Brown Shoe Company, Inc. reported sales slid 2.2% to $631.7 million from $645.5 million a year ago. Earnings decreased 61.5% to $10.4 million, or 25 cents per diluted share, from $27.0 million, or 61 cents, in the year-ago quarter. Excluding non-recurring charges, profits slumped 26.9%. The retailer also forecast a loss ranging from 29 cents to 39 cents for the fourth quarter, which includes costs of 6 cents per share related to its headquarters consolidation and its information technology initiatives.

The latest quarter included a 24-cents-a-share charge related to the company's headquarters consolidation and its information technology initiatives. The year-ago period included a 6-cents-per-share of costs related to the company's Earnings Enhancement Plan.

Excluding these items, adjusted earnings in the quarter decreased 26.9% to $20.5 million, 49 cents per share, from $29.9 million, or 67 cents, a year ago. Same-store sales at Famous Footwear declined by 5.0% during the third quarter versus a decrease of 2.6% in the comparable 2007 period.

Ron Fromm, Brown Shoe chairman and CEO, stated: “While the third quarter began as anticipated, as we delivered to our Back-to-School expectations, our results for the quarter were subsequently impacted by the sudden and rapid decline in consumer spending that followed the onset of the economic crisis in which we find ourselves. We are confident that Brown Shoe's financial strength and portfolio of brands position us well to weather these turbulent times. Nonetheless, we have taken a proactive approach to managing our business in this downturn, as we do not expect an improvement in the near- term.”

He continued, “We will maintain the brand integrity we possess with consumers and retailers alike, while directing our resources more judiciously to ensure that the dollars spent are achieving an appropriate return. As such, we have reduced our store expansion plans for the 2009 to 2011 period, indefinitely paused our headquarters redevelopment initiative, and will continue to monitor the pace of expenditures for our new ERP platform. In total, we have lowered our planned capital expenditures for the 2009 to 2011 period by an aggregate of $72.0 million. We will seek to align our costs to this new sales environment and have instituted more stringent expense management disciplines. In the near-term, our goal is to maximize profit outcomes and cash flows while maintaining the strength of our balance sheet. We believe this strategy has us poised to come out of this downturn even stronger and better able to maximize the many opportunities we see for our brands and company.”

For the third quarter, net sales were $631.7 million, a 2.2% decrease, compared to $645.5 million in 2007.

Gross margins decreased 100 basis  points to 39.3% of net sales from 40.3% of net sales in 2007.  This decrease was driven primarily by the increased promotional cadence at the company's retail divisions as well as an increased sales mix of licensed brands versus owned brands, an increased mix of mid-tier channel sales, and higher markdowns and allowances in its wholesale division.

Selling and administrative expenses in the third quarter of 2008 increased by 8.6% to $235.8 million, or 37.3% of net sales, versus $217.0 million, or 33.7% of net sales, in the same period last year. The year-over-year change primarily consisted of two components, with 190 basis points of the change resulting from non-recurring costs of $16.5 million related to the company's headquarters consolidation and its information technology initiatives, versus $4.5 million in the prior year related to Earnings Enhancement Plan costs. The remaining 170 basis point change resulted from the impact of operating 78 more Famous Footwear stores, expense deleverage from negative same-store sales performance, and lower wholesale sales;

The factors above resulted in a decrease in operating earnings as a
percentage of net sales to 2.0%, or $12.9 million, in the third quarter of 2008, versus 6.6% of net sales, or $42.8 million in 2007.

The company recognized a $0.9 million tax benefit in the quarter resulting from a higher relative mix of foreign earnings, which are subject to lower statutory rates, and state tax incentives related to job creation and training, resulting from the company's headquarters consolidation.

Segment Highlights for Third Quarter of 2008

Retail Division

Net sales at Famous Footwear were $362.7 million, a 0.5% increase, compared to $361.0 million last year. Same-store sales decreased by 5.0% in the quarter, as compared to a decrease of 2.6% in the comparable 2007 period. Gross margins declined by 70 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 $9.0 million to 38.6% of net sales, an increase of 230 basis points from the prior year, as a result of operating 78 additional stores and expense deleverage from negative same-store sales. Operating earnings decreased to $20.0 million, or 5.5% of net sales, compared to $30.8 million, or 8.5% of net sales, in the year-ago period. Famous Footwear opened 18 new stores and closed seven during the quarter, resulting in 1,138 stores open at the end of the quarter compared to 1,060 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 $65.6 million, a 7.3% decrease from $70.8 million in the year-ago period. Same-store sales declined 6.7% during the quarter. Net sales at Shoes.com decreased by 7.0% versus the year-ago period. The division's sales comparisons were also impacted by 270 basis points of foreign exchange translation. The segment's operating loss was $3.0 million compared to a loss of $1.9 million in the year earlier period. During the quarter, the division opened seven stores and closed one, resulting in 286 stores open in North America at the end of the quarter, compared to 278 at the end of the year-ago period. The division also opened two Naturalizer stores in China under its B&H Footwear joint venture for a total of 17 in operation, with an additional 36 stores in China operated by an affiliate of its joint venture partner.

Wholesale Division

Wholesale net sales declined 4.8% in the quarter to $203.4 million, compared to $213.7 million in the year earlier period, as the Company's retail partners tightly managed their inventory levels in the quarter due to the weakening consumer environment. The best performers during the quarter were the Etienne Aigner, Naturalizer, Dr. Scholl's and Sam Edelman brands, while the LifeStride and Private Label and Private Brand businesses were the most challenged. The softness in its customers' retail sales led to increased markdowns and higher allowances, which, along with a greater mix of sales from licensed brands versus owned brands and an increased mix of mid-tier sales, contributed to the 40 basis point decline in gross margins in the quarter. Operating earnings, as a percentage of net sales, decreased 170 basis points in the quarter to 9.1%, or $18.5 million, versus 10.8%, or $23.1 million, in the year-ago period.

Balance Sheet

Inventory at quarter-end was $469.3 million, as compared to $440.9 million at the end of the third quarter of 2007. The year-over-year increase was due primarily to the 78 net additional stores at Famous Footwear, as average inventory on a per store basis was flat in the quarter. The company's debt- to-capital ratio at the end of the third quarter was 23.7% reflecting higher borrowings under its revolving credit facility and a combination of lower earnings performance and higher capital expenditures in the quarter.

Outlook and Guidance

Consumer sentiment, and therefore traffic and spending, declined significantly during September and October because of the many factors affecting the macroeconomic environment in the United States. The immediate outlook for change is not knowable with any certainty at this time. Accordingly, the company is planning for the fourth quarter and 2009 to remain challenging. As such, the company is actively managing its resources to maximize profit outcomes. This includes forecasting multiple scenarios, developing more stringent expense disciplines and intensifying its management of inventory and order flows. Additionally, the company has reduced its new store opening plan for 2009 to a net of 25 Famous Footwear stores and reduced the number of store remodels. Furthermore, the planning for its headquarters redevelopment project has been paused indefinitely. The company continues on-pace and on-budget with its logistics and information technology initiatives, as they are both strategically important and are expected to generate significant operating efficiencies when completed. In total, the company expects to reduce its capital spending plan for the 2009 to 2011 timeframe by $72 million.

The company is revising its fiscal 2008 guidance to reflect the current weak economy and to eliminate the previously expected real estate gain associated with redevelopment of its headquarters facility. Management's current guidance for the full year and fourth quarter of 2008 is as follows:

* Consolidated net sales: $2.27 to $2.29 billion for the full year 2008 and $515 to $538 million for the fourth quarter 2008;

* Famous Footwear same-store sales: negative 5.1 to negative 5.5% for the full year and negative 5.0 to negative 7.0% in the fourth quarter;

* Store openings and closings: The company now expects to open 89 new Famous Footwear stores and close 25 stores for the full year.  The company expects to open 25 to 30 new Specialty Retail stores, including 15 to 20 in China, and approximately three closings for the full year;

*Wholesale net sales:  negative 7.0 to negative 9.0% for the  full year and in the range of negative 14.0 to negative 21.0% in the fourth quarter.

* Earnings per share: in the range of 9 cents to 18 cents per diluted share for the full year, which includes costs of 43 cents per diluted share related to headquarters consolidation and costs of 5 cents per diluted share related to its information technology initiatives, offset by a net gain of 15 cents per diluted share for insurance recoveries, net of associated fees and costs, related to environmental remediation at the company's Denver, CO facility.  Excluding these charges, adjusted earnings for the full year are expected to be in the range of 42 cents to 51 cents per diluted share. 
 
For the fourth quarter, the company expects an estimated loss per diluted share of 29 cents to 39 cents, which includes costs of 6 cents per diluted share related to its headquarters consolidation and its information technology initiatives.
 
Purchases of property and equipment are expected to be approximately $85.0 million for the full year, primarily relating to new stores and remodels, logistics network and other infrastructure, and capitalized software and information systems upgrades, including ERP and non-ERP related systems.

BROWN SHOE COMPANY, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                                 (Unaudited)

    (Thousands, except per share data)

                          Thirteen Weeks Ended      Thirty-nine Weeks Ended
                        November 1,    November 3,  November 1,   November 3,
                           2008           2007         2008          2007

    Net sales            $631,657       $645,546   $1,755,367    $1,788,465
    Cost of goods sold    383,166        385,705    1,066,917     1,067,827

    Gross profit          248,491        259,841      688,450       720,638
      - % of Net Sales       39.3%          40.3%        39.2%         40.3%

    Selling and
     administrative
     expenses             235,764        217,021      657,050       642,484
      - % of Net Sales       37.3%          33.7%        37.4%         35.9%
    Equity in net
     (earnings) loss
     of nonconsolidated
     affiliate               (198)            14          169            14

    Operating earnings     12,925         42,806       31,231        78,140

    Interest expense,
     net                   (3,433)        (2,797)     (10,251)       (8,990)

    Earnings before
     income taxes and
     minority interests     9,492         40,009       20,980        69,150

    Income tax benefit
     (provision)              852        (13,046)      (1,759)      (22,901)
    Minority interests in
     net loss of consolidated
     subsidiaries              54             46          589           226

    NET EARNINGS          $10,398        $27,009      $19,810       $46,475

    Basic earnings per
     common share           $0.25          $0.62        $0.48         $1.07

    Diluted earnings per
     common share           $0.25          $0.61        $0.47         $1.04

    Basic number of
     shares                41,547         43,688       41,516        43,494

    Diluted number of
     shares                41,859         44,469       41,779        44,576