Investor Update
BROWN SHOE COMPANY, INC.
Fall 2008
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:
This investor update 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 Part I, 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.
- September 23, 2008
NOTE:
Full-Year and Third Quarter 2008 guidance was issued on August 27, 2008 and has not been updated.
BROWN SHOE FITS THE WORLD…
with lifestyle footwear that expresses the individual consumer’s fashion sensibility. Whether at play, at work or on the town, people trust Brown Shoe’s signature brands
to walk them through the stories of their lives.
Brown Shoe is proud to offer a compelling family of footwear brands that reveal an intrinsic understanding of its consumers at every stage of their lives. Each shoe is an intuitive yet calculated response to the needs, desires and distinctive personalities of men, women and children passionate about substance and style.
Every day, people around the globe put on shoes before stepping out into the world. Every day, Brown Shoe works diligently to design and deliver brands that strengthen its highly personal connection to consumers. Brown Shoe delivers an expertly crafted business model – across retail, e-commerce and wholesale – built on a global platform of integrated business systems and diverse distribution channels.
Future-focused and innovative,
Brown Shoe listens carefully and thoughtfully, evolving brands that give our customers the confidence to be themselves...
every person,
every day,
every moment.
Brown Shoe - $2.4 Billion in Sales for 2007
Total BWS
Direct-to-Consumer
$110 million
(Includes FamousFootwear.com, Naturalizer.com, Naturalizer Catalog, Shoes.com)
Famous Footwear
Appx. 1,100 retail stores in the U.S.
$1.3 billion
Specialty Retail
Appx. 300 stores in the U.S.
$263 million
Wholesale
$784 million
Spec. Stores
18%
Dept. Stores
22%
Mass
37%
Mid-Tier
23%
Brown Shoe Platform
A greatly connected footwear company with an integrated, synergistic wholesale-retail platform
Retail
Wholesale
Ecommerce
| • | Appx. 1,400 total retail doors – appx. 1,100 |
| | Famous Footwear, appx. 300 Naturalizer, Brown Shoe Closet, FX LaSalle, and branded concepts. 130 million consumer visits per year |
| • | 2,000 retail customers served across our branded and private label/brand divisions |
| • | Integrated ecommerce platform for all BWS brands – including 3rd largest pureplay internet footwear retailer in Shoes.com. |
| | 30+ million e-visitors per year |
| • | World class global sourcing network. Sourced 76 million pairs at wholesale and sold 40 million at retail |
| • | All BWS brands play across BWS retail/ecommerce concepts |
| • | 13% to 15% of Famous Footwear sales from BWS brands |
| • | Front-end / Back-end perspective from retail and wholesale provides greater insights to consumer desires and understanding of trends |
| • | Cross-skilled talent base |
Brown Shoe Platform
Power of the Integrated Wholesale/Retail Model – Driving Growth, Profitability, and Value Creation
Control the Customer Experience
| • | Fragmentation of the consumer has significantly expanded the matrix of style preferences and retail options |
| • | Integrated model allows a wide variety of brands in the “right” channel |
Maximize theValue of Footwear Expertise
| • | Consumer contact and feedback at retail and ecommerce stimulates and accelerates the design process |
| • | Improves ability to stay “on-trend” across segments |
Own the Entire Margin
| • | Capturing greater product margin on owned brands through owned retail |
| • | Careful balance to minimize channel conflict |
Leverage Infrastructure
| • | Optimizes supply chain and distribution |
| • | Leverages shared resources and costs |
Diversify the Business Model
| • | Removes volatility through portfolio of retail and wholesale brands |
| • | Maximizes returns on capital |
Brown Shoe Portfolio
*Source: NPD. 12 months ending February 1, 2008. This NPD data is confidential and proprietary and cannot be reproduced or disseminated by third parties without prior written consent.
Fashion
Domestic Sales = $32.7B*
Athletic
Domestic Sales = $10.8B*
Salon
Bridge
Impulse
Better
Moderate
Junior
Comfort
Mass
Private Label / Brand
Brown Shoe Vision
Brown Shoe is the leading fashion footwear marketer, winning loyal customers with compelling global brands.
Doubling our rate of profitability while doubling our sales over the next five years.
Growth and Profit Drivers
| 1. | Build powerful consumer brands |
| • | Grow brand equity of flagship brands |
| • | Test, incubate, and grow new brands |
| • | Search for strategic opportunities that fit our growth criteria |
| 2. | Drive brands through owned retail |
| • | Leverage vertical & multi-channel businesses |
| • | Maximize owned-distribution and owned-branded assets |
| 3. | Expand our brands to global markets |
| • | Extend existing brands to international markets |
| • | Build and acquire brands with international demand |
| 4. | Penetrate growth markets |
| • | Target new and fast-growing markets and channels of distribution |
| 5. | Drive operational excellence and maximize synergies |
| • | Earnings Enhancement Plan, Real Estate Strategy, Consumer-Driven Model, Inventory Management |
| • | Implementing enterprise-wide information systems to support and leverage our operations |
Investing over $1 billion in Talent, Stores, Systems, and Marketing over the next five years
Famous Footwear
“Shoe Love Is True Love”
| ● | Growth opportunity to a minimum of 1,500 doors. As new stores mature, operating performance will improve across the store base |
| ● | Real estate strategy to maximize markets |
| ● | Leading inventory management disciplines |
| ● | Leveraging multi-channel platform |
| ● | Using technology to redefine service |
| ● | Vertical synergy ¢ 13% - 15% of sales from Brown Shoe brands. Retail growth feeds Wholesale growth |
| ● | Approximately 54% of sales are driven by our rewards program |
Naturalizer
“Beautiful Feels So Good”
| ● | Extended brand essence to new categories and consumer touchpoints |
| ● | Tightly-targeted consumer communications |
| ● | Sell-through model; fresh trend-right product |
| ● | Improved product delivered when she wants |
| ● | All-in brand (retail and wholesale combined) contributes double-digit operating margins |
| ● | Global expansion – next 5 years, through combination of joint venture and licenses, 400 Naturalizer stores will be opened in China and the Far East, as well as an additional 32 new stores in Japan. Potential for a total 700 – 750 Naturalizer stores outside of US in next 5 years |
| ● | Launched Natural Soul in Kohl’s in 2007 |
Direct To Consumer
“My Own Private Shoe Store”
| ● | Growth by winning in new and emerging markets |
| ● | $350 to $450 million opportunity in next 5 years |
| ● | Integrated platform. Consolidated Shoes.com into St. Louis in 2007 |
| ● | Re-launched Shoes.com in Spring 2008 |
| ● | Branded web sites and multi-channel opportunities |
Brown New York
| | Provides fashion halo to portfolio |
| | •Strong emotional connection with consumer |
| | •Fashion, Style Credibility, Talent |
| | •Brand extension and lifestyle potential |
| | •Expect double-digit sales increase in 2008 |
| | •August 2008, announced agreement with Vera Wang to design and market her Lavender Label Collection |
Dr. Scholl’s®
| ● | Innovation and technology |
| ● | High brand recognition and strong equity |
| ● | Partnerships with Wal-Mart and Schering-Plough |
| ● | Extending brand into new categories and channels |
| ● | Feel Crazy Green – sustainability product |
| ● | Dr. Scholl’s Studio – Mid-Tier brand extension |
| ● | Growth through Brown Shoe vertical model at Famous Footwear |
Positioning For Growth
1997 2008
Survival
| • | Reorganization of Executive Team |
| • | Focus on core activities |
| • | Secured financing and stabilized liquidity |
Rebuild
| • | 1st Naturalizer re-sizing and reorganization |
Improving Core Competencies
| • | Good to Great disciplines |
Increasing Prospects for Profitability
| • | Focus on best brands and market opportunities |
| • | Consumer-Driven Wholesale Model |
| • | Integrated, efficient business model |
Sustainable Growth
| • | Earnings Enhancement Plan |
| • | Accelerating Famous growth |
| • | International Opportunities |
| • | IT infrastructure transformation |
Appendix
Non-GAAP Financial Measures
In the following pages, the Company’s financial results and measures are provided both in accordance with generally accepted accounting principles (GAAP), and using certain non-GAAP financial measures. In particular, the Company provides historic and estimated future net earnings per diluted share excluding certain charges and recoveries, as well as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which are non-GAAP financial measures. In addition, the Company provides financial data for certain of its Famous Footwear stores, including sales per square foot, total sales, operating earnings, EBITDA, cash investments, and return on investment, which are non-GAAP financial measures. These results and measures are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help indicate underlying trends in the Company’s business and provide useful information to both management and investors by excluding certain items that are not indicative of the Company’s core operating results. These results and measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.
Recent Events – Famous Footwear Transition
On April 10, 2008, announced the relocation of Madison office to St. Louis
This move will create one greatly connected footwear company
| | •Will aid in achieving our vision of being a leading footwear marketer and doubling our rate of |
| | profitability while doubling sales, as it will foster collaboration, increase speed-to-market and strengthen our connection with consumers |
The transition began during the first quarter of 2008 and is expected to be substantially complete by the end of the third quarter of 2008
We expect to incur pre-tax expenses of $25 to $30 million (after-tax $0.37 to $0.44 per diluted share) to implement the transition, to be substantially incurred in fiscal 2008. For the full year 2008, we expect after-tax costs of $0.09 per diluted share, net of an expected nonrecurring gain on real estate sales. Cost breakdown is expected to be as follows:
| | Expense Category Estimate of |
| | People-related costs, including relocation, retention incentives and severance $15 - $16 million |
| | Asset write-offs (non-cash) $4 - $5 million |
| | Lease termination costs $4 - $6 million |
Under various state economic development programs, we will collaborate with public partners to attempt to avail ourselves of eligible incentives
totaling approximately $37 million related to training and job creation and redevelopment of our Clayton site
| | •Our growth plan anticipates relocating or creating 500 - 700 new jobs over the next several years |
| | •We intend to work with public and private partners on the redevelopment of our 12-acre property into a mixed-use project with office, retail, and residential facilities, that will include a new, more efficient headquarters for the Brown Shoe of the future. Working with our development partners, we anticipate a monetization of existing assets and an operating lease of the new facility on a portion of the existing property. |
Recent Events – IT Transformation
| § | 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, 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 $0.04 per diluted share in 2008 related to the ERP implementation. |
Third Quarter 2008 & Full Year Guidance
Guidance was issued on August 27, 2008 and has not been updated
| | Consolidated Sales: 2008 Estimated 2007 Actual |
| | Third Quarter $650 - $660 million $646 million |
| | Full Year $2.38 - $2.40 billion $2.36 billion |
| | Third Quarter $0.31 to $0.41$0.61 |
| | Full Year $1.12 to $1.29 $1.37 |
Other Annual Estimates:
Consolidated Tax Rate: 24% to 26%
Famous Footwear
Same-Store Sales: -2 to -4% for the full year; -1% to -3% for Q3
Store Openings: 90 openings and approximately 30 closings for the full year
Wholesale: Wholesale sales are expected to be flat to -2% for the full year and be flat to -4% in Q3
Capital Expenditures: $85 to $90 million, reflecting new and remodeled stores, logistics network and otherinfrastructure, and capitalized software and information systems upgrades relating to ITinfrastructure transformation
Other: Full year EPS guidance includes:
| • | Costs of $0.09 per diluted share, net of an expected non-recurring gain on real estate sales, related to the relocation of Madison, WI offices to St. Louis. Costs of $0.04 per diluted share related to information technology infrastructure transformation. (In Q308, EPS includes $0.21 per diluted share in costs related to the Madison relocation and Information Technology infrastructure transformation); |
| • | Gain of $0.15 per diluted share for insurance recoveries, net of related fees and costs. |
Sales and EPS – 2003 to Estimated 2008
Guidance was issued on August 27, 2008 and has not been updated
Adjusted EPS
GAAP EPS
Guidance range
Sales in Billions
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
2003
2004
2005
2006
2007
2008 Est
$2.40 - $2.38 Billion
Earnings Per Share
$1.50
$1.00
$0.50
$0.0
2003
2004
2005
2006
2007
2008 Est
$1.10
$1.13
$1.02
$1.48
$0.96
$1.63
$1.51
$1.65
$1.37
$1.29 - $1.12*
*Charges and recoveries included in net earnings and EPS for 2006 & 2007 are listed in Reconciliation of GAAP Net Earnings to Adjusted Net Earnings on page 26.
NOTE: Please see page 16 for language regarding non-GAAP financial data
Review of BWS Financials
(all $’s in millions except EPS, all earnings are on a GAAP basis)
| | | 26 Weeks Ended August 2, 2008 | 26 Weeks Ended August 4, 2007 | % Chg. |
| | | | | | | |
| Net Sales | $1,123.7 | | $1,142.9 | | -1.7% |
| | | | | | | |
| | | | | | | |
| Net Earnings | $9.4 | | $19.5 | | -51.6% |
| | | | | | | |
| | | | | | | |
| EPS | | $0.23 | | $0.44 | | -47.7% |
| | | | | | | |
| Gross Margin | 39.2% | | 40.3% | | |
| Debt/Cap* | 21.1% | | 21.1% | | |
| EBITDA** | $45.6 | | $60.0 | | -24.0% |
| | | | | | | |
* See page 24 for Debt/Cap reconciliation table
**See page 25 for EBITDA reconciliation table
NOTE: Please see page 16 for language regarding non-GAAP financial data
Earnings Enhancement Plan:
Savings of $26 million through 2007
Key Accomplishments in 2007:
Reorganization of Brown Shoe Retail and associated consolidation of key functions:
| | • Blended all retail field operations and store support functions, across |
| | • Created enterprise-wide D2C organization, including relocation of Shoes.com organization to St. Louis |
Continued reorganization of key Wholesale operations:
| | • Completed Brown New York reorganization and redevelopment of core merchandising functions |
Consolidation of total corporate real estate and organizational locations:
| | • Needham office, Dover Distribution Center, LA office (in Shoes.com relocation), Satellite sourcing offices (Italian offices, Taiwan office, Brazil house) |
Executed other key operating efficiency initiatives:
| | • Reorganized corporate and divisional finance functions |
| | • Increased leverage of non-trade spend (e.g. indirect procurement) |
| | • Achieved budgeted inventory turns due to retail inventory optimization initiative |
Remaining key areas of focus:
| § | Distribution Network - made decision to open West Coast Retail DC, enabling improved operating efficiencies across our retail supply chain |
| § | Headquarters consolidation - decision to join Madison and St. Louis offices announced in April 2008 |
| § | Enterprise-wide information systems - decision to implement enterprise resource planning system in August 2008 |
Capital Expenditure Schedule
(all $’s in millions)
| | | | 2008 Est. | | | 2007 |
| | | | | | | | |
| New Stores | | $ 14.0 | to | $ 15.0 | | $ 22.8 |
| | | | | | | | |
| Remodel | | 16.0 | to | 17.0 | | 13.8 |
| | | | | | | | |
| Logistics | | 25.0 | to | 25.0 | | 0.1 |
| | | | | | | | |
Infrastructure (Incl. IT hardware) | 15.0 | | 4.8 |
| | | | | | | | |
| Software (incl. ERP) | 17.0 | to | 18.0 | | 5.7 |
| | | | | | | | |
| Total | | $ 85.0 | to | $ 90.0 | | $ 47.2 |
| | | | | | | | |
NOTE: Please see page 16 for language regarding non-GAAP financial data
Debt to Capital Ratio
($’s in millions)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Debt to Capital Ratio | | Q2 2008 | | Q2 2007 | | 2007 | | 2006 | | 2005 | | 2004 |
| Total Debt Obligations* | $ 150 | | $ 150 | | $ 165 | | $ 151 | | $ 200 | | $ 142 |
| Total Shareholders' Equity | 559 | | 560 | | 559 | | 524 | | 434 | | 391 |
| Total Capital | | $ 709 | | $ 710 | | $ 724 | | $ 675 | | $ 634 | | $ 533 |
| | | | | | | | | | | | | | |
| Debt to Capital Ratio** | | 21.1% | | 21.1% | | 22.8% | | 22.4% | | 31.5% | | 26.6% |
| | *Total Debt Obligations include long-term debt and borrowings under revolving credit agreement. |
| | **Total Debt Obligations divided by Total Capital |
NOTE: Please see page 16 for language regarding non-GAAP financial data
EBITDA Reconciliation
(all $’s in millions)
| | | | 26 Weeks Ended | 26 Weeks Ended |
| | | | August 2, 2008 | | August 4, 2007 |
| Operating Earnings | $ 18.3 | | $ 35.3 |
| | | | | | |
| Depreciation & | | | | |
| Amortization | | 27.3 | | 24.7 |
| | | | | | |
| EBITDA | | $ 45.6 | | $ 60.0 |
| | | | | | |
| | * Depreciation & amortization excludes amortization of debt issuance costs in the amount of $0.7 million for the 26 weeks ended August 2, 2008 and August 4, 2007 |
NOTE: Please see page 16 for language regarding non-GAAP financial data
Reconciliation of GAAP Net Earnings to
Adjusted Net Earnings (2007 vs. 2006)
| | | | | | |
| | | | | | |
| | | | | | |
| | 2007 | | | 2006 | |
| ($'s in thousands) | Net Earnings | EPS | | Net Earnings | EPS |
| | | | | | |
| GAAP Net Earnings | $60,427 | $1.37 | | $65,708 | $1.51 |
| | | | | | |
| Charges/Other Items: | | | | | |
| Earnings Enhancement Plan | 12,351 | 0.28 | | 3,927 | 0.09 |
| | | | | | |
| Bass Exit Costs | - | - | | 2,337 | 0.05 |
| | | | | | |
| Insurance Recoveries, Net | - | - | | (1,007) | (0.02) |
| Adjusted Net Earnings | $72,778 | $1.65 | | $70,965 | $1.63 |
NOTE: Please see page 16 for language regarding non-GAAP financial data
Review of Segment Financials
| | | | | | | |
| | | 26 Weeks Ended August 2, 2008 | 26 Weeks Ended August 4, 2007 | % Chg. |
| ($'s in millions) | | | | | |
| Famous Footwear | | | | | |
| | Sales | $645.0 | | $641.4 | | 0.6% |
| | Operating Profit | $18.9 | | $40.0 | | -52.8% |
| | Same-Store Sales | -5.1% | | 3.5% | | |
| | | | | | | |
| Specialty Retail | | | | | |
| | Sales | $121.0 | | $122.3 | | -1.1% |
| | Operating Profit | -$7.8 | | -$4.7 | | -66.0% |
| | Same-Store Sales | -3.0% | | 0.9% | | |
| | | | | | | |
| | | | | | | |
| Wholesale | | | | | |
| | Sales | $357.7 | | $379.2 | | -5.7% |
| | Operating Profit | $20.3 | | $25.9 | | -21.8% |
NOTE: Please see page 16 for language regarding non-GAAP financial data
Wholesale Portfolio - 2007
Children's
Private Label / Private Brand
Famous Footwear: Sales by Category 2007
Athletic Product = 43%
Fashion Product = 57%
Accessories 5%
Women's 30%
Athletic 15%
Men's 16%
Athletic 20%
Kid's 6%
Athletic 8%
Famous Footwear: Rewards Program
Through increased focus on customer relationship management, the Famous Footwear Rewards Program has shown continued improvement and currently contributes more than 50% of Famous Footwear sales. The Rewards customer spends more per transaction, buys more units per transaction, and buys more often. The retention rate is approximately 50%.
Famous Footwear Rewards - Active Members
(defined as purchased in past 12 months)
Active Members
% Member Sales
Active Members (millions)
8
7
6
5
4
3
2
1
0
2002
2003
2004
2005
2006
2007
Memebers Sales (% of Famous Footwear Sales)
60%
50%
40%
30%
20%
10%
0%
17%
30%
34%
39%
45%
54%
1.9
3.4
3.8
4.4
5.4
6.5
Famous Footwear: Store Maturity
2007 Sales per Square Foot
Sales Per Square Foot
$300
$250
$200
$150
$100
$50
$-
Number of Years Open
1 Year
2 Years
3 Years
4 Years
5 Years
6 Years
7 Years
8 Years
9 Years
10 Years
Older
$139
$152
$185
$171
$170
$182
$187
$210
$211
$242
$195
NOTE: Please see page 16 for language regarding non-GAAP financial data
Famous Footwear: New Store Sales Performance
Represents average sales per square foot results for all stores opened during the 2001-2006 period
Sales Per Square Foot
$185
$180
$175
$170
$165
$160
$155
$150
$145
$140
$136
1st Year Avg.
2nd Year Avg.
3rd Year Avg.
4th Year Avg.
5th year Avg.
$150
$161
$171
$174
$178
NOTE: Please see page 16 for language regarding non-GAAP financial data
Famous Footwear: Unit-level Store Economics
(all $’s in thousands)
2007 Operating Performance
(average store for all stores more than 2 yrs old)
Sales $1,317
$ per Square Ft. $188
% of Sales
Operating Earnings 98 7.4%
EBITDA $118 8.9%
Cash Investment
(Average for stores opened during last 3 years)
Fixed Assets $176
Tenant Allowances (98)
Inventory 218
Accounts Payable (60)
Net Cash Investment $236
Return on Investment
EBITDA $188
Cash Investment $236
Return on Investment 50%
NOTE: Please see page 16 for language regarding non-GAAP financial data
naturalizer - - Global Expansion
Current and future international store base
2007 2012 Est.
US 133
Canada 120
*Central & S. America 25
*Pacific Rim 38
**China 26
Total 342 700 - 750
*All Central and South America and Pacific Rim stores are franchised
**21 of the 26 China stores are franchised by the B&H Footwear joint venture to an
affiliate of Hongguo International as part of JV agreement
Current Domestic Markets
Current International Markets
2008-2012 International Markets
