Tech Woes Limit Brown’s Profits

Tech Woes Limit Brown’s Profits
Famous Footwear was a bright spot for Brown Shoe in the quarter.

Brown Shoe Co.’s wholesale business will likely remain challenged through the first half, analysts said this week.

Christopher Svezia, analyst at Susquehanna Financial, noted that the first quarter will be choppy due to continuing problems with the firm’s new IT systems, and because of that, growth will be heavily weighted to the second half.

“Execution of the ongoing SAP [software] implementation will continue to affect the wholesale business in the first quarter, and although significant order delays appear to be in the past, there will still be gross margin effects given higher distribution costs and greater vendor allowances,” he said.

“Product costs also will remain an overhang on margins throughout the year, and it remains to be seen how smoothly the transition of American Sporting Goods [which Brown acquired last month] will play out,” Svezia added.

Sterne Agee analyst Sam Poser agreed, saying the first quarter will still be marked by labor pains because “any time you do an SAP conversion, nothing goes smoothly. Redoing your systems to make them better works in the long term, but it takes at least six months to see the fruits of such labor, and their guidance still reflects too optimistic an outlook.”

Brown Shoe President and COO Diane Sullivan explained on a call with analysts that the fourth quarter’s sales growth of 15 percent fell short of the expected 20 percent.

“The [SAP] transition impacted the near-term level of quality and fulfillment for some of our customers, resulting in some late shipments and canceled orders, some visibility and reporting inefficiencies, and diminished productivity due to re-training, requiring significant overtime [as we] essentially [went to] a seven-day operation. All this led to lower-than-expected gross margins in our wholesale business,” Sullivan said.

She added that the firm will “continue to experience some effects of the systems implementation in the first half of 2011, as we do many tasks for the first time under the new processes.”

Meanwhile, the $145 million acquisition of ASG is expected to raise the average margin of Brown Shoe’s wholesale business by 50 basis points, said Mark Hood, the firm’s SVP and CFO.

Two bright spots for Brown Shoe were Famous Footwear and specialty retail, which benefited from a strong performance in higher-margin categories, including boots, and fewer promotions than in the previous year.

For the year, Famous operated with 44 percent fewer “buy-one-get-one” days. The firm is planning zero BOGO promotions in the first quarter.

Brown Shoe earned a lower-than-expected profit in the fourth quarter, missing analysts’ estimates. For the period ended Jan. 29, 2011, the St. Louis-based company earned $3.4 million, or 8 cents a share, down 40 percent from $5 million, or 12 cents, in the same quarter a year ago. Revenue advanced 7 percent to $604.5 million, driven by a 4.9 percent increase in same-store sales at Famous Footwear.

For the full year, Brown Shoe’s profit nearly quadrupled to $37.2 million, or 85 cents a share, from $9.5 million, or 22 cents, in fiscal 2009. Full-year revenue increased 12 percent to $2.5 billion.

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