Caleres Inc (CAL) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Brown Shoe third-quarter 2004 financial results conference call.

This call is made possible due to the public via the Web cast in accordance with the SEC Regulation FD. (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 are not current or historical facts, but are forward-looking statements.

These involve known and unknown risks and uncertainties that can cause actual results to materially differ from historical results or from any future results expressed or implied by any 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 factors listed from time to time in the Company's SEC reports.

Copies of the Company's reports are available online and from the Company's Investor Relations Department.

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

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

And now I would like to turn the call over to Mr. Ronald Fromm, Chairman and CEO of the Brown Shoe Company.

Joining Mr. Fromm are Brown Shoe's President Diane Sullivan, its Chief Financial Officer Andy Rosen, and Joe Wood, President of Brown Shoe's Famous Footwear division.

Please go ahead, Mr. Fromm.

Good morning.

Thank you all for joining us to discuss our third-quarter fiscal 2004 results.

While we are pleased to report earnings that were a penny ahead of our recently revised expectations, we are disappointed that we were unable to exceed last year's exceptional performance due to challenges in certain areas of our wholesale business and at Naturalizer Retail.

As you certainly noted with our press release, we expected the challenging retail environment to continue into the fourth quarter, especially within the moderate zone, and therefore announce today that we are lowering our full-year earnings guidance to $2.35 to $2.50 per share.

Again, this has been more than a little disappointing, but we have seen the pressure on our department store business increase since September, and we think that prudence is important here.

We anticipate business will remain promotional in this channel as well.

You know having said that we believe our LifeStride, our men's and women's mass-market businesses, and our Famous Footwear division will be on plan delivering their projected earnings for the fourth quarter.

Just a few highlights now looking at the third quarter.

Net sales of $514.8 million are up 4.3 percent from 493.4 million a year ago.

And diluted earnings per share totaled $1.01, down from last year's $1.13.

We ended the quarter once again with a very strong balance sheet.

Our debt to capital ratio was solid at 26.9 percent.

During the quarter, we continue to focus on the key strategic initiatives that we have laid out.

First creating differentiation in our stores, our products and our brands in order to build through competitive advantage.

Secondly, delivering compelling styles to build brand preference and increase brand equity both at wholesale and retail.

And third improving sell-through rates by increasing our speed to market and intensifying our test and (inaudible) practices.

These initiatives have led us to own plan performance in our Famous Footwear chain despite a challenging back-to-school period, and we have benefited from our commitment to exclusive products and an improved store format that really sets us apart from the competition.

At wholesale these initiatives have led us to notable sales gains achieved in our LifeStride and our Carlos Santana business, which grew 19 percent and 66 percent respectfully.

LifeStride, where the business model is focused on sell-throughs, excelled at balancing its merchandising classification during this period, and the Carlos, with its compelling styles, help us continue to penetrate into the better zone.

And within our mass channel, our men's and athletics business performed well.

Earnings were impacted by the challenges within our children's, Bass and Naturalizer segments.

As we have shared previously, we are working diligently to improve these segments of our business with actions that include our new Disney license platform, fine-tuning our Bass business model, and as you will hear from Diane, several new management changes which will benefit our Naturalizer business.

The new organizational structure should allow us to make Brown Shoe Company stronger, faster and more efficient.

And now I would like to turn the call over to Diane Sullivan to review some of our organizational structure and our sales highlights.

Good morning and thanks, Ron.

Last week we announced changes to our organizational structure that are expected to strengthen our operating platform and better prepare it for growth.

On the wholesale side, we created one customer focus division by providing our Naturalizer wholesale division with Brown Shoe wholesale.

This division previously operated our LifeStride, Dr. Scholl's, Carlos, Bass Kids and our private-label businesses.

The new structure will allow us to implement the consistent approach across each of our brands and present a comprehensive portfolio brands that focus on different segments of the footwear market.

Specifically we will be able to present our entire portfolio of brands to retailers with each of our brands collaborating to bring a common focus on maximizing sell-through rates, driving growth margin dollars through product differentiation, tight inventory management, and by ensuring that we have the appropriate style for each target consumer segment.

The bottom line is that these efforts are all designed and aimed at increasing our market share and profitability as we implement this approach with our retail partners.

Importantly, this new structure allows us to better maximize project excel efforts, which are dedicated to increasing our speed to market for each of the brands that we operate.

Gary Rich has been charged with leading this wholesale division.

We are very confident in his abilities, especially given his proven track record here at Brown Shoe.

In addition to this change, we have also created a specialty retail division which will be headed by John Mazurk.

John has an impressive background in both the department store and specialty store channels, and since January 2002, he has been part of our Famous Footwear team cutting our store operations.

Our 365 U.S. and Canadian Naturalizer retail stores and our 16 F.X.

LaSalle stores will report to John, while our 914 store Famous Footwear division continues to operate under Joe.

So going forward our specialty retail division will be charged with improving the profitability of our store base.

We have several initiatives underway -- evaluating each of our locations, looking for opportunities to build the brands, looking at how we maximize the very real potential of our test and learn practices in the store, and an additionally we continue to drive the integration of our Canadian and U.S. operations.

It is clear that we have lots of work to do, and this is evidenced by the increased operating loss reported for Naturalizer retail in the quarter.

Nonetheless, we remain committed to improving the performance of this segment and developing a model that maximizes the penetration and contribution of the Naturalizer brand.

More news and details to follow in the next quarter.

Now turning to a review of our major wholesale brands, starting with Naturalizer wholesale.

Our Naturalizer wholesale business was challenged during the third quarter with sales down 10 percent compared to the third quarter of last year.

Clearly the environment was tough as we faced a market shift favoring the better dressed and active casual segments of the marketplace.

And as you all know, Naturalizer's strong foothold is in the moderate segment in both casual and tailored casual where weak consumer demand caused higher-than-expected markdowns.

On the positive front, Naturalizer year-to-date has gained market share, and again in September, it was the number two NPD spot for women's footwear in department stores.

With that said, we have identified and are actively focusing on critical issues that need to be addressed.

Number one, ensuring that we have trend-right product.

Number two, making sure that we are balancing these assortments at retail across all classifications.

And three, making sure that as the consumer continues to look for freshness, we must be careful to manage our inventory levels and flow of goods so that they work together to satisfy consumer demand and ensure profitability at the same time.

We are confident that our initiatives will give Naturalizer an improved profitability profile for 2005.

At LifeStride our performance was terrific with sales rising 19 percent during the quarter exceeding our expectations.

LifeStride was one of the few brands showing gains in the department store sector this quarter, and it really benefited by delivering compelling assortments in the right quantities of dressed, tailored and casual styles.

Carlos, our Carlos brand continues to build on the positive momentum that it had from the first half of the year with sales up 66 percent in the third quarter.

While this is still a small division for us, Carlos is important because it has given us an entry into the better market and has proven that we can perform there.

Now looking at the challenges in our children's and our Bass business.

In children's, as expected, we experienced a sales and profit decline in the quarter.

And as you may recall, we have talked about the lack of fresh new properties in our character footwear business, and this continues to contribute to the weakness.

As we look to 2005, we will begin to benefit from new license properties such as Disney and Star Wars.

At Bass, both sales and operating profit were below our initial expectations.

On a positive note, we have continued to make progress in redesigning the Bass product, looking at improving margins, repositioning the brand, and some of our latest shipments are really showing some improved selling at retail.

It is early and we still have a lot of work to do, but we continue to believe that Bass presents us with good potential over time.

And at our mass business, our Dr. Scholl's casual and athletic products for men and women continued to perform extremely well, and this is expected to translate into solid gains for the year.

And our private-label business performed with the market, down just slightly for the quarter.

So in total, while our wholesale sales results were mixed, we believe our new portfolio approach will have benefits for all of our brands, allowing us to use the consistent major account strategy approach to withstand sales, improve our margins and build market share for each of our brands for the long-term.

Turning to our retail businesses.

At Famous Footwear, sales were 312 million, a 3.3 percent increase compared to sales of 302 million last year.

Operating earnings were up 5.9 percent to 24.8 million.

Here we are pleased that Famous reported on plan profit results for the quarter, especially given the difficult back-to-school season.

The differentiation in our product and stores is yielding good results with expectations of marketshare gains going forward.

And now I would like to turn the call over to Joe.

Thank you, Diane, and good morning.

We are pleased to report solid third-quarter results during a very competitive sales period.

Sales for the quarter were off slightly at just .4 percent on a comp store basis as August sales were less than planned.

Our comp store increases in both September and October just could not offset the August loss.

However, as Diane indicated, an improvement in our operating earnings during the quarter permitted us to deliver on our financial projections, and our fiscal year-end projections also remain on plan.

Back-to-school did come late as we originally forecasted.

Our shifting of product delivery and marketing initiatives to compensate for a late back-to-school proved to be efficient and timely, and our sales performance validated the anticipated late selling season.

In total our sales rose 3.3 percent for the quarter driven by Athletics, which experienced a 9 percent increase in business.

In our non-Athletics, while our children's business increased by 5 percent, our men's categories were down 1 percent.

At the same time, our women's business declined by 6 percent during the same period.

Both of these declines occurred in the casual categories of our businesses, and was not unlike the same results experienced by others in the footwear industry.

As I have mentioned in the past, it is rare that all categories across the board are up at the same timeframe, so it is understandable when a category like women's and men's casuals is slow as the focus has shifted to fashion Athletics and dressed.

It is simply a consumer demand driven by different desires to fill their closets.

Clearly I believe the advantages of being a family footwear chain assist us during the quarter as we correctly balanced our assortments favoring the stronger trending categories, and obviously it has enabled us to generate strong gains in Athletics, particularly in the fashion Athletics styles driven by color and aided by the marketing enthusiasm we generated around our exclusive programs.

At this point, we know our Athletic category performed very well in a very competitive landscape.

Now at the same time we funded our women's and men's dress category, both of which, especially women's, continues to show sales momentum, while we reduced our commitment to a casual footwear category.

For our women's and men's non-Athletics sales, we are below a year ago.

We have begun to see a rate of decline, a moderate decline, from September to October and are pleased to cease the building in this segment of our business as we start to enter the holiday selling season.

During the third quarter, we made the decision to flow our merchandise differently than previous years to better match our customer's shopping patterns which is closer to need.

This was particularly evident as it pertained to our boot business whether it be in women's, men's or children's.

Currently boots are selling well in states that have experienced snow and cold weather.

Boots sales, however, are currently down to last year as we had planned and as others are currently experiencing in their businesses.

That said, we still fully expect the boot business to reverse its current trend as we enter the true boot selling season.

As we look ahead, we will continue to use the sales flexibility of our store formats to address the desires of our consumers, meeting their needs with the types of trend like current product by category that they prefer.

This flexibility continues to work well for us and is expected to continue to separate us from others, enabling our Famous to drive market share gains.

We are well positioned for the start of holiday shopping that kicks off over the Thanksgiving weekend.

Similar to back-to-school, our initiatives continue to be focused on trend current product, exclusive styling, building brands, a great value not a price, and a clear marketing message that supports those initiatives.

We anticipate these efforts to translate into increased sales in our stores for the fourth quarter.

In summary our ongoing strategies did generate solid third-quarter results.

Our merchandising offering continues to be fresh and trend current.

Our store renovation program remains on schedule at an accelerated pace as we have discussed before, and our store presentation and marketing direction is designed to further set us apart from our competition.

Our continued work to differentiate Famous Footwear with compelling assortments, innovative presentations and differentiating marketing messages to consumers are expected to drive a positive fourth-quarter business and subsequently achieve our planned year-end results.

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

Good morning, everyone.

Brown Shoe Company consolidated net sales for the quarter totaled $514.8 million, increasing 4.3 percent from 493.4 million during the third quarter of last year.

Our new Bass business represented about half of this increase.

Total operating income declined by 4.1 million to 28.3 million or 5.5 percent of net sales from 32.4 million or 6.6 percent of sales last year.

Components of operating income included a 110 basis point decline in gross profit margin to 40.4 percent from 41.5 percent last year.

This decline was primarily due to increased markdowns taken within certain of our wholesale brands and the Naturalizer Retail segment.

Famous Footwear margins were down slightly also from the third quarter last year.

SG&A increased by 4.3 percent to 179.8 million, in line with our sales increase, and accordingly as a percent of sales, SG&A was even with last year at 34.9 percent.

In the third quarter, we also benefited from reduced compensation costs associated with stock-based and incentive compensation plans.

Net income for the quarter was 18.8 million compared to 21.2 million last year, and diluted earnings per share totaled $1.01 versus $1.13 in the year ago quarter.

Breaking our third-quarter results down further, at Famous Footwear we reported sales of 311.7 million, up 3.3 percent from 301.6 million in the third quarter last year.

Comp store sales declined by 0.4 percent for the quarter due to declines reported in August that were not entirely offset by the increases we posted in September and October.

The chain did a good job of expense management throughout the period.

As a result, operating earnings were up 5.9 percent to $24.8 million or 8 percent of sales versus 23.4 million or 7.8 percent of sales in the year ago quarter.

Year-to-date we opened 54 new stores and closed 33 stores and ended the quarter with 914 total stores in Famous.

Turning to wholesale, in the third quarter, sales were 148.7 million, up 6.2 percent from 140.1 million last year.

Total operating earnings declined by 5.1 million to 10.4 million from 15.5 million last year.

As Ron and Diane outlined, we have several initiatives underway, including a new organizational structure aimed at improving operating earnings within our wholesale segment going forward.

At Naturalizer Retail, our sales totaled 49.9 million compared to 49.8 million in the third quarter last year, while combined U.S. and Canadian comp store sales fell by 2.8 percent for the quarter.

We ended the third quarter with 211 U.S. stores this year versus 210 stores last year.

Our Canadian chain operated 170 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 $1.5 million this quarter versus a loss of $166,000 in the year ago quarter.

Once again, we believe our new management structure, together with the work underway, will finally put us on track to optimize the Naturalizer stores.

Net interest expense totaled $1.8 million in the third quarter compared to 2.1 million last year.

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

As Ron indicated, the Company ended the quarter with a strong balance sheet.

Cash flow from operating activities was $23.9 million.

Total inventory levels at the end of the third quarter were 410 million, rising 8.9 percent due largely to the addition of Bass, additional stores in Famous Footwear and Dr. Scholl's.

This compares to 376.6 million in the prior year quarter.

Importantly, inventories remain clean and current.

Total debt increased by 24 million to 143.5 million compared to 119.5 million in the third quarter last year, and debt to total capital totaled 26.9 percent, increasing from 25.8 percent at quarter-end last year.

Year-to-date CapEx has totaled 23.9 million, and we estimate CapEx for fiscal 2004 in a range around $30 million.

For the first nine months of fiscal 2004, net sales totaled 1,465,000,000, increasing 4.8 percent from 1.398 billion during the first nine months of fiscal 2003.

Total operating income decreased 14.9 percent to 56.5 million or 3.9 percent of net sales compared to 66.4 million or 4.7 percent of sales in the first nine months of last year.

Net earnings were 35.2 million compared to 41.8 million last year, and diluted earnings per share declined to $1.87 compared to $2.25 during the first nine months of last year.

Remember, 2004 results reflect approximately 17 cents per share associated with the Bass transition costs.

Offsetting these charges are benefits from reduced compensation costs associated with stock-based and incentive compensation plans that were 32 cents per share lower than the comparable nine-month period last year.

As to forward guidance, given the view that the difficult retail environment will continue to affect our wholesale business in the fourth quarter, we now estimate fiscal 2004 diluted earnings per share in the range of $2.35 to $2.50.

For the fourth quarter, we estimate diluted earnings per share in the range of 48 cents to 63 cents.

This all compares to fiscal 2003 earnings per share of $2.52 for the full year and 27 cents for the fourth quarter.

As you will recall, we had special charges that affected both the fourth quarter and full year 2003.

These included special charges of 14 cents connected with the closing of our last Canadian manufacturing facility and the 11 cents per share from our environmental litigation charge.

Finally, I would say our guidance is predicated on an expectation of slightly positive same-store sales performance at our Famous Footwear division.

With that, I will turn the call back over to Ron.

Thanks, Andy, Joe and Diane.

You know in conclusion clearly the retail climate remains disappointing.

You know on the other hand we're very excited and encouraged about the number of strategies that we are currently implementing that we have been talking about, and we continue to see lots of opportunities to improve our business and we are very focused on making that improvement happen.

You know our move to different Famous Footwear is starting to see great traction and gain traction particularly with the consumer.

The stores look great, the product looks great, exclusives in the marketing is truly making a difference, and we are very encouraged by the progress at Famous Footwear.

You know despite the quarter's setback, we know Naturalizer is a great brand with a strong franchise and a very healthy market share, and our teams are working to make it even better and the changes that we announced we think will help us do that.

We know that rebuilding Bass will take a little time.

It is a bit more than we thought, but the opportunity is real.

We see that every day when we see our new retail results.

Early signs are encouraging, and we will continue to do some great brand building work with the Heritage of the Bass name.

Still looking at our kids business, clearly it has been a difficult year, and that landscape has changed.

We know that retailers are preferring Evergreen products and properties, and that is why we have chosen to partner with Disney, and with the Disney platform, we are going to see more of that in the future.

Our enterprisewide initiatives around speed to market creating differentiation call for us to become faster and smarter, and Project Excel continues to guide us in getting that work done.

We see the small successes from that work every day.

We also continue to believe that the diversification in our business model by brand, by segment and by breakpoint positions us to maintain and grow our leadership position within the footwear industry.

Now I will turn the call back over to the operator so we can begin the question-and-answer portion.

(OPERATOR INSTRUCTIONS).

John Shanley.

Susquehanna Financial Group.

Good morning, folks.

Either Diane or Ron, I wonder if you can drill down with us a little bit more on the wholesale results and also the forecast that you gave us.

The unfilled orders from the press release were up 6 percent, yet you are guiding us down in the fourth quarter.

And wholesale orders were down substantially or sales were down substantially in the fourth quarter of last year, down 12 percent.

Can you clarify it a little bit more and maybe give us some color in terms of what -- is this confined to a few brands like Bass and it is more widespread, and also is it confined to some retail accounts whether it is Payless or whoever that is causing the substantial downtick in terms of wholesale order activity?

Well, I think I will let Diane talk in a moment.

First of all, when we look at it, we are up 6 percent in total, and so Bass is also up 1.7 percent.

So you can see that the swing is in our network.

Let me make sure I am clear here.

Excluding Bass, we are up 1.7 percent.

So as you said, the wholesale business is just slightly up, and I think that as we continue to look forward, you are seeing the shifts in some of our businesses in terms of how we are flowing goods on our fill-in side, particularly with some of our Dr. Scholl's comfort businesses shifted from where a more significant part of it is on a fill-in basis.

And so your future orders business will show some decline there.

But Diane has probably got a clearer view.

The continuing challenge is really around our kids business and the Bass business and now our Naturalizer wholesale business.

And when we look at the on order base and we look at how we expect our business to perform through the rest of this year, I wanted to take a very cautious approach to how we looked at that and how we forecasted.

We have seen, particularly in Naturalizer wholesale, the performance of that brand at retail eroding in the last, I would say, 30 to 60 days, certainly faster than we had up until this point in time.

And we have been managing our shipments and managing inventory levels to ensure that we minimize any markdown risk that we have out there in the fourth quarter.

So our reorders during this quarter you know we have managed very carefully.

So all of those things combined, kids, Bass and the Naturalizer wholesale piece of it have contributed.

And then you add to the strength, when you look John at NPD these last couple of months, dress is up significantly, tailored casual and casual business is down.

Boots are significantly down as well.

All of those things combined are impacting our overall performance.

I guess what I'm trying to get to, Diane, is the 33 percent decline in wholesale operating profits, where was that heavily focused?

Was it weighted in Bass, or was it also in Dr. Scholl's originals and the Naturalizer?

I am just trying to find out where it was.

John, it is a mix of kids, it is a mix of original Dr. Scholl's, and it is a mix of Bass and Naturalizer.

So it is all four, and they are fairly equally split in terms of the overall impact on the quarter.

Okay.

That helps clarify it.

I will just take my second question if I can.

Andy or Ron, there was a substantial increase in Notes Payable up about 172 percent.

Why are you borrowing money when you're sitting on about $20 million more cash than you had at the end of the third quarter of last year?

Well, as you know, John, our payables leverage a float throughout the year, and we try to leverage that as best we can.

The specific answer to your question is we do collect an awful lot of earnings offshore, and you can find yourself in a position where you are generating net positive cash, and a good portion of that cash associated is collected offshore and not repatriated.

So you can find yourself in a position where you're using cash domestically, but next you are collecting earnings and cash offshore.

And so as you close out the third quarter you have got inventory that you have brought in for your heaviest season where you have to pay for it, and it is particularly at Famous, and so that is pretty much the driver of it.

It is the mix of cash earned domestically versus cash earned offshore.

I see.

And also on the balance sheet, the 9 percent increase in inventories, was that at retail or wholesale for the most part?

It is a combination, John.

You have new stores additional stores at Famous Footwear, number one.

You're also beginning to bring in some inventory given that you have got much earlier Easter coming this year and in anticipation of backlogs at the West Coast, so you want to prepare yourself there.

So some portion of it is at retail, but this year the comparisons also are we have Bass that we did not have last year, and we are also running in stock Dr. Scholl's inventory positions for some of the mass merchants, which is new.

It is very beneficial both to Brown and to our retail partners.

So you've got the Dr. Scholl's piece and the Bass piece which are driving the wholesale component of it.

And so I think it is in both places, John.

Scott Krasik.

C.L. King.

Good morning, everybody.

Diane, I guess a question best answered by you.

Going back to Naturalizer wholesale, one of the reasons that Naturalizer did so well was you were taking market share from some of the Nine West brands.

Jones on their conference call talked a lot about in 2005 the relaunch of Easy Steer (ph) with new technology, and also the Jones footwear brands that are going to be coming out next year.

How do you view that as impacting the Naturalizer business going forward?

Well, we believe in and know that Naturalizer is an incredible brand that has a very strong franchise and a great connection with consumers.

It has been solidly now at a number two or three position in the market, and when we look at its performance relative to this year to any of the Nine West brands, in the Jones portfolio we have performed almost consistently better than those brands.

But our focus is on making sure that we continue on Naturalizer to build our trend-right product that we need, to do a better job of diversifying our assortments across different classifications so that we can weather these trends when the classifications move from one category to the other.

And then continue to do -- we think there's a little more opportunity for us to do better work in terms of sort of I guess managing and a little bit better tightening our flow and our inventory so that we have a little more freshness at retail, but the depth of the assortment that we present out there is a little lighter.

So we are paying close attention every day, but really focused on what do we need to do to continue to build Naturalizer and connect with consumers.

Are you planning for the Naturalizer wholesale brand to be up next year year-over-year?

We have not completed the plan for next year yet, so we are in the process of doing that.

So we will know next 30 days or so.

Then, Andy, the guidance you gave for the fourth quarter is a pretty wide range.

Is it just Famous Footwear comps that could get you to the high end of that range, or is there something else that could get you to the high-end?

You know, this is a difficult marketplace right now.

Famous Footwear is our largest business as most of you know, and we cannot get there without moderate comps at Famous Footwear.

And I don't think that is an (inaudible) projection.

I think Famous Footwear has basically been hanging in there up through current business.

I do think that the risk in our wholesale business has evidenced itself through much of this year, and I think we have taken a cautionary approach to the fourth quarter given some of the pushback pressure we have seen from the department stores, allowance pressure and the like.

So the conservative posture I think while it is dependent on Famous Footwear, our conservative posture to a large degree reflects uncertainties associated with the moderate retail markets that the department stores are selling into as well as mix.

So yes, it's pretty much across the board.

What is your fourth-quarter comp assumption for Famous?

Is it basically flat or 1 percent or --?

Yes, it is flat to up 1 or so.

It is pretty consistent with where we have been targeting the last half of the year.

Okay.

Again, I think we can do it without stable comps at Famous Footwear.

I think the risk of the fourth quarter and the reason for the wide range is uncertainty around the wholesale selling into.

Can you quantify some of the savings with the restructuring of the Naturalizer division?

Not really at this time.

I think again we just made those announcements.

I think we are focused on improving the whole Naturalizer brand.

I don't think the restructuring was focused on cost savings as much as it was focused on getting a like mindset around the key components that drive both our retail and our wholesale business.

The thing that I always come back to it is the core synergies or elements of the business we are driving enterprisewide.

And so when we look at project impact, freshness and velocity, and then when we want to make sure that each one of our business units is doing their best job at making sure that freshness and velocity is in front of the consumer.

We think that by combining the wholesale group together, that we get one mindset, a real very strong point of view of how to manage and keep the freshness and the flow high, and I think that our department store partners are looking for us to increase the turn of that product at the department store level.

So to some degree, we sort of do expect a little bit softening of our backlog here because we believe that there are going to be more expectations for the quickness and the speed to market turnover within our department store sector.

We have been working hard on that, and we are making great strides there.

So it does not scare us, but it makes us dependent on getting that reorder business and that flow of business in there.

So much more about soft processes, getting our business model both on the retail side and wholesale side aligned to drive the business and not much about cost savings, although there are always some cost savings when you combine businesses correctly.

I think we continue to work on the combination of our Canadian and domestic Naturalizer business, but again it is focused on how we create a great brand of Naturalizer, not on the cost side.

Thank, guys.

Virginia Syer-Genereux.

Merrill Lynch.

Good morning.

I want to ask you guys about the comp accrual.

I had understood from you you were going to see fit in the fourth quarter that you were going to see 25 to 30 cents of benefit from lower compensation costs.

But you said you have seen 32 cents so far this year, 28 cents this quarter.

Did you pull that forward, and is that no longer in the fourth quarter? (multiple speakers)

I think when you look at the fourth, last year we earned I think something like 27 -- we had about 25 in charges one time which took us to 52.

The comparison between the fourth quarter on comp charges, what we took last year versus what we're going to experience this year, is something around 15 cents a share.

The difference between the two.

And then we have some additional here in the third as we reported.

So our original projections on the fourth quarter were that base business of 52, we knew we had favorable adjustments comparatively speaking of about 15, and then on top of that, earlier we were projecting a 10 to 15 percent improvement in operating performance.

Nothing has changed in the fourth quarter from those earlier calculations with the exception of such stress in the wholesale side on the allowance piece and on top line shortfalls, and some margin pressure as well, that is all operating driven.

The comp comparisons that we anticipated really have not changed.

It is the pressure on the wholesale side that contributed to expected shortfalls in the fourth quarter and some certain uncertainty as to what additional risk if any may remain from that side.

That pretty much kind of summarizes I think that comparison.

Okay, Andy, but I was thinking in the fourth quarter it was a lot higher.

But you're telling me -- we can debate that later -- that it is 15 cents for the fourth quarter you think?

Yes, I think about 15 cents for the fourth quarter, but again it is a floating number.

These plans pay when the Company performs, and they don't pay -- they are working the way they are supposed to, and based on the projections right now, that is about correct.

Okay but that -- you're saying it is still going to be a 47 cent variability -- it is 47 cents less you're paying out this year in total, and that is equally distributed across the operating divisions?

If you include the fourth quarter, that is the current projection.

Okay.

Secondly if I may, can I just ask a couple of questions about the wholesale side given what you're seeing there across the brands?

Maybe the first, Diane, you said that the Naturalizer performance has eroded in the past 30 to 60 days.

Can you be more specific about what you're seeing there?

Yes.

What I would tell you that both in our own retail stores during the month of August and September, we had challenging comps as you saw, and again the sell-through performance on the classifications of business today that the consumer is not responding to as much and that is the casual and tailored casual piece of it.

And then as we look at our department store business, our department store business in the months of October -- August and September were not too bad.

The month of October, though, again saw significant erosion in the performance of Naturalizer and department stores.

And again, although there was some effort to balance the assortment against the number of categories, Naturalizer is just not seen as somebody that --a brand that consumers go to for dressed size products.

So that was not enough to really offset the losses that we are seeing in our tailored casual and casual side.

That again is pretty consistent with the results that we are seeing from NPD and what consumer takeaways are across the department store channels.

The other thing is, Virginia, that boots started off extremely slow, and that typically is a higher price point item as well.

So there was a lot of things around boots and the rate of sale on boots early in the season.

It has just started to pick up right now, and in fact actually our LifeStride business benefited greatly by having a whole new classification of boots that they introduced as part of the business.

And there has been a lot of promotional activity around and in the department store channel.

So I don't know if that helps, but that would be quickly how I would characterize it.

If you think about our business at Naturalizer, the products, our new products in what we call our update zone actually are performing better.

And sometimes it is the stable product portion of the department store business that has been very moderate in its style, and that is the product that is not having the sell-throughs that are up to our historical benchmarks.

So let me ask you all, if Naturalizer retail is comping poorly, do you see that both -- is that both reflected in poor Naturalizer retail results and lower margins at your wholesale division?

This whole arms-length notion, do you know what I mean?

You know -- ask me that question -- say that again.

Is Naturalizer -- is the underperformance of Naturalizer retail also -- one, we know Naturalizer retail operating profit has been very negative.

But the thought always was that you were getting the benefit on the wholesale side.

Is it hurting your wholesale results as well?

You know not to this point in time, it has not hurt the wholesale results year-to-date.

Because when we look at the internal shipments between wholesale to retail, they are fairly consistent.

Also, we increased the penetration of internally sourced products or same-store products I would say in our Canadian stores.

So up to this point in time, Virginia, I don't believe that it has.

I don't know if Andy or Ron see anything different than that, but (multiple speakers)

I think the shortfall in our margin on the wholesale side is strongly attributed to markdown pressure in our department store business.

Okay.

Thanks, Ron.

And can you give us a sense of maybe magnitude?

Who are your biggest customers there?

Well, I won't go into that, but the -- but to some degree I think it has a more even spread.

Diane may have a more specific there.

But I think again when we are talking about markdown allowances, again we are very diligent about how we account for our business.

And so when we see -- and you know this from Project Impact -- when we see weaknesses in our inventory management, we immediately adjust the cost of those goods to meet the impact standards.

So that we continue to put ourselves in the position that we will be clean on inventory come the end of the year.

So we give allowances where we don't see the sell-through, so it is very account specific and it is very account specific at the end of the sell-through period.

But given the current environment and our current sell-through, we believe that we have accurately accounted the reserves for the markdowns and allowances that we see ahead of us.

Okay.

One, how much is the wholesale business now is at one source's backlog, and where do you see that going next year?

You mentioned (multiple speakers)

We are at one business right now.

It is probably around 17 to 18 percent of our total business, and we see that again as there are not as many basic or core products that carry over from season to season, we don't see that part of our business growing going forward into next year, and we have been managing again the replenishment and the reorder piece of the business to make sure our inventory levels at retail don't get out of line either, Virginia.

Thanks, but, Ron, I thought you made some comments that you might see some softening of backlog effectively as the business switches to more replenishment or at once that you're going to have to take on a little more inventory risk effectively?

That is more associated with the Bass -- not the Bass business -- more associated with our mass business.

We talked about our Dr. Scholl's business.

Okay and then just lastly and I will let somebody else get in.

With Dr. Scholl's weakness, you said, Diane, it was sort of downside was balanced across -- is that just -- you know we know who the biggest customer is -- is that problem specifically there?

Can you comment on -- or has that business just gotten as big as it is going to get?

There are two pieces of our Dr. Scholl's business.

Our Dr. Scholl's business in the mass part of our segment is very strong and it is performing well.

The original part of our business, which is a more department store driven piece of it, has been the one that has been more challenging and kind of continued from the spring season when the exercise stand-alone sandals markdowns were fairly heavy, but it is a small component to the total.

Our mass Dr. Scholl's business is very strong right now.

(OPERATOR INSTRUCTIONS).

Sam Posier (ph).

Mosaic Research.

Can you break out the store openings first of all at Famous for the quarter?

You gave the --?

Joe, you got that off the top of your head?

Openings and closings.

Sam, I'm sorry.

For the quarter you wanted the store openings results?

How many you opened and how many you closed?

Oh, for the quarter.

If I'm not mistaken, we opened 23 during the quarter, and we closed at that timeframe about 10 within one or two (inaudible) of that, Sam.

Diane, you talk a lot about updating the assortment in both Naturalizer and Bass product.

Can you give me some idea of what that is?

Where you are looking to update it?

Because about a year and one half ago with the Naturalizer brand, it was making -- the customer in your stores had appeared to have been getting younger than more recently when we have been out in the stores and seen them, they are getting older again.

What changed in that time because it looks like the evolution was there?

Yes.

It is a great question and a good point.

I think on the Naturalizer side of the business again it is a number of different things.

When we talk about trend-right product, we do think that while a couple of years ago that we seemed to be hitting the mark more consistently, we would say over the last season or so we do feel that in terms of being styled right for that woman who is shopping in our stores we are not quite there.

Because women today whether they are 40, 50 or 60 are looking for trend-right product and not product -- that is not fashionable.

So we think we have lost our focus there a little bit and we want to get back to making sure that we are building product and delivering product to the consumer that is consistent with what our needs and demands are and styled just right for her.

So I think it is a fine-tuning and really an evolution of where we have been on Naturalizer.

On the Bass thing, I think you and I had a conversation at one point in time about getting back to the root of where Bass heritage was, around more classic American looks.

And that actually has been a focus for us as you have seen for the last year I would say.

It has finally starting to work for us and pay more dividends.

So getting back again to the core roots of what that brand is about is what we mean by making sure that we are delivering appropriate product.

Just as a follow-up for clarity, we have got the calculator out, and actual store activity for the third quarter at Famous, we actually opened 16 and closed 17.

I think we have a slug of stores, something around 10 or so, that we're going to open the first week in November.

I think directionally what Joe gave you is right on, but specifically for the quarter it was about a breakeven.

They were all opened by the 7th of November.

Just a follow-up, Diane, to that, you described the Bass product as classic American looks.

What is this description of style right with Naturalizer?

What would be the sustained --?

Yes.

I think when we -- we've done actually a lot of work around this the last couple of months, including everything from going out and doing some research where we have looked at the entire women's footwear landscape and did a deep dive into Naturalizer consumers and who they are and what are the different consumer segments that are buying Naturalizer.

And what we have found it sort of sounds simple, but we have three segments.

One of our stores the women -- we refer to them I guess as balancers.

These women are really looking for that perfect balance.

They don't want to sacrifice comfort for style, and they don't want to sacrifice style for comfort in either way.

So they are that group.

Then we have another group that are called -- we call them leaders.

And they are women that are actually looking for a little more fashionability in their product.

And then there is another group that we have that is sort of looking for the more functional side of it.

So we have really been focusing on the balancers, which are these women that will not sacrifice style for comfort or vice versa.

And in terms of the attitude and the look, it really is about I think, you know not overdelivering so that it is fashion or too trendy.

It is this kind of perfect balance, but not also having it too much on the other side of the spectrum either, where it is not feminine, not light, not having a certain to it.

And then making sure that we have and we are working hard at trying to figure out what are those earmarks within Naturalizer that gives that consumer the Qs around what that right style and fashionability is, and then what are the components in the footwear that we need to deliver for her, too.

So it's one of those challenges of finding that right balance and delivering trend-right footwear for her aggressive classifications.

So we're in the process of really kind of fine-tuning and being really clear about what our style point of views is so we can be consistent.

Great.

One just more thing for Joe.

How are you shifting your boot and your athletic business going forward, and how do you see that all playing out going into Q4?

A couple of things.

We have delivered our boot inventory.

Obviously it is November.

We delivered very little in August.

Actually moved it 30 days into September.

Athletic, it is interesting.

We don't anticipate the Athletic business slowing down.

Usually you get a little bit of a slowdown in fourth quarter when you transition into more of outdoor whether it becomes boot or casual business.

But as we head into the middle of November, our athletic business has not slowed down.

As I said, where we have had cold weather, our boots business has been good.

We just constantly delivered it late this year because it did not perform well in August and early September last year.

So we anticipate then the boot season basically for us has been November to mid-January, maybe the end of January.

So we just delivered it the same way and decided why bring it in and sit on it all.

Those take up room in our stores and our warehouse.

So we just delivered it 30 days later and think it was prudent to do so.

You know the boot business has been tough, except for those maybe 10 or 12 states that have had some early snow and cold weather.

I don't know if that answers your question.

You have definitely put more thought into your Athletic business this fall versus last fall, because of the strength of it?

Yes, but I think we saw that -- when you take a look at '03, it was a tough athletic year. '04 started out strong and has remained that way, not only with us but with some other retailers.

I don't think that changes.

You know with the format that we have, if a consumer and it is across the board, in men's, women's and children's, the athletic business is strong.

So it's just not in one gender.

So with the format we have, you know hopefully, which we think we are smart enough to say if that is what they are asking for and that is where the trend is going, which it is and has been since late January, then we are going to fund it that way.

So I don't expect my boot business to be up, but I expect my Athletic business to more than offset that.

Stephen Martin.

Slater Asset Management.

Sam actually asked a lot of my questions about the boot versus athletic.

Joe, when you look at boot for the season, however you define it, I guess mid-November to the end of January, year-over-year do you expect that now to be up, flat or down versus last year?

You know, I think we're going to at this point have to say it's going to be slightly down.

The first two weeks of November have come out a little softer than we had anticipated.

If I have to take a shot at it right now between now and fiscal year-end, I would say our boots sales will be down, again more than offset by our Athletic business.

Now turning to Athletic, if they are running that much ahead of plan, what are you doing to keep in stock?

Because I have seen obviously the Sports Scan data and does show Athletic as not giving up as much ground as I think most retailers expected this time of year?

Well, we have been kind of fortunate in two things.

One, we planned for an increase.

A strong low single digit -- it is running higher than that.

We have been very fortunate with our vendors that have gone out of their way to supply us with the additional footwear that we needed against the trend that we were running.

So we're ready to take a look at a Nike Adidas case with Converse.

They have been outstanding in meeting our needs as far as running ahead of our trend.

So we have been very fortunate.

And when you look out to spring and fashion, you think this color -- I guess classic color, however you want to -- everybody defines it a little differently -- do you think this going to continue one more season again?

Yes, I think we feel pretty comfortable, and obviously we will be placing our back-to-school shoes here in December.

So first quarter is the place.

We feel comfortable with that.

We don't see that trend changing through back-to-school.

I think we are pleased to see that our classic business has not dropped off dramatically as we increase what I consider street fashion color business in Athletics.

So we feel comfortable at least right now in that again we have previewed second quarter.

So we feel comfortable through back-to-school at this point.

All right.

Thanks a lot.

And with that, we will turn it back to Mr. Ronald Fromm for any closing or ending remarks?

Thanks, everybody.

You know you've got to be encouraged by what we see at Famous Footwear and the job that they are doing with the customer in the stores.

We are excited by some real improvement in our test and learn, our LifeStride, our better zone with the Carlos product, what is happening there, and clearly we are focused on improvements where necessary, and we're going to do what it is going to take to get ourselves back to growing this business profitably.

So we look forward to talking to you next quarter.

Thanks a lot.

That does conclude today's conference call.

We thank you very much for your participation and have a good day.