Famous Footwear 2004 Annual Report Download - page 33

Table of Contents
BROWN SHOE COMPANY, INC. 2003 FORM 10-K
causes gross profit rates at Famous Footwear to be lower than the initial markup during periods when permanent price reductions are taken
to clear product. At all other divisions, we provide markdown reserves to reduce the carrying values of inventories to a level where, upon sale
of the product, we will realize our normal gross profit rate. We believe these policies reflect the difference in operating models between
Famous Footwear and our other divisions. Famous Footwear continually runs promotional events to drive seasonal sales to clear seasonal
inventories. The other divisions rely on permanent price reductions to clear slower-moving inventory.
Beginning in late fiscal 2001 and throughout fiscal 2002 and 2003, the Famous Footwear division implemented an initiative to reduce
significantly its overall level of inventory and improve the freshness of product and velocity of inventory turnover in its stores. In the fourth
quarter of fiscal 2001, we recorded a $16.0 million charge to allow unusually deep retail price reductions to accelerate the clearance of older
merchandise. As a result of this initiative, the aging of the inventory at the end of fiscal 2003 and 2002 had improved considerably. With the
reduction in aged merchandise, inventory turns have improved, and customers are purchasing more current-season merchandise, which
has improved the gross profit rates at the division.
Income Taxes
We provide taxes for the effects of timing differences between financial and tax reporting. These differences relate principally to employee
benefit plans, bad debt reserves, depreciation and inventory.
We do not provide deferred taxes on the accumulated unremitted earnings of our Canadian and other foreign subsidiaries. Based on the
current United States and Canadian income tax rates, we anticipate that no additional taxes would be due if the Canadian earnings were
distributed. With regard to our other foreign subsidiaries, our intention is to reinvest these earnings indefinitely or to repatriate the earnings
only when it is tax-effective to do so. If these amounts were not considered indefinitely reinvested, additional deferred taxes of approximately
$26.7 million would have been provided.
At January 31, 2004, we had foreign tax credit carryforwards of $6.2 million. The carryforward periods for these credits expire in fiscal 2006.
We believe these credits will be realized through normal operations and available tax planning strategies.
Store Closing and Impairment Charges
We regularly analyze the results of all of our stores and assess the viability of underperforming stores to determine whether they should be
closed or whether their long-lived assets have been impaired. We perform asset impairment tests at least annually, on a store-by-store basis.
After allowing for an appropriate start-up period, unusual nonrecurring events or favorable trends, we write down to fair value the fixed assets
of stores indicated as impaired.
Litigation and Tax Contingencies
We are the defendant in several claims and lawsuits arising in the ordinary course of business. We do not believe any of these ordinary
course of business proceedings will have a material adverse effect on our consolidated financial position or results of operations. We accrue
our best estimate of the cost of resolution of these claims. Legal defense costs of such claims are recognized in the period in which we incur
the costs.
We are audited periodically by domestic and foreign tax authorities. In evaluating issues raised in such audits, we provide reserves for
exposures as appropriate.
Environmental Matters
We are involved in environmental remediation and ongoing compliance activities at several sites. We are remediating, under the oversight of
Colorado authorities, contamination at and beneath our owned facility in Colorado (also known as the “Redfield” site) and groundwater and
indoor air in residential neighborhoods adjacent to and near the property, which have been affected by solvents previously used at the site and
surrounding facilities. In addition, various federal and state authorities have identified the Company as a potentially responsible party for
remediation at certain landfills. While we currently do not operate manufacturing facilities, prior operations included numerous
manufacturing and other facilities for which we may have responsibility under various environmental laws to address conditions that may be
identified in the future. See Note 14 to the consolidated financial statements for a further description of specific properties.
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