Brown Shoe Co.’s profits rose 12.4 percent in the third quarter, prompting the company to adjust its earnings forecast a bit higher for the rest of the year. While the family shoe chain saw some of the same traffic challenges reported by other retailers during the BTS season, transactions were up and Famous Footwear delivered a 4.9 percent gain in comparable store sales.
On the downside, Ryka continued to underperform for the company. BWS officials’ outlook also remained cautious for the fourth quarter despite the BTS pickup.
Companywide, Q3 earnings improved 5.4 percent to $27.3 million, or 63 cents, excluding charges related to its portfolio realignment efforts in the year-ago quarter. Results exceeded Wall Street’s consensus target of 59 cents a share although estimates had come sharply down after Brown Shoe adjusted its guidance during the second quarter.
Sales in the third quarter, excluding sales from discontinued brands, lifted 1.0 percent to $702.8 million.
At its Famous Footwear segment, sales inched up 0.6 percent to $439.6 million, held back by a net decline of 13 stores versus the 2012 quarter Operating earnings gained 3.2 percent to $37.0 million. Gross margins eroded slightly to 42.6 percent from 42.7 percent a year ago.
The same-store gain came on top of a 6.8 percent gain last year and reflected strength across all geographies, climate zones and genders, Diane Sullivan, Brown Shoe’s president and CEO, said on a conference call with analysts. For the back-to-school period, weeks 24 through 33, same-store sales were ahead 5.6 percent.
Sullivan said the improvement reflects initiatives put in place over the last 18 months.
“We accelerated our store portfolio review, and are now in a much better position in terms of store profitability and revenue per square foot,” said Sullivan. “We also invested in our assortment efforts. We are focused on a smaller number of key styles, but providing greater depth with those products. And finally, we have developed a relevant and compelling approach to marketing that has really resonated with the consumer. And the results have followed.”
Sullivan said Famous did see weak traffic during “back-to-school, like many of our peers,” and traffic has been soft throughout the year. However, conversion was up 5.3 percent while pairs per transaction and AURs were also positive for the quarter. On a trailing 12-month basis, Famous’ revenue per square foot is “solidly over” $205 and approaching $210
Among categories, Famous continued to find “good success with canvas, which was up 25 percent, including boat shoes. Lightweight running is still also tracking very well, and accounts for nearly two-thirds of all running shoe sales,” said Sullivan.
During the BTS time frame, sports slides were up 32 percent and sandals were up 16 percent, aided by warmer weather. Boots were up only 2 percent in the BTS and “have been somewhat sluggish” in the first few weeks of November. Sullivan added, “But we feel confident that we have the right product in-store for when the consumer is ready to buy.”
At its Wholesale segment, revenues rose 4.5 percent to $205.3 million, led by high-shaft boots, shooties and booties across its brands. Said Sullivan, “We are seeing a lot of buckle and strap details, jewel-toned suedes, distressed leathers, which are somewhat new for a lot of consumers this season.”
Wholesale operating earnings improved to $16.8 million from $16.6 million on an adjusted basis. Gross margins fell to 31.8 percent from 33.0 percent due to repositioning efforts at Ryka.
For its Healthy Living platform, sales were down 5.6 percent to $106.6 million, reflecting the shift of approximately $7 million of sales into the second quarter from the third, primarily for Naturalizer. On a YTD basis, Healthy Living sales improved 1.2 percent over 2012.
Healthy Living wholesale sales were down 5.6 percent in the third quarter, excluding sales from discontinued brands. But as we talked about last quarter, approximately $7 million of Healthy Living sales, primarily Naturalizer, shifted into the second quarter from the third quarter this year. So if you look at the Healthy Living portfolio on a year-to-date basis, sales are up 1.2 percent over 2012, in line with our expectations. And we expect to be running somewhere around up 2 percent by year-end.
Naturalizer sales were down 6.1 percent. Dr. Scholl's saw “good growth” at the mid-tier although that was offset by declines at mass. LifeStride continued to see gains across the board. Ryka’s sales were down year-over-year but in line with expectations.
Contemporary Fashion wholesale sales jumped 19.3 percent to $98.4 million, with strong double-digit growth from both Sam Edelman and Franco Sarto. Franco Sarto was led by flats, casual, booties and riding boots. Carlos Santana, Fergie and Via Spiga all declined. Vince, a new brand, continues to see strength across categories and Brown expects to have doubled its door presence by 2014.
At its Specialty Retail segment, largely its Naturalizer chain, revenues declined to $57.9 million from $62.8 million. Operating earnings were reduced to $25.8 million from $28.1 million.
Famous.com’s sales were up 6 percent in the quarter. Overall, owned e-commerce businesses accounted for slightly less than 5 percent of third-quarter sales.
Companywide gross margins eroded 50 basis points to 39.6 percent in the quarter. The majority of this weakness was primarily related to Ryka “as the team has begun working to transform this promising brand,” CFO Russ said on the call. SG&A margin declined 70 basis points to 33.2 percent of net sales.
For the full year, Brown Shoe now expects EPS in the range of $1.36 from $1.40, up from a range of $1.27 to $1.32 previously.
Gross margins are now expected to be up 10 basis points, up from flat previously. Wholesale sales are expected to up mid-single digits, an improvement over expectations of a low-to-mid single digit gain previously. Famous' comps are still expected to be up mid-single digits.
The new guidance implies Q4 profit of 8-12 cents a share, on the low-end analysts’ consensus estimates of 12 cents in Q4 and $1.36 for the year.
Sullivan noted that the company had “received a fair amount of grief for our realistic view of the back half,” after readjusting its outlook in the second quarter. But she said a cautious view is still merited.
“As our wholesale peers and our retail partners have reported their third quarters, you will have heard a lot of concerns swirling around out there in terms of the promotional environment, consumer sentiment, et cetera, over a lot of things that we don't have control over. So we are going to continue to operate as we have all year,” said Sullivan. “And we are going to be focused on executing the things that we have control over, and try to appropriately plan for the external factors that are beyond that scope.”
