Brown Shoe Co., the parent of Famous Footwear, reported earnings before special items more than doubled in the second quarter, exceeding internal expectations. With comps ahead 6.8 percent, Famous Footwear delivered a record second quarter sales operating profit. Its wholesale platforms – Healthy Living and Contemporary Fashion – reported double-digit increases in sales.
Looking ahead, Brown Shoe increased its adjusted EPS guidance to $1.27 to $1.32, up from guidance of $1.22 to $1.29 previously. At the high end of the guidance, earnings are expected to rise 17 percent over 2012 results.
However, despite Q2 results that handily topped Wall Street’s targets and the higher guidance, shares of Brown Shoes fell $2.11 Tuesday to 21.59, or 8.9 percent, as Brown officials offered a cautious outlook for the second half. Indeed, the raised guidance fell just short of Wall Street’s consensus estimate of $1.33, implying that EPS projections for the third and fourth quarter will be lower than prior year results.
Brown officials attributed the decline in EPS in the second half partly to shifts in sales that benefited the second quarter at the expense of the third quarter. But Russ Hammer, chief financial officer, also noted that the company is also “maintaining a realistic but cautious stance, as we continue to monitor the macro retail environment.”
On an adjusted basis, second quarter earnings jumped 108.3 percent to $14.2 million, or 33 cents per diluted share, exceeding Wall Street’s consensus estimate of 22 cents a share.
Reported earnings reached $15.4 million, or 35 cents, rebounding from a loss of $2.5 million, or 6 cents, in the prior year. The latest quarter’s results included after-tax income of $1.2 million, or 2 cents, associated with portfolio realignment efforts. The 2012 quarter included $9.3 million, or 22 cents, in after-tax of costs related to the portfolio realignment and for other organizational changes.
Net sales were up 10.1 percent to $621.7 million, excluding sales from discontinued operations for both quarters. Gross margins improved 70 basis points to 41.0 percent. SG&A for the quarter was down 30 basis points to 37.2 percent.
Famous Footwear’s second quarter climbed 10.8 percent to $388.2 million. The 6.8 percent comp gain came on top of a 5.9 percent gain a year ago. Operating earnings rose 38.9 percent to $29.0 million on an adjusted basis. Gross margins improved to 45.6 percent from 44.8 percent in the quarter. Average revenue per square foot continued to improve.
On a conference call with analysts, Diane Sullivan, president and chief executive officer, remarked that “weather remains unpredictable,” resulting in a traffic decline for Famous in the period. But conversion rate was up 6.3 percent.
“We believe our improved conversion rate is due to solid performance in key categories during the quarter,” said Sullivan. “Women's and kids sandals were both up 10 percent, and we also saw good overall athletic sales, up 7 percent in total with men's, women's, and kids all contributing to this growth.”
Canvas ran up 26 percent, driven by interest in color. Color also helped accessories, up 8 percent. Boots, becoming less of a seasonal item, were up 7 percent.
At Famous.com, sales were up 14 percent in the quarter. The site logged 15 million visits with over 5 million of those via mobile. Traffic was up 15 percent.
Back-to-school sales were up mid-single digits over the past six weeks. Sullivan said Famous “targeted big brand ideas and invested in key product inventory,” even more this year. She also credited the solid BTS start to a continuation with national TV, including the addition of the Good Morning America summer concert series sponsorship; and increased online digital and online advertising. Its Rewards program is expected to add more than 1 million new members during back-to-school, up 6 percent over last year.
“With each new rewards member, we gain more information on our consumers and insight into their shopping history,” said Sullivan. “As a result, we are able to target our offers to be more relevant to each individual consumer.”
Wholesale Operations segment sales rose 12.4 percent in the quarter to $180.5 million, excluding discontinued brands. Sullivan noted that segment benefited from about $7 million of sales shifting into the second quarter from the third, primarily for Naturalizer and its other Healthy Living brands. Added Sullivan, “The shift includes the acceleration of orders at the request of our retail partners, which is an encouraging sign, as well as supply chain improvements that have helped us get product to market sooner than last year.”
For the Healthy Living platform, wholesale sales jumped 14.4 percent to $106.1 million. Naturalizer, its largest brand, grew 17 percent. Dr. Scholl's and LifeStride both were up double-digits for both brands. Ryka “exceeded its internal plan as we continued with the transition of this brand to St. Louis,” said Sullivan.
The company’s Contemporary Fashion wholesale sales were up 10.2 percent to $73.4 million, with good growth from Sam Edelman and Franco Sarto. Via Spiga “saw some weakness,” said Sullivan. Wholesale gross margin of 31.0 percent expanded by 20 basis points. Wholesale operations operating earnings climbed 71.1 percent to $8.2 million.
In its Specialty Retail segment, the Naturalizer chain and shoes.com, sales were down to $53.0 million from $54.0 million a year ago. Operating earnings were cut to $1.83 million from $5.8 million. Comps rose 4.8 percent against a 1.5 percent decline a year ago.
Looking ahead, while the EPS range for the full year was raised, the sales forecast was slightly lowered to $2.53 to $2.56 billion, from $2.54 to $2.57 billion previously. Famous is expected to continued to show a comp gain in the low-single digits while the gain from its Wholesale Operations, excluding brand exits, are still projected to be ahead low-single digits. Gross margins are expected to now be flat versus up 30 to 50 basis points previously. The bottom line is expected to benefit from a slightly lower tax rate.
In her statement, Sullivan concluded that Brown had clearly exceeded expectation in the second quarter, with Famous Footwear “firing on all cylinders” and on track for a “good” BTS.
Regardless, she said one week of BTS sales, or approximately $15 million of incremental sales, moved to the second quarter from the third this year, on top of the $7 million of wholesale sales which shifted into the second quarter from the third. Sullivan said the company is also seeing other retailers beginning to indicate that they may be shifting some spring orders from the fourth quarter of this year due to an increasing appetite for buy now, wear now trends.
“They are shopping seasonally,” said Sullivan. “It is not going to always flow perfectly from quarter to quarter, and that is going to include the back half of this year for us.
“With that said, I believe we are retaining an appropriate amount of realism for the back half, despite our strong first half, based on the current macro retail environment. And, at this point, it is difficult to tell what impact, if any, this will have on our third and fourth quarter.”
