Caleres Inc (CAL) 2003 Q3 法說會逐字稿

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

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

At this time, all participants are in a listen-only mode.

Then we will hold a question-and-answer session and instructions will follow at that time.

For assistance during the call, (OPERATOR INSTRUCTIONS) 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 historical results or from any future results expressed or implied by forward-looking statements.

Factors that could cause actual results to differ materially include those listed in our press release issued this morning and available on our 8-K, filed prior to this call, and other 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.

The Company does not undertake any obligation or plan to update these forward-looking statements even though a situation may change.

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

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

Please go ahead, Sir.

Good morning.

Thank you for joining us to discuss our third-quarter fiscal results.

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

Following my opening remarks, I will turn the call over to Joe to highlight Famous Footwear's third-quarter operating performance and provide an update as to our current strategies and expected drivers of our future performance there at Famous.

Then Andy will cover our financial performance and future guidance.

And we will certainly take your questions.

We're very pleased with our third-quarter results.

More importantly, we believe they demonstrate the powerful platform that we have created and are continuing to implement for our wholesale brands and Famous Footwear stores.

The third-quarter results reflected a 1.5 percent increase in sales to $493 million, and a 0.8 percent increase in net earnings to $21.2 million, both versus the third quarter last year.

This translated into diluted earnings per share of $1.13, which was above our expectations of $1 to $1.10.

We also believe these results demonstrate the ongoing success of our business strategy, including the great progress we have made in raising our product margins across Brown Shoe.

Our diversified brand and channel strategies served us well during the quarter, allowing us to increase our growth potential while limiting risk.

It also feels good to deliver these results during a period that can best described as significant investment in our stores, our brands, and our talent base.

During the quarter, we continued to progress toward achieving the goals we set at the beginning of the year.

We capitalized on the increasing momentum in our wholesale division with our wholesale brands.

This enabled us to report a 2.9 percent sales gain for our flagship Naturalizer brand, an improving trend from the second quarter.

We also recorded a strong 18.3 percent sales gain in our LifeStride division.

We are also pleased with sales from the new brands we have added to our fold, especially Carlos by Carlos Santana and Original Dr. Scholl's.

Most notably, we recorded a strong back-to-school selling season at our largest division, Famous Footwear.

All along, we have said that the initiatives we implanted to (ph) expected to improve our product offerings and revitalize our store base would bear fruit during the third quarter and we're extremely pleased to see that they did.

We also continued to progress toward reaching our goals of enhancing brand preference and the in-store shopping experience.

We expect the investments we are making will allow us to continue gaining market share, providing us with a platform to raise our operating margins over time.

Our balance sheet continued to strengthen.

We generated strong cash flow, reduced our inventory, and lowered our debt-to-cap ratio.

As we look ahead, we feel positive about our business, especially given the increasing importance of our Famous Footwear chain, and the preference we're building for our wholesale brands with the consumer.

For Famous Footwear, again, except for traffic, key metrics for this business are positive.

And Joe will share with you shortly, we believe the product we have in our stores and the new deliveries that we are expecting, especially in 2004, for brands like Adidas, Nike, and New Balance, Converse and K-Swiss, are becoming a strong point of differentiation for us.

They also become a great marketing vehicle to drive increased traffic into our stores.

Also, our women's fashion business has been strong all year.

We are targeting a fashion value customer, giving her a great assortment of styles for herself and her teenage daughter.

Famous Footwear is no longer a low-priced footwear chain.

We offer the top brands at exceptional value.

Most gratifying for us is that consumers have responded to the many changes we have made.

Turning to Naturalizer and LifeStride, here, our sales momentum continued to generate market share gains.

We attribute this to our ability to consistently deliver trend-right, fashion-right, high-quality footwear.

Our retail partners are achieving sales gains with both brands, which is allowing us to increase the penetration of our styles onto footwear floors.

The best indicator of our future performance is that our order backlog for these brands is up 7 percent for Naturalizer and 16 percent for LifeStride from prior years.

In terms of our market share for these brands, we are gaining in an otherwise difficult environment.

To this point, according to NPD Group, year-to-date Naturalizer has increased its share of women's fashion footwear in the U.S. department store channel to 4.8 percent from 4.5 percent a year ago.

And LifeStride has increased its market share to 2.4 percent share from 2 percent.

This is significant accomplishment given that year-to-date women's fashion footwear in the department store channel shows a decline of 4.4 percent.

Turning to our expanded branded offerings, our Carlos by Carlos Santana brand, while still small and not yet profitable, shows great promise.

This niche brand continues to increase its penetration within existing doors, thus allowing us for better floor presentation, and its increasing distribution as retailers and consumers like what they see.

Also, our introduction of closed-up footwear under the Original Dr. Scholl's brand was well-received, including strong full price selling over the fall season.

We are certainly excited about the potential for this brand and believe this recent success has us well positioned as an all year brand.

We are heading into our seasonally strong period for selling Dr. Scholl's.

We feel great about the brand, and the offerings we have this spring.

In children's, our business was down this quarter, primarily at the mass.

We continue to be pleased with the growth of Spider-Man, as little boys seem to really identify with this superhero, and we expect its strength to continue into next spring.

Right now, we are delivering footwear that coincides with holiday movies, including Cat in the Hat and Looney Tunes character shoes, boots and slippers.

As you can hopefully tell, we are quite pleased with the direction we're headed, and we feel good about our ability to maintain our annual guidance during a difficult year of retail.

Substantially all of our businesses and brands are vibrant, and we are gaining market share.

And, as you read in our press release, we are taking steps to revitalize our Canadian Naturalizer business.

Most importantly, we are on the road to building brand preference for Famous Footwear, Naturalizer, and LifeStride.

We expect continued benefits from our impact initiatives, as we run the business more efficiently and effectively, leading to strong cash flow, improved freshness (indiscernible) our inventory and lower debt.

And, we are only in the initial stages of leveraging the opportunities afforded us by our combined wholesale and retail model in strengthening operating platform.

I will turn the call over to Joe Wood now so he can comment on our Famous Footwear business.

Thank you, Ron.

We are very pleased with our third-quarter performance, which included a strengthening in our sales during the back-to-school period in August and September.

It was rewarding to reap the benefits of our store renovations, our new product assortments and our new marketing initiatives, all as we received an additional benefit, an increase in sales in the markets where we spent incremental dollars on TV and radio.

Our improvement is best demonstrated, I think, by key metrics we track.

Starting with traffic, which is captured through our electronic counters.

You know, while it's still running down versus last year, it is showing definite signs of improvement by quarter.

We are seeing increases in the number of pairs per transaction and a continuing increase in our purchase ratios.

Our inventory at quarter-end was on plan, and below last year by $9 million.

And our (indiscernible) inventory was at a historic low, which obviously indicates the freshness of our product offering.

We have been very pleased to have produced these results while continuing to increase our gross margin.

It's also encouraging that we deliver this increase while continuing our investment in our stores and our markets.

Regarding our business highlights during the quarter, what pleased us was the nice rebound in athletics during the back-to-school period.

Our emphasis here was focused on featuring our exclusive product, both in advertising and in our in-store presentation.

Our junior women's business continued to be a highlight for us, attracting the female consumer from the teenage years to those well into their late 30s.

This category continued its double-digit gains from the first half of the year.

Our men's and children's business were slightly behind plan and slightly behind last year's numbers.

We view these two categories as real opportunities as we plan next year.

The favorable weather we experienced in September and October continued the momentum for certain warm weather categories, such as open-toed footwear, canvas athletics and sandals.

This had both a positive and a negative effect.

Positive in the fact that it continued to drive the hot back-to-school businesses, but negative from the standpoint that it lowered our average price points in October, as you would expect boots and other cool weather footwear carrying higher retails to be in selling in early fall.

Despite the October decline, we ended the quarter up 0.7 percent on same-store sales comp basis.

We were very pleased with that.

As we look forward, we are just beginning to see a change in weather in parts of the country, as we transition our business from white to brown.

Our expectations is that the environment will remain promotional through the balance of the year.

However, we are not increasing the number of promotions we have planned for Thanksgiving and the holiday period.

Instead, we believe that our current strategic positioning in regards to our store environment, presentation, pricing, and trend-right product will continue the positive momentum that began for us this past quarter.

And we're just as excited about the potential of Famous Footwear heading into next year.

A few highlights of our initiatives that we believe will help us in 2004 include the completion of our remodel program.

By the end of fiscal '04, we expect all of our 700 stores slated for remodel to be completed.

Also, we will develop the new initiatives that we believe further enhances our remodel efforts.

This is the introduction of our next-generation store format.

Currently, we have remodeled 7 test stores in this new format, that has been updated with a new floor, fixture layout, seating, lighting, colors, and an assortment that really takes Famous Footwear to another level.

Our commitment to our female customer is giving her a shopping experience that clearly differentiates Famous from others.

We're very excited about this pilot program and it will become our new format as we enter the first quarter of next year.

And we think most importantly, our product introductions, including an expanded assortment of exclusive product from Nike, New Balance, Adidas and Converse will represent a more significant part of our business.

As I am sure you are aware, these brands do drive additional traffic and sales to Famous Footwear.

At this time, I would like to turn the call over to Andy Rosen to review our financials.

Thank you, Joe.

Good morning, everyone.

Brown Shoe Company consolidated sales for the third quarter totaled $493.4 million compared to 468.3 million during the third quarter last year.

Net sales rose by 1.5 percent, primarily due to gains at Famous Footwear.

Total operating profit increased to $32.4 million, or 6.6 percent of sales, from $31.5 million, or 6.5 percent of sales, last year.

Gains in operating income were driven by a 70 basis point improvement in gross margin.

This was partially offset by investment spending throughout the Company, which caused SG&A to rise by approximately 50 basis points as a percent of sales.

Net earnings increased $21.2 million, compared to $21 million flat last year.

Diluted earnings per share totaled $1.13 on 18.7 million shares, compared to $1.18 on 17.8 million shares outstanding in the prior year.

For the first nine months of fiscal 2003, consolidated net sales totaled 1.4 billion, essentially even with the prior year period.

Total operating earnings increased 12 percent to 66.4 million, or 4.7 percent of sales, compared to 59.3 million, or 4.3 percent of sales, in the first nine months of last year.

Net earnings increased nearly 17 percent to $41.8 million compared to 35.8 million last year.

And, diluted earnings per share increased to $2.25 per share compared to $2.01.

Breaking our third-quarter results down further, Famous Footwear generated sales of 301.6 million, up 2.4 percent, compared to $294.5 million last year.

Our improved product offering, together with our back-to-school marketing, proved successful, resulting in the positive same-store sales achieved during the quarter.

We expanded our gross margin, which was partially offset by increased investment in our stores.

Even so, our third-quarter operating profit rose 3.7 percent faster than our rate of sales to $23.4 million compared to 22.6 million last year.

During the third quarter, we opened 19 stores at Famous and closed 20, and at the end of the year -- excuse me, at the end of the quarter, Famous Footwear operated 908 stores.

Turning to wholesale, for the third quarter, sales totaled $140.1 million compared to 140.8 million last year.

We achieved a solid performance within our Naturalizer, LifeStride and Dr. Scholl's businesses.

Declines, however, were experienced in our women's private-label and our children's businesses, and within our Canadian business.

Once again, the tough environment limited sales growth as retailers tightened their inventories.

On a positive note, our fall deliveries are performing well.

This coupled with improved expense leverage contributed to a 31.7 percent gain in wholesale operating income.

For the quarter, wholesale operating income totaled $15.4 million compared to 11.7 million in the third quarter last year.

At Naturalizer retail, our sales totaled 49.8 million compared to 49.9 million in the third quarter last year.

We did achieve positive comp store sales gains within our U.S. segment; however, total sales declined slightly as we operated 23 fewer stores in this year's third quarter.

Our Canadian Naturalizer stores benefited from a favorable Canadian dollar conversion rate, and reported increased sales for the quarter.

Same-store sales, however, declined 6.2 percent.

We continue to assess the Canadian division's operating platform as we work to achieve the product success we have created in the United States.

Our Canadian chain operated 173 stores at the end of the quarter, compared to 172 at the same time last year.

As a result of lower than planned sales in this consolidated Naturalizer retail segment, operating earnings declined from a $1.5 million profit to a loss of $166,000 this quarter.

The Company's interest expense totaled 2.3 million in the third quarter, compared to 2.8 million last year.

The reduction in interest expense was attributed to lower average borrowings, which declined by 15 percent.

Brown Shoe ended the quarter with a strong balance sheet.

Year-to-date cash flow from operating activities after capital expenditures exceeded $50 million, despite increased investment spending.

We also continue to maintain our strict inventory discipline.

At quarter end, inventory declined by 4.8 million to 376.6 million, from 381.4 million in the prior-year quarter.

Our inventories are current, on plan, and we are well-positioned for the holiday season.

Total debt declined by approximately 41 million to 119.5 million compared to 160.5 million at this time last year.

Debt to total capitalization improved to 25.8 percent from 35.8 percent last year, and 34 percent at the end of 2002.

CAPEX for the quarter totaled 5.5 million, and we now estimate CAPEX for fiscal 2003 at about 30 million.

Before I review our annual guidance, I would like to update you on the status of our Denver litigation.

We currently expect the Antolovich class action lawsuit regarding our Redfield site in Denver to conclude in late November or early December.

As we have stated in the past, we are vigorously contesting this lawsuit, believe we have a meritorious defense and believe the specified claims are without merit.

While we are not able to assess or estimate a loss or range of loss, if any, we do not believe these proceedings will have a material adverse effect on the Company's financial condition.

We do believe over time the truth and our record as a good corporate citizen will prove just that.

For a more complete description of this case, I refer you to our last 10-Q filed for our second quarter, ended August 2nd.

As to our forward guidance, we are reiterating our estimated diluted earnings per share for 2003 of $2.75, which compares favorably to fiscal earnings per share of $2.52 last year, remembering that last year included a 7 cent (ph) recovery in the fourth quarter from reserves provided in 2001.

Our fourth quarter earnings per share are estimated at 50 cents versus 51 cents in the year-ago period.

This guidance is predicated on a slightly positive same-store sales retail performance for the fourth quarter of 2003, as soft sales in the promotional marketplace of October are anticipated to continue.

We also believe our wholesale operating earnings will be flat in the fourth quarter, as difficult comparisons exist versus the fourth quarter of 2002, when concerns about labor issues at West Coast ports caused some retailers to accelerate receipts into the fourth quarter of 2002.

With that as an overview of our financial performance, I will now turn the call back to the operator and we will be pleased to take questions.

Thank you, Mr. Rosen.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) John Shanley with Wells Fargo.

I got a couple of questions for Joe, if I can, please.

Joe, are you seeing a change in terms of the core customer makeup of the Famous Footwear stores with all of the new products you just outlined that you're bringing into the store and the modernization effort.

Has that precipitated a different type of shopper, and if so, where had that shopper been frequenting before coming into Famous?

I don't think it really gets us a different shopper.

I think we have kept our core shopper.

I think our intent was, and it is starting to bear fruit now, that the woman who was coming in and shopping for here family before, whether it be her children or her husband, was purchasing there for them.

What she was not doing -- all of our research shows that (ph) she was not shopping for herself.

So, a lot of our gains have really come from the fact that she obviously feels extremely comfortable both with the environment and with the assortment to purchase for herself now, where she did not 12 months ago.

I think that's the big benefit that we're seeing, again, from our store presentation and our product.

For that woman's product line that you're now selling to your shoppers, is the gross margin attainment level that you're achieving in the woman's dress and dress casual shoe area, or the fashion products you mentioned, substantially better than your overall product offering, or is it just comparable to the product offerings?

That's a good point.

It has been very encouraging.

It has been much higher than other categories that we offer to consumers, so it has been a definite benefit -- it has been much higher.

Super.

Lastly, in terms of Famous, I wonder if you can kind give us a little bit of an overview of the athletic product lines that you mentioned that are exclusive.

About what percentage of your athletic offerings, Joe, are now either exclusive or a limited availability product versus -- for '04 versus what you may have had for the '03 selling season?

John, really exclusive product for us during '03 was relatively small, being in the neighborhood of maybe 5 percent.

We anticipate that that increasing to about 15 to 18 percent as we enter first quarter of next year -- first deliveries coming at the end of January for February.

So, it is going to be a dramatic increase in '04 compared to '03.

Again, as you know, the athletic industry, as we place future 7 and 8 months out, it is taking us that long to get into a position with (ph) our assortments.

We've had a lot of success with what we brought in in '03.

We are obviously just ramping that up into '04 and anticipate an exciting assortment compared to where we have been, and we have had success in the past.

So, that's why we're looking forward to '04.

Okay, great.

Either Ron or Andy, I had a question on the wholesale business, primarily the mass channel product offerings.

Where do you think your position is in terms of the products that you source for your mass retail customers or in terms of market share position versus the overall industry?

Are you gaining, staying the same, or changing any of your market positions in terms of the product that you source on either a first cost basis or direct basis that are sold in mass channels in the U.S.?

I think overall, we'd say that we are gaining market share in the wholesale segment against our competitors.

I think that it is somewhat account specific, and where we have some robust business.

But things like Dr. Scholl's and those elements continue to help drive that business and work through it.

I think that overall, our total market share is probably up slightly year-over-year.

I think, again, particularly when you look at the branded side of the business, our LifeStride and Naturalizer and Original Dr. Scholl's business, all have solid -- brought that wholesale business up to solid.

And of course, we continue to be the largest provider in the mass channel and our customer base there, from Target to Wal-Mart to Payless, all has -- we've got a lot of great programs there.

But, we also continue to see the challenges in the Payless business, and that effect on us.

Sidoti & Company, Mike Ryan (ph).

Good morning, guys.

Joe, I guess I just had a question for you.

More for Famous Footwear.

You guys obviously have done a lot of initiatives and investments in your marketing and in-store improvements in the third quarter.

I just wanted to see how that carried forward into the fourth quarter, especially with marketing for the holiday season.

Again, it's a process, and what we do is, as we have completed new markets and store renovations, we will pick up those key markets as we move in the fourth quarter.

This holiday we will pick up an additional three markets -- when I say three markets, three relatively large markets, and we will continue to add those markets with additional marketing dollars each quarter.

So it is a progression as each market is completely renovated.

I don't know if that answered your question.

Okay, yes.

I guess just any comments on the competitive landscape?

Have you seen any changes in the promotional activity?

You know, actually have seen less in October, and I won't go into what companies.

In some cases -- it is a mixed bag.

A few retailers have gotten more aggressive, but overall, as I take a look at retail companies that we follow in the month of October and so far in November, we have actually seen companies cut back on their buy-one, get one half in the promotional activity.

So, it will remain promotional, but I think a lot of retailers, as they came out of back-to-school, found that they could run their businesses without giving it away, will carry some of that same mentality in the fourth quarter.

So, I expect to be promotional;

I don't expect it to be a blood bath.

Steve Martin (ph) with Slater (ph) Asset Management.

Hi, guys.

A couple of questions.

A follow-up to John's.

We all understand the Payless business has been tough and I know you don't want to break it out and talk too much about it.

But can you tell us at least when the comparisons on that first cost private-label business begin to get easier?

We're all kind of hands off (multiple speakers).

Let me try a little bit, because I think that, again there are so many factors in the way of the businesses flowing today.

We continue to work with our retail partners to maximize the opportunities that are out there in that channel of distribution.

I think that -- first of all, I think the two largest elements that cause us to pause, because it is difficult to quantify and look at where the flow is, is the West Coast strike a year ago caused considerable changes in the timing of fourth quarter product last year and first quarter product last year, and we won't know that until we actually work our whole way through as we get into spring.

I just don't think we can give a good perspective on where that falls.

And I think a lot has to do with how good the retail business is, and how quickly people want to get back into business for spring, and I think we don't know that.

But we expect the West Coast strike moved up shipments last year, and so therefore, we would expect shipments to be less this year, and then how does that affect the flow as we go forward.

Ron, let me interrupt for a second.

When you get out beyond -- let's assume that all of those disruption issues are true.

When you get out beyond -- once you get beyond first quarter, we should be apples to apples again.

And then I will tell you that the second reason -- the second issue -- first is West Coast -- the second issue is, we as a company particularly, but we as the footwear business industry has continued to work significantly to reduce lead times and increase the flow of inventory.

And so with every major account, we at Brown have been building programs to improve the supply chain management side for our project impact initiatives sort of from a wholesale perspective, how we do more business with carrying less inventory for ourselves and for our partners.

And so the number of days advanced booking process is down and changing considerably.

I think that all of that gives us a picture of a different sense of timing than what we historically have.

And so, I think that we will continue to see significant business done in the mass channel of footwear.

I don't see that changing, and I think that we are going to continue to see that.

And I think we continue to expect Brown to participate and win in that channel of footwear, and that's why we work so hard on the children's division and the license opportunities, which is a huge driver of our first-cost business, and that business is our children's division.

I think that we continue to work hard to bring branded offerings into the mass channel, and partnership offerings with work we have done with the folks at Target and Wal-Mart and Payless.

So, it is just a very changing dynamic for us, one in which we are very excited about because we like the attitude of what's happening with the consumer and the business there, and I think that as we turn the corner, we would expect business to improve.

I think that any single account, that's their business, and we -- our perspective on that is we believe that one of our great strengths is being a great partner in good times and tough times, and we work diligently with those people to build the business.

So, I don't think I can give much more than that, Steve.

I think we're positive about the thing.

I don't think it is about immediate comparison year-to-year and quarter-to-quarter.

We got some flow, as flow works out through the first quarter.

But just quite frankly, it used to be we would be well into booking orders and flowing into the first quarter and second quarter next year, and that is just not how we're running the business, nor do we plan on running the business as we go forward.

Okay.

With all that said, and bringing down lead times and inventory levels to support the business, you have reduced your debt dramatically.

You've got a huge credit line against which you are not really using a lot.

So I have a couple of questions.

What are you going to do on the debt side of the balance sheet in terms of maybe reducing interest expense rates etc.?

You're clearly a much better credit today than you were a couple years ago.

And you have a huge availability that you're not tapping into, which you are obviously paying for.

So can you comment on that -- on the whole debt structure and what your current rates are versus last year.

I think our current rates -- I think our spread, obviously, is comparable to last year, a couple hundred basis points above LIBOR.

I think, Steve, we are going to be measured in how we structure the capital side of the business as we continue to evaluate our growth opportunities.

And so, I don't think you're going to see us reducing capacity.

We've got opportunity here to grow our wholesale platform, we think in a fairly robust way.

We've got an opportunity to grow Famous Footwear's platform as they continue to drive improving ROIs and become deserving of more and more capital.

I think you may see us term out longer opportunistically, but I don't think you're going to see us -- the carry cost of the line is not that significant.

I think we need that capacity as we think about how we are going to grow this business and start to drive meaningful increases.

We need to make investments in our infrastructure to do so, as we did this year, and while we don't have a budget for next year as yet, as we will next year.

Sam Poser (ph) with Mosaic Research.

Joe, the Thanksgiving holiday looks like -- from my impression, looks like it's going to be pretty good, but it looks like the selling of the rest of the holiday season may come really late, and your inventories are in really good shape.

Doesn't that put you in better position to be much less promotional?

Yes, we are.

Again, we will run the same promotions that we had last year, as far as the number of promotions.

But we re going to run them at margins that are acceptable to us and at a savings to the consumer, making the assumption that our product trends are correct.

But we won't be that promotional.

We are a retailer that has great value savings for the consumer.

Today's words, I think, the difference between promotional and great savings.

We are in great shape for fourth quarter.

The margins picked up 64 basis point margin and your SG&A was up 86.

Is that going to continue in that mode, or do think you're going to do more leverage in SG&A and do a little bit less in margin?

I think we still have opportunities to drive gross margin gains, as our focus on the asset base, and particularly inventories, continues to be central to our ability to run the business.

So I think that is possible.

I think where Joe is taking the business with respect to the fashion value customer and the exclusive products we're able to develop, out to break us out of the pack a little bit, and I would think that there is some opportunity for some margin expansion there.

I think on the SG&A side, it's a function of how quickly the sales come and to what extent we are able to exercise leverage with that base.

But, I would see us -- I don't see that SG&A expanding too significantly; but we still have some investments to make to grow the business and to reinforce the platform.

I can answer the question better after we have a budget constructed and put together for next year, and so I would like to defer on that until we work through the final details.

But, I think from a bottom-line perspective, you ought to expect over the next several years expansion and operating margin, and the budget will determine to what degree that is an increase in gross margin and how the SG&A base plays out there.

I'm not giving you any more of a definitive answer at this point, just because we do not have the budget completed yet.

But I would look for expanded operating margins over the next couple of years.

John Curty (ph) of Principal Global Investments.

Good morning.

I had a couple of questions on the Naturalizer Retail business.

This quarter's obviously quite a bit of a swing from last year and also for the nine-month results.

What is kind of the outlook for the fourth quarter and into next year, and if you could maybe elaborate a little bit on the types of initiatives that you're taking to try to improve results there.

We have a task force that is working on the Naturalizer retail business.

I will share a little with you, but I think we still have a lot of work that we're doing, and as we understand where that work is going to take us, we will keep you informed and let you know.

First of all, probably most importantly, we continue to do research around the consumer that helps us understand the essence of the Naturalizer brand, and what is the emotional connection we need to create to that Naturalizer customer.

And we need to understand what is going to be our process and methodology of getting more of those Naturalizer customers who have learned to prefer our brand into our stores.

We know that when we get the customer into our store, we're satisfying her better than we ever have.

And we continue to benefit from some of the marketing and relationship marketing that we have done over the course of time here.

We have also come to understand and learn that we need to work our Canadian retail operation and our domestic retail operation together, and we are in the process of pulling these teams together and having them work as one.

They just were developed as two separate models many years ago, and times have changed, particularly the Canadian marketplace post NAFTA three years -- or three or four years, has just changed with the way product is sourced and sold in the Canadian marketplace, and the amount of competition in the Canadian marketplace, of -- I believe one (indiscernible) we have is 4 or 500 more stores at the discount level in footwear.

So as we take a look at those things, we have built a series of initiatives to bring us to a retail operating platform that we think we will be successful with and continue to move forward with.

I think we have an expectation that to the fourth quarter and into next year, on the domestic Naturalizer side, we would expect to continue to see gains on a store-per-store basis.

I think on the Canadian side, we need to rationalize that store base and then integrate our marketing and programs.

That work, starting with some very robust research on the Canadian consumer, is being started and done, so we can understand the sameness and the differences between our two platforms up there.

So, we have a lot of work underway.

We think it is critical to the long-term future success of Naturalizer, the brand.

One of the things that clearly we believe we are benefiting as we built our core competencies around Naturalizer, the brand, not really giving strong consideration to retailer or wholesale, so working on the consumer of Naturalizer, what does she want and can we give her that special experience in any venue from our retail stores to our department stores.

Clearly, we would have liked to see more success in the Naturalizer retail business to date, and we are working on delivering that as we go into next year.

So, we will keep you updated as we make more decisions and let you know what is going on, but let's just -- suffice it to say we have a task force in place; they have been given some pretty clear instructions on how to attack this, and we believe that we have started that process and then we will continue to analyze and perform as we move forward.

As a follow-up, how many stores do you have in Canada?

175, I think roughly -- 173.

In terms of the store rationalization, would that be pretty much confined to Canada, because you've already done that through the U.S., haven't you?

I think we have done if considerably in the U.S.

I think we look at continuing to do the work on rationalization for the Naturalizer brand.

We have expanded that platform look to say, where should we have the best face of Naturalizer, whether it's in the United States or in Canada.

So, I think I would not say it is limited to Canada, but I think substantially that work has been done, as you said.

But I think we continue to look at how do we position Naturalizer retail stores across North America, if you will, to give us the right amount of cachet with the Naturalizer consumer and still leverage the distribution opportunity.

But it is more focused on how does that help us market the brand and deliver the essence of the brand in a unique way in our Naturalizer shops that is unavailable to us in department stores.

Steve Martin.

Share buybacks.

Last quarter, you did not buy back any shares.

Did you this quarter and what is your current thought on that?

No, we haven't and we do not have many thoughts on it.

Sam Poser.

Sam Poser.

It's been answered.

Thanks.

There are no further questions at this time.

I will now turn the conference back to Mr. Fromm for closing remarks.

Thanks again for joining us today.

In summary, we are pleased with the progress we're making in both improving our product and our shopping experience in our retail stores and developing preference in our wholesales brands.

Most importantly, our business is very healthy.

Our footwear looks great, our inventories are clean, we are well-positioned to drive additional market share gains as we enter the holiday season and into the first quarter.

We are truly excited about what is happening here at Brown.

We continue to believe that we can deliver the expectations we have laid out.

Have a great Thanksgiving, everybody, and we look forward to seeing many of you in a couple of weeks here at the New York FANNY (ph) Shoe Show.

That does conclude today's conference.

We thank you for your participation.

You may now disconnect.