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 3, 1996
[ ] 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 August 31, 1996, 17,965,952 shares of the registrant's common stock were
outstanding.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
-------------------
August 3, July 29, February 3,
1996 1995 1996
--------- -------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 35,120 $ 23,016 $ 35,058
Receivables, net of allowances of
$10,723 at August 3, 1996,
$11,582 at July 29, 1995, and
$11,267 at February 3, 1996 77,760 86,250 86,417
Inventories, net of adjustment to
last-in, first-out cost of
$22,835 at August 3, 1996,
$32,824 at July 29, 1995, and
$27,672 at February 3, 1996 410,282 368,981 342,282
Other Current Assets 41,724 48,177 41,581
--------- --------- ---------
Total Current Assets 564,886 526,424 505,338
Property and Equipment 199,279 211,634 191,457
Less allowances for depreciation
and amortization (114,981) (118,066) (103,737)
--------- --------- ---------
84,298 93,568 87,720
Other Assets 69,729 59,709 67,998
--------- --------- ---------
$ 718,913 $ 679,701 $ 661,056
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 121,000 $ 91,571 $ 112,000
Accounts Payable 157,015 135,080 106,113
Accrued Expenses 72,739 80,046 71,491
Income Taxes 5,703 5,109 4,335
Current Maturities of Long-Term Debt 2,000 52,763 2,000
--------- --------- ---------
Total Current Liabilities 358,457 364,56 295,939
Long-Term Debt and Capitalized
Lease Obligations 104,022 57,467 105,470
Other Liabilities 26,314 33,247 28,011
Shareholders' Equity
Common Stock 67,376 67,286 67,242
Additional Capital 46,467 46,519 46,015
Cumulative Translation Adjustment (4,829) (4,710) (4,913)
Unamortized Value of Restricted Stock (7,075) (8,668) (7,822)
Retained Earnings 128,181 123,991 131,114
--------- --------- ---------
230,120 224,418 231,636
--------- --------- ---------
$ 718,913 $ 679,701 $ 661,056
========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share)
Three Months Ended Six Months Ended
------------------- -------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- -------- --------- ---------
Net Sales $389,983 $342,861 $745,768 $700,303
Cost of Goods Sold 245,462 226,352 465,370 463,599
-------- -------- -------- --------
Gross Profit 144,521 116,509 280,398 236,704
-------- -------- -------- --------
Selling and Administrative Expenses 130,786 121,425 261,470 245,341
Interest Expense 4,522 3,964 9,255 7,880
Other (Income) Expense 261 4,030 (140) 3,422
-------- -------- -------- --------
Earnings (Loss) Before Income Taxes 8,952 (12,910) 9,813 (19,939)
Income Tax (Provision) Benefit (3,438) 4,529 (3,772) 7,147
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 5,514 $ (8,381) $ 6,041 $(12,792)
======== ======== ======== ========
NET EARNINGS (LOSS) PER COMMON SHARE $ .31 $ (.48) $ .34 $ (.73)
======== ======== ======== ========
Weighted Average Number of
Outstanding Shares
of Common Stock 17,367 17,578 17,626 17,593
DIVIDENDS PER COMMON SHARE $ .25 $ .40 $ .50 $ .80
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
----------------------
August 3, July 29,
1996 1995
--------- ---------
Net Cash Provided by Operating Activities $ 8,357 $ 10,484
Investing Activities:
Capital expenditures (7,815) (17,159)
Other 944 88
-------- --------
Net Cash (Used) by Investing Activities (6,871) (17,071)
Financing Activities:
Increase in short-term notes payable 9,000 25,486
Principal payments of long-term debt (1,450) (49)
Dividends paid (8,974) (14,359)
Payments for purchase of treasury stock - (824)
Proceeds from issuance of common stock - 427
-------- --------
Net Cash Provided (Used) by Financing Activities (1,424) 10,681
-------- --------
Increase in Cash and Cash Equivalents 62 4,094
Cash and Cash Equivalents at Beginning of Period 35,058 18,922
-------- --------
Cash and Cash Equivalents at End of Period $ 35,120 $ 23,016
======== ========
See Notes to Condensed Consolidated Financial Statements.
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 February 3, 1996.
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):
August 3, July 29, February 3,
1996 1995 1996
--------- -------- -----------
Finished Goods $402,955 $353,586 $329,184
Work in Process 1,762 2,354 1,843
Raw Materials and Supplies 5,565 13,041 11,255
-------- -------- --------
$410,282 $368,981 $342,282
======== ======== ========
During fiscal 1995 and 1996, the remaining domestically manufactured footwear
at Brown Shoe Company is being sold, resulting in a liquidation of LIFO
inventory layers. The effect of this liquidation was to increase pretax income
in the second quarter 1995 by $3.7 million, first quarter 1996 by $3.1 million
and second quarter 1996 by $.9 million.
Note D - Income Taxes
---------------------
In July 1996, the Internal Revenue Service declined to appeal an Appeals Court
ruling overturning a Tax Court decision supporting an Internal Revenue Service
assessment against the Corporation on a portion of its unremitted foreign
earnings, and accordingly has no further right of appeal. The Corporation had
recorded the recovery of the related $5.8 million reserve in fiscal 1995.
Accordingly, no adjustment to the tax accounts or income tax expense will
result from the resolution of this matter, which now has become final.
Note E - Financial Instruments
------------------------------
In the second quarter of fiscal 1996, the Corporation entered into a
nondeliverable forward exchange contract maturing in June 1997 to purchase
notional $17 million in Brazilian Real. This contract is designed to protect
inventory values of the Corporation's Brazilian subsidiary in the event of a
major devaluation in the Brazilian currency. Many complex factors, in addition
to currency devaluation, may impact the effectiveness of this contract,
including the extent and timing of a devaluation, a devaluation's impact on the
Brazilian economy, inflationary factors, and footwear market conditions. This
forward contract does not qualify as a hedge for financial reporting purposes;
therefore, gains and losses on this contract are included in income. At August
3, 1996, the Corporation had an immaterial gain on this contract. The
counterparty to this agreement is a major financial institution; therefore,
management believes the risk of incurring losses related to credit risk is
remote.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------
Results of Operations
---------------------
Quarter ended August 3, 1996 compared to the Quarter ended July 29, 1995
------------------------------------------------------------------------
Consolidated net sales for the second quarter ended August 3, 1996, were $390.0
million, an increase of 13.7% from last year's second quarter sales of $342.9
million.
Net earnings of $5.5 million for the second quarter of 1996 compare to a loss
of $8.4 million for the second quarter of 1995. The 1995 results include an
aftertax charge of $9.6 million to provide for the costs of closing the
Corporation's five remaining domestic manufacturing facilities. The closure
costs included inventory writedowns, factory asset writeoffs associated with
factory buildings and machinery, and severance and benefit costs. Offsetting
these costs, in part, was an aftertax credit of $2.4 million from the
liquidation of LIFO inventories.
The substantial improvement in earnings in the second quarter of 1996,
excluding the charge for plant closings in the second quarter of 1995, reflects
higher operating earnings at each of the Company's operating divisions. Famous
Footwear's operating earnings for the second quarter of $8.9 million
represented a 43.5% increase over operating earnings of $6.2 million for the
second quarter of 1995, primarily reflecting management's focus on execution
and better leveraging of expenses as well as store maturation resulting in
generally higher profitability. The most significant improvement occurred in
the Pagoda and Brown Shoe wholesaling businesses, where operating earnings of
$5.8 million for the second quarter of 1996 compare to an operating loss of
$5.6 million in the second quarter of 1995, primarily reflecting higher sales
of branded and licensed footwear, and higher margins from the shift to offshore
sourcing.
Sales from the footwear retailing operations increased 9.6% to $249.4 million
from the second quarter of 1995. Famous Footwear's total sales increased 11.5%
to $200.5 million reflecting a same-store sales increase of 2.1% and the sales
from 32 more units in operation. Famous Footwear operated 787 stores as of
August 3, 1996. The Naturalizer stores' total sales decreased .3% to $35.3
million in the quarter as compared to the prior year period, but increased 1.1%
on a same-store basis. The Naturalizer sales include sales at 40 outlet mall
stores transferred from Famous Footwear at the beginning of fiscal 1996. Both
Famous Footwear and the Naturalizer Retail division's sales and store counts
for fiscal 1995 have been restated to reflect the transfer of these stores.
The Canadian retailing operation's sales increased 10.6% with a same-store
sales increase of 6.5% and four more units than the prior year period.
Sales from footwear wholesaling businesses increased 21.8% to $140.6 million
from the same period last year with sales at Brown Shoe and Pagoda increasing
4.4% and 31.3%, respectively. Pagoda's gain reflects higher shipments of its
licensed products led by "The Hunchback of Notre Dame" footwear. The sales
from the Canadian wholesale division, which consists of the Company's Canadian
marketing and manufacturing operations, increased 22.9% to $7.0 million from
$5.7 million for the second quarter of 1995, in part due to higher sales of
children's footwear.
Gross profit as a percent of sales increased to 37.1% from 34.0% for the same
period last year. This improvement reflects the shift of all remaining
production of Brown Shoe products to offshore factories, higher margins at
Pagoda due to increased sales of higher margin branded and licensed products,
and the effect in 1995 of inventory writedowns as a result of the charge to
close the domestic factories.
Selling and administrative expenses as a percent of sales decreased to 33.5%
from 35.4% for the same period last year, primarily as a result of increased
sales at Famous Footwear and Pagoda, which increased at a rate in excess of the
rate at which selling and administrative expenses increased.
Other Expense was $.3 million in 1996 compared to $4.0 million in the 1995
second quarter, which included plant closing charges of $4.2 million.
Six Months ended August 3, 1996 compared to the Six Months ended July 29, 1995
------------------------------------------------------------------------------
Consolidated net sales for the first half of 1996 were $745.8 million, an
increase of 6.5% from the first six months of 1995 total of $700.3 million.
Net earnings of $6.0 million for the first half of 1996 compare to a loss of
$12.8 million for the first half of 1995. The 1995 results include the
aftertax charge of $9.6 million for plant closures, which was partially offset
by an aftertax credit of $2.4 million from liquidation of LIFO inventories.
The year-to-date earnings improvement, excluding the factory closing charge in
1995, reflects higher operating earnings at each of the Company's operating
divisions. Famous Footwear's 1996 year-to-date operating earnings improved
53.8% to $12.2 million from $7.9 million for the first six months of 1995,
primarily reflecting management's focus on execution and better leveraging of
expenses, as well as store maturation resulting in higher profitability. Brown
Shoe Company's and Pagoda's operating earnings improved by almost $17 million
over the first six months of 1995 primarily due to higher margins from more
efficient sourcing of Brown Shoe Company's branded products offshore, as well
as the repositioning of the Naturalizer brand to moderately higher price
points, and Pagoda's increased sales of licensed products.
Sales from the footwear retailing operations increased 9.7% to $476.3 million
from the first half of 1995. Famous Footwear's total sales for the first six
months of 1996 increased 11.1% to $384.2 million, reflecting a 0.1% increase
in same-store sales, with the balance of increased sales attributable to more
units in operation. Naturalizer stores' total sales increased 1.3% to $68.3
million in the first half of 1996 and 2.1% on a same-store basis. Sales from
the Canadian retailing operation, which consists of 96 Naturalizer and 16 F.X.
LaSalle stores, during the first half of 1996 increased 14.5% to $23.7 million,
with a same-store sales increase of 8.8% and four more units than in the six
month period ended July 29, 1995.
Sales from footwear wholesaling businesses for the first six months of 1996
increased 1.2% to $269.5 million from the same period last year. Higher
shipments of Brown Shoe Company's and Pagoda's branded and licensed footwear
during the first half of 1996 were offset by lower shipments of private label
product. The sales from the Canadian wholesale division, which consists of the
Company's Canadian marketing and manufacturing operations, during the first six
months of 1996 increased 20% to $14.5 million from $12.1 million for the first
six months of 1995, in part due to higher sales of children's footwear.
Gross profit as a percent of sales increased to 37.6% for the six month period
ended August 3, 1996 from 33.8% for the six month period ended July 29, 1995.
This improvement reflects more efficient sourcing resulting from the shift to
foreign sourcing following the closure of the Company's remaining domestic
manufacturing facilities, a pretax LIFO credit of $4.0 million from the
liquidation of footwear manufactured in closed domestic facilities, and the
effect in 1995 of inventory writedowns as a result of the charge to close the
domestic factories.
Selling and administrative expenses as a percent of sales increased to 35.1%
for the first six months of 1996 from 35.0% for the first six months of 1995,
reflecting higher advertising and marketing expenses at Brown Shoe Company and
a higher percentage of the Company's sales occurring at Famous Footwear which
carries higher expenses as a percent of net sales than the wholesaling
divisions. The selling and administrative expenses as a percent of sales at
Famous Footwear decreased during the six month period ended August 3, 1996 from
the six month period ended July 29, 1995, as there was better leveraging of the
expense base as newer stores matured.
Other Income was $.1 million in the first half of 1996 compared to Other
Expense of $3.4 million in the first half of 1995, which included plant closing
charges of $4.2 million.
Financial Condition
-------------------
A summary of key financial data and ratios at the dates indicated is as
follows:
August 3, July 29, February 3,
1996 1995 1996
--------- -------- -----------
Working Capital (millions) $206.4 $161.9 $209.4
Current Ratio 1.6 1.4 1.7
Total Debt as a Percentage of
Total Capitalization 49.7% 47.4% 48.7%
Net Debt (Total Debt less Cash and
Cash Equivalents) as a Percentage
of Total Capitalization 45.5% 44.3% 44.3%
Cash flow provided from operating activities for the first half of fiscal 1996
was $8.4 million versus $10.5 million for the same period last year. The
decrease in cash provided by operations resulted from higher inventory and
other working capital requirements partially offset by higher net earnings.
Cash used by investing activities was lower in the first six months of 1996
than the same period of 1995 reflecting lower capital expenditures primarily
at Famous Footwear due to opening fewer stores in 1996.
Financing activities in the first half of fiscal 1996 reflect an increase in
notes payable which were drawn under the Corporation's Bank Credit Agreement.
The increase in the ratio of total debt as a percentage of total capitalization
at August 3, 1996, compared to the end of fiscal 1995, is due primarily to the
Corporation's additional borrowings to finance higher inventories. At the end
of the quarter, $121.0 million was borrowed under the Corporation's $200.0
million Bank Credit Agreement.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
--------------------------
There have been no material developments during the quarter ended
August 3, 1996, in the legal proceedings described in the Corporation's
Form 10-K for the period ended February 3, 1996.
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
At the Annual Meeting of Shareholders held on May 23, 1996, two proposals
described in the Notice of Annual Meeting of Shareholders dated April 17,
1996, were voted upon.
1. The shareholders elected four directors, Mr. John Peters MacCarthy,
Mr. John D. Macomber, Mr. William E. Maritz, and General Edward C.
Meyer, Retired, for terms of three years each; Mr. Daniel R. Toll for
a term of two years; and Mr. Jerry E. Ritter for a term of one year.
The voting for each director was as follows:
Directors For Withheld
--------- ---------- --------
John Peters MacCarthy 14,447,612 385,563
John D. Macomber 14,450,048 383,127
William E. Maritz 14,439,754 393,421
General Edward C. Meyer, Retired 14,448,541 384,634
Daniel R. Toll 14,439,922 393,253
Jerry E. Ritter 14,459,411 373,764
2. The proposal to ratify and approve an amendment to the Brown Group,
Inc. Stock Option and Restricted Stock Plan of 1994 was approved by a
vote of 13,760,168 in favor to 852,941 against, with 220,066
abstaining.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Listing of Exhibits
(3) (i) (a) Certificate of Incorporation of the
Corporation as amended through
February 16, 1984, incorporated
herein by reference to Exhibit 3 to
the Corporation's Report on Form 10-K
for the fiscal year ended November 1,
1986.
(i) (b) Amendment of Certificate of
Incorporation of the Corporation
filed February 20, 1987, incorporated
herein by reference to Exhibit 3 to
the Corporation's Report on Form 10-K
for the fiscal year ended January 30,
1988.
(ii) Bylaws of the Corporation as amended
through May 23, 1996, incorporated
herein by reference to Exhibit 3(ii)
to the Corporation's Report on Form
10-Q for the quarter ended May 4,
1996.
(4)(a) Senior Note Agreement dated as of
October 24, 1995 between the Company
and Prudential Insurance Company of
America.
(4)(b) Bank Credit Agreement, as amended,
dated as of December 22, 1993 between
the Company and The First National
Bank of Chicago, as Agent for certain
Lenders and The Boatmen's National
Bank of St. Louis and Citibank, N.A.,
as Co-Agents of such Lenders.
(11) Computation of Earnings Per Share
(page 184)
(27) Financial Data Schedule (page 185)
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the quarter ended
August 3, 1996.
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: September 16, 1996 /s/ Harry E. Rich
------------------------ --------------------------
Harry E. Rich
Executive Vice President
and Chief Financial Officer and
On Behalf of the Corporation as
the Principal Financial Officer