Brown Shoe Company, Inc. reported sales for the third quarter increased 14.5% to $716.1 million. Earnings grew 14.1% to $18.6 million, or 42 cents a share, compared to earnings of $16.3 million, or 38 cents, in the third quarter of 2009. 

On an adjusted basis, excluding charges related to the company's information technology initiatives, net earnings were $19.8 million, or 45 cents per diluted share, compared to net earnings of $17.7 million, or 42 cents per diluted share in the third quarter of 2009.

Ron Fromm, Brown Shoe's chairman and chief executive officer, said, “Our record sales performance in the quarter was gratifying and reinforces that our targeted efforts to bring national brands and value to our core consumer are succeeding.  More important, earnings were ahead of expectations, even as our previously discussed investments in marketing and incentives moderated improvement in operating margins by 230 basis points.  Famous Footwear registered a record Back-to-School season, driven by broad-based gains across athletics, dress and casual styles.  Gross profit margin at Famous Footwear also improved, with less promotional activity on a year-over-year basis, proof that our customers continue to respond positively to our enhanced assortments.  Wholesale grew across all channels, posting the largest quarterly organic sales increase in at least a decade.  The investments we made in marketing and design are elevating demand for our brands and we expect this positive momentum to carry over into 2011.”

Fromm continued, “As we begin the fourth quarter, we continue to experience robust sales growth at Famous Footwear, where same-store sales are trending in the high single-digits, and momentum at Wholesale, driven by a 25% increase in backlog at quarter-end. Consequently, we expect to generate $1.00 to $1.05 in adjusted EPS this year, with further increases next year based on low to mid single-digit sales gains along with operating margin expansion, attributable in part to approximately $21 million in costs that are not expected to continue.  We are targeting diluted EPS for 2011 in the range of $1.31 to $1.43.”

Third Quarter 2010 Results:

Net Sales

    * Famous Footwear net sales increased 8.3% to $421.5 million, reflecting a record for both the quarter and Back-to-School season.  The sales results were driven by a 10.6% same-store sales increase, with positive performances across all categories, channels, and geographies;  
    * Net sales in the Wholesale division rose 33.7% to $227.1 million, with increases by nearly all brands and across all channels of distribution;
    * Net sales in the Specialty Retail division were $67.4 million, reflecting a 2.1% same-store sales increase for the segment; and
    * The increase in retail sales in the third quarter was supported by a 14.1% increase in company-wide ecommerce net sales.

Gross Profit

Gross profit increased by $23.3 million, or 9.0%, versus the year-ago period.  As a% of net sales, gross profit was 39.4% versus 41.4% last year reflecting several factors:

    * Wholesale gross profit rate decreased to 28.6% of net sales in the quarter from 34.0% in the year-ago period, which reflects:
          o Lower initial margins driven by channel mix, with comparatively stronger growth in the mid-tier and mass channels during the quarter, and changes in product mix, brand mix and somewhat higher product costs, as well as an increase in inventory markdowns; and
          o A challenging comparison with the year-ago period when gross profit rate increased by 390 basis points from the prior year due to favorable impact of channel and brand mix.
    * Additionally, the Wholesale division, which carries a lower gross margin rate than the retail division, represented 32% of consolidated net sales in the quarter versus 27% in the previous year;  
    * The gross profit rate at Famous Footwear increased by 30 basis points to 44.3% of net sales.  The higher gross profit rate reflects improved sell-through across categories and 19% fewer store BOGO days than in the year-ago period.

Selling and Administrative Expenses

Selling and administrative expenses increased to $247.1 million from $222.4 million in the year-ago period.  As a% of net sales, selling and administrative expenses were 34.5%, a decrease of 100 basis points, despite $16.8 million in incremental marketing and incentive compensation expenses during the quarter.  

Net Restructuring and Other Special Charges

Net restructuring and other special charges related to the company's information technology initiatives were $1.9 million and $2.2 million in the 2010 and 2009 third quarters, respectively.

Operating Earnings

Operating earnings were $33.3 million, or 4.6% of net sales, compared to operating earnings of $34.3 million, or 5.5% of net sales, in the third quarter of 2009.  

Net Interest and Tax

Net interest expense was $4.9 million, unchanged from a year ago.  The company's effective tax rate in the third quarter of 2010 was 34.9% compared to 42.1% in the third quarter of 2009.

Net Earnings

Net earnings were $18.6 million, or 42 cents per diluted share, versus net earnings of $16.3 million, or 38 cents per diluted share, in the year-ago quarter.  The third quarter of 2010 included an after-tax charge of $1.2 million, or 3 cents per diluted share, and the third quarter of 2009 included an after-tax charge of $1.4 million, or 4 cents per diluted share.  Charges in both quarters related to the company's information technology initiatives.

Balance Sheet

At quarter-end, the company had $256.3 million in availability under its revolving credit facility and had $29.7 million in cash and cash equivalents.  Inventory at quarter-end was $539.9 million versus $450.2 million in the year-ago period, increasing 19.9%, including a 15.4% increase in inventory at Famous Footwear.  Average units per store at Famous Footwear increased 12.4% versus the year-ago period.  The increase in inventory supports planned sales growth as well as shifts in inventory flow in the company's Famous Footwear and Wholesale businesses.  The acceleration of fourth quarter receipts into the third quarter was done in anticipation of launching the company's enterprise-wide software solution in November.    

Fourth Quarter and Full Year 2010 Targets

The company expects to generate earnings per diluted share of $0.90 to $0.95 for the full year 2010.  On an adjusted basis, excluding $0.10 of net restructuring and other special charges related to its information technology initiatives, the company expects to generate earnings per diluted share of $1.00 to $1.05.

Consolidated net sales for the fourth quarter are expected to increase in the high single- to low double-digit range, which includes an increase in same-store sales at Famous Footwear in the high single-digit range and an increase in Wholesale net sales in the high 'teens to low 20s range.  

Selling and administrative expenses as a% of net sales are expected to be in the range of 36.8 to 37.2% for the full year of 2010, which includes net restructuring and other special charges of $6.5 million to $7.0 million related to the company's information technology initiatives.  Also included in the full year expectation is a year-over-year increase in marketing expense of approximately $18 million and anomalous costs of approximately $21 million, related to incentive compensation, air freight, and other items.

Depreciation and amortization of capitalized software and intangible assets are expected to total $50.0 million to $50.5 million and net interest expense is expected to approximate $20.0 million to $20.5 million for the full year of 2010.  The company expects an effective tax rate of 34.8 to 35.2% for the full year of 2010 and purchases of property and equipment and capitalized software are targeted in the range of $58.0 million to $60.0 million for the full year of 2010.

Introducing Full Year 2011 Targets

The company introduces its full year 2011 earnings per diluted share target of $1.31 to $1.43 on a GAAP basis.  This range is predicated upon the following:

    * Consolidated net sales growth in the low to mid single-digit range;
    * Famous Footwear same-store sales growth in the low to mid single-digit range;
    * Wholesale net sales growth in the mid single-digit range; and
    * Included in this expectation is a normalized incentive compensation rate and the elimination of anomalous costs.

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)



Thirteen Weeks Ended


Thirty-nine Weeks Ended









(Thousands, except per share data)

October 30,

2010


October 31,
2009


October 30,
2010


October 31,
2009

















Net sales

$

716,093


$

625,635


$

1,899,567


$

1,675,996



Cost of goods sold


433,874



366,692



1,131,318



1,005,249

















Gross profit


282,219



258,943



768,249



670,747





39.4%



41.4%



40.4%



40.0%

















Selling and administrative expenses


247,089



222,384



696,052



641,721



Restructuring and other special charges, net


1,852



2,222



5,460



6,834

















Operating earnings


33,278



34,337



66,737



22,192





4.6%



5.5%



3.5%



1.3%<

About The Author

Thomas J. Ryan

Thomas J. Ryan Senior Business Editor | SGB Media tryan@sgbonline.com | 917.375.4699

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