Charges Hurt Footstar FY, Q4 Results

Footstar's net income for the fourth quarter, before the effect of restructuring, other charges and reversals, was $12.5 million, compared with $19.5 million,before restructuring charges, in the fourth quarter of 2000. Diluted earnings per share were $0.60 per share in the fourth quarter of 2001,versus $0.95 per share in the fourth quarter of 2000. Including restructuring charges, net income in the fourth quarter of 2001 was $9.1 million, or diluted earnings of $0.44 per share, as compared to net income of $17.5 million, or diluted earnings of $0.85 per share, in the fourth quarter of 2000.

During the fourth quarter, the company recorded net after-tax restructuring charges of $3.4 million. These charges relate primarily to inventory write-downs, reflected as a component of cost of sales, and severance costs in connection with the closure of 54 Ames stores announced in the fourth quarter as well as the restructuring plan announced in the company's third quarter.

Operating profit, before the effects of restructuring charges, for the fourth quarter of 2001 totaled $39.6 million, compared to operating profit, before restructuring charges, of $57.1 million for the fourth charges in both periods, operating profit for the fourth quarter of 2001 was $34.3 million, compared to $54.1 million last year.

Net sales rose 3.7% in the fourth quarter of 2001 to $638.0 million from $615.3 million in the prior-year period. Meldisco's total sales for the thirteen-week period increased 8.9% to $400.1 million, and total sales for the athletic segment decreased 4.0% to $237.9 million.
Footstar's comparable-store sales for the quarter decreased 6.1%. Meldisco's comparable-store sales declined 8.4%, while the athletic segment's comparable-store sales decreased 2.6%.

Mickey Robinson, COB/CEO, commented, "Footstar's disappointing performance in the fourth quarter reflects the sizeable effect that weather has on our winter footwear business. With very little snowfall and mild conditions in November and December, sales of boots and other winter products were well below our expectations at our Meldisco division. Meldisco's results also reflect a reduction in circular advertising by Kmart and lower margins due to actions we took to manage year-end inventory levels in certain categories. In the athletic segment, lower sales of apparel and accessories led to the decline for the quarter, although the business was less promotional than a year ago.

"Despite the lower than anticipated fourth quarter results, inventories were well managed, and we ended the year with overall inventories below previously announced expectations and long-term debt in line with our expectations.

"As we entered 2002, more seasonable weather in January led to a rebound in winter boot sales at Meldisco, and we
announced a very strong 19% comparable-stores sales gain at Meldisco for the month. Early sales of spring product were also very strong in the month, making us optimistic that we will have a better spring season this year. In the athletic segment, we expect profitability to improve in 2002 as we continue moving ahead with our previously announced restructuring plan to close underperforming stores. Of note, the net loss in the stores we plan to close under that plan accounted for more than 100% of the reduction in operating profit in the athletic segment in the fourth quarter, compared with the prior year. With a more
productive store base, we expect improved operating margins

For the fiscal year 2001, net income was $46.8 million before the effect of restructuring charges, compared to $61.8 million, before restructuring charges, in fiscal year 2000. Diluted earnings per share were $2.26, versus diluted earnings per share of $3.04 in 2000, before the effects of restructuring in both periods.

Including the impact of restructuring charges, Footstar recorded a net loss for 2001 of $23.5 million, or ($1.16) per diluted share, compared to net income of $60.4 million, or $2.97 per diluted share in 2000. Operating profit for 2001, before restructuring charges, amounted to $142.8 million, versus 2000 operating profit of $171.4 million before the effects of restructuring. Including the effects of restructuring events in both periods, operating profit for 2001 was $36.0 million, compared with $169.3 million for 2000.

Net sales for fiscal year 2001 rose 10.0% to $2,460.5 million from $2,237.1 million in 2000. Footstar's comparable-store sales decreased 2.2% in 2001. Meldisco's comparable-store sales decreased 5.2%, and the athletic segment's comparable store-sales increased 2.0%.

For the fiscal year 2001, sales at the footwear departments operated in Kmart stores were $1,209.3 million compared with
$1,290.5 million in fiscal year 2000. Total operating profit for 2001 from the Kmart departments was $127.4 million, compared to $149.9 million in 2000. On a pro forma basis, after excluding Kmart's 49% equity interest in the footwear departments, Footstar's operating profit from the licensed footwear departments at Kmart would be approximately $65 million in 2001 and $76 million in 2000.

After a difficult year in 2001, the company reported that it expects its athletic segment, which includes Footaction and Just For Feet, to more than double its operating profit in 2002. The profit improvement is expected to result from the positive effects of the restructuring plan announced in the third quarter of 2001 and continued improvement in the Just For Feet business.

In its Meldisco division, the footwear departments operated in Kmart stores account for a significant portion of Footstar's total sales and profits, and, as such, any potential restructuring activities by Kmart, including store closings, may be expected to have a negative impact on Footstar's future results. Subsequent to its voluntary filing on January 22, 2002 to reorganize under Chapter 11 of the bankruptcy laws, Kmart announced that it plans to evaluate the performance of every store in its portfolio by
the end of its first quarter of 2002 with the objective of closing unprofitable or underperforming stores this year. Until more detailed information is available about Kmart's future plans, it is premature to predict or evaluate what the impact on Footstar would be.

Footstar is currently comfortable with First Call estimates for its first quarter ended March 30, 2002 of $0.01 per share, before the effect of any possible charges related to the Kmart situation, compared to a loss of ($0.20) per share last year. However, given the uncertainty concerning Kmart's plans, the company is not in a position to give earnings guidance beyond the first quarter at this time.