Brown Trims Costs, but Still Posts Loss

NEW YORK — Expense management and cost cutting at Brown Shoe Co. during the first quarter made an impression on analysts, but some expressed concern over a slowdown in the company’s top-line growth.

“Brown is at least managing the expense equation better, but the wholesale piece of the business is very difficult right now,” said Susquehanna Financial Group analyst Christopher Svezia.

The company’s aggressive debt cutting of $32.7 million during the first quarter, as well as its 5 percent average inventory reduction per store in its Famous Footwear division, was a sign of “stabilization,” said R.J. Hottovy, an equity analyst with Morningstar Inc.

Brown also announced plans to close between 55 and 70 Famous Footwear stores during 2009. “I like to see retailers conserving cash in this environment. They needed to cut back on capital spending, and a year or two down the road, they might be able to get more attractive real estate deals,” said Hottovy.

Still, the St. Louis-based firm recorded a net loss of $7.6 million in the quarter, or 18 cents a diluted share, compared with a profit of $7.2 million, or 17 cents, during the year-ago period.

Revenues for the first quarter dropped 3 percent to $538.7 million, versus $554.5 million in the first quarter of 2008. The Famous Footwear division saw sales drop slightly to $317.6 million, and same-store sales dipped by 4.9 percent. Brown’s wholesale division saw a more precipitous sales decline of 5 percent for the quarter, as existing brands such as Naturalizer and Dr. Scholl’s declined by low double digits.

Brown executives acknowledged the effects of the economic environment on retail traffic during a conference call last week and said the wholesale business would be challenged in the near term. “While we believe we are on the right track in terms of our styling and value,” Chairman and CEO Ron Fromm said during the call, “we expect our wholesale business to remain difficult during the second quarter, where sales are more heavily weighted toward reorders. We expect [reorders] to be lower in this difficult environment.”

Fromm emphasized strength in Brown’s newer labels, including Sam Edelman, Fergie and Fergalicious, and noted that new brands posted gains in the high single digits during the first quarter.

Svezia praised the work being done in those brands, but said their financial contribution is minimal compared with the company’s core brands: Famous Footwear, Dr. Scholl’s and Naturalizer, which make up 80 percent of the company’s sales. “Famous was a growth catalyst for them, and now that they’re closing stores, they’re removing that catalyst,” said Svezia.

As for Brown’s wholesale business, he added, “The backdrop for the core brands remains very difficult, and there don’t seem to be any changes in [retailers’] ordering patterns right now. At some point, they have to reverse that trend and reinvigorate the business with new investment.”

For full-year 2009, Brown expects growth in its new brands and channels of distribution, but predicted high-single-digit declines in its existing and private-label brands. The company expects to narrow its net loss in the second quarter, but post positive earnings for the full year, with revenues of $2.2 billion to $2.3 billion.

However, Hottovy is doubtful that Brown will end up in the black for 2009. “Even though you see some signs of stabilization, this is going to be a tough year for discretionary spending, and I don’t see a whole lot of improvement on the wholesale side of the business,” he said. “It’s going to be difficult to get positive net earnings for the year.”

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