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Brown Shoe Reports First Quarter 2011 Earnings

05/25/2011

Net sales of $624.6 million increased 4.5% year-over-year
GAAP net earnings per diluted share of $0.08
Adjusted net earnings per diluted share of $0.16

Brown Shoe Company, Inc. (NYSE: BWS), (http://www.brownshoe.com/) today reported its first quarter 2011 financial results, with net sales of $624.6 million, an increase of 4.5% compared to first quarter 2010 net sales of $597.7 million.

Net earnings were $3.7 million, or $0.08 per diluted share, compared to net earnings of $10.0 million, or $0.23 per diluted share, in the first quarter of 2010. On an adjusted* basis, net earnings were $7.0 million, or $0.16 per diluted share, compared to net earnings of $11.2 million, or $0.26 per diluted share in the first quarter of 2010. Gross profit margin in the first quarter of 2011 was 40.0% versus 41.4% in the first quarter of 2010.

"As expected, we saw revenue improvement in the first quarter, although our overall results were mixed. Despite tough year-over-year comparisons, we were able to grow our gross profit margin at Famous Footwear and experienced revenue growth in our Wholesale Operations," said Diane Sullivan, president and chief operating officer of Brown Shoe. "I continue to feel good about our overall strategy, and the entire company is looking forward to heading into the back-to-school selling season and to meeting our consumers' needs and driving market share in our target areas of healthy living, contemporary fashion and family."

               
US$ in millions, except per share data (unaudited)     13 Weeks Ended       52 Weeks Ended
    4/30/11     5/1/10     Change       4/30/11     5/1/10     Change
Famous Footwear     342.7     362.2     -5.4%       1,467.1     1,408.2     4.2%
Wholesale Operations     222.1     174.7     27.1%       801.8     637.7     25.7%
Specialty Retail     59.8     60.8     -1.7%       262.1     255.0     2.8%
Consolidated net sales     $624.6     $597.7     4.5%       $2,531.0     $2,300.9     10.0%
Gross profit     249.8     247.6     0.9%       1,005.8     942.5     6.7%
Margin     40.0%     41.4%     -140 bps       39.7%     41.0%     -130 bps
SG&A expenses     235.5     224.6     4.9%       934.0     871.5     7.2%
% of net sales     37.7%     37.5%     20 bps       36.9%     37.9%     -100 bps

Net restructuring, other special charges

    1.7     1.7     1.6%       7.9     11.0     -28.0%
Operating earnings     12.6     21.3     -41.0%       63.9     60.0     6.5%
% of net sales     2.0%     3.6%     -160 bps       2.5%     2.6%     -10 bps
Net interest expense     6.6     4.5     47.2%       21.5     19.2     12.3%
Earnings before income taxes     6.0     16.8     -64.5%       42.4     40.8     3.8%
Tax rate     39.1%     37.4%     170 bps       28.8%     31.3%     -250 bps
Net earnings     $3.7     $10.0     -63.3%       $30.9     $27.1     13.7%
Per share     $0.08     $0.23     -65.2%       $0.70     $0.63     11.1%
Adjusted per share     $0.16     $0.26     -38.5%       $0.86     $0.79     8.9%

Highlights

The improvement in net sales in the first quarter was primarily due to the acquisition of American Sporting Goods (ASG) on February 17, which accounted for 6.6% of consolidated net sales. This addition, along with an improvement in net sales for legacy Wholesale Operations, helped offset a decline in Famous Footwear first quarter net sales. Famous Footwear net sales performance in the first quarter of 2011 was second only to the first quarter of 2010, which represented its best first quarter performance in its 50 year history.

At Famous Footwear, same store sales decreased (3.9%) in the first quarter, compared to an increase of 15.5% in the prior year. Beginning in the first quarter of 2010, the company reevaluated and changed its promotion strategy, and this shift resulted in a gradual decline in BOGO days during 2010 and the elimination of BOGO days in the first quarter of 2011. During the quarter, the company closed 12 underperforming stores while adding 14 new stores. When compared to the prior first quarter, the total number of stores declined to 1,112 from 1,134.

While consolidated gross profit increased on a year-over-year basis, gross profit margin declined, due to mix shift in the first quarter. The mix of Retail and Wholesale Operations net sales was 64% to 36%, respectively, compared to 71% and 29% in the first quarter of 2010. In the first quarter, Famous Footwear gross profit margin was up 40 basis points year-over-year. Gross profit margins in the company's Retail businesses are traditionally higher than in Wholesale Operations.

First quarter 2011 GAAP earnings per diluted share of $0.08 included ($0.08) of ASG acquisition and integration costs and related inventory purchase accounting adjustments. Excluding these items, adjusted earnings were $0.16 per diluted share. For the first quarter of 2010, GAAP earnings per diluted share of $0.23 included ($0.03) of ERP systems implementation costs. Excluding these costs, adjusted earnings were $0.26 per diluted share.

At quarter-end, Brown Shoe had $212.8 million in availability under its revolving credit facility and $54.2 million in cash and cash equivalents. During the quarter, the company announced and priced its offering of $200 million in 71/8 % senior notes due 2019, and it is using a portion of the net proceeds to fund the purchase and retirement of its outstanding 8¾% senior notes due 2012.

Inventory at the end of the first quarter was $534.7 million, up 23.9% compared to $431.5 million in the first quarter of 2010. For the first quarter, Famous Footwear inventory was up 8.8%, while Wholesale Operations inventory was up 128.2%, with ASG making up approximately two-thirds of the Wholesale increase.

Full Year 2011 Guidance

"For 2011, we are maintaining our previous annual guidance, however, based on our first quarter results, we are currently expecting this to trend toward the lower end," said Mark Hood, chief financial officer for Brown Shoe. "As expected, we still foresee our annual improvement to come in the back half of the year, due to a strong first half in 2010 and costs related to the acquisition of ASG."

       
Consolidated net sales     Increase low-double digit range
Famous Footwear same-store sales     Increase low- to mid-single digit range
Wholesale Operations net sales     Increase low- to mid-single digit range for legacy brands
Gross profit margin     Flat, excluding inventory related purchase accounting
Net interest expense     $26 to $28 million
Effective tax rate     35.0% to 36.0%
Earnings per diluted share     $1.25 to $1.32
Depreciation and amortization     $60 to $62 million
Capital expenditures     $58 to $60 million

Investor Conference Call

Brown Shoe will webcast an investor conference call at 9:00 a.m. ET today, May 25, 2011. The webcast will be available at brownshoe.com/investor. A live conference call will be available at (877) 217-9089 for analysts in North America or (706) 679-1723 for international analysts by using the conference ID 67007476. A replay will be available on the website for a limited period. Investors may also access the replay by dialing (800) 642-1687 in North America or (706) 645-9291 internationally and using the conference ID 67007476 through June 8, 2011.

* Non-GAAP Financial Measures

In this press release, the Company's financial results are provided both in accordance with generally accepted accounting principles (GAAP) and using certain non-GAAP financial measures. In particular, the Company provides historic and estimated future net earnings and earnings per diluted share adjusted to exclude certain charges and recoveries, which are non-GAAP financial measures. These results are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help identify underlying trends in the Company's business and provide useful information to both management and investors by excluding certain items that may not be indicative of the Company's core operating results. These measures should not be considered a substitute for or superior to GAAP results.

Definitions

All references in this press release, outside of the condensed consolidated financial statements that follow, unless otherwise noted, related to net earnings attributable to Brown Shoe Company, Inc. and diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders, are presented as net earnings and earnings per diluted share, respectively.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This press release contains certain forward-looking statements and expectations regarding the Company's future performance and the future performance of its brands. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) potential disruption to Brown Shoe's business and operations as it integrates ASG into its business; (iii) potential disruption to Brown Shoe's business and operations as it implements its information technology initiatives; (iv) Brown Shoe's ability to utilize its new information technology system to successfully execute its strategies, including integrating ASG's business; (v) intense competition within the footwear industry; (vi) rapidly changing fashion trends and purchasing patterns; (vii) customer concentration and increased consolidation in the retail industry; (viii) political and economic conditions or other threats to the continued and uninterrupted flow of inventory from China, where ASG has manufacturing facilities and both ASG and Brown Shoe rely heavily on third-party manufacturing facilities for a significant amount of their inventory; (ix) the ability to recruit and retain senior management and other key associates; (x) the ability to attract and retain licensors and protect intellectual property rights; (xi) the ability to secure/exit leases on favorable terms; (xii) the ability to maintain relationships with current suppliers; (xiii) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (xiv) the ability to source product at a pace consistent with increased demand for footwear; and (xv) the impact of rising prices in a potentially inflationary global environment. The Company's reports to the Securities and Exchange Commission contain detailed information relating to such factors, including, without limitation, the information under the caption Risk Factors in Item 1A of the Company's Annual Report on Form 10-K for the year ended January 29, 2011, which information is incorporated by reference herein and updated by the Company's Quarterly Reports on Form 10-Q. The Company does not undertake any obligation or plan to update these forward-looking statements, even though its situation may change.

About Brown Shoe Company, Inc.

Brown Shoe is a $2.7 billion global footwear company. Brown Shoe's Retail division operates Famous Footwear, a leading family branded footwear destination with over 1,100 stores nationwide and e-commerce site FamousFootwear.com, approximately 250 specialty retail stores in the U.S., Canada, and China primarily under the Naturalizer brand name, and footwear e-tailer shoes.com. Through its wholesale divisions, Brown Shoe designs and markets leading fashion and athletic footwear brands including Naturalizer, Dr. Scholl's, LifeStride, Sam Edelman, Franco Sarto, Via Spiga, Etienne Aigner, Vera Wang Lavender, Avia, rykä, AND 1, and Buster Brown. Brown Shoe press releases are available on the Company's website at http://www.brownshoe.com/.

               
SCHEDULE 1
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
13 Weeks Ended     52 Weeks Ended
(Thousands, except per share data)   April 30, 2011     May 1, 2010     April 30, 2011     May 1, 2010
Net sales $ 624,620 $ 597,718 $ 2,530,993 $ 2,300,946
Cost of goods sold     374,820         350,158         1,525,199         1,358,411  
Gross profit     249,800         247,560         1,005,794         942,535  
Selling and administrative expenses 235,468 224,515 933,929 871,491
Restructuring and other special charges, net     1,744         1,717         7,941         11,026  
Operating earnings     12,588         21,328         63,924         60,018  
Interest expense (6,698 ) (4,512 ) (21,833 ) (19,458 )
Interest income     85         18         270         249  
Earnings before income taxes     5,975         16,834         42,361         40,809  
Income tax provision     (2,334 )       (6,299 )       (12,195 )       (12,760 )
Net earnings   $ 3,641       $ 10,535       $ 30,166       $ 28,049  
Less: Net (loss) earnings attributable to
noncontrolling interests     (47 )       489         (709 )       900  
Net earnings attributable to Brown
Shoe Company, Inc.   $ 3,688       $ 10,046       $ 30,875       $ 27,149  
Basic earnings per common share
attributable to Brown Shoe Company, Inc. shareholders   $ 0.08       $ 0.23       $ 0.70       $ 0.63  
Diluted earnings per common share
attributable to Brown Shoe Company, Inc. shareholders   $ 0.08       $ 0.23       $ 0.70       $ 0.63  
Basic number of shares 42,475 41,755 42,336 41,632
Diluted number of shares 43,006 41,987 42,699 41,800
               
SCHEDULE 2
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands) April 30, 2011       May 1, 2010       January 29, 2011
ASSETS
Cash and cash equivalents $ 54,229 $ 59,465 $ 126,548
Receivables 144,484 87,296 113,937
Inventories 534,725 431,488 524,250
Prepaid expenses and other current assets   57,468         47,444         43,546
Total current assets   790,906         625,693         808,281
Other assets 135,103 116,075 133,538
Goodwill and intangible assets, net 173,162 75,535 70,592
Property and equipment, net   141,398         137,063         135,632
Total assets $ 1,240,569       $ 954,366       $ 1,148,043
LIABILITIES AND EQUITY
Borrowings under revolving credit agreement $ 288,000 $ - $ 198,000
Trade accounts payable 171,386 190,263 167,190
Other accrued expenses   132,806         128,020         146,715
Total current liabilities   592,192         318,283         511,905
Long-term debt 150,000 150,000 150,000
Deferred rent 34,127 37,982 34,678
Other liabilities   44,438         27,854         35,551
Total other liabilities   228,565         215,836         220,229
Total Brown Shoe Company, Inc. shareholders' equity 419,022 410,702 415,080
Noncontrolling interests   790         9,545         829
Total equity   419,812         420,247         415,909
Total liabilities and equity $ 1,240,569       $ 954,366       $ 1,148,043
         
SCHEDULE 3
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 Weeks Ended
(Thousands) April 30, 2011       May 1, 2010
OPERATING ACTIVITIES:
Net earnings $ 3,641 $ 10,535
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 8,921 8,087
Amortization of capitalized software 3,327 2,497
Amortization of intangibles 2,066 1,691
Amortization of debt issuance costs 599 549
Share-based compensation expense 1,663 1,406
Tax deficiency related to share-based plans 431 237
Loss on disposal of facilities and equipment 308 490
Impairment charges for facilities and equipment 543 1,193
Deferred rent (551 ) (887 )
Provision for doubtful accounts 335 26
Foreign currency transaction gains (2 ) (211 )
Changes in operating assets and liabilities, net of acquired businesses:
Receivables (9,628 ) (3,011 )
Inventories 39,362 25,624
Prepaid expenses and other current and noncurrent assets 268 (5,323 )
Trade accounts payable (9,155 ) 12,410
Accrued expenses and other liabilities (37,348 ) (12,145 )
Other, net   (1,123 )         (1,034 )
Net cash provided by operating activities   3,657           42,134  
INVESTING ACTIVITIES:
Purchases of property and equipment (7,067 ) (5,136 )
Capitalized software (2,640 ) (6,202 )
Acquisition cost (156,636 ) -
Cash recognized on initial consolidation   3,121           -  
Net cash used for investing activities   (163,222 )         (11,338 )
FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 759,500 111,000
Repayments under revolving credit agreement (669,500 ) (205,500 )
Dividends paid (3,104 ) (3,040 )
Debt issuance costs (1,234 ) -
Proceeds from stock options exercised 484 214
Tax deficiency related to share-based plans   (431 )         (237 )
Net cash provided by (used for) financing activities   85,715           (97,563 )
Effect of exchange rate changes on cash and cash equivalents   1,531           399  
Decrease in cash and cash equivalents (72,319 ) (66,368 )
Cash and cash equivalents at beginning of period   126,548           125,833  
Cash and cash equivalents at end of period $ 54,229         $ 59,465  
 
SCHEDULE 4
BROWN SHOE COMPANY, INC.
Reconciliation of Operating Earnings, Net Earnings and Diluted Earnings Per Share (GAAP Basis) to Adjusted Operating Earnings, Net Earnings and Diluted Earnings Per Share (Non-GAAP Basis)
      13 Weeks Ended April 30, 2011     13 Weeks Ended May 1, 2010
(Thousands, except per share data) Operating

Earnings

    Net Earnings

Attributable

to Brown

Shoe

Company,

Inc.

    Diluted

Earnings Per

Share

    Operating

Earnings

    Net Earnings

Attributable

to Brown

Shoe

Company,

Inc.

    Diluted

Earnings Per

Share

GAAP earnings $ 12,588     $ 3,688     $ 0.08     $ 21,328     $ 10,046     $ 0.23
Charges / Other Items:
ASG cost of goods sold adjustment(1) 2,711 1,604 0.04 - - -
Acquisition-related costs(2) 1,743 1,667 0.04 - - -
IT initiatives - - - 1,717 1,185 0.03
Total charges / other items   4,454       3,271       0.08       1,717         1,185         0.03  
Adjusted earnings $ 17,042     $ 6,959     $ 0.16     $ 23,045       $ 11,231       $ 0.26  
52 Weeks Ended April 30, 2011     52 Weeks Ended May 1, 2010
(Thousands, except per share data) Operating Earnings     Net Earnings

Attributable

to Brown

Shoe

Company,

Inc.

    Diluted

Earnings Per

Share

    Operating

Earnings

    Net Earnings

Attributable

to Brown

Shoe

Company,

Inc.

    Diluted

Earnings Per

Share

GAAP earnings $ 63,924 $ 30,875 $ 0.70 $ 60,018 $ 27,149 $ 0.63
Charges / Other Items:
ASG cost of goods sold adjustment(1) 2,711 1,604 0.04 - - -
Acquisition-related costs(2) 2,862 2,391 0.05 - - -
IT initiatives 5,078 3,351 0.07 8,266 5,274 0.12
Organizational changes - - - 4,624 2,825 0.07
Headquarters consolidation - - - (1,864 ) (1,139 ) (0.03 )
Total charges / other items   10,651       7,346       0.16       11,026         6,960         0.16  
Adjusted earnings $ 74,575     $ 38,221     $ 0.86     $ 71,044       $ 34,109       $ 0.79  
1) In accordance with GAAP, purchase accounting rules require the company to record inventory at fair value (i.e. expected selling price less costs to sell) on the acquisition date. This results in lower than typical gross margins when the acquired inventory is sold. This adjustment reflects the elimination of the unfavorable impact of lower gross margins for ASG product sold in the first quarter of 2011.
(2) A significant portion of the acquisition related expenses incurred in the first quarter of 2011 are not tax-deductible and therefore do not have a tax benefit allocated to those costs. In addition, certain acquisition costs recognized by the company in the fourth quarter of 2010 have, upon consummation of the ASG acquisition in the first quarter of 2011, become non-deductible. Therefore, the acquisition related costs line also reflects a $0.2 million increase in tax expense related to certain acquisition costs incurred during 2010.
             
SCHEDULE 5
 
BROWN SHOE COMPANY, INC.
OPERATING RESULTS BY MAJOR SEGMENT
Famous Footwear   Wholesale Operations   Specialty Retail
($ millions) 13 Weeks Ended   13 Weeks Ended   13 Weeks Ended
April 30, May 1, April 30, May 1, April 30, May 1,
2011   2010   2011   2010   2011   2010
Net Sales $ 342.7 $ 362.2 $ 222.1 $ 174.7 $ 59.8 $ 60.8
Gross Profit $ 156.6 $ 164.2 $ 67.8 $ 56.7 $ 25.4 $ 26.7
Gross Profit Rate 45.7 % 45.3 % 30.5 % 32.4 % 42.5 % 44.0 %
Operating Earnings (Loss) $ 18.8 $ 28.2 $ 6.5 $ 8.7 $ (3.7 ) $ (2.9 )
Operating Earnings (Loss) % 5.5 % 7.8 % 2.9 % 5.0 % -6.3 % -4.8 %
Same-store Sales % -3.9 % 15.5 % - - -1.0 % 16.2 %
Number of Stores       1,112       1,134       -       -         252       269  
Famous Footwear   Wholesale Operations   Specialty Retail
52 Weeks Ended   52 Weeks Ended   52 Weeks Ended
April 30, May 1, April 30, May 1, April 30, May 1,
($ millions) 2011   2010   2011   2010   2011   2010
Net Sales $ 1,467.1 $ 1,408.2 $ 801.8 $ 637.7 $ 262.1 $ 255.0
Gross Profit $ 661.5 $ 620.6 $ 233.2 $ 213.0 $ 111.1 $ 108.9
Gross Profit Rate 45.1 % 44.1 % 29.1 % 33.4 % 42.4 % 42.7 %
Operating Earnings (Loss) $ 81.0 $ 69.8 $ 30.1 $ 43.9 $ (6.8 ) $ (10.9 )
Operating Earnings (Loss) % 5.5 % 5.0 % 3.8 % 6.9 % -2.6 % -4.3 %
Same-store Sales %       5.7 %     5.4 %     -       -         2.8 %     5.8 %

Contact:

Brown Shoe Company, Inc.
Investors:
Peggy Reilly Tharp, 314-854-4134
ptharp@brownshoe.com
or
Media:
Erin Conroy, 718-913-0960
econroy@brownshoe.com

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