Caleres (CAL) 10-Q 2002 Q3 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 November 3, 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 December 1, 2001, 17,464,835 shares of the registrant's common stock were outstanding.
 
 

1

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands)
 

	(Unaudited)
	November 3, 2001			October 28, 2000			February 3, 2001
ASSETS
Current Assets
Cash and Cash Equivalents	$	25,152		$	44,634		$	50,491
Receivables		55,962			57,942			64,403
Inventories		445,065			444,355			427,830
Other Current Assets		23,157			26,979			20,008
Total Current Assets		549,336			573,910			562,732
Other Assets		87,587			80,125			86,732
Property and Equipment		251,566			247,235			245,608
Less Allowances for Depreciation       and Amortization		(162,685	)		(156,144	)		(155,003	)
		88,881			91,091			90,605
	$	725,804		$	745,126		$	740,069
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable	$	85,000		$	59,000		$	66,500
Accounts Payable		109,748			141,292			127,887
Accrued Expenses		70,527			85,562			89,954
Income Taxes		2,464			8,606			1,850
Current Maturities of Long-Term Debt		28,550			10,000			10,000
Total Current Liabilities		296,289			304,460			296,191
Long-Term Debt and Capitalized    Lease Obligations		123,490			152,037			152,037
Other Liabilities		19,294			19,443			21,869
Shareholders' Equity
Common Stock		65,506			66,553			65,477
Additional Capital		47,836			47,465			46,578
Unamortized Value of Restricted Stock		(2,057	)		(2,596	)		(2,386	)
Accumulated Other Comprehensive Loss		(9,311	)		(7,915	)		(7,138	)
Retained Earnings		184,757			165,679			167,441
		286,731			269,186			269,972
	$	725,804		$	745,126		$	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					Thirty-nine Weeks Ended
	November 3, 2001		October 28, 2000			November 3, 2001			October 28, 2000
Net Sales	$	462,361	$	463,312		$	1,340,578		$	1,277,216
Cost of Goods Sold		280,874		278,955			814,499			762,794
Gross Profit		181,487		184,357			526,079			514,422
Selling & Administrative Expenses		161,098		157,050			479,651			455,385
Interest Expense		4,827		4,747			15,591			13,326
Other (Income) Expense		312		(168	)		(1,665	)		(675	)
Earnings Before Income Taxes		15,250		22,728			32,502			46,386
Income Tax Provision		3,399		7,113			8,445			15,025
NET EARNINGS	$	11,851	$	15,615		$	24,057		$	31,361
BASIC EARNINGS PER     COMMON SHARE	$	.69	$	.88		$	1.40		$	1.76
DILUTED EARNINGS PER     COMMON SHARE	$	.68	$	.88		$	1.37		$	1.75
DIVIDENDS PER COMMON SHARE	$	.10	$	.10		$	.30		$	.30

See Notes to Condensed Consolidated Financial Statements.

3

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Thousands)

	Thirty-nine Weeks Ended
	November 3, 2001			October 28, 2000
Net Cash Provided (Used) by Operating Activities	$	(11,966	)	$	(4,985	)
Investing Activities:
Capital expenditures		(18,031	)		(23,636	)
Other		2,181			906
Net Cash Used by Investing Activities		(15,850	)		(22,730	)
Financing Activities:
Increase in short-term notes payable		18,500			59,000
Principal payments of long-term debt		(10,000	)		(10,000	)
Payments for purchase of treasury stock		(2,630	)		(5,380	)
Proceeds from stock options exercised		1,847			13
Dividends paid		(5,240	)		(5,442	)
Net Cash Provided by Financing Activities		2,477			38,191
Increase (Decrease) in Cash and Cash Equivalents		(25,339	)		10,476
Cash and Cash Equivalents at Beginning of Period		50,491			34,158
Cash and Cash Equivalents at End of Period	$	25,152		$	44,634

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 November 3, 2001 and October 28, 2000 ($000's, except per share data):
 

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	November 3, 2001		October 28, 2000		November 3, 2001		October 28, 2000
Numerator:
Net earnings - Basic and Diluted	$	11,851	$	15,615	$	24,057	$	31,361
Denominator:
Weighted average shares        outstanding - - Basic		17,208		17,648		17,179		17,810
Effect of potentially dilutive securities		206		141		383		159
Weighted average shares        outstanding - - Diluted		17,414		17,789		17,562		17,969
Basic earnings per common share	$	.69	$	.88	$	1.40	$	1.76
Diluted earnings per common share	$	.68	$	.88	$	1.37	$	1.75

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 November 3, 2001 and October 28, 2000 (000's):
 

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 3, 2001			October 28, 2000			November 3, 2001			October 28, 2000
Net Earnings	$	11,851		$	15,615		$	24,057		$	31,361
Other Comprehensive Income:
Foreign Currency Translation Adjustment		(1,345	)		(1,163	)		(2,141	)		(1,881	)
Unrealized Gains (Losses) on        Derivative Instruments		226			-			(32	)		-
		(1,119	)		(1,163	)		(2,173	)		(1,881		)
Comprehensive Income	$	10,732		$	14,452		$	21,884		$	29,480

Note D - Business Segment Information

Applicable business segment information is as follows for the periods ended November 3, 2001 and October 28, 2000 (000's):
 

	Famous Footwear		Wholesale Operations		Naturalizer Retail			Other			Totals
Thirteen Weeks Ended November 3, 2001
External Sales	$	280,942	$	128,915	$	52,159		$	345		$	462,361
Intersegment Sales		86		44,548		-			119			44,753
Operating profit (loss)		14,189		12,308		(1,354	)		(4,386	)		20,757
Thirteen Weeks Ended October 28, 2000
External Sales	$	292,813	$	120,473	$	50,026		$	-		$	463,312
Intersegment Sales		-		46,666		-			-			46,666
Operating profit (loss)		22,257		9,798		(1,775	)		(2,955	)		27,325
Thirty-nine Weeks Ended November 3, 2001
External Sales	$	803,102	$	379,226	$	157,711		$	539		$	1,340,578
Intersegment Sales		128		120,973		-			166			121,267
Operating profit (loss)		23,781		37,326		(385	)		(13,414	)		47,308
Thirty-nine Weeks Ended October 28, 2000
External Sales	$	783,837	$	341,317	$	152,062		$	-		$	1,277,216
Intersegment Sales		-		136,061		-			-			136,061
Operating profit (loss)		46,757		23,364		(1,788	)		(9,104	)		59,229

 

6

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

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	November 3, 2001		October 28, 2000			November 3, 2001			October 28, 2000
Total operating profit	$	20,757	$	27,325		$	47,308		$	59,229
Interest expense		4,827		4,747			15,591			13,326
Non-operating other (income) expense		680		(150	)		(785	)		(483	)
Earnings before income taxes	$	15,250	$	22,728		$	32,502		$	46,386

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 nine months of fiscal 2001, changes in the fair value of derivatives and reclassifications from Other Comprehensive Income to earnings from the initial transition adjustment resulted in a decrease in Other Comprehensive Income of $32,000, 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 fiscal 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. The Company has not yet determined what the effect of the application of the new standard 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 November 3, 2001 and October 28, 2000, and the related condensed consolidating statements of earnings and cash flows for the thirty-nine weeks period are provided. These condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes this information, presented in lieu of complete financial statements for each of the guarantor subsidiaries, provides meaningful information to allow investors to determine the nature of the assets held by, and the operations and cash flows of, each of the consolidating groups.
 
 

8

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 3, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Assets
Current Assets
Cash and cash equivalents	$	637		$	15,207		$	9,308		$	-		$	25,152
Receivables		31,499			12,358			12,105			-			55,962
Inventories		54,003			397,386			738			(7,062	)		445,065
Other current assets (liabilities)		(8,030	)		25,051			1,889			4,247			23,157
Total Current Assets		78,109			450,002			24,040			(2,815	)		549,336
Other Assets		51,711			31,946			3,934			(4	)		87,587
Property and Equipment, net		14,635			73,145			1,101			-			88,881
Investment in Subsidiaries		306,586			33,091			-			(339,677	)		-
Total Assets	$	451,041		$	588,184		$	29,075		$	(342,496	)	$	725,804
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable	$	85,000		$	-		$	-		$	-		$	85,000
Accounts payable		3,650			94,245			11,853			-			109,748
Accrued expenses		17,917			50,092			5,107			(2,589	)		70,527
Income taxes payable (receivable)		(1,124	)		506			2,385			697			2,464
Current maturities of        long-term debt		28,550			-			-			-			28,550
Total Current Liabilities		133,993			144,843			19,345			(1,892	)		296,289
Long-Term Debt and        Capitalized Lease Obligations		123,490			-			-			-			123,490
Other Liabilities (Assets)		19,824			(1,261	)		731			-			19,294
Intercompany Payable (Receivable)		(112,997	)		131,447			(22,637	)		4,187			-
Shareholders' Equity		286,731			313,155			31,636			(344,791	)		286,731
Total Liabilities and               Shareholders' Equity	$	451,041		$	588,184		$	29,075		$	(342,496	)	$	725,804

9

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Sales	$	195,834		$	1,164,179		$	191,512		$	(210,947	)	$	1,340,578
Cost of goods sold		131,470			724,927			166,676			(208,574	)		814,499
Gross profit		64,364			439,252			24,836			(2,373	)		526,079
Selling and administrative expenses		61,007			407,870			13,147			(2,373	)		479,651
Interest expense		15,459			15			117			-			15,591
Intercompany interest     (income) expense		(11,551	)		11,552			(1	)		-			-
Other (income) expense		(798	)		103			(970	)		-			(1,665	)
Equity in earnings of subsidiaries		(24,095	)		(13,437	)		-			37,532			-
Earnings Before Income Taxes		24,342			33,149			12,543			(37,532	)		32,502
Income tax provision		285			7,799			361			-			8,445
Net Earnings	$	24,057		$	25,350		$	12,182		$	(37,532	)	$	24,057

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Cash Provided (Used) by     Operating Activities	$	(15,284	)	$	(10,886	)	$	17,922		$	(3,718	)	$	(11,966	)
Investing Activities:
Capital expenditures		(2,164	)		(15,344	)		(523	)		-			(18,031	)
Other		2,181			-			-			-			2,181
Net Cash Provided (Used) by     Investing Activities		17			(15,344	)		(523	)		-			(15,850	)
Financing Activities:
Increase in short-term        notes payable		18,500			-			-			-			18,500
Principal payments of        long-term debt		(10,000	)		-			-			-			(10,000	)
Proceeds from stock        options exercised		1,847			-			-			-			1,847
Payments for purchase of        Treasury stock		(2,630	)		-			-			-			(2,630	)
Dividends paid		(5,240	)		-			-			-			(5,240	)
Intercompany financing		6,444			26,804			(43,166	)		9,918			-
Net Cash Provided (Used) by     Financing Activities		8,921			26,804			(43,166	)		9,918			2,477
Increase (Decrease) in Cash and     Cash Equivalents		(6,346	)		574			(25,767	)		6,200			(25,339	)
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	$	637		$	15,207		$	9,308		$	-		$	25,152

10

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF OCTOBER 28, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries		Eliminations			Consolidated  Totals
Assets
Current Assets
Cash and cash equivalents	$	1,458		$	11,960		$	31,216	$	-		$	44,634
Receivables		28,069			15,390			14,483		-			57,942
Inventories		46,564			410,662			2		(12,873	)		444,355
Other current assets (liabilities)		(4,770	)		26,404			840		4,505			26,979
Total Current Assets		71,321			464,416			46,541		(8,368	)		573,910
Other Assets		49,469			30,380			280		(4	)		80,125
Property and Equipment, net		13,936			76,173			982		-			91,091
Investment in Subsidiaries		278,876			12,278			-		(291,154	)		-
Total Assets	$	413,602		$	583,247		$	47,803	$	(299,526	)	$	745,126
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable	$	59,000		$	-		$	-	$	-		$	59,000
Accounts payable		4,289			124,388			12,615		-			141,292
Accrued expenses		21,813			54,253			6,673		2,823			85,562
Income taxes		5,611			1,042			1,802		151			8,606
Current maturities of        long-term debt		10,000			-			-		-			10,000
Total Current Liabilities		100,713			179,683			21,090		2,974			304,460
Long-Term Debt and        Capitalized Lease Obligations		152,037			-			-		-			152,037
Other Liabilities (Assets)		20,152			(734	)		25		-			19,443
Intercompany Payable (Receivable)		(128,486	)		124,225			14,410		(10,149	)		-
Shareholders' Equity		269,186			280,073			12,278		(292,351	)		269,186
Total Liabilities and               Shareholders' Equity	$	413,602		$	583,247		$	47,803	$	(299,526	)	$	745,126

 

11

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Sales	$	195,067		$	1,145,736		$	167,626		$	(231,213	)	$	1,277,216
Cost of goods sold		144,254			701,108			148,645			(231,213	)		762,794
Gross profit		50,813			444,628			18,981			-			514,422
Selling and administrative expenses		52,077			396,206			8,070			(968	)		455,385
Interest expense		13,258			55			13			-			13,326
Intercompany interest     (income) expense		(9,940	)		9,953			(13	)		-			-
Other (income) expense		(2,171	)		1,265			(737	)		968			(675	)
Equity in earnings of subsidiaries		(33,543	)		(11,069	)		-			44,612			-
Earnings Before Income Taxes		31,132			48,218			11,648			(44,612	)		46,386
Income tax provision (benefit)		(229	)		14,675			579			-			15,025
Net Earnings	$	31,361		$	33,543		$	11,069		$	(44,612	)	$	31,361

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000

(Thousands)	Parent			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Eliminations			Consolidated  Totals
Net Cash Provided (Used) by     Operating Activities	$	6,289		$	(21,893	)	$	7,273		$	3,346		$	(4,985	)
Investing Activities:
Capital expenditures		(817	)		(22,324	)		(495	)		-			(23,636	)
Other		906			-			-			-			906
Net Cash Provided (Used) by     Investing Activities		89			(22,324	)		(495	)		-			(22,730	)
Financing Activities:
Increase in short-term        notes payable		59,000			-			-			-			59,000
Principal payments of        long-term debt		(10,000	)		-			-			-			(10,000	)
Proceeds from stock        options exercised		13			-			-			-			13
Payments for purchase of        treasury stock		(5,380	)		-			-			-			(5,380	)
Dividends paid		(5,442	)		-			-			-			(5,442	)
Intercompany financing		(51,962	)		51,623			3,685			(3,346	)		-
Net Cash Provided (Used) by of     Financing Activities		(13,771	)		51,623			3,685			(3,346	)		38,191
Increase (Decrease) in Cash and     Cash Equivalents		(7,393	)		7,406			10,463			-			10,476
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	$	1,458		$	11,960		$	31,216		$	-		$	44,634

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

Results of Operations

Quarter ended November 3, 2001 compared to the Quarter ended October 28, 2000

Consolidated net sales for the quarter ended November 3, 2001 were $462.4 million compared to $463.3 million in the quarter ended October 28, 2000. Net earnings of $11.9 million for the third quarter of 2001 compares to net earnings of $15.6 million in the third quarter of 2000. Diluted earnings per share was $.68 in the third quarter of 2001 compared to $.88 in the third quarter of 2000.

Famous Footwear 's sales decreased 4.1% during the third quarter of 2001 to $280.9 million. The decrease was driven by a 9.4% same-store-sales decline partially offset by five additional stores resulting in a total of 924 stores in operation. Famous Footwear had operating earnings for the third quarter of 2001 of $14.2 million compared to $22.3 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 $128.9 million during the third quarter of 2001 compared to $120.5 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 $12.3 million increased from $9.8 million in the third 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 increased 4.3% to $52.2 million in the third quarter of 2001. Same-store sales in the third quarter of 2001 increased 5.4% in the United States and 8.8% in Canada. The Company had 32 less stores in operation in the United States in 2001 and had 11 more stores in operation in Canada than in 2000. At the end of the third quarter of 2001, 477 stores were in operation including 319 stores in the United States and 158 stores in Canada. Total Naturalizer Retail operations achieved operating losses of $1.4 million in the third quarter of fiscal 2001 compared to losses of $1.8 million in 2000. The improvement was primarily due to the higher sales.

Consolidated gross profit as a percent of sales for the third quarter of 2001 decreased to 39.3% from 39.8% during the same period last year. This decrease was primarily due to lower margins in the Company's retail operations primarily as a result of a highly competitively promotional environment for Famous Footwear.
 
 

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Selling and administrative expenses as a percent of sales for the third quarter of 2001 increased to 34.8% from 33.9% for the same period last year. This increase was due to the lower sales in the quarter at Famous Footwear while expenses were relatively flat.

The consolidated tax rate was 22.3% of pre-tax income for the third quarter of 2001 compared to 31.3% 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.
 

Nine Months ended November 3, 2001 compared to the Nine Months ended October 28, 2000

Consolidated net sales for the first nine months of 2001 were $1.341 billion, an increase of 5.0% from the first nine months of 2000 total of $1.277 billion. Net earnings of $24.1 million for the first nine months of 2001 compare to net earnings of $31.4 million for the first nine months of 2000, a decrease of 23.2%.

Sales at Famous Footwear for the first nine months of 2001 increased 2.5% to $803.1 million from the first nine months of last year, reflecting a 6.4% decrease in same-store sales offset by the effect of opening 53 new, larger and higher volume stores and the closing of 54 lower volume stores during 2001. Operating earnings for the first nine months of 2001 decreased 49.1% to $23.8 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 nine months of 2001 increased 11.1% to $379.2 million from the same period last year. Operating earnings for the first nine months of 2001 of $37.3 million increased $14.0 million from the same period last year due primarily to the increased sales volume.

In the Company's Naturalizer Retail operations, net sales increased 3.7% to $157.7 million in the first nine months of 2001. Same-store sales increased 2.9% in the United States and 8.5% in Canada. Total Naturalizer Retail operations had operating losses of $0.4 million in the first nine months of 2001 compared to operating losses of $1.8 million 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 nine months of 2001 decreased to 39.2% from 40.3% for the same period last year. This decrease was primarily due to lower margins at Famous Footwear reflecting higher promotional activities.

Selling and administrative expenses as a percent of sales for the first nine months of 2001 increased to 35.8% from 35.7% for the same period last year. This increase was primarily due to higher operating expenses at Famous Footwear offset partially by lower expenses at the Company's wholesale operations.
 
 

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

The consolidated tax rate was 26.0% of consolidated pre-tax income for the first nine months of 2001 compared to 32.4% 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 nine months and projected for the year.
 

Fourth Quarter Charge

Subsequent to the end of the third quarter, the Company announced that it intended to take an after-tax charge in its fourth quarter of $29-$32 million. This charge relates to a series of initiatives, which include profitability-enhancing measures in the Naturalizer division which will lead to a more productive retail store base, the development of a shared services administrative platform, inventory utilization improvements, and more efficient logistics operations. These programs are expected to increase after-tax earnings by approximately $13 million in fiscal 2003 and $20 million by fiscal 2005. The fourth quarter charge is expected to include costs related to restructuring the Naturalizer division, severance costs, incremental inventory markdowns, management transition at Famous Footwear, and debt restructuring including the costs to call the Company's $100 million 9½% Senior Notes which were scheduled to mature in fiscal 2006.
 

Financial Condition

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

	November 3, 2001	October 28,  2000	February 3, 2001
Working Capital (millions)	$253.0	$269.5	$266.5
Current Ratio	1.9:1	1.9:1	1.9:1
Total Debt as a Percentage   of Total Capitalization	45.3%	45.1%	45.8%

Cash used from operating activities for the first nine months of fiscal 2001 was $12.0 million versus cash usage of $5.0 million last year. This decrease resulted primarily from the lower earnings.
 
 

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The decrease in the ratio of total debt as a percentage of total capitalization at November 3, 2001, compared to the end of fiscal 2000, is due to higher shareholders' equity, offset partially by cash usage and resultant higher borrowings. At November 3, 2001, $85.0 million was borrowed and $1.5 million of letters of credit were outstanding under the Company's $165.0 million revolving bank Credit Agreement.

In November 2001, the Company received a commitment from Bank of America to underwrite a new revolving credit facility. In the Fourth Quarter of fiscal 2001, the Company expects to enter into a new $350 million Credit Agreement, which will replace the Company's current $165 million revolving bank Credit Agreement dated November 20, 2000. Borrowings under the new Credit Agreement will be secured by accounts receivable and inventory of the Company's domestic and Canadian subsidiaries. In addition, the Company announced its intention to call its $100 million 9½% Senior notes in the fourth quarter of fiscal 2001. Such notes were scheduled to mature in 2006. The total costs associated with this debt restructuring are approximately $5.0 million, aftertax, including the call premium and the write-off of deferred debt issuance costs.

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 nine months of fiscal 2001, the Company purchased 145,900 shares at a cost of $2.6 million under this authorization. Since the inception of this program, 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.
 
 

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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.
 
 

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PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

There have been no material developments during the quarter ended November 3, 2001 in the legal proceedings described in the Company's Annual Report on Form 10-K for the year ended February 3, 2001.Item 6 - Exhibits and Reports on Form 8-K
 

(a)	(3)	(a)	Restated Certificate of Incorporation of the Company, dated October 17, 2001, filed herewith.
		(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.
	(4)	(a) (ii)	Second Amendment to Rights Agreement between Brown Shoe Company, Inc., First Chicago Trust Company of New York, and EquiServe Trust Company, N.A., dated and effective as of December 6, 2001, filed herewith.
	(10)	(g)	Early Retirement and Consulting Agreement dated July 27, 2001, between the Company and Brian C. Cook, filed herewith.

(b)	Reports on Form 8-K:
	The Company filed no reports on Form 8-K during the quarter ended November 3, 2001.

 

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

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

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