Rising Costs May Trim Brown Shoe’s Margins

NEW YORK — Margin pressures in the back half may slow the momentum at Brown Shoe Co., analysts said last week.

“The company had a solid quarter for all intents and purposes. Comps were stronger, and wholesale was stronger, but they were coming at the expense of higher investment in things like marketing and shipping product overseas,” said Susquehanna Financial analyst Christopher Svezia.

“There’s a whole plethora of margin issues here,” he added, referring to supply cost pressures emerging from China.

Sterne Agee analyst Sam Poser agreed: “Their futures orders are good and their wholesale figures are strong, but there are a lot of moving parts right now.”

Analysts added that such uncertainty may have been what caused Brown Shoe’s stock price to fall about 14 percent in trading last Wednesday, after the company reported second quarter net earnings of $5.3 million, or 12 cents a share, compared with a net loss of $4.2 million, or 10 cents, in the same period a year earlier.

“We delivered solid results in the second quarter [and] continue to believe that we’re well-positioned to drive the favorable momentum into the back half of the year,” said Diane Sullivan, president and COO.

Brown Shoe Chairman and CEO Ron Fromm said in a conference call with analysts the company “had an encouraging start to back-to-school with double-digit comps in the early markets.”

And SVP and CFO Mark Hood noted that the firm expects third-quarter net sales to increase in the low teens, and consolidated net sales for fiscal 2010 to grow in the low double digits.

Net sales for the period ended July 31 increased 15 percent to $585.8 million, from $511.6 million, buoyed by less promotional activity, as well as a 20 percent increase across the firm’s e-commerce platform.

Famous Footwear revenue increased 11 percent to $347.3 million, driven by an 11.8 percent same-store sales increase. Wholesale revenue rose 26 percent to $178.6 million, while sales from the specialty retail division totaled $59.8 million, reflecting a 6.8 percent same-store increase.

While sales are expected to continue accelerating in the back half of the year, so are selling and administrative expenses, which were up $8.7 million in the second quarter. The company forecast expenses to total roughly 38 percent of net sales for the full year.

Brown Shoe had cash and cash equivalents of $30.7 million at the end of the quarter, after investing $32.7 million in cash and $7.3 million in stock to complete the Sam Edelman acquisition in June. Long-term debt stood unchanged at $150 million.

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