Caleres Inc (CAL) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the Brown Shoe second-quarter 2004 financial results conference call. This call is being made accessible to the public via webcast in accordance to this FDC (ph) Regulation FD. At this time, all participants are in a listen-only mode. Then we will be holding a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

Before we begin, I would like to remind you about 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. Discussions of the Company's future plans and other statements in this call that are not currently or historically fact, are forward-looking statements. These involve known and unknown risks and uncertainties that could cause the actual results to differ materially from historical results and from other future results expressed or implied by the 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 K-8 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 or from the Company's Investor Relations Department. The Company does not undertake any obligation or plans to update these forward-looking statements even though the situation may change.

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

Now, I'd like to turn the call over to Ron Fromm, Chairman and CEO of Brown Shoe Company. Joining Mr. Fromm are Brown Shoe's President, Diane Sullivan, it's Chief Financial Officer, Andy Rosen, and Joe Wood, President of Brown Shoe's Famous Footwear division. Mr. Fromm, please go ahead.

Good morning. Thank you all for joining us to discuss our second-quarter fiscal 2004 results. Joe Wood is just a few minutes away from the office; he's coming down this morning to be here, so I'm sure he'll be here on the call in just a few moments.

Clearly, we are disappointed that we were unable to deliver our original second-quarter expectations. After 9 quarters of meeting or exceeding our plans, we know that we are better than this and believe this quarter is not a representative of the type of results that Brown Shoe can generate and should generate on a sustainable basis.

You know, at that time, we told you that we expected to earn 60 to 65 cents this quarter. We were wrong. The very strong momentum that we had experienced in the first quarter just did not continue. Yes, Famous Footwear hit its earnings plan for the second quarter, even as we faced the difficult comparisons due to some of the tax-free shifts and the later back-to-school. However, that in itself was not enough to offset other factors.

Again, (indiscernible) with our children's business turned out to be worse than anticipated. Sales at Bass, although early, have not met our expectations. In addition, continuing weakness at Naturalizer Retail will be discussed at some length -- as well as, compounding the situation, were the common carrier transportation issues that occurred at the close of the quarter.

Welcome, Joe.

This brought second-quarter net sales to $459 million, up slightly from $458 million last year. Diluted earnings per share totaled 41 cents, versus 62 cents in the second quarter of 2003.

Bass transition costs were in line with our expectations at 5 cents per share in the quarter, and we have completed the transition portion on schedule. Also, the quarter benefited by a reduction in expenses related to our executive stock-based and other incentive compensation costs.

On the plus side, the second quarter ended with an extremely strong balance sheet. While inventories were slightly up, they were very clean and very current and debt-to-cap was 26 percent, down from the 29 percent last year.

Importantly, we have identified initiatives that are aimed at improving the results within each of our weakness areas. At the same time, our back-to-school is well planned, and we believe we are competitively positioned in the marketplace. Although it's too soon to draw conclusions because of the market and calendar shifts, the back-to-school season is opening a bit slower than we thought. With that said, the most significant part of our marketing spend is in front of us, and for the combined August/September period, we believe we will get our fair share of the marketplace.

On the wholesale side, our outlook is improving, particularly compared to the weakness of the second quarter. In total, we remain focused and committed to building a portfolio of premier brands that have high consumer preference at retail. As you know, we continue to invest in the talent, the systems and the stores to improve our execution. We believe this strategy will position us to gain market share in the footwear industry, going forward.

Before I turn the call over to Diane, I'd like to take the opportunity to briefly describe the actions that we are taking to improve our children's, Bass, and Naturalizer Retail operations.

First, let's speak to children's. Earlier in the year, we recognized that our children's business, which consists primarily of licensed character footwear and aimed at the mass channel, was lacking some important continuing licenses to maintain sales. These timing issues can occur in our licensed business and worked against us in this quarter.

To improve results, we set out to expand our portfolio of licensed characters with a focus on some high-demand properties. To this end, we recently announced that we have signed a major license agreement with Disney Consumers Products, covering 30 of their characters, including the number one children's entertainment brand, Winnie the Pooh, and the number two brand, the original Mickey Mouse. We also have a signed license for the June 2005 Star Wars movie. With these new licenses, particularly the platform of Disney, we believe we've offset this gap and this business will begin to stabilize with a solid platform for increased earnings in 2005.

At the same time, we've added additional resources to help us stay abreast of the top licenses and work even harder to avert timing issues in the future. I believe our children's group has a remarkable track record of having successfully continued to maintain that platform, and this miss is an exception.

Second, as many of you know, we acquired the Bass license in February. During the quarter, we began to implement the changes in the way Bass business is going to run in the future, as we bring it closer to the Brown shoe platform and better position the brand for growth and profitability. I don't think we've done anything unusual here; I think that we are focused on creating the great Bass brand.

First, our decision to accelerate markdowns of certain footwear styles nearing the end of their product lifecycle -- these styles were also sourced to high-cost factories. While this hurt margins in the quarter, it clearly is the right decision for the business in the long-term, and it allows us to invest in higher-margin goods sourced advantageously as we go forward.

Second, we chose to reduce sales through certain channels of distribution to elevate the Bass brand status and build greater integrity as we target better department and specialty stores for this product. This led us to a reduction in sales during the quarter versus our original expectations. But once again, this was the right decision for the long-term positioning growth and profitability of the brand.

In total, Bass contributed over $9 million in sales during the quarter. Going forward, we will continue to implement Best Practices within Bass, applying the same model that was successfully implemented in our Naturalizer, LifeStride and our Famous Footwear business. This is expected to improve product styling, improve the sell-through for our retail partners, and give us margin that meets our standards.

Third, Naturalizer Retail -- let me assure you that Naturalizer Retail has management's complete attention. As you know, we are in the process of combining our U.S. and Canadian store operations. This will allow us and give us better styling and better margins in Canada. In the U.S., our Naturalizer Retail serves both a strategic brand-building focus and particular focus in helping us achieve wholesale results through our test-and-learn platform. With that said, our team, working with additional outside advisers, is committed to optimizing this change contribution, and we will continue to brief you on our progress.

Fourth, at the close of the quarter, we experienced greater impact than we expected from the lack of available, common-carrier trucks, which constrained our ability to ship from our warehouses. This was exacerbated by delays in inbound products to our West Coast port. We fully expect to recapture these missed sales during the third quarter, and we're planning more diligently as we look prospectively at higher-volume shipping periods and the needs for our transportation requirements.

With that, I think I'll turn the call over to Diane to review our operating highlights with greater detail.

Good morning. We thought this morning it would be helpful if I provided an overview of our major wholesale brands and retail businesses, so you can better understand why we believe our outlook is improving for the second half of the year.

Let me start with Naturalizer. While Naturalizer sales were down slightly in the second quarter -- from second quarter last year, we did capture an increase in market share in the department store channel, even in this stress cycle. To this point, during the five-month period ended June 30, Naturalizer was the number two brand in U.S. department stores for women's fashion footwear, according to NPD. We feel good about our prospects for the Naturalizer product line heading into fall. Retailers are really behind our efforts to expand the line's tailored and dressier components. Our product tests indicate several big shoes for fall, especially in tailored moccasins and certain of our tailored dress categories.

Also, average retails were up 3 percent this spring, and we are projecting another increase as we enter the fall season. And as department stores lower their inventories and work to increase their turns, we believe we are well positioned to realize upside in our at-once (ph) business in Naturalizer.

Looking at the marketplace, we continue to see an emphasis on color, materials and dressy looks. While this benefited our Carlos brand and other better brands this spring, we believe you will soon see it take much more hold in the moderate zone in a larger way. Going forward we see a nice balance in Naturalizer across all platforms, because this brand is terrific in that it transcends multiple lifestyles from casual two tailored to dress kind of looks.

Now, LifeStride -- well, LifeStride sales were about flat for the quarter, which was in line with our plans, given that we were up against a 26 percent sales gain for the second quarter of 2003. Now, as we head into fall, we believe LifeStride is poised to gain market share again and benefit from its position as the fashion sense brand, giving women up-to-date fashion at entry price points in many department stores across the country.

Our original Dr. Scholl's sales were down versus last year. Now remember, most of our sandal shipments occurred in the first quarter. We succeeded in broadening our stylings beyond the original exercise sandal to include higher heels, wedges, colors, ornamentation. We're building this into a full-year lifestyle brand, where the design positioning is hip comfort. While we still have work to do, for fall '04, we still (indiscernible) more closed up offerings at retail and increased distribution. Again, this is a process; it doesn't happen overnight and looking at the indicators from the most recent WSA, we believe we have won our spot on the shoe floor for spring '05, so we see many opportunities for us as we go forward.

Carlos Santana had a phenomenal quarter with sales quadrupling. While this is yet a very small base, we expect the brand will be up significantly for the year as it gains consumer preference at retail. We expect this positive momentum to continue, especially given the trend towards dressy, sexy shoes; this is Carlos' niche.

In children's, as Ron had talked about, we had a sales decline of 36 percent during the quarter, due primarily to the lack of fresh, new property in our character footwear business. As Ron outlined, children's continues to represent a solid business opportunity for us, and we look forward to our new licenses. Currently, our team is hard at work building the Disney program, which we expect to start shipping in late 2004.

At the mass channel, our Dr. Scholl's casual and athletic product for men and women continues to perform well and we believe it should be up nicely for the year, helping to offset some of the softness that we do see in our women's private-label business. Plus, we have initial shipments of our Hot Kiss junior brand going into two major mid-tier retailers this fall as well.

So, to reiterate our strategy within our wholesale segment, we are intently focused on building strong lifestyle brands that are diversified by channel and consumer segments. We believe that this is smart because it will maximize our sales and earnings potential in this segment and reduce our risk to any one channel or brand. While Naturalizer, LifeStride and Bass give us a presence in the moderate zone, we have become the penetration in the better zone with Carlos. Additionally, Dr. Scholl's demonstrates our ability to operate in multiple channels of distribution, from mass to upscale.

Now, turning to our retail businesses, as Ron mentioned, we are committed to improving our Naturalizer Retail platform. This spring, we faced execution issues related to our emphasis on sandals and casuals footwear when the market was favoring dressy looks. This led to a poor performance in Canada and in our U.S. outlet stores. That said, we did see solid results in our 140 U.S. concept locations, which were stocked with trend-right merchandise. With fall, our Canadian stores will be assorted with better fashions, higher-grade imported products and priced to deliver better margins. Also, our U.S. outlet locations will transition to more trend-right merchandise.

We continue to believe that the Naturalizer chain is vital to our brand-building and our product testing. However, we must capture these benefits while at the same time optimize its financial contribution to Brown Shoe. This is both our challenge and a critical objective to which we will hold ourselves accountable.

At Famous Footwear, sales were about even with last year at 270 million and operating earnings declined by 2.1 percent to 12.6 million. Again, let me emphasize that we've made great strides but have much left to do as we work to differentiate Famous Footwear from others in the channel.

As a management group, we were disappointed not to see a better performance from Famous Footwear in the quarter, and Joe will expand upon specific highlights shortly, but let me say that the strength in the first quarter gave way to a more difficult sale in June and July. With that said, Joe's team has done a good job with our fall product line-up. Our athletic product looks great and we're concentrating on expanding our assortment of women's dress-up styles.

Now I will turn the call over to Joe.

Thanks, Diane, and good morning, everyone. While we were pleased to report on planned financial results for the second quarter, we were disappointed that we did not deliver a stronger sales performance, especially given our stellar first-quarter results. Due to the later start of the back-to-school year, we had planned for 2 million in sales and some operating profits to shift out of July and into the third quarter. Even so, June and July sales were weaker than expected and caused us to end the quarter with same-store sales down 2.5 percent versus last year.

As Diane mentioned, total sales for the quarter were 270 million and our operating profits were 12.6 million. Although this was around $200,000 shy of last year, it did reflect the anticipated shift of business from July into August and September.

We attributes some of the weakness on our second quarter to difficulties in our women's casual, sandals, and our junior fashion businesses. With regard to juniors, after having a healthy business for 18 months, this category did weaken for Famous and athletics strengthened. However, I don't find this unusual; it's rare to find both junior non athletics and junior athletics performing well at the same timeframe. Therefore, we've shifted our financing to junior athletics to capitalize on this consumer shift.

Our junior dress business, on the other hand, continued its strong performance. There again, we have shifted our finances to continue its growth in the coming quarters.

We came out somewhat challenged in the dress shoe category at the end of the second quarter and feel we've lost some sales here. After very positive results in March and early April, sales -- we started to run short of inventory, and we struggled to fill the stores' pipeline for the June and July period. This fashion shift towards dress did come at the expense of our women's and juniors casual business, which had become two of the cornerstones of our women's business. As you know, sandals just stopped selling in June but came back very nicely in July, and this trend has continued into August. We are pleased that our inventories are in line and expect this category to perform well during the back-to-school season.

At this point, we're just a few weeks into back-to-school. It's still much too early to judge the period. That said, we believe we will be positioned to capture our fair share of the market, given the strength in athletics, which produced a comp-store sales gain for the quarter. Our focus becomes threefold during selling season -- a continuation of classic footwear, which has not shown signs of weakness thus far; a substantial increase in fashion color, both in trends and solid colorations; and finally, the back-to-school. As part of this strategy, we've launched an aggressive exclusive program. This season, we have 65 SKUs of exclusive product with all of our key vendors participating, versus 6 SKUs last year and with only one vendor participating. While the 65 exclusives are only about 50 (ph) percent of our athletic business, early reads indicate that this year's program is making a difference and as it serves as a point of differentiation for us. We do advertise our exclusive shoes in our newspaper inserts as well as radio and TV spots, (indiscernible) only Famous. This product maintains higher average retail and healthier margins. We will continue to focus on this opportunity as we go forward.

To complement this initiative, our stores' merchandise showcase these exclusives, helping us with our overall strategy of differentiating Famous Footwear from the marketplace. This should make a difference, as athletics represent over 60 percent of our business during the back-to-school period, compared to about 47 percent during other selling periods.

As we enter the key weeks of back-to-school and early fall, we have become well sorted in junior and women's dress footwear, which includes some of our own Brown Shoe brands like LifeStride, Naturalizer, Dr. Scholl's and Hot Kiss. We see this business continuing to build momentum in the coming quarters and into early next year.

Finally, we've made strides in our children's business. We've strengthened the buying team and have shifted to a stronger branded assortment at higher average retails. Again, this is a deliberate move to differentiate Famous Footwear, and we expect it to continue to produce positive gains in future quarters. Differentiation is our strategic focus. We have continued our investment in consumer research to focus on our consumer segment and what she wants.

The retro-fitting of our stores continues at an accelerated pace. Now, hopefully you've had a chance to visit one of our updated Famous Footwear stores with (indiscernible) bins, brighter lighting, new colors and additional seating. We continue to work on building partnerships with our vendors -- very apparent as you look at the quality of our assortments.

It's beginning to (indiscernible) dividends. Our goal remains to have the right shoes that are fashion-current at a value price, footwear that sets us apart from other retailers in the marketplace. Our vendors continue to work with us to give Famous the product that is right for our customers at healthy margins where we both make money.

Thank you. Now, I'd like to turn the call over to Andy to review the financials.

Good morning, all. Brown Shoe Company consolidated sales for the quarter totaled $458.7 million, compared to 458.4 million during the second quarter of last year. Total operating income declined to 13.3 million, or 2.9 percent of sales, from 18.6 million, or 4.1 percent of sales, last year.

Components of operating income included a 30 basis point improvement in gross margins to 41.3 percent. This was offset by investment spending throughout the Company, primarily driven by project Accel, additional investments in talent and costs associated with adding Bass. This caused SG&A to rise by approximately $6.7 million or 150 basis points as a percent of sales.

Net income was 7.8 million, compared to 11.6 million last year. Diluted earnings per share were 41 cents versus 62 cents in the year-ago quarter.

Bass transition costs totaled 5 cents during the quarter. In addition, the quarter was negatively affected by difficulty in shipping wholesale product due to capacity stress on common-carrier transportation, specifically a truck shortage during late July. Together, the trucking delay plus the Bass transition costs were more than offset by a few pennies per share -- our reductions in stock-based compensation plans and other incentive compensation costs. Notwithstanding these unusual items, as Ron and Diane described, we experienced more weakness in our children's business than anticipated and disappointing results at Naturalizer Retail and Bass.

Breaking our second-quarter results down, at Famous Footwear, we reported sales of 269.8 million, compared to 268.9 million in the second quarter last year. Comp-store sales declined by 2.5 percent for the quarter. The chain did a good job of expense management throughout the period. As a result of the comp-store sales decline for Famous Footwear, operating earnings fell by 10 basis points to $12.6 million, or 4.7 percent of sales, versus 12.9 million or 4.8 percent of sales in the year-ago quarter. Year-to-date, we opened 38 new stores and closed 16, and at the close of the quarter, Famous operated 915 stores.

Turning to the wholesale divisions, in the second quarter, sales were $136.9 million compared to 137.9 last year. On a positive note, we achieved modest market share gains for Naturalizer, LifeStride and Carlos Santana. This was offset by weakness in children's and Bass. Total operating earnings at wholesale declined by approximately 29 percent to $9 million from 12.6 million last year. At Naturalizer Retail, our sales totaled 48.3 million compared to 49.7 million in the second quarter last year, while comp-store sales fell by 3.9 percent for the quarter.

We ended the second quarter with fewer U.S. stores this year -- 209 versus last year's 213. Our Canadian chain operated 171 stores at the end of the quarter, compared to 173 at the same time last year. The operating loss for the Naturalizer Retail segment worsened to 2.6 million this quarter versus a loss of 1 million in the year-ago quarter. As Ron and Diane both indicated, this division has management's full attention.

Interest expense for the Corporation totaled $2 million in the second quarter compared to 2.4 million last year. The reduction in interest expense is attributed to lower average borrowings.

The Company ended the quarter with a strong balance sheet. Cash flow from operating activities was $25 million. Total inventory levels at the end of the second quarter were 453 million, representing an 8.4 percent increase from 418 million in the prior quarter -- prior-year quarter, excuse me. Importantly, inventories remain clean and current. Total debt was reduced by approximately $5 million to 127.5 million compared to 132.5 million in the second quarter last year. Debt-to-total cap improved to 26 percent from 29 percent at quarter-end last year. Year-to-date CapEx totaled 14.2 million. We continue to estimate CapEx for fiscal 2004 in the range of 33 to 35 million.

For the first half of fiscal 2004, net sales totaled 950.5 million compared to 904.8 million during the first half of fiscal 2003. Total operating income decreased 17 percent for the first half to 28.2 million, or 3 percent of sales, compared to 34 million or 3.8 percent of sales in the first half of last year. Net earnings were 16.4 million compared to 20.6 million last year and diluted EPS declined 86 cents compared to $1.11 during the first half of last year.

As to forward guidance, coincident (indiscernible) the late start of the back-to-school season, our Famous Footwear chain has seen a slow start to August with sales and gross margin dollars lagging expectation. At this time, we believe it's prudent to wait until the back-to-school season develops before providing an earnings guidance range for the third quarter. Importantly, while overall sales have lagged, the early back-to-school markets offer neither an encouraging or discouraging read at this time. Therefore, it's difficult this early in the game to extrapolate a meaningful trend, in part because there are fewer stores in early markets this year versus last year. Furthermore, because we anticipated a later start to the season, we shifted a greater percentage of our marketing and promotions to later in the period. As you know, in the third quarter, a disproportionate amount of sales and earnings come from Famous Footwear. With the shifts that are taking place this year, we just lack a good read at this time. So we would rather wait until our marketing efforts kick in and consumer patterns develop before we meaningfully assess back-to-school.

Now, I'll turn the call back to Ron.

You know, just a couple of unprepared remarks -- you know, I think that Andy, Joe and Diane and myself try very hard to keep the investors well-informed. So we are always trying to give you as much information so you can get as great an understanding as you want. (indiscernible) listen to our call here and I want to see if we can't just simplify things a little bit. Yes, the children's business was and is underperforming to our expectations, and you heard that the Disney license is one piece of getting that back in position.

Secondly, sandals and casuals underperformed in the market at Naturalizer, at Dr. Scholl's, at Carlos, at Famous Footwear -- everywhere, even in Canada or maybe even more so in Canada.

Most importantly is that we maintain our project impact standards for keeping our inventory clean and in position. Therefore, we take the costs associated with doing that in the second quarter.

I also think it's important to again remind everyone that, while we segment-report our earnings in the business for the SEC, we manage Naturalizer as a single entity today, and we should manage it as a single entity. It's going to make us better; it's already making us better. Naturalizer grew its earnings when you're all-in, okay? It grew year-over-year performance. We just were very pleased with that. At the same time, the emphasis on retail remains a key focus of this team. It will only make the entire Naturalizer brand better.

Fourth, Famous Footwear -- it did make its earnings plan. But with that said, that's not what we call success. We want both sales and earnings, but more importantly, we want to attract more customers who choose Famous Footwear as their place to shop.

You know, lastly, after a very challenging quarter, I would just like to share that this team has gained some valuable insights into our business during this quarter. The erratic marketplace and our erratic performance did show us a number of weaknesses in our business, which we clearly are working to address. After nine straight quarters without a miss, it has been tough to disappoint ourselves and our investors. But this management is focused on the future; we are excited about the investments that we continue to make and will continue to make in our brand-building and in our business. We know we've come a long way in rebuilding the excitement, vitality of Brown Shoe but what most excites us is how far we believe this platform will take us.

Thank you for joining us. Now, we will open it up for (indiscernible) questions.

Thank you. The question-and-answer session will be held electronically today. (OPERATOR INSTRUCTIONS). John Shanley with Susquehanna Financial.

Ron, I wonder if you could give us a little bit more insight in terms of the 6 percent decline in the kids business. Was that across the board, or was it more heavily weighted towards the Bass channels? If so, was that due to a specific retailer changing their merchandising or sourcing capabilities in the quarter?

Good question. A couple of things there -- first, it is primarily the mass channel we are talking about. As a matter of fact, our Famous Footwear children's business had a quite terrific quarter, particularly our Buster Brown initiative there. (technical difficulty) -- (indiscernible) children's business is getting back. I also think it would be fair to say -- I think Joe would also say that the kids business is one of the later things in the transition at Famous that we've worked on, so that's maybe a softer base.

There's a number of issues in the mass channel. It's no one license nor is it one retailer and therefore, the magnitude of the decline. I think, over the years, we've done a great job of balancing retailer changes, retailer thought-process changes, and licenses to match. In this case, we had a number of retailers who shifted how they were managing their open stock; we had some license shifts that had bigger impacts on the business than we had anticipated. Clearly, we've been working on filling that gap; we announced (indiscernible) this week. I think, John, you of everyone would understand, we've been working on it for months.

So, I think the miss is there; I think the worst is behind us; and I think, as we build for '05, we will be in good shape.

Diane, do you have anything to add to that?

I would just say it was really a little bit across the board. It wasn't any one particular thing. Primarily this (indiscernible) where we were in the life cycle of the licensed products. We believe that with Disney and others that we will be able to offset (indiscernible) as we go into next year.

Was that an indication you got, Diane, from WSA in terms of retailer interest in those new products?

Yes. Again, we did have Disney products there at WSA, so the team was on it, knowing that we were having the issues that (indiscernible) children's business, so they have been actively working on that for the last six months. So we did show product; people were very excited about it and we saw all of our major customers there, so we do feel like we, as we turn a corner into '05, we will have stabilized the business.

That's encouraging. I wonder if I could just take my second question -- I'd like to ask Joe if -- I know it's early into back-to-school but in terms of the last two weeks, as the back-to-school season unfolded, has the store traffic level increased? How are you doing with the exclusive product lines that you have in for the athletic component of your business?

We still stay extremely excited about the exclusive products. I guess you would have to take a look at the stores. I mean, 65 SKUs is a big base; it's upfront, presented well, and it's performing very well. Athletics continue to perform as they did in June and July.

The hardest thing -- I know what you're asking, John, is with the sales. You know, the last two weeks become not only so important because of the shift but I think if you talked to other retailers, we expect dramatic increases in week one and two of September, so yes, I guess I will back off a little bit by saying and hold the same tradition I have -- ask me September 15 and not even at the end of August. As we said, our early back-to-school markets have been okay, so what we're looking at is hopefully the mid and late markets respond the same way as the early markets. This weekend represents the mid-market really, the kickoff in marketing expenditure. The late markets -- we don't kickoff until Labor Day weekend.

So I don't know if that answered your question, John, but we always took a look at it as a seven-week window between August 1 and September 15, knowing that analysts will want to see how your August went. You know, we will have to see but again, the first two weeks -- there is substantial volume this year compared to last year.

Fair enough. The sell-through rate on the athletic -- is it meeting your plans and expectations?

Yes, it is. John, very pleased with it.

From C.L. King, we'll hear from Scott Krasik.

Joe, I guess my question is, assuming that back-to-school does pick up, are you guys planned for any major sell-throughs? I knew you guys had some difficulties in the spring keeping some of your hotter product on the shelves. Are you prepared for that, to be able to restock and have the product that people want?

Yes, and that was really in the women's and junior's dress areas that performed very well. We learned a lesson -- very pleased in March and early April. We (indiscernible) couldn't get back into business quickly enough in June and July.

We have currently delivered that product at the end of July, the first two weeks of August; we are in great position. We will not repeat that same mistake going forward into third and fourth quarters. We are very comfortable with our positions and our back-up orders for the third and fourth quarter and where our current inventory stands compared to June and July.

Okay. Just coming out of WSA, anything meaningful that you guys have changed sort of last-minute for fall and holiday of '04, or are you guys still pretty set with your plan and you like what you had expected to put in the stores?

I don't think we saw anything that was earth shattering or changing coming out of the show, so we came out of the show just as convinced that the plans we originally put into place for this year are still sound and have stayed with those. There's no major changes; we're very comfortable with where we are.

Okay. Diane, I guess just a question on Bass. Am I correct that the sales met plan for the quarter and it was only the margins that didn't?

No, neither the sales nor margins met the plans for the quarter. Basically what was done was, because we wanted to transition out of some products that were at the end of their life cycle and also were actually lower-margin items that were being forced out of Italy -- and with the euro, we are having significant issues over there -- we decided to accelerate the movement of those goods and get new products in there so we can continue to have decent selling rates on our products in department stores in our men's business. So that was primarily what the shift was there.

So as we get into -- getting into fall and holiday of '04, what gives you confidence? Is it new product in men's and women's? Is it perception from department stores? I mean, what gives you confidence that Bass will be on plan for the rest of the year?

Here's the best way to answer that -- we still know that we have a lot of work to do. But what I would say about the men's business for the back half of the year is that the current selling and the sell-through rates on our products at retail right now are where we expect them to be.

We're doing all the work that we ought to be doing on Bass to make sure that we position the brand and set it up here at Brown the way that it needs to be. So we've done (indiscernible) on everything from going back and -- we've done consumer research in terms of where the brand really needs to be positioned, how are we testing product to see how consumers react to that. We have, in addition to that, then, redesigning and doing all products based on that. Then at WSA, the reaction that we had on both the men's line -- and the women's line is really the one where we have the bigger opportunity; we get a very good, strong indication of that from retailers going into spring, '05. So I would say that we feel like our men's business will be on track for the rest of the year and that we expect that women's, going into '05, will continue to improve, based on the reaction that we got.

But again, we've taken -- not taken anything for granted on this and making sure, with this kind of transition that we went through in the last six months, moving people, moving inventories, changing and everything, we know that we need to keep the pressure on this to make sure that we do everything we can to continue to deliver results. So --.

Okay, so then you feel pretty confident as of right now that is going to take getting the right product out and getting that cleaned up, but the retailers are committed to staying with the mass (indiscernible) whether it's department stores or -- I mean, you're not going to have to completely reposition the brand for a new retail channel, right?

No. In fact, and I think again Ron mentioned it in his comments, that we made some shifts. We had too much of our business that was at a certain tier of distribution, where there was too much -- you know, special make-up product that we wanted to move to higher margin goods. So we've made some actually difficult choices over the last couple of months -- smart, long-term choices, difficult for our short-term choices to make sure that we do tee ourselves up well.

Let me -- I don't think that -- first of all, I think we're managing this business for many years to come, and so our focus is really on '05 as we do the work. So I think, quite frankly, that's where so much of our headset is, is working on getting the right things done. I think, when we look at getting to '05, I don't think there's a material impact on the total Company's business. But I do think that -- if I think about how the plan, how someone might think about our second half, I think that we would expect lower sales of goods that we don't expect to distribute in low value-added channels, and I think we would see that number come down. So, I would suspect that total sales will be off but I think that as we continue to build for '05, we will -- we haven't lost any of our enthusiasm for what I think this brand is going to do and we're doing good work, as Diane says. I don't think we're doing anything exceptional or different or unique; I think we're looking at the business and getting it to be run on the same metrics that Brown Shoe is run at.

Virginia Genereux with Merrill Lynch.

Thank you and good morning. Andy, maybe, can you quantify the sort of shipment delay, what you think that was in terms of maybe lost revenues, how much of that you might pick up in the October quarter, and what in terms of EPS hit? Then I want to ask you something else about that.

I don't know that I can give you the EPS element of it, but I think it impacted the quarter by 2 to $3 million -- closer to $3 million. It's a mix of merchandise, and so, you know, I can give you some perspective if we run the numbers but it is a mix of product and each of the lines carries obviously different margin rates.

Okay, but that wasn't -- I don't know if I would assign some contribution margin to that. It's not much in terms of EPS. (multiple speakers).

Yes, I'm thinking a couple of pennies, 3 pennies, something like that.

Okay, and that was missing on the wholesale side, Andy, not related to -- not in the retail businesses?

Correct. I will just add a little flavor. Because we are wholesale and retail and we are on a retailer's year, the trucking issue wasn't unique to Brown Shoe Company nor was it unique to footwear, as you know. But because we are on a retailer's year, the shift of sales for us from July into August impacts our accounted results. We are a traditional sort of wholesaler who is more likely, on a calendar year -- whether it falls into July or whether it falls into August doesn't impact the optics of reported results. So it hit us in a way that skewed our founding a little bit.

In your prepared remarks, you said something that the trucking shortage and the Bass charges were offset by a reduction in sort of management and comp accruals and stock-based compensation. You said sort of words to that effect which, as I listened to it, made me think that if it was offset by lower -- by reductions in comp accruals, then where was the earnings miss kind of thing?

The earnings miss in the quarter -- what we said in the remarks, or what we intended to say, was the reversal of accruals associated with comp plans, which are driven by stock price and targeted payouts, were that the quarter was helped a little bit more by that. We said by a few pennies, then I won't call them one-time but certainly the unusual trucking situation and the Bass transition, so the quarter was helped by a couple of pennies. The earnings miss was generated by difficult topline gains, as Diane described, Joe described and Ron described, led by difficulty at children's, Naturalizer Retail, and Bass.

So it's a performance issue within those three divisions, and Famous made its plan but the momentum that Famous had generated in the first quarter wasn't sustained to that degree in the second, and so the strength of Famous wasn't enough to offset what was a falling, weakening market in part driven by a very difficult sample season, as Ron and Diane described.

Yes. Secondly, if I may, for Joe? Can you talk, Joe, the Shoe Carnival guys have been, for a couple of quarters now, saying they felt that the classics, the sort of white fashion, classic athletic business, was slowing, that it had gotten much more promotional, seeing much more promotion coming out of the mall-based guys. Again, this was the second quarter they said this. What is your view on that business in particular and then more broadly where you are in the sort of athletic cycle in your channel? Then any other observations about sort of what you see next or as a continuation of sort of this fashion/color, women's dress shoe business? Thank you.

Virginia, you asked about five questions in there! You know, I really can't comment on Shoe Carnival. I can comment on our business. Classics -- we really have not seen a price issue with classics to this point. As it relates maybe to more so into the mall, I think that that's being addressed and there's probably one retailer that's become a little more price-driven with that but we don't feel any price pressure on that business right now. It's still performing well.

Our futures business for spring, although only up 5 percent for '05, that would be on top of more than a 20 percent increase in '04, so slowing a little bit (indiscernible) price depression on it. We don't feel, in the classics, that it's been price-driven right now.

As far as looking forward in athletic, I think what we're going to see, Virginia, is as classics maybe are starting to peak -- again, we're still looking for a slight increase in '05 -- what you're finding is styling coming out of let's say of other brands that are more off of a junior look, in athletic and junior people taking an athletic look to their styling as we go into '05. So I think you're going to see a shift in athletic styling from some vendors that are not, i.e., Nike, Reebok or Adidas. As the enter the first quarter of next year, this should make an impact; we are going to see a change there.

Did that answer your question?

How you're planning ? I just -- do you anticipate athletic to be up for you next year, Joe, flat, any observation there?

We do anticipate the Athletics to be up for -- we've done our financial planning through the first and second quarter. First quarter, second quarter anticipated and both of those quarters are up in Athletics.

From EnTrust Capital, we'll hear from Adam Comora.

A couple of quick questions -- the first is, if I add up the EBIT that Andy had broken down, I think you said 12.6 from Famous and wholesale was 9 million and it sounded like Naturalizer Retail lost 2.5. That gets me to sort of a 19 million EBIT in the quarter. If I look at the income statement, it's 13.3, and I understand there was about 1.5 of the Bass transition costs. What sort of is the other delta in there? Are those fully loaded EBIT numbers that you give us or was that other delta of about 4 million from sort of these consulting costs and continuing project impact?

Yes, there's unallocated corporate overhead costs associated with that that need to also be factored in.

What is sort of the ballpark figure for that?

I think, if you just offset the add-up of the operating earnings to the consolidated, that you can back into it.

Okay, so there was no other one-time sort of consulting expenses and that sort of thing in the SG&A this quarter?

Well, there is consulting in the quarter associated with project Accel, but that would be reflected in that. I don't know that it was that significant. I don't want to say that the second-quarter SG&A was skewed by consulting if that was not the case.

Okay.

It was skewed, as you said, by Bass transition but not consulting.

Sam Posier (ph) with Mosaic Research.

Good morning. Joe, can you talk a little bit about how you're planning on attracting more people into the stores? I mean, your store traffic has been sort of steady and then down. Can you talk about the specific marketing strategies there?

I think it's a continuing process from where we started two years ago. I think we are having some success (indiscernible) but if you take look at our first quarter, our traffic count was up during the first quarter. Unfortunately, it wasn't the second, and the (indiscernible) reflection on just a horrible June. But it's a continuation of everything that we have put into place, whether it becomes a product. If you take look at our store, our retro-fitting process, the additional dollars that we have financed in our marketing as our stores and product have come along to the point where we could spend the marketing dollars to complement the other two strategies. I think that that's starting to pay off. We were excited about our first quarter, again disappointed in the second by a terrible June, and okay July. So I think we are starting to see our traffic come back a little bit and start paying off and then the strategic initiatives that we put into place. Again, we will have to take a look at the third and fourth quarter and see if we continue to make progress.

But without going into numbers, Sam, if I go back three years ago and track our store traffic from three years ago and do it by quarter through the end of the second quarter this year, then we have showed continual improvement. I anticipate that to continue to improve as we go through the balance of this year and into '05, again driven off the three strategic initiatives we put in place with the product, stores and marketing.

Great. Then Diane, you mentioned that Naturalizer and LifeStride are up there, up on the list (indiscernible) Naturalizer is the number two brand in department stores according to NPD.

Yes.

The business there is shrinking. Is that a bigger piece of a smaller pie? Because with that business dropping off a little bit --.

Well, actually, department stores for the quarter and for the first half -- I don't have the numbers in front of me, but I know there was growth in that channel during that time period, so it was real market share gains in that channel for the first half. It has over (indiscernible) department stores over the last couple of years have been under pressure in terms of overall performance. But Naturalizer and LifeStride in that -- for these last six months actually did have market-share gains.

To complement what Diane said, Sam, our turns of our -- the turn of our product in department stores increased nicely as well, so on a lower inventory base, our product turn generated those kind of market share gains, so it's a combination.

So where's the softness coming in both of those, then?

The softness in department stores or Naturalizer?

In Naturalizer and LifeStride?

I think Naturalizer, like everything else, casuals is certainly part of the challenge there, but our business in LifeStride on a -- you know, you get some swings because we have our own business with Famous and internal and things like that, but that business is just fine. Don't be off-track by the flat water. It sort of spiked between some inter-company business (indiscernible) external basis we were still up and the business continues to grow. I think Naturalizer has had more modest growth in the moderate zone. You know, we are -- were not going to get as many reorders in the second quarter because of the poor sandal business, as we typically would have. That probably accounts for most of it, would be maybe a softening in the growth rate in both Naturalizer and LifeStride. But our expectations -- and I think Andy gave orders numbers things. We don't give orders by division but our book for the third quarter is just fine.

I would just come back onto what Andy said, too. Turns at retail were up significantly with most of our retail partners, so again, the retail performance of those brands was good and gained share.

I think if you look at profitability for the quarter, I think we've said it six ways, Sam, so clearly we're not trying to hide anything. We took markdowns and allowances at wholesale and retail to keep our project impact standards in line, keep our inventory fresh, and make sure we don't have any poor, lagging problems from the sandal and casual shortfall in the first half or primarily in the second quarter. So that's probably what you're seeing.

From Slater (ph) Asset Management, we'll hear from Steve Martin (ph).

Two questions, most of the others have been answered. Payless made some announcements about store closings and possible longer-term restructuring. Can you comment on -- I know you don't like to get too specific, but sort of where you are with them?

The second question, Joe, there's a lot of Ug-like product in the market. Is it too early to get a read on how that is going to shake out, recognizing that you don't have Ugs per se? When you look at your open-to-buy dollars into the fourth quarter, which is more of a boot season, where did the Ug dollars come out of?

Let me address the retail question first in regards to Ug. (technical difficulty) -- surprising. No, we don't have Ugs. Obviously we have our own programs with other vendors that are Ug-type boots. There is a lot of that product obviously in the marketplace; it will continue to be more so as we go into September and in the fall. It has been surprising that the product, not only original Ugs (indiscernible) you talk about the retailers but Ug-like product has sold extremely well, surprisingly, for the first couple of weeks of August, so we expect to see that continue.

We didn't take dollars out of anyplace else. We actually added dollars to our boot category, especially as we took a look at mid-September through mid-November. So, we didn't take it out of any category. We looked at it as additional business in women's.

The only thing that will be interesting to see how pricey that gets, and we are aware of that -- how pricey that gets. Ugs will still sell because it's the original, but I think you'll be able to find that product at anywhere from 15, $20 up through 60 or 70 in a lot of retailers.

What kind of price points are you guys trying to get on that?

We're not going to get down into lower-priced product. We're going to stay at 50, $60 and above. So we will let some other people really look at the 20, $30 product and we are going to stay at about 50, $60.

You know, the Payless Shoesource announcement obviously has a couple of parts to it and we certainly are a major supplier there. So the Parade business will be ascertained when they finalize where that end up. I suspect that we will be able to maintain our share of whatever that business is or wherever it is. I think that we are well aware in calculating what this size chain differentiation would be, but I think our focus -- and we've had, as I'm sure every other vendor has had, we've had a number of meetings with Payless management to talk about opportunities to get greater share of their business.

Again, I would point particularly to children's as areas we are working on. When you look at the breadth of the license opportunities Disney offers us, it gives us an opportunity to differentiate and do some things there, so I'm sure we are working down some plans there as well. So it's going to be our job to get our fair share of that business. We're going to be (indiscernible). I think we've calculated it and (inaudible) basis.

Andy, do you have anything to add there?

(inaudible) -- (Multiple Speakers).

I think that's where we are at.

John Shanley with Susquehanna Financial.

Just a quick question, if you could? On the 8.4 percent build in inventory, either Andy or Ron, was that more weighted towards the wholesale or the retail side of the business?

That was Joe getting you happy? He is going to be ready for back-to-school!

That was on the athletic side. If you take a look at the business swings, again and I mentioned that athletics did show a comp gain in June/July. We have gotten a little more aggressive with our athletic business, not only for back-to-school but I think we see some opportunity also going into third and fourth quarter. So, we have prepped our Athletics business a little bit more, but that's where we see the opportunity coming, both now and as we go forward in future quarters. So, we have increased our inventory. We will expect to see better results coming from that at retail but if it doesn't, we have always managed our inventory well, so we'll see.

I think it was a planned act; it was a planned act, you know, early on.

I think that's exactly right. I think it's Famous-driven. It also includes -- you know, we've more stores open now and we also have Bass in the fold, so it's really a combination of the three, but I think Famous is the driver.

Okay, that's understandable. Can you give us an update in terms of where you are in terms of store monetization? How many stores have been upgraded and what's the expectation in terms of completing the process?

Two things -- it's hard to answer and not hard to answer. There's almost 450 stores completely renovated, and that's between -- there's two segments there -- between vanilla and the new chocolate with our chocolate and cherry color. There are 240 stores. We started the renovations; we continued the renovations in last year in vanilla stores as we transferred over to chocolate and cherry -- had eight of those in January. As of today, we have 240. We anticipate to have over 500 of those done by spring, March/April of '05. That's about 550 out of 700 stores. Remember, we have 200 outlet stores.

Right. You're not touching those, right?

No, that is just paint and carpet. So that will leave us about 150 stores yet to do as of March or April, and out of that 150, there will probably be 75 that we won't touch simply because the leases are coming up and we don't see putting the investment in that So by back-to-school next year '05, we will be done.

Okay, that's good. Can you give us any indication in terms of the level of productivity that the upgraded stores are generating? Is there a noticeable improvement?

Again, a little too early. I think I mentioned, back in May or June, someone else asked me the question -- I'm not sure whether it was you -- that I'd rather get through back-to-school. You know, almost 150 of those came onboard from June through the first of August -- just a huge push. But again, I think we're going to measure it. I don't have an answer for you. I will answer it sometime after mid-September. But I think the main point is I think it's the cost of doing business to continue to upgrade your stores. We would have spent that capital anyway, whether it becomes a new format or as we go forward into continuing investment to try to differentiate our stores from everyone else in this channel. So, I will have a better answer towards the end of September.

Virginia Genereux with Merrill Lynch.

Thank you. Just a follow-up -- maybe Ron, you said that you made the point that Naturalizer -- that the wholesale/retail businesses combined were up, year-over-year. Was that for the quarter? Because if I add -- it's tough to get there, even adding back sort of the Bass launch costs.

No, it's for the year. I know it's for the year because we were doing some work this week and I was looking at a report that had month and year on it but I think for the quarter as well. As a matter of fact, Andy is just nodding for sure for the quarter as well, so again, we manage that business as one critical component. Every time, you know, Virginia, when we sit down and we talk about NPD and we look at that sheet, we've got three, four SKUs from Naturalizer in the top 10, top 20 things. So many of those emanate from great early reads and results from the retail stores, so you add that (indiscernible) (inaudible). Ultimately and I think we're starting to see it now, I think Diane talked to the effects of color and style in the marketplace. While Naturalizer clearly is casual comfort with great styling, you know, the dressy, more updated looks -- we haven't gotten that distribution or earned that distribution in department stores before, but as the moderate zone gets more dressy, we expect to get a bigger chunk of the tailored business with Naturalizer in department stores as well. So, the answer to your question is all-in, year-over-year, quarter-over-quarter, Naturalizer is growing.

To give you a little flavor, Virginia, for the quarter, Naturalizer U.S. wholesale is up; Naturalizer Canada wholesale is up; Naturalizer retail U.S. and Canada are down. The wholesale strength more than offset the weakness at retail and that kind of was reflected in I think the comments you heard this morning.

We can talk about that afterwards. Let me ask you guys this -- the first-half Naturalizer Retail performance, sort of operating profit as you guys reported down almost 5 million. I mean, that's dramatically below where it's been, I mean, going back many, many years, even prior to these restructurings. So, as you look at your retail segment, again, as you look at your retail segment alone, Ron, do you think about -- are there thoughts that, you know what, maybe we don't need this many either stores in Canada or outlet stores, what have you?

Yes, no doubt about it. I think we're looking at that entire mix right now and trying to do -- you know, we've been working with some people -- Virginia, I would say this has been a sort of chronic challenge for us, and so we have actually engaged some outside people to sort of look at it with some fresh eyes and look through it. They've done a lot of work and in the next quarter or so, we will update that work. But clearly, when we look at the work they've done, they've come to the same conclusion; that the proper mix of these things is essential to our business. We will see some -- I think we will see some more flagship locations; we will see some more focus on fashion locations; we will see fewer sort of just locations for distribution.

We need to understand the Canadian platform works a little different. Again, when you look at retail and the difference in retail performing, so much of it this quarter is driven by the casual and sandals part, both in the U.S. and Canada, and not insignificant in Canada most probably from a weather and a timing bit. While I don't think you'll ever know, Virginia, you know, we know we made the right decision by closing the factory up there and moving to offshore sourcing. We knows that because, and Andy said, our wholesale margin and profit is up and it's driven entirely by the offshore sourcing.

On the other side, we've ran through a whole lot of sandals through the manufacturing platform up in Canada in the first quarter of this year, and so (indiscernible) no shoes get pushed to retail in the second quarter. I don't even know -- it's hard to say whether it was a miss or we just got caught in the throes of the a bad spring but clearly that wasn't the right decision. So that had a big effect on that retail business, both in Canada and the U.S., the sandal/casual business is the issue. As we get early here -- you know, we haven't even finished clearance in Naturalizer stores for spring yet, so it's too early to get real excited about fall.

On the other hand, because we have built a more aggressive test, learn and react program with Naturalizer, we do have now data year-over-year that shows our prospects for fall are encouraging, so you get the whole story there.

Great. Thank you all.

Mr. Fromm, there appears to be no further questions. I will turn the conference back over to you for any closing remarks, sir.

Thanks, everybody, for joining us. I think terrific questions, I appreciate your support. We look forward -- as you can imagine, we look forward with next quarter in mind, and we will talk to you in November if not sooner. Thanks a lot.

That does conclude our teleconference for today and our webcast. A replay will be available through Brown Shoe's Web site and also dialing in at 719-457-0820 and referencing the confirmation code of 529375. We would like to thank you all for your participation. You may now all disconnect.