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 1, 1998
[ ] 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 29, 1998, 18,046,477 shares of the registrant's common stock were
outstanding.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
--------------------
August 1, August 2, January 31,
1998 1997 1998
--------- --------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 32,180 $ 42,320 $ 50,136
Receivables, net of allowances of
$9,651 at August 1, 1998,
$8,974 at August 2, 1997, and
$9,925 at January 31, 1998 75,109 73,484 77,355
Inventories, net of adjustment to
last-in, first-out cost of
$15,265 at August 1, 1998,
$17,203 at August 2, 1997, and
$15,617 at January 31, 1998 396,657 439,208 380,177
Other Current Assets 26,014 37,634 30,862
--------- --------- ---------
Total Current Assets 529,960 592,646 538,530
Property and Equipment 214,260 208,234 212,330
Less allowances for depreciation
and amortization (135,310) (124,368) (129,586)
--------- --------- ---------
78,950 83,866 82,744
Other Assets 75,250 72,110 73,714
--------- --------- ---------
$ 684,160 $ 748,622 $ 694,988
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable $ - $ 47,000 $ 54,000
Accounts Payable 161,772 160,795 118,907
Accrued Expenses 87,549 80,154 93,191
Income Taxes 14,197 5,674 11,995
Current Maturities of Long-Term Debt 15,000 2,000 -
--------- --------- ---------
Total Current Liabilities 278,518 295,623 278,093
Long-Term Debt and Capitalized
Lease Obligations 182,029 197,025 197,027
Other Liabilities 20,540 23,929 20,678
Shareholders' Equity
Common Stock 67,682 67,590 67,685
Additional Capital 46,883 46,814 47,036
Cumulative Translation Adjustment (10,079) (6,599) (8,427)
Unamortized Value of Restricted Stock (3,226) (5,290) (4,358)
Retained Earnings 101,813 129,530 97,254
--------- --------- ---------
203,073 232,045 199,190
--------- --------- ---------
$ 684,160 $ 748,622 $ 694,988
========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Thousands, except per share)
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------- ----------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Net Sales $383,618 $378,823 $785,927 $770,638
Cost of Goods Sold 229,616 232,587 476,601 478,569
-------- -------- -------- --------
Gross Profit 154,002 146,236 309,326 292,069
-------- -------- -------- --------
Selling and Administrative Expenses 140,116 134,746 282,898 272,753
Interest Expense 4,858 5,364 10,490 11,129
Other (Income) Expense 1,284 346 1,236 (90)
-------- -------- -------- --------
Earnings Before Income Taxes 7,744 5,780 14,702 8,277
Income Tax Provision 3,449 2,250 6,536 3,205
-------- -------- -------- --------
NET EARNINGS $ 4,295 $ 3,530 $ 8,166 $ 5,072
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ .24 $ .20 $ .46 $ .29
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ .24 $ .20 $ .46 $ .29
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .10 $ .25 $ .20 $ .50
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Twenty-six Weeks Ended
----------------------
August 1, August 2,
1998 1997
--------- ---------
Net Cash Provided by Operating Activities $ 47,531 $ 36,942
Investing Activities:
Capital expenditures (7,915) (9,677)
Other - 370
--------- ---------
Net Cash Used by Investing Activities (7,915) (9,307)
Financing Activities:
Decrease in short-term notes payable (54,000) (15,000)
Proceeds from issuance of common stock 37 14
Dividends paid (3,609) (9,015)
--------- ---------
Net Cash Used by Financing Activities (57,572) (24,001)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents (17,956) 3,634
Cash and Cash Equivalents at Beginning of Period 50,136 38,686
--------- ---------
Cash and Cash Equivalents at End of Period $ 32,180 $ 42,320
========= =========
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 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 period
ended January 31, 1998.
Note B - Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
per share for the periods ended August 1, 1998 and August 2, 1997 (000's,
except per share data):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- ---------- ---------
Numerator:
Net earnings -
Basic and Diluted $ 4,295 $ 3,530 $ 8,166 $ 5,072
======= ======= ======= =======
Denominator:
Weighted average shares
outstanding-Basic 17,689 17,591 17,657 17,578
Effect of potentially
dilutive securities 290 289 276 218
------- ------- ------- -------
Weighted average shares
outstanding-Diluted 17,979 17,880 17,933 17,796
======= ======= ======= =======
Basic earnings per share $ .24 $ .20 $ .46 $ .29
======= ======= ======= =======
Diluted earnings per share $ .24 $ .20 $ .46 $ .29
======= ======= ======= =======
Note C - Comprehensive Income
- -----------------------------
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which established standards for the reporting and display of Comprehensive
Income and its components. Comprehensive Income represents the change in
Shareholders' Equity during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity except
those resulting from investments by owners and distributions to owners.
The following table sets forth the reconciliation from Net Income to
Comprehensive Income (000's):
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Net Income $ 4,295 $ 3,530 $ 8,166 $ 5,072
Currency Translation Adjustment (2,055) (85) (1,652) (2,166)
------- ------- ------- -------
Comprehensive Income $ 2,240 $ 3,445 $ 6,514 $ 2,906
======= ======= ======= =======
Note D - Computer Software Costs
- --------------------------------
Effective February 1, 1998, the Company elected to adopt AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1), which requires the capitalization of
certain costs, including internal payroll costs, incurred in connection with
the development or acquisition of software for internal use. The adoption of
this standard resulted in an increase in net earnings of $276,000 or $0.02 per
diluted share for the thirteen weeks ended August 1, 1998 and $636,000 or $0.04
per diluted share for the twenty-six weeks ended August 1, 1998. No
restatement of prior year results was allowed or required.
Note E - Pagoda International Restructuring Reserve
- ---------------------------------------------------
In fiscal 1998, the Company utilized approximately $9.7 million of the $31.0
million initial restructuring reserve primarily to cover inventory markdowns,
royalty agreement shortfalls and severance. In addition, in fiscal 1998 the
Company provided an additional $1.4 million to cover costs associated with the
restructuring. It is expected that the remaining reserve of $21.1 million as
of August 1, 1998, will be utilized primarily in the remainder of fiscal 1998.
Year-to-date operating losses and additional charges for Pagoda International
are $5.5 million, and total losses for fiscal 1998 are projected to be between
$7.0 million and $8.0 million.
Note F - Condensed Consolidated Financial Information
- -----------------------------------------------------
Certain of the Company's debt is unconditionally and jointly and severally
guaranteed by certain wholly-owned domestic subsidiaries of the Company.
Accordingly, condensed consolidating balance sheets as of August 1, 1998 and
August 2, 1997, and the related condensed consolidating statements of earnings
and cash flows for the twenty-six weeks ended August 1, 1998 and August 2,
1997, 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 that
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.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Assets
Current Assets
Cash and cash equivalents . . $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180
Receivables, net. . . . . . . 32,569 10,121 32,419 - 75,109
Inventory, net. . . 51,667 336,559 22,296 (13,865) 396,657
Other current assets . . . . (667) 16,037 5,792 4,852 26,014
---------- ------------ ------------- ----------- ------------
Total Current Assets . . . . 89,739 372,724 84,760 (17,263) 529,960
Property and Equipment, net. . . 15,968 55,796 7,186 - 78,950
Other Assets . . . . . . . . . . 46,663 17,071 11,628 (112) 75,250
Investment in Subsidiaries . . . 240,698 33,129 3,811 (277,638) -
---------- ------------ ------------- ----------- ------------
Total Assets . . . . . . . . $ 393,068 $ 478,720 $ 107,385 $ (295,013) $ 684,160
========== ============ ============= =========== ============
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable . . . . . . . . $ - $ - $ - $ - $ -
Accounts payable. . . . . . . 6,458 132,021 23,293 - 161,772
Accrued expenses. . . . . . . 24,511 49,467 14,519 (948) 87,549
Income taxes. . . . . . . . . 3,690 9,640 1,233 (366) 14,197
Current maturities of
long-term debt . . . . . . . 15,000 - - - 15,000
---------- ------------ ------------- ----------- ------------
Total Current Liabilities 49,659 191,128 39,045 (1,314) 278,518
Long-Term Debt and Capitalized
Lease Obligations. . . . . . 182,029 - 39 (39) 182,029
Other Liabilities. . . . . . . . 20,117 125 367 (69) 20,540
Intercompany Payable (Receivable) (61,810) 65,501 17,918 (21,609) -
Shareholders' Equity . . . . . . 203,073 221,966 50,016 (271,982) 203,073
---------- ------------ ------------- ----------- ------------
Total Liabilities and
Shareholders' Equity . $ 393,068 $ 478,720 $ 107,385 $ (295,013) $ 684,160
========== =========== ============ =========== ============
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Net Sales. . . . . . . . . . . . $ 135,737 $ 610,568 $ 176,437 $ (136,815) $ 785,927
Cost of goods sold . . . . . . . 97,955 373,309 142,152 (136,815) 476,601
---------- ------------ ------------- ----------- ------------
Gross profit . . . . . . . . . . 37,782 237,259 34,285 - 309,326
Selling and administrative
expenses. . . . . . . . . . . 39,346 215,179 29,204 (831) 282,898
Interest expense . . . . . . . . 10,421 5 64 - 10,490
Intercompany interest
(income) expense. . . . . . . (7,338) 7,298 40 - -
Other (income) expense . . . . . (1,601) (8) 2,014 831 1,236
Equity in (earnings) of
subsidiaries. . . . . . . . . (9,298) (723) - 10,021 -
---------- ------------ ------------- ----------- ------------
Earnings (Loss) Before
Income Taxes . . . . . . . . 6,252 15,508 2,963 (10,021) 14,702
Income tax provision (benefit) . (1,914) 6,210 2,240 - 6,536
---------- ------------ ------------- ----------- ------------
Net Earnings . . . . . . . . $ 8,166 $ 9,298 $ 723 $ (10,021) $ 8,166
========== ============ ============= =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Net Cash Provided (Used) by
Operating Activities. . . . . $ 13,023 $ 36,162 $ (11,779) $ 10,125 $ 47,531
Investing Activities:
Capital expenditures. . . . . (213) (6,086) (1,616) - (7,915)
Other . . . . . . . . . . . . - - - - -
---------- ------------ ------------ ------------ ------------
Net Cash (Used) by
Investing Activities. . . . . (213) (6,086) (1,616) - (7,915)
Financing Activities:
Increase (decrease) in
short-term notes payable . . (54,000) - - - (54,000)
Proceeds from issuance of
common stock . . . . . . . . 37 - - - 37
Dividends paid. . . . . . . . (3,609) - - - (3,609)
Intercompany financing. . . . 49,484 (26,912) (4,237) (18,335) -
---------- ------------ ------------ ------------ ------------
Net Cash Provided (Used) by
Financing Activities. . . . . (8,088) (26,912) (4,237) (18,335) (57,572)
Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . 4,722 3,164 (17,632) (8,210) (17,956)
Cash and Cash Equivalents at
Beginning of Period . . . . . 1,448 6,843 41,885 (40) 50,136
---------- ------------ ------------ ------------ ------------
Cash and Cash Equivalents at
End of Period . . . . . . . . $ 6,170 $ 10,007 $ 24,253 $ (8,250) $ 32,180
========== ============ ============ ============ ============
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 2, 1997
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Assets
Current Assets
Cash and cash equivalents . . $ 1,324 $ 10,533 $ 30,463 $ - $ 42,320
Receivables, net. . . . . . . 30,538 10,225 32,721 - 73,484
Inventory, net. . . . . . . . 67,010 339,202 47,535 (14,539) 439,208
Other current assets. . . . . 7,321 17,416 7,544 5,353 37,634
---------- ------------ ------------- ------------ ------------
Total Current Assets . . . . 106,193 377,376 118,263 (9,186) 592,646
Property and Equipment, net. . . 18,328 57,784 7,754 - 83,866
Other Assets . . . . . . . . . . 42,701 16,661 12,973 (225) 72,110
Investment in Subsidiaries . . . 265,382 58,691 3,811 (327,884) -
---------- ------------ ------------- ------------ ------------
Total Assets . . . . . . . . $ 432,604 $ 510,512 $ 142,801 $ (337,295) $ 748,622
========== ============ ============= ============ ============
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable . . . . . . . . $ 47,000 $ - $ - $ - $ 47,000
Accounts payable. . . . . . . 6,599 132,319 21,877 - 160,795
Accrued expenses. . . . . . . 25,953 44,901 13,875 (4,575) 80,154
Income taxes. . . . . . . . . 4,627 1,428 (1,203) 822 5,674
Current maturities of
long-term debt . . . . . . . 2,000 - - - 2,000
---------- ------------ ------------- ------------ ------------
Total Current Liabilities 86,179 178,648 34,549 (3,753) 295,623
Long-Term Debt and Capitalized
Lease Obligations. . . . . . 197,025 - 75 (75) 197,025
Other Liabilities. . . . . . . . 21,184 2,244 597 (96) 23,929
Intercompany Payable (Receivable) (103,829) 86,441 17,738 (350) -
Shareholders' Equity . . . . . . 232,045 243,179 89,842 (333,021) 232,045
---------- ------------ ------------- ------------ ------------
Total Liabilities and
Shareholders' Equity . $ 432,604 $ 510,512 $ 142,801 $ (337,295) $ 748,622
========== =========== ============= ============ ============
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Net Sales. . . . . . . . . . . . $ 123,986 $ 588,349 $ 185,494 $ (127,191) $ 770,638
Cost of goods sold . . . . . . . 88,250 370,691 146,891 (127,263) 478,569
---------- ------------ ------------- ------------ ------------
Gross profit . . . . . . . . . . 35,736 217,658 38,603 72 292,069
Selling and administrative
expenses. . . . . . . . . . . 38,012 200,324 35,110 (693) 272,753
Interest expense . . . . . . . . 11,033 - 96 - 11,129
Intercompany interest
(income) expense. . . . . . . (7,721) 7,720 1 - -
Other (income) expense . . . . . (1,790) 319 616 765 (90)
Equity in (earnings) of
subsidiaries. . . . . . . . . (7,888) (2,589) - 10,477 -
---------- ------------ ------------- ------------ ------------
Earnings (Loss) Before
Income Taxes . . . . . . . . 4,090 11,884 2,780 (10,477) 8,277
Income tax provision (benefit) . (982) 3,996 191 - 3,205
---------- ------------ ------------- ------------ ------------
Net Earnings . . . . . . . . $ 5,072 $ 7,888 $ 2,589 $ (10,477) $ 5,072
========== ============ ============== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
Guarantor Non-Guarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Totals
---------- ------------ ------------- ------------ ------------
Net Cash Provided (Used) by
Operating Activities . . . . $ 13,914 $ 28,416 $ (9,343) $ 3,955 $ 36,942
Investing Activities:
Capital expenditures . . . . (2,008) (6,732) (937) - (9,677)
Other. . . . . . . . . . . . 363 - 7 - 370
---------- ------------ ------------- ------------ ------------
Net Cash (Used) by
Investing Activities . . . . (1,645) (6,732) (930) - (9,307)
Financing Activities:
Increase (decrease) in
short-term notes payable. . (15,000) - - - (15,000)
Proceeds from issuance of
common stock. . . . . . . . 14 - - - 14
Dividends paid . . . . . . . (9,015) - - - (9,015)
Intercompany financing . . . 13,186 (17,461) 10,429 (6,154) -
---------- ------------ ------------- ------------ ------------
Net Cash Provided (Used) by
Financing Activities . . . . (10,815) (17,461) 10,429 (6,154) (24,001)
Increase (Decrease) in Cash and
Cash Equivalents . . . . . . 1,454 4,223 156 (2,199) 3,634
Cash and Cash Equivalents at
Beginning of Period. . . . . (130) 6,310 30,307 2,199 38,686
---------- ------------ ------------- ------------ ------------
Cash and Cash Equivalents at
End of Period . . . . . . . . $ 1,324 $ 10,533 $ 30,463 $ - $ 42,320
========== ============ ============= ============ ============
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
Results of Operations
---------------------
Quarter ended August 1, 1998 compared to the Quarter ended August 2, 1997
- -------------------------------------------------------------------------
Consolidated net sales for the fiscal quarter ended August 1, 1998 were $383.6
million compared to $378.8 million in the quarter ended August 2, 1997. Net
earnings of $4.3 million for the second quarter of 1998 compare to net earnings
of $3.5 million in the second quarter of 1997 primarily as a result of higher
sales and gross profit margins.
Second quarter 1998 sales from the footwear retailing operations increased 2.3%
from the second quarter of 1997. Famous Footwear's total sales of $218.2
million increased 2.1% from last year representing a same-store sales increase
of 0.5% and 7 more stores, reflecting a total of 810 stores in operation. The
Naturalizer Retail division's total sales increased 5.1% in the 1998 second
quarter to $36.6 million, reflecting an increase of 2.5% on a same-store basis
and higher sales in new stores opened versus those stores closed in the past
year, partially offset by the effect of 10 fewer stores in operation. The
Canadian retailing operation's sales increased 5.7% in Canadian dollars
reflecting flat same-store sales with 9 more stores in operation than in the
second quarter of 1997. However, due to the weakening of the Canadian dollar,
sales in U.S. dollars were flat with last year.
Sales from footwear wholesaling businesses decreased 1.2% to $113.9 million
compared to $115.3 million in the second quarter of 1997. The sales decline
primarily relates to lower sales of $6.4 million from the Pagoda International
marketing division as the Company continues to reduce its investment in that
business. However, Brown Shoe Company's wholesale divisions - Brown Branded
Marketing and Pagoda USA - achieved combined sales of $99.4 million, reflecting
a 5.0% increase from last year. The increase in sales was primarily derived
from the Naturalizer and NaturalSport brands.
Gross profit as a percent of sales increased to 40.1% from 38.6% for the same
period last year. This increase was primarily due to higher margins at Famous
Footwear offset slightly by lower margins in the wholesale business.
Selling and administrative expenses as a percent of sales increased to 36.5%
from 35.6% for the same period last year. This increase was due to higher
expenses at Famous Footwear and Naturalizer Retail.
Other expense in the second quarter of 1998 primarily represents additional
Pagoda International charges of $0.8 million.
The consolidated tax rate was 44.5% of consolidated pre-tax income for the
second quarter of 1998 compared to 38.9% in last year's quarter resulting from
no tax benefit being provided on operating losses at the Pagoda International
marketing division in fiscal 1998.
Six Months ended August 1, 1998 compared to the Six Months ended August 2, 1997
- -------------------------------------------------------------------------------
Consolidated net sales for the first half of 1998 were $785.9 million, an
increase of 2.0% from the first six months of 1997 total of $770.6 million.
Net earnings of $8.2 million for the first half of 1998 compare to net earnings
of $5.1 million for the first half of 1997.
Sales from the footwear retailing operations increased 4.5% to $528.0 million
from the first half of 1997. Famous Footwear's total sales for the first six
months of 1998 increased 4.1% from the first half of last year to $430.5
million, reflecting a 2.1% increase in same-store sales and 7 more units in
operation. With 10 less stores in operation, Naturalizer stores' total sales
increased 7.6% to $70.8 million in the first half of 1998, reflecting an
increase of 4.9% on a same-store basis and higher sales levels in new stores
versus those stores closed in 1998. Sales from the Canadian retailing
operation during the first half of 1998 increased 3.7% to $26.8 million, with
a same-store sales increase of 3.7% and 9 more units than in the six-month
period ended August 2, 1997.
Sales from footwear wholesaling businesses for the first six months of 1998
decreased 2.8% to $257.9 million from the same period last year. The sales
decline primarily relates to lower sales of $18.2 million from the Pagoda
International marketing division. However, Brown Shoe Company's wholesale
divisions - Brown Branded Marketing and Pagoda USA - achieved combined sales
of $226.8 million, reflecting a 5.4% increase from last year. The increase in
sales was derived from the Children's division of Pagoda USA, as well as sales
gains in the Naturalizer and NaturalSport brands.
Gross profit as a percent of sales increased to 39.4% for the six-month period
ended August 1, 1998 from 37.9% for the six-month period ended August 2, 1997.
This increase was primarily due to higher margins at Famous Footwear.
Selling and administrative expenses as a percent of sales increased to 36.0%
for the first six months of 1998 from 35.4% for the first six months of 1997.
This increase was due to higher expenses at Famous Footwear and Naturalizer
Retail.
Other expense for the first half of 1998 primarily represents additional Pagoda
International charges of $1.4 million.
The consolidated tax rate was 44.5% of consolidated pre-tax income for the
first half of 1998 compared to 38.7% in last year resulting from no tax benefit
being provided on higher operating losses at the Pagoda International marketing
division in fiscal 1998.
Financial Condition
- -------------------
A summary of key financial data and ratios at the dates indicated is as
follows:
August 1, August 2, January 31,
1998 1997 1998
--------- -------- -----------
Working Capital (millions) $251.4 $297.0 $260.4
Current Ratio 1.9:1 2.0:1 1.9:1
Total Debt as a Percentage of
Total Capitalization 49.2% 51.5% 55.8%
Net Debt (Total Debt less Cash and
Cash Equivalents) as a Percentage
of Total Capitalization 44.8% 46.7% 50.2%
Cash flow from operating activities for the first half of fiscal 1998 was a net
generation of $47.5 million versus $36.9 million last year. In 1998's first
half, cash flow improved primarily as a result of lower accounts receivable and
continued improvement in inventory management.
The decline in the current ratio at August 1, 1998 compared to August 2, 1997,
is due primarily to the impact of the Pagoda International restructuring
charges and operating losses recorded in late fiscal 1997.
The decrease in the ratio of total debt as a percentage of total capitalization
at August 1, 1998, compared to the end of fiscal 1997, is due to strong cash
flow which allowed the Company to reduce notes payable. At August 1, 1998,
$17.3 million of letters of credit were the only items outstanding under the
Company's $155 million revolving bank Credit Agreement.
Forward-Looking Statements
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This Form 10-Q contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially. In Exhibit 99 to the Company's fiscal 1997 Annual Report
on Form 10-K, detailed factors that could cause variations in results to occur
are listed and discussed. Such Exhibit is incorporated herein by reference.
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings
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There have been no material developments during the quarter ended August 1,
1998, in the legal proceedings described in the Company's Form 10-K for the
period ended January 31, 1998.
Item 5 - Other Information
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In accordance with the Bylaws of the Company, a stockholder who at any
annual meeting of stockholders of the Company intends to nominate a person
for election as a director or present a proposal must so notify the
Secretary of the Company in writing, describing such nominee(s) or proposal
and providing specified information concerning such stockholder or nominee
and the reasons for and interest of such stockholder in the proposal, as
well as various other matters. Generally, to be timely, such notice must
be received by the Secretary at the executive offices of the Company not
less than 60 days nor more than 90 days prior to the meeting; provided,
however, that in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than
the close of business on the 10th day following the day on which such notice
of the meeting was mailed or such public disclosure was made. The Company's
next annual meeting is currently scheduled to be held on May 27, 1999, so
that any such notice must be received between February 26, 1999, and March
28, 1999, to be considered timely for purposes of the 1999 Annual Meeting.
Any person interested in making such a nomination or proposal should request
a copy of the relevant Bylaw provisions from the Secretary of the Company.
These time periods also apply in determining whether notice is timely for
purposes of rules adopted by the Securities and Exchange Commission relating
to exercise of discretionary voting authority, and are separate from and in
addition to the Securities and Exchange Commission's requirements that a
stockholder must meet to have a proposal included in the Company's proxy
statement. Stockholder proposals intended to be presented at the 1999
Annual Meeting must be received by the Company no later than December 25,
1998, in order to be eligible for inclusion in the Company's proxy statement
and proxy relating to that meeting. Upon receipt of any proposal, the
Company will determine whether to include such proposal in accordance with
regulations governing the solicitation of proxies.
Item 6 - Exhibits and Reports on Form 8-K
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(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 Company'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 Company's Report on Form 10-K for
the fiscal year ended January 30,
1988.
(ii) Bylaws of the Corporation as amended
through March 5, 1998, incorporated
herein by reference to Exhibit 3 to
the Company's Report on Form 10-K for
the fiscal year ended January 31,
1998.
(10) (f) Severance Agreement, dated July 27,
1998 between the Company and Brian C.
Cook, filed herewith.
(10) (g) Severance Agreement, dated July 27,
1998 between the Company and Ronald
A. Fromm, filed herewith.
(10) (h) Severance Agreement, dated July 27,
1998 between the Company and Gary M.
Rich, filed herewith.
(10) (i) Severance Agreement, dated July 27,
1998 between the Company and Harry E.
Rich, filed herewith.
(10) (j) Severance Agreement, dated July 27,
1998 between the Company and David H.
Schwartz, filed herewith.
(27) Financial Data Schedule (Page 99)
(99.1) Discussion of Certain Risk Factors
That Could Affect the Company's
Operating Results as incorporated
herein by reference to the Company's
Report on Form 10-K for the fiscal
year ended January 31, 1998.
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the
quarter ended August 1, 1998.
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 11, 1998 /s/ Harry E. Rich
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Executive Vice President
and Chief Financial Officer and
On Behalf of the Corporation as
the Principal Financial Officer