<Page 1>
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 30, 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 November 27, 1999, 18,258,490 shares of the registrant's common
stock were outstanding.
<Page 2>
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
(Unaudited)
October 30, October 31, January 30,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 47,704 $ 37,419 $ 45,532
Receivables, net of allowances of
$10,666 at October 30, 1999,
$9,850 at October 31, 1998, and
$9,820 at January 30, 1999 68,546 67,287 67,815
Inventories, net of adjustment to
last-in, first-out cost of
$12,759 at October 30, 1999,
$14,968 at October 31, 1998, and
$13,424 at January 30, 1999 384,400 369,423 362,274
Other Current Assets 21,341 25,896 21,762
--------- --------- ---------
Total Current Assets 521,991 500,025 497,383
Other Assets 76,206 76,821 75,671
Property and Equipment 231,704 215,692 217,054
Less allowances for depreciation
and amortization (147,891) (137,826) (134,876)
--------- --------- ---------
83,813 77,866 82,178
--------- --------- ---------
$ 682,010 $ 654,712 $ 655,232
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 23,000 $ - $ -
Accounts Payable 119,860 121,447 124,921
Accrued Expenses 92,090 85,182 90,081
Income Taxes 10,343 15,638 6,442
Current Maturities of Long-Term Debt 10,000 25,000 25,000
--------- --------- ---------
Total Current Liabilities 255,293 247,267 246,444
Long-Term Debt and Capitalized
Lease Obligations 162,033 172,030 172,031
Other Liabilities 18,593 20,352 19,583
Shareholders' Equity
Common Stock 68,473 67,738 68,131
Additional Capital 49,109 46,961 48,243
Unamortized Value of Restricted Stock (3,793) (2,996) (4,058)
Accumulated Other Comprehensive Loss (7,527) (9,548) (8,842)
Retained Earnings 139,829 112,908 113,700
--------- --------- ---------
246,091 215,063 217,174
--------- --------- ---------
$ 682,010 $ 654,712 $ 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 Thirty-nine Weeks Ended
------------------------ ------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $429,132 $411,976 $1,236,058 $1,197,903
Cost of Goods Sold 257,288 248,222 745,332 724,823
-------- -------- ---------- ----------
Gross Profit 171,844 163,754 490,726 473,080
-------- -------- ---------- ----------
Selling and Administrative Expenses 146,279 136,887 429,461 419,785
Interest Expense 4,236 4,464 13,311 14,954
Other (Income) Expense (722) 774 (2,055) 2,010
-------- -------- ---------- ----------
Earnings Before Income Taxes 22,051 21,629 50,009 36,331
Income Tax Provision 7,288 8,731 18,413 15,267
-------- -------- ---------- ----------
NET EARNINGS $ 14,763 $ 12,898 $ 31,596 $ 21,064
======== ======== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ .82 $ .73 $ 1.77 $ 1.19
======== ======== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ .81 $ .72 $ 1.74 $ 1.18
======== ======== ========== ==========
DIVIDENDS PER COMMON SHARE $ .10 $ .10 $ .30 $ .30
======== ======== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<Page 4>
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------
October 30, October 31,
1999 1998
----------- -----------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 19,300 $ 59,131
Investing Activities:
Proceeds from the sale of le coq sportif 9,410 -
Capital expenditures (19,983) (12,542)
--------- ---------
Net Cash Used by Investing Activities (10,573) (12,542)
Financing Activities:
Increase (decrease) in short-term notes payable 23,000 (54,000)
Principal payments of long-term debt (25,000) -
Proceeds from issuance of common stock 913 109
Dividends paid (5,468) (5,415)
--------- ---------
Net Cash Used by Financing Activities (6,555) (59,306)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 2,172 (12,717)
Cash and Cash Equivalents at Beginning of Period 45,532 50,136
--------- ---------
Cash and Cash Equivalents at End of Period $ 47,704 $ 37,419
========= =========
</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 October 30,
1999 and October 31, 1998 (000's, except per share data):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings -
Basic and Diluted $14,763 $12,898 $31,596 $21,064
======= ======= ======= =======
Denominator:
Weighted average shares
outstanding-Basic 17,899 17,717 17,842 17,677
Effect of potentially
dilutive securities 307 191 302 247
------- ------- ------- -------
Weighted average shares
outstanding-Diluted 18,206 17,908 18,144 17,924
======= ======= ======= =======
Basic earnings per share $ .82 $ .73 $ 1.77 $ 1.19
======= ======= ======= =======
Diluted earnings per share $ .81 $ .72 $ 1.74 $ 1.18
======= ======= ======= =======
</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 October
30, 1999 and October 31, 1998 (000's):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $14,763 $12,898 $31,596 $21,064
Currency Translation
Adjustment 1,245 531 1,315 (1,121)
------- ------- ------- -------
Comprehensive Income $16,008 $13,429 $32,911 $19,943
======= ======= ======= =======
</TABLE>
Note E - Pagoda International Restructuring Reserve
- ---------------------------------------------------
In the first nine months of 1999, the Company utilized
approximately $2.0 million of the $10.7 million restructuring
reserve remaining at the end of fiscal 1998. The reserve was
primarily used for inventory markdowns and severance. It is
currently expected that a majority of the remaining reserve of
$8.7 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 October 30, 1999 and October 31, 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 October 30, 1999
External sales $263,136 $116,715 $ 46,649 $ 141 $ 2,491 $ 429,132
Intersegment sales - 47,780 - - - 47,780
Operating profit
(loss) 23,531 8,809 (1,956) 37 (3,067) 27,354
Thirteen Weeks Ended October 31, 1998
External sales $239,689 $119,242 $ 46,265 $ 4,637 $ 2,143 $ 411,976
Intersegment sales - 50,922 - - - 50,922
Operating profit
(loss) 18,580 12,295 (84) (932) (2,663) 27,196
Thirty-nine Weeks Ended October 30, 1999
External sales $724,271 $363,369 $140,756 $ 468 $ 7,194 $1,236,058
Intersegment sales - 138,809 - - - 138,809
Operating profit
(loss) 48,839 27,472 (2,279) (639) (9,659) 63,734
Thirty-nine Weeks Ended October 31, 1998
External sales $670,152 $353,785 $143,805 $23,871 $ 6,290 $1,197,903
Intersegment sales - 151,195 - - - 151,195
Operating profit
(loss) 41,610 23,623 1,554 (5,860) (7,616) 53,311
</TABLE>
<Page 7>
Reconciliation of operating profit to consolidated earnings
before income taxes (000's):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total operating profit $ 27,354 $ 27,196 $ 63,734 $ 53,311
Interest expense (4,236) (4,464) (13,311) (14,954)
Non-operating other expense (1,067) (1,103) (414) (2,026)
-------- --------- --------- --------
Earnings before income taxes $ 22,051 $ 21,629 $ 50,009 $ 36,331
======== ========= ========= ========
</TABLE>
The "Other" segment includes the Scholze Tannery business and
Corporate general and administrative expenses, which are not
allocated to the operating 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 $.6 million and $2.0
million for the thirteen weeks ended and thirty-nine weeks
ended October 30, 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, a portion of
the proceeds of which 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 October 30, 1999 and October
31, 1998, and the related condensed consolidating statements
of earnings and cash flows for the thirty-nine weeks ended
October 30, 1999 and October 31, 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 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 OCTOBER 30 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 $ 6,790 $ 6,231 $ 34,683 $ - $ 47,704
Receivables, net 34,539 12,152 21,855 - 68,546
Inventory 39,366 337,733 19,118 (11,817) 384,400
Other current assets (3,800) 19,029 1,976 4,136 21,341
-------- --------- --------- --------- ----------
Total Current Assets 76,895 375,145 77,632 (7,681) 521,991
Other Assets 51,063 19,306 5,882 (45) 76,206
Property and Equipment, net 14,145 63,231 6,437 - 83,813
Investment in Subsidiaries 264,761 49,716 - (314,477) -
-------- --------- --------- --------- ----------
Total Assets $406,864 $ 507,398 $ 89,951 $(322,203) $ 682,010
======== ========= ========= ========= ==========
Liabilities & Shareholders' Equity
- ----------------------------------
Current Liabilities
Notes payable $ 23,000 $ - $ - $ - $ 23,000
Accounts payable 6,505 99,190 14,165 - 119,860
Accrued expenses 24,261 53,949 11,063 2,817 92,090
Income taxes 1,522 8,756 112 (47) 10,343
Current maturities of
long-term debt 10,000 - - - 10,000
-------- --------- --------- --------- ----------
Total Current Liabilities 65,288 161,895 25,340 2,770 255,293
Long-Term Debt and Capitalized
Lease Obligations 162,033 41 - (41) 162,033
Other Liabilities 19,198 (811) 206 - 18,593
Intercompany Payable (Receivable) (85,746) 77,563 13,524 (5,341) -
Shareholders' Equity 246,091 268,710 50,881 (319,591) 246,091
-------- --------- --------- --------- ----------
Total Liabilities and
Shareholders' Equity $406,864 $ 507,398 $ 89,951 $(322,203) $ 682,010
======== ========= ========= ========= ==========
</TABLE>
<Page 9>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999
(Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $192,924 $990,051 $253,937 $(200,854) $1,236,058
Cost of goods sold 138,569 602,428 205,189 (200,854) 745,332
-------- -------- -------- --------- ----------
Gross profit 54,355 387,623 48,748 - 490,726
Selling and
administrative expenses 52,998 345,528 32,105 (1,170) 429,461
Interest expense 13,274 - 37 - 13,311
Intercompany interest
(income) expense (10,179) 10,208 (29) - -
Other (income) expense 531 (3,460) (296) 1,170 (2,055)
Equity in earnings
of subsidiaries (33,614) (13,407) - 47,021 -
-------- -------- -------- --------- ----------
Earnings (Loss) Before
Income Taxes 31,345 48,754 16,931 (47,021) 50,009
Income tax provision (benefit) (251) 15,140 3,524 - 18,413
-------- -------- -------- --------- ----------
Net Earnings (Loss) $ 31,596 $ 33,614 $ 13,407 $ (47,021) $ 31,596
======== ======== ======== ========= ==========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999
(Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
-------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Provided (Used) by
Operating Activities $ 10,596 $ (9,211) $ 11,997 $ 5,918 $ 19,300
Investing Activities:
Capital expenditures (273) (18,240) (1,470) - (19,983)
Proceeds from sale of
le coq sportif - 9,410 - - 9,410
-------- ---------- -------- --------- ----------
Net Cash Used by
Investing Activities (273) (8,830) (1,470) - (10,573)
Financing Activities:
Increase in short-term
notes payable 23,000 - - - 23,000
Principal payments of
long-term debt (25,000) - - - (25,000)
Proceeds from issuance of
common stock 913 - - - 913
Dividends paid (5,468) - - - (5,468)
Intercompany financing (9,164) 19,534 (4,452) (5,918) -
-------- ---------- -------- --------- ----------
Net Cash Provided (Used) by
Financing Activities (15,719) 19,534 (4,452) (5,918) (6,555)
Increase (Decrease) in Cash and
Cash Equivalents (5,396) 1,493 6,075 - 2,172
Cash and Cash Equivalents at
Beginning of Period 12,186 4,738 28,608 - 45,532
-------- ---------- -------- --------- ----------
Cash and Cash Equivalents at
End of Period $ 6,790 $ 6,231 $ 34,683 $ - $ 47,704
======== ========== ======== ======== ==========
</TABLE>
<Page 10>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 31, 1998
(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 $ 15,935 $ 5,490 $ 18,994 $ (3,000) $ 37,419
Receivables, net 29,750 13,649 23,888 - 67,287
Inventory 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
Other Assets 47,249 17,708 11,973 (109) 76,821
Property and Equipment, net 15,381 55,766 6,719 - 77,866
Investment in Subsidiaries 254,773 37,064 - (291,837) -
-------- ---------- -------- --------- ----------
Total Assets $412,824 $ 458,241 $ 87,481 $(303,834) $ 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 61,443 (296,954) 215,063
-------- ---------- -------- --------- ----------
Total Liabilities and
Shareholders' Equity $412,824 $ 458,241 $ 87,481 $(303,834) $ 654,712
======== ========== ======== ========= ==========
</TABLE>
<Page 11>
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
(Thousands)
<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 (Loss) 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
(Thousands)
<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
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 12>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
Quarter ended October 30, 1999 compared to the Quarter ended October 31, 1998
- ------------------------------------------------------------------------------
Consolidated net sales for the fiscal quarter ended October 30,
1999 were $429.1 million compared to $412.0 million in the
quarter ended October 31, 1998. Net earnings of $14.8 million
for the third quarter of 1999 compares to net earnings of $12.9
million in the third quarter of 1998. The increase in net
earnings resulted from improved performance at Famous Footwear
as well as a reduction in the International division's losses
in the third quarter of 1999. These improvements were slightly
offset by lower operating results within the Company's
wholesale and Naturalizer Retail operations. Excluding the
effect of lower International losses, net earnings for the
third quarter of 1999 increased 7.0% over the third quarter of
1998.
Famous Footwear achieved record third quarter sales and
operating earnings which followed record results for fiscal
1998 and the first two quarters of 1999. Sales of $263.1
million increased 9.8% from last year representing a same-store
sales increase of 3.7% and 36 more stores, reflecting a total
of 849 stores in operation. Operating earnings for the third
quarter of 1999 increased 26.6% to $23.5 million as a result of
higher sales and improved margin and expense rates.
The Company's wholesale operations - the Brown Branded, Brown
Pagoda and Brown Canada divisions - had a net sales decrease of
2.1% during the third quarter of 1999 to $116.7 million from
$119.2 million in the third quarter of 1998. Sales decreased
primarily from the discontinuation of the le coq sportif
division which was sold in July 1999. The increased marketing
investment at Brown Branded supporting the new, updated
Naturalizer product, along with the lower sales, were the
primary factors in operating earnings decreasing $3.5 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 increased
0.8% to $46.6 million in the third quarter of 1999 from $46.3
million in the third quarter of 1998. Same-store sales in the
third quarter of 1999 decreased 1.5% in the United States and
8.7% in Canada. Domestically, the Company had 5 more stores in
operation in 1999; Canada had 7 more stores in operation. At
the end of the third quarter of 1999, 481 stores were in
operation including 343 stores in the United States and 138
stores in Canada. Total Naturalizer Retail operations had an
operating loss of $2.0 million in 1999 compared to $0.1 million
loss in 1998. The lower operating earnings resulted directly
from lower same-store sales and higher marketing costs
associated with an expanded customer catalog and new store
merchandizing presentations to reflect the udpated Naturalizer
image.
The Pagoda International division broke even in the third
quarter of 1999 compared to a $0.9 million operating loss last
year reflecting a significantly reduced level of operations.
Consolidated gross profit as a percent of sales increased to
40.0% from 39.7% for the same period last year. This increase
was primarily due to a higher mix of retail sales, which
historically earn higher margins than wholesale sales.
<Page 13>
Selling and administrative expenses as a percent of sales
increased to 34.1% from 33.2% for the same period last year.
This increase was primarily due to the increased marketing
investment in the wholesale operations and a higher mix of
retail sales, which carry a higher expense rate.
Other Income in the third quarter of 1999 varies from prior
year's Other Expense primarily from additional environmental
costs recorded last year.
The consolidated tax rate was 33.1% of consolidated pre-tax
income for the third quarter of 1999 compared to 40.4% for last
year. The higher effective tax rate for last year reflects the
impact of higher operating losses at the Pagoda International
marketing division, on which tax benefits could not be
realized.
Nine Months ended October 30, 1999 compared to the Nine Months
ended October 31, 1998
- ---------------------------------------------------------------
Consolidated net sales for the first nine of 1999 were $1.236
billion, an increase of 3.2% from the first nine months of 1998
total of $1.198 billion. Net earnings of $31.6 million for the
first nine months of 1999 compare to net earnings of $21.1
million for the first nine months of 1998, an increase of 50%.
Excluding the impact of reduced losses at the International
division, 1999 earnings increased 18.3% over 1998.
Sales at Famous Footwear for the first nine months of 1999
increased 8.1% from $670.2 million for the first nine months of
last year to $724.3 million, reflecting a 3.3% increase in same-
store sales and 36 more units in operation. The higher levels
of sales and slightly improved margin and expense rates
resulted in operating earnings for 1999 increasing 17.4% to
$48.8 million.
The Company's wholesale sales for the first nine months of 1999
increased 2.7% to $363.4 million from $353.8 million for the
same period last year. The increased sales is derived from
Brown Pagoda's Star Wars, Barbie and Dr. Scholl's licensed
products. Operating earnings of $27.5 million increased $3.9
million from last year due to the increased sales combined with
effective expense leveraging.
In the Company's Naturalizer Retail operations, net sales
decreased 2.1% to $140.8 million in the first nine months of
1999. Same-store sales decreased 5.1% in the United States and
2.5% in Canada. Domestically, the Company had 5 more stores in
operation in 1999; Canada had 7 more stores in operation. Total
Naturalizer Retail operations had an operating loss of $2.3
million in 1999 compared to operating earnings of $1.6 million
in 1998. The lower operating performance continues to result
primarily from the lower sales.
At the Pagoda International division, operating losses were
$0.6 million in the first nine months of 1999 compared to $5.9
million last year reflecting a significantly reduced level of
operations.
Consolidated gross profit as a percent of sales increased to
39.7% from 39.5% 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 34.7% from 35.0% for the same period last year.
This decrease was primarily due to the lower expense rate at
the Company's wholesale operations offset by the higher mix of
retail sales, which carry a higher expense rate.
<Page 14>
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 recognized in the
second quarter of 1999. In addition, prior year's Other
Expense includes $1.4 million of additional provision
associated with the International operations.
The consolidated tax rate was 36.8% of consolidated pre-tax
income for the first nine months of 1999 compared to 42.0% 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. In addition, the 1999 year-to-date 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.
Financial Condition
- -------------------
A summary of key financial data and ratios at the dates
indicated is as follows:
October 30, October 31, January 30,
1999 1998 1999
----------- ----------- -----------
Working Capital (millions) $266.7 $252.8 $250.9
Current Ratio 2.0:1 2.0:1 2.0:1
Total Debt as a Percentage of
Total Capitalization 44.2% 47.8% 47.6%
Cash flow from operating activities for the first nine months
of fiscal 1999 provided $19.3 million versus a net generation
of $59.1 mi1lion last year. In the first nine months of 1999,
cash flow decreased primarily as a result of higher inventory
levels to support growth within the Famous Footwear division.
The current ratio at October 30, 1999 remained consistent with
the ratio for October 31, 1998, primarily due to the
combination of higher inventory slightly offsetting decreases
in other current assets and various increases in current
liabilities.
The decrease in the ratio of total debt as a percentage of
total capitalization at October 30, 1999, compared to the end
of fiscal 1998, is due to principal payments made on long-term
debt combined with earnings for the first nine months of 1999.
At October 30, 1999, $23.0 million was borrowed and $8.4
million of letters of credit were outstanding under the
Company's $155.0 million revolving bank Credit Agreement.
On November 9, 1999, Standard & Poor's revised its outlook on
the Company to stable from negative. The "BB" corporate credit
and senior unsecured debt ratings were reaffirmed by Standard &
Poor's.
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 to oversee and
manage the Company's Year 2000 project.
<Page 15>
The Company has completed a thorough assessment of all of its
information systems and has 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 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 substantially Year 2000 compliant. With
regard to its key foreign footwear manufacturers, the Company
has determined that their use of date-sensitive technology is
relatively low. 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 has developed assessment and contingency plans as
considered necessary based on the risks of noncompliance of
internal systems and business disruptions at its significant
suppliers and customers. The Company is establishing Command
Centers which will be staffed to respond to such presently
unanticipated Year 2000 difficulties as may occur on or after
January 1, 2000.
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 October 30, 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 October 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 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 no reports on Form 8-K during
the quarter ended October 30, 1999.
<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: December 10, 1999 /s/ Andrew M. Rosen
- ----------------------- ------------------------------
Andrew M. Rosen
Chief Financial Officer and
Treasurer On Behalf of the
Corporation as the Principal
Financial Officer
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