Brown Shoe Company's second-quarter results were hit by a drop in toning shoes, prompting the company to lower its full-year earnings guidance. The group managed to raise its top line by 7.2 percent to $628.1 million thanks to the acquisition of American Sporting Goods (ASG), completed on Feb. 17 for $145 million in cash and assumed debt. Nevertheless, the sales figure was $10 million below market expectations.

However, Brown Shoe announced that it agreed to sell its And 1 basketball brand to Galaxy International, a newly formed brand management company, for $55 million in cash. The transaction is expected to close within 45 days. Brown Shoe plans to use the proceeds from the disposal to pay down debt. And 1 was part of the ASG acquisition. Brown Shoe is completing a review of its brand portfolio and And 1 did not align with its customer target. And 1 shoes are distributed in 68 countries worldwide. Galaxy International believes it can expand this further.

The group's retailer Famous Footwear reported a 0.7 percent decline in sales to $344.9 million in the quarter ended on July 30. Excluding toning, sales were up by 3.2 percent thanks to stronger sales of running shoes and sandals. Comparable store sales increased by 0.2 percent. Excluding toning, the growth reached 3.9 percent. During the quarter, the company closed eight underperforming stores and added 12 new stores. When compared with the second quarter of 2010, the total number of Famous Footwear stores declined to 1,116 from 1,128.

On a trailing 12-month period, Famous Footwear stores generated on average sales of $186 per square foot. The stores opened this year are averaging $211 per square foot. The group said it has become more aggressive regarding underperforming stores and wants to take advantage of the current real estate situation to gain access to better locations. For the full year, the group wants to open 50 stores and close 40-45 stores.

ASG was the primary contributor to the 24.6 percent improvement in the group's wholesale sales to $222.7 million. Sales of the specialty retail division, which includes the Naturalizer stores, Shoes.com and overall direct-to-consumer business, increased by 1.2 percent to $60.5 million. The number of specialty stores fell to 245 at the end of July from 264 a year earlier but comparable store sales rose by 5.2 percent. Sales at Naturalizer stores were up by 3.4 percent, with same-store sales up by 5.5 percent, driven by the Canadian shops. The number of specialty stores fell to 245 at the end of July from 264 a year earlier. The direct-to-consumer operations boosted sales by nearly 10 percent.

The consolidated gross margin slipped to 37.7 percent from 40.7 percent a year earlier. The margin fell in all businesses, with Famous Footwear passing to 43.2 percent from 46.0 percent, wholesale to 28.5 percent from 30.3 percent and specialty retail to 40.0 percent from 41.4 percent. The group's bottom line registered a net loss of $4.6 million, or $0.11 per share, compared with a $5.3 million profit. The loss was partially widened by costs to integrate ASG.

Brown Shoe forecast that it will finish the year with sales of $2.68-2.71 billion, below market expectations of $2.75 billion. The company sees its gross margin improving in the second half but the overall decline for the full year will reach 0.6-0.9 percentage points. Comparable store sales are expected to be flat at Famous Footwear in the full year despite possible improvement in the second half of the year. Wholesale sales, excluding ASG, are also expected to remain unchanged. Capital expenditure is forecast to reach $52-54 million in the full year.

Following the results, the rating agency Moody's cut the outlook on Brown Shoe's credit rating to “stable” from “positive” on the likelihood that sales and earnings growth at Famous Footwear and the company's wholesale brands will be “somewhat muted,” with most of the growth coming from its acquisition of ASG. Moody's affirmed Brown Shoe's existing ratings including its B2 corporate family rating and probability of default rating, B3 senior unsecured notes rating and SGL-2 speculative-grade liquidity rating.