to $89 for the first quarter of last year.  

Gross Profit 

Gross profit increased $0.3 million, or 1.6%, to $23.5 million for the first quarter of 2013, compared to $23.2 million for the first quarter of last year. As a percent of net sales, our gross profit increased to 43.0% for the first quarter of 2013 from 41.3% for the first quarter of last year. The increases in our gross profit andgross profit rate were primarily driven by lower freight costs.  

Selling and Administrative Expenses 

Selling and administrative expenses decreased $1.1 million, or 4.1%, to $24.8 million for the first quarter of 2013, compared to $25.9 million for the first quarter of last year, reflecting lower facility and employee expenses, due to a lower store count. As a percent of net sales, selling and administrative expenses decreased to 45.4% for the first quarter of 2013, compared to 46.2% for the first quarter of last year, reflecting the above named factors. 

Restructuring and Other Special Charges, Net 

We did not incur restructuring and other special charges, net, during the first quarter of 2013, compared to $0.8 million during the first quarter of last year for our portfolio realignment efforts, which included costs to close underperforming stores.

Operating Loss

Specialty Retail reported an operating loss of $1.3 million for the first quarter of 2013, compared to $3.5 million for the first quarter of last year, primarily due to the decrease in selling and administrative expenses, a decrease in restructuring and other special charges, net, and an increase in the gross profit rate, as discussed above. 

OTHER SEGMENT

The Other segment includes unallocated corporate administrative expenses and other costs and recoveries. The segment reported costs of $9.9 million for the first quarter of 2013, compared to costs of $8.1 million for the first quarter of last year. The primary driver of the $1.8 million increase related to employee benefits costs and higher director compensation.

LIQUIDITY AND CAPITAL RESOURCES

Borrowings

	May 4,		April 28,		February 2,
($ millions)	2013		2012		2013
Borrowings under revolving credit agreement	$	66.0	$	124.0	$	105.0
Senior notes		198.9		198.7		198.8
Total debt	$	264.9	$	322.7	$	303.8

Total debt obligations decreased $57.8 million to $264.9 million at May 4, 2013, compared to $322.7 million at April 28, 2012, and decreased $38.9 million from $303.8 million at February 2, 2013 due to lower borrowings under our revolving credit agreement, resulting from strong cash provided by operating activities. As a result of the lower average borrowings under our revolving credit agreement, interest expense for the first quarter of 2013 decreased $0.3 million to $5.8 million, compared to $6.1 million for the first quarter of last year.

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, subject to the calculated borrowing base restrictions, and provides for an increase at our option of up to $150.0 million from time to time during the term of the Credit Agreement (the “general purpose accordion feature”) subject to satisfaction of certain conditions and the willingness of existing or new lenders to assume the increase.

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

Interest on borrowings is at variable rates based on the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate, as defined in the Credit Agreement, plus a spread. The interest rate and fees for letters of credit vary based upon the level of excess availability under the Credit Agreement. There is an unused line fee payable on the unused portion under the facility and a letter of credit fee payable on the outstanding face amount under letters of credit.

The Credit Agreement limits our ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. In addition, certain additional covenants would be triggered if excess availability were to fall below specified levels, including fixed charge coverage ratio requirements. Furthermore, if excess availability falls below the greater of (i) 15.0% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million for three consecutive business days, or an event of default occurs, the lenders may assume dominion and control over our cash (a “cash dominion event”) until such event of default is cured or waived or the excess availability exceeds such amount for 30 consecutive days.

The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, judgment defaults in excess of a certain threshold, the failure of any guaranty or security document supporting the agreement to be in full force and effect and a change of control event. In addition, if the excess availability falls below the greater of (i) 12.5% of the lesser of (x) the borrowing base or (y) the total commitments and (ii) $35.0 million, and the fixed charge coverage ratio is less than 1.0 to 1.0, we would be in default under the Credit Agreement. The Credit Agreement also contains certain other covenants and restrictions. We were in compliance with all covenants and restrictions under the Credit Agreement as of May 4, 2013.

At May 4, 2013, we had $66.0 million in borrowings outstanding and $8.9 million in letters of credit outstanding under the Credit Agreement. Total additional borrowing availability was $413.8 million at May 4, 2013.  

On May 14, 2013, subsequent to the end of our first quarter of 2013, American Sporting Goods Corporation was sold and ceased to be a borrower under the Credit Agreement. The proceeds from the sale will be utilized to pay down the revolving credit facility. See Note 3 to the condensed consolidated financial statements for further information on the sale of American Sporting Goods Corporation.  

$200 Million Senior Notes Due 2019

On May 11, 2011, we issued $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. 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 May 4, 2013, we were in compliance with all covenants and restrictions relating to the 2019 Senior Notes.

On May 14, 2013, subsequent to the end of our first quarter of 2013, American Sporting Goods Corporation was sold and ceased to be a borrower under the Credit Agreement. See Note 3 to the condensed consolidated financial statements for further information on the sale of American Sporting Goods Corporation.  

23

Working Capital and Cash Flow

	Thirteen Weeks Ended
	May 4,		April 28,		Increase/
($ millions)	2013		2012		(Decrease)
Net cash provided by operating activities	$	25.9	$	79.9	$	(54.0)
Net cash used for investing activities		(6.9)		(7.0)		0.1
Net cash used for financing activities		(42.1)		(81.4)		39.3
Effect of exchange rate changes on cash and cash equivalents		(0.5)		0.6		(1.1)
Decrease in cash and cash equivalents	$	(23.6)	$	(7.9)	$	(15.7)

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

Cash provided by operating activities was $54.0 million lower in the first quarter of 2013 as compared to the first quarter of 2012, reflecting the following factors:

· A decrease in inventory in the first quarter of 2013 compared to a larger decrease in the same period of 2012 due to continued inventory management in the first quarter of 2013;

· A larger decrease in trade accounts payable in the first quarter of 2013 as compared to the same period last year due to the timing of payments;

· A smaller increase in prepaid expenses and other current and noncurrent assets in the first quarter of 2013 as compared to last year; and,

· A decrease in accrued expenses and other liabilities in the first quarter of 2013 as compared to an increase in the first quarter of last year. Accrued expenses decreased in 2013 due in part to no incentive plan payouts in 2012 related to our 2011 incentive plans as compared to payouts in 2013 related to our 2012 incentive plans;  

· All above partially offset by a larger decrease in accounts receivable in the first quarter of 2013 as compared to the first quarter of last year due to the timing of payments.

Cash used for investing activities was lower by $0.1 million in the first quarter of 2013, as compared to the same period in 2012, primarily due to the $1.5 million of proceeds from sale of assets, partially offset by $1.4 million of increased purchases of property and equipment and capitalized software. We expect purchases of property and equipment and capitalized software of approximately $50 million to $55 million in 2013, primarily related to remodeled and new stores and general infrastructure. 

Cash used for financing activities was $39.3 million lower than the same period in 2012 primarily due to lower borrowings, net of repayments, under our Credit Agreement.

A summary of key financial data and ratios at the dates indicated is as follows:

	May 4, 2013		April 28, 2012		February 2, 2013
Working capital ($ millions) (1)	$	327.1	$	296.3	$	303.3
Current ratio (2)	1.83:1		1.67:1		1.65:1
Debt-to-capital ratio (3)	39.1%		43.9%		41.6%

(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 May 4, 2013, was $327.1 million, which was $23.8 million higher than at February 2, 2013 and $30.8 million higher than at April 28, 2012. Our current ratio increased to 1.83 to 1 as of May 4, 2013 compared to 1.65 to 1 at February 2, 2013 and compared to 1.67 to 1 at April 28, 2012. The increase in the current ratio from April 28, 2012 as compared to May 4, 2013, was primarily driven by a decrease in borrowings under our revolving credit agreement due to our strong financial performance and resulting cash provided by operating activities. The increase in the current ratio from February 2, 2013 as compared to May 4, 2013, was primarily driven by a decrease in borrowings under our revolving credit agreement and a decrease in trade accounts payable due to timing of payments, both partially offset by a decrease in cash, inventory and accounts receivable. Our debt-to-capital ratio was 39.1% as of May 4, 2013, compared to 41.6% as of February 2, 2013 and 43.9% as of April 28, 2012. The decrease in our debt-to-capital ratio from February 2, 2013 and April 28, 2012, is primarily due to lower borrowings under our revolving credit agreement.

At May 4, 2013, we had $44.7 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.  

On May 14, 2013, we sold American Sporting Goods Corporation. The proceeds from the sale were utilized to pay down the revolving credit facility.

We declared and paid dividends of $0.07 per share in both the first quarter of 2013 and the first 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. 

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.

During the first quarter of 2013, in connection with our agreement to sell certain supply chain and sourcing assets we entered into a minimum purchase commitment contract with the purchaser of these assets to source the manufacturing of 8 million pairs of shoes over the next 2 years, 4 million each year at market pricing. The total purchase obligation is estimated at approximately $100 million. This commitment can be fulfilled from any of the facilities owned by the purchaser, many of which we have historically used for sourcing.

As discussed earlier, we sold our American Sporting Goods Corporation subsidiary on May 14, 2013. In connection with the sale of American Sporting Goods Corporation, we entered into a six month transition services agreement. Certain lease and purchase obligations associated with that subsidiary will no longer be obligations of the Company after May 14, 2013, or in some cases, beyond the six month transition services period.

Except for the changes discussed above and 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 under and repayments of 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 February 2, 2013.  

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 February 2, 2013.

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 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 Brown Shoe Company relies heavily on manufacturing facilities for a significant amount of their inventory; (vi) the ability to recruit and retain senior management and other key associates; (vii) the ability to attract, retain and maintain good relationships with licensors and protect intellectual property rights; (viii) the ability to secure/exit leases on favorable terms; (ix) the ability to maintain relationships with current suppliers; (x) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (xi) the ability to source product at a pace consistent with increased demand for footwear; and (xii) the impact of rising prices in a potentially inflationary global environment. 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 February 2, 2013, 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 February 2, 2013.

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 May 4, 2013, 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 May 4, 2013, 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 16 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 February 2, 2013.

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 first quarter of 2013:

							Maximum Number
						Total Number	of Shares that
						Purchased	May Yet Be
	Total Number		Average			as Part of Publicly	Purchased Under
	of Shares		Price Paid			Announced	the Program
Fiscal Period	Purchased		per Share			Program (1)	(1)
February 3, 2013 – March 2, 2013	24,834	(2)	$	17.03	(2)	–		2,500,000
March 3, 2013 – April 6, 2013	143,613	(2)		16.85	(2)	–		2,500,000
April 7, 2013 – May 4, 2013	–			–		–		2,500,000
Total	168,447	(2)	$	16.88	(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 first quarter of 2013; therefore, there were 2.5 million shares authorized to be purchased under the program as of May 4, 2013. 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.

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ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None.

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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		Stock Purchase Agreement, dated May 14, 2013, by and among Brown Shoe Company, Inc., Brown Shoe International Corp. and Galaxy Brand Holdings, Inc., incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed May 20, 2013.
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.
	†	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 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.

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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: June 12, 2013	/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

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