Brown Shoe Company, Inc. reported net sales in the fourth quarter decreased 10.6% to $571.4 million compared to $639.3 million in the year ago quarter. Net earnings in the fourth quarter increased 2.7% to $14.0 million, or $0.33 per diluted share, compared to $13.6 million, or $0.31 per diluted share, in the year ago quarter. Net earnings and net earnings per diluted share in both fiscal years were impacted by charges related to the company's Earnings Enhancement Plan and other non-recurring costs. Additionally, the fourth quarter of 2006 included an extra week because of the fifty-three week fiscal calendar in 2006. The additional week resulted in $22.5 million of net sales in 2006 but did not materially impact net earnings or net earnings per diluted share.


Ron Fromm, Brown Shoe's Chairman and CEO, stated, “While fiscal 2007 was a challenging year for the industry, it was also a year of progress for Brown Shoe. In the first half of the year we enjoyed momentum from a strong 2006, however pressures on the consumer led to reduced consumer spending and traffic levels in the back half of 2007. I am proud of the way our team managed the business by adjusting the flow of product, at both retail and wholesale, using promotions and markdowns to ensure currency of inventory, and managing expenses. We are in solid shape as we start 2008. More importantly, we made progress on our strategic plans by further laying the groundwork in 2007. We opened 110 new Famous Footwear stores and continue to focus on the opportunity to be the leading branded family value footwear retailer in the country. We have improved our Wholesale gross margins by 130 basis points as we focus on reallocation of resources to our higher-margin branded businesses. We made significant progress in the execution of our Earnings Enhancement Plan, with pre-tax savings to date, net of reinvestment, of approximately $26 million. Additionally, we accelerated our international expansion through our joint venture in China and continued to focus on brand acquisition opportunities ranging from Reba and Sam Edelman to larger strategic plays. As a sign of confidence in our business and strategic direction, we repurchased 2.4 million shares in the fourth quarter and our Board of Directors authorized an additional 2.5 million share repurchase program.”


Fromm continued, “As we look forward, we are planning 2008 cautiously. At this point, we see the first half as more challenging, reflecting continued softness with consumers and we will also be going up against our strong first half results from 2007. Our focus in 2008 will be to manage the business sensibly, while taking disciplined yet aggressive action to grow market share as well as making further investments in our infrastructure.”

For the full fiscal year, net sales were $2.36 billion, a decrease of 4.5% compared to $2.47 billion in fiscal 2006. Net earnings were $60.4 million, or $1.37 per diluted share, versus net earnings of $65.7 million, or $1.51 per diluted share, in the prior year.  Fiscal 2007 net earnings include charges related to the company's Earnings Enhancement Plan of 28 cents per diluted share.  Fiscal 2006 net earnings included charges of 12 cents per diluted share related to the company's Earnings Enhancement Plan, the exiting of the Bass business, and costs and recoveries related to environmental remediation activities at its Denver, CO property.


On an adjusted basis, net earnings increased 2.6% to $72.8 million, or $1.65 per diluted share, compared to net earnings of $71.0 million, or $1.63 per diluted share, for the year ago period.

Gross margins in 2007 increased 70 basis points to 40.0% of net sales from 39.3% of net sales in the year prior, driven by a greater mix of retail sales and improved margins at its Wholesale division. Selling and administrative expenses during the year increased as a percent of net sales by 100 basis points to $847.3 million or 35.9% of net sales, versus $862.8 million or 34.9% in 2006, driven by lower sales leverage on fixed retail store expenses, partially offset by lower incentive and stock-based compensation costs and savings from the company's Earnings Enhancement Plan, net of implementation costs.


Operating earnings as a percent of net sales decreased to 4.1%, or $95.7 million, versus 4.4% of net sales, or $108.1 million in 2006.
For the fourth quarter, net sales were $571.4 million, a decrease of 10.6% compared to $639.3 million in the fourth quarter 2006. The fourth quarter 2006 included an extra week due to the  fifty-three week fiscal calendar, which resulted in an additional $22.5 million in net sales in the year ago quarter.


Net earnings were $14.0 million, or 33 cents per diluted share, in the fourth quarter versus net earnings of $13.6 million, or 31 cents per diluted share, in the year ago quarter.  Fourth quarter 2007 net earnings include charges related to the company's Earnings Enhancement Plan of 6 cents per diluted share.  Fourth quarter 2006 net earnings included charges of 16 cents per diluted share related to the company's Earnings Enhancement Plan, the exiting of the Bass business, and costs related to environmental remediation activities at its Denver, CO property.


On an adjusted basis, net earnings were $16.5 million or 39 cents per diluted share in the fourth quarter of 2007 compared to net earnings of $20.6 million or 47 cents per diluted share for the year ago quarter. 
Gross margins in the quarter decreased 70 basis points to 39.0% of net sales from 39.7% of net sales in the year ago quarter, driven by increased promotions and aggressive inventory clearance at retail in the quarter. Selling and administrative expenses as a percent of net sales decreased by 60 basis points to 35.8%, or $204.8 million, versus 36.4%, or $232.6 million, in the fourth quarter 2006, driven by lower incentive and stock-based compensation costs, savings from the company's Earnings Enhancement Plan (net of implementation costs), tight expense control, and one less week of selling and administrative expenses compared to the year ago quarter.


Operating earnings as a percent of net sales decreased to 3.1%, or $17.5 million, versus 3.3%, or $21.3 million, in the fourth quarter 2006. The company's tax rate in the quarter was 4.0% versus 25.9% in the year ago quarter.  The lower tax rate reflects the continuing shift of the efforts of the company's Far East operations to support its branded product business, resulting in greater cost deductibility in our higher-taxed jurisdictions and the business-mix impact of lower retail earnings, which operate at a higher tax rate than the company's wholesale business.


    Segment Highlights for Fourth Quarter 2007
Retail Division
Total net sales at Famous Footwear decreased 3.2% to $310.7 million, compared to $320.9 million for the fourth quarter last year. Excluding the impact of the fifty-third week in 2006, net sales increased 2.8%. Same-store sales in the quarter decreased by 1.7%. Operating earnings decreased to $13.4 million, or 4.3% of net sales, compared to $22.5 million or 7.0% of net sales in the year ago period. Famous Footwear opened 19 new stores and closed five during the quarter, resulting in 1,074 stores open at the end of the quarter compared to 999 during the year ago period.


The Specialty Retail segment, which primarily consists of Naturalizer stores and the Shoes.com e-commerce business, reported net sales in the quarter of $70.1 million, a 5.1% decrease from last year's $73.9 million. Excluding the impact of the fifty-third week last year, net sales were flat in the quarter. Same-store sales declined 0.5% during the quarter. Net sales at Shoes.com decreased by 1.3% versus the year ago period, but excluding the impact of the fifty-third week, Shoes.com net sales increased 4.4%. The segment's operating loss was $1.5 million compared to a loss of $0.4 million in the year earlier period. During the quarter, the division opened five stores, including two stores in China, and closed two, resulting in 284 stores open at the end of the quarter, compared to 290 at the end of the year ago period (six additional stores were opened during the quarter in China by an affiliate of the company's joint venture partner, Hongguo International Holdings Limited).


Wholesale Division
Wholesale net sales declined 22.0% in the quarter to $190.6 million, compared to $244.5 million in the year earlier period, driven primarily by a reduction in private label business, the exit of the Bass license, and the timing of shipments, as the company's retail customers tightly managed their inventory levels in the quarter. The challenging consumer environment impacted most brands in the division, with Naturalizer, LifeStride, and Carlos by Carlos Santana performing below fourth quarter 2006 levels. At the same time, the Dr. Scholl's and Children's groups performed well in the quarter. Despite lower sales, the company's efforts to improve operating efficiency proved successful, as the shift of resources to more higher-margin branded business resulted in a 20 basis point improvement in gross margins in the quarter, although the softness in retail sales led to higher allowances. Operating earnings, as a percent of net sales, increased 240 basis points in the quarter to 9.7%, or $18.5 million, versus 7.3%, or $17.8 million, in the year ago period, due in part to lower Earnings Enhancement Plan and incentive costs and a greater mix of branded business.


Balance Sheet
Inventory at year-end was $435.7 million, as compared to $420.5 million last year. The year-over-year increase is due primarily to the 75 additional stores at Famous Footwear, however average inventory per store is down 3.4%. The company's debt-to-capital ratio at the end of the year was 22.8%, compared to 22.4% at the same time last year, which reflects $15.0 million borrowed under the company's revolving credit facility at the end of the year.


Strategic Initiatives Update
Costs during the quarter related to the company's Earnings Enhancement Plan were $3.7 million on a pre-tax basis ($2.6 million after-tax or $0.06 per diluted share) in the quarter. In 2007, pre-tax implementation costs were $19.0 million ($12.4 million after-tax or $0.28 per diluted share), while the company realized pre-tax benefits of approximately $21.0 million. In the first quarter of 2008, the company expects to enter into a lease for a West Coast distribution center for its retail operations. After-tax implementation costs for the Earnings Enhancement Plan in 2008 are currently estimated to be approximately $2.0 to $3.0 million and incremental after-tax benefits in 2008 are estimated to be at the low end of the $5 to $7 million range previously disclosed.

Full-Year and First Quarter 2008 Guidance

    — Total net sales: $2.50 to $2.55 billion for full-year 2008 and $575 to

       $585 million for the first quarter 2008

    — Same-store sales: flat to negative 2.0 percent for the full-year and

       negative 3.0 to negative 5.0 percent in the first quarter;

    — Store openings and closings: 100 to 110 new Famous Footwear stores and

       approximately 40 closings for the full-year.  35 to 40 new

       Specialty Retail stores, including 20 to 25 in China (70 to 75

       additional stores in China by an affiliate of the Company's joint

       venture partner, Hongguo International Holdings Limited), and

       approximately seven closings for the full-year.

    — Income tax rate: 30.0 to 31.0 percent for both the full-year and

       quarter.

    — Average diluted shares: 42.0 million.

    — Earnings per share: in the range of $1.52 to $1.62 per diluted share

       for the full-year and in the range of $0.07 to $0.11 per diluted share

       for the first quarter.

    — Purchases of property and equipment: approximately $75.0 to

       $85.0 million for the full-year, primarily due to new stores and

       remodels, logistics network and other infrastructure, and non-ERP

       information systems upgrades.

    — Other: Approximately $21 million for the full-year in targeted annual

       incentive plan costs and approximately $16 million in incremental

       marketing costs.


 
                         BROWN SHOE COMPANY, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

                                 (Unaudited)


    (Thousands, except per share data)


                            Thirteen    Fourteen     Fifty-two   Fifty-three

                           Weeks Ended Weeks Ended  Weeks Ended  Weeks Ended

                           February 2, February 3,  February 2,  February 3,

                              2008        2007         2008         2007


    Net sales                $571,444    $639,261  $2,359,909   $2,470,930

    Cost of goods sold        348,683     385,369   1,416,510    1,500,037


    Gross profit              222,761     253,892     943,399      970,893

    – % of Net sales            39.0%       39.7%       40.0%        39.3%


    Selling and

     administrative expenses  204,794     232,586     847,278      862,780

    – % of Net sales            35.8%       36.4%       35.9%        34.9%

    Equity in net loss of

     nonconsolidated affiliate    425           –         439            –


    Operating earnings         17,542      21,306      95,682      108,113


    Interest expense, net      (2,880)     (2,895)    (11,870)     (14,700)


    Earnings before

     income taxes and

     minority interests        14,662      18,411      83,812       93,413


    Income tax provision         (582)     (4,777)    (23,483)     (27,719)

    Minority interests in net

     (earnings) loss of

     consolidated subsidiaries   (128)        (55)         98           14


    NET EARNINGS              $13,952     $13,579     $60,427      $65,708


    Basic earnings per

     common share               $0.33       $0.32       $1.40        $1.56


    Diluted earnings per

     common share               $0.33       $0.31       $1.37        $1.51


    Basic number of shares     42,409      42,627      43,223       42,225


    Diluted number of shares   42,811      44,245      44,141       43,639