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Brown Upbeat, but Analysts Cautious

The firm said discounting hit its bottom line in the second quarter.

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NEW YORK — Even though Brown Shoe Co. turned in a bigger-than-expected $4.2 million net loss in the second quarter, the firm is still bullish on the back half of the year.

However, analysts cautioned that sluggish sales trends and an increased reliance on promotions could hurt Brown’s bottom line.

“I’m concerned that the company is being overly optimistic in terms of merchandising margin and operating profits in the back half,” said R.J. Hottovy, an equity analyst at Morningstar Inc., referring to Brown’s stated expectations to generate profitability in both the third and fourth quarters, and positive net earnings for the full year.

“There’s going to be a lot of discounting in the footwear space in the third and fourth quarter, and Brown is going to have to counter with increased promotions of its own,” Hottovy said.

Discounting affected the St. Louis-based company’s profits in the second quarter. Although Brown had tried to rely less on the buy-one-get-one strategy at its Famous Footwear stores, it was forced to reintroduce BOGO in June and plans to continue the promotion throughout the back-to-school season.

“We changed our promotional cadence early in the [second] quarter in favor of single-pair promotions,” Brown President and COO Diane Sullivan said on a conference call. “Unfortunately the industry and consumers remained focused on BOGO.”

Sam Poser, senior research analyst at Sterne Agee & Leach, said that the company’s reliance on BOGO is taking a toll, particularly when the promotion includes product that would move at full price on its own. “This is the kind of situation where you should break away from BOGOs and promote key items,” he said. “Focus on your weak business and discount that, not the product that’s selling.”

As a result of discounting, decreased store traffic and lowered inventories, Brown’s total second-quarter revenue dropped 10 percent to $511.6 million from $569.2 million last year. Famous Footwear’s same-store sales slid 6.7 percent in the second quarter, and the division’s revenue totaled $314.1 million, down 4 percent from a year ago.

Sales in Brown’s wholesale division, which includes the Naturalizer and Dr. Scholl’s brands, fell 21 percent to $142 million. The company noted weakness in all its wholesale brands, with the exception of Carlos Santana and Sam Edelman.

Still, executives were enthusiastic about Brown’s second-half wholesale businesses, predicting fourth-quarter growth from several of its newer brands, such as Vera Wang and Sam Edelman. “As we look at a number of the brands in our portfolio, we do see some momentum building,” said Sullivan.

But Poser cautioned that Brown’s increasing reliance on its wholesale business with Macy’s could put the company at the retailer’s mercy for the third and fourth quarters. “If Macy’s business doesn’t improve dramatically in the back half, [the department store is] going to come asking for huge amounts of markdown money,” he said.

For the three months ended Aug. 1, Brown reported a net loss of $4.2 million, or 10 cents a share, compared with a $2.2 million profit, or 5 cents, in the year-ago period. Analysts polled by Yahoo Finance had expected a 7-cent decline for the second quarter on sales of $539.3 million.

During the second quarter, Brown reported impairment charges of $2 million related to information technology initiatives. Charges in the first quarter of 2008 totaled $10.1 million as a result of headquarters consolidation and information technology initiatives.

The company lowered its full-year sales guidance to $2.18 billion to $2.2 billion, as second-half consolidated sales are expected to be flat or down 2 percent from last year.

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