Brown Shoe Company third quarter net sales increased 9.6% to $676.8 million from $617.7 million in the third quarter of fiscal 2005. Net earnings were $26.9 million or 93 cents per diluted share, inclusive of 4 cents per diluted share for stock option expense, and compares to net earnings of $19.7 million or 70 cents per diluted share, in the year-ago period.
Adjusted net earnings were $28.3 million or 97 per diluted share, inclusive of 4 cents per diluted share for stock option expense, and versus previously issued EPS guidance of 81 cents to 86 cents. This compares to third quarter fiscal 2005 adjusted net earnings of $23.0 million or 81 cents per diluted share.
Brown Shoe Chairman and CEO Ron Fromm explained, “We delivered an all-time record quarter driven by an exceptional performance by our Famous Footwear chain in the period and solid contributions from our Wholesale and Specialty Retail segments. Famous Footwear recorded an 8.2 percent increase in comparable store sales in the quarter, which, together with strong gross margin performance, fueled a 51 percent increase in its operating income, demonstrating our ability to meet our customers' needs for fashion and value. Specialty Retail, led by Naturalizer stores, posted a 6.0 percent increase in comparable store sales during the quarter, reflecting the continuation of our efforts to improve the segment's performance. Wholesale sales increased by 7.0 percent on the strength of our Naturalizer, Children's and Dr. Scholl's brands. Excluding the Bass exit costs, Wholesale operating earnings increased by 16.1 percent. In addition, we made solid progress on our strategic initiatives and continue to expect to achieve the targeted savings we announced last quarter.”
The Company continues to review and implement certain strategic initiatives as part of its earnings enhancement plan, 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 determined early in the fourth quarter that it will close its Needham, MA office and consolidate these operations into its existing New York City facilities; close its Dover, NH distribution center and utilize its existing wholesale and retail distribution network; and outsource its Canadian wholesale business to a third-party operator. The Company believes these changes will improve the efficiency of operations by locating the Bennett group in New York (re-named Brown New York) and further integrating these operations into the Company's product development and sourcing teams.
At the same time, the Company noted that it remains in the early stages of developing certain of these earnings enhancement initiatives and, as previously indicated, it will update costs and savings estimates as these initiatives are developed.
In 2006 these initiatives are expected to be minor with after-tax implementation costs of approximately $5 million; In 2007, after-tax benefits continue to be estimated at $10 million to $12 million with estimated after-tax implementation costs of $16 million to $18 million; and Beginning in 2008, annual after-tax benefits continue to be estimated at $17 million to $20 million.
Total sales at Famous Footwear rose 11.7% to $366,289,000 for the quarter, versus $328,059,000 for the same 13-week period last year. Same-store sales for the period rose 8.2% percent and gross margin increased by 160 basis points, leading to operating earnings growth of 51 percent to $39,553,000 from $26,178,000 for the year-ago period. Sales were led by strong performances in the women's and children's categories, while athletics grew 3.9 percent on a store-for-store basis. Famous Footwear opened 26 stores in the quarter and closed 10 stores, resulting in 979 stores open at quarter-end. Approximately 90 new store openings and 45 closings are expected during fiscal 2006.
The Specialty Retail segment, which includes Naturalizer, F.X. LaSalle, Via Spiga, Franco Sarto, other concept stores and the Shoes.com e-commerce business, reported sales of $68,189,000, an increase of 8.0 percent over last year's $63,137,000. The segment generated operating income of $978,000, compared to a loss of $6,993,000 in the third quarter last year, which included pre-tax costs of $5,229,000 to close underperforming Naturalizer stores and consolidate Canadian operations. The year-over-year improvement reflects a 6.0 percent same-store sales increase, higher gross margin rates, and better expense leverage following the closing of underperforming stores in 2005. The division opened one new store and closed eight during the quarter, leaving 298 stores open in the U.S. and Canada at quarter end.
Wholesale sales increased 7.0% to $242,334,000, versus $226,480,000 last year, due primarily to higher sales of the Naturalizer, Children's, and Dr. Scholl's brands.
Wholesale operating earnings were $19,993,000, compared to $19,201,000 last year. The 2006 operating earnings are net of $2,294,000 of costs and losses associated with the previously announced exit of the Bass license. Excluding these costs, wholesale operating earnings increased 16.1 percent in the quarter.
Inventory at October 28, 2006 was fresh and clean and totaled $434 million, compared to $429 million last year. The Company's debt-to-capital ratio at the end of the quarter was 25.4 percent, compared to 39.0 percent at the same time last year. This decrease reflects strong operating cash flows and the repatriation of foreign cash near the end of fiscal 2005.
FIRST NINE MONTHS RESULTS
- Net sales increased 8.2% to $1,831,669,000, compared with
$1,692,439,000 in the first nine months last year.
- Net earnings were $52,129,000, or $1.80 per diluted share, inclusive of
$0.11 per diluted share related to stock option expense. This compares
to net earnings of $27,634,000, or $0.97 per diluted share, for the
first nine months of fiscal 2005.
- Adjusted net earnings were $50,328,000, or $1.73 per diluted share,
inclusive of $0.11 per diluted share related to stock option expense.
This compares to adjusted net earnings of $42,860,000 or $1.51 per
diluted share (an increase of 24% including footnote options
expense in 2005) for the first nine months of fiscal 2005.
The Company now expects fiscal fourth quarter diluted earnings per share to be in the range of $0.48 to $0.53, inclusive of $0.04 per diluted share related to stock option expense. This guidance range also includes estimated charges and costs related to the implementation of the Company's strategic initiatives of $0.14 per diluted share and estimated costs and losses to exit the Bass license of $0.03 per diluted share. Excluding these costs, fourth quarter adjusted earnings per diluted share are anticipated to be in the range of $0.65 to $0.70. This compares to adjusted earnings per diluted share of $0.71 in the fourth quarter last year.
The Company is raising its fiscal 2006 guidance based on achieving better-than-expected third quarter results. For the full-year fiscal 2006, the Company now estimates diluted earnings per share in the range of $2.28 to $2.33, inclusive of $0.15 per diluted share for stock option expense. This guidance range also includes (i) estimated costs for implementation of the strategic initiatives of $0.18 per diluted share; (ii) estimated costs and losses associated with the exiting of the Bass license of $0.07 per diluted share; and (iii) 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 $2.38 to $2.43 on an adjusted basis, inclusive of $0.15 per diluted share for stock option expense. This compares to adjusted earnings per diluted share of $2.22 in fiscal 2005.
Fromm concluded, “As we look ahead, we remain excited about our growth prospects both in the near and long term. The majority of our businesses and brands are poised for expansion and we have strategies in place to take our Company to a new exciting level. We are focused on building preeminent footwear brands and we expect fiscal 2006 to represent another year of significant accomplishments toward reaching this objective, especially as we begin to implement our earnings enhancement plan, capitalize on our strength in the marketplace and benefit from our brand building initiatives.”