Brown Shoe Reports Second Quarter Financial Results; Revises 2008 EPS Guidance

ST. LOUIS, Aug. 27 /PRNewswire-FirstCall/ -- Brown Shoe Company, Inc.
(NYSE: BWS) reported results for the second quarter of 2008 ended August 2.
Net sales in the second quarter decreased 1.3 percent to $569.2 million
compared to $576.6 million in the year-ago quarter. Net earnings in the
second quarter decreased 77.4 percent to $2.2 million, or $0.05 per diluted
share, which includes costs of $0.15 per diluted share, primarily related to
the relocation of the Company's Famous Footwear division headquarters from
Madison, WI to St. Louis, MO. This compares to net earnings of $9.8 million,
or $0.22 per diluted share, in the year-ago quarter, which included $0.08 per
diluted share of costs related to the Company's Earnings Enhancement Plan.
Ron Fromm, Brown Shoe's Chairman and CEO, stated, "During the second
quarter, we continued to focus on advancing our long-term goals, while
managing the business in an ongoing challenging retail environment. While
sales and earnings were impacted by reduced store traffic and increased
promotional activity across our industry, our expenses and inventory were well
controlled, as we emphasized cost discipline and our freshness and velocity
strategies. At the same time, we continued to invest in our brands, our
stores, and infrastructure in support of our long-term growth."
Fromm continued, "To this end, we announced plans to implement a new
enterprise resource planning system to transform the information technology
infrastructure for our integrated business model, we made significant progress
on the transition of Famous Footwear to St. Louis, and we continued to improve
our product design competencies across our brands. We believe these
initiatives along with the diversification and growth from new brand launches,
such as Fergie and our partnership with Vera Wang to design and market her
Lavender Label Collection, will enable Brown Shoe to become a stronger more
resilient company in the future. Even so, we are taking a cautious approach to
the back half of 2008 by appropriately reducing guidance and tightening our
standards for capital management. As a result, we now expect 90 new store
openings for Famous Footwear for the year, versus our original plan of 130.
While we expect the retail environment to remain uncertain, we believe we are
in a position of strength and expect to win market share while executing to
our long-term strategic goals."
Consolidated Results for Second Quarter of 2008:

* Net sales were $569.2 million, a decrease of 1.3 percent compared to
$576.6 million in the second quarter of 2007;
* Gross margins in the second quarter of 2008 decreased 80 basis
points to 39.3 percent of net sales from 40.1 percent of net sales
in the second quarter of 2007. This decrease was driven by
increased promotions at the Company's retail division as well as an
increased sales mix of licensed brands versus owned brands, an
increased mix of mid-tier sales, and higher allowances in its
Wholesale division;
* Selling and administrative expenses in the second quarter of 2008
increased as a percent of net sales by 140 basis points to 38.4
percent of net sales, or $218.3 million, versus 37.0 percent, or
$213.1 million, in the same period last year. The year-over-year
change was driven by costs related to the relocation of the Famous
Footwear headquarters to St. Louis, operating 103 more Famous
Footwear stores, and deleverage as a result of lower net sales,
partially offset by lower incentive compensation costs;
* Operating earnings as a percent of net sales decreased to
0.9 percent, or $4.9 million, in the second quarter of 2008 versus
3.1 percent of net sales, or $17.9 million in the second quarter of
2007;
* The Company generated a net tax benefit in the second quarter
primarily related to a higher relative mix of foreign earnings,
which are subject to lower statutory rates, the continuing shift in
the Company's Far East operations to support its branded product
business resulting in greater cost deductibility in higher-taxed
jurisdictions, and tax credits for incentives related to the
Company's headquarters consolidation initiatives;
* Net earnings were $2.2 million, or $0.05 per diluted share, versus
net earnings of $9.8 million, or $0.22 per diluted share, in the
prior year. Second quarter of 2008 net earnings include charges of
$6.2 million, or $0.15 per diluted share, primarily related to the
relocation of the Company's Famous Footwear division to St. Louis.
Second quarter of 2007 net earnings included charges of $3.6
million, or $0.08 per diluted share, related to the Company's
Earnings Enhancement Plan.

Segment Highlights for Second Quarter of 2008

Retail Division
Net sales at Famous Footwear increased 3.2 percent to $326.2 million,
compared to $316.1 million for the second quarter of last year. Same-store
sales in the quarter decreased by 2.9 percent, versus a decrease of 0.3
percent, as reported on a comparable calendar basis, in the year-ago period.
Gross margins declined by 80 basis points in the quarter, as Famous Footwear
increased promotional activity. Operating earnings decreased to $11.3
million, or 3.5 percent of net sales, compared to $19.0 million, or 6.0
percent of net sales, in the year-ago period. Famous Footwear opened 30 new
stores and closed three during the quarter, resulting in 1,127 stores open at
the end of the quarter compared to 1,024 during the year-ago period.
The Specialty Retail segment, which primarily consists of Naturalizer
stores and the Shoes.com e-commerce business, reported net sales in the
quarter of $63.0 million, a 1.5 percent increase from $62.0 million in the
year-ago period. Same-store sales declined 0.2 percent during the quarter.
Net sales at Shoes.com decreased by 3.2 percent versus the year-ago period.
The segment's operating loss was $3.1 million compared to a loss of $1.8
million in the year earlier period. During the quarter, the division opened
six stores, including four stores in China, and closed two, resulting in 295
stores open at the end of the quarter, compared to 279 at the end of the
year-ago period.
Wholesale Division
Wholesale net sales declined 9.3 percent in the quarter to $180.1 million,
compared to $198.4 million in the year earlier period, as the Company's retail
partners tightly managed their inventory levels in the quarter. The
challenging consumer environment impacted sales, with the Naturalizer and
LifeStride divisions performing below second quarter 2007 levels, and the
Company continued to reallocate resources away from lower-margin private label
business. At the same time, the Franco Sarto, Etienne Aigner, Via Spiga and
Original Dr. Scholl's divisions performed well in the quarter. The softness
in retail sales led to higher allowances, which, along with a greater mix of
sales from licensed brands versus owned brands and an increased mix of
mid-tier sales, contributed to the 130 basis point decline in gross margins in
the quarter. Operating earnings, as a percent of net sales, decreased 10
basis points in the quarter to 6.4 percent, or $11.6 million, versus 6.5
percent, or $12.9 million, in the year-ago period, reflecting lower net sales
and lower gross margin rate, partially offset by lower incentive compensation
and strong expense control.
Balance Sheet
Inventory at quarter-end was $502.9 million, as compared to $474.5 million
at the end of the second quarter of 2007. The year-over-year increase was due
primarily to the 103 net additional stores at Famous Footwear, while average
inventory on a per store basis was down 0.7 percent. The Company's debt-to-
capital ratio at the end of the second quarter was 21.1 percent, flat with the
same time last year.
Earnings Enhancement Plan Update
On April 10, 2008, the Company announced, as part of its Earnings
Enhancement Plan, the relocation of its Famous Footwear office from Madison,
WI to St. Louis, MO, creating a more connected footwear company that will
foster collaboration, increase speed-to-market and strengthen the Company's
connection with its consumers. The transition began during the first quarter
and will be substantially complete by the end of the third quarter of 2008.
The Company expects costs during 2008 of $0.09 per diluted share to implement
the relocation, net of an expected nonrecurring gain on the sale of real
estate. Under various state economic development programs, the Company will
collaborate with public partners to avail itself of eligible incentives
totaling more than $37 million related to training, job creation, and the
redevelopment of its St. Louis, MO property. The Company, working with its
development partners, intends to redevelop its 12-acre property over the next
few years creating a multi-use office, retail, and residential place. The
Company anticipates a potential monetization of existing real estate and an
operating lease for its new offices on a portion of the existing property.
During the second quarter of 2008, the Company announced plans to
implement an integrated information technology system provided by SAP AG and
Parametric Technology Corporation (PTC), third-party vendors. The Company will
utilize SAP's industry specific solution, SAP Apparel and Footwear Solution
for Consumer Products package, to help manage its supply chain. The Enterprise
Resource Planning (ERP) information technology system will replace certain
existing internally developed and other third-party applications and will
support the Company's growth strategy while streamlining and transforming
day-to-day operations for our integrated business model. The Company
anticipates the implementation will enhance its profitability and deliver
increased shareholder value through improved management and execution of its
business operations, financial systems, supply chain efficiency and planning
and employee productivity. The phased implementation began during the second
quarter of 2008 and is expected to continue through 2011. The Company expects
costs of approximately $0.04 per diluted share in 2008 related to the ERP
implementation.
Full Year and Third Quarter 2008 Guidance
Management's current guidance for the full year and third quarter is as
follows:

* Consolidated net sales: $2.38 to $2.40 billion for full year 2008
and $650 to $660 million for the third quarter 2008;
* Famous Footwear same-store sales: negative 2.0 to negative 4.0
percent for the full year and negative 1.0 to negative 3.0 percent
in the third quarter;
* Store openings and closings: The Company now expects to open 90 new
Famous Footwear stores, down from previous guidance of 100 to 110,
and close approximately 30 stores for the full year. The Company
expects to open 25 to 30 new Specialty Retail stores, including 15
to 20 in China, and approximately three closings for the full year;
* Wholesale net sales: flat to negative 2.0 percent for the full year
and in the range of flat to negative 4.0 percent in the third
quarter;
* Income tax rate: 24.0 to 26.0 percent for both the full year and
third quarter;
* Average diluted shares: 42.0 million;
* Earnings per share: in the range of $1.12 to $1.29 per diluted share
for the full year, which includes costs of $0.09 per diluted share,
net of an expected nonrecurring gain on real estate sales, related
to the relocation of the Company's Famous Footwear division to St.
Louis and costs of $0.04 per diluted share related to its
information technology transformation, offset by a net gain of $0.15
per diluted share for insurance recoveries, net of associated fees
and costs, related to environmental remediation at the Company's
Denver, CO facility. For the third quarter, earnings per share are
estimated in the range of $0.31 to $0.41 per diluted share, which
includes costs of $0.21 per diluted share related to the relocation
of Famous Footwear to St. Louis and its information technology
transformation;
* Purchases of property and equipment: approximately $85.0 to
$90.0 million for the full year, primarily relating to new stores
and remodels, logistics network and other infrastructure, and
capitalized software and information systems upgrades, including ERP
and non-ERP related systems.

Conference Call
A conference call to discuss second quarter 2008 results will be held this
morning at 9:00 a.m. EDT. While participation in the question-and-answer
session of the call will be limited to institutional analysts and investors,
retail brokers and individual investors are invited to attend via a live
web-cast to be hosted at http://www.brownshoe.com/investor or
http://www.earnings.com (at the website, type in the BWS ticker symbol to
locate the broadcast).
Safe Harbor Statement Under the Private Securities Litigation Reform Act
of 1995:
This press release contains certain forward-looking statements and
expectations regarding the Company's future performance and the future
performance of its brands. Such statements are subject to various risks and
uncertainties that could cause actual results to differ materially. These
include (i) the preliminary nature of estimates of the costs and benefits of
strategic business transformation, which are subject to change as the Company
makes decisions and refines these estimates over time; (ii) potential
disruption to the Company's business and operations as it implements the ERP
application as well as the relocation of positions from its Madison, WI office
to its St. Louis, MO headquarters; (iii) the timing and uncertainty of
activities and costs related to redevelopment of the Company's St. Louis, MO
headquarters site as well as software implementation and business
transformation; (iv) the Company's ability to utilize its new information
technology system to successfully execute its growth strategy; (v) intense
competition within the footwear industry; (vi) rapidly changing consumer
demands and fashion trends and purchasing patterns, which may be influenced by
consumers' disposable income, which in turn can be influenced by general
economic conditions; (vii) customer concentration and increased consolidation
in the retail industry; (viii) political and economic conditions or other
threats to continued and uninterrupted flow of inventory from China and
Brazil, where the Company relies heavily on third-party manufacturing
facilities for a significant amount of its inventory; (ix) the Company's
ability to attract and retain licensors and protect its intellectual property;
(x) the Company's ability to secure leases on favorable terms; (xi) the
Company's ability to maintain relationships with current suppliers; (xii) the
Company's ability to successfully execute its international growth strategy;
and (xiii) the uncertainties of pending litigation. The Company's reports to
the Securities and Exchange Commission contain detailed information relating
to such factors, including, without limitation, the information under the
caption "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K
for the year ended February 2, 2008, which information is incorporated by
reference herein and updated by the Company's Quarterly Reports on Form 10-Q.
The Company does not undertake any obligation or plan to update these
forward-looking statements, even though its situation may change.
About Brown Shoe Company, Inc.
Brown Shoe is a $2.4 billion footwear company with global operations.
Brown Shoe's Retail division operates Famous Footwear, the over 1,100-store
chain that sells brand name shoes for the family, approximately 300 specialty
retail stores in the U.S., Canada, and China under the Naturalizer, Brown Shoe
Closet, FX LaSalle, and Franco Sarto names, and Shoes.com, the Company's
e-commerce subsidiary. Brown Shoe, through its Wholesale divisions, owns and
markets leading footwear brands including Naturalizer, LifeStride, Via Spiga,
Nickels Soft, Connie and Buster Brown; it also markets licensed brands
including Franco Sarto, Dr. Scholl's, Etienne Aigner, Carlos by Carlos
Santana, Hot Kiss, Fergie branded footwear, and Vera Wang Lavender Label
Collection as well as Barbie, Disney and Nickelodeon character footwear for
children. Brown Shoe press releases are available on the Company's website at
http://www.brownshoe.com.

SCHEDULE 1

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(Thousands) August 2, 2008 August 4, 2007

ASSETS

Cash and cash equivalents $64,420 $64,335
Receivables 108,911 110,440
Inventories 502,856 474,541
Prepaid expenses and other current assets 22,671 33,672
Total current assets 698,858 682,988

Other assets 103,769 105,938
Investment in nonconsolidated affiliate 6,274 -
Goodwill and intangible assets, net 213,732 216,481
Property and equipment, net 148,757 141,995
Total assets $1,171,390 $1,147,402

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Borrowings under revolving credit agreement $- $-
Trade accounts payable 241,958 217,119
Accrued expenses 130,999 127,891
Income taxes 2,668 1,961
Total current liabilities 375,625 346,971

Long-term debt 150,000 150,000
Deferred rent 41,547 37,209
Other liabilities 43,177 53,251
Total other liabilities 234,724 240,460
Minority interests 1,714 (200)
Shareholders' equity
Common stock 423 442
Additional paid-in capital 144,009 181,455
Accumulated other comprehensive income 14,536 16,134
Retained earnings 400,359 362,140
Total shareholders' equity 559,327 560,171
Total liabilities and shareholders' equity $1,171,390 $1,147,402

SCHEDULE 2

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

(Thousands, except per share data)

Thirteen Weeks Ended Twenty-six Weeks Ended
August 2, August 4, August 2, August 4,
2008 2007 2008 2007

Net sales $569,219 $576,571 $1,123,710 $1,142,919
Cost of goods sold 345,722 345,577 683,751 682,122

Gross profit 223,497 230,994 439,959 460,797
- % of Net Sales 39.3% 40.1% 39.2% 40.3%

Selling and
administrative
expenses 218,305 213,129 421,286 425,463
- % of Net Sales 38.4% 37.0% 37.6% 37.2%
Equity in net loss
of nonconsolidated
affiliate 253 - 367 -

Operating earnings 4,939 17,865 18,306 35,334

Interest expense, net (3,253) (2,835) (6,818) (6,193)

Earnings before
income taxes and
minority interests 1,686 15,030 11,488 29,141

Income tax (provision)
benefit 369 (5,298) (2,611) (9,855)
Minority interests in net
loss of consolidated
subsidiaries 162 98 535 180

NET EARNINGS $2,217 $9,830 $9,412 $19,466

Basic earnings per
common share $0.05 $0.23 $0.23 $0.45

Diluted earnings per
common share $0.05 $0.22 $0.23 $0.44

Basic number of shares 41,538 43,609 41,500 43,397

Diluted number of
shares 41,788 44,508 41,743 44,611

SCHEDULE 3

BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Thousands) Twenty-six Weeks Ended
August 2, 2008 August 4, 2007

OPERATING ACTIVITIES:
Net earnings $9,412 $19,466
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 28,060 25,435
Share-based compensation (income) expense (360) 5,678
Loss on disposal or impairment of facilities
and equipment 1,038 1,049
Deferred rent 132 (816)
Deferred income taxes (227) (996)
Provision for doubtful accounts 414 (18)
Foreign currency transaction losses (gains) 8 (124)
Undistributed loss of nonconsolidated affiliate 367 -
Minority interests (535) (180)
Changes in operating assets and liabilities:
Receivables 7,536 22,180
Inventories (67,683) (52,311)
Prepaid expenses and other current assets 1,941 (580)
Trade accounts payable 69,125 31,009
Accrued expenses 16,822 (18,844)
Income taxes 1,768 532
Other, net (3,910) (2,005)

Net cash provided by operating activities 63,908 29,475

INVESTING ACTIVITIES:
Purchases of property and equipment (27,825) (21,238)
Capitalized software (10,000) (3,638)
Acquisition cost - (2,750)
Investment in joint venture - (1,020)

Net cash used for investing activities (37,825) (28,646)

FINANCING ACTIVITIES:
Decrease in borrowings under revolving
credit agreement (15,000) (1,000)
Proceeds from stock options exercised 244 8,898
Tax benefit related to share-based plans 87 5,802
Dividends paid (5,927) (6,245)

Net cash (used for) provided by financing
activities (20,596) 7,455

Effect of exchange rate changes on cash (868) 2,390

Increase in cash and cash equivalents 4,619 10,674

Cash and cash equivalents at beginning of period 59,801 53,661

Cash and cash equivalents at end of period $64,420 $64,335

SOURCE Brown Shoe Company, Inc.

investors, Ken Golden of Brown Shoe Company, Inc., +1-314-854-4134,
kgolden@brownshoe.com; or media, Dave Garino of Fleishman-Hillard,
+1-314-982-0551, garinod@fleishman.com, for Brown Shoe Company, Inc.