Brown Shoe Company, Inc. saw fourth quarter net sales increase 6.6% to $639.3 million, from $599.6 million last year. Sales at the company's Famous Footwear concept increased 13.0% to $320.9 million for the 14 week fourth quarter, versus $284.1 million for the 13-week period last year. Same-store sales for the 13 weeks increased 2.9%.
Ron Fromm, Brown Shoe's Chairman and CEO, stated, “Fiscal 2006 was a year of many accomplishments for Brown Shoe Company. Our growth was balanced across our wholesale and retail platforms with a record performance at Famous Footwear and significant strides made with our Naturalizer and Dr. Scholl's brands during the year. Our ability to satisfy consumers' desires for compelling brands and fashion at all channels of distribution remains a core strength. Adherence to our sell-through model and inventory discipline also contributed to our double-digit increase in earnings for the year. During the year, we continued to evaluate our portfolio to ensure that we are focused on opportunities that maximize our long-term sales and profit growth. To this end, we made decisions to exit our Bass license and reposition our Brown New York brands to the consumer-driven model that has been successful in our core brands. Lastly, we began to implement an earnings enhancement plan that has already begun to positively impact our business, as we benefit from increased talent, a more efficient operation, and a reduction in costs.”
Fromm continued, “As a result of our strong performance in 2006 and confidence in our 2007 outlook, our Board of Directors authorized a 3-for-2 stock split, to be effected in the form of a stock dividend, and an increase in the quarterly dividend. This is the second such stock split and dividend increase in the past 12 months.”
Fourth Quarter Highlights:
– Net sales increased 6.6% to $639.3 million, as compared to
$599.6 million in the fourth quarter of fiscal 2006. Fiscal 2006
includes 53 weeks and compares to a 52-week period in fiscal
2005, with the additional week occurring in the fourth quarter of
fiscal 2006. The 53rd week increased net sales by $22.5 million
and was not material to net earnings in the fourth quarter of
– Net earnings were $13.6 million, or 46 cents per diluted share,
inclusive of (i) 9 cents per diluted share in earnings enhancement
plan costs; (ii) 12 cents per diluted share in charges related to
environmental remediation activities at its Denver, Colorado
property; and (iii) 3 cents per diluted share in costs related to
the exit of its Bass license. This compares to net earnings of
$13.4 million, or 47 cents per diluted share, in the fourth quarter
of fiscal 2005 inclusive of (i) 9 cents per diluted share in tax
provisions due to the repatriation of foreign earnings; and (ii)
15 cents per diluted share in charges related to the closure of
underperforming Naturalizer stores.
– Adjusted net earnings, excluding the above items, were $20.6
million, or 70 cents per diluted share, inclusive of 4 cents per
diluted share for stock option expense, as compared to fourth
quarter fiscal 2005 adjusted net earnings of $20.0 million, or
71 cents per diluted share (an increase of 4.5%, inclusive of
footnote option expense in 2005).
Fiscal Year Highlights
– Net sales increased 7.8 percent to $2.47 billion compared with
$2.29 billion in the prior fiscal year.
– Net earnings were $65.7 million, or $2.26 per diluted share,
inclusive of (i) 13 cents per diluted share in earnings enhancement
plan costs; (ii) 8 cents per diluted share in costs related to the
exit of the Bass license; and (iii) 3 cents per diluted share from
the net gain related to Redfield-related insurance recoveries and
environmental remediation charges. This compares to net earnings
of $41.0 million, or $1.45 per diluted share, in the prior fiscal
year, inclusive of (i) 42 cents per diluted share related to tax
provisions due to the repatriation of foreign earnings; (ii)
2 cents per diluted share in costs related to the bridge loan fee
associated with the acquisition of Bennett Footwear Group; (iii)
33 cents per diluted share in charges related to the closure of
underperforming Naturalizer stores.
– Adjusted net earnings, excluding the above items, were $71.0
million, or $2.44 per diluted share inclusive of 14 cents per
diluted share for stock option expense in fiscal 2006, as
compared to adjusted net earnings of $62.9 million, or $2.22 per
diluted share in the prior fiscal year (an increase of 17.3%, inclusive of footnote option expense in 2005).
Strategic Initiatives Update
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.
During the fourth quarter, the company made substantial progress in implementing a number of initiatives under this program, including:
– The announcement of the closing of its Bennett's division's
(renamed Brown New York) Needham, MA office and its Dover, NH
distribution center which was completed in February 2007;
– The consolidation of the company's New York City operations to
accommodate the offices of its Brown New York division personnel,
as well as its product development team and its showrooms;
– The announcement of the closing of its Italian sales office in
the first quarter of fiscal 2007;
– The outsourcing of its Canadian wholesale business to a third
party operator; and
– The closing of all but one of its Via Spiga stores.
These actions, along with severance costs from personnel reductions and consulting costs related to the earnings enhancement plan, resulted in after- tax costs of $2.7 million in the fourth quarter of 2006 and $3.9 million for the full year of 2006.
While much has been accomplished, certain of the initiatives are still in early stages of development, and the company expects to update cost and savings estimates as they are further developed. Current estimates are 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 still
estimated to be $17 to $20 million.
Total sales at Famous Footwear, the company's 999-store family footwear chain, increased 13.0% to $320.9 million for the 14 week fourth quarter, versus $284.1 million for the 13-week period last year. Same-store sales for the 13 weeks increased 2.9%. Strong sales growth together with a 110 basis point improvement in gross margin rate contributed to record fourth quarter operating earnings. Operating earnings increased by 49.2% to $22.5 million from $15.0 million for the year-ago period. All categories of footwear were positive for the quarter. Famous Footwear opened 28 stores in the quarter and closed eight stores, resulting in 999 stores open at year-end.
The Specialty Retail segment, which primarily includes the Naturalizer Retail stores and the Shoes.com e-commerce business, reported sales of $73.9 million, an increase of 12.4% versus $65.7 million last year, driven by top-line growth at Shoes.com and improved productivity at Naturalizer Retail. The segment's operating loss decreased to $0.4 million, inclusive of $0.9 million in pre-tax costs to close the Via Spiga stores, as compared to a loss of $6.7 million in the year-ago period, which included pre-tax costs of $6.5 million to close underperforming Naturalizer stores and consolidate the company's Canadian operations. Comparable-store sales for the 290 U.S. and Canadian stores on a comparable 13-week basis increased 4.0%. The division opened one new store and closed nine stores during the quarter.
Wholesale sales declined 2.1% to $244.5 million, versus $249.8 million last year, as higher sales of the company's Naturalizer, Dr. Scholl's, LifeStride, and Children's offerings were offset by lower sales at the company's Brown New York brands, as the company transitioned these brands to its consumer-driven model, deemphasized non-branded product distribution, and completed the exit from the Bass license.
Wholesale operating earnings of $17.8 million included $4.7 million in pre-tax costs associated with exiting the Bass license and implementation of initiatives associated with the company's earnings enhancement plan. This compares to operating earnings of $27.1 million in the fourth quarter last year.
Redfield Environmental Remediation
During the fourth quarter of fiscal 2006, the company submitted a long- term plan to the State of Colorado to continue its onsite remediation activities at its Denver, Colorado property and developed a revised plan for the offsite remediation activities. The additional discounted cost of the program and updated estimates for other remediation in the areas adjacent and near to this property resulted in an after-tax charge of $3.4 million, or 12 cents per diluted share. In the second quarter of fiscal 2006, the company recognized income from insurance recoveries of $4.4 million, after-tax, related to this site and is continuing to pursue additional recoveries from other insurance companies and the Colorado Department of Transportation.
Balance Sheet Highlights
Inventory at February 3, 2007 was $421 million, as compared to $414 million at January 28, 2006. Inventory growth at Famous Footwear and growth in Shoes.com were partially offset by reductions in the company's Wholesale and Specialty Retail segments. The company's debt-to-capital ratio at the end of the quarter was 22.4%, compared to 31.5% at the same time last year.
Fiscal and First Quarter 2007 Guidance
The company is introducing net sales and net earnings guidance for fiscal and first quarter 2007.
For the full fiscal year, the company is introducing net sales guidance in the range of $2.48 billion to $2.52 billion. This reflects expectations for same-store sales to increase in the range of 2.5% to 3.5% and an addition of approximately 110 new store openings and 45 closings at Famous Footwear. The company also anticipates that its combined wholesale sales will be below 2006 full-year results, with growth of its branded business offset by the exit of the Bass license and a sales decline in its private label business. Diluted net earnings per share for the fiscal 2007 year are expected to be in the range of $2.28 to $2.33, which compares to diluted earnings per share of $2.26 in fiscal 2006. On an adjusted earnings basis, after excluding earnings enhancement plan costs in 2007 and 2006, as well as Bass exit costs and net Redfield recoveries in 2006, the company expects diluted earnings per share to be in the range of $2.75 to $2.80, an increase of 13% to 15 percent, compared to $2.44 in 2006. In 2007, the company also expects to increase its marketing media spend by approximately $4.0 million pre-tax, as it evolves its brand marketing programs. Additionally, the company expects the effective tax rate in 2007 to be approximately 31.7 percent, compared to 29.7% in 2006. The higher anticipated tax rate in 2007 reflects a reduced mix of foreign earnings, which have lower tax rates. The rate difference equates to approximately 7 cents per diluted share.
For the first quarter of fiscal 2007, the company expects net sales in the range of $575 million to $580 million, as compared to actual first quarter fiscal 2006 net sales of $575.5 million. Included in the company's net sales guidance is an expectation for same store sales at Famous Footwear to increase in the range of 2.5% to 3.5%. The company also anticipates that its combined wholesale sales will be below the first quarter results last year, with growth of its branded business offset by the exit of the Bass license and a sales decline in its private label business. Diluted earnings per share for the first quarter are expected to be in the range of 27 cents to 29 cents, as compared to actual first quarter fiscal 2006 diluted net earnings per share of 35 cents. The 2007 estimated earnings guidance includes after-tax costs related to the implementation of the earnings enhancement plan of approximately $3.0 million or 10 cents per diluted share. Excluding these costs results in adjusted diluted earnings per share guidance of 37 cents to 39 cents, an increase of 6% to 11% compared to 35 cents per diluted share in the first quarter 2006.
Outlook for Fiscal 2007
Fromm concluded, “We are well positioned as we begin fiscal 2007. The majority of our brands and retail concepts are performing well, we have initiatives in place to improve our Brown New York brands, and we are well underway on our earnings enhancement plan. Our priorities are to deliver great product through innovation and differentiation and begin transforming our brand marketing, while capitalizing on the strength of our Famous Footwear chain. Our goals are focused on building preeminent footwear brands and we expect fiscal 2007 to be another year of significant accomplishments toward reaching this objective for Brown Shoe Company.”
BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Thousands, except per share data) Fourteen Thirteen Fifty-Three Fifty-Two Weeks Ended Weeks Ended Weeks Ended Weeks Ended February 3, January 28, February 3, January 28, 2007 2006 2007 2006 Net Sales $639,261 $599,618 $2,470,930 $2,292,057 Cost of Goods Sold 385,369 367,019 1,500,037 1,393,753 Gross Profit 253,892 232,599 970,893 898,304 - % of Sales 39.7% 38.8% 39.3% 39.2% Selling & Administrative Expenses 232,641 209,205 862,766 809,673 - % of Sales 36.4% 34.9% 34.9% 35.3% Operating Earnings 21,251 23,394 108,127 88,631 - % of Sales 3.3% 3.9% 4.4% 3.9% Interest Expense, Net 2,895 4,538 14,700 17,484 Earnings Before Income Taxes 18,356 18,856 93,427 71,147 Income Tax Provision (4,777) (5,490) (27,719) (30,147) NET EARNINGS $ 13,579 $ 13,366 $65,708 $41,000 Basic Net Earnings per Common Share $0.48 $0.49 $2.33 $1.50 Diluted Net Earnings per Common Share $0.46 $0.47 $2.26 $1.45 Basic Number of Shares 28,418 27,387 28,150 27,260 Diluted Number of Shares 29,497 28,631 29,093 28,350