Brown Shoe Company, Inc. reported that fourth quarter net sales rose 25.8% to $599.6 million, from $476.5 million in the year-ago quarter. Net earnings rose 56.4% to $13.4 million, or 70 cents per diluted share, compared with net earnings of $8.5 million, or 46 cents per diluted share in 2004.
The fourth quarter fiscal 2005 net earnings reflect charges of $6.6 million, or 35 cents per diluted share, related to the company's closing of underperforming Naturalizer stores and the repatriation of foreign earnings. Excluding these charges, adjusted earnings were $20.0 million or $1.05 per diluted share, versus adjusted earnings of $9.7 million or 53 cents per diluted share for the year-ago period, which included net charges of $1.2 million, or 7 cents per diluted share, related to a bond guarantee and a tax adjustment (see Schedule 4 for a Reconciliation of Net Earnings (GAAP Basis) to Adjusted Net Earnings (Non-GAAP)).
“We had a terrific year. Momentum built with each quarter as our wholesale and retail initiatives produced strong results for our Company,” said Ron Fromm, Chairman and Chief Executive Officer. “Our better- than-expected fourth quarter results were driven by record sales at Famous Footwear and a rebound in our wholesale business. We also were pleased by the performance of our Bennett brands. Bennett, which we acquired in April 2005, contributed $0.17 per share to our full-year earnings results — in line with our expectations. In addition, we significantly increased our cash flow from operations, managed our inventories and strengthened our balance sheet.
“In summary, while the footwear industry in general experienced good growth, our initiatives in 2005 have paid off and we believe we are well positioned to achieve our goals in 2006 and beyond,” he said. “In addition, we believe our solid top-line performance demonstrates the strong earnings leverage we can realize from sales gains.”
Full-Year Results
Net sales for the 52 weeks of fiscal 2005 rose 18.0% to a record $2.3 billion, compared to $1.9 billion the year before. For fiscal 2005, Brown Shoe net earnings were $41.0 million, or $2.17 per diluted share, compared to $43.3 million, or $2.30 per diluted share in fiscal 2004.
Earnings for fiscal 2005 include $21.9 million, or $1.15 per diluted share, of charges related to the company's closing of underperforming Naturalizer stores, financing its Bennett acquisition and the repatriation of foreign cash. Accordingly, adjusted earnings for the full year were $62.9 million, or $3.32 per diluted share, up 30% from adjusted earnings of $48.3 million, or $2.57 per diluted share in fiscal 2004, which included $5.0 million, or 27 cents per diluted share of items related to the Bass transition and other net charges (see Schedule 4 for a Reconciliation of Net Earnings (GAAP Basis) to Adjusted Net Earnings (Non-GAAP)).
Results for Famous Footwear
For the fourth quarter, Famous Footwear net sales increased 8.0% to $284.1 million from $263.1 million a year ago. The chain increased same-store sales by 4.4%, as both its average unit retail prices and traffic levels were up for the quarter. Same-store sales were positive in all major categories, led by juniors' and women's fashion footwear and kids' non- athletic footwear; athletics were up slightly. Operating earnings were up 34.4% to $15.0 million, from $11.2 million for the year-ago quarter.
For fiscal 2005, Famous Footwear sales increased 6.3% to $1.2 billion from $1.1 billion in 2004. Same-store sales increased 2.5%. The chain achieved an 11.2% increase in operating earnings to $67.0 million, versus $60.3 million in fiscal 2004. Famous Footwear opened 74 new stores and closed 40, to end the year with 953 stores. Total square footage increased 3.4% to 6.7 million square feet at the end of fiscal 2005. For 2006, plans are to open about 90 stores and close about 40-50 stores.
“We achieved a record year at Famous Footwear,” said Fromm. “The Famous Footwear management team did an outstanding job of execution, driving double- digit operating earnings gains through improved product assortments, good inventory management and expense control, and the effective use of themed marketing (across our advertising, in-store, and in our direct-to-customer pieces). As a result, our traffic levels were up every quarter versus last year, as customers responded well to our offerings.”
Results for Wholesale Division
For the fourth quarter, Wholesale sales were $249.8 million, rising 57.3% from $158.8 million a year ago, due in part to strong year-end shipments and a $71.2 million contribution from the newly acquired Bennett division. Operating earnings more than doubled to $27.1 million from $12.7 million in the year-ago quarter. The Bennett division contributed $5.9 million to operating earnings, and 11 cents per diluted share to earnings.
For the full year, Wholesale sales increased 40.4% to $864.9 million, from $615.9 million in 2004, including a $186.2 million contribution from the Bennett division. Wholesale operating earnings were $80.1 million, increasing 78.4% from $44.9 million a year ago. Year-over-year gains in operating earnings were driven by a rebound of the Naturalizer brand and the children's business and by solid contributions from the Dr. Scholl's and the Bennett brands. Bennett contributed $13.9 million to operating earnings; after inclusion of interest costs to finance the acquisition, the Bennett division contributed 17 cents to the earnings per diluted share for the full year. For comparison purposes, excluding the 2005 contributions from Bennett and the 2004 costs of $5.6 million associated with the Bass transition, wholesale operating earnings rose 31% in 2005 versus 2004.
At year-end, unfilled orders for the Wholesale division were down 2.5% from year-ago levels, excluding the orders of the Bennett division. This decline reflects the move to an improved sell-in business model at Naturalizer in Spring 2005. The year-over-year unshipped order comparison excluding Naturalizer was up 7.5%.
“We feel good about the progress at Naturalizer,” said Fromm. “Despite the short-term consolidation pressures in the department store channel, our sell-through business model allows us to increase our deliveries of fresh product and meet retailers' goals of buying closer to need. It also has allowed us to decrease our inventory and increase 'turns.' Going forward, our strategy is to continue providing a continuous flow of fresh merchandise at retail to maximize sell-through and profit growth.”
Results for Specialty Retail
The Specialty Retail division, which is comprised of 314 stores in North America — under the Naturalizer, F.X. LaSalle and Via Spiga names and the e- commerce subsidiary, Shoes.com — posted sales of $65.7 million in the fourth quarter of 2005, versus $54.7 million in the year-ago quarter. An operating loss of $6.7 million was incurred in the quarter, compared to an operating loss of $4.7 million the year before. The operating loss in the 2005 quarter includes $6.5 million of expenses associated with the closure of 66 underperforming Naturalizer stores. Same-store sales for the quarter were up 4.5%.
Last June, the company announced a series of initiatives to strengthen its flagship Naturalizer brand by closing underperforming stores and consolidating retail administration. The initiative resulted in the closing of 95 stores.
For the full year, sales for the division were $240.0 million, compared to $209.2 million for 2004. In 2005, 49 stores were opened; 110 were closed. An operating loss of $22.7 million was incurred in 2005, compared to an operating loss of $11.2 million in 2004. The operating loss in 2005 included costs of $14.1 million related to closing the underperforming Naturalizer stores and consolidation of Canadian operations. These results reflect a 1.8% same-store sales increase.
At year's end, there were 314 Specialty Retail stores, compared to 375 at the end of fiscal 2004. Plans are to open approximately 11 stores and close about 25 stores in fiscal 2006.
“Our planned restructuring of the Naturalizer store base was completed on time and within budget,” said Fromm. “Having closed 95 unprofitable stores, we now operate a better positioned store base, which should provide a more positive economic contribution and enable us to build stronger preference for the Naturalizer brand.
“In addition, we are pleased with the progress made by our e-commerce sites, especially Shoes.com,” Fromm said. “Shoes.com has achieved a compound growth rate of approximately 100 percent since acquired by Brown Shoe in 2001, as we've significantly expanded our brand and product offering.”
Financial Position and Forward-Looking Guidance
The company's financial position remains strong. Net cash provided by operating activities in fiscal 2005 was $146.8 million. Total debt decreased to $200.0 million from $279.5 million at the end of the first quarter 2005 (following the acquisition of Bennett); this compares to $142.0 million at year-end in 2004. Inventories at year-end were very well controlled at $414.3 million, down from $421.5 million at the end of 2004, after the addition of the Bennett business and additional Famous Footwear stores. Net pretax interest expense for the year was $17.5 million versus $7.5 million last year. The debt-to-capital ratio at year-end improved to 31.5% from 41.5% at the end of 2005's first quarter. At year-end 2004, the debt-to- capital ratio was 26.6%.
“Looking ahead, the financial estimates for 2006 reflect some shifting of earnings between the first and second quarters, resulting in part from the new Naturalizer business model which is built around quality 'sell-in' and reduced markdown and allowance exposure,” Fromm said. “Furthermore, they take into consideration the later timing of 2006 children's license sales, as well as an impacted shift in wholesale product flow following strong 2005 year end shipments which are expected to impact order timing in the first half of 2006.”
Brown Shoe therefore anticipates that net earnings for the first quarter will be in the range of 45 cents to 50 cents per diluted share, including stock option expense of about 5 cents per diluted share. On an adjusted basis, excluding stock option expense, earnings per share are estimated at 50 cents to 55 cents. In first quarter 2005, diluted earnings per share were 20 cents, which included charges totaling 54 cents per share as set forth in Schedule 5, which resulted in adjusted earnings per share of 74 cents.
For the second quarter of 2006, net earnings are estimated at 55 cents to 65 cents per diluted share, including stock option expense of approximately 5 cents per diluted share. This compares to second quarter 2005 diluted earnings per share of 22 cents. In the second quarter of 2005, Naturalizer restructuring charges of 9 cents were recorded as set forth in Schedule 5, which resulted in adjusted earnings per share of 31 cents.
For fiscal 2006, the company estimates sales of approximately $2.48 billion and net earnings per diluted share of $3.35 to $3.45, which includes costs of approximately 20 cents per share to expense stock options as required by the Statement of Financial Accounting Standards No. 123 — Share Based Payment. This estimate is predicated on a same-store-sales increase of 2 to 3 percent at Famous Footwear. In addition, it reflects the Company's belief that order flow in the consolidating department store channel will normalize during the second half of the year. It also reflects a better matching of merchandise flow to customer demand in order to improve inventory turns and margin performance.
On an adjusted basis, earnings per share for fiscal 2006 are estimated at $3.55 to $3.65, compared to an adjusted earnings per share of $3.32 in fiscal 20055.
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Thousands, except per share data) Thirteen Weeks Ended Fifty-Two Weeks Ended January 28, January 29, January 28, January 29, 2006 2005 2006 2005 Net Sales $599,618 $476,490 $2,292,057 $1,941,804 Cost of Goods Sold 367,019 288,776 1,393,753 1,157,437 Gross Profit 232,599 187,714 898,304 784,367 - % of Sales 38.8% 39.4% 39.2% 40.4% Selling & Administrative Expenses 209,205 179,113 809,673 720,013 - % of Sales 34.9% 37.6% 35.3% 37.1% Provision for Environmental Litigation Costs - 586 - 586 Operating Earnings 23,394 8,015 88,631 63,768 Interest Expense, Net 4,538 1,398 17,484 7,481 Earnings Before Income Taxes 18,856 6,617 71,147 56,287 Income Tax (Provision) Benefit (5,490) 1,928 (30,147) (12,982) NET EARNINGS $ 13,366 $ 8,545 $ 41,000 $ 43,305 Basic Net Earnings per Common Share $ .73 $ .48 $ 2.26 $ 2.42 Diluted Net Earnings per Common Share $ .70 $ .46 $ 2.17 $ 2.30 Basic Number of Shares 18,258 17,962 18,173 17,917 Diluted Number of Shares 19,087 18,695 18,900 18,808