CALERES INC — Interim / Quarterly Report 1994

Jun 10, 1994

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 April 30, 1994 [ ] 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) 8400 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 May 27, 1994, 17,909,693 shares of the registrant's common stock were outstanding. 2 BROWN GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands)

See Notes to Condensed Consolidated Financial Statements. 2 BROWN GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Thousands, except per share)

See Notes to Condensed Consolidated Financial Statements. 4 BROWN GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Thousands)

See Notes to Condensed Consolidated Financial Statements. 5 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 29, 1994. 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):

6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) REVIEW BY INDEPENDENT AUDITORS At the Corporation's request, its independent auditors, Ernst & Young, have performed a review of the accompanying financial statements. Their review was performed in accordance with the standards for such reviews by the American Institute of Certified Public Accountants. 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ Results of Operations --------------------- Quarter ended April 30, 1994 compared to the Quarter ended May 1, 1993 ---------------------------------------------------------------------- Consolidated net sales for the first quarter ended April 30, 1994, were $427.2 million, an increase of 9.8% from last year's first quarter. Earnings from continuing operations of $7.9 million for the first quarter of 1994 compare to $4.5 million last year, an increase of 76.9%. Sales from the footwear retailing operations increased 15.1% from the first quarter of 1993. Famous Footwear's sales increased 24.7% due to a same-store increase of 6.1% and 95 more units. The Canadian retailing operation's sales also showed improvement, posting an increase of 8.8%. Sales of the Naturalizer stores increased 5.3% over last year's first quarter, reflecting same-store sales gains of 2.6%. These increases were partially offset by an overall sales decline of 40.2% at the Connie and Regal stores, reflecting 64 fewer units in operation as a result of the phasing out of these stores as part of the corporation's restructuring. Sales from footwear wholesaling activities increased 10.1% over the same period last year. Pagoda's sales increased 16.5%, and Brown Shoe's increased 3.6%. Pagoda's increase was primarily driven by higher licensed product sales, primarily the Dr. Scholl's line; while Brown Shoe's branded lines showed improvement, especially in the NaturalSport brand. Cloth World's first quarter sales decreased 6.2% with same-store sales declining 2.3% and 14 fewer units in operation. Sales decreases were recorded in all major departments with the exception of home decorating and craft fabrics. Gross profit as a percentage of sales increased to 36.3% from 35.9% for the same period last year. Cloth World and Naturalizer experienced increased margins, while Pagoda and Famous Footwear posted modest declines. Brown Shoe's gross profit percentage was flat with last year's. Cloth World experienced strong margin increases in the crafts category, while tight inventory management produced reduced markdowns at Naturalizer stores. Lower sourcing margins on Brazilian footwear and higher markdowns on children's shoes contributed to Pagoda's decreased margin. Selling and administrative expenses as a percentage of sales decreased slightly to 32.5% from 32.7%. Expenses continue to be tightly controlled in all areas of the corporation. Other income/expense is a net income of $0.7 million in 1994 compared to expense of $0.4 million in 1993. The prior year amount includes $1.0 million in costs to close the company's tannery. Overall, operating earnings improved at all companies in the first quarter of 1994 over the same period in 1993. 8 Discontinued Operations ----------------------- The discontinuance of the Wohl Leased Department business, which was announced in January 1994, is proceeding as planned. The corporation has entered negotiations with all 26 lessors and has completed contracts and withdrawn from operating in 14 of the department-store groups, including the largest, Carter Hawley Hale. As leased department assets are sold or liquidated, cash flow will be primarily used to repay short-term borrowings. Restructuring ------------- The restructuring initiatives also announced in January 1994 are proceeding as planned. During the first quarter of 1994, four manufacturing facilities and 14 retail stores were closed. The majority of the store closings are expected to occur in the second half of 1994 and first quarter of 1995. Staff reductions will be occurring throughout fiscal 1994 as Brown Shoe Company and Pagoda proceed with the merging of the operations of the two companies. Financial Condition A summary of key financial data and ratios at the dates indicated is as follows:

Cash flow from operating activities of continuing operations for the first three months of fiscal 1994 was approximately $15.9 million higher than in the first three months of 1993. The increase was primarily the result of higher earnings and decreased accumulation of inventories, which were partially offset by lower increases of accounts payable and accrued expenses. Cash flow used by discontinued operations decreased by $3.8 million. In addition, the sale of certain discontinued assets results in $10.0 million of cash flow during the first quarter of 1994. Financing activities in the first quarter of 1993 reflect an increase in notes payable and a decrease in current maturities of long-term debt, which is partially due to the rearrangement of $75 million of the corporation's long- term debt. The corporation took steps to rearrange its debt structure to take advantage of lower interest rates. In January 1993 the corporation issued $50 million in 6.47% senior notes to partially refinance its $75 million 8-1/8% debentures that were originally due in 1996. In the interim period, prior to redemption, these proceeds were used to reduce short-term commercial paper borrowing. In April 1993 the corporation called for redemption of these debentures. They were paid with proceeds from the issuance of commercial paper. The increase in the ratio of total debt as a percentage of total capitalization at April 30, 1994, compared to the end of the first quarter last year, has been caused by an increase in short-term borrowings used largely to fund the growth at Famous Footwear, as well as the impact on stockholders' equity of restructuring and discontinued operations disposal charges recorded in January 1994. In spite of the increase in this ratio, the Corporation's financial condition and debt to capitalization ratios continue to provide additional borrowing capacity, if needed. 9 PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings -------------------------- There have been no material developments during the quarter ended April 30, 1994, in the legal proceedings described in the Corporation's Form 10-K for the period ended January 29, 1994. Item 4 - Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ At the Annual Meeting of Stockholders held on May 26, 1994, three proposals described in the Notice of Annual Meeting of Stockholders dated April 20, 1994, were voted upon. 1. The stockholders elected three directors, Mr. Joseph L. Bower, Ms. Joan F. Lane, and Mr. Harry E. Rich, for terms of three years each, and Mr. Morton I. Sosland for a term of two years. The voting for each director is as follows:

(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. 13 EXHIBIT 15 Acknowledge Letter Stockholders and Board of Directors Brown Group, Inc. We are aware of the incorporation by reference in the Registration Statements (Form S-8 Numbers 2-58347 and 33-22328) pertaining to the employee stock purchase plan and employee stock appreciation plans, respectively, and in the Registrant Statement (Form S-3 Number 33-21477) for the registration of debt of Brown Group, Inc., of our report dated May 24, 1994, relating to the unaudited condensed consolidated interim financial statements of Brown Group, Inc. which are included in its Form 10-Q for the quarter ended April 30, 1994. Pursuant to rule 436(c) of the Securities Act of 1933, our report is not part of the Registration Statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. May 24, 1994 \s\ Ernst & Young