Caleres Inc (CAL) 2003 Q2 法說會逐字稿

Welcome to the Brown Shoe Company second-quarter 2003 financial results conference call.

This call is being made accessible to the public via webcast in accordance with the SEC's Regulation FD.

At this time, all participants are in a listen-only mode, then we will hold a Q&A session, and instructions will follow at that time.

Before we begin, I would like to remind you of the Company's safe harbor language.

During this conference call, the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

Discussion of the Company's future plans and other statements in this call that are not current or historical facts are forward-looking statements.

These involve known and unknown risks and uncertainties that could cause the actual results to materially differ from the historical results or from future results expressed or implied by any forward-looking statements.

Factors that could cause actual results to differ materially include the following -- general economic conditions and the consumers' preferences and purchasing patterns -- these may influence the consumers' disposable income; intense competition within the footwear industry, and uncertainties of pending litigation and other matters, as described in the Company's reports; and political and economic conditions or other threats to continued or uninterrupted flow of inventory from Brazil and China, where the company relies heavily on third party manufacturing facilities for a significant amount of its inventory; and others risk factors listed from time to time in the Company's SEC reports.

Copies of the Company's reports are available online and from the Company's investor relations department.

As a reminder, ladies and gentlemen, this call is being recorded, and any reproduction of this call in whole or part is not permitted without the prior express written authorization of Brown Shoe Company.

At this time, I will now turn the call over to Brown Shoe Company's Chairman of the Board, President and Chief Executive Officer, Mr. Ronald Fromm.

Good afternoon.

Thanks for joining us to discuss our second-quarter fiscal 2003 results.

With me today are Andy Rosen, our Chief Financial Officer, and Joe Wood, our President of Famous Footwear.

Following my opening remarks I will turn the call over to Joe, who is going to highlight Famous Footwear's second-quarter performance and provide an update as to our current strategies and expected drivers of the future performance of the Famous Footwear division; then, Andy will cover our financial performance and future guidance, and we will take your questions.

Looking at second-quarter performance, the synergies from our wholesale and retail operating platform, coupled with our disciplined approach to asset management and expense control, proved successful and enabled us to generate better than expected results.

Given the sluggish retail environment, we are certainly pleased with those results, led this quarter by Famous Footwear.

Earnings per share rose 55% to 62 cents, versus 40 cents in the prior year period, on sales that were just slightly up for the quarter -- $458 million compared to $456 million last year.

Our balance sheet also continued to strengthen.

We generated strong cash flow and lowered our debt to cap ratio as well.

During the quarter, we also made progress towards several of our key goals.

First, we greatly improved the profitability of Famous.

We accomplished this by being fashion and trend right in our assortments and through significant improvements in the look of our stores.

We correctly identified the winning styles across the broad assortment of men's, women's and children's footwear.

And the consumer has begun to respond to these many changes that we have made.

I also would like to add that we are seeing increasing consumer awareness levels, as indicated by our research in our target markets.

In fact, in the 11 markets we are tracking, unaided awareness rose significantly over the past year.

Second, we increased market share for our Naturalizer, LifeStride and original Dr. Scholl's brands, again, by delivering fashion-right footwear that provided strong sell-throughs for our retail partners.

In fact, in March, April, May and again in June, Brown Shoe brands comprised five of the top-selling patterns of women's footwear, as ranked by NPD in the US department stores.

And while Naturalizer wholesale sales were slightly down at 4% during the quarter, the brand actually increased its market share in the spring season, and three of those top-selling selling five NPD patterns were Naturalizers.

I also should add that LifeStride continues to build on its turnaround we began seeing last quarter, and LifeStride sales for the second-quarter were up 26%.

Third, we continue to capitalize on the synergies that exist between our retail and wholesale organizations.

Our ability to test our wholesale styles within our retail chains has improved our performance and enabled us to better identify big shoes and reduce markdown exposure and risk.

Also, the sharing of trend information between wholesale and retail has never been stronger; it partially contributed to Famous Footwear's same-store sales gain in the women's and juniors fashion categories, which were strong all quarter.

Second-quarter results also clearly demonstrate the benefits of our significant investments in our product, our teams, our systems and marketing.

Famous Footwear is building momentum and our wholesale brands and licenses are vibrant.

As we look ahead, we are confident that our strategies will result in continued momentum for our businesses.

The advantages we possess in operating a 900-store footwear chain, and sourcing more than 75 million pairs of shoes a year, are surely assisting us in reaching our goals.

With that in mind, let me point to 4 drivers of future performance.

First, Famous Footwear.

At Famous, we are in the midst of the back-to-school selling season.

It is our Christmas, as you know, and nearly 20 million consumers shop our stores during this six-week period.

Our assortments, which Joe will expand upon later, are clearly compelling.

We will add exclusive athletic styles by Nike and others, which will likely continue to drive traffic and add to the excitement of our remodeled stores.

To maximize the effectiveness of the back-to-school time period, we plan to increase our marketing spend, providing us with a great opportunity to reintroduce consumers to the Famous Footwear store.

Second, Naturalizer and LifeStride.

Our ability to partner with major retailers continues to lead to new opportunities for our company, as we benefit from an improved presence and increased style counts on department store and specialty store floors.

While it was difficult for Naturalizer to achieve (indiscernible) even given the retail environment this quarter, we remain very positive about the opportunities for these 2 brands.

Third, looking at our expanded brand offerings, we are encouraged by the opportunity afforded us by the license of Carlos by Carlos Santana footwear, as our door count significantly increases.

We also expect Hot Kiss to continue expansion on the basis of its expanded apparel offering, which will create more awareness for this line of junior style footwear.

And, perhaps most significantly, the Dr. Scholl's opportunity is being realized.

Dr. Scholl's sandals were undoubtedly the hottest shoes this summer, appearing in all major fashion magazines and nearly 2500 retail doors.

This fall, we are delivering closed up footwear under the Dr. Scholl's brand for the first time, and, I might add, to an eagerly-awaiting retail community.

Dr. Scholl's is certainly growing brand awareness and will be placed in approximately 2000 doors this fall.

On a sidenote, the fashion relevance of our brands is validated by the fact that for the months of June, July and September, you are going to find our shoes featured each month in the fashion pages of more than 13 of the top fashion magazines -- including Marie Claire, Cosmopolitan, Glamour, In Style, Lucky and so on -- and I am talking about a significant amount of editorial exposure from the fashion world, not paid for exposure.

And I think that that speaks a lot for where we are going and headed with our fashion relevance.

And lastly, our children's business.

This business is solidly positioned for continued growth.

As you may recall, we recently signed a number of license agreements with Warner Brothers.

I am pleased to report that Supergirl is in the store and early reads are very positive.

Superman shoes are shipping right now, and Looney Tune footwear is on order.

In addition, our new Cat in the Hat footwear arrives at the market just in time for a new holiday movie.

Further, for this spring season, Spiderman and Barbie continue to be the top-selling girls and boys licensed footwear.

As we move ahead, we see Spiderman even getting stronger next year as a new Spiderman man comes out in 2004; so we are well positioned with our children's offering.

Going forward, we still believe that we are in the initial stages of leveraging the opportunities afforded us, as we combine our wholesale and retail model and strengthen our operating platform.

Our purchase ratios continue to validate that we have improved the Famous Footwear shopping experience.

Our ability to consistently deliver wholesale shoes, which rank among the top 10 patterns, demonstrates the benefit of our product testing capabilities and our more closely aligned product development teams.

In addition, clearly, the efficiencies created by our impact initiatives continue to allow us to have interest savings, as we manage our balance sheet well and reduce our debt.

Company-wide, we continue to embrace freshness and velocity as our drivers, and as we have seen, consumers like the resulting fresh assortments.

As you recall, whenever we outlined our plans for 2003, we emphasized that this would be a year where we would balance earnings plans with significant investments in our business.

These investments included investments in talent, marketing, systems and stores; to all of these things, focusing on increasing consumer preference for our brands and for our retail concepts.

As Andy will tell you when he reviews our guidance, we feel very good about being able to hold our earnings guidance during this very tough retail year, while we are making these significant investments.

And we attribute our performance to greatly-improved execution, our ability to deliver trend right product and the diversity of our operating model.

With that said, in the second half of the year, our planned investments in our stores, marketing and brand building will increase our expenses.

Accordingly, we believe it is prudent to maintain our full year guidance at $2.75 per share.

To give you a little more flavor, I am going to turn the call over to Joe Wood.

With second-quarter operating profits up 88%, it certainly is good to see Joe smiling today.

Thank you, Ron.

Famous Footwear did achieve better than expected results in the second-quarter.

Current fresh product and a revitalized store base drove our strong operating results.

We managed our business well this past quarter.

Faced with reductions in store traffic, we held back on being overly promotional, which served us well as we experienced margins above last year and above our plan.

We converted more shoppers into buyers and increased our dollars per transaction.

And without a doubt, our consumers are responding to the many changes we have made.

Once again, the women's category was the star performer during the quarter, with significant gains realized with companies such as LEI, Madden, Mudd and Clark's.

Even better results were experienced with Brown's wholesale division, with record sales resulting from the sale of Dr. Scholl's, LifeStride and Naturalizer.

Our men's and children's categories continued to perform well, also.

Performance athletic, representing about 50% of the business of Famous, remained weak, a trend that we have experienced since the beginning of the year.

We did, however, see strengthening in our K-Swiss and Converse businesses.

With the start of back-to-school season now in full swing, each of our categories have enjoyed gains, demonstrating once again our buyers ability to select the correct styles and brands that consumers want.

The recent good news is we have seen a marked change in the performance of the athletic category, and this, coupled with continued gains within our women's, kid's and men's categories, should enable us to report modest sales -- same store sales gains through back-to-school and, hopefully, the remainder of the season.

We have certainly made a lot of progress in our stores, and we are eager to capitalize on the improved traffic that comes at the start of this back-to-school season.

I would like to take a few minutes to share with you a few trends that we believe will enhance our positive momentum.

First is our vendor support.

I am sure you are aware that Famous Footwear stores reach consumers in all 50 states through its 909 stores.

Our ability to sell large quantities of branded footwear has enabled us to become a preferred retailer to top vendors.

This has generated increased visibility for us, and is prompting better deliveries of key product.

We see some major advantages and developing for us at Famous through this additional support.

One is the -- is with differentiated products.

For the first time, Famous Footwear is offering a variety of exclusive styles and color, and product assortments, companies such as Nike, Converse, K-Swiss, New Balance, Asics, Avia and Adidas.

We have coupled this expansive trend and current product assortment with a vast advertising effort that includes direct-mail, a customer rewards program, print, radio and television.

We firmly believe that this exclusive product is drawing additional traffic to our stores.

However, the real impact of this initiative is expected to be delivered at the beginning of spring 2004, as we intensify this effort with all of our vendors that we purchase from.

We are also experiencing preferred service.

Our vendors continue to recognize Famous as a preferred customer, especially during this past year, as they have seen the visual change in our store presentation, having remodeled 100 locations in the past 18 months, 500 by the end of this year and a total of 700 by the fiscal year of 2004 end.

That means that all of our strip and mall stores will have been remodeled by the end of next year.

We will also give a facelift to half of our 200 outlet stores.

To this end, some of our vendors have elected to assign footwear designers dedicated only to Famous.

We, in turn, have made office space available to them in order to speed up our timing with regards to this special product and quickness to the marketplace.

Finally, we put our buyer in a position to better leverage trend information brought to us by our wholesale organization.

Recognizing weekly selling trends that come anywhere from the mass merchants to the high-end department stores allows us to quickly adapt our current assortment and future orders to meet the ever-changing needs of today's fashion to value customer.

Being first to the retail marketplace has its obvious advantages.

In total, we are quite pleased with where we are today, having made considerable progress in our stores.

Our product is right, and our selling associates have a clear and enthusiastic understanding of the new Famous positioning.

While we know the environment continues to present some challenges, we believe our improved platform and proactive execution strategies will continue to yield positive results here at Famous Footwear.

At this time, I am going to turn the call over, I believe, to Andy Rosen for his comments.

Good afternoon, everyone.

I will take a few minutes to highlight our financial performance for the second-quarter.

Brown Shoe Company consolidated sales for the quarter totaled $458.4 million, compared to $456.3 million during the second-quarter of last year.

Most of our businesses generated revenue at or near last year, as topline gains were difficult to achieve in this environment.

Total operating income increased to $18.6 million, or 4.1% of sales, from $14.5 million, or 3.2% of sales, last year.

Gains in operating income were driven by a 200 basis point improvement in gross margin.

This was partially offset by investment spending throughout the Company, which caused SG&A to rise by approximately $6 million, or 110 basis points as a percent of sales.

Net income increased 61% to $11.6 million, compared to $7.2 million last year.

And earnings per share increased to 62 cents versus 40 cents in the year-ago quarter.

For the first half of fiscal 2003, net sales totaled $904.8 million, compared to $903 million during the first half of fiscal 2002.

Total operating income increased 14% to $34.2 million, or 3.8% of sales, compared to $29.9 million, or 3.3% of sales in the first half of last year.

Net income increased 39% to $20.6 million, compared to $14.8 million last year.

And diluted earnings per share increased to $1.11 compared to 83 cents during the first half of last year.

Breaking our second-quarter results down further, in the second-quarter at Famous Footwear, we reported sales of $268.9 million, compared to $270.8 million in the second-quarter last year.

We improved the consumer shopping experience with a better product and a more compelling store format.

Comp-store sales declined by 2.9% for the quarter.

In the quarter, we did reduce our reliance on promotional activity, given the reductions in consumer traffic we had estimated.

The chain also did an excellent job of expense management throughout the period.

This strategy proved successful, and operating income for Famous Footwear improved by 88%, to $12.9 million versus $6.9 million in the year-ago quarter.

During the quarter, we opened 12 stores and closed 16, and at the close of the quarter, Famous operated 909 stores.

Turning to wholesale -- for the second-quarter, sales rose by 2.8% to $137.9 million, compared to $134.2 million last year.

We achieved strong growth within our LifeStride, children's, men's and athletic businesses, which were offset by a slowing momentum within our women's private-label -- Naturalizer -- and weakness at our Canadian business.

As Ron mentioned previously, we do not believe that the small wholesale sales gain reflects the true excitement for our Naturalizer, LifeStride and Dr. Scholl's brands, especially given that our brands consistently were represented in the top 10 issues sold within department stores.

The tough environment held back sales growth, as stores tightened their inventories and pushed back new shipments.

On a positive note, our strong sell through rates are allowing us to achieve meaningful market share gains.

Gains in wholesale gross margins were also achieved, which helped subsidize the increased investment spending for our brands.

Taking this all into account, total operating income at wholesale declined by approximately 5%, to $12.6 million from $13.2 million last year.

At Naturalizer retail, our sales totaled $49.7 million, compared to $50.2 million in the second-quarter last year.

A positive indicator in this segment was the 4.5% comp-store sales gain we achieved during the quarter in our US stores.

As many of you are aware, we ended the second-quarter with fewer stores this year -- 213 -- versus last year -- 244 stores -- which accounts for the decline in total sales at Naturalizer.

Our Canadian Naturalizer stores reported same-store sales declined 1%, due to heavy end of season clearance sales.

Our Canadian chain operated 173 stores at the end of the quarter, compared to 168 at the same time last year.

As a result of the weakness in our Canadian stores, operating earnings for the Naturalizer retail segment declined from breakeven last year to a loss of $1 million this quarter.

Interest expense for the Corporation totaled $2.5 million in the second-quarter, compared to $3 million last year.

The reduction in interest expense was attributed to lower average borrowings.

Other income totaled $129,000, compared to other expense of $1.3 million in last year's second-quarter, primarily due to environmental costs last year.

The Company ended the quarter with a strong balance sheet.

Cash rose by approximately $10 million, to $50.4 million from $40.5 million in the prior period.

Total inventory levels at the end of the second-quarter were $417.7 million, representing a 2% increase from $410.2 million in the prior year quarter.

Importantly, inventories remain clean and current, and drive the type of gross margin improvement we continue to achieve.

Total debt was reduced by approximately $37.2 million to $132.5 million, compared to $169.7 million in the second-quarter of last year.

And debt to total capitalization improved to 29.2%, from 38.8% at quarter end last year, and compared to 34% at the end of 2002.

Year-to-date, CapEx has totaled $16.1 million, and we continue to estimate CapEx for fiscal 2003 in the range of $33-$35 million.

As to our forward guidance, Brown Shoe is reiterating its estimate of fiscal 2003 earnings per share of $2.75, which compares favorably to fiscal 2002 earnings per share of $2.52, remembering 2002 included a 7 cent recovery.

This guidance is predicated on the following assumptions -- that famous footwear will continue the low single digit positive store-for-store retell performance it currently is achieving with early back-to-school business, but, in anticipation of a highly promotional marketplace; that the ability to generate same-store sales gains in the second half without increased marketing spending will be difficult; therefore, we expect Famous Footwear to increase marketing dollars to better participate in the increased traffic flow that develops with back-to-school and holiday seasons.

As a result, increased marketing expenses, coupled with increased store operating costs, will increase SG&A for the second half of 2003 versus the year ago period; and finally, that wholesale operating earnings will be up versus last year for the second half, and we expect margins to be strong.

This earnings increase is expected despite difficult comparisons versus the fourth quarter of 2002, when concerns about labor issues at West Coast ports caused some retailers to accelerate receipts.

So, in summary -- as we look at our third-quarter, we now estimate earnings per share will be in the range of $1.00-$1.10, versus $1.18 last year.

Fourth quarter is estimated to be up moderately versus last year.

In conclusion, increased investment spending to capitalize on the opportunity we have at Famous Footwear is expected to offset our strengthening business at wholesale.

We believe these investments in our Famous chain are timely and likely to result in a positive shopping experience for our customers, strengthening consumer preference and a reversal of declining traffic.

Accordingly, and as we have previously stated, this reconfirms our full year guidance at $2.75.

Let me add -- we would have loved to take guidance up after a great quarter like this, but we believe continuing our investments in our marketing and brand building activities is just crucial and vital to our ability to achieve sustainable long-term growth, especially given the tremendous amount of traffic that will be driven to our stores during this latter part of the year; and therefore, we believe that deviating from the plan is not appropriate at this time.

We believe it is a marathon, not a race.

We have talked about this before.

With that said, you know that you can count on us to manage the business as astutely and proactively in the second half as we have in the first.

Sorry, Andy.

I just think it is important that you understand we are in this for the right reasons for the long-term.

We are going to do the right thing as we build this company.

Why don't I -- if you don't mind Andy -- why don't we turn it over to the operator and start with questions.

(Operator Instructions) We’ll take our first question from John Shanley with Wells Fargo.

Good afternoon, and congratulations on a very impressive quarter guys.

Joe, congratulations particularly to you on Famous Footwear, it looks like you’ve really started to turn it around.

Joe, I wonder if you can take us into the back-to-school season a little bit?

Can you give us an indication of whether you are on plan, or does it look like it's more robust or about what you expected for the back-to-school season?

And maybe some indication of what products seem to be doing particularly well?

Let's say according to our plan -- other than our little power outage -- our business has been a little more robust than we had originally planned at the beginning of the year.

So that we have been extremely pleased with, and as we got through Friday and part of Saturday, it returned back to being robust again.

So it's nice coming out of the chute early when you are facing some of your biggest weeks yet to come.

Product-wise, it continues to be along the same lines that we have been with.

I won't go over what I consider the Junior Brown business -- which continues to be extremely strong, along with our wholesale divisions that we do business with; that has been strong and continues to be.

Athletic gains a lot more momentum, it becomes about 60% of our business during back-to-school.

The performance of a K-Swiss, performance of a Converse has been absolutely stunning.

We continue a very strong base with our New Balance business at the current timeframe, and we have had a resurgence of our Nike business, again, through some products that we have been fortunate enough to bring in starting at the end of June.

And those 4 athletic people right now -- even though we have seen a nice increase in each one of the athletic companies we deal with -- those 4 seem to be leading the pack for us right now, and had performance (indiscernible) nicely over the last -- especially over the last three weeks.

And that's considerably different than what you experienced for most of Q2?

Yes it is.

It has been a dramatic turnaround, really starting about the last week in July and has continued through August.

I think a lot of that really was driven more so by a lot of new product we delivered in June and July, which was a lot more exciting than what was delivered in the first quarter and beginning of the second.

Do you--got a pop due to the child tax credit and some of the abatement on the sales tax in certain states, like --?

We did.

I think (indiscernible) you never know what type of response that you get with the rebate checks; you always anticipate a positive response in that, but also the tax-free states that we had helped to get us out of the chute very nicely.

I think what was just as important, even non tax-free states showed small increases prior to back-to-school really kicking in.

So at least to this point, we have been extremely pleased with our business in August.

Joe or Ron -- walk us through a little more on this increased spending for Famous in the back half of the year.

I am not sure I understand exactly how much of this is going to be aimed at increased advertising and sales promotion, and how much of it may be involved in an acceleration of the store modernization program.

Is one factor going to be more important than the other?

I think the way I look at it is we are really focusing on putting more effort against improving the customer experience when they are shopping Famous Footwear.

And to your point, there's a variety of mix there; and clearly, we continue to believe and see when we get her back, she is buying more.

So the more that we can do to enhance that experience -- we think that a lot of that effort is in the store, through both visual presentation and store experience with our sales associates and customers.

And that goes all the way back to improvement in our systems programs that has enabled us to better merchandise the stores geographically and there, so I think it is a big element there.

We have got significant, continued investment in that store base.

I think Joe touched on this -- as we go through the remainder of improving the store remodels and work through there -- so it's marketing; it has some elements of advertising, some elements of in-store.

And significantly -- I think that Andy said our expense base is up some 110 basis points over (indiscernible).

So again, I think that it is just the building of that expense base, and then as we leverage that with getting customers back in the store as we go forward, that will begin to turn over to where we are getting positive leverage.

So if I had to summarize it, I could say that it is capital expenditures for physical elements, rather than marketing elements, that is going to drive the increase?

Is that a fair statement?

I think that is fair.

I think it's a little bit of both.

Is there one more than the other?

I would say that facilities cost will probably drive it more than marketing, but they both make up the gain.

Ron, on the wholesale front -- can you give me an idea of why LifeStride seems to continue to outperform Naturalizer?

It did last quarter and seems to be doing it again this quarter.

Is it the price points, the styling content, the channel of the distribution -- what's happening there?

Yes.

I think all three.

Let's make sure we put on level fields.

I think the Naturalizer brand has significantly more presence, so we are not starting from an equal basis of growth.

Comparatively, LifeStride is growing at a significantly greater rate.

And it's because we are able to get greater penetration on the sales floor, due to having just clearly exceptional sell throughs of the LifeStride brand.

I believe that it is driven by two key elements.

The first element, and probably most important, is we have products she wants.

And if you translate that, that means we are more casual and more contemporary than we were, say, 12-18 months ago.

And that is driving the customer into our stores.

And when she is there, LifeStride is just an incredible value today.

The quality of footwear, styles (indiscernible) for that consumer base is where we're picking up market share and working through that.

Again, Naturalizer market share actually grew in the quarter again, and I think that as we properly account Naturalizer and you look through the spring season and the associated cost with getting ourselves in the right inventory position for the fall, we didn't get the sales increases out of the spring that we had expected, and that really goes back to the slow early spring developments and work through that.

I think we mentioned before that almost every major department store we have saw near double-digit growth with Naturalizer for last six months and the last quarter.

We have a couple of accounts that we had to make sure we were in position to go forward in the fall, and we have done that, and our order position in Naturalizer is actually up.

I forget the exact number. 5%-6%.

Of course, the LifeStride order position is significantly greater than that, and then added to that is that the original Dr. Scholl's launch for fall here is too early to get a read -- at least where we are at, it's about 98 degrees outside right now, so it is not exactly conducive to fall shoes -- but we are pretty confident that all of our retail partners are with us on this and I think we will have good distribution presence.

Does LifeStride sell the majority of its products into department stores, or are they in other channels of distribution?

The vast majority is at the major department stores.

It would be Dillards, May Company, Saks Inc. -- those type of places with less distribution in Federated.

So that's where that --

Can you give us an update on the Denver lawsuit?

Any developments, any new changes, in terms of the status of that action?

The short answer is I don't believe there's any changes.

Trial starts about a week after Labor Day, and we are diligently preparing.

But nothing to report at this point.

Steve Martin with Slater Capital Management.

With respect to the investment spending for the third quarter, is that your worst case number, and how would you match that up against the sales assumption?

I think that we were pretty clear on the guidance here, because we have worked this very thoughtfully.

We have built in about a 1.5%-2.5% store for store increase in the second half of the year.

We just announced that, I think, for the quarter -- the second quarter, we were down close to 4% or something like that in store for store -- 2.9%, Andy corrects me.

So we think that's a pretty dramatic improvement and increase, and we have built plants around that and the attainment of that.

We think that's pretty aggressive, but we think we are up to the task, given -- particularly given the success we are seeing with the Famous Footwear customer.

On the other side, we had -- and we have talked about this going all the way back to probably a year ago now -- we began investment spending in Famous Footwear stores, in the remodel process, in our inventory management system and in our brand building and talent -- which is also a significant component of that -- and we continue down that path.

We see no reason to deviate from that plan, and I think that obviously, greater sales success will materially improve the outlook.

But I think that it's early to -- we have got to deliver the whole second half, not just a few good weeks.

Steve Martin;

Joe, what are you seeing in average selling price, in average transactions and things like that?

The average selling price is down slightly.

There's good news and there's bad news, and I would say it is down slightly.

Two categories are really driving that.

One is the amount of sandal business we are doing in August -- obviously we didn't have a spring -- and our sandal business is showing tremendous increases.

You are looking at 30%, 40% increases in sandals.

But that average sale has come down versus last year.

Some larger programs in the canvas areas, especially with Chuck Taylors have been -- it was just a huge program.

But again, those price points are in around $30.

So that has brought down the average sale -- but probably the positive point is that it has risen our rate of our margin significantly.

So our average sale isn't down because of promotion, it's really down because of our mix, but we are making a higher margin.

I hope that answers your question.

But how has the trend been the last 3-4 months?

Do you see getting -- is it possible or do you see getting to a flat ASP, or are we going to continue to see a small decrease?

We don't anticipate a decrease; in fact, we anticipate a small increase in our average sale as we go into third and fourth quarter.

With respect to the business with Payless -- and I know things have been tough for them and you (indiscernible) first cost business for them -- how much is that down year-over-year, and what did that cost you in the quarter?

We won't comment on what individual an customer is doing.

It's not been our (indiscernible) to do that.

Clearly, the Payless business, as has been reported, is difficult.

And I think that as we look at our total business, we are very confident and very pleased with the nature of our retail and wholesale platform, which -- through its breadth of opportunity -- gives us the ability to go where the customer is and to build our business to where that greatest opportunity is.

And that's really where we concentrate on.

I will also tell you that it has always been one of our great strengths, is we really feel we are a terrific partner with our retail partners, if you will, in that we have worked with them and through these phases of business.

So that as the business prospects improve, our prospects improve with their success.

So that's my perspective on it.

We all know that their business has been tough.

At what point do you see that, from your perspective, getting better, flat year-over-year, up year-over-year?

Or is it just going to continue to be negative year-over-year?

I think their business flow -- our business tends to flow with their business, and we are working hard to build programs that can help them be successful.

But I just can't -- you have got to ask them where they think their business prospects are.

I think that is hard for me to --

Andy, can you give us some guidance on where interest expense is going to be?

Now that your balance sheet is clean, or a lot cleaner than it was, what are you thinking about your balance sheet, shares, debt, etc.?

A couple of questions there Steve.

I think we generated (indiscernible) of savings in the quarter at 2.5 versus 3, and I think you will see those sorts of improvements be sustained in the last 2 quarters.

It's a function -- to some degree it is a function of where rates are as well.

What about your outstanding balances?

Our outstanding debts?

In other words, your debt balances going into the back half of the year?

It's a function of the seasonality of our inventory, so as we brought in lots of shoes and merchandise for back-to-school, those payables will be coming due.

So I think from where we are now, you'll see debt rise, but rise slightly, as we pay off those payables.

You are talking $5-$10 million increase, maybe something like that.

Alright, thanks a lot.

There are no further questions at this time.

Mr. Fromm, I will turn it back over to you for any additional or closing remarks.

Terrific.

In closing, we feel real good about delivering a great quarter.

We are working hard to deliver a great year, as well.

Our brands are more vibrant than they have been in recent history, and we are pleased to see momentum starting to build again at Famous Footwear.

We think this positions us very well, even as the environment certainly remains uncertain.

Thanks for joining us.

We will talk to you again at the next quarter.

Thank you.

That does conclude today's conference.

We thank you for your participation.