Caleres Inc (CAL) 2004 Q1 法說會逐字稿

Welcome to the Brown Shoe Company first-quarter 2004 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, and we will hold a question-and-answer session and instructions will follow at that time. (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 these 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 its 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 the prior express written authorization of the Brown Shoe Company.

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

Please go ahead, sir.

Good morning.

Thank you for joining us to discuss our first quarter fiscal 2004 results.

With me today are Diane Sullivan, our President;

Andy Rosen, our Chief Financial Officer; and Joe Wood, the President of Famous Footwear.

Andy and I are joining you from Dongguan, China, where we have been visiting our key suppliers as well as getting ready for the dedication of our new sourcing and technical center facility that is located in Dongguan.

You know, this center, we will talk a little bit about this morning, which has allowed us to consolidate several of our sourcing offices into a significant complex, as well, and maybe even more importantly, is a critical step in the supporting of our Project ExCEL.

Following my opening remarks, I will turn the call over to Diane, who will provide additional insight into our performance during the quarter and update you as to our current initiatives.

Joe will highlight Famous Footwear's performance, and Andy will cover our financial performance and forward guidance.

Then we will open up the call for question and answer session.

I would be remiss if I did not make a couple remarks -- as I have been on this Far East trip, I continue to be significantly impressed by the improvement in the infrastructure in the Far East, but mostly I'm impressed with the partnerships that we have created with our supplier network, both at retail and wholesale.

You know, we've talked to you all quite a bit about one of our core competencies being a very knowledgeable and sharing partner.

And I think, without any hesitation, this trip has validated that progress, which is going to allow us to continue to build differentiated product and continued to allow us to use our unique platform to differentiate us in the marketplace.

Having said that, as you know, I am very pleased with the results that we have in the first quarter.

Sales rose by 10 percent to $492 million and diluted earnings per share totaled 45 cents, including 11 cents for the costs of the Bass integration.

Our results reflect a strengthening of our wholesale brands and solid performance at Famous Footwear.

Our balance sheet remains strong and even with our newly-acquired Bass footwear license, our inventory was reduced from last year.

In fact, at Famous Footwear inventories were down six percent on a square foot basis.

Importantly, we moved forward on our key strategic goals.

First, the repositioning of Famous Footwear.

In the first quarter, we saw measurable progress from these efforts, and as you know, we have invested in talent, marketing, improved merchandising and systems, and our stores and vendor partnerships continue to be a key asset.

Sales were up 4 percent and operating income grew 17 percent, with operating margins rising to 4.6 percent from 4.1 percent last year.

We believe we are poised to build upon the current success as we approach the summer and the important back-to-school season.

And also we believe that there is substantial growth yet to be realized for this chain in the future.

Second, our Bass assimilation is nearly complete.

We remain excited by this opportunity.

We expect to revitalize and grow this brand.

We know this is an emerging core competency of our Company.

During the quarter, we retained the talent that was desired.

We integrated our systems and consolidated distribution and infrastructure, and for the year, we remain on target to achieve the 60 to $70 million in Bass sales.

And longer-term, we continue to believe that Bass offers significant expansion potential.

Third, we continue to invest in our platform.

Here, we have pushed forward on our Project ExCEL initiative.

This investment is expected to provide us with material benefits in 2006 and beyond.

It will be instrumental in increasing our ability to be trend-right, our speed to market, and reducing our product costs.

Fourth, our strategic marketing programs continue to be a very strong focus for us.

We are intently pursuing enhancement of our brand preference capabilities across the organization, from Famous Footwear to Naturalizer, LifeStride to Dr. Scholl's, and we have added talent in these areas.

We've invested in more consumer research and we are building more targeted marketing campaigns.

We are also maximizing the strength of our unique wholesale and retail platform.

The knowledge we gain from this unique operating model sets us apart from our peers and offers us a true competitive advantage.

I think the first quarter gets us a little peek at what that advantage can really bring to us.

Now I will turn the call over to Diane for some further comments.

Thanks, Ron, and good morning, everyone.

In total, our wholesale brands met expectations for the quarter.

We achieved sales increases within our LifeStride, Dr. Scholl's, Carlos, and private-label segments.

And with the addition of Bass, our first quarter sales were 21.7 percent ahead of last year.

These results were assisted by a shift in sandal shipment dates to the first quarter from the second quarter for certain of our key retailers.

As we know, the footwear industry is in the midst of a new fashion cycle that is colorful and dressy, and this has led to great performance in the Better and Bridge markets.

Our expectation is that for this newness, we will see it manifest itself into a strengthening business at the moderate level this fall.

This trend really benefited our Carlos brand this spring, and places us in a good position going forward, especially given the capabilities and the strength of our Naturalizer and LifeStride brands.

The best indicator of these capabilities and the current business momentum is that our backlog of unshipped orders is up 14 percent from the prior year.

Turning to some of our brands individually.

While Naturalizer sales were about even with the first quarter last year, we enjoyed solid selling at retail.

To this point during the most recent period, which includes February and March, Naturalizer moved to the number two spot in U.S. department stores for women's fashion footwear, according to NPD.

This compares to the number eight spot we held just a few years ago.

We are very pleased with the direction of the Naturalizer line heading into fall, reflecting our efforts to expand and balance the line's tailored and dress components.

Also a positive is that our backlog of unshipped orders is up mid single digits compared to last year.

LifeStride sales rose 14 percent in the quarter, which was incredibly impressive given that we were up against a 32 percent sales gain in the first quarter of 2003.

Retail sell-through rates were strong across the board for LifeStride, and they were particularly robust with any of our dressy styles.

And now as we head into summer, LifeStride is expected to benefit from the infusion of color in all of its sandalized offerings.

Original Dr. Scholl's enjoyed strong sales increases over the period as well.

Here, we are benefiting from the great support from many of our retail partners.

As better department stores recognize the true potential of this brand, they are giving us premium display space on the shoe floor.

Indeed, for spring, 60 percent of the line has moved beyond the original sandal.

Our new styles feature more updated fashion, with higher heels and wedges, color and jeweled ornamentation, just a great fashion look overall.

We really believe that this validates that Dr. Scholl's is truly a lifestyle brand capable of meeting consumers' varying footwear needs.

We are positioning Original Dr. Scholl's in top doors, and going forward, our focus will be on increasing the penetration that we have within these accounts and within these doors.

In our children's business, we posted a sales decline of 9 percent during the quarter, due in part to a contraction in the market and the lack of fresh new properties in our character footwear business.

Notwithstanding this, the children's business continues to represent a solid opportunity for us.

We remain a strong performer in this market, and are currently evaluating a number of exciting new business and license opportunities for this segment of our business.

Turning to our newest addition, Bass, our Bass business was right in line with our plans during the quarter, delivering about $15 million in sales.

As you know, we finalized our licensing agreement in February of this year, and our goal in the quarter was to transition the Bass operation to our headquarters by relocating people and integrating systems, and we are very pleased to be nearly complete, while maintaining the momentum in the business.

We continue to believe that Bass complements our branded portfolio with its portrayal of this easy American lifestyle, and it certainly presents us with another growth vehicle.

To this point, we expect to build upon our current successes in men's and we are all working diligently to build a meaningful presence in our women's business.

One of our most recent strategic initiatives focuses on strengthening our Naturalizer retail platform.

As you know, we are transitioning from domestically produced footwear in Canada to use Brown Shoe's worldwide sourcing to deliver a higher grade product to the Canadian market at better margins.

In March, we combined our U.S. and Canadian organizations under the leadership of Byron Norfleet with the charge of unifying the Naturalizer brand across North America.

We fully expect to realize these synergies as we integrate these organizations and look to achieve improved performance for the retail chains in the fall and into next year.

In the U.S., we continue to believe that the knowledge that we gain through our testing in our stores and brand awareness achieved through our Naturalizer retail channel is significant, and this allowed for the increased strength of the brand and our styles through our wholesale accounts.

This led to a 4.1 percent same-store sales gain in the quarter.

In the Famous Footwear, we feel very good about our first quarter financial accomplishments, and are equally excited by the opportunity that our improved operating model presents going forward.

While we are midway through the repositioning process, and we have lots of work yet to do, the consumer has responded well to the many changes we have made at Famous.

Our stores look great.

The new products (technical difficulty) well for the back-to-school period, and as many of you know, we have focused over the past two years on changing our positioning and marketing message, our store presentation as well as our merchandise mix, and we are pleased with the results to date.

But as I said, we are still early in the process, but we are very encouraged.

In total, the quarter marked a solid start to the year, and as we look ahead, we expect to continue to capitalize on the momentum for our many footwear brands and offerings at both wholesale and retail.

And now, I will turn the call over to Joe Wood.

Thanks, Diane, and good morning, everyone.

I am pleased to report a strong quarterly performance at Famous Footwear.

Overall sales grew 4.2 percent to $272.1 million and same-store sales were better than expected, rising 2.6 percent.

Operating leverage from same-store sales growth, along with improvements in our gross margin, enabled operating income to increase by 17 percent to $12.4 million or 4.6 percent of sales.

Today, our store base is in the best shape it has been in in many years and our merchandise mix is trend-current.

As a result of these efforts, we are starting to gain recognition from our new target customer, who tends to purchase multiple pairs of shoes at higher retails.

For the first time since our new team took reins at Famous, we saw increases in customer traffic levels while our conversion rates continue to rise.

This, together with solid gross margins, contributed to our double-digit gain in operating income for the quarter.

Further, I think the lessons we learned while working to reposition our women's business is now translating very well for our men's and children's businesses.

We were pleased that each of our categories posted positive comparisons during the first quarter.

Overall, our business is shaping up very nicely and we are starting to gain traction in the marketplace.

Highlights of the quarter included positive performances for each of our store formats, including the power strip centers, mall-based and our outlet locations.

With better product and a significant percentage of our stores remodeled, we continue to invest more advertising dollars to build awareness and drive additional gains in traffic and sales.

In light of these promising results to date, we are encouraged that ongoing support from our marketing efforts will help solidify traffic improvement trends as the year progresses.

I think our results demonstrate the upside opportunities afforded by our current operating model and we expect to build upon this positive momentum as we go forward.

On a category basis, we are pleased to report strength across the board, which was led by athletics.

We are in the midst of a meaningful recovery in our athletic footwear business, which posted a mid single digit comp increase during the period.

While the classic athletic footwear remains strong, new products featuring bright colors are driving significant sales gains.

As many of you are aware, color has been a dominant theme in women's dress and dress casual categories.

This trend has had a favorable impact on athletics, which should benefit from easier comparisons to last year through the back-to-school selling season.

Our men's business performed well during the first quarter, posting a comp increase, led by favorable results in dress and the sandal categories.

Our momentum with our women's business continued, and we saw comp increases again there in dress and the sandal categories.

Looking forward, I feel there are several drivers that will enable us to meet our growth objectives.

First of all, the health of the athletic business continues to be strong.

This business does account for just slightly less than half of Famous's sales and we expect it to continue to strengthen through the second quarter and the back-to-school selling season.

We are facing easier comparisons and feel confident about our product and our marketing initiatives as we enter this time frame.

Second, we are planning square footage growth this year.

We remain on track to open about 70 stores and close about 50, for a net opening of approximately 20 stores.

The new stores are somewhat larger than the ones that will close; therefore, we expect our square footage to grow in the neighborhood of 1 to 2 percent.

Longer-term, we continue to believe that we have the opportunity to significantly grow our 900 store base.

Third, I firmly believe we are benefiting from initiatives aimed at differentiating our stores, which position us to expand our market share.

Exclusives, trend-right product, an exciting store format and an excitable shopping experience positions us well to achieve our goals.

Fourth, our focus continues to increase awareness, supported by a much-improved store renovation base and product offering.

Our plans have not changed in regards to marketing.

We will increase our expenditure during peak selling periods of spring, back-to-school, and holiday.

And finally, we will continue our commitment to our stores to further appeal to our consumer and enhance their shopping experience.

To this end, we expect our store base to be well-positioned for the important back-to-school selling season.

In summary, the quarter reflected a strong start to the year.

All of us at Famous were pleased with the first-quarter results and remain enthusiastic about the future of Famous Footwear.

Our product continues to improve each quarter, and our marketing efforts continue to drive new traffic levels, so we're looking forward to the coming months and coming quarters.

Now if I could, I would like to turn the call over to Andy to review the financials.

Thank you, Joe, and good morning.

Consolidated sales for the first quarter totaled $491.8 million, representing a 10 percent increase compared to $446.4 million last year.

This included $15 million in sales from Bass.

Before the incremental Bass sales, we grew revenue by 7 percent to $477 million.

Overall, we are pleased with the results as our sales growth was broadly based.

Consolidated operating profit for the quarter declined 2.7 percent to $14.9 million from $15.3 million last year, and operating margin declined 40 basis points to 3 percent.

We had originally anticipated somewhat lower operating profit due to the transition costs associated with the new Bass license.

Excluding the approximate $3.3 million in Bass transition costs, our operating margin would have expanded by roughly 30 basis points to 3.7 percent versus 3.4 percent last year.

We attribute our better-than-planned performance to more robust sales and to disciplined management of assets and expenses throughout the Corporation.

Breaking the quarter down further, gross margin totaled 40.5 percent, compared to 41.5 percent in the prior year's quarter.

Here, we experienced continued expansion in the gross margin at Famous, which was offset by an increased mix of wholesale business, which generates lower relative gross margin rates.

Overall, SG&A dollars increased $14.7 million to $184.4 million.

However, as a percent of sales, SG&A improved to 37.5 percent, compared to 38 percent of sales in the prior year.

Net interest expense totaled $2.4 million in the first quarter, compared to $2.8 million last year.

The reduction in interest expense was attributed to lower interest rates.

Our tax rate rose to 31.8 percent from 28.1 percent in the year-ago period, reflecting a greater expected annual mix of domestic income.

This brought diluted earnings per share to 45 cents on 18.9 million shares, compared to 49 cents on 18.4 million shares outstanding in the prior year.

Net earnings were $8.6 million versus $9 million last year, and again, that is after the Bass transition costs of $2 million after-tax.

Breaking our first-quarter results down at the segment level, Famous Footwear reported sales of $272.1 million, up 4.2 percent, and operating profit of $12.4 million, up 17 percent.

Famous Footwear's divisional operating profit improved by 50 basis points, 4.6 percent.

We ended the quarter with inventories current and in good shape, down about $15 million compared to last year.

As Joe indicated, same-store sales rose 2.6 percent.

During the first quarter, we opened 12 stores and closed 8, and at the end of the first quarter, Famous Footwear operated 897 stores.

Turning to wholesale, for the first quarter, sales totaled $171.5 million, up 21.7 percent from $141 million last year.

Wholesale operating income was impacted by the Bass transition costs of $3.3 million pretax.

Including this, wholesale operating income totaled $12.8 million, compared to $13 million in the first quarter last year.

At Naturalizer retail, sales increased 5.8 percent to $45.3 million, compared to $42.8 million in the first quarter last year.

We were pleased to achieve a 4.1 percent increase in same-store sales within our U.S. segment, which was partially offset by a 1 percent same-store sales decline in our Canadian stores.

As Diane mentioned, our Canadian results have not yet, but we expect soon will, reflect benefits from imported product.

On a go-forward basis, we plan to report Naturalizer retail same-store sales on a combined global basis, reflecting U.S. and Canadian stores in our monthly press releases.

This is consistent with how we have organized and plan to operate the business.

At Naturalizer U.S., we opened two stores and closed four, ending the quarter with 206 stores versus 214 stores in the year-ago period.

For our Canadian chain, we ended the quarter with 173 stores, even with last year.

Total operating losses for the Naturalizer retail segment totaled $2.2 million, compared to a loss of $1.4 million in the year-ago period.

This year-over-year decline was mostly attributed to the Canadian stores.

The Company did end the quarter with a strong balance sheet.

We maintained and improved upon our inventory metrics.

At quarter end, inventory declined by $2.3 million to $366.9 million from $369.2 million in the prior-year quarter.

This includes approximately $14 million in inventory related to Bass.

Our inventories are current and on plan, and we believe we are well-positioned for the summer and fall seasons.

Total debt was reduced at quarter end by approximately $5 million to $143 million, compared to $148 million at the end of the first quarter last year.

Debt to total capital improved to 28.2 percent from 32.5 percent at the end of the first quarter of 2003.

Capital expenditures for the quarter totaled $7 million.

We continue to estimate CAPEX for fiscal 2004 in the range of $33 million to $35 million.

With respect to our forward-looking guidance, for the second quarter, we continue to estimate diluted earnings per share in the range of 60 to 65 cents versus 62 cents for the second quarter last year.

This estimate includes transition costs for the Bass Footwear license of approximately 4 cents per share in the second quarter, and does reflect a more difficult wholesale children's business than anticipated.

Net sales for the second quarter are estimated in the range of $475 million to $485 million, compared to $458 million in the second quarter of fiscal 2003.

For the fiscal 2004 year, we continue to estimate net earnings per diluted share in the range of $3.20 to $3.25, as compared to our previous guidance of $3.15 and last year's diluted earnings per share of $2.52.

Fiscal 2004 net sales are currently estimated at $2 billion versus fiscal 2003 sales of $1.8 billion.

This guidance is predicated on a store-for-store increase of between 1 and 2 percent in Famous Footwear over the full year.

Now I would like to turn the call back to Ron for closing comments.

Thanks, Andy.

Clearly, our key strategies are in place, which we believe will allow us to achieve both our short-term earnings targets, as we've discussed, as well as our longer-term goals for sustainable growth.

We know it starts with the dynamic operating platform that we've created by combining the great wholesale brands with the strength of a leading family footwear chain.

You know, you add to that building momentum at Famous Footwear and our gains in market share at wholesale, and also add our commitment to making substantial investments to build our brands and create consumer preference at both wholesale and retail, and I think hopefully you'll understand the excitement that we feel for our business.

I really think the team continues to gel.

We continue to prosper from the synergy that we are creating with the team.

As we’ve added talent over the last few years, I think it continues to show in our operating results and continues to show with our terrific ability to partner both at retail and wholesale.

Now I would like to call over to the operator so we can have the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS) John Shanley with Wells Fargo Securities.

Good morning, Diane and Joe, and good evening, Andy and Ron.

It's been a long day, I guess, for you guys!

Diane, I have a question on the level of forward orders.

Excluding Bass, can you give us an indication of what the forward orders for the Company would be?

You indicated Naturalizer and most of the other brands seem to be doing well, so we have an apples-to-apples comparison, what would it likely be --?

John, good to talk to you.

On a general basis, I'd tell you we are roughly about 10 percent up.

Okay.

And on the Naturalizer forward orders, is that being driven by just getting more shelf space in existing Naturalizer accounts, or are you expanding the account base to include more retails, including department store chains?

It is primarily better penetration in the existing doors that we have and we are in.

We feel like we are in about the right amount of doors.

There's a little bit of potential addition there, but again our focus is making sure that our brands perform and look great in the doors that we are in.

Okay, great.

Then Joe, I had a question on Famous.

You mentioned improvements in gross margin across most product categories.

Were there particular standouts for you?

You mentioned athletic.

Was that a particularly strong margin or is it still coming out of the women's dress and casual shoe area?

I wondered if you’d give us a little color.

John, actually, I was very happy with the margins coming out of athletic the first quarter.

As you know, our first quarter last year was not that strong -- the industry in total did not perform very well.

So even though we held our margins in women's and our men's and kids' business, a lot of the margin increase came out of athletic because of the performance and sales they had for first quarter, so that was extremely pleasing.

Is that likely to lead you to increase your open to buy commitments to athletic and maybe drive athletic off of 50 percent of your revenues in the back half of the year?

I think we will continue to let our consumer tell us whether we need to continue to make those investments.

But obviously, with the performance we had in first quarter, we have reinvested additional dollars for back-to-school in athletics.

So that has been very positive at this time frame.

But we have reinvested additional dollars for back-to-school.

Super.

Andy, you gave us some really good color on the second quarter, but I wonder if you could give us a little help on the gross margin expectations.

It was down a little bit in the first quarter -- what should we anticipate in terms of margin levels for the second quarter?

I think you'll see us come back.

I think we will do a little bit better against the LY period, but you still have the Bass addition.

That will be offset probably a little bit by some shortfalls in children's, as we indicated.

So I think we will be pretty close, John.

And SG&A, should we maintain it at the level it has been running at for the last couple quarters or is there anything different in SG&A expenses that we may want to factor in?

I think on a net basis dollar-wise, I don't think you're going to see a lot of surprise from us.

The degree of leverage that we will generate in that ratio really becomes a function of top line, and I think we will see how the Famous top line performs, but I am not anticipating a whole lot of change right now.

Great.

And Ron, since you are in China, I want to take advantage of getting your perspective in terms of sourcing costs.

You seeing any pressure for your Chinese suppliers in terms of any indication that they may try to jack up prices a little bit, based on the weakness of the U.S. dollar, or is it basically maintaining status quo?

You know, John, I think it is more maintaining business as usual right now.

As I have had the opportunity to visit a number -- and I would probably say five or six of our key suppliers -- a couple things do come to mind.

Each and every one of them is in an expansion mode in their facilities.

And quite frankly, most of them are moving some of their additional facilities closer to our technical center in Dongguan, which is going to be a benefit to us.

I also have been very encouraged -- one of the things that we're doing on this trip is we have laid out some pretty aggressive expectations from our Project ExCEL over the next 2.5 years here.

And we need some real solid cooperation from our vendor partnership in improving the cycle time, and improving that in a variety of ways.

I think doing those things ultimately also leads us to taking cost out of the total system, which should help us maintain our place in the marketplace.

So I think it is business as usual.

I think we hear all of the scuttle out there, but I think pricing is really holding.

I also think we continue to see, as we move into fall order period, with the fashion trends, both on the color side and the detail side and the closed-up footwear for fall, I think that our expectation is our average retails will probably be supporting slightly higher as we go through the fall season.

So I don't see anything drastic happening and I think I'm encouraged by what I see.

John, I know you travel over here quite often.

You just have to consistently be both encouraged and amazed at the improvements in infrastructure to support the footwear industry.

That is encouraging to hear.

Do you get a sense, Ron, that there still is ample or possibly even excessive footwear manufacturing capacity in China that is going to be able to allow you to maintain the pricing?

I think they are building in some additional capacity, as I said.

Particularly in what I would call the better factory system that both our Famous customers and us as wholesalers participate in, I do think there is consolidation going on.

But there has continued to be growth in those core customers, and they appear to be adding the capacity, and so I think that's going to be pretty balanced.

Great.

Thanks a lot.

I appreciate it.

Margaret Mager with Goldman Sachs.

Can you just tell us, since you are in China, what is your mix of sourcing by country in Asia?

You know, I will chat a little bit so Andy can think, but I am going to tell you that it is primarily -- in Asia, we are very, very close to 96, 97 percent is China-based.

We do have some product that we do for some of our international customers, but it is very small.

One of the things we have that we do work on, though, is that our sourcing mix, the core factories we are working on do have operations in Vietnam as well as China.

And for us, we just don't see much happened in Indonesia anymore.

Andy is paging through.

Since we're out here, we're going through some details.

Andy, want to add any perspective?

From the Far East, Margaret, well over 90 percent is sourced from China -- well, about 90 percent is probably right, with a small piece from Indonesia and an even a smaller piece from Vietnam -- but 90 percent plus is coming from here.

Okay.

And footwear is not really part of the changing quota landscape, as I understand it.

Is that correct?

I think that for domestic footwear that is correct.

I think the next round of changes takes place in November on some of the tariffs, and that will be a reduction over time.

Okay.

We had a question on just if you could clarify on your Canadian stores what you are doing with regard to your product there.

We thought we heard you say something on the order of you are bringing more product in from overseas.

Is there some meaningful change in the sourcing of Canadian product?

Margaret, about midyear last year, we announced that we were closing our Canadian factory, and we did accomplish that, primarily before the end of the year.

I think that we literally are closing out the final orders pulled from the Canadian facility as we speak.

And so as we enter into the second quarter and more in the third and certainly the fourth quarter, we will be supported and supplied by importing all product for our Canadian stores as well.

And I think that we have given some guidance earlier that we would expect and we are already seeing that we will see significant margin improvement from that effort.

Andy might want to --

So the Canadian government isn't taxing away your price differential on your sourcing by bringing the product from overseas?

No, I think that really going back the last two or three years, as all of that has been rolled through post-NAFTA, and we found ourselves with two Canadian manufacturing facilities that could better be supported by our worldwide sourcing network.

And so we expedited closing those facilities, and so it's just a natural margin improvement by reaping the benefits of sourcing from both the Far East and Brazil compared to Canadian manufacturing costs.

That's very helpful and interesting.

Thanks, Ron.

I have two other questions, one on Bass and one on the athletic space.

First on Bass, could you just elaborate on what it is you are doing with Bass in terms of positioning the brand?

And how do their factory outlet store networks fit into your future?

Those are both good questions.

I think I will turn it over to Diane and let her start with positioning and we will fill in on the outlets.

Nice to hear from you.

Thank you.

Congratulations on your move to Brown Shoe.

Thank you.

Let me tell you a little bit about that quickly.

We are continuing to focus on getting Bass back to its core positioning, and it really ties back to it being this authentic American brand that has this easy lifestyle.

And we're looking at it to really deliver great looking style, very accessible, casual to sort of dress casual kinds of looks, and almost bringing it back a little bit to when it was really in its heyday, back to when it was in tune very much so with popular culture in the '60s -- it had a youthful and a little bit younger spirit to it.

So we've been doing that work on the men's business for the last two years and we have had increasing success around that.

We feel that that is a strategy that is going to work for our women's business as well as we go into next year.

So generally, that is what we are doing, and as I mentioned a little bit earlier, that we will be showcasing an entirely new line at FFANY and then even more at WSA.

And we really think now with Bass being part of the Brown organization, that is really going to strengthen our ability to do that.

And with respect to the outlet stores, obviously, we have a very good working relationship with PVH.

And we are making sure that as much as possible we are in sync with them and trying to build the brand together.

Ron, if you have some other comments on that.

PVH retained the ownership, as you know, obviously of the Bass brand.

Okay.

I just -- functionally, I am not really clear on how the factory outlet stores fit into the picture.

Are you going to provide all products to those and sell it to them as a wholesale sale?

We will be supplying them with some product.

That is really going to be, at the end of the day, up to them.

We are working to build a brand together, making sure that we're in sync in terms of how we're positioning the brand to the consumer, because at the end of the day, that's the most important piece of it.

But they will, as the outlet stores have in the past, buy product internally from the Bass wholesale line, as well as look at outside resources, which is pretty consistent with the way that they operated it before, as well.

Thank you.

And then my question on footwear, Joe, I don't know if you could give us a little bit more analysis on what is driving the athletic footwear business.

You mentioned classics.

You said color was picking up.

I don't know if you can get down to any comments from a brand perspective or a product type perspective.

What exactly is working?

It's a little vague.

If you can help me out, that would be great.

I try to stay vague.

We really don't talk about our vendors.

Let's talk about categories first.

I mentioned that color was really driving the increases that we are seeing, and that's primarily in running first and in basketball second.

So those two categories have performed extremely well as we've brought color into the business.

What I think was important about spring was the classic business, as we increased the color business, and especially in running and basketball, our classic -- what you consider classic and white business -- did not drop.

Usually you end up trading one for the other.

That didn't happen.

The primary vendors, that I think you know in the top five -- at least four or five, each one of those increased their business in Famous stores for spring.

So the key vendors we book to drive business, it happened there, and it is nice to see that because they own such a great market share that when their needle moves and their business becomes stronger, obviously the needle moves very quickly.

So it's really being driven by the top three or four brands, and colors in running and in basketball.

Okay.

All right.

Well, that helps a little bit.

Thank you very much and we're looking forward to seeing all of you at the small cap conference.

Sam Poser (ph) of Mosaic Research.

Good morning.

Joe, what is the timing of the store openings throughout the year by quarter?

I'm sitting at an NSGA conference.

I do not have that.

Half of them will open up by back-to-school and the other half is really after back-to-school.

So approximately 35 to 40 prior to August 1 and then the balance really comes in prior to November 1.

We try not to open up any, obviously, after November 1.

And do the closings mirror the openings?

Yes, they do.

Obviously, you try to keep the base somewhat equal.

We will mirror those.

Right.

And Ron, out of Asia, what kind of changes are you seeing in the freight costs?

You know, we are seeing a little bit of increase in the freight costs, and we certainly have seen some slowing of -- on the shipping lanes, although nothing material at this time.

For us as a company, we have a number of initiatives that have been put in place over the last few quarters that have to do with maintaining a lower inventory position, shortening up our lead times and cycle times.

And if we do that well, and we've been doing it well for the last five or six quarters, we are really taking gross cost out of the system right now, and so it's a little hard for us to have that comparative.

So you have some sort of raw costs going up slightly.

Most of these things, I think we can manage with our -- again, having a 75 million pair base allows us to be pretty proactive in managing those freight costs.

But there is a little bit of pressure right now, but nothing significant.

Okay.

And then, Diane, you mentioned that there were early sandal shipments pulled forward.

Just in the overall volume -- I'm not sure if you're the person to ask -- but on the overall volume for the second quarter over the last few years, Q2 has been bigger than Q1 in total.

This year it looks like it may be a little bit less.

Is that because of that shift forward of those goods or is there something else going on there?

It really was a little bit of that, in terms of the shifting.

But again, that was really the way that I guess the customer wanted it and the consumer demanded it as well.

So it was a natural shift, I guess I should say.

Great, thank you very much.

Scott Krasik with CL King.

Good quarter.

Diane, I was just wondering if you could give us an early indication as you work through the summer sandal season what you expect in department store pricing for the fall.

I think the department stores have been doing a better job.

Is there any indication that there will be any excessive promotions or anything like that?

I would say generally that I think business has been good, as we've seen from all the results of the quarter across the board for most retailers.

And inventory levels seem to be very much in line with where current sales trends are.

And in fact, I think there has been a nice balance between this fashion and core component of the business out there.

So I would say generally speaking that it looks to be a nice balance and I don't see the need right now, as we're sitting here today, that there is going to be any more promotional activity in the business.

And in fact, I think we hear a little bit about the ability to -- with this cycle that we're in with the fashion and dress and price points and details and all of that getting a little bit more money for some of the shoes too.

So I think all of that is really helping to make the spring season probably finish up pretty clean and pretty strong.

Okay.

And other than the kids' business, were there any other wholesale brands that lagged your expectations?

No.

All of them were absolutely right in line and in some cases a little bit better.

Kids was the only where we struggled in the first quarter.

Okay, good.

And Joe, I did get on the call a little bit late, but have you been able to quantify yet, since you have had some of the chocolate remodels open for a while, what the sales lift is from the remodel?

Any color you can give there.

No.

Let's put it this way.

We are remodeling some of those so quickly right now.

We have as of today, I believe, 23 of those that have changed into chocolate and cherry.

There will be 170 by back-to-school.

If I had to say anything that we were encouraged enough with the 23 to aggressively pursue our plans to take up to 170 for back-to-school, so obviously we saw a lift, saw that it was more than worth the investment.

But I think we will be in very good shape by September 1.

If you ask me the same question by August 1, again we will have 170 of those open.

But it is definitely the first 20 or 25 that we have opened have definitely confirmed the fact that we should go ahead with the investment as quickly as we can.

Were any open for back-to-school last year?

No.

Actually, the first one we opened was in November, three test stores, and then we opened up five more in January, and off of those seven then continued to open up 15 -- approximately 15 more.

So again, I think there's about 25 or 27 today.

And as we continued to get validation off of those stores and started seeing some lift out of those stores, it more than warranted the faster renovation plans.

So I think that I won't dodge your question become September 1, but there so many that are going to be remodeled in May, June, and July, that I will be able to give you a sense of that, and I will answer that question at that time frame.

I'll look forward to that.

What is the cost -- full signage, change, any new --?

The cost of doing to stores is really -- we would have remodeled approximately the same number of stores in what we considered -- probably not a fair way of evaluating -- we called it a vanilla package.

But the cost of going to chocolate and cherry was no higher than the remodel package that we already had in place.

So that keeps us on our budget.

So nothing additional in the cost of doing those stores a different way.

Can you quantify what that is, just so as we get the sales returns, we can get some ROI?

Are you asking the cost of doing those stores?

Yes.

That can really vary.

It can vary anywhere from as low as $30,000 to $80,000.

And again, the same cost as the previous format that we were rolling into.

That gives us an indication.

Thanks, Joe.

Adam Tamora (ph) with INTRUST Capital.

Good quarter.

Two quick questions.

One is, previously you had mentioned some supply chain consulting costs.

Was that included in the $3.3 million that you outlined?

No, the $3.3 million was associated with Bass transition.

So incremental consulting costs would be in addition to that.

Terrific.

And any indications on how May is going?

I know it's early, but --

I think it is early and it is just where it is.

It's fine, stable.

Stable?

Okay, thanks.

That is our last question and at this time I would like to turn the conference back to Mr. Fromm for any closing or additional remarks.

Thanks, everybody.

It has been a terrific quarter.

Certainly our operating results met or exceeded our expectations.

You know, we are really encouraged by our solid gains on the sales growth for the first quarter.

The addition of Bass was key.

The improvement in our wholesale business.

We opened a new and exciting Famous Footwear store on 34th and Broadway in Manhattan, for many of you, if you haven't had a chance, go down and see it.

I think we're really pleased with it.

And of course, we are really excited about the new technical and sourcing facility that we opened here in Dongguan.

We think this is real key to our ExCEL initiative.

And most of all, I think we are very excited about the consumer environment and what it's doing for the footwear business, so real encouraged here.

I appreciate your support, and I will talk to at the second quarter.

Thank you very much.

That concludes today's conference.

Thank you for your participation and you may now disconnect your lines.