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 July 31, 1999
[ ] 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 SHOE COMPANY, 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)
N/A
(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 August 28, 1999, 18,248,590 shares of the registrant's common
stock were outstanding.
<PAGE> 2
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
(Unaudited)
---------------------
July 31, August 1, January 30,
1999 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
ASSETS
- ------
Current Assets
Cash and Cash Equivalents $ 34,642 $ 32,180 $ 45,532
Receivables, net of allowances of
$9,660 at July 31, 1999,
$9,651 at August 1, 1998, and
$9,820 at January 30, 1999 72,975 75,109 67,815
Inventories, net of adjustment to
last-in, first-out cost of
$12,692 at July 31, 1999,
$15,265 at August 1, 1998, and
$13,424 at January 30, 1999 412,485 396,657 362,274
Other Current Assets 22,085 26,014 21,762
--------- --------- ---------
Total Current Assets 542,187 529,960 497,383
Other Assets 76,066 75,250 75,671
Property and Equipment 228,750 214,260 217,054
Less allowances for depreciation
and amortization (144,168) (135,310) (134,876)
--------- --------- ---------
84,582 78,950 82,178
--------- --------- ---------
$ 702,835 $ 684,160 $ 655,232
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 2,000 $ - $ -
Accounts Payable 163,404 161,772 124,921
Accrued Expenses 92,472 87,549 90,081
Income Taxes 11,897 14,197 6,442
Current Maturities of Long-Term Debt 10,000 15,000 25,000
--------- --------- ---------
Total Current Liabilities 279,773 278,518 246,444
Long-Term Debt and Capitalized
Lease Obligations 172,033 182,029 172,031
Other Liabilities 19,175 20,540 19,583
Shareholders' Equity
Common Stock 68,436 67,682 68,131
Additional Capital 49,183 46,883 48,243
Unamortized Value of Restricted Stock (3,882) (3,226) (4,058)
Accumulated Other Comprehensive Loss (8,772) (10,079) (8,842)
Retained Earnings 126,889 101,813 113,700
--------- --------- ---------
231,854 203,073 217,174
--------- --------- ---------
$ 702,835 $ 684,160 $ 655,232
========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 3
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales $410,100 $383,618 $806,926 $785,927
Cost of Goods Sold 249,025 229,616 488,044 476,601
-------- -------- -------- --------
Gross Profit 161,075 154,002 318,882 309,326
Selling and Administrative Expenses 141,533 140,116 283,182 282,898
Interest Expense 4,392 4,858 9,075 10,490
Other (Income) Expense (2,628) 1,284 (1,333) 1,236
-------- -------- -------- --------
Earnings Before Income Taxes 17,778 7,744 27,958 14,702
Income Tax Provision 7,261 3,449 11,125 6,536
-------- -------- -------- --------
NET EARNINGS $ 10,517 $ 4,295 $ 16,833 $ 8,166
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ .59 $ .24 $ .95 $ .46
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ .58 $ .24 $ .93 $ .46
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .10 $ .10 $ .20 $ .20
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 4
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------
July 31, August 1,
1999 1998
--------- ---------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 10,278 $ 47,531
Investing Activities:
Proceeds from the sale of le coq sportif 9,281 -
Capital expenditures (14,577) (7,915)
--------- ---------
Net Cash Used by Investing Activities (5,296) (7,915)
Financing Activities:
Increase (decrease) in short-term notes payable 2,000 (54,000)
Principal payments of long-term debt (15,000) -
Proceeds from issuance of common stock 773 37
Dividends paid (3,645) (3,609)
--------- ---------
Net Cash Used by Financing Activities (15,872) (57,572)
--------- ---------
Decrease in Cash and Cash Equivalents (10,890) (17,956)
Cash and Cash Equivalents at Beginning of Period 45,532 50,136
--------- ---------
Cash and Cash Equivalents at End of Period $ 34,642 $ 32,180
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
BROWN SHOE COMPANY, 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 30, 1999.
Note B - Change of Company Name
- -------------------------------
On May 27, 1999, the shareholders of the Company approved a
change in the company's name to Brown Shoe Company, Inc. from
Brown Group, Inc. The Company's shares began trading under the
"BWS" symbol on the New York and Chicago Stock Exchanges on
Friday, May 28, 1999.
Note C - Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and
diluted earnings per share for the periods ended July 31, 1999
and August 1, 1998 (000's, except per share data):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net earnings -
Basic and Diluted $10,517 $ 4,295 $16,833 $ 8,166
======= ======= ======= =======
Denominator:
Weighted average shares
outstanding-Basic 17,861 17,689 17,812 17,657
Effect of potentially
dilutive securities 387 290 300 276
------- ------- ------- -------
Weighted average shares
outstanding-Diluted 18,248 17,979 18,112 17,933
======= ======= ======= =======
Basic earnings per share $ .59 $ .24 $ .95 $ .46
======= ======= ======= =======
Diluted earnings per share $ .58 $ .24 $ .93 $ .46
======= ======= ======= =======
</TABLE>
<PAGE> 6
Note D - Comprehensive Income
- -----------------------------
Comprehensive Income represents the change in Shareholders'
Equity during a period from transactions and other events and
circumstances from nonowner sources and accordingly excludes
investments by and distributions to owners.
The following table sets forth the reconciliation from Net
Income to Comprehensive Income for the periods ended July 31,
1999 and August 1, 1998 (000's):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net Income $10,517 $ 4,295 $16,833 $ 8,166
Currency Translation
Adjustment (1,736) (2,055) 70 (1,652)
------- ------- ------- -------
Comprehensive Income $ 8,781 $ 2,240 $16,903 $ 6,514
======= ======= ======= =======
</TABLE>
Note E - Pagoda International Restructuring Reserve
- ---------------------------------------------------
In the first half of 1999, the Company utilized approximately
$1.7 million of the $10.7 million restructuring reserve
remaining at the end of fiscal 1998. The reserve was primarily
used to cover inventory markdowns and severance. It is
currently expected that a substantial portion of the remaining
reserve of $9.0 million will be utilized by the end of fiscal
1999.
Note F - Business Segment Information
- -------------------------------------
Applicable business segment information is as follows for the
periods ended July 31, 1999 and August 1, 1998 (000's):
<TABLE>
<CAPTION>
Famous Wholesale Naturalizer Pagoda
Footwear Operations Retail International Other Totals
-------- ---------- ----------- ------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Thirteen Weeks Ended July 31, 1999
- ----------------------------------
External sales $237,522 $120,348 $49,977 $ 93 $2,160 $410,100
Intersegment sales - 41,888 - - - 41,888
Operating profit (loss) 13,935 8,778 865 (206) (3,301) 20,071
Thirteen Weeks Ended August 1, 1998
- -----------------------------------
External sales $218,199 $102,734 $51,512 $9,145 $2,028 $383,618
Intersegment sales - 43,340 - - - 43,340
Operating profit (loss) 12,607 3,438 1,848 (1,985) (2,485) 13,423
Twenty-six Weeks Ended July 31, 1999
- ------------------------------------
External sales $461,135 $246,655 $94,106 $ 327 $4,703 $806,926
Intersegment sales - 91,031 - - - 91,031
Operating profit (loss) 25,308 18,664 (323) (676) (6,593) 36,380
Twenty-six Weeks Ended August 1, 1998
- -------------------------------------
External sales $430,463 $234,542 $97,541 $19,234 $4,147 $785,927
Intersegment sales - 100,274 - - - 100,274
Operating profit (loss) 23,030 11,331 1,636 (4,930) (4,952) 26,115
</TABLE>
<PAGE> 7
Reconciliation of operating profit to consolidated earnings before
income taxes:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Total operating profit $ 20,071 $ 13,423 $ 36,380 $ 26,115
Interest expense (4,392) (4,858) (9,075) (10,490)
Non-operating other
income/(expense) 2,099 (821) 653 (923)
-------- -------- -------- --------
Total consolidated earnings
before income taxes $ 17,778 $ 7,744 $ 27,958 $ 14,702
======== ======== ======== ========
</TABLE>
The "Other" segment includes the Scholze Tannery business and
Corporate general and administrative expenses, which are not
allocated to the operatin g units. Operating profit represents
gross profit less general and administrative expenses and other
operating income or expense.
In fiscal 1999, the Company revised its method of determining
the level of profit to be earned on intersegment sales from
the Wholesale Operations to Naturalizer Retail. The change
resulted in an increase to operating profit of $1.0 million
and $1.3 million for the thirteen weeks ended and twenty-six
weeks ended July 31, 1999, respectively, for Naturalizer Retail
and a corresponding decrease to operating profit for the
Wholesale Operations.
Note G - Sale of le coq sportif
- -------------------------------
In July 1999, the Company sold its le coq sportif footwear and
apparel business for approximately $12.4 million, of which
$3.1 million was received in the form of a note payable. The
Company recognized a $2.3 million pre-tax gain in connection
with the sale; however, the gain was substantially offset by
a tax provision of $2.0 million. The tax provision included
$1.2 million of taxes related to the repatriation of previously
untaxed foreign cash generated from the sale.
Note H - 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 July 31, 1999 and August 1,
1998, and the related condensed consolidating statements of
earnings and cash flows for the twenty-six weeks ended July 31,
1999 and August 1, 1998, 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.
<PAGE> 8
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 31, 1999
(Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
- ------
Current Assets
Cash and cash equivalents $ 1,353 $ 1,985 $ 31,304 $ - $ 34,642
Receivables, net 33,521 12,932 26,522 - 72,975
Inventory, net 45,341 360,123 19,552 (12,531) 412,485
Other current assets (4,958) 21,063 1,595 4,385 22,085
-------- -------- --------- ---------- --------
Total Current Assets 75,257 396,103 78,973 (8,146) 542,187
Other Assets 49,481 20,815 5,815 (45) 76,066
Property and
Equipment, net 14,643 63,549 6,390 - 84,582
Investment in Subsidiaries 248,577 46,097 - (294,674) -
-------- -------- --------- ---------- --------
Total Assets $387,958 $526,564 $ 91,178 $(302,865) $702,835
======== ======== ======== ========= ========
Liabilities & Shareholders' Equity
- ----------------------------------
Current Liabilities
Notes payable $ 2,000 $ - $ - $ - $ 2,000
Accounts payable 6,095 136,967 20,342 - 163,404
Accrued expenses 25,331 52,987 12,092 2,062 92,472
Income taxes 2,096 8,697 339 765 11,897
Current maturities of
long-term debt 10,000 - - - 10,000
-------- -------- --------- ---------- --------
Total Current
Liabilities 45,522 198,651 32,773 2,827 279,773
Long-Term Debt and
Capitalized Lease
Obligations 172,033 41 - (41) 172,033
Other Liabilities 20,312 (1,336) 199 - 19,175
Intercompany Payable
(Receivable) (81,763) 75,433 17,122 (10,792) -
Shareholders' Equity 231,854 253,775 41,084 (294,859) 231,854
-------- -------- --------- ---------- --------
Total Liabilities
and Shareholders'
Equity $387,958 $526,564 $ 91,178 $(302,865) $702,835
======== ======== ======== ========= ========
</TABLE>
<PAGE> 9
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
TWENTY-SIX WEEKS ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $126,104 $640,099 $173,338 $(132,615) $806,926
Cost of goods sold 90,963 390,655 139,041 (132,615) 488,044
-------- -------- -------- --------- --------
Gross profit 35,141 249,444 34,297 - 318,882
Selling and
administrative expenses 34,550 227,975 21,457 (800) 283,182
Interest expense 9,060 - 15 - 9,075
Intercompany interest
(income) expense (6,881) 6,894 (13) - -
Other (income) expense 15 (2,057) (91) 800 (1,333)
Equity in (earnings)
of subsidiaries (18,682) (9,788) - 28,470 -
-------- -------- -------- --------- --------
Earnings (Loss) Before
Income Taxes 17,079 26,420 12,929 (28,470) 27,958
Income tax provision
(benefit) 246 7,738 3,141 - 11,125
-------- -------- -------- --------- --------
Net Earnings (Loss) $ 16,833 $ 18,682 $ 9,788 $ (28,470) $ 16,833
======== ======== ======== ========= ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
TWENTY-SIX WEEKS ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided (Used)
by Operating Activities $ 10,420 $(16,041) $ 4,530 $ 11,369 $ 10,278
Investing Activities:
Capital expenditures (200) (13,397) (980) - (14,577)
Proceeds from sale of
le coq sportif - 9,281 - - 9,281
-------- -------- -------- --------- --------
Net Cash Used by
Investing Activities (200) (4,116) (980) - (5,296)
Financing Activities:
Increase in short-term
notes payable 2,000 - - - 2,000
Principal payments of
long-term debt (15,000) - - - (15,000)
Proceeds from issuance of
common stock 773 - - - 773
Dividends paid (3,645) - - - (3,645)
Intercompany financing (5,181) 17,404 (854) (11,369) -
-------- -------- -------- --------- --------
Net Cash Provided (Used)
by Financing Activities (21,053) 17,404 (854) (11,369) (15,872)
Increase (Decrease) in Cash
and Cash Equivalents (10,833) (2,753) 2,696 - (10,890)
Cash and Cash Equivalents
at Beginning of Period 12,186 4,738 28,608 - 45,532
-------- -------- -------- --------- --------
Cash and Cash Equivalents
at End of Period $ 1,353 $ 1,985 $ 31,304 $ - $ 34,642
======== ======== ======== ========= ========
</TABLE>
<PAGE> 10
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 1, 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 $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180
Receivables, net 32,569 10,121 32,419 - 75,109
Inventory, net 51,667 336,559 22,296 (13,865) 396,657
Other current assets (667) 16,037 5,792 4,852 26,014
-------- -------- -------- --------- --------
Total Current Assets 89,739 372,724 84,760 (17,263) 529,960
Other Assets 46,663 17,071 11,628 (112) 75,250
Property and Equipment, net 15,968 55,796 7,186 - 78,950
Investment in Subsidiaries 240,698 33,129 - (273,827) -
-------- -------- -------- --------- --------
Total Assets $393,068 $478,720 $103,574 $(291,202) $684,160
======== ======== ======== ========= ========
Liabilities & Shareholders' Equity
- ----------------------------------
Current Liabilities
Notes payable $ - $ - $ - $ - $ -
Accounts payable 6,458 132,021 23,293 - 161,772
Accrued expenses 24,511 49,467 14,519 (948) 87,549
Income taxes 3,690 9,640 1,233 (366) 14,197
Current maturities of
long-term debt 15,000 - - - 15,000
-------- -------- -------- --------- --------
Total Current
Liabilities 49,659 191,128 39,045 (1,314) 278,518
Long-Term Debt and
Capitalized Lease
Obligations 182,029 - 39 (39) 182,029
Other Liabilities 20,117 125 367 (69) 20,540
Intercompany Payable
(Receivable) (61,810) 65,501 17,918 (21,609) -
Shareholders' Equity 203,073 221,966 46,205 (268,171) 203,073
-------- -------- -------- --------- --------
Total Liabilities
and Shareholders'
Equity $393,068 $478,720 $103,574 $(291,202) $684,160
======== ======== ======== ========= ========
</TABLE>
<PAGE> 11
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $135,737 $610,568 $176,437 $(136,815) $785,927
Cost of goods sold 97,955 373,309 142,152 (136,815) 476,601
-------- -------- -------- --------- --------
Gross profit 37,782 237,259 34,285 - 309,326
Selling and
administrative expenses 39,346 215,179 29,204 (831) 282,898
Interest expense 10,421 5 64 - 10,490
Intercompany interest
(income) expense (7,338) 7,298 40 - -
Other (income) expense (1,601) (8) 2,014 831 1,236
Equity in (earnings)
of subsidiaries (9,298) (723) - 10,021 -
-------- -------- -------- --------- --------
Earnings (Loss) Before
Income Taxes 6,252 15,508 2,963 (10,021) 14,702
Income tax provision
(benefit) (1,914) 6,210 2,240 - 6,536
-------- -------- -------- --------- --------
Net Earnings $ 8,166 $ 9,298 $ 723 $ (10,021) $ 8,166
======= ======== ======== ========= ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
TWENTY-SIX WEEKS ENDED AUGUST 1, 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 $13,023 $ 36,162 $(11,779) $ 10,125 $ 47,531
Investing Activities:
Capital expenditures (213) (6,086) (1,616) - (7,915)
-------- -------- -------- --------- --------
Net Cash Used by
Investing Activities (213) (6,086) (1,616) - (7,915)
Financing Activities:
Decrease in short-term
notes payable (54,000) - - - (54,000)
Proceeds from issuance of
common stock 37 - - - 37
Dividends paid (3,609) - - - (3,609)
Intercompany financing 49,484 (26,912) (4,237) (18,335) -
-------- -------- -------- --------- --------
Net Cash Provided (Used) by
Financing Activities (8,088) (26,912) (4,237) (18,335) (57,572)
Increase (Decrease) in Cash
and Cash Equivalents 4,722 3,164 (17,632) (8,210) (17,956)
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 $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180
======= ========= ========= ========= ==========
</TABLE>
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------
Results of Operations
- ---------------------
Quarter ended July 31, 1999 compared to the Quarter ended
August 1, 1998
- ---------------------------------------------------------------
Consolidated net sales for the fiscal quarter ended July 31,
1999 were $410.1 million compared to $383.6 million in the
quarter ended August 1, 1998. Net earnings of $10.5 million
for the second quarter of 1999 compares to net earnings of $4.3
million in the second quarter of 1998. The increase in net
earnings resulted from increased revenue in the Company's core
businesses as well as a reduction in the liquidated
International division's losses in the second quarter of 1999.
Excluding the effect of lower International losses, net
earnings for the second quarter of 1999 increased 56.1% over
the second quarter of 1998.
Famous Footwear achieved record second quarter sales and
operating earnings which continued the pattern beginning in
fiscal 1998 and the first quarter of fiscal 1999. Sales of
$237.5 million increased 8.9% from last year representing a
same-store sales increase of 4.3% and 29 more stores,
reflecting a total of 839 stores in operation. Operating
earnings for the second quarter of 1999 increased 10.5% to
$13.9 million primarily as a result of higher sales.
The Company's wholesale operations - the Brown Branded, Brown
Pagoda and Brown Canada divisions - had a net sales increase of
17.1% during the second quarter of 1999 to $120.3 million. The
substantial increase in sales was derived from Brown Pagoda's
Star Wars, Barbie and Dr. Scholl's licensed products. The
increased sales combined with good expense leveraging resulted
in operating earnings increasing $5.4 million from last year to
$8.8 million this year.
In the Company's Naturalizer Retail operations, which includes
both the United States and Canadian stores, net sales decreased
3.0% to $50.0 million in the second quarter of 1999. Same-
store sales in the second quarter of 1999 decreased 6.9% in the
United States while increasing 0.8% in Canada. Domestically,
the Company had 9 less stores in operation in 1999; Canada had
7 more stores in operation. At the end of the second quarter of
1999, 465 stores were in operation including 329 stores in the
United States and 136 stores in Canada. Total Naturalizer
retail operations had operating earnings of $0.9 million in
1999 compared to $1.8 million in 1998. The lower operating
earnings resulted directly from the lower sales.
Operating losses at the Pagoda International division were $.2
million in the second quarter of 1999 compared to $2.0 million
last year reflecting a significantly reduced level of
operations.
Consolidated gross profit as a percent of sales decreased to
39.3% from 40.1% for the same period last year. This decrease
was primarily due to lower margins at the Company's wholesale
operations, which primarily represents a higher mix of sales at
the Brown Pagoda division. Margins earned on this business are
historically lower than the margin earned at the Company's
wholesale branded operations.
Selling and administrative expenses as a percent of sales
decreased to 34.5% from 36.5% for the same period last year.
This decrease was primarily due to the lower expense rate at
the Company's wholesale operations.
<PAGE> 13
Other income in the second quarter of 1999 primarily represents
a $2.3 million gain from the sale of the le coq sportif
footwear and apparel business.
The consolidated tax rate was 40.8% of consolidated pre-tax
income for the second quarter of 1999 compared to 44.5% for
last year. The higher effective tax rate for last year
reflects higher operating losses at the Pagoda International
marketing division, on which tax benefits could not be
realized. The 1999 tax provision includes $1.2 million of taxes
to allow repatriation of the previously untaxed foreign cash
generated from the sale of the le coq sportif business.
Six Months ended July 31, 1999 compared to the Six Months ended
August 1, 1998
- ---------------------------------------------------------------
Consolidated net sales for the first half of 1999 were $806.9
million, an increase of 2.7% from the first six months of 1998
total of $785.9 million. Net earnings of $16.8 million for the
first half of 1999 compare to net earnings of $8.2 million for
the first half of 1998, an increase of 106.1%. Excluding the
impact of lower losses at the International division, 1999
earnings increased 29.6% over 1998.
Sales at Famous Footwear for the first six months of 1999
increased 7.1% from the first half of last year to $461.1
million, reflecting a 3.0% increase in same-store sales and 29
more units in operation. The higher levels of sales resulted in
operating earnings for 1999 increasing 9.9% to $25.3 million.
The Company's wholesale sales for the first six months of 1999
increased 5.2% to $246.7 million from the same period last
year. Operating earnings of $18.7 million increased $7.4
million from last year due to the increased sales combined with
good expense leveraging.
In the Company's Naturalizer Retail operations, net sales
decreased 3.5% to $94.1 million in the first six months of
1999. Same-store sales decreased 6.8% in the United States
while increasing 0.5% in Canada. Domestically, the Company had
9 less stores in operation in 1999; Canada had 7 more stores in
operation. Total Naturalizer retail operations had an operating
loss of $0.3 million in 1999 compared to operating earnings of
$1.6 million in 1998. The lower operating performance
continues to result directly from the lower sales.
At the Pagoda International division, operating losses were $.7
million in the first six months of 1999 compared to $4.9
million last year reflecting a significantly reduced level of
operations.
Consolidated gross profit as a percent of sales increased to
39.5% from 39.4% for the same period last year. This increase
was primarily due to a higher mix of retail sales, which
historically earn a higher gross profit rate.
Selling and administrative expenses as a percent of sales
decreased to 35.1% from 36.0% for the same period last year.
This decrease was primarily due to the lower expense rate at
the Company's wholesale operations.
Other income has varied from prior year's other expense
primarily due to the $2.3 million gain from the sale of the le
coq sportif footwear and apparel business.
<PAGE> 14
The consolidated tax rate was 39.8% of consolidated pre-tax
income for the first six months of 1999 compared to 44.5% for
last year. The higher effective tax rate for last year
reflects higher operating losses at the Pagoda International
marketing division, on which tax benefits could not be
realized. As previously discussed, the 1999 tax provision
includes $1.2 million of taxes related to the repatriation of
foreign cash.
Financial Condition
- -------------------
A summary of key financial data and ratios at the dates
indicated is as follows:
July 31, August 1, January 30,
1999 1998 1999
-------- --------- -----------
Working Capital (millions) $262.4 $251.4 $250.9
Current Ratio 1.9:1 1.9:1 2.0:1
Total Debt as a Percentage of
Total Capitalization 44.3% 49.2% 47.6%
Cash flow from operating activities for the first half of
fiscal 1999 provided $10.3 million versus a net generation of
$47.5 million last year. In the first half of 1999, cash flow
decreased primarily as a result of higher inventory levels.
The current ratio at July 31, 1999 remained consistent with the
ratio for August 1, 1998, primarily due to the combination of
higher inventory slightly offsetting decreases in receivables
and other current assets.
The decrease in the ratio of total debt as a percentage of
total capitalization at July 31, 1999, compared to the end of
fiscal 1998, is due to principal payments made on long-term
debt combined with earnings for the first six months of 1999.
At July 31, 1999, $2.0 million was borrowed and $13.2 million
of letters of credit were outstanding under the Company's
$155.0 million revolving bank Credit Agreement.
Year 2000 Compliance
- --------------------
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 miscalculations. The Company has
established a company-wide Steering Committee, consisting of
the Chief Financial Officer, Vice Presidents of the Information
Services (IS) functions, internal auditors, executive financial
and legal management and other employees, to oversee and manage
the Company's Year 2000 project.
The Company has completed a thorough assessment of all of its
information systems and has substantially completed the
modification or replacement of its operating and financial
systems that were not Year 2000 compliant used in its
wholesaling, retailing and sourcing operations, and the testing
of all systems. These systems included operating systems and
equipment used in the Company's distribution centers, offices
and other facilities that may have contained embedded chips.
The Company will use the balance of 1999 for additional testing
and to correct any problems that may arise.
<PAGE> 15
The Company relies on independent business partners, including
foreign footwear factories, to provide various products and
services. The Company has communicated with key suppliers and
service providers and has conducted on-site visits to key
factories in an ongoing effort to determine to the extent
possible the status of such third parties' assessment,
remediation and test plans, and whether the Company can rely
upon such third parties going forward. As a result of these
efforts, the Company believes that its key suppliers and
service providers are making progress toward achieving Year
2000 compliance. With regard to its key foreign footwear
manufacturers, the Company has determined that their use of
date-sensitive technology is relatively low. The Company
continues to communicate with key partners to obtain as much
assurance as possible that such third parties will be Year 2000
compliant. Nevertheless, there can be no assurance that such
third parties remediation efforts, or those of suppliers or
service providers to such third parties, will be totally
successful.
The Company believes that its greatest Year 2000 risk is that
its suppliers of footwear, for both its wholesale and retail
businesses, will not be able to provide an uninterrupted flow
of products due to their own or their suppliers' systems
failures or as a result of disruptions in transportation,
utilities or other government services. If there is a
disruption in the flow of footwear, the Company believes that
there is adequate footwear production capacity available from
alternate sources and that if there is a disruption, 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 or secure alternative sources of
footwear at acceptable prices.
The Company's wholesale division's 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 and to test directly with them.
The Company has adopted the Year 2000 compliant version of EDI.
The Company intends to continue to monitor and assess the EDI
and the general state of Year 2000 readiness of its major
retail customers; however, a Year 2000 failure by a major
retail customer could have a materially adverse effect on the
Company.
The Company is developing contingency plans as considered
necessary based on assessments of risks of noncompliance of
internal systems, and business disruptions at its significant
suppliers and customers. The development of these plans will
continue throughout the remainder of 1999.
Management estimates that the non-incremental internal IS staff
and outside consultant costs of the Company's Year 2000 efforts
will total approximately $1.6 million. Through July 31, 1999
virtually this entire total has been incurred and expensed. In
addition, the cost for new purchased or leased hardware and
software that both upgraded the functionality and operating
efficiency of store and financial systems, and resulted in Year
2000 compliance, is approximately $15 million, which will be
expensed over the next several years. All expenditures related
to the Company's Year 2000 project are being funded through
operating cash flows.
<PAGE> 16
The conclusions, estimates and risks in this Year 2000
information are based on management's best current estimates of
numerous 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 customers, 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).
Forward-Looking Statements
- --------------------------
This Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. Actual results could differ materially. In Item 1 of
the Company's fiscal 1998 Annual Report on Form 10-K, detailed
risk factors that could cause variations in results to occur
are listed and further discussed. Such filing is incorporated
herein by reference.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
- ---------------------------------------------------------------
No material changes have taken place in the quantitative and
qualitative information about market risk since the end of the
most recent fiscal year.
<PAGE> 17
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
- --------------------------
There have been no material developments during the quarter
ended July 31, 1999, in the legal proceedings described in
the Company's Annual Report on Form 10-K for the period ended
January 30, 1999.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The results of the votes cast at the Annual Meeting of
Shareholders held on May 27, 1999 were reported in the
Company's Quarterly Report on Form 10-Q for the quarter ended
May 1, 1999.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Listing of Exhibits
(3)(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.
(a)(i) 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.
(a)(ii) Amendment of Certificate of
Incorporation of the Company
filed May 27, 1999,
incorporated herein by
reference to Exhibit 3 to the
Company's report on Form 10-Q
for the quarter ended May 1,
1999.
(b) Bylaws of the Company as
amended through April 20,
1999, incorporated herein by
reference to Exhibit 3 to the
Company's Report on Form 10-K
for the fiscal year ended
January 30, 1999.
(27) Financial Data Schedule (Page 19)
(b) Reports on Form 8-K:
The Company filed a current report on
Form 8-K dated May 27, 1999, which
reported the approval by the Company's
shareholders to change the name of the
company to Brown Shoe Company, Inc.
<PAGE> 18
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 SHOE COMPANY, INC.
Date: September 10, 1999 /s/ Harry E. Rich
------------------- -----------------------------
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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