Caleres - 10-Q quarterly report FY

(Mark One)

     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 September 1, 2001, 17,468,485 shares of the registrant's common stock were outstanding.

(Thousands)

See Notes to Condensed Consolidated Financial Statements.

(Thousands, except per share)

See Notes to Condensed Consolidated Financial Statements.

(Thousands)

See Notes to Condensed Consolidated Financial Statements.

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) to present fairly the Company's financial condition, results of operations, and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States.

The fiscal 2000 Condensed Consolidated Statements of Earnings have been reclassified to conform to the fiscal 2001 presentation, whereby royalty income, previously reflected in Other Income, has been reclassified to Net Sales.

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 year ended February 3, 2001.

Note B - Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the periods ended August 4, 2001 and July 29, 2000 ($000's, except per share data):
 

Note C - Comprehensive Income

Comprehensive Income includes all changes in equity except those resulting from investments by shareholders and distributions to shareholders.

The following table sets forth the reconciliation from Net Earnings to Comprehensive Income for the periods ended August 4, 2001 and July 29, 2000 (000's):
 

Note D - Business Segment Information

Applicable business segment information is as follows for the periods ended August 4, 2001 and July 29, 2000 (000's):
 

Reconciliation of operating profit to earnings before income taxes (000's):
 

Operating profit represents gross profit less selling and administrative expenses and other operating income or expense. The "Other" segment includes Corporate selling and administrative expenses, which are not allocated to the operating units, and the Company's investment in Shoes.com, Inc., a footwear e-commerce company.

Note E - New Accounting Standards

On February 4, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes standards for recognition and measurement of derivatives and hedging activities. In adoption of this statement at the beginning of fiscal 2001, the Company recorded a cumulative transition adjustment to increase Other Comprehensive Income by $0.3 million (net of tax), to recognize the fair value of its derivative instruments. The Company expects to reclassify all of the transition adjustment into earnings in 2001.

The Company uses derivative financial instruments, primarily foreign exchange contracts and interest rate caps and swaps, to reduce its exposure to market risks from changes in foreign exchange rates and interest rates. These derivatives, designated as cash flow hedges, are used to hedge the procurement of footwear from foreign countries and the variability of cash flows paid on variable-rate debt. The terms of these instruments are generally less than one year. The effective portions of changes in the fair value of derivatives are recorded in Other Comprehensive Income and reclassified to earnings when the hedged item affects earnings. The ineffective portions of changes in the fair value of cash flow hedges are immediately recognized in earnings.

During the first six months of fiscal 2001, changes in fair value of derivatives and reclassifications from Other Comprehensive Income to earnings reduced the initial transition adjustment, resulting in a decrease in Other Comprehensive Income of $258,000, net of tax (see Note C).
 

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives.

The Company will apply the new standards on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income in fiscal 2002 of approximately $1 million ($0.06 per share). During fiscal 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
 

Note F - Consolidation

The consolidated financial statements include the accounts of Brown Shoe Company, Inc. and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. Prior to the first quarter of 2001, the accounts of the Company's Brown Pagoda division were consolidated on a calendar year basis, which was approximately one month earlier than the rest of the Company. In the first quarter of 2001, this one-month reporting lag was eliminated to provide uniform reporting. As a result, the earnings for this division in the month of January, 2001 of $0.2 million were credited directly to Retained Earnings.
 

Note G - Condensed Consolidated Financial Information

Certain of the Company's debt is fully, unconditionally and jointly and severally guaranteed by certain wholly-owned domestic subsidiaries and the Canadian subsidiary of the Company. Accordingly, condensed consolidating balance sheets as of August 4, 2001 and July 29, 2000, and the related condensed consolidating statements of earnings and cash flows for the twenty-six week periods then ended. 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.
 

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

Results of Operations

Quarter ended August 4, 2001 compared to the Quarter ended July 29, 2000

Consolidated net sales for the second quarter ended August 4, 2001 were $442.1 million compared to $419.1 million in the quarter ended July 29, 2000. Net earnings of $5.8 million for the second quarter of 2001 compares to net earnings of $9.2 million in the second quarter of 2000. Diluted earnings per share was $.33 in the second quarter of 2001 compared to $.51 in the second quarter of 2000.

Famous Footwear achieved a sales increase of 4.9% during the second quarter of 2001 to $266.4 million. The increase was driven by 32 additional stores resulting in a total of 907 stores in operation, partially offset by a 5.5% same-store sales decline. Famous Footwear had an operating loss for the second quarter of 2001 of $0.3 million compared to operating earnings of $13.5 million last year. The decrease in operating profitability was due to several factors including a slowdown in consumer traffic levels and corresponding declines in comparable store sales, as well as an inventory clearance program, which resulted in lower margins.

The Company's wholesale operations had net sales of $120.9 million during the second quarter of 2001 compared to $110.0 million last year. This sales increase was primarily due to higher sales of Naturalizer branded product as well as women's private label and licensed footwear, and children's footwear. Operating earnings of $13.7 million increased from $5.5 million in the second quarter of 2000 primarily as a result of the higher sales volume.

In the Company's Naturalizer Retail operations, including stores in both the United States and Canada, net sales decreased 0.9% to $54.6 million in the second quarter of 2001. Same-store sales in the second quarter of 2001 decreased 2.1% in the United States and increased 3.4% in Canada. The Company had 25 less stores in operation in the United States in 2001 and had 12 more stores in operation in Canada than in 2000. At the end of the second quarter of 2001, 472 stores were in operation including 318 stores in the United States and 154 stores in Canada. Total Naturalizer Retail operations achieved operating earnings of $1.5 million in the second quarter of fiscal 2001 compared to earnings of $1.7 million in 2000. The decline was primarily due to a lower margin rate and increased marketing expenses.

Consolidated gross profit as a percent of sales for the second quarter of 2001 decreased to 38.4% from 40.1% during the same period last year. This decrease was primarily due to lower margins in the Company's retail operations as a result of higher promotional activities.

Selling and administrative expenses as a percent of sales for the second quarter of 2001 was 35.9%, the same as last year. Lower expenses within the wholesale operations were offset by higher expenses within the retail operations.
 

Other income consisted primarily of a gain from the sale of the Company airplane.

The consolidated tax rate was 25.9% of pre-tax income for the second quarter of 2001 compared to 32.9% last year. The decrease from last year's effective rate reflects a higher mix of offshore operating income, which is taxed at lower rates, for the quarter and projected for the year.
 

Six Months ended August 4, 2001 compared to the Six Months ended July 29, 2000

Consolidated net sales for the first half of 2001 were $878.2 million, an increase of 7.9% from the first six months of 2000 total of $813.9 million. Net earnings of $12.2 million for the first half of 2001 compare to net earnings of $15.7 million for the first half of 2000, a decrease of 22.3%.

Sales at Famous Footwear for the first half of 2001 increased 6.3% from the first half of last year to $522.2 million, reflecting a 4.6% decrease in same-store sales and 32 more units in operation during 2001. Operating earnings for the first half of 2001 decreased 60.8% to $9.6 million due to lower same-store sales and an inventory clearance program that resulted in lower margins.

The Company's wholesale operations' net sales for the first half of 2001 increased 13.3% to $250.3 million from the same period last year. Operating earnings for the first half of 2001 of $25.0 million increased $11.4 million from the same period last year due primarily to the increased sales volume.

In the Company's Naturalizer Retail operations, net sales increased 3.4% to $105.6 million in the first half of 2001. Same-store sales increased 1.7% in the United States and 8.3% in Canada. Domestically, the Company had 25 less stores in operation in 2001; Canada had 12 more stores in operation. Total Naturalizer Retail operations had earnings of $1.0 million in the first half of 2001 compared to break-even results in 2000. The improved operating performance was primarily due to the higher sales volume.

Consolidated gross profit as a percent of sales for the first half of 2001 decreased to 39.2% from 40.5% for the same period last year. This decrease was primarily due to lower margins at the Company's retail operations resulting from an inventory clearance program.

Selling and administrative expenses as a percent of sales for the first half of 2001 decreased to 36.3% from 36.7% for the same period last year. This decrease was primarily due to lower expenses at the Company's wholesale operations offset partially by higher expenses at the Company's retail operations.

Other income for the first half of 2001 consisted primarily of a gain on the sale of the Company airplane.
 

The consolidated tax rate was 29.2% of consolidated pre-tax income for the first half of 2001 compared to 33.4% for last year. The decrease from last year's effective rate reflects a higher mix of offshore operating income, which is taxed at lower rates, for the first six months and projected for the year.
 

Financial Condition

A summary of key financial data and ratios at the dates indicated is as follows:
 

Cash provided from operating activities for the first half of fiscal 2001 was $9.0 million versus $3.2 million last year. This increase resulted primarily from a larger increase in accounts payable compared to last year.

The decrease in the ratio of total debt as a percentage of total capitalization at August 4, 2001, compared to the end of fiscal 2000, is due to higher net worth, offset partially by cash usage. At August 4, 2001, $68.0 million was borrowed and $10.6 million of letters of credit were outstanding under the Company's $165.0 million revolving bank Credit Agreement.

In May 2000, the Company announced a stock repurchase program under which the Company was authorized to repurchase up to 2 million shares of the Company's outstanding common stock. In the first half of fiscal 2001, the Company purchased 145,900 shares at a cost of $2.6 million under this authorization. Through the end of the first half of 2001, the Company has repurchased a total of 928,900 shares for approximately $11.3 million under this authorization.
 

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 2000 Annual Report on Form 10-K, detailed risk factors that could cause variations in results to occur are listed and further described. Such description 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. For further information, see Item 7A of the Company's Annual Report and Form 10-K for the year ended February 3, 2001.
 
 

Item 1 - Legal Proceedings

Item 4 - Submission of Matters to a Vote of Security Holders

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.