MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

2000 COMPARED TO 1999

In fiscal 2000, Brown Shoe Company, Inc. achieved a 5.7% increase in sales and a 4.1% increase in diluted earnings per share compared to fiscal 1999.These results reflect another year of record sales and earnings at the Famous Footwear division and a strong sales gain by the flagship Naturalizer brand at wholesale. At the same time, these sales and earnings gains fell short of planned levels as 2000 presented an overall difficult retail environment, which contributed to the relatively flat same-store sales levels at our Famous Footwear and Naturalizer Retail stores.

Net sales of $1.685 billion for the 53-week fiscal 2000 were 5.7% higher than the $1.594 billion in fiscal 1999, which included 52 weeks. Net earnings in fiscal 2000 reached $36.4 million compared to net earnings of $35.5 million in fiscal 1999, an increase of 2.5%. Diluted earnings per share of $2.04 were 4.1% higher than the $1.96 per share earned in fiscal 1999.

Famous Footwear achieved its fifth consecutive year of improved operating earnings. For the first time, Famous surpassed the $1 billion mark in sales, reporting sales of $1.034 billion in fiscal 2000, an increase of 11.4% over fiscal 1999’s sales of $927.6 million. In fiscal 2000, on a comparable 52-week basis, same-store sales decreased .6%, but sales per square foot increased .6% reflecting the addition of more productive stores. In fiscal 2000, 92 new stores were opened, 26 stores were acquired with the Mil-Mar chain of stores primarily located in the Greater Milwaukee area, and 60 stores were closed. This resulted in the net addition of 58 stores. At the end of fiscal 2000, Famous operated 925 stores compared to 867 at the end of fiscal 1999. Operating earnings for fiscal 2000 were $58.0 million compared to $54.0 million in fiscal 1999, an increase of 7.4%, reflecting the higher sales and improved margins, partially offset by an increase in expenses as a percent of sales. The increased expense rate was driven by higher inventory distribution costs as a result of increasing inventory levels in the stores to meet customer demand and drive sales, and the addition of new, larger stores in power strip-malls.

In fiscal 2001, Famous Footwear intends to continue to reposition its real estate portfolio by opening 8,000 – 10,000 square-foot strip-mall stores, and replacing certain of its current 5,000 – 6,000 square-foot stores, leading to a gradual increase in the average size of the chain’s stores. Famous expects to open approximately 100 new stores and close 90 in fiscal 2001.

The Company’s Wholesale operations had net sales of $447.6 million in fiscal 2000, which was 4.9% lower than the $470.8 million in fiscal 1999. The decrease reflects lower sales of children’s footwear compared to 1999, during which the Company had the Star Wars movie license, and lower sales of the discontinued NaturalSport brand. These declines were partially offset by an 18.6% increase in sales of the Naturalizer brand and a 12.4% increase in private label women’s footwear. Operating earnings declined from $32.8 million in fiscal 1999 to $31.0 million in fiscal 2000 reflecting lower sales.

Sales at the Company’s Naturalizer Retail operations, including stores in both the United States and Canada, of $203.5 million in fiscal 2000 were up 9.1% from the $186.6 million achieved in 1999. Same-store sales, on a comparable 52-week basis, increased .5% in the United States and 5.9% in Canada. An operating loss of $3.8 million was incurred in fiscal 2000, compared to a $3.7 million loss in fiscal 1999. Higher store operating costs in fiscal 2000 offset the impact of the higher sales. At the end of fiscal 2000, 481 stores were in operation including 331 in the United States and 150 in Canada.

Consolidated gross profit as a percent of sales of 40.5% in fiscal 2000 improved from 39.3% in fiscal 1999.This improvement reflects a higher margin rate at Famous Footwear and the Wholesale operations, and a higher proportion of the Company’s sales being at retail, which carries a higher gross profit rate than wholesale.

Selling and administrative expenses as a percent of sales increased from 35.0% in fiscal 1999 to 36.3% in fiscal 2000. This was the result of the higher proportion of sales being at retail, and a higher expense rate at Famous Footwear and the Wholesale operations.

Interest expense increased from $17.3 million in fiscal 1999 to $18.8 million in fiscal 2000 due to higher average short-term borrowings and higher interest rates. The increased borrowings resulted from increased inventories at Famous Footwear, the acquisition of the 26 Mil-Mar stores in August 2000, and the purchase of treasury stock.

Other expense of $0.2 million in fiscal 2000 compared to other income in fiscal 1999 of $0.6 million. The variance reflects higher environmental costs in fiscal 2000.

The Company’s tax provision of $16.0 million in fiscal 2000 represented an effective tax rate of 30.5%, which is slightly lower than the fiscal 1999 rate of 31.4%. The Company’s effective tax rate is below the statutory United States federal rate because of earnings in the Far East, which are taxed at lower rates, as disclosed further in Note 4 to the consolidated financial statements.