CALERES INC — Interim / Quarterly Report 2001

Dec 17, 2001

10-Q 1 bs10q3rd01.htm THIRD QUARTER FORM 10-Q html PUBLIC "-//w3c//dtd html 4.0 transitional//en"

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 November 3,
2001 |
| --- | --- |
| [ ] | 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) | |
| N/A (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 December 1, 2001, 17,464,835 shares of the registrant's common stock were outstanding.

1

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands)

	(Unaudited) — November 3, 2001	October 28, 2000		February 3, 2001
ASSETS
Current Assets
Cash and
Cash Equivalents	$ 25,152	$	44,634	$	50,491
Receivables	55,962		57,942		64,403
Inventories	445,065		444,355		427,830
Other Current
Assets	23,157		26,979		20,008
Total Current Assets	549,336		573,910		562,732
Other Assets	87,587		80,125		86,732
Property and Equipment	251,566		247,235		245,608
Less Allowances
for Depreciation and Amortization	(162,685	)	(156,144	)	(155,003	)
	88,881		91,091		90,605
	$ 725,804	$	745,126	$	740,069
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable	$ 85,000	$	59,000	$	66,500
Accounts
Payable	109,748		141,292		127,887
Accrued Expenses	70,527		85,562		89,954
Income Taxes	2,464		8,606		1,850
Current Maturities
of Long-Term Debt	28,550		10,000		10,000
Total Current Liabilities	296,289		304,460		296,191
Long-Term Debt and Capitalized Lease Obligations	123,490		152,037		152,037
Other Liabilities	19,294		19,443		21,869
Shareholders' Equity
Common Stock	65,506		66,553		65,477
Additional
Capital	47,836		47,465		46,578
Unamortized
Value of Restricted Stock	(2,057	)	(2,596	)	(2,386	)
Accumulated
Other Comprehensive Loss	(9,311	)	(7,915	)	(7,138	)
Retained
Earnings	184,757		165,679		167,441
	286,731		269,186		269,972
	$ 725,804	$	745,126	$	740,069

See Notes to Condensed Consolidated Financial Statements.

2

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Thousands, except per share)

	Thirteen Weeks Ended — November 3, 2001	October 28, 2000	November 3, 2001		October 28, 2000
Net Sales	$ 462,361	$ 463,312	$	1,340,578	$	1,277,216
Cost of Goods
Sold	280,874	278,955		814,499		762,794
Gross Profit	181,487	184,357		526,079		514,422
Selling &
Administrative Expenses	161,098	157,050		479,651		455,385
Interest Expense	4,827	4,747		15,591		13,326
Other (Income)
Expense	312	(168	)	(1,665	)	(675	)
Earnings Before
Income Taxes	15,250	22,728		32,502		46,386
Income Tax
Provision	3,399	7,113		8,445		15,025
NET EARNINGS	$ 11,851	$ 15,615	$	24,057	$	31,361
BASIC EARNINGS PER COMMON SHARE	$ .69	$ .88	$	1.40	$	1.76
DILUTED EARNINGS PER COMMON SHARE	$ .68	$ .88	$	1.37	$	1.75
DIVIDENDS PER COMMON SHARE	$ .10	$ .10	$	.30	$	.30

See Notes to Condensed Consolidated Financial Statements.

3

BROWN SHOE COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Thousands)

	Thirty-nine Weeks Ended — November 3, 2001		October 28, 2000
Net Cash Provided (Used)
by Operating Activities	$ (11,966	)	$ (4,985	)
Investing Activities:
Capital expenditures	(18,031	)	(23,636	)
Other	2,181		906
Net Cash Used by Investing
Activities	(15,850	)	(22,730	)
Financing Activities:
Increase
in short-term notes payable	18,500		59,000
Principal
payments of long-term debt	(10,000	)	(10,000	)
Payments
for purchase of treasury stock	(2,630	)	(5,380	)
Proceeds
from stock options exercised	1,847		13
Dividends
paid	(5,240	)	(5,442	)
Net Cash Provided by Financing
Activities	2,477		38,191
Increase (Decrease) in
Cash and Cash Equivalents	(25,339	)	10,476
Cash and Cash Equivalents
at Beginning of Period	50,491		34,158
Cash and Cash Equivalents
at End of Period	$ 25,152		$ 44,634

See Notes to Condensed Consolidated Financial Statements.

4

BROWN SHOE COMPANY, 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) to present fairly the Company's financial condition, 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.

The fiscal 2000 Condensed Consolidated Statements of Earnings have been reclassified to conform to the fiscal 2001 presentation, whereby royalty income, previously reflected in Other Income, has been reclassified to Net Sales.

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 year ended February 3, 2001.

Note B - Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share for the periods ended November 3, 2001 and October 28, 2000 ($000's, except per share data):

	Thirteen Weeks Ended — November 3, 2001	October 28, 2000	Thirty-nine Weeks Ended — November 3, 2001	October 28, 2000
Numerator:
Net earnings - Basic and Diluted	$ 11,851	$ 15,615	$ 24,057	$ 31,361
Denominator:
Weighted average shares outstanding
- Basic	17,208	17,648	17,179	17,810
Effect of potentially dilutive securities	206	141	383	159
Weighted average shares outstanding
- Diluted	17,414	17,789	17,562	17,969
Basic earnings
per common share	$ .69	$ .88	$ 1.40	$ 1.76
Diluted
earnings per common share	$ .68	$ .88	$ 1.37	$ 1.75

5

Note C - Comprehensive Income

Comprehensive Income includes all changes in equity except those resulting from investments by shareholders and distributions to shareholders.

The following table sets forth the reconciliation from Net Earnings to Comprehensive Income for the periods ended November 3, 2001 and October 28, 2000 (000's):

	Thirteen Weeks Ended — November 3, 2001	October 28, 2000		November 3, 2001		October 28, 2000
Net Earnings	$ 11,851	$	15,615	$	24,057	$	31,361
Other Comprehensive
Income:
Foreign
Currency Translation Adjustment	(1,345	)	(1,163	)	(2,141	)	(1,881	)
Unrealized
Gains (Losses) on Derivative
Instruments	226		-		(32	)	-
	(1,119	)	(1,163	)	(2,173	)	(1,881	)
Comprehensive
Income	$ 10,732	$	14,452	$	21,884	$	29,480

Note D - Business Segment Information

Applicable business segment information is as follows for the periods ended November 3, 2001 and October 28, 2000 (000's):

	Famous Footwear	Wholesale Operations	Naturalizer Retail
Thirteen
Weeks Ended November 3, 2001
External
Sales	$ 280,942	$ 128,915	$ 52,159	$	345	$	462,361
Intersegment
Sales	86	44,548	-		119		44,753
Operating
profit (loss)	14,189	12,308	(1,354	)	(4,386	)	20,757
Thirteen
Weeks Ended October 28, 2000
External
Sales	$ 292,813	$ 120,473	$ 50,026	$	-	$	463,312
Intersegment
Sales	-	46,666	-		-		46,666
Operating
profit (loss)	22,257	9,798	(1,775	)	(2,955	)	27,325
Thirty-nine
Weeks Ended November 3, 2001
External
Sales	$ 803,102	$ 379,226	$ 157,711	$	539	$	1,340,578
Intersegment
Sales	128	120,973	-		166		121,267
Operating
profit (loss)	23,781	37,326	(385	)	(13,414	)	47,308
Thirty-nine
Weeks Ended October 28, 2000
External
Sales	$ 783,837	$ 341,317	$ 152,062	$	-	$	1,277,216
Intersegment
Sales	-	136,061	-		-		136,061
Operating
profit (loss)	46,757	23,364	(1,788	)	(9,104	)	59,229

6

Reconciliation of operating profit to earnings before income taxes (000's):

	Thirteen Weeks Ended — November 3, 2001	October 28, 2000	November 3, 2001		October 28, 2000
Total operating
profit	$ 20,757	$ 27,325	$	47,308	$	59,229
Interest
expense	4,827	4,747		15,591		13,326
Non-operating
other (income) expense	680	(150	)	(785	)	(483	)
Earnings before income taxes	$ 15,250	$ 22,728	$	32,502	$	46,386

Operating profit represents gross profit less selling and administrative expenses and other operating income or expense. The "Other" segment includes Corporate selling and administrative expenses, which are not allocated to the operating units, and the Company's investment in Shoes.com, Inc., a footwear e-commerce company.

Note E - New Accounting Standards

On February 4, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes standards for recognition and measurement of derivatives and hedging activities. In adoption of this statement at the beginning of fiscal 2001, the Company recorded a cumulative transition adjustment to increase Other Comprehensive Income by $0.3 million (net of tax), to recognize the fair value of its derivative instruments. The Company expects to reclassify all of the transition adjustment into earnings in 2001.

The Company uses derivative financial instruments, primarily foreign exchange contracts and interest rate caps and swaps, to reduce its exposure to market risks from changes in foreign exchange rates and interest rates. These derivatives, designated as cash flow hedges, are used to hedge the procurement of footwear from foreign countries and the variability of cash flows paid on variable-rate debt. The terms of these instruments are generally less than one year. The effective portions of changes in the fair value of derivatives are recorded in Other Comprehensive Income and reclassified to earnings when the hedged item affects earnings. The ineffective portions of changes in the fair value of cash flow hedges are immediately recognized in earnings.

During the first nine months of fiscal 2001, changes in the fair value of derivatives and reclassifications from Other Comprehensive Income to earnings from the initial transition adjustment resulted in a decrease in Other Comprehensive Income of $32,000, net of tax (see Note C).

7

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives.

The Company will apply the new standards on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income in fiscal 2002 of approximately $1 million ($0.06 per share). During fiscal 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets. The Company has not yet determined what the effect of the application of the new standard will be on the earnings and financial position of the Company.

Note F - Consolidation

The consolidated financial statements include the accounts of Brown Shoe Company, Inc. and its wholly-owned and majority-owned subsidiaries, after the elimination of intercompany accounts and transactions. Prior to the first quarter of 2001, the accounts of the Company's Brown Pagoda division were consolidated on a calendar year basis, which was approximately one month earlier than the rest of the Company. In the first quarter of 2001, this one-month reporting lag was eliminated to provide uniform reporting. As a result, the earnings for this division in the month of January, 2001 of $0.2 million were credited directly to Retained Earnings.

Note G - Condensed Consolidated Financial Information

Certain of the Company's debt is fully, unconditionally and jointly and severally guaranteed by certain wholly-owned domestic subsidiaries and the Canadian subsidiary of the Company. Accordingly, condensed consolidating balance sheets as of November 3, 2001 and October 28, 2000, and the related condensed consolidating statements of earnings and cash flows for the thirty-nine weeks period 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 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.

8

CONDENSED CONSOLIDATING BALANCE SHEET AS OF NOVEMBER 3, 2001

(Thousands)	Parent								Consolidated Totals
Assets
Current
Assets
Cash and cash equivalents	$ 637	$	15,207	$	9,308	$	-		$ 25,152
Receivables	31,499		12,358		12,105		-		55,962
Inventories	54,003		397,386		738		(7,062	)	445,065
Other current assets (liabilities)	(8,030	)	25,051		1,889		4,247		23,157
Total Current Assets	78,109		450,002		24,040		(2,815	)	549,336
Other Assets	51,711		31,946		3,934		(4	)	87,587
Property
and Equipment, net	14,635		73,145		1,101		-		88,881
Investment
in Subsidiaries	306,586		33,091		-		(339,677	)	-
Total Assets	$ 451,041	$	588,184	$	29,075	$	(342,496	)	$ 725,804
Liabilities
& Shareholders' Equity
Current
Liabilities
Notes payable	$ 85,000	$	-	$	-	$	-		$ 85,000
Accounts payable	3,650		94,245		11,853		-		109,748
Accrued expenses	17,917		50,092		5,107		(2,589	)	70,527
Income taxes payable (receivable)	(1,124	)	506		2,385		697		2,464
Current maturities of long-term
debt	28,550		-		-		-		28,550
Total Current Liabilities	133,993		144,843		19,345		(1,892	)	296,289
Long-Term
Debt and Capitalized
Lease Obligations	123,490		-		-		-		123,490
Other Liabilities
(Assets)	19,824		(1,261	)	731		-		19,294
Intercompany
Payable (Receivable)	(112,997	)	131,447		(22,637	)	4,187		-
Shareholders'
Equity	286,731		313,155		31,636		(344,791	)	286,731
Total Liabilities and Shareholders' Equity	$ 451,041	$	588,184	$	29,075	$	(342,496	)	$ 725,804

9

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001

(Thousands) — Net Sales	Parent — $ 195,834	$	1,164,179	$	191,512	$	(210,947	)	Consolidated Totals — $ 1,340,578
Cost of goods
sold	131,470		724,927		166,676		(208,574	)	814,499
Gross profit	64,364		439,252		24,836		(2,373	)	526,079
Selling and
administrative expenses	61,007		407,870		13,147		(2,373	)	479,651
Interest expense	15,459		15		117		-		15,591
Intercompany
interest (income) expense	(11,551	)	11,552		(1	)	-		-
Other (income)
expense	(798	)	103		(970	)	-		(1,665	)
Equity in earnings
of subsidiaries	(24,095	)	(13,437	)	-		37,532		-
Earnings Before Income Taxes	24,342		33,149		12,543		(37,532	)	32,502
Income tax
provision	285		7,799		361		-		8,445
Net Earnings	$ 24,057	$	25,350	$	12,182	$	(37,532	)	$ 24,057

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THIRTY-NINE WEEKS ENDED NOVEMBER 3, 2001

| (Thousands) — Net Cash
Provided (Used) by Operating Activities | Parent — $ (15,284 | ) | Guarantor Subsidiaries — $ (10,886 | ) | Non-Guarantor Subsidiaries — $ 17,922 | $ | (3,718 | ) | Consolidated Totals — $ (11,966 | ) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Investing
Activities: | | | | | | | | | | |
| Capital expenditures | (2,164 | ) | (15,344 | ) | (523 | ) | - | | (18,031 | ) |
| Other | 2,181 | | - | | - | | - | | 2,181 | |
| Net Cash
Provided (Used) by Investing Activities | 17 | | (15,344 | ) | (523 | ) | - | | (15,850 | ) |
| Financing
Activities: | | | | | | | | | | |
| Increase in short-term notes
payable | 18,500 | | - | | - | | - | | 18,500 | |
| Principal payments of long-term
debt | (10,000 | ) | - | | - | | - | | (10,000 | ) |
| Proceeds from stock options
exercised | 1,847 | | - | | - | | - | | 1,847 | |
| Payments for purchase of Treasury
stock | (2,630 | ) | - | | - | | - | | (2,630 | ) |
| Dividends paid | (5,240 | ) | - | | - | | - | | (5,240 | ) |
| Intercompany financing | 6,444 | | 26,804 | | (43,166 | ) | 9,918 | | - | |
| Net Cash
Provided (Used) by Financing Activities | 8,921 | | 26,804 | | (43,166 | ) | 9,918 | | 2,477 | |
| Increase
(Decrease) in Cash and Cash Equivalents | (6,346 | ) | 574 | | (25,767 | ) | 6,200 | | (25,339 | ) |
| Cash and
Cash Equivalents at Beginning of Period | 6,983 | | 14,633 | | 35,075 | | (6,200 | ) | 50,491 | |
| Cash and
Cash Equivalents at End of Period | $ 637 | | $ 15,207 | | $ 9,308 | $ | - | | $ 25,152 | |

10

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF OCTOBER 28, 2000

(Thousands)	Parent					Eliminations		Consolidated Totals
Assets
Current
Assets
Cash and cash equivalents	$ 1,458	$	11,960	$	31,216	$ -		$ 44,634
Receivables	28,069		15,390		14,483	-		57,942
Inventories	46,564		410,662		2	(12,873	)	444,355
Other current assets (liabilities)	(4,770	)	26,404		840	4,505		26,979
Total Current Assets	71,321		464,416		46,541	(8,368	)	573,910
Other
Assets	49,469		30,380		280	(4	)	80,125
Property
and Equipment, net	13,936		76,173		982	-		91,091
Investment
in Subsidiaries	278,876		12,278		-	(291,154	)	-
Total Assets	$ 413,602	$	583,247	$	47,803	$ (299,526	)	$ 745,126
Liabilities
& Shareholders' Equity
Current
Liabilities
Notes payable	$ 59,000	$	-	$	-	$ -		$ 59,000
Accounts payable	4,289		124,388		12,615	-		141,292
Accrued expenses	21,813		54,253		6,673	2,823		85,562
Income taxes	5,611		1,042		1,802	151		8,606
Current maturities of long-term
debt	10,000		-		-	-		10,000
Total Current Liabilities	100,713		179,683		21,090	2,974		304,460
Long-Term
Debt and Capitalized
Lease Obligations	152,037		-		-	-		152,037
Other
Liabilities (Assets)	20,152		(734	)	25	-		19,443
Intercompany
Payable (Receivable)	(128,486	)	124,225		14,410	(10,149	)	-
Shareholders'
Equity	269,186		280,073		12,278	(292,351	)	269,186
Total Liabilities and Shareholders' Equity	$ 413,602	$	583,247	$	47,803	$ (299,526	)	$ 745,126

11

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000

(Thousands) — Net Sales	Parent — $ 195,067	$	1,145,736	$	167,626	$	(231,213	)	Consolidated Totals — $ 1,277,216
Cost of
goods sold	144,254		701,108		148,645		(231,213	)	762,794
Gross profit	50,813		444,628		18,981		-		514,422
Selling
and administrative expenses	52,077		396,206		8,070		(968	)	455,385
Interest
expense	13,258		55		13		-		13,326
Intercompany
interest (income) expense	(9,940	)	9,953		(13	)	-		-
Other (income)
expense	(2,171	)	1,265		(737	)	968		(675	)
Equity in
earnings of subsidiaries	(33,543	)	(11,069	)	-		44,612		-
Earnings Before Income Taxes	31,132		48,218		11,648		(44,612	)	46,386
Income tax
provision (benefit)	(229	)	14,675		579		-		15,025
Net Earnings	$ 31,361	$	33,543	$	11,069	$	(44,612	)	$ 31,361

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000

| (Thousands) — Net Cash
Provided (Used) by Operating Activities | Parent — $ 6,289 | $ | (21,893 | ) | Non-Guarantor Subsidiaries — $ 7,273 | $ | 3,346 | $ | (4,985 | ) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Investing
Activities: | | | | | | | | | | |
| Capital expenditures | (817 | ) | (22,324 | ) | (495 | ) | - | | (23,636 | ) |
| Other | 906 | | - | | - | | - | | 906 | |
| Net Cash
Provided (Used) by Investing Activities | 89 | | (22,324 | ) | (495 | ) | - | | (22,730 | ) |
| Financing
Activities: | | | | | | | | | | |
| Increase in short-term notes
payable | 59,000 | | - | | - | | - | | 59,000 | |
| Principal payments of long-term
debt | (10,000 | ) | - | | - | | - | | (10,000 | ) |
| Proceeds from stock options
exercised | 13 | | - | | - | | - | | 13 | |
| Payments for purchase of treasury
stock | (5,380 | ) | - | | - | | - | | (5,380 | ) |
| Dividends paid | (5,442 | ) | - | | - | | - | | (5,442 | ) |
| Intercompany financing | (51,962 | ) | 51,623 | | 3,685 | | (3,346 | ) | - | |
| Net Cash
Provided (Used) by of Financing Activities | (13,771 | ) | 51,623 | | 3,685 | | (3,346 | ) | 38,191 | |
| Increase
(Decrease) in Cash and Cash Equivalents | (7,393 | ) | 7,406 | | 10,463 | | - | | 10,476 | |
| Cash and
Cash Equivalents at of Beginning of Period | 8,851 | | 4,554 | | 20,753 | | - | | 34,158 | |
| Cash and
Cash Equivalents at End of Period | $ 1,458 | $ | 11,960 | | $ 31,216 | $ | - | $ | 44,634 | |

12

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION A ND RESULTS OF OPERATIONS

Results of Operations

Quarter ended November 3, 2001 compared to the Quarter ended October 28, 2000

Consolidated net sales for the quarter ended November 3, 2001 were $462.4 million compared to $463.3 million in the quarter ended October 28, 2000. Net earnings of $11.9 million for the third quarter of 2001 compares to net earnings of $15.6 million in the third quarter of 2000. Diluted earnings per share was $.68 in the third quarter of 2001 compared to $.88 in the third quarter of 2000.

Famous Footwear 's sales decreased 4.1% during the third quarter of 2001 to $280.9 million. The decrease was driven by a 9.4% same-store-sales decline partially offset by five additional stores resulting in a total of 924 stores in operation. Famous Footwear had operating earnings for the third quarter of 2001 of $14.2 million compared to $22.3 million last year. The decrease in operating profitability was due to several factors including a slowdown in consumer traffic levels and corresponding declines in comparable store sales, as well as an inventory clearance program, which resulted in lower margins.

The Company's wholesale operations had net sales of $128.9 million during the third quarter of 2001 compared to $120.5 million last year. This sales increase was primarily due to higher sales of Naturalizer branded product as well as women's private label and licensed footwear, and children's footwear. Operating earnings of $12.3 million increased from $9.8 million in the third quarter of 2000 primarily as a result of the higher sales volume.

In the Company's Naturalizer Retail operations, including stores in both the United States and Canada, net sales increased 4.3% to $52.2 million in the third quarter of 2001. Same-store sales in the third quarter of 2001 increased 5.4% in the United States and 8.8% in Canada. The Company had 32 less stores in operation in the United States in 2001 and had 11 more stores in operation in Canada than in 2000. At the end of the third quarter of 2001, 477 stores were in operation including 319 stores in the United States and 158 stores in Canada. Total Naturalizer Retail operations achieved operating losses of $1.4 million in the third quarter of fiscal 2001 compared to losses of $1.8 million in 2000. The improvement was primarily due to the higher sales.

Consolidated gross profit as a percent of sales for the third quarter of 2001 decreased to 39.3% from 39.8% during the same period last year. This decrease was primarily due to lower margins in the Company's retail operations primarily as a result of a highly competitively promotional environment for Famous Footwear.

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Selling and administrative expenses as a percent of sales for the third quarter of 2001 increased to 34.8% from 33.9% for the same period last year. This increase was due to the lower sales in the quarter at Famous Footwear while expenses were relatively flat.

The consolidated tax rate was 22.3% of pre-tax income for the third quarter of 2001 compared to 31.3% last year. The decrease from last year's effective rate reflects a higher mix of offshore operating income, which is taxed at lower rates, for the quarter and projected for the year.

Nine Months ended November 3, 2001 compared to the Nine Months ended October 28, 2000

Consolidated net sales for the first nine months of 2001 were $1.341 billion, an increase of 5.0% from the first nine months of 2000 total of $1.277 billion. Net earnings of $24.1 million for the first nine months of 2001 compare to net earnings of $31.4 million for the first nine months of 2000, a decrease of 23.2%.

Sales at Famous Footwear for the first nine months of 2001 increased 2.5% to $803.1 million from the first nine months of last year, reflecting a 6.4% decrease in same-store sales offset by the effect of opening 53 new, larger and higher volume stores and the closing of 54 lower volume stores during 2001. Operating earnings for the first nine months of 2001 decreased 49.1% to $23.8 million due to lower same-store sales and an inventory clearance program that resulted in lower margins.

The Company's wholesale operations' net sales for the first nine months of 2001 increased 11.1% to $379.2 million from the same period last year. Operating earnings for the first nine months of 2001 of $37.3 million increased $14.0 million from the same period last year due primarily to the increased sales volume.

In the Company's Naturalizer Retail operations, net sales increased 3.7% to $157.7 million in the first nine months of 2001. Same-store sales increased 2.9% in the United States and 8.5% in Canada. Total Naturalizer Retail operations had operating losses of $0.4 million in the first nine months of 2001 compared to operating losses of $1.8 million in 2000. The improved operating performance was primarily due to the higher sales volume.

Consolidated gross profit as a percent of sales for the first nine months of 2001 decreased to 39.2% from 40.3% for the same period last year. This decrease was primarily due to lower margins at Famous Footwear reflecting higher promotional activities.

Selling and administrative expenses as a percent of sales for the first nine months of 2001 increased to 35.8% from 35.7% for the same period last year. This increase was primarily due to higher operating expenses at Famous Footwear offset partially by lower expenses at the Company's wholesale operations.

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Other income for the first nine months of 2001 consisted primarily of a gain on the sale of the Company airplane.

The consolidated tax rate was 26.0% of consolidated pre-tax income for the first nine months of 2001 compared to 32.4% for last year. The decrease from last year's effective rate reflects a higher mix of offshore operating income, which is taxed at lower rates, for the first nine months and projected for the year.

Fourth Quarter Charge

Subsequent to the end of the third quarter, the Company announced that it intended to take an after-tax charge in its fourth quarter of $29-$32 million. This charge relates to a series of initiatives, which include profitability-enhancing measures in the Naturalizer division which will lead to a more productive retail store base, the development of a shared services administrative platform, inventory utilization improvements, and more efficient logistics operations. These programs are expected to increase after-tax earnings by approximately $13 million in fiscal 2003 and $20 million by fiscal 2005. The fourth quarter charge is expected to include costs related to restructuring the Naturalizer division, severance costs, incremental inventory markdowns, management transition at Famous Footwear, and debt restructuring including the costs to call the Company's $100 million 9½% Senior Notes which were scheduled to mature in fiscal 2006.

Financial Condition

A summary of key financial data and ratios at the dates indicated is as follows:

	November 3, 2001	October 28, 2000	February 3, 2001
Working Capital (millions)	$253.0	$269.5	$266.5
Current Ratio	1.9:1	1.9:1	1.9:1
Total Debt
as a Percentage of Total Capitalization	45.3%	45.1%	45.8%

Cash used from operating activities for the first nine months of fiscal 2001 was $12.0 million versus cash usage of $5.0 million last year. This decrease resulted primarily from the lower earnings.

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The decrease in the ratio of total debt as a percentage of total capitalization at November 3, 2001, compared to the end of fiscal 2000, is due to higher shareholders' equity, offset partially by cash usage and resultant higher borrowings. At November 3, 2001, $85.0 million was borrowed and $1.5 million of letters of credit were outstanding under the Company's $165.0 million revolving bank Credit Agreement.

In November 2001, the Company received a commitment from Bank of America to underwrite a new revolving credit facility. In the Fourth Quarter of fiscal 2001, the Company expects to enter into a new $350 million Credit Agreement, which will replace the Company's current $165 million revolving bank Credit Agreement dated November 20, 2000. Borrowings under the new Credit Agreement will be secured by accounts receivable and inventory of the Company's domestic and Canadian subsidiaries. In addition, the Company announced its intention to call its $100 million 9½% Senior notes in the fourth quarter of fiscal 2001. Such notes were scheduled to mature in 2006. The total costs associated with this debt restructuring are approximately $5.0 million, aftertax, including the call premium and the write-off of deferred debt issuance costs.

In May 2000, the Company announced a stock repurchase program under which the Company was authorized to repurchase up to 2 million shares of the Company's outstanding common stock. In the first nine months of fiscal 2001, the Company purchased 145,900 shares at a cost of $2.6 million under this authorization. Since the inception of this program, the Company has repurchased a total of 928,900 shares for approximately $11.3 million under this authorization.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially. In Item 1 of the Company's fiscal 2000 Annual Report on Form 10-K, detailed risk factors that could cause variations in results to occur are listed and further described. Such description is incorporated herein by reference.

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of the Company's Annual Report and Form 10-K for the year ended February 3, 2001.

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PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

There have been no material developments during the quarter ended November 3, 2001 in the legal proceedings described in the Company's Annual Report on Form 10-K for the year ended February 3, 2001. Item 6 - Exhibits and Reports on Form 8-K

| (a) | (a) | Restated Certificate of Incorporation
of the Company, dated October 17, 2001, filed herewith. |
| --- | --- | --- |
| | (b) | Bylaws of the Company as
amended through March 2, 2000, incorporated herein by reference to Exhibit
3 to the Company's report on Form 10-K for the fiscal year ended January
29, 2000. |
| (4) | (a) (ii) | Second Amendment to Rights
Agreement between Brown Shoe Company, Inc., First Chicago Trust Company
of New York, and EquiServe Trust Company, N.A., dated and effective as
of December 6, 2001, filed herewith. |
| (10) | (g) | Early Retirement and Consulting
Agreement dated July 27, 2001, between the Company and Brian C. Cook, filed
herewith. |

(b)
The Company filed no reports
on Form 8-K during the quarter ended November 3, 2001.

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 SHOE COMPANY, INC.
Date: December 17,
2001	/s/ Andrew M. Rosen
	Chief Financial Officer and Treasurer On Behalf of the Corporation as the Principal Financial Officer

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