1
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 October 28, 1995
[ ] 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 GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 43-0197190
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
8300 Maryland Avenue
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 854-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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 November 25, 1995, 17,932,477 shares of the registrant's common stock
were outstanding.
2
BROWN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
October 28, October 29, January 28,
1995 1994 1995
----------- ----------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 28,662 $ 31,382 $ 18,922
Receivables, net of allowances of
$10,880 at October 28, 1995,
$11,361 at October 29, 1994, and
$11,664 at January 28, 1995 94,420 115,271 98,079
Inventories (net of adjustment to
last-in, first-out cost of
$29,682 at October 28, 1995,
$37,351 at October 29, 1994, and
$37,286 at January 28, 1995) 356,340 322,901 322,029
Net Current Assets of Discontinued
Operations - (429) -
Other Current Assets 47,907 60,978 39,930
-------- --------- ---------
Total Current Assets 527,329 530,103 478,960
Property, Plant and Equipment 213,895 199,818 203,227
Less allowances for depreciation
and amortization (119,111) (105,930) (110,323)
-------- --------- ---------
94,784 93,888 92,904
Net Noncurrent Assets of
Discontinued Operations - 1,739 -
Other Assets 64,447 58,908 64,651
-------- --------- ---------
$686,560 $ 684,638 $ 636,515
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $106,500 $ 59,450 $ 41,085
Accounts Payable 106,966 97,261 85,045
Accrued Expenses 89,802 102,624 92,231
Income Taxes 12,890 6,824 (642)
Current Maturities of Long-Term Debt 2,756 2,078 2,063
-------- --------- ---------
Total Current Liabilities 318,914 268,237 219,782
Long-Term Debt and Capitalized
Lease Obligations 107,469 135,214 133,213
Other Liabilities 29,873 30,324 33,793
Stockholders' Equity
Common Stock 67,251 67,437 67,388
Additional Capital 46,224 46,537 46,957
Cumulative Translation Adjustment (4,367) (3,221) (5,556)
Unamortized Value of Restricted Stock (8,027) (11,468) (10,878)
Retained Earnings 129,223 151,578 151,816
-------- --------- ---------
230,304 250,863 249,727
-------- --------- ---------
$686,560 $ 684,638 $ 636,515
======== ========= =========
See Notes to Condensed Consolidated Financial Statements.
3
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share)
Three Months Ended Nine Months Ended
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Net Sales $406,921 $406,934 $1,107,224 $1,129,422
Cost of Goods Sold 262,912 267,422 726,511 738,649
-------- -------- ----------
Gross Profit 144,009 139,512 380,713 390,773
-------- -------- ---------- ----------
Selling and Administrative
Expenses 125,004 113,315 370,345 334,011
Interest Expense 3,858 3,988 11,738 12,477
Other (Income) Expense (2,364) (844) 1,058 (1,991)
-------- -------- ---------- ----------
Earnings (Loss)from Continuing
Operations Before Income Taxes 17,511 23,053 (2,428) 46,276
Income Tax 7,796 8,127 649 16,483
-------- -------- ---------- ----------
Earnings (Loss) from
Continuing Operations 9,715 14,926 (3,077) 29,793
Earnings (Loss) from Discontinued
Operations, Net of Taxes - 777 - 1,282
-------- -------- ---------- ----------
NET EARNINGS (LOSS) $ 9,715 $ 15,703 $ (3,077) $ 31,075
======== ======== ========== ==========
NET EARNINGS (LOSS) PER COMMON SHARE:
Continuing Operations $ .55 $ .85 $ (.17) $ 1.70
Discontinued Operations - .04 - .07
-------- -------- ---------- ----------
NET EARNINGS (LOSS)
PER COMMON SHARE $ .55 $ .89 $ (.17) $ 1.77
======== ======== ========== ==========
Weighted Average Number of
Outstanding Shares
of Common Stock 17,584 17,595 17,590 17,530
DIVIDENDS PER COMMON SHARE $ .25 $ .40 $ 1.05 $ 1.20
======== ======== =========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
October 28, October 29,
1995 1994
----------- -----------
Net Cash Provided (Used) by Operating Activities of:
Continuing operations $ 10,110 $ 28,434
Discontinued operations - (498)
-------- --------
Net Cash Provided by Operating Activities 10,110 27,936
Investing Activities
Capital expenditures (24,312) (23,804)
Proceeds from sales of assets of discontinued
operations - 118,519
Other 2,822 817
-------- --------
Net Cash Provided (Used) by Investing Activities (21,490) 95,532
Financing Activities
Increase/(decrease) in short-term notes payable 40,415 (86,640)
Principal payments of long-term debt (56) (5,746)
Dividends paid (18,842) (21,420)
Payments for purchase of treasury stock (824) -
Other 427 4,828
-------- --------
Net Cash Provided (Used) by Financing Activities 21,120 (108,978)
-------- --------
Increase in Cash and Cash Equivalents 9,740 14,490
Cash and Cash Equivalents at Beginning of Period 18,922 16,892
-------- --------
Cash and Cash Equivalents at End of Period $ 28,662 $ 31,382
======== ========
See Notes to Condensed Consolidated Financial Statements.
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BROWN GROUP, 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 and the effect on LIFO inventory valuation of estimated annual
inflationary cost increases and year-end inventory levels) to present fairly
the results of operations. These statements, however, do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flow in conformity with generally
accepted accounting principles.
The Corporation'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 Corporation's Annual Report and Form 10-K for the
period ended January 28, 1995.
Note B - Earnings Per Share
---------------------------
Net earnings per share of Common Stock is computed by dividing net earnings by
the weighted average number of shares outstanding. The dilutive effect of
stock options is not significant and is therefore excluded from the
calculation.
Note C - Inventories
--------------------
The components of inventory are as follows ($000):
October 28, October 29, January 28,
1995 1994 1995
----------- ----------- -----------
Finished Goods $339,795 $303,191 $298,235
Work in Process 2,193 3,115 4,193
Raw Materials and Supplies 14,352 16,595 19,601
-------- -------- --------
$356,340 $322,901 $322,029
======== ======== ========
During fiscal 1995, inventory quantities will be reduced at one of the
Corporation's divisions, which will result in a liquidation of LIFO inventory
layers. On an aftertax basis, the effect of this liquidation is to increase
third quarter's and year-to-date net income by $3.2 million and $5.6 million,
respectively.
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Note D - Contingencies
----------------------
The Corporation has completed remediation efforts at its closed New York
tannery and two associated landfills. As such, in September 1995, state
environmental authorities reclassified the status of the site to one that has
been properly closed and that requires only continued maintenance and
monitoring. This change in status has allowed the Corporation to reliably
estimate the future liability for monitoring and maintenance based on a
specific site plan. Accordingly, in the third quarter of 1995, the estimated
liability related to this site of $5.3 million was discounted, using a 6.4%
rate, resulting in a $2.0 million reduction in the previously recorded
liability of $4.7 million. This increase in third quarter earnings was included
in Other (Income) Expense on the Condensed Consolidated Statements of Earnings.
The expected payments for the next five years are approximately $.2 million per
year with the balance due thereafter. At October 28, 1995, the total accrued
environmental liabilities for all sites, including the above discounted
liability, total $3.2 million.
Note E - Long-Term and Short-Term Financing Arrangements
--------------------------------------------------------
In October 1995, the Corporation refinanced $50 million of 6.47% unsecured
Senior notes due in February 1996 with $50 million of 7.36% unsecured Senior
notes. The new debt agreement requires annual payments of $10 million in 1999
through 2003.
The Corporation also amended certain terms of its $200 million revolving bank
Credit Agreement, which will now expire in December 1999. At October 28, 1995,
$105.0 million has been borrowed under this agreement. Interest on borrowings
under this agreement are at varying rates and at the Corporation's option,
based on one of the following: the Eurodollar rate, the competitive bid rate,
the First National Bank of Chicago's corporate base rate or the Federal funds
rate. A commitment fee of .125% is payable on the unused portion of the
agreement.
The Senior notes and Credit Agreement contain covenants which, among other
provisions, require the maintenance of certain financial ratios related to
fixed charge coverage and long-term debt-to-capital, establish minimum levels
of net worth and working capital, and limit the sale of assets and the level
of liens and certain investments.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Results of Operations
---------------------
Quarter ended October 28, 1995 compared to the Quarter ended October 29, 1994
-----------------------------------------------------------------------------
Consolidated net sales for the third quarter ended October 28, 1995, were
$406.9 million, flat with last year's third quarter.
Earnings from continuing operations of $9.7 million for the third quarter of
1995 compares to earnings of $14.9 million last year.
Net earnings of $9.7 million for the third quarter of 1995 compares to net
earnings of $15.7 million last year. The 1995 earnings include an aftertax
credit of $3.2 million from the liquidation of LIFO inventories associated with
the factory closings, which was announced in the second quarter. Last year's
net earnings figure reflects aftertax income from discontinued operations of
$.8 million.
Sales from the footwear retailing operations increased 13% from the third
quarter of 1994. Famous Footwear's sales increased 19% due to 143 more units
in operation with a same-store decrease of 2.7%. The Canadian retailing
operation's sales increased 3.0% with a same-store decrease of 1.0%.
Naturalizer stores' sales decreased 13.0% over last year's third quarter,
reflecting same-store sales loss of 7.2%, excluding sales from close-out
locations temporarily opened last year as part of the company restructuring
program, and a net decrease of 26 units. These same-store sales decreases
reflect the continuing difficult footwear and apparel retail business.
Sales from footwear wholesaling activities decreased 16% over the same period
last year. Pagoda's sales decreased 16% and Brown Shoe's decreased 17%. The
decline was due to weakness in the Corporation's retail customers' business and
decreases in shipments of branded footwear.
Gross profit as a percent of sales increased to 35.4% from 34.3% for the same
period last year. Retailing footwear activities experienced a decrease in
gross profit as a percent of sales of 2.5% due to promotional nature of the
current retail environment. Wholesale margins increased by 3.4%. The overall
gross profit and wholesale gross profit were positively impacted by the credit
recorded from the LIFO liquidation associated with the plant closures announced
in the second quarter.
Selling and administrative expenses as a percentage of sales increased to 30.7%
from 27.8%, primarily due to reduced sales levels at the wholesale operations
and to costs associated with the rapid expansion at Famous Footwear.
Other income for the third quarter of 1995 was $2.4 million compared to income
of $.8 million for the same period last year. The income in 1994 consisted
primarily of royalty income. The increase in other income in 1995 is primarily
due to a $2.0 million reduction in the environmental liability related to
favorable reclassification of the Corporation's closed tannery site.
Year-to-Date 1995 compared to Year-to-Date 1994
-----------------------------------------------
Consolidated net sales of $1,107.2 million were 2% lower than the first nine
months of last year.
8
The loss from continuing operations of $3.1 million for the first nine months
of 1995 compares to earnings of $29.8 million last year. Fiscal 1995 includes
an aftertax charge of $9.6 million for plant closures recorded in the second
quarter of fiscal 1995, which was partially offset by an aftertax credit of
$5.6 million from the liquidation of LIFO inventories.
The net loss for the first nine months of 1995 was $3.1 million compared to net
earnings of $31.1 million for the same period last year. Last year's net
earnings reflect aftertax earnings from discontinued operations of $1.3
million.
Sales in the footwear retailing operations increased 14% compared to the first
nine months of last year. Sales at Famous Footwear increased 22%, while
decreasing 1.4% on a same-store basis. There were 820 Famous Footwear stores
in operation at the end of the third quarter, 143 more than at the same time
last year. The Canadian retailing operation's sales improved, increasing by
4%, including a same-store increase of .3%. The Naturalizer retailing
operation's sales declined 10%, including a same-store decrease of 5.4%. At
the end of the third quarter, there were 321 Naturalizer stores in operation,
26 less than in 1994. These same-store sales decreases reflect the difficult
footwear and apparel retail business.
Sales from footwear wholesaling activities decreased by 20%. Pagoda's sales
decreased 17% and Brown Shoe's decreased 28%. The declines were primarily due
to weakness in the Corporation's retail customers' businesses, the sale of the
men's business, and decreased shipments of branded footwear.
Gross profit as a percentage of sales decreased to 34.4% from 34.6% for the
same period last year. Retailing footwear activities experienced a decrease
in gross profit as a percent of sales of 2.3% due to the promotional nature of
the current retail environment. Wholesale margins decreased by 1.2%. The
overall gross profit and wholesale gross profit were negatively impacted by the
charges recorded to close the remaining manufacturing facilities in the second
quarter of $10.1 million partially offset by a year-to-date $8.6 million LIFO
credit from the liquidation of manufactured inventories of $8.6 million.
Selling and administrative expenses as a percentage of sales increased to 33.4%
from 29.6% for the same period in 1994, primarily due to reduced sales levels
at the wholesale operations and to costs associated with the rapid expansion
and lower same-store sales of Famous Footwear.
Other (income) expense is a net expense of $1.1 million in the first nine
months of 1995 compared to income of $2.0 million in the same period last year.
The income in 1994 consisted primarily of royalty income. In 1995, royalty
income, in addition to a $2.0 million credit related to the Corporation's
environmental liability, was more than offset by a $4.3 million charge related
to factory closures.
Fiscal 1995 Fourth Quarter Outlook
----------------------------------
Retail sales of footwear and apparel have been poor for most of 1995,
particularly in the discount arena where Famous Footwear competes. We expect
this to continue. With our tight cost control and the structural changes we
have made, Brown Group plans to operate profitably in the fourth quarter.
9
Financial Condition
-------------------
A summary of key financial data and ratios at the dates indicated is as
follows:
October 28, October 29, January 28,
1995 1994 1995
----------- ----------- -----------
Working Capital (millions) $208.4 $261.9 $259.2
Current Ratio 1.7 2.0 2.2
Total Debt as a Percentage of
Total Capitalization 48.5% 44.0% 41.4%
Net Debt (Total Debt less Cash and
Cash Equivalents) as a Percentage
of Total Capitalization 45.0% 39.7% 38.7%
Cash flow from operating activities of continuing operations for the first nine
months of fiscal 1995 was $17.8 million less than in the first nine months of
1994. The decrease was primarily the result of lower earnings and increased
inventories at Famous Footwear, partially offset by reduced restructuring
reserve usage and lower accounts receivable at Brown and Pagoda.
Financing activities in the first nine months of fiscal 1995 reflect an
increase in notes payable which is due primarily to lower earnings and
additional investment in Famous Footwear. In the first nine months of 1994, the
corporation was able to reduce total debt with proceeds from the sale of assets
from the discontinued leased department and Cloth World businesses.
In October 1995, the Corporation refinanced $50 million of 6.47% unsecured
Senior notes due in February 1996 with $50 million of 7.36% unsecured Senior
notes. The new debt agreement requires annual principal payments of $10
million in 1999 through 2003.
In addition, the Corporation amended certain terms of its $200 million
revolving bank Credit Agreement, which will now expire in 1999. At October 28,
1995, $105.0 million has been borrowed under this agreement. Interest on
borrowings under this Agreement are at varying rates, and at the Corporation's
option, based on the Eurodollar rate, the competitive bid rate, the First
National Bank of Chicago's corporate base rate, or the Federal funds rate. A
commitment fee of .125% is payable on the unused portion of the Agreement.
The Senior notes and the Credit Agreement contain covenants which, among other
provisions, require the maintenance of certain financial ratios related to
fixed charge coverage and long-term debt-to-capital, establish minimum levels
of net worth and working capital, and limit the sale of assets and the level
of liens and certain investments.
10
The increase in the ratio of total debt as a percentage of total capitalization
at October 28, 1995 compared to the end of the third quarter in 1994, is due
primarily to the lower earnings and additional investment in Famous Footwear
in 1995 and the Corporation paying down short-term debt in the third quarter
of fiscal 1994 with additional cash flow generated from discontinued
operations. The current ratio decreased to 1.7 to 1 from 2.0 to 1 at the end
of 1994. The decline was due to lower earnings and additonal investment in
Famous Footwear.
In September 1995, the Corporation's long-term debt rating was downgraded to
Baa3 by Moody's Investors Service and to BB+ by Standard & Poor's Corporation.
The Corporation's commercial paper rating was also downgraded to Prime-3 by
Moody's and to B by Standard & Poor's.
At the end of the second quarter, in view of prevailing business conditions,
the Board of Directors at their September 7, 1995 meeting, reduced the regular
quarterly dividend to 25 cents per share from the previous level of 40 cents
per share.
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
--------------------------
There have been no material developments during the quarter ended October
28, 1995, in the legal proceedings described in the Corporation's Form 10-K
for the period ended January 28, 1995.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Listing of Exhibits
(11) Computation of Earnings Per Share (Page 11)
(27) Financial Data Schedule (Page 12)
(b) Reports on 8-K
There were no reports on Form 8-K for the quarter ended
October 28, 1995.
SIGNATURES
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 GROUP, INC.
Date: December 8, 1995 /s/ Harry E. Rich
Executive Vice President
and Chief Financial Officer and
On Behalf of the Corporation as
the Principal Financial Officer
11
EXHIBIT 11
PART II - OTHER INFORMATION
COMPUTATION OF EARNINGS PER SHARE
BROWN GROUP, INC.
(Thousands, except per share)
Three Months Ended Nine Months Ended
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
----------- ----------- ----------- -----------
PRIMARY
Weighted average shares outstanding 17,584 17,595 17,590 17,530
Net effect of dilutive stock options
based on the treasury stock method
using average market price - 79 9 102
-------- --------- --------- ---------
TOTAL 17,584 17,674 17,599 17,632
======== ========= ========= =========
Earnings (loss) from continuing operations $ 9,715 $ 14,926 $ (3,077) $ 29,793
Discontinued operations - 777 - 1,282
-------- --------- --------- ---------
Net earnings (loss) $ 9,715 $ 15,703 $ (3,077) $ 31,075
======== ========= ========= =========
Earnings (loss) per share from
continuing operations $ .55 $ .85 $ (.17) $ 1.70
Discontinued operations - .04 - .07
-------- --------- --------- ---------
Net earnings (loss) per share (1) $ .55 $ .89 $ (.17) $ 1.77
======== ========= ========= =========
FULLY DILUTED
Weighted average shares outstanding 17,584 17,595 17,590 17,530
Net effect of dilutive stock options
based on the treasury stock method
using the period-end market price,
if higher than the average market price - 79 29 110
-------- --------- --------- ---------
TOTAL 17,584 17,674 17,619 17,640
======== ========= ========= =========
Earnings (loss) from continuing operations $ 9,715 $ 14,926 $ (3,077) $ 29,793
Discontinued operations - 777 - 1,282
-------- --------- --------- ---------
Net earnings (loss) $ 9,715 $ 15,703 $ (3,077) $ 31,075
======== ========= ========= =========
Earnings (loss) per share from
continuing operations $ .55 $ .85 $ (.17) $ 1.70
Discontinued operations - .04 - .07
-------- --------- --------- ---------
Net earnings (loss) per share (1) $ .55 $ .89 $ (.17) $ 1.77
======== ========= ========= =========
(1) The dilutive effect of stock options was not
included in weighted average shares outstanding
for purposes of calculating earnings per share
because dilution was less than 3% and not material.