Brown Shoe Company, Inc. second quarter net sales increased 5.0% to $579.3 million compared to $551.5 million in the second quarter of fiscal 2005; Net earnings were $15.2 million or 52 cents per diluted share, inclusive of four cents per diluted share for stock option expense, as compared to net earnings of $4.1 million or 14 cents per diluted share, in the year ago period.
In addition, the Company announced its intention to implement a strategic plan that is expected to increase earnings through cost reductions and efficiency initiatives while reallocating resources and investment to build its brands. The Company also announced plans to exit the Bass business.
Net earnings adjusted to exclude costs related to the new strategic initiatives and net recoveries from insurance companies related to remediation costs associated with the Company’s Denver, Colorado facility, were $11,990,000, or $0.41 per diluted share, inclusive of $0.04 per diluted share for stock option expense, in the second quarter of fiscal 2006. This compares to previously issued guidance of $0.37 – $0.43 per diluted share including stock option expense. Second quarter fiscal 2005 adjusted net earnings were $5,881,000, or $0.20 per diluted share, excluding after-tax charges related to the closing of underperforming Naturalizer stores in the second quarter of fiscal 2005.
“We are pleased to report a second quarter marked with continued progress toward achieving our key strategic goals,” stated Brown Shoe Chairman and CEO Ron Fromm. “Consolidated Naturalizer business performed well, led by Naturalizer wholesale and better results in our stores. Naturalizer wholesale achieved solid growth, as consumers favored our stylish assortments, and our sell-in model enhanced the performance of the brand. Brown Shoe continues to benefit from prior initiatives, which contributed to strong margin performance and an improved balance sheet at quarter end. In addition, we began a company-wide initiative aimed at creating a more productive Brown Shoe, as we take steps to increase efficiencies through platform realignment and cost reductions, while reinvesting a portion of these savings into building our brands. While this is expected to result in increased costs to implement, these steps are aimed at attaining higher rates of both sales and profitability.
“We were disappointed by a challenging sandal season for Franco Sarto and Via Spiga and below plan performance for Bass. Because Bass no longer aligns with Brown Shoe’s strategic direction, we have decided to not renew this license when it expires at fiscal year end,” Fromm continued. “At Famous Footwear, while sales fell short of our expectations, gross margin remained strong, which enabled the chain to post a double digit increase in earnings. Accordingly, we achieved second quarter adjusted earnings at the higher end of our guidance range.”
Table 1: Reconciliation of Second Quarter GAAP Net Earnings to Adjusted Net Earnings dollars in thousands, except for per share data 2nd Quarter 2006* 2nd Quarter 2005 Per Per diluted diluted After-tax $ share After-tax $ share Net earnings $15,191 $0.52 $4,083 $0.14 Strategic initiatives costs 1,231 0.04 Insurance recoveries, net (4,432) (0.15) Charges related to closing Naturalizer stores 1,798 0.06 Adjusted net earnings $11,990 $0.41 $5,881 $0.20 * Second quarter fiscal 2006 includes stock option expense of $0.04 per share with no related expense in the second quarter of fiscal 2005
“Importantly, we begin the second half of the year with healthy inventory levels and plans in place to elevate the performance of our wholesale brands,” Fromm pointed out. “At Famous Footwear, while still early, back-to-school has begun positively and we believe that the chain is poised to gain market share during the fall season.”
The Company has begun to review and implement strategic initiatives, with the goal to increase earnings and reallocate resources and investment to drive consumer preference. Key elements of the plan include: i) restructuring administrative and support areas; ii) redesigning logistics and distribution platforms; iii) reorganizing to eliminate operational redundancies; iv) realigning strategic priorities; and v) refining the supply chain process and enhancing inventory utilization. The Company noted that it is in the early stages of developing these earnings improvement initiatives. As a result, the Company has provided preliminary estimated ranges for expected costs and benefits and expects to refine this information in the upcoming quarters, providing updated guidance as appropriate.
These strategic initiatives are currently expected to yield the following:
- In 2006, benefits related to the strategic initiatives are expected to
be minor with after-tax implementation costs estimated at $6 million
to $7 million;
- In 2007, after-tax benefits are estimated to be $10 million to $12
million with after-tax implementation costs estimated at $14 million
to $16 million; and
- Beginning in 2008, annual after-tax benefits are estimated to be $17
million to $20 million.
Total sales at Famous Footwear, the Company’s 963-store family footwear chain, rose 2.2 percent to $292,682,000 for the quarter, versus $286,245,000 for the same 13-week period last year. While same-store sales for the period decreased 0.1 percent, gross margin rate rose 120 basis points, which drove an operating earnings increase of 28.4 percent to $11,935,000 from $9,296,000 for the year-ago period. All categories of footwear, except athletics, were positive for the quarter with the women’s junior category performing particularly well. Famous Footwear opened 28 stores in the quarter and closed 17 stores, resulting in 963 stores open at quarter-end. Approximately 90 new store openings and about 40 closings are expected during fiscal 2006.
The Specialty Retail segment, which includes Naturalizer, Via Spiga, F.X. LaSalle, Franco Sarto, and other concept stores, plus the Shoes.com e-commerce business, reported sales of $59,475,000, an increase of 2.8 percent over last year’s $57,856,000. The segment’s operating loss decreased to $1,450,000 from last year’s loss of $5,470,000, which included pre-tax costs of $2,349,000 to close underperforming Naturalizer stores and consolidate Canadian operations. The year-over-year improvement also reflects higher gross margin rates and better expense leverage following the closing of underperforming stores in 2005.
Same-store sales for the 305 U.S. and Canadian stores declined 2.7 percent. The division opened one new store and closed eight during the quarter.
Wholesale sales increased 9.5 percent to $227,162,000, versus $207,379,000 last year, due primarily to higher sales of our Naturalizer, Dr. Scholl’s, and private label product.
Wholesale operating earnings of $19,053,000 were 17.2 percent ahead of last year’s operating earnings of $16,260,000, as the impact of sales and margin gains in the above-named divisions were partially offset by continuing below plan results from Bass and costs associated with the planned exit, as well as below plan performance from the Bennett brands.
Inventory at July 29, 2006 was $480 million, as compared to $494 million last year, primarily due to reduced inventory in our Wholesale division and fewer stores in the Specialty Retail segment. The Company’s debt-to-capital ratio at the end of the quarter was 29.9 percent, compared to 41.2 percent at the same time last year. This decrease reflects strong cash flow and the repatriation of foreign cash near the end of fiscal 2005.
For the first half of fiscal 2006 net sales increased 7.5% to $1.154 billion compared with $1.07 billion in the first half last year. Net earnings for the six months were $25.2 million or 87 cents per diluted share, inclusive of seven cents per diluted share for stock option expense compared to $7.9 million or 28 cents per diluted share, in the first half of fiscal 2005.
Net earnings, adjusted to exclude costs related to the new strategic initiatives and net recoveries from insurance companies related to remediation costs associated with the Company’s Denver, Colorado facility were $22,021,000, or $0.76 per diluted share, inclusive of $0.07 per diluted share for stock option expense. This compares to adjusted net earnings of $19,859,000, or $0.70, and excludes: i) after tax charges related to the closing of underperforming Naturalizer stores in the first half of fiscal 2005; ii) a tax provision related to repatriation of foreign earnings; and iii) a bridge loan fee related to the acquisition of Bennett.
Table 2: Reconciliation of First Half GAAP Net Earnings to Adjusted Net Earnings dollars in thousands, except for per share data 1st Half 2006* 1st Half 2005 Per Per Diluted diluted After-tax $ share After-tax $ share Net earnings $25,222 $0.87 $7,862 $0.28 Strategic initiatives costs 1,231 0.04 Insurance recoveries, net (4,432) (0.15) Charges related to closing Naturalizer stores 1,798 0.06 Tax provision related to repatriation of foreign earnings 9,564 0.34 Bridge loan fee associated with Bennett acquisition 635 0.02 Adjusted net earnings $22,021 $0.76 $19,859 $0.70 * First half fiscal 2006 includes stock option expense of $0.07 per share with no related expense in the first half of fiscal 2005
“We believe that our strategic initiatives will further increase the efficiency of our company and enhance long-term sales and profitability,” Fromm said. “We are encouraged by our progress and remain enthusiastic about our future growth prospects.”
Fiscal 2006 guidance has been updated to reflect the impact of the Company’s strategic initiatives. The Company is in the early stages of developing this earnings improvement program and therefore has provided estimated ranges for expected costs and benefits. As it refines this information in the upcoming quarters, it will provide updated guidance as appropriate.
For the full year fiscal 2006, the Company estimates diluted earnings per share in the range of $2.08 to $2.17, inclusive of $0.15 per diluted share for stock option expense. This guidance range also includes (i) preliminary estimated charges and costs related to the early stages of implementation of the strategic initiatives of $0.21 to $0.25 per diluted share; (ii) estimated incremental costs and losses associated with the decision to exit the Bass license of $0.07 per diluted share; (iii) and net recoveries from insurance companies related to remediation costs associated with the Company’s Denver, Colorado facility of $0.15 per diluted share. Excluding these costs and recoveries, the Company expects fiscal 2006 earnings per diluted share in the range of $2.25 to $2.30 on an adjusted basis, inclusive of $0.15 per diluted share for stock option expense. This is in line with our prior guidance and compares to adjusted earnings per diluted share of $2.22 in fiscal 2005.
The Company is introducing fiscal third quarter guidance for diluted earnings per share in the range of $0.73 to $0.78, inclusive of $0.04 per diluted share related to stock option expense. This guidance range also includes preliminary estimated charges and costs related to the early stages of implementation of the Company’s strategic initiatives of $0.04 per diluted share and estimated incremental costs and losses to exit the Bass license of $0.04 per diluted share. Excluding these costs, third quarter diluted earnings per share are anticipated to be in the range of $0.81 to $0.86, which includes costs of $0.04 related to stock option expense and compares to adjusted earnings per diluted share of $0.81 in the third quarter last year. (See Schedule 4 attached for a reconciliation from GAAP earnings to adjusted earnings and the discussion of “Non-GAAP Financial Measures” below).
Separately, the Company announced that Executive Vice President and Chief Financial Officer, Andrew M. Rosen, plans to retire at the end of the year. “After thirty-three years of dedicated and highly valuable service to Brown Shoe Company, Andy has decided to retire,” Fromm said. “We have begun the search for his successor both internally and externally and, until his successor is named, Andy will remain as CFO and will continue to be a key member of our executive team.”
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Thousands, except per share data) Thirteen Weeks Ended Twenty-six Weeks Ended July 29, July 30, July 29, July 30, 2006 2005 2006 2005 Net Sales $579,319 $551,480 $1,154,857 $1,074,763 Cost of Goods Sold 355,299 335,834 707,840 648,511 Gross Profit 224,020 215,646 447,017 426,252 - % of Sales 38.7% 39.1% 38.7% 39.7% Selling & Administrative Expenses 197,754 204,872 402,157 392,410 - % of Sales 34.1% 37.1% 34.8% 36.5% Operating Earnings 26,266 10,774 44,860 33,842 Interest Expense, Net 3,941 4,973 8,145 7,923 Earnings Before Income Taxes 22,325 5,801 36,715 25,919 Income Tax Provision 7,134 1,718 11,493 18,057 NET EARNINGS $15,191 $4,083 $25,222 $7,862 Basic Net Earnings per Common Share $0.54 $0.15 $0.90 $0.29 Diluted Net Earnings per Common Share $0.52 $0.14 $0.87 $0.28 Basic Number of Shares 28,153 27,219 27,967 27,165 Diluted Number of Shares 29,114 28,401 29,094 28,276