Brown Shoe company, Inc., the parent of Famous Footwear, reported sales in the second quarter reached $511.6 million, a decrease of 10.1% compared to $569.2 million in the year-ago quarter. The net loss in the period came to $4.2 million, or 10 cents a share, after charges related to its information technology initiatives of $1.3 million, or 3 cents a share.
The loss compares to earnings in the year-ago quarter of $2.2 million, or 5 cents per diluted share, which included charges of $6.2 million, or 15 cents per diluted share, related to the company's headquarters consolidation and information technology initiatives.
In addition, during the quarter:
* The company opened its 350,000-square-foot, highly automated West Coast Retail Distribution Center in Tejon Ranch, CA on-time and on-budget. The facility is expected create transportation efficiencies and deliver fresher assortments more frequently; and
* Famous Footwear's “Make Today Famous” branding initiative launched nationwide in July in advance of the Back-to-School selling season. The campaign included national television advertising, a first for the company, as well as consumer messaging through digital media, viral videos, and social networking sites, delivering 100% sales coverage and 137% more consumer impressions.
Ron Fromm, Brown Shoe's Chairman and CEO, stated, “We delivered earnings within our expectations for both the second quarter and first half of 2009, despite a challenging top line resulting from the difficult consumer environment. Our same-store sales at Famous Footwear were down in-line with consumer traffic patterns. Our Wholesale sales continued to be impacted by lower shipments, as our retail partners adjusted their inventory levels to the environment, as well as by the ongoing shift in certain retail channels to source private brands directly. During the quarter, we continued to be aggressive on expense management and now expect to achieve more than $40 million in annual expense savings during 2009.
“We have positioned ourselves well to win market share during the Back-to-School season, launching our largest branding initiative in history at Famous Footwear and making strategic inventory investments to capitalize on trend-right product during a peak shopping period. Our stores have never looked better and our team is energized. The season has started at levels we expected; nonetheless, calendar shifts associated with a late Labor Day holiday and consumers' propensity to shop closer to need will likely result in a later Back-to-School season. We are also excited about the product improvements and innovations across our wholesale brands with retailers reviewing our spring 2010 product assortments quite favorably.”
Fromm concluded, “Looking to the back half of 2009, we remain confident in our ability to return to profitability in the third and fourth quarters while reaffirming our expectation of achieving positive net earnings for the full year. Second half 2009 consolidated net sales are expected to be flat to down two% with an improvement in profitability year-over-year, though non-comparability and the volatility from the end of last year make year-over-year comparisons uneven, with sales expected to be down mid-single digits in the third quarter and up mid-single digits in the fourth.”
Consolidated Results for Second Quarter 2009:
* Net sales were $511.6 million, a decrease of 10.1%, compared to $569.2 million in the second quarter of 2008. Famous Footwear net sales were $314.1 million, a decline of 3.7% from the second quarter of last year, as same-store sales declined 6.7% in the quarter, driven primarily by a 6.6% decline in traffic, partially offset by operating 40 more stores than in the year-prior period. Net sales at the company's Wholesale division were $142.0 million, a decrease of 21.1% in the quarter versus the same period last year, primarily related to retailers reducing inventory levels across the company's channels of distribution in response to weak consumer spending as well as the continued decline in its private label business. This was partially offset by the growth of new businesses launched since the second half of 2008. Net sales in the Specialty Retail division were $55.5 million in the quarter, a decline of 12.0% in the quarter versus the same period last year, reflecting lower sales in its shoes.com business, a weaker Canadian dollar exchange rate, a same-store sales decline of 3.8% at its North American stores, and a year-over-year net decrease of four North American stores;
* Gross margin rate in the second quarter increased 50 basis points to 39.8% of net sales from 39.3% of net sales in the second quarter of 2008, driven by an increase in gross margin rate in its Wholesale division, resulting from an increased mix of higher-margin branded sales accompanied by vertical profits resulting from an increase in the penetration of the company's wholesale brands at Famous Footwear. Also contributing was an increase in mix of the company's retail business, which generates a higher gross margin rate than wholesale. This was partially offset by a decline in gross margin rate at Famous Footwear, driven by an increase in promotional activity during the quarter;
* Selling and administrative expenses in the second quarter decreased by $1.4 million to $206.6 million, or 40.4% of net sales, versus $208.0 million, or 36.5% of net sales, in the same period last year. The year-over-year decrease was primarily related to a shift in the timing of marketing expenses, as a result of a later Back-to-School, and lower expenses associated with the company's expense control initiatives, partially offset by the impact of operating 36 more North American stores across its portfolio and the consolidation of Edelman Shoe, Inc. in the current year;
* Net restructuring and other special charges were $2.0 million in the second quarter of 2009 and $10.1 million in the second quarter of last year. Charges in 2009 include costs related to the company's information technology initiatives, while charges in the second quarter of 2008 reflect costs related to its headquarters consolidation and information technology initiatives;
* Operating loss in the quarter was $5.0 million versus operating earnings of $5.1 million in the second quarter of 2008;
* Net interest expense in the quarter increased $1.3 million to $4.7 million versus $3.4 million in the year-ago period due to higher borrowings on the company's revolving credit facility;
* The company recognized a $5.5 million income tax benefit in the quarter;
* Net loss was $4.2 million, or $0.10 per diluted share, versus net earnings of $2.2 million, or $0.05 per diluted share, in the year-ago quarter. Second quarter of 2009 net loss included charges, net of tax, of $1.3 million, or $0.03 per diluted share, related to the company's information technology initiatives. Second quarter of 2008 net earnings included charges, net of a tax, of $6.2 million, or $0.15 per diluted share, related to its headquarters consolidation and information technology initiatives;
* Inventory at quarter-end was $526.8 million, as compared to $502.9 million at the end of the second quarter of 2008. The inventory increase was due primarily to a strategic pull-forward of receipts for key, on-trend product at Famous Footwear for the Back-to-School selling season, operating 40 additional Famous Footwear stores than the second quarter of last year, and the consolidation of Edelman Shoe, Inc. Average inventory on a per store basis at Famous Footwear increased 3.2% in the quarter, while at the same time the division improved its aged-inventory position. Average inventory per store at the company's North American Specialty Retail stores declined 5.8%, on a constant dollar basis, as compared to second quarter-end last year; and
* At quarter-end, the company's borrowings against its revolving credit facility were $47.5 million with availability of more than $320 million. Cash and cash equivalents at quarter-end were $37.3 million.
Dividend
The company's Board of Directors has declared a quarterly dividend of $0.07 per diluted share, payable October 1, 2009 to shareholders of record on September 18, 2009. This dividend will be the 347th consecutive quarterly dividend paid by the company.
Outlook
Based on second quarter results and the current outlook, the company expects the following for 2009:
* Consolidated net sales in the range of $2.18 billion to $2.20 billion. Consolidated net sales in the second half of 2009 are expected to be flat to down 2% versus the second half of 2008, consisting of a mid-single digit decline in the third quarter and a mid-single digit increase in the fourth quarter;
* Famous Footwear same-store sales are expected to decline in the low- to mid-single digit range in the back half of 2009. Famous Footwear expects store openings for the full year of 2009 to total 54 while closing 55 to 70 stores, with substantially all of the openings completed at the end of the second quarter;
* For its Wholesale division, as a result of the anniversary of the severe swings in retail sales during the second half of 2008, the company expects a sales decline in the third quarter of 2009 in the mid- to high-teen digit range with an offsetting increase in the fourth quarter, resulting in flat to down low-single digit year-over-year sales in the second half;
* Selling and administrative expenses in the range of 38.8 to 39.2% for the full year, which includes costs of $8.5 million to $9.0 million, related to its information technology initiatives;
* Depreciation and amortization of capitalized software and intangible assets is expected to total $51 million to $52 million for the full year;
* Net interest expense should approximate $20.5 million to $21.5 million, driven by increased periodic year-over-year borrowings and higher unused fees on its revolving credit facility;
* The company expects to generate a tax benefit in 2009. Its consolidated effective tax rate is heavily dependent on its mix of foreign and domestic earnings;
* Purchases of property and equipment and capitalized software are targeted in the range of $53 million to $55 million; and
* The company expects to generate positive earnings in the third and fourth quarters, resulting in both positive operating earnings (earnings before interest and taxes) and positive net earnings for the full year of 2009.
