Brown Shoe Company, Inc. reported consolidated first quarter net sales of $566.3 million, a decrease of 1.6% from $575.5 million in same period last year. Net earnings were $9.6 million, or 22 cents per diluted share, versus net earnings of $10.0 million, or 23 cents per diluted share in the prior-year period.

First quarter 2007 earnings include charges related to the company's Earnings Enhancement Plan of 7 cents per diluted share. On an adjusted basis, excluding these charges, net earnings were $13.0 million, or 29 cents per diluted share, an increase of 26.1% compared to 23 cents per diluted share for the same period last year and guidance range of 25 cents to 26 cents per diluted share on an adjusted basis.

Ron Fromm, Brown Shoe's chairman and CEO, stated, “Our first quarter results were ahead of expectations, driven primarily by the ongoing strength of our Famous Footwear chain. Famous Footwear generated a 3.4 percent same-store-sales gain in the quarter, fueled by its fashion-right merchandise selection. Our Specialty Retail segment, which includes our Naturalizer stores and Shoes.com business, achieved solid progress in the quarter, also generating a 3.4 percent same-store-sales gain. Our Wholesale division sales were slightly lower than we had expected. Nonetheless, operating margins in the quarter at Wholesale were strong, generating a 190 basis point improvement over last year, excluding costs for our Earnings Enhancement Plan. We believe our first quarter results reflect the positive impact of our initiatives to improve our enterprise profitability and we expect continued progress in the near and long term.”


Segment Highlights

Retail Division

Total sales at Famous Footwear rose 7.6% to a first quarter record $325.3 million compared to $302.3 million for the same 13-week period last year. Same-store sales for the quarter ended May 5, 2007 increased 3.4% over the quarter ended April 29, 2006. Operating earnings were $21.0 million compared to $15.9 million last year, an increase of 31.8%. Famous Footwear opened 18 new stores and closed eight during the quarter, resulting in 1,009 stores open at the end of the quarter.

The Specialty Retail segment, which primarily consists of Naturalizer stores and the Shoes.com e-commerce business, reported sales in the quarter of $60.3 million, a 6.9% increase from last year's $56.4 million. The sales increase was driven by a 3.4% same-store-sales gain in the segment and a 46.6% gain at Shoes.com. The segment's operating loss was even with last year at $2.9 million; however, 2007 results include $0.2 million in charges related to the company's Earnings Enhancement Plan, primarily related to the closing of its remaining Via Spiga store. During the quarter, no new stores were opened and 10 were closed, resulting in 280 stores open at the end of the quarter, compared to 312 at the end of the year-ago period.


Wholesale Division

Wholesale sales declined 16.6% in the quarter to $180.7 million compared to $216.8 million in the previous year. Sales were modestly below the company's expectations. Solid performances from Naturalizer, LifeStride, Etienne Aigner, and Dr. Scholl's were offset by the exiting of the Bass license at the end of 2006 and the reduced emphasis on lower-margin private label business. Operating earnings were $13.0 million in the quarter, including charges of $2.1 million related to the company's Earnings Enhancement Plan, compared to $14.1 million in the year ago period. The segment's focus on higher-quality sales led to an operating profit that, as a percent of sales, increased 190 basis points to 8.4%, after excluding the above charges, from 6.5% last year.


Balance Sheet

Inventory at May 5, 2007 was $398 million, as compared to $405 million last year. Inventory at the company's Famous Footwear division was down $1.7 million in the quarter while operating 57 more stores. Wholesale inventory was down 18.4% in the quarter. Specialty Retail inventory was up 13.9% due to growth at Shoes.com; however, inventory at the division's stores was down 11.5% with 32 fewer stores. The company's debt-to-capital ratio at the end of the quarter was 22.7%, compared to 30.6% at the same time last year.


Strategic Initiatives Update

Costs related to the company's Earnings Enhancement Plan during the quarter were in-line with expectations. During the first quarter, the company closed its Italian sales office, its Dover, NH distribution center, and its Needham, MA office, and incurred costs for severance and other projects still under development. As a result of these actions, the company incurred after-tax costs of $3.3 million or 7 cents per diluted share in the quarter. The company continues to work on other initiatives related to this plan. Estimates of costs and benefits remain as follows:


    -- In 2007, after-tax implementation costs are estimated to be
       approximately $14 million, while the Company expects to realize
       after-tax benefits of $10 to $12 million;

    -- In 2008, after-tax implementation costs are estimated to be
       approximately $5 million and annual after-tax benefits are
       estimated to be $17 to $20 million.


Full-Year and Second Quarter 2007 Guidance

For fiscal 2007, the company continues to estimate sales will range from $2.48 billion to $2.52 billion and now expects net earnings per diluted share of $1.55 to $1.59, versus previous guidance of $1.52 to $1.55. This guidance includes estimated costs related to the company's Earnings Enhancement Plan of 31 cents per diluted share. On an adjusted basis, net earnings per diluted share are now estimated to be $1.86 to $1.90, versus previous guidance of $1.83 to $1.87. This estimate is predicated on a same-store-sales increase at Famous Footwear of 2.5% to 3.5%. As previously announced, Wholesale division sales in 2007 are expected to be below 2006 results, with growth at its branded businesses offset by the exit of the Bass license and an expected sales decline in its private label business. In 2007, the company also expects to increase its marketing and media spend by approximately $4.0 million on a pre-tax basis, as it evolves its brand marketing programs. Additionally, the company expects its effective tax rate to increase by approximately 200 basis points, as a result of a reduced mix of lower tax rate foreign earnings.

For the second quarter of 2007, the company expects sales of $582 million to $592 million, an increase of 0.5% to 2.2% compared to $579.3 million in the year-ago period and net earnings of $9.8 million to $10.7 million compared to $15.2 million in the previous year. Net earnings per diluted share in the quarter are estimated to be 22 cents to 24 cents as compared to 35 cents per diluted share in the previous year. This guidance range includes estimated charges and implementation costs of the company's Earnings Enhancement Plan of 8 cents in the second quarter of 2007. In the second quarter of 2006, the company incurred charges of 3 cents per diluted share related to its Earnings Enhancement Plan offset by a net insurance recovery of 11 cents per diluted share related to environmental remediation costs at its Denver, CO facility. On an adjusted basis, the company expects second quarter 2007 net earnings per diluted share of 30 cents to 32 cents an increase of 11.1% to 18.5% compared to $0.27 per diluted share in the same period a year ago. Second quarter guidance is predicated on a 4.0% to 5.0% same-store-sales increase at Famous Footwear, which reflects the change in the retail reporting calendar in 2007 following a 53-week year in 2006. In 2007, this shift causes the second quarter to end on August 4, 2007 and thereby includes an additional week of the Back-To-School selling season compared to the 13 weeks ended July 29, 2006. This one-week shift is expected to result in lower third quarter same-store sales growth. Second quarter Wholesale sales and earnings are both expected to increase over the first quarter 2007, but will be lower than last year's second quarter, due to the growth of its branded businesses being offset by the exit of the Bass license and a reduced emphasis on lower-margin private label business and as a result of changes in marketing expenses, including the timing of trade shows.


Outlook for Full-Year 2007

Fromm concluded, “Following on our first quarter results, we are confident in our abilities to deliver a strong 2007. In addition, we are building the processes and the platform to assist us in executing our growth strategies and realize our vision of being a top performer in the footwear industry.”

                        BROWN SHOE COMPANY, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

    (Thousands, except per share data)          Thirteen        Thirteen
                                              Weeks Ended     Weeks Ended
                                              May 5, 2007    April 29, 2006

    Net Sales                                 $  566,348     $   575,538
    Cost of Goods Sold                           336,545         352,541

    Gross Profit                                 229,803         222,997
    - % of Sales                                    40.6%           38.7%

    Selling & Administrative Expenses            212,252         204,403
    - % of Sales                                    37.5%           35.5%

    Operating Earnings                            17,551          18,594
    - % of Sales                                     3.1%            3.2%

    Interest Expense, Net                          3,358           4,204

    Earnings Before Income Taxes                  14,193          14,390

    Income Tax Provision                          (4,557)         (4,359)

    NET EARNINGS                              $    9,636      $   10,031

    Basic Earnings per Common Share           $     0.22      $     0.24

    Diluted Earnings per Common Share         $     0.22      $     0.23

    Basic Number of Shares                        43,186          41,670

    Diluted Number of Shares                      44,620          43,495