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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 30, 2004
 
[  ] 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 SHOE COMPANY, INC.
(Exact name of registrant as specified in its charter)
   
New York
(State or other jurisdiction
of incorporation or organization)
43-0197190
(IRS Employer Identification Number)
   
8300 Maryland Avenue
St. Louis, Missouri
(Address of principal executive offices)
63105
(Zip Code)
 
(314) 854-4000
(Registrant's telephone number, including area code)
 

Indicate by checkmark 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 [  ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  [X]    No [  ]

As of November 27, 2004, 18,196,916 common shares were outstanding.

1


 
PART I
FINANCIAL INFORMATION

 
ITEM 1
FINANCIAL STATEMENTS

 
BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
     
($ thousands)
October 30, 2004
November 1, 2003
January 31, 2004

Assets                  
Current Assets                  
   Cash and cash equivalents
$
74,793
  
$
52,750
  
$
55,657
  
   Receivables  
74,850
    
64,534
    
81,930
  
   Inventories  
409,961
    
376,602
    
376,210
  
   Prepaid expenses and other current assets
17,963
24,717
15,888
Total current assets
577,567
518,603
529,685
Other assets  
87,928
    
84,056
    
83,692
  
Goodwill and intangible assets, net  
20,860
    
20,435
    
20,405
  
Property and equipment  
291,684
    
271,405
    
272,151
  
   Allowances for depreciation and amortization
(201,944
)
(186,598
)
(186,603
)
Total property and equipment
89,740
84,807
85,548
Total assets
$
776,095
$
707,901
$
719,330
Liabilities and Shareholders' Equity                
Current Liabilities                  
   Notes payable
$
43,500
  
$
16,000
  
$
19,500
  
   Trade accounts payable  
108,617
    
107,894
    
116,677
  
   Accrued expenses  
92,291
    
93,613
    
96,707
  
   Income taxes  
11,811
    
14,272
    
2,960
  
   Current maturities of long-term debt
-
3,500
-
Total current liabilities
256,219
235,279
235,844
Other Liabilities                  
   Long-term debt  
100,000
    
100,000
    
100,000
  
   Other liabilities
29,550
28,317
28,358
Total other liabilities
129,550
128,317
128,358
Shareholders' Equity                  
   Common stock  
68,229
    
67,640
    
67,787
  
   Additional capital  
62,977
    
55,135
    
62,772
  
   Unamortized value of restricted stock  
(2,935
 )  
(2,691
 )  
(3,408
 )
   Accumulated other comprehensive loss  
(607
 )  
(5,366
 )  
(4,934
 )
   Retained earnings
262,662
229,587
232,911
Total shareholders' equity
390,326
344,305
355,128
Total liabilities and shareholders' equity
$
776,095
$
707,901
$
719,330
See notes to condensed consolidated financial statements.

2


BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
(Unaudited)
  
(Unaudited)
  
 
Thirteen Weeks Ended
Thirty-nine Weeks Ended
($ thousands, except per share amounts)
October 30, 2004
November 1, 2003
October 30 , 2004
November 1, 2003
                         
Net sales
$
514,825
  
$
493,433
  
$
1,465,314
  
$
1,398,261
  
Cost of goods sold
306,782
288,721
868,661
820,557
Gross profit
208,043
204,712
596,653
577,704
Selling and administrative expenses
179,762
172,278
540,177
511,317
Operating earnings
28,281
32,434
56,476
66,387
Interest expense  
1,980
    
2,256
    
6,600
    
7,679
  
Interest income
(221
)
(118
)
(517
)
(318
)
Earnings before income taxes
26,522
30,296
50,393
59,026
Income tax provision
7,702
9,096
15,192
17,267
Net earnings
$
18,820
$
21,200
$
35,201
$
41,759
                 
Basic net earnings per common share
$
1.05
$
1.19
$
1.97
$
2.37
                 
Diluted net earnings per common share
$
1.01
$
1.13
$
1.87
$
2.25
                 
Dividends per common share
$
0.10
$
0.10
$
0.30
$
0.30
See notes to condensed consolidated financial statements.

3


BROWN SHOE COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
  
 
Thirty-nine Weeks Ended
 
($ thousands)
October 30, 2004
November 1, 2003
Operating Activities:            
Net earnings
$
35,201
  
$
41,759
  
Adjustments to reconcile net earnings to net cash provided by operating activities:            
   Depreciation and amortization  
18,251
    
19,053
  
   Share-based compensation (income) expense  
(1,480
 )  
3,299
  
   Tax benefit related to share-based plans  
913
    
-
  
   Loss on disposal of facilities and equipment  
739
    
1,599
  
   Impairment charges for facilities and equipment  
1,481
    
2,147
  
   Provision for (recoveries from) doubtful accounts  
(342
 )  
278
  
   Changes in operating assets and liabilities:            
      Receivables  
7,422
    
17,674
  
      Inventories  
(33,751
 )  
15,982
  
      Prepaid expenses and other current assets  
(2,075
 )  
(3,739
 )
      Trade accounts payable and accrued expenses  
(12,476
 )  
(31,198
 )
      Income taxes  
8,851
    
8,920
  
   Other, net 
1,164
(182
)
Net cash provided by operating activities
23,898
75,592
Investing Activities:            
Capital expenditures  
(23,880
 )  
(21,668
 )
Other
153
368
Net cash used by investing activities
(23,727
)
(21,300
)
Financing Activities:            
Increase (decrease) in short-term notes payable  
24,000
    
(13,000
 )
Principal repayments of long-term debt  
-
    
(20,000
 )
Debt issuance costs  
(1,274
 )  
-
  
Proceeds from stock options exercised  
1,687
    
4,696
  
Dividends paid
(5,448
)
(5,359
)
Net cash provided (used) by financing activities
18,965
(33,663
)
Increase in cash and cash equivalents
19,136
20,629
Cash and cash equivalents at beginning of period
55,657
32,121
Cash and cash equivalents at end of period
$
74,793
$
52,750
See notes to condensed consolidated financial statements.

4

BROWN SHOE COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
Note 1.
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) to present fairly the Company's financial position, results of operations, and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States.

Certain prior period amounts on the condensed consolidated balance sheets, statements of earnings and statements of cash flows have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings.

The Company's business is subject to seasonal influences, particularly the back-to-school selling season at Famous Footwear which falls in the Company's third quarter. 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 on Form 10-K for the year ended January 31, 2004.
 
 
Note 2.
Earnings Per Share

The following table sets forth the computation of basic and diluted net earnings per common share for the periods ended October 30, 2004 and November 1, 2003:
 

   
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
($ thousands, except per share data)
October 30,
2004
November 1,
2003
October 30, 
2004
November 1,
2003 
NUMERATOR                          
Net earnings
$
18,820
$
21,200
$
35,201
$
41,759
DENOMINATOR (thousand shares)                          
Denominator for basic net earnings per common share    
17,943
    
17,761
    
17,902
    
17,634
  
Dilutive effect of unvested restricted stock and stock options
706
937
950
900
Denominator for diluted net earnings per common share
18,649
18,698
18,852
18,534
Basic net earnings per common share
$
1.05
$
1.19
$
1.97
$
2.37
Diluted net earnings per common share
$
1.01
$
1.13
$
1.87
$
2.25

Options to purchase 387,600 and 34,921 shares of common stock for the thirteen week periods and 284,978 and 37,216 shares of common stock for the thirty-nine week periods ended October 30, 2004 and November 1, 2003, respectively, were not included in the denominator for diluted net earnings per common share because their effect would be antidilutive.
 
 
Note 3.
Comprehensive Income

Comprehensive income includes changes in shareholders' equity related to foreign currency translation adjustments and unrealized gains or losses from derivatives used for hedging activities.

5

The following table sets forth the reconciliation from net earnings to comprehensive income for the periods ended October 30, 2004 and November 1, 2003:
 

   
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
($ Thousands)
October 30,
2004
November 1,
2003
October 30,
2004
November 1,
2003
Net earnings   $
18,820
   $
21,200
  
$
35,201
  
$
41,759
  
Other comprehensive income (loss), net of tax:                          
   Foreign currency translation adjustment    
3,580
    
2,448
    
3,488
    
5,707
  
   Unrealized losses on derivative instruments    
(631
 )  
(624
 )  
(743
 )  
(1,179
 )
   Net loss from derivatives reclassified into earnings
418
536
1,582
1,253
3,367
2,360
4,327
5,781
Comprehensive income
$
22,187
$
23,560
$
39,528
$
47,540

 
Note 4.
Business Segment Information

Applicable business segment information is as follows for the periods ended October 30, 2004 and November 1, 2003:
 
($ thousands)
Famous
Footwear
  
Wholesale
Operations
  
Naturalizer
Retail
  
Other
  
Totals
  
Thirteen Weeks Ended October 30, 2004                    
External sales $
311,685
   $
148,696
   $
49,911
   $
4,533
   $
514,825
  
Intersegment sales  
414
    
46,786
    
-
    
-
    
47,200
  
Operating earnings (loss)  
24,802
    
10,375
    
(1,491
 )  
(5,405
 )  
28,281
  
Operating segment assets  
359,044
    
188,362
    
79,836
    
148,853
    
776,095
  
Thirteen Weeks Ended November 1, 2003                    
External sales $
301,588
   $
140,062
   $
49,789
   $
1,994
   $
493,433
  
Intersegment sales  
284
    
35,968
    
-
    
-
    
36,252
  
Operating earnings (loss)  
23,427
    
15,460
    
(166
 )  
(6,287
 )  
32,434
  
Operating segment assets  
345,000
    
171,986
    
70,669
    
120,246
    
707,901
  
Thirty-nine Weeks Ended October 30, 2004                    
External sales $
853,620
   $
457,125
   $
143,507
   $
11,062
   $
1,465,314
  
Intersegment sales  
1,054
    
121,718
    
-
    
-
    
122,772
  
Operating earnings (loss)  
49,818
    
32,144
    
(6,262
 )  
(19,224
 )  
56,476
  
                               
Thirty-nine Weeks Ended November 1, 2003                    
External sales $
831,634
   $
418,950
   $
142,296
   $
5,381
   $
1,398,261
  
Intersegment sales  
693
    
100,718
    
-
    
-
    
101,411
  
Operating earnings (loss)  
46,914
    
41,106
    
(2,534
 )  
(19,099
 )  
66,387
  

The Other segment includes corporate administrative and other expenses, which are not allocated to the operating units, and the Company's investment in its majority-owned subsidiary, Shoes.com, Inc., a footwear e-commerce company.

Effective February 1, 2004, the Company began accounting for its Irish financing subsidiary, Brown Group Dublin Limited, which holds cash and short term investments relating to offshore earnings other than in Canada, within the Other segment. Brown Group Dublin Limited had previously been accounted for within the Wholesale Operations segment. Prior year

6

amounts have been reclassified to conform to the current year presentation. This reclassification had no effect on operating earnings, but resulted in a transfer of assets of $68.0 million and $47.1 million at October 30, 2004 and November 1, 2003, respectively, to the Other segment.
 
 
Note 5
Restructuring Reserves

Closure of Canadian Manufacturing Facility

In the fourth quarter of fiscal year 2003, the Company announced the closing of its last Canadian footwear manufacturing facility, located in Perth, Ontario, and recorded a pre-tax charge of $4.5 million, the components of which were as follows:

The following is a summary of the activity in the reserve, by category of costs:
 

($ millions)
Employee
Severance
Inventory
Markdowns
Lease
Buyouts
Total
Original charge and reserve balance
$
2.3
  
$
1.6