News Details

Brown Shoe Company, Inc. (NYSE: BWS) (www.brownshoe.com) today reported financial results for the 13-week period ended October 30, 2010. Net sales for the third quarter increased 14.5 percent from the third quarter of 2009 to a record $716.1 million. Net earnings attributable to Brown Shoe Company, Inc. (hereafter "net earnings") were $18.6 million, or $0.42 per diluted share, compared to net earnings of $16.3 million, or $0.38 per diluted share, 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 $0.45 per diluted share, compared to net earnings of $17.7 million, or $0.42 per diluted share in the third quarter of 2009. See Schedule 4 attached for a reconciliation to net earnings on a GAAP basis and the discussion of "Non-GAAP Financial Measures."

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 percent 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

In the third quarter of 2010, consolidated net sales were $716.1 million versus $625.6 million in the year-ago period, a 14.5 percent increase. The sales increase reflects continued strong momentum across the Company's retail, wholesale, and ecommerce businesses.

• Famous Footwear net sales increased 8.3 percent 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 percent same-store sales increase, with positive performances across all categories, channels, and geographies;
• Net sales in the Wholesale division rose 33.7 percent 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 percent same-store sales increase for the segment; and
• The increase in retail sales in the third quarter was supported by a 14.1 percent increase in Company-wide ecommerce net sales.

Gross Profit

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

• Wholesale gross profit rate decreased to 28.6 percent of net sales in the quarter from 34.0 percent in the year-ago period, which reflects:
  • 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
  • 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 thanthe retail division, represented32 percent of consolidated net sales in the quarter versus 27 percent in the previous year;
• The gross profit rate at Famous Footwear increased by 30 basis points to 44.3 percent of net sales. The higher gross profit rate reflects improved sell-through across categories and 19 percent 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 percent of net sales, selling and administrative expenses were 34.5 percent, 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 percent of net sales, compared to operating earnings of $34.3 million, or 5.5 percent 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 percent compared to 42.1 percent in the third quarter of 2009.

Net Earnings

Net earnings were $18.6 million, or $0.42 per diluted share, versus net earnings of $16.3 million, or $0.38 per diluted share, in the year-ago quarter. The third quarter of 2010 included an after-tax charge of $1.2 million, or $0.03 per diluted share, and the third quarter of 2009 included an after-tax charge of $1.4 million, or $0.04 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 percent, including a 15.4 percent increase in inventory at Famous Footwear. Average units per store at Famous Footwear increased 12.4 percent 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 percent of net sales are expected to be in the range of 36.8 to 37.2 percent 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 percent 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.

Definitions

Consistent with guidance issued by the FASB on noncontrolling interests in consolidated financial statements, 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.

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.

Conference Call

A conference call to discuss third quarter 2010 results will be held today at 9:00 a.m. ET. While participation in the question-and-answer session of the call will be limited to institutional analysts and investors, retail brokers and individual investors are invited to attend via a live web-cast at www.brownshoe.com/investor or www.earnings.com (at the website, type in the BWS ticker symbol to locate the broadcast).

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 include (i) changing consumer demands, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (ii) the timing and uncertainty of activities and costs related to the Company's information technology initiatives, including software implementation and business transformation; (iii) potential disruption to the Company's business and operations as it implements its information technology initiatives; (iv) the Company's ability to utilize its new information technology system to successfully execute its strategies; (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 continued and uninterrupted flow of inventory from China and Brazil, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (ix) the Company's ability to attract and retain licensors and protect its intellectual property; (x) the Company's ability to secure/exit leases on favorable terms; (xi) the Company's ability to maintain relationships with current suppliers; (xii) compliance with applicable laws and standards with respect to lead content in paint and other product safety issues; (xiii) the Company's ability to successfully execute its international growth strategy; (xiv) the Company's 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 30, 2010, 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 $2.5 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 260 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 footwear brands including Naturalizer, Dr. Scholl's, Franco Sarto, LifeStride, Etienne Aigner, Sam Edelman, Via Spiga, Vera Wang Lavender and Buster Brown. Brown Shoe press releases are available on the Company's website at www.brownshoe.com.