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BWS > SEC Filings for BWS > Form 10-Q on 30-Nov-2012All Recent SEC Filings

Show all filings for BROWN SHOE CO INC

Form 10-Q for BROWN SHOE CO INC


30-Nov-2012

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our third quarter 2012 results reflect a solid back-to-school selling season and record third quarter net sales for our Famous Footwear segment. We experienced improvements in net sales, gross profit and gross profit rate resulting in an increase in the third quarter operating earnings. We have also utilized our strong operating cash flow to reduce borrowings under our revolving credit agreement.

The following is a summary of the financial highlights for the third quarter of 2012:

· Consolidated net sales increased $18.4 million, or 2.6%, to $732.2 million for the third quarter of 2012, compared to $713.8 million for the third quarter of last year. Net sales of our Famous Footwear segment increased by $20.6 million, reflecting our strong back-to-school season, while our Specialty Retail and Wholesale Operations segments decreased by $1.2 million and $1.0 million, respectively. Our Famous Footwear segment experienced an increase in same-store sales of 6.8% in the third quarter of 2012, as compared to a decrease of 0.4% in the third quarter of 2011. Our Specialty Retail segment also experienced an increase in same-store sales of 8.4% in the third quarter of 2012, as compared to a decrease of 1.9% in the third quarter of 2011.

· Consolidated operating earnings were $41.1 million in the third quarter of 2012, compared to $32.4 million for the third quarter of last year.

· Consolidated net earnings attributable to Brown Shoe Company, Inc. were $24.3 million, or $0.56 per diluted share, in the third quarter of 2012, compared to $33.7 million, or $0.79 per diluted share, in the third quarter of last year.

The following items impacted our third quarter results in 2012 and 2011 and should be considered in evaluating the comparability of our results:

· Portfolio realignment - Our portfolio realignment efforts include selling The Basketball Marketing Company, Inc. ("TBMC") (markets and sells footwear bearing the AND 1 brand name, which was acquired with American Sporting Goods Corporation ("ASG")); exiting certain women's specialty and private label brands; exiting the children's wholesale business; closing two U.S. distribution centers; closing or relocating numerous underperforming or poorly aligned retail stores; closing facilities in China; and other infrastructure changes. The termination of the Etienne Aigner license agreement is also considered part of the Company's portfolio realignment efforts. We incurred costs of $2.6 million ($1.6 million after-tax, or $0.04 per diluted share) related to our portfolio realignment efforts during the third quarter of 2012. In the third quarter of 2011, we sold TBMC for a gain of $21.6 million ($15.4 million after-tax, or $0.37 per diluted share). Also in the third quarter of 2011, we incurred costs related to these portfolio realignment efforts of $4.5 million ($2.8 million after-tax, or $0.07 per diluted share). These efforts will continue throughout 2012. See Note 5 to the condensed consolidated financial statements for additional information.

· Incentive plans - Our selling and administrative expenses were higher by $6.3 million during the third quarter of 2012, compared to the third quarter of last year, due to higher anticipated payments under our cash and stock-based incentive plans.

· ERP stabilization - During the third quarter of 2011, our results were negatively impacted by increases in allowances and customer charge backs, margin related to lost sales and incremental stabilization costs related to our ERP platform. We estimated that the impact of these items reduced earnings before income taxes by $4.9 million ($3.0 million on an after-tax basis, or $0.07 per diluted share) during the third quarter of 2011, with minimal impact on the third quarter of 2012.

· ASG integration costs - We incurred costs of $1.1 million ($0.8 million on an after-tax basis, or $0.02 per diluted share) during the third quarter of 2011 related to the integration of ASG, with no corresponding charges during the third quarter of 2012. These costs were included in restructuring and other special charges, net. See Note 3 and Note 5 to the condensed consolidated financial statements for additional information.

Our debt-to-capital ratio, as defined herein, decreased to 41.7% at October 27, 2012, compared to 50.1% at October 29, 2011, primarily due to the $112.0 million decrease in borrowings under our revolving credit agreement driven by our strong financial performance and resulting cash provided by operating activities. Our debt-to-capital ratio decreased from 49.1% at January 28, 2012 reflecting our $91.0 million decrease in borrowings under our revolving credit agreement, driven by our strong cash provided by operating activities. Our current ratio, as defined herein, was 1.70 to 1 at October 27, 2012, compared to 1.50 to 1 at October 29, 2011 and 1.55 to 1 at January 28, 2012. Inventories at October 27, 2012 were $539.4 million, down from $580.2 million at the end of the third quarter of last year, driven by the effective inventory management and a lower retail store count.

Outlook for the Remainder of 2012

We are optimistic about our ability to successfully execute on our remaining portfolio realignment efforts and drive improvement in our ongoing business. We expect to earn $0.55 to $0.59 per diluted share in 2012, which includes pre-tax costs of approximately $34 million, or $0.51 per diluted share, related to our portfolio realignment efforts, organizational changes and ASG integration costs.

Following are the consolidated results and the results by segment:

CONSOLIDATED RESULTS





                                    Thirteen Weeks Ended                        Thirty-nine Weeks Ended
                           October 27, 2012      October 29, 2011       October 27, 2012       October 29, 2011
                                        % of                  % of                   % of                   % of
                                         Net                   Net                    Net                    Net
($ millions)                            Sales                 Sales                  Sales                  Sales
Net sales                  $ 732.2    100.0%     $ 713.8    100.0%    $ 1,957.9    100.0%    $ 1,953.9    100.0%
Cost of goods sold           446.4     61.0%       437.3     61.3%      1,199.2     61.3%      1,195.8     61.2%
Gross profit                 285.8     39.0%       276.5     38.7%        758.7     38.7%        758.1     38.8%
Selling and
administrative expenses      242.4     33.1%       239.4     33.5%        680.5     34.7%        707.6     36.2%
Restructuring and other
special charges, net           2.3      0.3%         4.7      0.7%         21.3      1.1%          7.1      0.4%
Impairment of intangible
assets                            -         -           -         -         5.8      0.3%             -         -
Operating earnings            41.1      5.6%        32.4      4.5%         51.1      2.6%         43.4      2.2%
Interest expense              (5.5  )  (0.7)%       (6.7  )  (0.9)%       (17.4  )  (0.9)%       (19.8  )  (0.9)%
Loss on early
extinguishment of debt            -         -           -         -            -         -        (1.0  )  (0.1)%
Interest income                0.1      0.0%         0.1      0.0%          0.2      0.0%          0.2      0.0%
Earnings before income
taxes from continuing
operations                    35.7      4.9%        25.8      3.6%         33.9      1.7%         22.8      1.2%
Income tax provision         (11.4  )  (1.6)%       (8.2  )  (1.2)%       (10.7  )  (0.5)%        (7.3  )  (0.4)%
Net earnings from
continuing operations         24.3      3.3%        17.6      2.4%         23.2      1.2%         15.5      0.8%
Discontinued operations:
Earnings from operations
of subsidiary, net of tax         -         -        0.7      0.1%             -         -         1.7      0.1%
Gain on sale of
subsidiary, net of tax            -         -       15.4      2.2%             -         -        15.4      0.8%
Net earnings from
discontinued operations           -         -       16.1      2.3%             -         -        17.1      0.9%
Net earnings                  24.3      3.3%        33.7      4.7%         23.2      1.2%         32.6      1.7%
Net loss attributable to
noncontrolling interest           -         -           -         -        (0.3  )  (0.0)%        (0.2  )  (0.0)%
Net earnings attributable
to Brown Shoe Company,
Inc.                       $  24.3      3.3%     $  33.7      4.7%    $    23.5      1.2%    $    32.8      1.7%

Net Sales

Net sales increased $18.4 million, or 2.6%, to $732.2 million for the third quarter of 2012, compared to $713.8 million for the third quarter of last year. Net sales of our Famous Footwear segment increased, while net sales at our Specialty Retail and Wholesale Operations segments decreased slightly. Our Famous Footwear segment reported a $20.6 million increase in net sales, which reflects a same-store sales increase of 6.8%, during the third quarter of 2012. Famous Footwear experienced increases in conversion rate, customer traffic levels and average retail price. The net sales of our Specialty Retail segment decreased $1.2 million, reflecting a lower store count and a decrease in sales at Shoes.com, partially offset by an increase in same-store sales of 8.4% and an improvement in the Canadian dollar exchange rate. Our Wholesale Operations segment reported a $1.0 million decrease in net sales, primarily attributable to lower sales of our exited brands and our Avia division, partially offset by increases in our Dr. Scholl's Shoes, Fergie, LifeStride, Sam Edelman, Rykä, Vince, Nevados and Franco Sarto divisions.

Net sales increased $4.0 million, or 0.2%, to $1,957.9 million for the thirty-nine weeks ended October 27, 2012, compared to $1,953.9 million for the thirty-nine weeks ended October 29, 2011. Net sales of our Famous Footwear segment increased, while net sales of our Wholesale Operations and Specialty Retail segments decreased. Our Famous Footwear segment reported a $30.3 million increase in net sales, which reflects a same-store sales increase of 4.6% during the thirty-nine weeks ended October 27, 2012. Famous Footwear experienced a higher average retail price, an improvement in customer traffic levels and an increase in the conversion rate. Our Wholesale Operations segment reported a $15.1 million decrease in net sales primarily attributable to lower sales of our exited brands and our Avia division, partially offset by increases in our Sam Edelman, Fergie, Franco Sarto, LifeStride and Rykä divisions. The net sales of our Specialty Retail segment decreased $11.4 million, reflecting a lower store count, a decrease in sales at Shoes.com and a decline in the Canadian dollar exchange rate, partially offset by an increase in our same-store sales of 3.2%.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months, including our applicable e-commerce websites. Relocated stores are treated as new stores, and closed stores are excluded from the calculation. Sales change from new and closed stores, net, reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.

Gross Profit

Gross profit increased $9.3 million, or 3.4%, to $285.8 million for the third quarter of 2012, compared to $276.5 million for the third quarter of last year, driven by our Famous Footwear division, which experienced higher net sales. As a percent of net sales, our gross profit increased to 39.0% for the third quarter of 2012 from 38.7% for the third quarter of last year. The increase in gross profit rate was primarily due to a higher mix of retail sales. Retail and Wholesale Operations net sales were 68% and 32%, respectively, in the third quarter of 2012, compared to 67% and 33% in the third quarter of 2011. Gross profit rates in our retail businesses are higher, on average, than in our wholesale business.

Gross profit increased $0.6 million, or 0.1%, to $758.7 million for the thirty-nine weeks ended October 27, 2012, compared to $758.1 million for the thirty-nine weeks ended October 29, 2011, due to our Famous Footwear division, which experienced both higher net sales and gross profit. As a percent of net sales, our gross profit decreased to 38.7% for the first nine months of 2012 from 38.8% for the first nine months of last year. The reduction in gross profit rate was primarily due to higher inventory markdowns in our Wholesale Operations segment.

We classify warehousing, distribution, sourcing and other inventory procurement costs in selling and administrative expenses. Accordingly, our gross profit and selling and administrative expense rates, as a percentage of net sales, may not be comparable to other companies.

Selling and Administrative Expenses

Selling and administrative expenses increased $3.0 million, or 1.2%, to $242.4 million for the third quarter of 2012, compared to $239.4 million in the third quarter of last year. The increase was primarily related to higher incentive plan costs of $6.3 million due to higher expected payouts under both our cash and stock-based plans and a shift in marketing efforts from the second quarter into the third quarter, partially offset by decreases in merchandising, facilities and direct selling expenses reflecting our portfolio realignment efforts and a lower store count. As a percent of net sales, selling and administrative expenses decreased to 33.1% for the third quarter of 2012 from 33.5% for the third quarter of last year, reflecting better leveraging of our expense base.

Selling and administrative expenses decreased $27.1 million, or 3.8%, to $680.5 million for first nine months of 2012, compared to $707.6 million in the first nine months of last year. The decrease was primarily related to decreases in marketing, selling and facilities expenses, reflecting our portfolio realignment efforts and a lower store count, partially offset by higher incentive plan costs due to higher expected payouts under both our cash and stock-based plans. As a percent of net sales, selling and administrative expenses decreased to 34.7% for first nine months of 2012 from 36.2% for the first nine months of last year, reflecting the factors discussed above.

Restructuring and Other Special Charges, Net

We recorded restructuring and other special charges, net, of $2.3 million for the third quarter of 2012, related to our portfolio realignment efforts. We recorded restructuring and other special charges, net, of $4.7 million for the third quarter of last year, related to our portfolio realignment efforts and the integration of ASG. See Note 5 to the condensed consolidated financial statements for additional information.

We recorded restructuring and other special charges, net, of $21.3 million for the first nine months of 2012, related to our portfolio realignment efforts, organizational changes and integration of ASG. We recorded restructuring and other special charges, net, of $7.1 million for the first nine months of last year, related to our portfolio realignment efforts and the acquisition and integration of ASG. See Note 5 to the condensed consolidated financial statements for additional information.

Impairment of Intangible Assets

During the second quarter of 2012, the Company terminated the Etienne Aigner license agreement, due to a dispute with the licensor. In conjunction with the termination, the Company recognized an impairment charge of $5.8 million to reduce the remaining unamortized value of the licensed trademark intangible asset to zero. See Note 15 to the condensed consolidated financial statements for additional information.

Operating Earnings

Operating earnings increased $8.7 million, or 27.1%, to $41.1 million for the third quarter of 2012, compared to $32.4 million for the third quarter of last year, driven by an increase in net sales, a higher gross profit rate and a decrease in restructuring and other special charges, net, partially offset by an increase in selling and administrative expenses, as described above.

Operating earnings increased $7.7 million, or 17.6%, to $51.1 million in the first nine months of 2012, compared to $43.4 million during the first nine months of last year, primarily driven by a decrease in selling and administrative expenses, partially offset by an increase in restructuring and other special charges, net, and impairment of intangible assets, as described above.

Interest Expense

Interest expense decreased $1.2 million, or 17.5%, to $5.5 million for the third quarter of 2012, compared to $6.7 million for the third quarter of last year, primarily reflecting lower average borrowings under our revolving credit agreement.

Interest expense decreased $2.4 million, or 12.4%, to $17.4 million for the first nine months of 2012, compared to $19.8 million for the first nine months of last year, primarily reflecting the same factor noted above for the third quarter of 2012.

Loss on Early Extinguishment of Debt

During the second quarter of 2011, the Company completed a cash tender offer for the 2012 Senior Notes and called for redemption and repaid the remaining notes that were not tendered. The Company incurred a loss on early extinguishment costs to retire the 2012 Senior Notes prior to maturity totaling $1.0 million, of which approximately $0.6 million was non-cash.

Income Tax Provision

Our effective tax rate can vary considerably from period to period, depending on a number of factors. The primary driver of this volatility is the relative mix of domestic and international earnings. Domestic earnings generally carry higher tax rates, while international earnings generally carry lower rates. Our consolidated effective tax rate was 31.9% for the third quarter of 2012, which is comparable to our third quarter of 2011 rate of 31.7%. For the first nine months of 2012, our consolidated effective rate was 31.6%, which is comparable to 32.0% in the prior year.

Net Earnings from Continuing Operations

We reported net earnings from continuing operations of $24.3 million in the third quarter of 2012, compared to $17.6 million in the third quarter of last year, as a result of the factors described above.

We reported net earnings from continuing operations of $23.2 million in the first nine months of 2012, compared to $15.5 million in the first nine months of last year, as a result of the factors described above.

Net Earnings from Discontinued Operations

During 2011, we sold TBMC, which markets and sells footwear bearing the AND 1 brand name. As such, the third quarter and first nine months of 2011 operations of TBMC are reported as discontinued operations.

Net Earnings Attributable to Brown Shoe Company, Inc.

We reported net earnings attributable to Brown Shoe Company, Inc. of $24.3 million and $23.5 million during the third quarter and first nine months of 2012, respectively, compared to $33.7 million and $32.8 million during the third quarter and first nine months of last year, respectively, as a result of the factors described above.


FAMOUS FOOTWEAR





                                   Thirteen Weeks Ended                         Thirty-nine Weeks Ended
                         October 27, 2012       October 29, 2011        October 27, 2012       October 29, 2011
                                      % of                   % of                    % of                   % of
($ millions, except                    Net                    Net                     Net                    Net
sales per square foot)                Sales                  Sales                   Sales                  Sales
Operating Results
Net sales                $ 436.8    100.0%     $  416.2    100.0%     $ 1,134.2    100.0%    $ 1,103.9    100.0%
Cost of goods sold         250.1     57.3%        237.9     57.2%         635.5     56.0%        619.9     56.2%
Gross profit               186.7     42.7%        178.3     42.8%         498.7     44.0%        484.0     43.8%
Selling and
administrative expenses    150.8     34.5%        149.9     36.0%         416.6     36.7%        429.3     38.8%
Restructuring and other
special charges, net         0.4      0.1%             -         -          7.7      0.7%             -         -
Operating earnings       $  35.5      8.1%     $   28.4      6.8%     $    74.4      6.6%    $    54.7      5.0%

Key Metrics
Same-store sales %
change                      6.8%                 (0.4) %                    4.6  %               (1.3)%
Same-store sales $
change                   $  26.7               $   (1.5  )            $    47.7              $   (14.6  )
Sales change from new
and
   closed stores, net    $  (6.1  )            $   (3.8  )            $   (17.4  )           $   (12.5  )

Sales per square foot,
excluding
   e-commerce (thirteen
and thirty-
   nine weeks ended)     $    58               $     53               $     151              $     141
Sales per square foot,
excluding
   e-commerce (trailing
twelve-
   months)               $   196               $    186               $     196              $     186
Square footage
(thousand sq. ft.)         7,249                  7,683                   7,249                  7,683

Stores opened                 18                     17                      43                     43
Stores closed                 11                     12                      71                     32
Ending stores              1,061                  1,121                   1,061                  1,121

Net Sales

Net sales increased $20.6 million, or 4.9%, to $436.8 million for the third quarter of 2012, compared to $416.2 million for the third quarter of last year. Same-store sales, including e-commerce, increased 6.8% during the third quarter of 2012, primarily due to increases in our conversion rate, customer traffic levels and average retail price. Boat shoes, running shoes and accessories were contributors to the increase in net sales. During the third quarter of 2012, we opened 18 new stores and closed 11 stores, resulting in 1,061 stores and total square footage of 7.2 million at the end of the third quarter of 2012, compared to 1,121 stores and total square footage of 7.7 million at the end of the third quarter of last year. Sales per square foot, excluding e-commerce, increased 10.3% to $58 in the third quarter of 2012, compared to $53 in the third quarter of last year. Members of our customer loyalty program, Rewards, continue to account for a majority of the segment's sales, as approximately 71% of our net sales were made to members of our Rewards program in the third quarter of 2012 compared to approximately 63% in the third quarter of 2011.

Net sales increased $30.3 million, or 2.7%, to $1,134.2 million for the first nine months of 2012, compared to $1,103.9 million for the first nine months of last year. Same-store sales, including e-commerce, increased 4.6% during the first nine months of 2012, reflecting a higher average retail price, an improvement in customer traffic levels and an increase in the conversion rate. Sales per square foot, excluding e-commerce, increased 7.4% to $151, compared to $141 in the first nine months of last year.

Gross Profit

Gross profit increased $8.4 million, or 4.7%, to $186.7 million for the third quarter of 2012, compared to $178.3 million for the third quarter of last year, due primarily to the increase in net sales. As a percent of net sales, our gross profit was 42.7% for the third quarter of 2012, which is comparable to 42.8% for the third quarter of last year.

Gross profit increased $14.7 million, or 3.1%, to $498.7 million for the first nine months of 2012, compared to $484.0 million for the first nine months of last year, due primarily to the increase in net sales. As a percent of net sales, our gross profit was 44.0% for the first nine months of 2012, compared to 43.8% for the first nine months of last year. The increase in our gross profit rate was primarily driven by lower markdowns.

Selling and Administrative Expenses

Selling and administrative expenses increased $0.9 million, or 0.6%, to $150.8 million for the third quarter of 2012, compared to $149.9 million for the third quarter of last year. The increase was primarily attributable to a shift in marketing efforts from the second quarter to the third quarter and higher incentive plan costs due to higher expected payouts under both our cash and stock-based plans, partially offset by lower retail facility and direct selling costs due to our lower store count. As a percent of net sales, selling and administrative expenses decreased to 34.5% for the third quarter of 2012, compared to 36.0% for the third quarter of last year.

Selling and administrative expenses decreased $12.7 million, or 2.9%, to $416.6 million for the first nine months of 2012, compared to $429.3 million for the first nine months of last year, primarily due to lower retail facility and direct selling costs, both due to our lower store count, and lower marketing expenses, all partially offset by higher incentive plan costs due to higher expected payouts under both our cash and stock-based plans. As a percent of net sales, selling and administrative expenses decreased to 36.7% for the first nine months of 2012, compared to 38.8% for first nine months of last year.

Restructuring and Other Special Charges, Net

We incurred restructuring and other special charges, net, of $0.4 million and $7.7 million for the third quarter and first nine months of 2012, respectively, as a result of our portfolio realignment efforts, which included the closure of a distribution center and the closure or relocation of underperforming stores. We did not incur corresponding charges related to our portfolio realignment efforts in the third quarter and first nine months of last year.

Operating Earnings

Operating earnings increased $7.1 million, or 25.2%, to $35.5 million for the third quarter of 2012, compared to $28.4 million for the third quarter of last year. The increase was primarily due to an increase in net sales and resulting gross profit, as described above. As a percent of net sales, operating earnings improved to 8.1% for the third quarter of 2012, compared to 6.8% for the third quarter of last year.

Operating earnings increased $19.7 million, or 36.1%, to $74.4 million for the first nine months of 2012, compared to $54.7 million in the first nine months of last year primarily due to an increase in net sales and resulting gross profit and a decrease in selling and administrative expenses, partially offset by restructuring and other special charges, net, as described above. As a percent of net sales, operating earnings increased to 6.6% in the first nine months of 2012, compared to 5.0% in the first nine months of last year.


WHOLESALE OPERATIONS





                                    Thirteen Weeks Ended                        Thirty-nine Weeks Ended
                           October 27, 2012      October 29, 2011       October 27, 2012      October 29, 2011
                                       % of                  % of                   % of                  % of
                                         Net                   Net                    Net                   Net
($ millions)                            Sales                 Sales                  Sales                 Sales
Operating Results
Net sales                  $ 232.6    100.0%     $ 233.6    100.0%      $ 650.7    100.0%     $ 665.8    100.0%
Cost of goods sold           161.4     69.4%       163.3     69.9%        463.2     71.2%       469.1     70.5%
Gross profit                  71.2     30.6%        70.3     30.1%        187.5     28.8%       196.7     29.5%
Selling and
administrative expenses       54.3     23.3%        57.1     24.5%        160.1     24.6%       174.6     26.2%
Restructuring and other
special charges, net           1.5      0.7%         3.6      1.5%          6.8      1.0%         3.6      0.5%
. . .
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