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St. Louis, Missouri-based Brown Shoe Company, Inc. ((BWS - Snapshot Report)) recently posted second quarter 2012 adjusted earnings of 16 cents per share, breezing past the Zacks Consensus Estimate of 3 cents and the year-ago quarter loss of 6 cents per share. The better-than-expected results were attributable to cost control efforts.

On GAAP basis, the company reported loss of $2.5 million, or 6 cents per share, better than a loss of $4.6 million, or 11 cents per share, a year earlier.

The company reported net sales of $599.3 million, down 3.4% year over year, due to sluggish performances at the Wholesale division and Specialty Retail.

Segment wise, Famous Footwear sales climbed 1.6% to $350.3 million in the second quarter, thanks to higher sales of running shoes and sandals. However, revenue at the Wholesale division fell 9.4% to $195.0 million, due to the loss from exited brands, partially offset by the solid performance of existing brands. Sales at the Specialty Retail also dropped 10.8% to $54.0 million.

Same-store sales at Famous Footwear crept up 3.9% and also compared favorably with the year-ago rise of 0.2%. Same-store sales at Specialty Retail slipped 1.5% during the quarter as opposed to a 5.2% upside in the year-ago quarter.

During the quarter, adjusted gross margin expanded 140 bps to 39.0%, aided by impressive performance of the Famous Footwear division (up 160 bps) and Wholesale division (up 40 bps), partially offset by the plunge in Specialty Retail division (down 50 bps).

Moreover, adjusted operating margin expanded 40 bps to 0.2%, benefiting from 120 bps plunge in SG&A expense as a percentage of revenue. Lower SG&A expense was attributable to cost-saving initiatives.

Store Update

During the quarter, Brown Shoe opened 14 new Famous Footwear stores and closed or relocated 26 underperforming stores. At the end of the quarter, the company had 1,054 Famous Footwear stores and 224 Specialty Retail stores.

To boost profitability, the company continues to realign its portfolio by closing underperforming stores and discarding struggling business units. Brown Shoe plans to shut down approximately 90 stores in 2012 and approximately 40 to 50 stores in 2013 and 2014. The benefit of portfolio realignment is mainly weighted towards the latter half of 2012 and into 2013.

Financial Position

At the end of the quarter, the company had cash and cash equivalents of $47.4 million and shareholders’ equity of $407.7 million. At the end of the quarter, Brown Shoe had $405.0 million available under its current revolving credit facility. The company’s debt-to-capital ratio declined to 43.6% from 53.4% in the year-ago quarter.

Outlook

For 2012, the company tightened its adjusted earnings guidance in the range of 85 to 95 cents per share from its previous expectations of 83 to 95 cents per share. The sales guidance remains unchanged at $2.57– $2.59 billion.

Our Take

Footwear retailer and wholesaler Brown Shoe is optimistic regarding 2012 based on better-than-expected first half 2012 results. However, it remains apprehensive regarding the overall macroeconomic environment and consumer spending.

 We expect estimates to go up in the coming days as Brown Shoe raised the lower end of its full-year profit outlook and reported better-than-expected second quarter results. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 92 cents and $1.19 per share, respectively.

Brown Shoe has a Zacks #2 Rank, implying a Buy rating over the short term. We also reiterate our long-term Neutral recommendation on the stock.

One of Brown Shoe’s primary competitors, Nike Inc. (
(NKE - Analyst Report)), a global leader in sports equipment and apparel, reported fourth-quarter 2012 earnings of $1.17 per share, down 6.0% from the year-ago earnings and missing the Zacks Consensus Estimate of $1.37 per share.

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