UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to __________
____________
Commission file number 1-2191
____________
BROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 43-0197190
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
8300 Maryland Avenue
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
As of November 28, 1998, 18,070,778 shares of the registrant's common stock
were outstanding.
<PAGE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
(Unaudited)
------------------------
October 31, November 1, January 31,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 37,419 $ 25,496 $ 50,136
Receivables, net of allowances of
$9,850 at October 31, 1998,
$10,512 at November 1, 1997, and
$9,925 at January 31, 1998 67,287 85,598 77,355
Inventories, net of adjustment to
last-in, first-out cost of
$14,968 at October 31, 1998,
$16,984 at November 1, 1997, and
$15,617 at January 31, 1998 369,423 393,972 380,177
Other Current Assets 25,896 35,471 30,862
--------- --------- ---------
Total Current Assets 500,025 540,537 538,530
Property and Equipment 215,692 210,262 212,330
Less allowances for depreciation
and amortization (137,826) (126,701) (129,586)
--------- --------- ---------
77,866 83,561 82,744
Other Assets 76,821 72,795 73,714
--------- --------- ---------
$ 654,712 $ 696,893 $ 694,988
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable $ - $ 32,000 $ 54,000
Accounts Payable 121,447 124,007 118,907
Accrued Expenses 85,182 87,647 93,191
Income Taxes 15,638 16,794 11,995
Current Maturities of Long-Term Debt 25,000 2,000 -
--------- --------- ---------
Total Current Liabilities 247,267 262,448 278,093
Long-Term Debt and Capitalized
Lease Obligations 172,030 197,027 197,027
Other Liabilities 20,352 23,282 20,678
Shareholders' Equity
Common Stock 67,738 67,579 67,685
Additional Capital 46,961 46,755 47,036
Cumulative Translation Adjustment (9,548) (7,298) (8,427)
Unamortized Value of Restricted Stock (2,996) (4,601) (4,358)
Retained Earnings 112,908 111,701 97,254
--------- --------- ---------
215,063 214,136 199,190
--------- --------- ---------
$ 654,712 $ 696,893 $ 694,988
========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $411,976 $433,886 $1,197,903 $1,204,524
Cost of Goods Sold 248,222 278,056 724,823 756,625
-------- -------- ---------- ----------
Gross Profit 163,754 155,830 473,080 447,899
Selling and Administrative Expenses 136,887 146,871 419,785 419,624
Interest Expense 4,464 5,145 14,954 16,274
Other Expense 774 395 2,010 305
-------- -------- ---------- ----------
Earnings Before Income Taxes 21,629 3,419 36,331 11,696
Income Tax Provision 8,731 16,742 15,267 19,947
-------- -------- ---------- ----------
NET EARNINGS (LOSS) $ 12,898 $(13,323) $ 21,064 $ (8,251)
======== ======== ========== ==========
BASIC EARNINGS (LOSS)
PER COMMON SHARE $ .73 $ (.76) $ 1.19 $ (.47)
======== ======== ========== ==========
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .72 $ (.76) $ 1.18 $ (.47)
======== ======== ========== ==========
DIVIDENDS PER COMMON SHARE $ .10 $ .25 $ .30 $ .75
======== ======== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 59,131 $ 45,223
Investing Activities:
Capital expenditures (12,542) (15,311)
Other - 390
--------- ---------
Net Cash Used by Investing Activities (12,542) (14,921)
Financing Activities:
Decrease in short-term notes payable (54,000) (30,000)
Proceeds from issuance of common stock 109 29
Dividends paid (5,415) (13,521)
--------- ---------
Net Cash Used by Financing Activities (59,306) (43,492)
--------- ---------
Decrease in Cash and Cash Equivalents (12,717) (13,190)
Cash and Cash Equivalents at Beginning of Period 50,136 38,686
--------- ---------
Cash and Cash Equivalents at End of Period $ 37,419 $ 25,496
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
BROWN GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and reflect all adjustments
which management believes necessary (which include only normal recurring
accruals and the effect on LIFO inventory valuation of estimated annual
inflationary cost increases and year-end inventory levels) to present fairly
the results of operations. These statements, however, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flow in conformity with generally
accepted accounting principles.
The Company's business is subject to seasonal influences, and interim results
may not necessarily be indicative of results which may be expected for any
other interim period or for the year as a whole.
For further information refer to the consolidated financial statements and
footnotes included in the Company's Annual Report and Form 10-K for the period
ended January 31, 1998.
Note B - Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the periods ended October 31, 1998 and November 1, 1997
(000's, except per share data):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) -
Basic and Diluted $12,898 $(13,323) $21,064 $(8,251)
======= ======== ======= =======
Denominator:
Weighted average shares
outstanding-Basic 17,717 17,595 17,677 17,584
Effect of potentially
dilutive securities 191 - 247 -
Weighted average shares
outstanding-Diluted 17,908 17,595 17,924 17,584
------- -------- ------- -------
Basic earnings (loss)
per share $ .73 $ (.76) $ 1.19 $ (.47)
======= ======== ======= =======
Diluted earnings (loss)
per share $ .72 $ (.76) $ 1.18 $ (.47)
======= ======== ======= =======
</TABLE>
<PAGE>
Note C - Comprehensive Income
- -----------------------------
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which established standards for the reporting and display of Comprehensive
Income and its components. Comprehensive Income represents the change in
Shareholders' Equity during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity except
those resulting from investments by owners and distributions to owners.
The following table sets forth the reconciliation from Net Earnings (Loss) to
Comprehensive Income (Loss)(000's):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings (Loss) $12,898 $(13,323) $21,064 $ (8,251)
Currency Translation
Adjustment 531 (699) (1,121) (2,865)
------- -------- ------- --------
Comprehensive Income (Loss) $13,429 $(14,022) $19,943 $(11,116)
======= ======== ======= ========
</TABLE>
Note D - Computer Software Costs
- --------------------------------
Effective February 1, 1998, the Company elected to adopt AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1), which requires the capitalization of
certain costs, including internal payroll costs, incurred in connection with
the development or acquisition of software for internal use. The adoption of
this standard resulted in an increase in net earnings of $334,000 or $0.02 per
diluted share for the thirteen weeks ended October 31, 1998 and $946,000 or
$0.05 per diluted share for the thirty-nine weeks ended October 31, 1998. No
restatement of prior year results was allowed or required.
Note E - Pagoda International Restructuring Reserve
- ---------------------------------------------------
In fiscal 1998, the Company has utilized approximately $13.7 million of the
$31.0 million initial restructuring reserve established in fiscal 1997
primarily to cover inventory markdowns, royalty agreement shortfalls and
severance. In addition, the Company provided an additional $1.4 million during
the first two quarters of fiscal 1998 to cover costs associated with the
restructuring. It is expected that the remaining reserve of $17.1 million as
of October 31, 1998, will be utilized primarily in the fourth quarter of 1998.
Year-to-date operating losses and additional charges for Pagoda International
are $6.3 million, and total losses for fiscal 1998 are still projected to be
between $7.0 million and $8.0 million.
<PAGE>
Note F - Condensed Consolidated Financial Information
- -----------------------------------------------------
Certain of the Company's debt is unconditionally and jointly and severally
guaranteed by certain wholly-owned domestic subsidiaries of the Company.
Accordingly, condensed consolidating balance sheets as of October 31, 1998 and
November 1, 1997, and the related condensed consolidating statements of
earnings and cash flows for the thirty-nine weeks ended October 31, 1998 and
November 1, 1997, are provided. These condensed consolidating financial
statements have been prepared using the equity method of accounting in
accordance with the requirements for presentation of such information.
Management believes that this information, presented in lieu of complete
financial statements for each of the guarantor subsidiaries, provides
meaningful information to allow investors to determine the nature of the assets
held by, and the operations and cash flows of, each of the consolidating groups
(000's).
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Current Assets
Cash and cash equivalents . . . $ 15,935 $ 5,490 $ 18,994 $ (3,000) $ 37,419
Receivables, net. . . . . . . . 29,750 13,649 23,888 - 67,287
Inventory, net. . . 50,496 313,607 18,992 (13,672) 369,423
Other current assets. . . . . . (760) 14,957 6,915 4,784 25,896
-------- -------- -------- --------- --------
Total Current Assets 95,421 347,703 68,789 (11,888) 500,025
Property and Equipment, net. . . 15,381 55,766 6,719 - 77,866
Other Assets . . . . . . . . . . 47,249 17,708 11,973 (109) 76,821
Investment in Subsidiaries . . . 254,773 37,064 3,811 (295,648) -
-------- -------- -------- --------- --------
Total Assets. . . . . . . . . $412,824 $458,241 $ 91,292 $(307,645) $654,712
======== ======== ======== ========= ========
Liabilities & Shareholders' Equity
- ----------------------------------
Current Liabilities
Notes payable . . . . . . . . . $ - $ - $ - $ - $ -
Accounts payable. . . . . . . . 6,159 99,805 15,483 - 121,447
Accrued expenses. . . . . . . . 21,600 51,530 13,616 (1,564) 85,182
Income taxes. . . . . . . . . . 4,043 10,851 407 337 15,638
Current maturities of
long-term debt. . . . . . . . 25,000 - - - 25,000
-------- -------- -------- --------- --------
Total Current Liabilities 56,802 162,186 29,506 (1,227) 247,267
Long-Term Debt and Capitalized
Lease Obligations . . . . . . 172,030 - 39 (39) 172,030
Other Liabilities. . . . . . . . 19,923 125 373 (69) 20,352
Intercompany Payable (Receivable) (50,994) 60,419 (3,880) (5,545) -
Shareholders' Equity . . . . . . 215,063 235,511 65,254 (300,765) 215,063
-------- -------- -------- --------- --------
Total Liabilities and
Shareholders' Equity. . $412,824 $458,241 $ 91,292 $(307,645) $654,712
======== ======== ======== ========= ========
</TABLE>
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . $199,410 $948,586 $259,642 $(209,735) $1,197,903
Cost of goods sold . . . . . . . 142,640 582,804 209,114 (209,735) 724,823
-------- -------- -------- --------- ----------
Gross profit. . . . . . . . . . 56,770 365,782 50,528 - 473,080
Selling and
administrative expenses . . . 55,349 324,179 41,514 (1,257) 419,785
Interest expense . . . . . . . . 14,884 6 64 - 14,954
Intercompany interest
(income) expense. . . . . . . (10,711) 10,661 50 - -
Other (income) expense . . . . . (1,406) 153 2,006 1,257 2,010
Equity in (earnings)
of subsidiaries . . . . . . . (22,842) (4,658) - 27,500 -
-------- -------- -------- --------- ----------
Earnings Before Income Taxes. . 21,496 35,441 6,894 (27,500) 36,331
Income tax provision . . . . . . 432 12,599 2,236 - 15,267
-------- -------- -------- --------- ----------
Net Earnings. . . . . . . . . . $ 21,064 $ 22,842 $ 4,658 $ (27,500) $ 21,064
======== ======== ======== ========= ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided (Used) by
Operating Activities . . . . . . $ 13,864 $ 41,090 $ 4,866 $ (689) $ 59,131
Investing Activities:
Capital expenditures . . . . . . (371) (10,449) (1,722) - (12,542)
Other. . . . . . . . . . . . . . - - - - -
-------- -------- -------- -------- --------
Net Cash (Used) by
Investing Activities . . . . . . (371) (10,449) (1,722) - (12,542)
Financing Activities:
Decrease in short-term
notes payable . . . . . . . . (54,000) - - - (54,000)
Proceeds from issuance of
common stock . . . . . . . . . 109 - - - 109
Dividends paid . . . . . . . . . (5,415) - - - (5,415)
Intercompany financing . . . . . 60,300 (31,994) (26,035) (2,271) -
-------- -------- -------- -------- --------
Net Cash Provided (Used) by
Financing Activities . . . . . . 994 (31,994) (26,035) (2,271) (59,306)
Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . 14,487 (1,353) (22,891) (2,960) (12,717)
Cash and Cash Equivalents at
Beginning of Period. . . . . . . 1,448 6,843 41,885 (40) 50,136
-------- -------- -------- -------- --------
Cash and Cash Equivalents at
End of Period. . . . . . . . . . $ 15,935 $ 5,490 $ 18,994 $ (3,000) $ 37,419
======== ======== ======== ======== ========
</TABLE>
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 1, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Current Assets
Cash and cash equivalents . . . $ 1,081 $ (2,866) $ 27,281 $ - $ 25,496
Receivables, net. . . . . . . . 29,090 12,400 44,108 - 85,598
Inventory, net. . . . . . . . . 60,234 315,310 33,135 (14,707) 393,972
Other current assets. . . . . . 3,616 20,315 6,349 5,191 35,471
------- -------- -------- --------- --------
Total Current Assets 94,021 345,159 110,873 (9,516) 540,537
Property and Equipment, net. . . 18,107 58,206 7,248 - 83,561
Other Assets . . . . . . . . . . 43,561 16,571 12,872 (209) 72,795
Investment in Subsidiaries . . . 250,657 44,215 3,811 (298,683) -
------- -------- -------- --------- --------
Total Assets. . . . . . . . . $406,346 $464,151 $134,804 $(308,408) $696,893
======== ======== ======== ========= ========
Liabilities & Shareholders' Equity
- ----------------------------------
Current Liabilities
Notes payable . . . . . . . . . $ 32,000 $ - $ - $ - $ 32,000
Accounts payable. . . . . . . . 5,793 92,957 25,257 - 124,007
Accrued expenses. . . . . . . . 25,040 41,306 16,184 5,117 87,647
Income taxes. . . . . . . . . . 3,781 11,804 694 515 16,794
Current maturities of
long-term debt. . . . . . . . 2,000 - - - 2,000
------- -------- -------- --------- --------
Total Current Liabilities. 68,614 146,067 42,135 5,632 262,448
Long-Term Debt and Capitalized
Lease Obligations . . . . . . 197,027 - 75 (75) 197,027
Other Liabilities. . . . . . . . 20,704 2,077 592 (91) 23,282
Intercompany Payable (Receivable) (94,135) 86,854 17,331 (10,050) -
Shareholders' Equity . . . . . . 214,136 229,153 74,671 (303,824) 214,136
------- -------- -------- --------- --------
Total Liabilities and
Shareholders' Equity. . $406,346 $464,151 $134,804 $(308,408) $696,893
======== ======== ======== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . $193,682 $922,032 $286,098 $(197,288) $1,204,524
Cost of goods sold . . . . . . . 137,950 578,452 237,610 (197,387) 756,625
-------- -------- -------- --------- ----------
Gross profit . . . . . . . . . . 55,732 343,580 48,488 99 447,899
Selling and
administrative expenses . . . 55,501 308,397 56,849 (1,123) 419,624
Interest expense . . . . . . . . 16,173 2 99 - 16,274
Intercompany interest
(income) expense. . . . . . . (11,414) 11,425 (11) - -
Other (income) expense . . . . . (2,907) 337 1,653 1,222 305
Equity in (earnings)
of subsidiaries . . . . . . . 6,138 11,887 - (18,025) -
-------- -------- -------- --------- ----------
Earnings (Loss) Before
Income Taxes. . . . . . . . . (7,759) 11,532 (10,102) 18,025 11,696
Income tax provision . . . . . . 492 17,670 1,785 - 19,947
-------- -------- -------- --------- ----------
Net Earnings (Loss) . . . . . . $ (8,251) $ (6,138) $(11,887) $ 18,025 $ (8,251)
======== ======== ======== ========= ===========
</TABLE>
<PAGE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided (Used) by
Operating Activities . $ 24,028 $ 19,519 $(11,979) $ 13,655 $ 45,223
Investing Activities:
Capital expenditures . (2,588) (11,647) (1,076) - (15,311)
Other . . . . . . . 383 - 7 - 390
-------- -------- -------- -------- --------
Net Cash Used by
Investing Activities . (2,205) (11,647) (1,069) - (14,921)
Financing Activities:
Increase (decrease) in
short-term notes payable. (30,000) - - - (30,000)
Proceeds from issuance of
common stock. . . 29 - - - 29
Dividends paid. . . (13,521) - - - (13,521)
Intercompany financing 22,880 (17,048) 10,022 (15,854) -
-------- -------- -------- -------- --------
Net Cash Provided (Used) by
Financing Activities . (20,612) (17,048) 10,022 (15,854) (43,492)
Increase (Decrease) in Cash and
Cash Equivalents. . 1,211 (9,176) (3,026) (2,199) (13,190)
Cash and Cash Equivalents at
Beginning of Period. . (130) 6,310 30,307 2,199 38,686
-------- -------- -------- -------- --------
Cash and Cash Equivalents at
End of Period . . . $ 1,081 $ (2,866) $27,281 $ - $ 25,496
======== ======== ======= ======== =========
</TABLE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
Results of Operations
- ---------------------
Quarter ended October 31, 1998 compared to the Quarter ended November 1, 1997
- -----------------------------------------------------------------------------
Consolidated net sales for the fiscal quarter ended October 31, 1998 were
$412.0 million compared to $433.9 million in the quarter ended November 1,
1997. Sales during the third quarter of 1998 of $407.3 million for the
Company's core businesses, which excludes the Pagoda International division and
Famous Fixtures business that was sold at year end 1997, increased 1.8% from
the third quarter of 1997.
Net earnings of $12.9 million for the third quarter of 1998 compare to a net
loss of $13.3 million in the third quarter of 1997. The 1997 loss includes an
aftertax charge of $21.0 million for the cost of reducing the Company's
investment in its Pagoda International division's operations. The 1997 loss
also includes a $5.0 million loss from the Pagoda International division's
operations compared to a $0.8 million loss in 1998.
Third quarter 1998 sales from the footwear retailing operations increased 1.4%
from the third quarter of 1997. Famous Footwear's retail sales of $239.7
million increased 1.9% from last year representing higher store productivity
with a sales per square foot improvement of 1.5% offset by a same-store sales
decrease of 1.4%. At the end of the third quarter, Famous Footwear has 813
stores in operation, reflecting one more unit than in 1997. The Naturalizer
Retail division, with 338 stores at October 31, 1998, had total sales increase
2.1% in the 1998 third quarter to $33.8 million, reflecting an increase of 0.5%
on a same-store basis and higher sales in new stores opened versus those stores
closed in the past year. These improvements for the Naturalizer Retail
division were partially offset by the effect of 13 fewer stores in operation.
The Canadian retailing operation's sales increased 1.7% in Canadian dollars
reflecting a decrease of 3.1% in same-store sales offset by 8 more stores in
operation than in the third quarter of 1997. However, due to the weakening of
the Canadian dollar, sales measured in U.S. dollars of $12.4 million decreased
by 7.9% from last year.
Sales from footwear wholesaling businesses decreased 12.6% to $126.0 million
compared to $144.2 million in the third quarter of 1997. The sales decline
primarily relates to lower sales of $21.3 million from the Pagoda International
marketing division as the Company continues to reduce its investment in that
business. However, Brown Shoe Company's wholesale divisions - Brown Branded
Marketing and Pagoda USA - achieved combined sales of $114.4 million,
reflecting a 3.1% increase from last year. The increase in sales was primarily
derived from the Pagoda USA division.
Gross profit as a percent of sales increased to 39.8% from 35.9% for the same
period last year. Excluding the Pagoda International restructuring charge
impact in 1997, last year's gross profit as a percent of sales was 37.7%. The
increase in 1998 was primarily due to higher margins within the Pagoda USA
division as well as at Famous Footwear.
<PAGE>
Selling and administrative expenses as a percent of sales decreased to 33.23%
from 33.9% for the same period last year. In 1997, selling and administrative
expenses as a percent of sales were 32.9% excluding the restructuring charge
impact. The 1998 increase was due to a higher mix of retail sales versus
wholesale sales.
The consolidated tax rate was 40.4% of consolidated pre-tax income for the
third quarter of 1998 compared to 40.8% in last year's quarter, excluding the
restructuring charge and operating losses from Pagoda International.
Nine Months ended October 31, 1998 compared to the Nine Months ended
November 1, 1997
- --------------------------------------------------------------------
Consolidated net sales for the first nine months of 1998 were $1,197.9 million,
a decrease of 0.5% from the first nine months of 1997 total of $1,204.5
million. Adjusting for the decline in sales at the Pagoda International
division and the sale of Famous Fixtures, sales of $1,174.0 million in the
Company's core businesses increased 4.4%.
Net earnings of $21.1 million for the first nine months of 1998 compare to a
net loss of $8.3 million for the first nine months of 1997. The 1997 loss
includes an aftertax charge of $21.0 million related to the Pagoda
International division. The 1997 loss also includes a $9.1 million loss from
Pagoda International operations compared to a $6.3 million loss in 1998.
Sales from the footwear retailing operations increased 4.6% to $814.0 million
in the first nine months of 1998. Famous Footwear's retail sales for the first
nine months of 1998 increased 4.7% from the first nine months of last year to
$670.2 million, reflecting a 0.9% increase in same-store sales, one more unit
in operation and higher store productivity with a sales per square foot
increase of 3.9%. With 13 less stores in operation, Naturalizer stores' total
sales increased 5.7% to $104.6 million in the first nine months of 1998,
reflecting an increase of 3.4% on a same-store basis and higher sales levels
in new stores versus those stores closed in 1998. Sales from the Canadian
retailing operation increased 6.4% in Canadian dollars reflecting a 1.3%
increase in same-store sales and 8 more stores in operation than in 1997.
However, due to the weakening of the Canadian dollar, sales measured in U.S.
dollars of $39.2 million decreased by 0.3% from last year.
Sales from footwear wholesaling businesses for the first nine months of 1998
decreased 6.2% to $383.9 million from the same period last year. The sales
decline primarily relates to lower sales of $39.5 million from the Pagoda
International marketing division. However, Brown Shoe Company's wholesale
divisions - Brown Branded Marketing and Pagoda USA - achieved combined sales
of $341.2 million, reflecting a 4.6% increase from last year. The increase in
sales was primarily derived from the Children's division of Pagoda USA.
Gross profit as a percent of sales increased to 39.5% for the nine-month period
ended October 31, 1998 from 37.2% for the nine-month period ended November 1,
1997. In 1997, gross profit as a percent of sales was 37.8% excluding the
restructuring charge impact. The 1998 increase was due to higher margins at
Famous Footwear.
<PAGE>
Selling and administrative expenses as a percent of sales increased to 35.0%
for the first nine months of 1998 from 34.8% for the first nine months of 1997.
Excluding the Pagoda International restructuring charge impact in 1997, last
year's selling and administrative expenses as a percent of sales were 34.5%.
This increase was due to higher expenses at Famous Footwear and Naturalizer
Retail.
Other expense for the first nine months of 1998 primarily represents
environmental costs of $1.8 million associated with a vacant manufacturing
facility in Colorado.
The consolidated tax rate was 42.0% of consolidated pre-tax income for the
first nine months of 1998 compared to 40.2%, excluding the restructuring charge
and operating losses at the Pagoda International marketing division, in fiscal
1997.
Financial Condition
- -------------------
A summary of key financial data and ratios at the dates indicated is as
follows:
October 31, November 1, January 31,
1998 1997 1998
----------- ----------- -----------
Working Capital (millions) $252.8 $278.1 $260.4
Current Ratio 2.0:1 2.1:1 1.9:1
Total Debt as a Percentage of
Total Capitalization 47.8% 51.9% 55.8%
Net Debt (Total Debt less Cash and
Cash Equivalents) as a Percentage
of Total Capitalization 42.6% 49.0% 50.2%
Cash flow from operating activities for the first nine months of fiscal 1998
was a net generation of $59.1 million versus $45.2 million last year. In
1998's first nine months, cash flow improved primarily as a result of lower
accounts receivable and continued improvement in inventory management.
The decline in the current ratio at October 31, 1998 compared to November 1,
1997, is primarily due to the combination of lower accounts receivable and
inventory and the increase in current maturities of long-term debt.
The decrease in the ratio of total debt as a percentage of total capitalization
at October 31, 1998, compared to the end of fiscal 1997, is due to strong cash
flow which allowed the Company to reduce notes payable. At October 31, 1998,
$13.3 million of letters of credit were the only items outstanding under the
Company's $155 million revolving bank Credit Agreement.
<PAGE>
Year 2000
---------
The "Year 2000" issue arises because many computer hardware and software
systems, including the Company's, use only two digits to represent the year.
As a result, these systems and programs may not accurately calculate dates
beyond 1999, which could cause system failures or malfunctions. The Company has
established a company-wide Steering Committee, consisting of the Chief
Financial Officer, Vice Presidents of the Information Services (IS) functions,
internal executive financial and legal management and other employees, to
oversee and manage this project.
A thorough assessment of all of the Company's existing information systems has
been completed, and a comprehensive plan to modify or replace all hardware and
software information systems that are not Year 2000 compliant has been
developed. All systems will be tested to ensure that they will operate properly
with respect to dates in the next century. The Company has assessed the
operating systems and equipment used in its distribution centers, offices and
other facilities that may contain embedded chips, and that may be Year 2000
sensitive, and will make modifications where necessary. The plan also includes
communicating with significant business partners to determine their state of
readiness for the Year 2000.
With respect to its internal information systems, as of October 31, 1998, the
Company has substantially completed the modification or replacement of the
systems used in its footwear wholesaling and sourcing operations, and its
financial systems. Testing of approximately half of these systems has been
successfully completed, with the balance scheduled to be tested by December 31,
1998. The Company's Naturalizer Retail division is modifying certain systems
and installing new in-store systems, which includes replacing all of its point-
of-sale registers. The new Year 2000 compliant registers and in-store systems
have been installed, and the remaining modification work and testing is
expected to be completed in early 1999. The Famous Footwear retail division has
completed the modification of its ongoing systems, and is also replacing its
in-store systems. The modified and new systems are expected to be fully tested
by the end of April 1999, with the new in-store systems installed in all stores
by mid-1999. For all of the Company's divisions, the balance of 1999 will be
used for additional testing and correction of any problems that may arise.
The Company relies on independent business partners to provide various products
and services. One of the most significant groups of partners is the
independently owned and operated factories, primarily in China and Brazil, from
which the Company purchases footwear for its wholesale and retail operations.
Based on communications with representatives of and on-site visits to these
factories, the Company has determined that the use of date-sensitive technology
in their production processes is relatively low. Nevertheless, the Company is
reviewing the assessment, remediation, and test plans of these factories to
attempt to determine whether they can be relied on as suppliers going forward.
The Company expects to complete this assessment by December 31, 1998. In
addition, the Company has been in contact with footwear companies that provide
Famous Footwear with the majority of its products, banks, benefit plan
providers, transportation providers and others who supply goods and services
to it. Communications with these partners are continuing in order to obtain as
much assurance as possible that they will be compliant. However, there can be
no assurance that these partners' Year 2000 remediation efforts will be wholly
successful, nor can there be assurance that third parties not contacted will
not have problems, and materially adversely affect the Company's operations.
Accordingly, the Company believes that the most reasonably likely worst case
Year 2000 scenario is that its suppliers of footwear, for both its wholesale
and retail businesses, would not be able to provide an uninterrupted flow of
products. The Company has not yet developed contingency plans for this
scenario, but intends to continue to monitor and evaluate the state of
readiness of these suppliers. By mid-1999 the Company will determine which
suppliers appear to be at risk of noncompliance, and will attempt to arrange
for alternative sources of footwear from its large and diverse group of
suppliers. The Company may also consider accelerating purchases of inventory
to reduce this risk. The Company believes that there is adequate footwear
producing capacity available to allow for the use of alternate sources or
accelerated purchases. The Company also believes that if there is a disruption
in the flow of footwear it will be short term in nature. Nevertheless, there
can be no assurance that the Company can accurately and fully anticipate the
level of disruption that may occur from its footwear and other suppliers, and
that there will be no materially adverse effect on the Company.
The Company's wholesale division customers are department stores, mass
merchants, and numerous other footwear retailers. The Company is communicating
with its significant retail customers through which it processes transactions
electronically using Electronic Data Interchange (EDI) technology to attempt
to determine their ability to continue to conduct business in this manner. The
Company has adopted the Year 2000 compliant version of EDI, and plans to
perform tests directly with its applicable retail customers throughout 1999.
As a contingency plan, if a customer is unable to continue to process
transactions through EDI, it is expected that manual procedures could be
implemented. The Company intends to continue to monitor and assess the EDI and
the general state of Year 2000 readiness of its major retail customers. A Year
2000 failure by a major retail customer could have a materially adverse effect
on the Company.
Management estimates that the non-incremental internal IS staff and outside
consultant costs of the Company's Year 2000 efforts will total approximately
$1.5 million. Through October 1998, approximately $1.0 million of this total
has been incurred. In addition, the cost of new purchased or leased hardware
and software that will both upgrade the functionality and operating efficiency
of store and financial systems, and result in Year 2000 compliance, is expected
to be approximately $15 million. All expenditures related to the Company's Year
2000 project are expected to be funded through operating cash flows. The costs
of new purchased and leased systems will be expensed over the next several
years. All costs related to modifying systems are being expensed as incurred.
The costs, and anticipated completion dates for Year 2000 modifications, and
the risks associated with the Year 2000 issues, are based on management's best
estimates utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Factors that may cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer code and systems, the cooperation and remediation success of the
Company's suppliers (and their suppliers), and the ability to correctly
anticipate risks and implement suitable contingency plans in the event of
systems failures at the Company or its suppliers and customers (and their
suppliers and customers).
<PAGE>
Forward-Looking Statements
--------------------------
This Form 10-Q contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially. In Exhibit 99 to the Company's fiscal 1997 Annual Report
on Form 10-K, detailed factors that could cause variations in results to occur
are listed and discussed. Such Exhibit is incorporated herein by reference.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
--------------------------
There have been no material developments during the quarter ended October
31, 1998, in the legal proceedings described in the Company's Annual Report
on Form 10-K for the period ended January 31, 1998.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Listing of Exhibits
(3) (i) (a) Certificate of Incorporation
of the Company as amended
through February 16, 1984,
incorporated herein by
reference to Exhibit 3 to the
Company's Report on Form 10-K
for the fiscal year ended
November 1, 1986.
(i) (b) Amendment of Certificate of
Incorporation of the Company
filed February 20, 1987,
incorporated herein by
reference to Exhibit 3 to the
Company's Report on Form 10-K
for the fiscal year ended
January 30, 1988.
(ii) Bylaws of the Company as
amended through March 5,
1998, incorporated herein by
reference to Exhibit 3 to the
Company's Report on Form 10-K
for the fiscal year ended
January 31, 1998.
(27) Financial Data Schedule (Page 19)
(99.1) Safe Harbor For Forward
Looking Statements; Certain
Risk Factors That Could
Affect the Company's
Operating Results as
incorporated herein by
reference to the Company's
Report on Form 10-K for the
fiscal year ended January 31,
1998.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter
ended October 31, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN GROUP, INC.
Date: December 4, 1998 /s/ Harry E. Rich
-------------------------------
Executive Vice President
and Chief Financial Officer and
On Behalf of the Corporation as
the Principal Financial Officer
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