Included in these after-tax charges are: a non-cash impairment charge of $119.2 million, or $2.87 per diluted share, related to the company's recorded goodwill and intangible assets, resulting from the deterioration in the general economic environment, recent industry trends, and the resulting decline in the company's share price and market capitalization; and restructuring and other special charges of $22.3 million, or 53 cents per diluted share related to the company's expense and capital containment initiatives (inclusive of its workforce reduction program), headquarters consolidation, and information technology initiatives. This compares to net earnings of $14.0 million, or 33 cents per diluted share, in the fourth quarter of 2007, inclusive of $2.6 million, or 6 cents per diluted share, in restructuring and other special charges related to the company's Earnings Enhancement Plan.
Excluding these charges, the company's adjusted net loss for the fourth quarter was $11.5 million, or 28 cents per diluted share. This compares to adjusted net earnings in the fourth quarter of 2007 of $16.5 million, or 39 cents per diluted share.
Ron Fromm, Brown Shoe Chairman and CEO, stated: “The fourth quarter marked one of the most challenging quarters in our 130-year history. During the quarter, we took actions to maintain our company's strong financial health and position Brown Shoe for improved profitability and cash flow in fiscal 2009. We not only completed the renewal of our credit facility for a five-year term, increasing its size to $380 million, but also identified $28 to $31 million in expense reductions, which we expect to implement in 2009. We also balanced our promotional cadence at retail during the quarter to clear inventory and drive product freshness, resulting in our inventory position being where we wanted it to be as we enter the Spring selling season.”
Fromm continued, “While the environment was difficult and results were disappointing in 2008, it was a productive year for Brown Shoe in developing the infrastructure and vehicles for future growth. During the year, we completed the transition of our
Fromm concluded, “As we begin fiscal 2009, the economic environment remains uncertain. As such, we are intently focused on our liquidity and capital management, stepping-up our inventory management practices, as well as continuing to emphasize expense disciplines. These efforts are expected to enable us to generate positive operating earnings and free cash flow for the year.”
FOURTH QUARTER
Net sales were $521.0 million in the fourth quarter, an 8.8% decrease from $571.4 million in the fourth quarter of 2007. Gross margins in the fourth quarter decreased 180 basis points to 37.2% of net sales in 2008, from 39.0% of net sales in 2007. This decrease was driven primarily by an increase in the promotional cadence at the company's retail divisions, as well as higher markdowns and allowances in its wholesale division, partially offset by a higher mix of retail sales, which carry a higher gross margin rate.
Selling and administrative expenses in the fourth quarter of 2008 increased to $213.7 million, or 41.0% of net sales, versus $200.9 million, or 35.2% of net sales, in the same period last year. The year-over-year change primarily resulted from the impact of operating 72 more North American stores as well as expense deleverage from the negative same-store sales performance at retail and lower wholesale sales.
Pre-tax impairment of goodwill and intangible assets represents a non-cash charge of $149.2 million in the quarter, as a result of the deterioration of general economic conditions, recent industry trends, and the resulting decline in the company's share price and capitalization.
Restructuring and other special charges in the quarter increased by $32.3 million from the prior year to $36.0 million, as a result of the company's expense and capital containment initiatives, headquarters consolidation, and information technology initiatives, versus $3.7 million in the prior year related to Earnings Enhancement Plan costs.
The factors above resulted in an operating loss of $205.1 million in the fourth quarter of 2008, versus operating earnings of $17.8 million in the fourth quarter of 2007.
The company recognized a $55.6 million tax benefit in the quarter primarily due to the impairment of goodwill and intangible assets, restructuring, and other special charges previously mentioned.
During the quarter the company also:
– Amended its asset-based revolving credit facility for a term of five years with an increased borrowing capacity of $380 million
– Announced the implementation of expense and capital containment initiatives that in 2009 are expected to yield annual savings of $28 to $31 million, and an additional reduction of capital expenditures of $35 million (for an aggregate reduction of $107 million for the 2008 to 2011 period). The company incurred costs of $30.9 million (or $19.1 million after-tax) during the fourth quarter for these initiatives, which include workforce reduction, changes in compensation structure, and a rationalization of operating expenses
– Acquired the remaining outstanding shares of Shoes.com, bringing the company's total equity interest to 100%, and increased its equity interest in Edelman Shoe, Inc. to 50.0% from 42.5%.
Segment Results:
Net sales at Famous Footwear were $312.3 million in the fourth quarter, a 0.5% increase, compared to $310.7 million in the same period last year. Same-store sales decreased by 3.6% in the quarter, as compared to a decrease of 1.7% in the comparable 2007 period. Gross margins declined by 230 basis points in the quarter, as Famous Footwear increased promotional activity to maintain market share and manage inventory. Selling and administrative expenses in the quarter increased by $11.6 million to 42.7% of net sales, as a result of operating 64 net additional stores and expense deleverage from negative same-store sales. Impairment of goodwill and intangible assets, restructuring, and other special charges totaled $7.3 million in the quarter, versus no charges incurred in the year-ago period.
Famous Footwear reported an operating loss of $11.9 million, compared to operating earnings of $13.4 million in the year-ago period. Famous Footwear opened four new stores and closed four during the quarter, resulting in 1,138 stores open at the end of the quarter compared to 1,074 during the year-ago period.
The Specialty Retail segment, which primarily consists of Naturalizer stores and the Shoes.com e-commerce business, reported net sales in the quarter of $66.0 million, a 5.9% decrease from $70.1 million in the year-ago period. Same-store sales declined 0.3% during the quarter. Net sales for the quarter at Shoes.com decreased by 5.1% versus the year-ago period. The segment's operating loss during the quarter, which included impairment of goodwill and intangible assets, restructuring, and other special charges of $17.2 million, was $19.7 million compared to a loss of $1.5 million in the year earlier period. During the quarter, the division opened five stores and closed four, resulting in 287 stores open in North America at the end of the quarter, compared to 279 at the end of the year-ago period.
Wholesale net sales declined 25.1% in the quarter to $142.7 million, compared to $190.6 million in the year earlier period, as the company's retail partners were more promotional and decreased their open-to-buy levels in response to the continued deterioration of the consumer-spending environment. Additionally, sales were impacted by a late January ice storm and power outage at the company's
Balance Sheet
Inventory at quarter-end was $466.0 million, as compared to $435.7 million at the end of the fourth quarter of 2007. The year-over-year inventory increase was due primarily to a $22.1 million increase at the company's wholesale division and operating 72 more North American stores. The increase in wholesale inventory was primarily driven by three factors: the consolidation of the Sam Edelman business, Spring inventory for new brand launches (the Fergie brands and Libby Edelman) and an increase in landed business for Dr. Scholl's at the mid-tier channel, and the closing of the company's Sikeston distribution center due to the ice storm and subsequent power outage in the last week of January. Average inventory on a per store basis at Famous Footwear was down 2.6% in the quarter and average inventory at the company's North American Specialty Retail stores was down 11.2%, on a constant dollar basis. At quarter-end, the company's borrowings against its revolving credit facility were $112.5 million, versus $15 million in the prior year, primarily from lower earnings performance in the quarter and higher purchases of property and equipment and capitalized software.
Dividend
The company's Board of Directors has declared a quarterly dividend of 7 cents per diluted share, payable Apr. 1, 2009 to shareholders of record on Mar. 20, 2009. This dividend will be the 345th consecutive quarterly dividend paid by the company.
Outlook
Due to the uncertain economic environment and lack of sufficient visibility, the company does not believe it is prudent or appropriate to provide quarterly or annual earnings per share guidance. However, the company provided perspectives on the following income statement and balance sheet metrics to enhance transparency and provide insight into the company's performance expectations. Based on the current economic conditions and outlook, the company expects the following for fiscal 2009:
– Net sales in the range of $2.2 billion to $2.3 billion
– Famous Footwear plans to open 55 new stores in 2009 while closing 35, which is expected to partially offset expectations of a mid-single digit same-store sales decline for the year
– For its wholesale division, the company expects a high-single digit decline of its existing brands and continued decline of its private label business, to be partially offset by growth in its new brands, such as Sam Edelman, Libby Edelman, Fergie and Fergalicious, and Vera Wang Lavender Label, accompanied by increased penetration by Dr. Scholl's in the mid-tier channel
– Selling and administrative expenses in the range of 39% to 40% for the full year, which includes costs of $7 to $9 million related to its information technology initiatives. Expenses increase on a year-over-year basis due to carrying the full-year of facilities expense for the 72 net new North American stores in 2008, the partial year facilities expense of the 20 net new North American stores in 2009, the full-year of expenses from the Edelman Shoe, Inc. consolidation, and benefit-related cost increases. This increase in expenses will be partially offset by the $28 to $31 million in expected savings from its expense and capital containment initiatives
– The company expects to generate a tax benefit in 2009, although at lower levels than in 2008, due to its mix of foreign and domestic earnings
– Depreciation and amortization is expected to total $55 to $58 million for the full-year
– Interest expense should approximate $22 to $24 million driven by increased borrowings and higher unused fees on its recently renewed revolving credit facility
– Purchases of property and equipment and capitalized software are targeted in the range of $60 million to $65 million, primarily related to the company's information technology initiatives, logistics network, new stores and remodels, and general infrastructure
– Although the company expects a quarterly loss in its fiscal first quarter of 2009, it expects to generate positive operating earnings in fiscal 2009, with earnings greater in the seasonally larger third quarter, and currently expects to generate positive cash flow (cash from operations less purchases of property and equipment and capitalized software).
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands) January 31, February 2,
ASSETS 2009 2008
Cash and cash equivalents $86,900 $59,801
Receivables 84,252 116,873
Inventories 466,002 435,682
Income taxes 28,692 –
Prepaid expenses and other current assets 17,421 24,701
Total current assets 683,267 637,057
Other assets 103,137 96,797
Investment in nonconsolidated affiliate – 6,641
Goodwill and intangible assets, net 84,000 217,382
Property and equipment, net 157,451 141,964
Total assets $1,027,855 $1,099,841
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Borrowings under revolving credit
agreement $112,500 $15,000
Trade accounts payable 152,339 172,947
Accrued expenses 139,131 115,073
Income taxes – 895
Total current liabilities 403,970 303,915
Long-term debt 150,000 150,000
Deferred rent 41,714 41,415
Other liabilities 29,957 43,847
Minority interests 8,110 2,087
Total shareholders' equity 394,104 558,577
Total liabilities and shareholders'
equity $1,027,855 $1,099,841
