Brown Shoe Company, Inc. saw net sales decrease 2.1% to $554.5 million compared to $566.3 million in the year ago quarter. Net earnings in the first quarter dropped 25.3% to $7.2 million, or 17 cents per diluted share, which includes costs of 3 cents per diluted share related to the relocation of the company's Madison office to its St. Louis headquarters and 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. For the year-ago first quarter, the company reported net income of $9.6 million, or 22 cents per diluted share, in the year ago quarter, which included 7 cents per diluted share of costs related to the company's Earnings Enhancement Plan.
Ron Fromm, Brown Shoe's chairman and CEO, stated, “The environment for consumer spending proved more challenging than we expected, resulting in lower than anticipated first quarter sales and profitability for Brown Shoe. Despite this, during the quarter we managed our business well maintaining stringent control of inventory and expenses while achieving several noteworthy goals. To this end, our Brown New York brands experienced solid sales growth, as our revitalization strategies took hold. We also generated strong growth within our Dr. Scholl's, Children's, and Carlos by Carlos Santana brands. Most importantly, we continued our emphasis on building Brown Shoe for the future by connecting Famous Footwear with Brown Shoe in St. Louis, forging new brand partnerships and further extending the reach of our Naturalizer brand to new geographies with the opening of additional retail stores in China. We remain confident that our strategies will result in long-term sustained growth in sales and profitability and increased value for our shareholders. Nonetheless, we believe it prudent to plan the remainder of the year cautiously.”
Retail Division
Net sales at Famous Footwear decreased 2.0% to $318.8 million, compared to $325.3 million for the first quarter last year. Same-store sales in the quarter decreased by 7.3%, versus a gain of 2.5% in the year ago period. Gross margins declined by 140 basis points in the quarter, as Famous Footwear increased promotional activity in order to manage inventory levels aggressively. Operating earnings decreased 63.8% to $7.6 million, or 2.4% of net sales, compared to $21.0 million or 6.4% of net sales in the year ago period. Famous Footwear opened 37 new stores and closed 11 during the quarter, resulting in 1,100 stores open at the end of the quarter compared to 1,009 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 $58.0 million, a 3.8% decrease from $60.3 million in the year-ago period. Same-store sales declined 5.8% during the quarter. Net sales at Shoes.com decreased by 6.8% versus the year ago period. The segment's operating loss was $4.7 million compared to a loss of $3.0 million in the year earlier period. During the quarter, the division opened eight stores, including six stores in China, and closed one, resulting in 291 stores open at the end of the quarter, compared to 280 at the end of the year ago period (seven additional stores were opened during the quarter in China by an affiliate of the Company's joint venture partner, Hongguo International Holdings Limited).
Wholesale Division
Wholesale net sales declined 1.7% in the quarter to $177.7 million, compared to $180.7 million in the year earlier period, as the company's retail customers tightly managed their inventory levels in the quarter. The challenging consumer environment impacted sales with Naturalizer and LifeStride performing below first quarter 2007 levels. At the same time, the Dr. Scholl's, Franco Sarto, Etienne Aigner, and Children's groups performed well in the quarter. The softness in retail sales led to higher allowances, which contributed to the 160 basis point decline in gross margins in the quarter. Operating earnings, as a percent of net sales, decreased 230 basis points in the quarter to 4.9%, or $8.7 million, versus 7.2%, or $13.0 million, in the year ago period.
Balance Sheet
Inventory at quarter-end was $403.6 million, as compared to $397.7 million at the end of the first quarter in 2007. The year-over-year increase is due primarily to the 91 additional stores at Famous Footwear, however average inventory per store is down 4.7%. The company's debt-to-capital ratio at the end of the first quarter was 21.1%, compared to 22.7% at the same time last year.
Earnings Enhancement Plan Update
On April 10, 2008, the company announced that, as part of its Earnings Enhancement Plan, it would relocate its Madison, WI office to St. Louis. This move will create a more connected footwear company and will foster collaboration, increase speed-to-market and strengthen the company's connection with its consumers. The transition began during the first quarter and will be substantially complete by the end of the third quarter of 2008. The company expects to incur pre-tax expenses of $25 million to $30 million (37 cents to 44 cents per diluted share) to implement the relocation. Under various state economic development programs, the company will collaborate with public partners to avail itself of eligible incentives totaling more than $43 million related to training, job creation, and the redevelopment of the company's Clayton, MO property. The company, working with its development partners, intends to redevelop its 12-acre property over the next few years creating a multi-use office, retail, and residential place. The company anticipates a potential monetization of existing real estate and an operating lease for its new offices on a portion of the existing property.
Full-Year and Second Quarter 2008 Guidance
Management's current guidance for the full-year and second quarter is as follows:
— Consolidated net sales: $2.43 to $2.48 billion for full-year 2008 and
$585 to $600 million for the second quarter 2008;
— Famous Footwear same-store sales: negative 1.0 to negative 3.0 percent
for the full-year and negative 1.0 to negative 3.0 percent in the
second quarter;
— Store openings and closings: 100 to 110 new Famous Footwear stores and
approximately 40 closings for the full-year. 25 to 30 new Specialty
Retail stores, including 15 to 20 in China (40 to 45 additional stores
in China by an affiliate of the Company's joint venture partner,
Hongguo International Holdings Limited), and approximately three
closings for the full-year;
— Wholesale sales: increasing by mid-single digits for the full-year and
in the range of negative 2.0 to positive 2.0 percent in the second
quarter;
— Income tax rate: 30.0 to 31.0 percent for both the full-year and second
quarter;
— Average diluted shares: 42.0 million;
— Earnings per share: in the range of $1.29 to $1.53 per diluted share
for the full-year, which includes costs of $0.11 per diluted share, net
of an expected non-recurring gain on real estate sales, related to the
relocation of the Company's Madison, WI office to St. Louis and a net
gain of $0.15 per diluted share for insurance recoveries, net of
associated fees and costs, related to environmental remediation at the
Company's Denver, CO facility. For the second quarter, earnings per
share are estimated in the range of $0.05 to $0.10 per diluted share,
which includes costs of $0.14 related to the relocation of the
Company's Madison, WI office to St. Louis;
— Purchases of property and equipment: approximately $75.0 to
$85.0 million for the full-year, primarily relating to new stores and
remodels, logistics network and other infrastructure, and non-ERP
information systems upgrades.
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Thirteen Thirteen
(Thousands, except per share data) Weeks Ended Weeks Ended
May 3, 2008 May 5, 2007Net sales $554,491 $566,348
Cost of goods sold 338,029 336,545Gross profit 216,462 229,803
– % of Net sales 39.0% 40.6%Selling and administrative expenses 202,981 212,334
– % of Net sales 36.6% 37.5%
Equity in net loss of
nonconsolidated affiliate 114 –Operating earnings 13,367 17,469
Interest expense, net (3,565) (3,358)
Earnings before income taxes and
minority interests 9,802 14,111Income tax provision (2,980) (4,557)
Minority interests in net loss of
consolidated subsidiaries 373 82NET EARNINGS $7,195 $9,636
Basic earnings per common share $0.17 $0.22
Diluted earnings per common share $0.17 $0.22
Basic number of shares 41,463 43,186
Diluted number of shares 41,675 44,620
