Brown Shoe Company, Inc. reported a 6.4% increase in consolidated net sales to $523,283,000 for the first quarter of fiscal 2005, ended April 30, versus $491,832,000 in the year-ago period.

Net earnings were $3,779,000 for the quarter, or 20 cents per diluted share, versus net earnings of $8,526,000, or 45 cents per diluted share, in the first quarter of 2004. First quarter 2005 net earnings reflect the following charges: (i) a $9,564,000 tax provision, or 51 cents per share, related to the repatriation of $60,463,000 of foreign earnings under the American Jobs Creation Act of 2004; and (ii) an after-tax cost of $635,000, or 3 cents per diluted share, for a bridge loan fee incurred with financing the acquisition of Bennett Footwear (completed April 22, 2005). In the year-ago quarter, results reflected costs of $2,079,000 after-tax, or 11 cents per diluted share, for the assimilation and transition of the Bass footwear license, which Brown Shoe acquired February 2, 2004.

Excluding these items in both years, adjusted earnings per share for the first quarter 2005 were 74 cents per share versus 56 cents per share in the first quarter of 2004. This compares to the company’s prior guidance of 60 cents to 70 cents per share, which had reflected 5 cents per share in first quarter costs to expense stock options under SFAS No. 123(R). As a result of the Securities and Exchange Commission’s April 15, 2005 announcement delaying the required implementation date for SFAS No. 123(R), the company has decided to delay adoption of the new rule until fiscal 2006.

“Our first quarter results were driven by solid performances at both Famous Footwear and our Wholesale division,” said Brown Shoe Chairman and CEO Ron Fromm. “Famous Footwear’s 1.5% increase in same-store sales contributed to our 34% increase in operating profits for the chain. Operating earnings in our Wholesale segment increased 37%, as we began to benefit from the merchandising and marketing initiatives we’d implemented late last year, and did not have transition costs to assimilate Bass from the year-ago quarter.

“In addition, during the quarter we completed our acquisition of Bennett Footwear, adding licensed and owned brands – like Franco Sarto, Via Spiga, Etienne Aigner and Nickels Soft – that sell primarily in the bridge and better zones,” Fromm continued. “The acquisition of Bennett not only strengthens our brand holdings, but is expected to be accretive in fiscal 2005 by approximately 15-20 cents per share, and add 30 cents per share to earnings in 2006.”

Because the acquisition closed just before quarter end, the results from nine days of Bennett’s operations are included in the consolidated statement of earnings, although they were not material overall. Bennett was acquired for $205 million in cash, which was financed through the issuance of $150 million of 8.75% 7-year bonds, and the foreign earnings repatriated.


Retail Divisions

Sales at Famous Footwear, the company's 927-store family footwear chain, were up 6.1% to $288,735,000 for the quarter, from $272,124,000 for the same 13-week period last year. Same-store sales for the quarter increased 1.5%. Operating earnings increased 34.1% to $16,514,000 versus $12,318,000 for the year-ago period.

Famous Footwear’s first quarter started strong, but weakened in March and April due in part to the Easter shift and unseasonably cool weather in the Midwest. Traffic was up for the quarter, and athletics remained the key category driver. Sandal sales, however, have been slower than anticipated. Improved earnings were achieved primarily as a result of good expense leverage from the higher sales and slightly higher gross margin rates. The chain opened 20 stores in the quarter and closed 12 stores, resulting in 927 stores open at quarter end.

The Specialty Retail segment, which, for all periods, now includes the Naturalizer stores, the Shoes.com e-commerce business and the eight newly acquired Via Spiga stores, reported sales of $53,260,000 in the first quarter, an increase of 10.6% over last year’s $48,163,000. The segment’s operating loss increased to $3,509,000 from last year’s loss of $2,469,000, primarily due to lower gross margin rates as a result of aggressive markdowns of Fall product in the Naturalizer stores.

Naturalizer Retail, the company's 366-store chain selling the Naturalizer brand of women's shoes in both the U.S. and Canada, posted sales of $46,410,000, compared to $45,331,000 for the same period last year. The 198 U.S.-based stores had a same-store sales increase of 1.0% for the quarter while the Canadian stores had a same-store sales decrease of 1.4% for the quarter. Naturalizer opened one store during the quarter and closed 10.

Shoes.com sales for the quarter were $6,644,000 compared to $2,832,000 last year. This business continued to post impressive sales gains. The eight Via Spiga stores added sales of $206,000 for the short period they were owned.


Wholesale Divisions

Wholesale sales for the quarter were up 5.7% to $181,289,000, versus $171,545,000 last year. Brown Shoe’s wholesale businesses includes its branded products such as Naturalizer, LifeStride, Bass, Carlos by Carlos Santana, and Dr. Scholl's; the new Bennett brands; private label footwear; Buster Brown & Co. kids’ footwear, and the company's Canadian wholesale operations. Nine days of wholesale sales from brands acquired with the Bennett acquisition totaled $5,829,000 and are included in the total for the quarter.

Wholesale operating earnings were up 36.7% at $17,504,000 versus $12,805,000 for the prior year quarter. This favorable comparison was due to business improvements as well as to $3,300,000 in expenses incurred in the first quarter of 2004 to transition the Bass line to Brown Shoe’s St. Louis headquarters and distribution centers.

Wholesale sales of the company’s flagship Naturalizer brand were up 6.1% versus last year. Brown Shoe’s LifeStride brand of women’s footwear had a wholesale sales gain of 2.7%. The company’s Dr. Scholl’s-licensed footwear business to mass merchants posted a strong increase over last year, while the Children’s business was even with the prior year.

At the end of the quarter, unshipped wholesale orders were 15% over the same time last year, excluding the impact of the acquired Bennett product lines.

“As a major initiative, we are in the process of completing an extensive review of our flagship Naturalizer brand, including both retail and wholesale operations,” said Fromm. “While Naturalizer continues to hold the No. 2 spot for women’s fashion footwear in department stores, we believe we are only just beginning to tap the brand’s full potential. Therefore, our teams are examining all aspects of the brand – from our marketing, to store base, to our wholesale business model – and we should be in a position to discuss our plans in the near future.”


Outlook for the Second Quarter and Full Year

The company currently estimates fiscal 2005 diluted earnings per share in the range of $2.30 to $2.45, as compared to its previous guidance of $2.55 to $2.65 per diluted share and last year’s diluted earnings per share of $2.30. The current estimated range (i) no longer reflects 20 cents per share in costs associated with the expensing of stock options, (ii) reflects an estimated expense of 55 cents per diluted share in incremental tax provisions related to the repatriation of foreign earnings, and (iii) reflects the anticipated accretion of 15 cents to 20 cents per share from the acquisition of Bennett Footwear.

Excluding the incremental tax costs, the estimated 2005 diluted adjusted earnings per share are anticipated to be in the range of $2.85 to $3.00. This guidance is predicated on an assumed store-for-store sales increase of 1% to 2% for Famous Footwear over the full year.

Fiscal 2005 net sales are currently estimated at $2.3 billion, versus fiscal 2004 net sales of $1.9 billion.

For the second quarter, Brown Shoe estimates diluted earnings per share will be in the range of 27 cents to 32 cents, versus 40 cents for the second quarter of last year. This estimate includes 6 cents dilution from lower margins on the acquired Bennett inventory, which was adjusted to fair market value as of the acquisition date. In addition, the company expects lower margins in anticipation of sandal clearance sales at Famous Footwear. Also, incentive compensation costs are expected to be higher in the second quarter than in the year-ago period due to the fact that in the second quarter 2004, the company reduced such compensation costs when its earnings projections declined.


BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)


 

(Thousands, except per share data)
 
     

Thirteen Weeks Ended

 

 
 
 
 
 

 
 
 
 
 
 
 

AS RESTATED

 

 
 
 
 
 

April 30,

2005

 

May 1

2004

 

 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 

Net Sales

 
 
 
 
 
 

$

523,283

 

$

491,832

 

Cost of Goods Sold

 
 
 
 
 
 
 

312,677

 
 

292,468
 
                   

Gross Profit

 
 
 
 
 
 
 

210,606

 
 

199,364

 

– % of Sales

 
 
 
 
 
 
 

40.2%

 
 

40.5%

 

 
 
 
 
 
 
 
 
 
 
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