Caleres (CAL) 10-Q 2002 Q2 Quarterly report

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 August 4, 2001
[  ]	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 (State or other jurisdiction of incorporation or organization)	43-0197190 (IRS Employer Identification Number)
8300 Maryland Avenue St. Louis, Missouri (Address of principal executive offices)	63105 (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 September 1, 2001, 17,468,485 shares of the registrant's common stock were outstanding.

1

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands)

	(Unaudited)
	August 4, 2001			July 29, 2000			February 3, 2001
ASSETS
Current Assets
Cash and Cash Equivalents	$	47,126		$	31,945		$	50,491
Receivables		63,760			60,832			64,403
Inventories		496,951			447,817			427,830
Other Current Assets		24,405			22,572			20,008
Total Current Assets		632,242			563,166			562,732
Other Assets		87,814			77,119			86,732
Property and Equipment		250,069			240,945			245,608
Less Allowances for Depreciation       and Amortization		(160,730	)		(153,155	)		(155,003	)
		89,339			87,790			90,605
	$	809,395		$	728,075		$	740,069
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable	$	68,000		$	14,000		$	66,500
Accounts Payable		200,801			170,303			127,887
Accrued Expenses		77,150			85,750			89,954
Income Taxes		3,574			6,500			1,850
Current Maturities of Long-Term Debt		28,550			10,000			10,000
Total Current Liabilities		378,075			286,553			296,191
Long-Term Debt and Capitalized    Lease Obligations		133,489			162,035			152,037
Other Liabilities		20,278			19,657			21,869
Shareholders' Equity
Common Stock		65,506			67,882			65,477
Additional Capital		47,842			48,514			46,578
Unamortized Value of Restricted Stock		(2,244	)		(2,932	)		(2,386	)
Accumulated Other Comprehensive Loss		(8,192	)		(6,752	)		(7,138	)
Retained Earnings		174,641			153,118			167,441
		277,553			259,830			269,972
	$	809,395		$	728,075		$	740,069

See Notes to Condensed Consolidated Financial Statements.

2

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Thousands, except per share)

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 4, 2001			July 29, 2000			August 4, 2001			July 29, 2000
Net Sales	$	442,079		$	419,147		$	878,217		$	813,904
Cost of Goods Sold		272,535			251,056			533,625			483,839
Gross Profit		169,544			168,091			344,592			330,065
Selling & Administrative Expenses		158,504			150,392			318,553			298,335
Interest Expense		5,247			4,314			10,764			8,579
Other Income		(2,032	)		(333	)		(1,977	)		(507	)
Earnings Before Income Taxes		7,825			13,718			17,252			23,658
Income Tax Provision		2,030			4,520			5,046			7,912
NET EARNINGS	$	5,795		$	9,198		$	12,206		$	15,746
BASIC EARNINGS PER     COMMON SHARE	$	.34		$	.51		$	.71		$	.88
DILUTED EARNINGS PER     COMMON SHARE	$	.33		$	.51		$	.69		$	.87
DIVIDENDS PER COMMON SHARE	$	.10		$	.10		$	.20		$	.20

See Notes to Condensed Consolidated Financial Statements.

3

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Thousands)

	Twenty-six Weeks Ended
	August 4, 2001			July 29, 2000
Net Cash Provided by Operating Activities	$	9,031		$	3,158
Investing Activities:
Capital expenditures		(11,684	)		(14,655	)
Other		2,080			805
Net Cash Used by Investing Activities		(9,604	)		(13,850	)
Financing Activities:
Increase in short-term notes payable		1,500			14,000
Payments for purchase of treasury stock		(2,630	)		(1,883	)
Proceeds from stock options exercised		1,830			10
Dividends paid		(3,492	)		(3,648	)
Net Cash (Used) Provided by Financing Activities		(2,792	)		8,479
Decrease in Cash and Cash Equivalents		(3,365	)		(2,213	)
Cash and Cash Equivalents at Beginning of Period		50,491			34,158
Cash and Cash Equivalents at End of Period	$	47,126		$	31,945

See Notes to Condensed Consolidated Financial Statements.

4

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):
 

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 4, 2001		July 29, 2000		August 4, 2001		July 29, 2000
Numerator:
Net earnings - Basic and Diluted	$	5,795	$	9,198	$	12,206	$	15,746
Denominator:
Weighted average shares        outstanding - Basic		17,182		17,863		17,164		17,891
Effect of potentially dilutive securities		444		194		472		167
Weighted average shares        outstanding - Diluted		17,626		18,057		17,636		18,058
Basic earnings per common share	$	.34	$	.51	$	.71	$	.88
Diluted earnings per common share	$	.33	$	.51	$	.69	$	.87

5

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):
 

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	August 4, 2001			July 29, 2000		August 4, 2001			July 29, 2000
Net Earnings	$	5,795		$	9,198	$	12,206		$	15,746
Other Comprehensive Income:
Foreign Currency Translation Adjustment		110			59		(796	)		(718	)
Unrealized Losses on Derivative Instruments		(303	)		-		(258	)		-
		(193	)		59		(1,054	)		(718		)
Comprehensive Income	$	5,602		$	9,257	$	11,152		$	15,028

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):
 

	Famous Footwear			Wholesale Operations		Naturalizer Retail			Other			Totals
Thirteen Weeks Ended August 4, 2001
External Sales	$	266,432		$	120,889	$	54,567		$	191		$	442,079
Intersegment Sales		41			33,379		-			47			33,467
Operating profit (loss)		(262	)		13,658		1,530			(3,626	)		11,300
Thirteen Weeks Ended July 29, 2000
External Sales	$	254,072		$	110,021	$	55,054		$	-		$	419,147
Intersegment Sales		-			40,422		-			-			40,422
Operating profit (loss)		13,482			5,507		1,711			(2,923	)		17,777
Twenty-six Weeks Ended August 4, 2001
External Sales	$	522,160		$	250,311	$	105,552		$	194		$	878,217
Intersegment Sales		41			76,427		-			47			76,515
Operating profit (loss)		9,592			25,020		968			(9,029	)		26,551
Twenty-six Weeks Ended July 29, 2000
External Sales	$	491,024		$	220,843	$	102,037		$	-		$	813,904
Intersegment Sales		-			89,397		-			-			89,397
Operating profit (loss)		24,500			13,566		(13	)		(6,149	)		31,904

6

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

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 4, 2001			July 29, 2000			August 4, 2001			July 29, 2000
Total operating profit	$	11,300		$	17,777		$	26,551		$	31,904
Interest expense		(5,247	)		(4,314	)		(10,764	)		(8,579	)
Non-operating other income		1,772			255			1,465			333
Earnings before income taxes	$	7,825		$	13,718		$	17,252		$	23,658

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).
 

7

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.
 

8

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF AUGUST 4, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries		Eliminations			Consolidated  Totals
Assets
Current Assets
Cash and cash equivalents	$	560		$	17,187		$	29,379	$	-		$	47,126
Receivables		30,538			14,264			18,958		-			63,760
Inventories		63,591			440,158			364		(7,162	)		496,951
Other current assets (liabilities)		(7,392	)		25,625			1,890		4,282			24,405
Total Current Assets		87,297			497,234			50,591		(2,880	)		632,242
Other Assets		51,596			32,138			4,084		(4	)		87,814
Property and Equipment, net		14,682			73,465			1,192		-			89,339
Investment in Subsidiaries		296,465			28,941			-		(325,406	)		-
Total Assets	$	450,040		$	631,778		$	55,867	$	(328,290	)	$	809,395
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable	$	68,000		$	-		$	-	$	-		$	68,000
Accounts payable		2,743			182,548			15,510		-			200,801
Accrued expenses		21,545			54,185			5,138		(3,718	)		77,150
Income taxes payable (receivable)		(1,061	)		2			2,215		2,418			3,574
Current maturities of long-term debt		28,550			-			-		-			28,550
Total Current Liabilities		119,777			236,735			22,863		(1,300	)		378,075
Long-Term Debt and        Capitalized Lease Obligations		133,489			-			-		-			133,489
Other Liabilities (Assets)		20,535			(1,273	)		1,016		-			20,278
Intercompany Payable (Receivable)		(101,314	)		93,766			4,017		3,531			-
Shareholders' Equity		277,553			302,550			27,971		(330,521	)		277,553
Total Liabilities and               Shareholders' Equity	$	450,040		$	631,778		$	55,867	$	(328,290	)	$	809,395

9

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

TWENTY-SIX WEEKS ENDED AUGUST 4, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Sales	$	122,915		$	769,396		$	127,143		$	(141,237	)	$	878,217
Cost of goods sold		80,245			482,788			110,384			(139,792	)		533,625
Gross profit		42,670			286,608			16,759			(1,445	)		344,592
Selling and administrative expenses		40,186			271,356			8,456			(1,445	)		318,553
Interest expense		10,674			15			75			-			10,764
Intercompany interest     (income) expense		(7,834	)		7,863			(29	)		-			-
Other (income) expense		(1,399	)		77			(655	)			-		(1,977	)
Equity in earnings of subsidiaries		(12,961	)		(9,290	)		-			22,251			-
Earnings Before        Income Taxes		14,004			16,587			8,912			(22,251	)		17,252
Income tax provision		1,798			2,876			372			-			5,046
Net Earnings	$	12,206		$	13,711		$	8,540		$	(22,251	)	$	12,206

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

TWENTY-SIX WEEKS ENDED AUGUST 4, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Cash Provided (Used) by     Operating Activities	$	(22,295	)	$	25,402		$	8,986		$	(3,062	)	$	9,031
Investing Activities:
Capital expenditures		(1,543	)		(9,671	)		(470	)		-			(11,684	)
Other		2,080			-			-			-			2,080
Net Cash Provided (Used) by     Investing Activities		537			(9,671	)		(470	)		-			(9,604	)
Financing Activities:
Increase in short-term        notes payable		1,500			-			-			-			1,500
Proceeds from stock        options exercised		1,830			-			-			-			1,830
Payments for purchase of        Treasury stock		(2,630	)		-			-			-			(2,630	)
Dividends paid		(3,492	)		-			-			-			(3,492	)
Intercompany financing		18,127			(13,177	)		(14,212	)		9,262			-
Net Cash Provided (Used) by     Financing Activities		15,335			(13,177	)		(14,212	)		9,262			(2,792	)
Increase (Decrease) in Cash and     Cash Equivalents		(6,423	)		2,554			(5,696	)		6,200			(3,365	)
Cash and Cash Equivalents at     Beginning of Period		6,983			14,633			35,075			(6,200	)		50,491
Cash and Cash Equivalents at     End of Period	$	560		$	17,187		$	29,379		$	-		$	47,126

10

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JULY 29, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries		Eliminations			Consolidated  Totals
Assets
Current Assets
Cash and cash equivalents	$	2,092		$	6,252		$	23,601	$	-		$	31,945
Receivables		29,200			15,852			15,780		-			60,832
Inventories		48,212			413,091			355		(13,841	)		447,817
Other current assets (liabilities)		(5,459	)		22,901			635		4,495			22,572
Total Current Assets		74,045			458,096			40,371		(9,346	)		563,166
Other Assets		50,057			26,792			274		(4	)		77,119
Property and Equipment, net		14,228			72,528			1,034		-			87,790
Investment in Subsidiaries		264,403			8,035			-		(272,438	)		-
Total Assets	$	402,733		$	565,451		$	41,679	$	(281,788	)	$	728,075
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable	$	14,000		$	-		$	-	$	-		$	14,000
Accounts payable		2,994			155,569			11,740		-			170,303
Accrued expenses		22,792			58,663			6,235		(1,940	)		85,750
Income taxes		3,692			1,065			1,507		236			6,500
Current maturities of long-term debt		10,000			-			-		-			10,000
Total Current Liabilities		53,478			215,297			19,482		(1,704	)		286,553
Long-Term Debt and        Capitalized Lease Obligations		162,035			-			-		-			162,035
Other Liabilities (Assets)		20,348			(713	)		22		-			19,657
Intercompany Payable (Receivable)		(92,958	)		85,266			14,140		(6,448	)		-
Shareholders' Equity		259,830			265,601			8,035		(273,636	)		259,830
Total Liabilities and               Shareholders' Equity	$	402,733		$	565,451		$	41,679	$	(281,788	)	$	728,075

11

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

TWENTY-SIX WEEKS ENDED JULY 29, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Sales	$	127,928		$	731,103		$	107,335		$	(152,462	)	$	813,904
Cost of goods sold		93,923			447,216			95,162			(152,462	)		483,839
Gross profit		34,005			283,887			12,173			-			330,065
Selling and administrative expenses		34,759			258,695			5,518			(637	)		298,335
Interest expense		8,512			55			12			-			8,579
Intercompany interest     (income) expense		(6,431	)		6,442			(11	)		-			-
Other (income) expense		(633	)		(49	)		(462	)		637			(507	)
Equity in earnings of subsidiaries		(17,902	)		(6,829	)		-			24,731			-
Earnings Before Income Taxes		15,700			25,573			7,116			(24,731	)		23,658
Income tax provision (benefit)		(46	)		7,671			287			-			7,912
Net Earnings	$	15,746		$	17,902		$	6,829		$	(24,731	)	$	15,746

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

TWENTY-SIX WEEKS ENDED JULY 29, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Cash Provided (Used) by     Operating Activities	$	931		$	2,745		$	(163	)	$	(355	)	$	3,158
Investing Activities:
Capital expenditures		(540	)		(13,711	)		(404	)		-			(14,655	)
Other		805			-			-			-			805
Net Cash Provided (Used) by     Investing Activities		265			(13,711	)		(404	)		-			(13,850	)
Financing Activities:
Increase in short-term        notes payable		14,000			-			-			-			14,000
Proceeds from stock        options exercised		10			-			-			-			10
Payments for purchase of        treasury stock		(1,883	)		-			-			-			(1,883	)
Dividends paid		(3,648	)		-			-			-			(3,648	)
Intercompany financing		(16,434	)		12,664			3,415			355			-
Net Cash Provided (Used) by of     Financing Activities		(7,955	)		12,664			3,415			355			8,479
Increase (Decrease) in Cash and     Cash Equivalents		(6,759	)		1,698			2,848			-			(2,213	)
Cash and Cash Equivalents at of     Beginning of Period		8,851			4,554			20,753			-			34,158
Cash and Cash Equivalents at     End of Period	$	2,092		$	6,252		$	23,601		$	-		$	31,945

12

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.
 

13

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.
 

14

 

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:
 

	August 4, 2001	July 29,  2000	February 3, 2001
Working Capital (millions)	$254.2	$276.6	$266.5
Current Ratio	1.7:1	2.0:1	1.9:1
Total Debt as a Percentage   of Total Capitalization	45.3%	41.7%	45.8%

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.
 

15

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.
 
 

16

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

There have been no material developments during the quarter ended August 4, 2001 in the legal proceedings described in the Company's Annual Report on Form 10-K for the year ended February 3, 2001.

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

The results of the votes cast at the Annual Meeting of Shareholders held on May 24, 2001 were reported in the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2001.Item 6 - Exhibits and Reports on Form 8-K
 

(a)	(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 March 2, 2000, incorporated herein by reference to Exhibit 3 to the Company's report on Form 10-K for the fiscal year ended January 29, 2000.

(b)	Reports on Form 8-K:
	The Company filed no reports on Form 8-K during the quarter ended August 4, 2001.

17

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

	BROWN SHOE COMPANY, INC.
Date:  September 17, 2001	/s/ Andrew M. Rosen
	Chief Financial Officer and Treasurer On Behalf of the Corporation as the  Principal Financial Officer

18