Brown Shoe Co. lowered its EPS guidance for the current year due to plans to exit some of its wholesale brands, IT implementation expenses, and eroding sales trends at retail. The company also revealed plans to shutter about 13 percent of its Famous Footwear store base and license out its Buster Brown, Sam Edelman and Avia wholesale children’s brands.
Adjusted earnings rose 10.6 percent in the quarter to $21.9 million, or 51 cents per share. The adjustments primarily reflect the sale of the And 1 basketball brand for $55 million in cash to Galaxy International. And 1 added $19.1 million to actual sales to the quarter and $24.6 million, including the gain on the sale, to operating earnings.
Sales in the quarter dipped 0.3 percent to $713.8 million.
Famous Footwear segment revenues slid 1.3 percent to $416.2 million in the quarter as toning sales fell 55 percent. Comps slid 0.4 percent versus a 10.6 percent gain in Q3 2010. Excluding toning, comps would have been up 2.6 percent in the latest quarter, Brown Shoe management said on a conference call with analysts. Gains were seen in running footwear, up 33.4 percent; sandals, +17 percent; and boots, +3.9 percent.
On the call, company SVP and CFO Mark Hood said while same-store sales at Famous from August to mid-September improved 1.7 percent, weakness was seen in the back half of September and October, and BTS continued to be pushed later into the season. Added Hood, “Overall we found our best consumers have become even better and they're making the most of promotions such as our target coupon and rewards offers.”
Operating earnings at Famous were down 11.8 percent to $28.4 million as gross margins eroded to 42.8 percent from 44.3 percent.
Wholesale segment revenues advanced 2.9 percent to $233.6 million as a result of the February 2011 acquisition of American Sporting Goods (ASG), which includes Avia, Ryka and the recently-sold And 1 brand. Legacy wholesale brands were down 11.8 percent as the company began to exit some of its brands and saw a 41.4 percent reduction in Dr. Scholl's sales due to strong toning and Pocket Shoe sales in the prior year. Contemporary Fashion, led by Sam Edelman, Franco Sarto, Via Spiga and Vera Wang, saw gains. Operating earnings in the Wholesale segment slumped 29.9 percent to $9.6 million with gross margins improving to 30.1 percent from 28.6 percent.
The Specialty Retail segment, which includes the Naturalizer chain, Naturalizer.com, as well as shoes.com, revenues were down 5.2 percent to $64.0 million. Operating profits were $100,000, down from $700,000 a year ago. In total, Brown's direct-to-consumer business improved more than 10 percent in the quarter, with FamousFootwear.com up nearly 50 percent year-over-year due to increases in both consumer conversion and pairs per order during the quarter.
Companywide gross margins declined to 38.7 percent of sales from 39.4 percent a year ago, primarily due to the lower sales and a decline in gross margin at Famous Footwear. SG&A was trimmed 100 basis points to 33.5 percent of sales as a result of good cost controls and lower incentive costs.
On the call, Diane Sullivan, president and CEO, pointed to several signs of progress in the quarter, including a 13 percent EPS gain, return on invested capital of approximately 15 percent and an EBIT margin of approximately 8 percent.
Sullivan also noted that its SAP integration cost 7-cents-a-share in the quarter but shipping accuracy is improving and more benefits from data collecting are slowly being realized.
ASG's financial and human resource functions are currently being transitioned to St. Louis. Added Sullivan, “Over the past three to six months we have brought on the talent we needed and the team at ASG is making rapid headway in product design and development. They are also working to become more competitive and nimble in terms of production and improving our speed to market.”
Brown also reached an agreement in the quarter to license its wholesale children's business for Buster Brown, Avia, and Sam Edelman to BBC International. It is also discontinuing its licenses for Marvel, Barbie and others kids franchises, and is exiting some private label brands.
On the retail front, 70 and 75 Famous stores are being closed, both this year and next, for a total of 145. Famous ended the quarter with 1,121. In addition, 20 Brown Shoe Closet and F.X. LaSalle locations, which are part of its Specialty Retail results, are being closed. Finally, Brown last week revealed plans to close its retail distribution center in Sun Prairie, WI.
Sullivan said in total, these steps are expected to reduce annual revenue by approximately $200 million and result in more than $80 million in annual SG&A savings.
Looking ahead, Brown now expects adjusted EPS of 73 to 85 cents for 2011, down from a range of 85 cents to 97 cents provided in late August. The lowered guidance reflects the loss in revenues in brands the company is exiting as well as full-year SAP-related impact of 26 cents a share. Hood also said the company is “approaching the holiday shopping season with a generally cautious outlook based on the continued wariness midrange consumers are exhibiting during these uncertain economic times.”
For the full year, Famous' comps are expected to be down 1 percent with Q4 sales expected to be flat to up 2 percent due to the elimination of the two weeks of expected BOGO.
