MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

1999 COMPARED TO 1998

Brown Shoe Company, Inc. had an impressive year in fiscal 1999, posting a 48% increase in earnings per share compared to fiscal 1998.

Net sales of $1.594 billion in fiscal 1999 were 3.5% higher than the $1.540 billion in fiscal 1998. The increased net sales reflected higher sales at Famous Footwear and the Wholesale operations. Net earnings in fiscal 1999 were $35.5 million compared to net earnings of $23.7 million in fiscal 1998. Net earnings in fiscal 1999 included a $0.7 million loss related to the withdrawal from the Pagoda International marketing division compared to a $7.5 million loss in fiscal 1998. Excluding the Pagoda International results, net earnings of the Company increased 16.0% to $36.2 million in fiscal 1999 versus $31.2 million in fiscal 1998.

Famous Footwear achieved its fourth consecutive year of improved operating earnings. Net sales of $927.6 million in fiscal 1999 increased 7.7% from $861.3 million in fiscal 1998. In fiscal 1999, same-store sales increased 2.2% and 40 net new stores were added, while sales per square foot increased 4.2%, reflecting improved store productivity from the newly opened stores versus those stores closed in the past year. Operating earnings for fiscal 1999 increased 14.4% to $54.0 million as a result of increased sales, stable gross margins, aggressive expense control and strong execution. At the end of fiscal 1999, 867 stores were in operation compared to 827 stores in fiscal 1998. During the year, 77 stores were opened and 37 stores were closed.

The Company’s Wholesale operations had net sales of $470.8 million in fiscal 1999, representing a 3.0% increase over fiscal 1998. Sales of the Naturalizer brand increased 5.0% in fiscal 1999, reflecting good customer acceptance of the rejuvenated product line. In addition, fiscal 1999 sales included a strong performance of Barbie, Star Wars, and Dr. Scholl’s licensed products. Operating earnings of $32.8 million in fiscal 1999 were slightly lower than the $33.5 million in fiscal 1998 due to a change in the method of determining the level of profit earned on intersegment sales to the Naturalizer Retail operations. Excluding the impact of this change, operating earnings for the Wholesale operations would have increased 5.2% in fiscal 1999, primarily due to the sales gains and improved execution in the developing and sourcing of footwear.

In the Company’s Naturalizer Retail operations net sales of $186.6 million in fiscal 1999 declined slightly from $187.2 million in fiscal 1998. Same-store sales in fiscal 1999 decreased 4.1% and 2.7% in the United States and Canada, respectively. An operating loss of $3.7 million was incurred in fiscal 1999 compared to an operating profit of $0.8 million in fiscal 1998.The decrease in operating earnings resulted from the same-store sales declines and increased marketing expenses to promote the Naturalizer brand's new image. At the end of fiscal 1999, 486 stores were in operation including 347 stores in the United States and 139 stores in Canada. Domestically, the Company had a net increase of 16 stores in fiscal 1999, while Canada had a net increase of eight stores.

Consolidated gross profit as a percent of sales was 39.3% in fiscal 1999, lower than the 39.9% achieved in fiscal 1998. The decrease reflected competitive pressures at both retail and wholesale, and higher markdowns.

Selling and administrative expenses as a percent of sales improved to 35.0% in fiscal 1999 versus 35.8% in fiscal 1998 due to strong expense control throughout the Company and additional leverage of the expense base at Famous Footwear.

Interest expense of $17.3 million in fiscal 1999 decreased from $19.4 million in fiscal 1998 due to lower average borrowings and the payments of $25.0 million due on long-term debt. The lower average borrowings resulted from positive cash flow from operations and foreign cash repatriation of approximately $26 million in fiscal 1999.

Other income of $0.6 million in fiscal 1999 primarily resulted from the gain recognized from the sale of the le coq sportif business. This compared to an expense of $5.9 million in fiscal 1998, primarily from the write-off of $1.9 million in intangible assets, additional charges of $2.0 million associated with the withdrawal from the Pagoda International business, and $1.8 million of environmental costs.

The Company’s tax provision of $16.3 million in fiscal 1999 represented an effective tax rate of 31.4% as compared to 37.1% in fiscal 1998. Fiscal 1998 results included a higher level of International losses on which no tax benefit was realized.