ST. LOUIS, Nov. 28 /PRNewswire-FirstCall/ -- Brown Shoe Company, Inc. reported results for the third quarter of fiscal 2007 ended November 3, 2007.
Third Quarter Highlights: -- Net earnings of $27.0 million or $0.61 per diluted share on a GAAP basis; -- Adjusted earnings per share total $0.67, which excludes $0.06 per share in Earnings Enhancement Plan costs. See Schedule 4 attached for a reconciliation to GAAP net earnings and the discussion of "Non-GAAP Financial Measures" below; -- Consolidated operating earnings increase 1.8 percent to $42.8 million and operating profit margins increase by 40 basis points to 6.6 percent of sales.
Consolidated net sales were $645.5 million, a decrease of 4.6 percent compared to $676.8 million in the third quarter of fiscal 2006. Net earnings were $27.0 million or $0.61 per diluted share versus net earnings of $26.9 million or $0.62 per diluted share in the prior-year period. Third quarter fiscal 2007 earnings include charges related to the Company's Earnings Enhancement Plan of $0.06 per diluted share. Third quarter fiscal 2006 earnings included a charge of $0.03 per diluted share related to the exit of the Bass business. On an adjusted basis, net earnings increased 5.5 percent to $29.9 million or $0.67 per diluted share compared to net earnings of $28.3 million or $0.65 per diluted share for the 13 weeks ended October 28, 2006. See Schedule 4 attached for a reconciliation to GAAP net earnings and the discussion of "Non-GAAP Financial Measures" below.
Consolidated gross margins during the third quarter increased 40 basis points to 40.3 percent of sales from 39.9 percent of sales in the year-ago period, driven by a greater mix of retail sales and improved margins at its Wholesale division. Expenses during the quarter decreased by 4.8 percent to $217.0 million or 10 basis points to 33.6 percent of sales versus $227.9 million or 33.7 percent in the third quarter 2006, driven by lower incentive and stock-based compensation costs and savings from the Company's Earnings Enhancement Plan, net of implementation costs. Operating earnings increased 1.8 percent to $42.8 million, or 6.6 percent of sales, from $42.0 million or 6.2 percent of sales.
Same-store sales at Famous Footwear declined by 6.2 percent (or a decrease of 2.6 percent on a comparable calendar) on top of last year's very strong 8.2 percent increase. The sales trend in the first half of the quarter was significantly better generating a same-store sales decline of 4.1 percent (or an increase of 1.2 percent on a comparable calendar) than the back-half of the quarter, when same-store sales declined 9.7 percent (or a decrease of 8.8 percent 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 Retail Division
Total sales at Famous Footwear declined 1.4 percent to $361.0 million compared to $366.3 million for the third quarter last year. Operating earnings decreased 22.2 percent to $30.8 million or 8.5 percent of sales compared to $39.6 million or 10.8 percent 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 percent increase over last year's $68.2 million. Same-store sales declined 1.9 percent while sales at Shoes.com grew by 29.5 percent. 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 percent 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 percent in the quarter to $23.1 million or 10.8 percent of sales versus $20.0 million or 8.3 percent 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 percent, compared to 25.4 percent 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 $0.06 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 $0.25 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 percent 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 $0.36 to $0.41 as compared to $0.31 per diluted share in the previous year. This guidance range includes estimated charges and implementation costs of the Company's Earnings Enhancement Plan of $0.03 in the fourth quarter of 2007. In the fourth quarter of 2006, the Company incurred charges of $0.16 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 $0.39 to $0.44 compared to $0.47 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 percent. See Schedule 5 attached for a reconciliation to GAAP net earnings.
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, as well as information regarding components of its reportable operating segments, 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 2007 results will be held this morning at 9:00 a.m. EDT. 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 to be hosted at http://www.brownshoe.com/investor or http://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) the preliminary nature of estimates of the costs and benefits of the Earnings Enhancement Plan, which are subject to change as the Company refines these estimates over time; (ii) intense competition within the footwear industry; (iii) rapidly changing consumer demands and fashion trends and purchasing patterns, which may be influenced by consumers' disposable income, which in turn can be influenced by general economic conditions; (iv) customer concentration and increased consolidation in the retail industry; (v) the Company's ability to successfully implement its Earnings Enhancement Plan; (vi) 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; (vii) the Company's ability to attract and retain licensors and protect its intellectual property; (viii) the Company's ability to secure leases on favorable terms; (ix) the Company's ability to maintain relationships with current suppliers; (x) the uncertainties of pending litigation; and (xi) the Company's ability to successfully execute its international growth strategy. 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 for the year ended February 3, 2007, which information is incorporated by reference herein. 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
Brown Shoe is a $2.4 billion footwear company with global operations. Brown Shoe's Retail division operates Famous Footwear, the 1,000-store chain that sells brand name shoes for the family, approximately 300 specialty retail stores in the U.S. and Canada under the Naturalizer, FX LaSalle, and Franco Sarto names, and Shoes.com, the Company's e-commerce subsidiary. Brown Shoe, through its Wholesale divisions, owns and markets leading footwear brands including Naturalizer, LifeStride, Via Spiga, Nickels Soft, Connie and Buster Brown; it also markets licensed brands including Franco Sarto, Dr. Scholl's, Etienne Aigner, and Carlos by Carlos Santana and Barbie, Disney and Nickelodeon character footwear for children. Brown Shoe press releases are available on the Company's website at http://www.brownshoe.com/.
SCHEDULE 1 BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Thousands) November 3, October 28, 2007 2006 ASSETS Cash and cash equivalents $79,932 $47,512 Receivables 96,800 127,010 Inventories 440,892 433,927 Prepaid expenses and other current assets 29,407 17,863 Total current assets 647,031 626,312 Property and equipment, net 145,800 126,415 Investment in nonconsolidated affiliate 7,066 - Other assets 320,474 302,798 $1,120,371 $1,055,525 LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings under revolving credit agreement $- $20,500 Trade accounts payable 165,231 153,307 Accrued expenses 115,063 139,263 Income taxes 5,134 5,222 Total current liabilities 285,428 318,292 Long-term debt 150,000 150,000 Deferred rent 39,640 36,150 Other liabilities 52,358 51,298 Minority interests 734 (8) Shareholders' equity 592,211 499,793 $1,120,371 $1,055,525 SCHEDULE 2 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 SCHEDULE 3 BROWN SHOE COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands) Thirty-nine Weeks Ended November 3, October 28, 2007 2006 OPERATING ACTIVITIES: Net earnings $46,475 $52,129 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 31,794 30,954 Share-based compensation expense 7,517 7,270 Loss on disposal or impairment of facilities and equipment 2,283 2,053 Provision for doubtful accounts 19 709 Foreign currency transaction (gains) losses (119) 142 Undistributed loss of non-consolidated affiliate 14 - Changes in operating assets and liabilities: Receivables 35,405 30,746 Inventories (20,372) (19,632) Prepaid expenses and other current assets 3,170 719 Trade accounts payable (20,536) (19,776) Accrued expenses (31,257) 7,854 Income taxes 3,705 1,394 Deferred rent 1,615 (69) Deferred income taxes (913) 732 Other, net 3,927 (47) Net cash provided by operating activities 62,727 95,178 INVESTING ACTIVITIES: Capital expenditures (34,356) (37,507) Acquisition cost (2,750) (22,700) Cash recognized on initial consolidation of joint venture 980 - Investment in nonconsolidated affiliate (7,080) - Net cash used by investing activities (43,206) (60,207) FINANCING ACTIVITIES: Decrease in borrowings under revolving credit agreement (1,000) (29,500) Proceeds from stock options exercised 8,962 7,874 Tax benefit related to share-based plans 5,802 6,568 Dividends paid (9,341) (6,842) Net cash provided (used) by financing activities 4,423 (21,900) Effect of exchange rate changes on cash 2,327 153 Increase in cash and cash equivalents 26,271 13,224 Cash and cash equivalents at beginning of period 53,661 34,288 Cash and cash equivalents at end of period $79,932 $47,512 SCHEDULE 4 BROWN SHOE COMPANY, INC. Reconciliation of Net Earnings (GAAP Basis) to Adjusted Net Earnings (Non-GAAP)
The following is a reconciliation of the Company's third quarter earnings from GAAP-reported Net Earnings to Adjusted Net Earnings:
(Thousands, except per share data) 3rd Quarter 2007 3rd Quarter 2006 Net Diluted Net Diluted Earnings EPS Earnings EPS GAAP Earnings $27,009 $0.61 $26,907 $0.62 Charges / Other Items: Earnings Enhancement Plan Costs 2,860 0.06 - - Costs Related to Withdrawal from Bass License - - 1,400 0.03 Total Charges / Items 2,860 0.06 1,400 0.03 Adjusted Net Earnings $29,869 $0.67 $28,307 $0.65
The following is a reconciliation of the Company's nine months earnings from GAAP-reported Net Earnings to Adjusted Net Earnings:
(Thousands, except per share data) Nine Months 2007 Nine Months 2006 Net Diluted Net Diluted Earnings EPS Earnings EPS GAAP Earnings $46,475 $1.04 $52,129 $1.20 Charges / Other Items: Earnings Enhancement Plan Costs 9,774 0.22 1,231 0.03 Insurance Recoveries, Net - - (4,432) (0.10) Costs Related to Withdrawal from Bass License - - 1,400 0.03 Total Charges / Items 9,774 0.22 (1,801) (0.04) Adjusted Net Earnings $56,249 $1.26 $50,328 $1.16 SCHEDULE 5 BROWN SHOE COMPANY, INC. Reconciliation of EPS Guidance (GAAP Basis) to Adjusted Net Earnings Guidance (Non-GAAP)
The following is a reconciliation of the Company's fourth quarter and full-year earnings per share guidance on a GAAP basis (reported and estimated) to Adjusted Net Earnings (Non-GAAP):
4th Quarter 2007 4th Quarter Fiscal 2007 Guidance 2006 Guidance Diluted Diluted Diluted Diluted Diluted Fiscal 2006 EPS EPS EPS EPS EPS Diluted (low) (high) (low) (high) EPS GAAP Earnings $0.36 $0.41 $0.31 $1.40 $1.45 $1.51 Charges / Other Items: Earnings Enhancement Plan Costs 0.03 0.03 0.06 0.25 0.25 0.09 Environmental Insurance Recoveries and Charges - - 0.08 - - (0.02) Costs Related to Withdrawal from Bass License - - 0.02 - - 0.05 Total Charges / Items 0.03 0.03 0.16 0.25 0.25 0.12 Adjusted Net Earnings per Share $0.39 $0.44 $0.47 $1.65 $1.70 $1.63
