Brown Shoe Company Inc. reported that consolidated net sales decreased 4.6% for the third quarter to $645.5 million from $676.8 million for the same period last year. Net earnings were $27.0 million or 61 cents per diluted share versus net earnings of $26.9 million or 62 cents per diluted share in the prior-year period. Third quarter fiscal 2007 earnings include charges related to the company's Earnings Enhancement Plan of 6 cents per diluted share. Third quarter fiscal 2006 earnings included a charge of 3 cents per diluted share related to the exit of the Bass business. On an adjusted basis, net earnings increased 5.5% to $29.9 million or 67 cents per diluted share compared to net earnings of $28.3 million or 65 cents per diluted share for the 13 weeks ended October 28, 2006.
Same-store sales at Famous Footwear declined by 6.2% (or a decrease of 2.6% on a comparable calendar) after last year's 8.2% increase. The sales trend in the first half of the quarter was significantly better generating a same-store sales decline of 4.1% (or an increase of 1.2% on a comparable calendar) than the back-half of the quarter, when same-store sales declined 9.7% (or a decrease of 8.8% on a comparable calendar).
Ron Fromm, Brown Shoe's chairman and CEO, stated, “This was a difficult quarter with results at Famous Footwear significantly impacting our results. Nonetheless, we are pleased at how our team managed the business in this tough environment, increasing consolidated operating margins by 40 basis points. Moreover, on an adjusted basis, excluding Earnings Enhancement Plan costs in 2007 and Bass exit costs in 2006, third quarter operating margins increased 80 basis points. While operating margins at Famous Footwear decreased due to expense de-leveraging on lower sales and lower gross margins, Wholesale operating earnings increased by 15.6 percent on $28.6 million less in sales, driven by an increase in gross margins of 110 basis points and the non-recurrence of Bass exit costs. Our focus on inventory management is evident in our inventory position at quarter-end, as our Wholesale division inventory was down 24 percent versus the third quarter last year and Famous Footwear was down 2.2 percent on a per store basis with inventory freshness in line with our expectations. Importantly, we have continued to make progress implementing the initiatives included in our Earnings Enhancement Plan and our growth initiatives overseas, which we believe will assist us in reaching our goal of doubling our revenues and doubling our rate of profitability over the next five years.”
Segment Highlights
Total sales at Famous Footwear declined 1.4% to $361.0 million compared to $366.3 million for the third quarter last year. Operating earnings decreased 22.2% to $30.8 million or 8.5% of sales compared to $39.6 million or 10.8% of sales in the year-ago period. Famous Footwear opened 51 new stores and closed 15 during the quarter, resulting in 1,060 stores open at the end of the quarter compared to 979 during the year-ago period.
The Specialty Retail segment, which primarily consists of Naturalizer stores and the Shoes.com e-commerce business, reported sales in the quarter of $70.8 million, a 3.8% increase over last year's $68.2 million. Same-store sales declined 1.9% while sales at Shoes.com grew by 29.5%. The segment's operating loss was $1.9 million compared to operating income of $1.0 million in the year earlier period. The loss in the quarter includes $2.8 million of Earnings Enhancement Plan costs primarily related to the relocation of the Shoes.com administrative office from Los Angeles to St. Louis. During the quarter, the division opened two stores and closed three, resulting in 278 stores open at the end of the quarter, compared to 298 at the end of the year-ago period.
Wholesale Division
Wholesale sales declined 11.8% in the quarter to $213.7 million compared to $242.3 million in the previous year, driven primarily by a reduction in private label business, the exit of the Bass license, and fewer re-orders from retail partners due to the difficult retail environment. The company had strong performances from the Dr. Scholl's, Etienne Aigner, and Franco Sarto brands during the quarter. While the company restructures its Wholesale business, it continues to improve the division's operating efficiency. Gross margins increased by 110 basis points in the quarter, as the company continues to shift resources to higher-margin branded businesses. Operating earnings increased 15.6% in the quarter to $23.1 million or 10.8% of sales versus $20.0 million or 8.3% of sales in the year-ago period, which included $2.3 million of costs associated with the exit of the Bass license.
Balance Sheet
Inventory at November 3, 2007 was $441 million, as compared to $434 million last year. The company's debt-to-capital ratio at the end of the quarter was 20.2%, compared to 25.4% at the same time last year.
Strategic Initiatives Update
Costs during the quarter related to the company's Earnings Enhancement Plan were better than expected, as the company incurred costs of $4.5 million on a pre-tax basis, or after-tax costs of $2.9 million or 6 cents per diluted share in the quarter, most of which were attributable to the relocation of the Shoes.com administrative offices from Los Angeles to St. Louis. 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 $11 million, while the company continues to expect to
realize after-tax benefits of $10 to $12 million;
-- In 2008, after-tax implementation costs are estimated to be
approximately $8 million and annual after-tax benefits upon completion
in late 2008 continue to be estimated to be $17 to $20 million.
Full-Year and Fourth Quarter 2007 Guidance
For fiscal 2007, the company now estimates that sales will range from $2.38 billion to $2.39 billion and expects net earnings per diluted share of $1.40 to $1.45. This guidance includes estimated costs related to the company's Earnings Enhancement Plan of 25 cents per diluted share. On an adjusted basis, net earnings per diluted share are now estimated to be $1.65 to $1.70. This estimate is predicated on a same-store-sales at Famous Footwear of flat to negative one percent for the full year. Wholesale division sales are expected to decline 14% to 15% in 2007. The company continues to expect that sales will grow in its Wholesale division in 2008 by mid-single digits, as it continues to execute its growth initiatives. Additionally, the company expects its effective tax rate to increase by approximately 300 basis points in fiscal 2007 compared to the previous year, primarily because of a reduced mix of lower tax rate foreign earnings.
For the fourth quarter of 2007, the company expects sales of $595 million to $605 million compared to $693.3 million in the year-ago period. As a result of the retail calendar, the year ago period included 14 weeks and the current year fourth quarter will include only 13 weeks. Net earnings per diluted share in the quarter are estimated to be 36 cents to 41 cents as compared to 31 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 3 cents in the fourth quarter of 2007. In the fourth quarter of 2006, the company incurred charges of 16 cents per diluted share related to its Earnings Enhancement Plan, the exiting of the Bass business, and costs related to environmental remediation activities at its Denver, CO property. On an adjusted basis, the company expects fourth quarter 2007 net earnings per diluted share of 39 cents to 44 cents compared to 47 cents per diluted share in the same period a year ago. Fourth quarter guidance is predicated on a same-store sales range at Famous Footwear of flat to negative two percent. Fourth quarter Wholesale sales are expected to decline 16% to 17%.
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share data)
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 3, October 28, November 3, October 28,
2007 2006 2007 2006
Net sales $645,546 $676,812 $1,788,465 $1,831,669
Cost of goods sold 385,705 406,828 1,067,827 1,114,668
Gross profit 259,841 269,984 720,638 717,001
- % of Net sales 40.3% 39.9% 40.3% 39.1%
Selling & administrative
expenses 217,021 227,941 642,484 630,194
- % of Net sales 33.6% 33.7% 35.9% 34.4%
Equity in net loss of
nonconsolidated
affiliate 14 - 14 -
Operating earnings 42,806 42,043 78,140 86,807
Interest expense, net (2,797) (3,660) (8,990) (11,805)
Earnings before income
taxes and minority
interests 40,009 38,383 69,150 75,002
Income tax provision (13,046) (11,449) (22,901) (22,942)
Minority interests in
net loss (earnings) of
consolidated subsidiaries 46 (27) 226 69
NET EARNINGS $27,009 $26,907 $46,475 $52,129
Basic earnings per
common share $0.62 $0.64 $1.07 $1.24
Diluted earnings per
common share $0.61 $0.62 $1.04 $1.20
Basic number of shares 43,688 42,344 43,494 42,081
Diluted number of shares 44,469 43,581 44,576 43,544
