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) <TABLE> <CAPTION> (Unaudited) ------------------- August 3, July 29, February 3, 1996 1995 1996 --------- -------- ----------- <S> <C> <C> <C> 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 ========= ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Thousands, except per share) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------- ------------------- August 3, July 29, August 3, July 29, 1996 1995 1996 1995 --------- -------- --------- --------- <S> <C> <C> <C> <C> 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 ======== ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements.
BROWN GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands) <TABLE> <CAPTION> Six Months Ended ---------------------- August 3, July 29, 1996 1995 --------- --------- <S> <C> <C> 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 ======== ======== </TABLE> 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): <TABLE> <CAPTION> August 3, July 29, February 3, 1996 1995 1996 --------- -------- ----------- <S> <C> <C> <C> 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 ======== ======== ======== </TABLE> 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: <TABLE> <CAPTION> August 3, July 29, February 3, 1996 1995 1996 --------- -------- ----------- <S> <C> <C> <C> 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% </TABLE> 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