Caleres Inc (CAL) 2004 Q4 法說會逐字稿

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

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

Before we begin I'd like to remind you of the Company's Safe Harbor language.

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

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

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

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

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

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

Now I would 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; its Chief Financial Officer, Andy Rosen; and Joe Wood, President of Brown Shoe's Famous Footwear division.

Please go ahead, Mr. Fromm.

Welcome everybody.

Just for those of you on the call, Joe obviously is calling in from Madison, and Diane is actually in New York this morning, and Andy and I are here in St. Louis.

So welcome.

Thanks for joining us as we discuss our fourth-quarter and fiscal 2004 results.

As we have shared with you, fiscal 2004 for the most part marked some challenging period of time for the Brown Shoe Company.

While we are pleased, you just have to be pleased with the operating results at Famous Footwear, especially in the fourth quarter, and with our ability to see some expansion of our portfolio of brands with the addition of Bass this year.

On the other hand, we were confronted with weaknesses in a number of our core wholesale businesses, as well as our Naturalizer retail segment.

And this, as you know, caused us in our results to fall short of our original expectation.

Indeed, we have learned a great deal from these experiences, and we have made a number of tough decisions.

We also believe that the actions we are taking will result in improved operating performance in 2005.

In fact, as we begin full 2005 focused on bettering all aspects of our business, having already undertaken a number of strategic and tactical initiatives to correct the weaknesses we had in '04.

Number one is being tighter management around our wholesale lines and our selling tactics to ensure high sell-through rates at retail.

Let me hit the Naturalizer subject head-on, if you will.

Clearly the Naturalizer brands in total did not perform up to our expectations.

And we would just state publicly that it does not meet our expectations and it's unacceptable to our executive team and our Board.

Let me remind you a little bit of the timing here.

You will remember that we took decisive action in the middle of the year, made some management changes, as we became aware that in numerous ways we were not living up to our project impact imperatives freshness and velocity disciplines that we know are so important to the success of Naturalizer.

We understood that and recognized it.

We changed some organizational structure to give us a better chance at competing with the Naturalizer brands, and I'm excited about the work that's gone on.

Diane is going to share a little bit more of that with you later on.

But clearly this has been an issue of strong debate.

We made some very deep dives with our strategic planning team here.

I have asked Andy and Diane to partner and read some efforts here to make sure we bring some real clarity to this wholesale retail Naturalizer brand platform that we're so excited about, and we know it means so much for this Company and the process that we're going through.

I also will state the obvious.

We have proven that we can turn businesses around.

We grew Naturalizer from number eight to number two, and it's still number two in department stores.

And we're very proud of that, yet we know it has future growth potential.

Strengthening results with Famous Footwear prove again that we know how to turn businesses around.

And I will remind you that we brought John Mazurk from that Famous team to help aid in this turnaround, another important turnaround for the Company.

You know, Famous Footwear had an exceptional fourth quarter.

We increased our operating earnings 100 percent, over 100 percent, on an 8.7 percent sales gain.

And certainly this testifies to that turnaround capability, and I truly applaud the efforts of Joe and that team.

We're going to apply those same disciplines to the Naturalizer retail segment.

I'm real proud of the way Joe and John and Diane have come together.

And off-line, even though it's not their correct responsibility, are really forming a strong team so that we take this thing and move it forward quickly.

Speed is in our voices and speed is in our action.

Diane will discuss some of that work as we go.

As we go into 2005, this is what I think you should expect from us -- marked progress.

We believe we will be back on track to deliver growth, the growth in earnings and sales that we expect of ourselves.

I would like to start out by saying we have had a robust discussion (technical difficulty)

Please stand by.

Thank you.

I hope everybody is back here.

Going back to 2005, as I said, we expect to show marked progress.

We have already started with a very robust exercise in making sure that we are being very aggressive and very cautious in our planning expenses for next year.

We will detail some of that as we go forward and we have built that into our expectations.

In our wholesale segment, we clearly look for improved performance from Naturalizer.

Just as well, our business at Bass is expected to improve.

And of course we will not have the transition costs that were incurred this year.

And we believe that we have stabilized our children's business and see that growing slightly as we've added new licenses to our fold.

We certainly expect momentum in the rest of our wholesale businesses.

Clearly our Carlos, our LifeStride business and others continue to perform and continue to add that momentum.

And of course, we do have a high expectation of Famous Footwear to deliver positive comps in that 1 to 2 percent, and deliver improved operating earnings.

Andy will walk you through the financials, including impacts of charges, recoveries and restatements due to the accounting lease issues that affected both fiscal 2004 and 2003 later in the call.

Now let me turn it over to Diane who is going to review our fourth-quarter results and some of our business initiatives for a '05.

Good morning, and thanks Ron.

Let me start with Famous Footwear this morning, and as Ron mentioned, it sure feels good to begin to reap the rewards of the strategies that that team has implemented over the last three years.

In the fourth quarter, no matter how you look at it, Famous Footwear recorded tremendous progress.

This success can be attributed to our unrelenting focus on improving our retail platform with the team concentrating on the four key areas that you've heard consistently about -- emphasizing fashion for that fashion value conscious woman and her family; creating a differentiated store format and presentation; showcasing our exclusive product and improving our product offerings; and then advertising this new message to add products to our consumer base.

As Joe will tell you, we're seeing the strong performance from the fourth quarter continue into 2005.

Positive change, as you heard from Ron, is certainly a theme for this year.

And as we look to improve the challenged areas of our Company, particularly Naturalizer retail business, we are going to apply the same discipline and focus that's helping to make Famous Footwear a preferred shopping destination.

But first, let me lay out the wholesale and specialty retail results for the quarter.

In the fourth quarter, wholesale sales were 158 million, up 11.5 percent from 142.3 million last year.

Total operating earnings declined by 2 million to 12.7 million from 14.7 million last year.

The decline in operating income was due to lower sales and higher markdowns and allowances within our Naturalizer division and higher than anticipated first-year losses in our Bass business.

In addition, sales declined in our children's business.

Backlog at the end of the year rose 13 percent with approximately 4 percent of this increase attributed to Bass.

Now results for specialty retail, which includes our 359 Naturalizer stores in the US and Canada and our 16 FX LaSalle stores in Canada, posted sales of 48.1 million compared to 46.9 million in the fourth quarter last year, while combined comp store sales fell by 2 percent for the quarter.

The increase in total sales was attributable to changes in the Canadian dollar exchange rate.

The operating loss for the Naturalizer retail segment worsened to 4.8 million this quarter versus a loss of 1.4 million in the year-ago quarter.

The decline in profitability was due to a number of factors.

First, was a declined in gross margin as a product did not perform, and we increased our promotional activity to clear seasonal inventory.

Also, we were unable to leverage our fixed SG&A expenses due to lower-than-expected sales.

So with this backdrop on the fourth quarter, let me discuss some of our plans for our Naturalizer brand.

And as you know, we have restructured and infused the retail organization with new leadership, with John Mazurk as GM.

John was an important member of the Famous Footwear turnaround team.

And we've also renamed this group specialty retail, which both reflects and reinforces their business focus.

And this meant separating retail from wholesale with the wholesale group moving under Gary Rich's leadership.

Now to improve results going forward, we have begun to implement a five-step approach that is expected to benefit the Naturalizer brand at both retail and wholesale.

First of all, late last year we completed extensive research on the Naturalizer consumer and what she expects of our brand.

We now have a terrific understanding and additional insight into our target customer's demand for both style and comfort.

It also validated for us that too many women still think of Naturalizer as shoes that provide functional comfort without much style.

So our next focus has to be on developing more compelling product.

As I mentioned on the last call, we've begun working to elevate the level of style and comfort in our products.

To augment our existing team we have added new design talent in our Italian office, including a new designer and a trend researcher.

We believe we are making progress, as evidenced by the positive feedback we received from retailers during WSA last month on our Fall '05 line.

Third is marketing.

We're in the process of a rebranding effort that will bring dramatic changes to our marketing, imagery and merchandising.

This work, when unveiled to retailers in August and to the consumer in late '05, will refresh the brand, elevate its style, and differentiate us in the marketplace.

We believe these moves in product and marketing combined will positively impact both our retail and wholesale businesses.

The fourth step is our store strategy.

In addition to the product and marketing efforts just mentioned, we've immediately taken steps to trim the division's expense base.

And also to improve results, we will close at least 20 stores on a net basis this year using natural lease expiration.

We are also working toward identifying a store that enhances the customers' in-store experience, strengthens the brand differentiation, as well as we are making numerous changes to the operating disciplines and principles so that we can improve profitability.

Concurrently, with these short-term steps, we are still evaluating alternative solutions for additional speed and improvement in both the short and long-term.

Now again, while these losses are unacceptable, it's important to remember that we sell product from our wholesale division to the specialty retail division at a markup, thereby generating upstream profits that are accounted in our wholesale segment.

Fifth, on the wholesale front, we're improving all aspects of the business model from the way we flow goods to our markdown strategy.

As you know, our enterprise-wide focus is on sell-through and not sell-in, and measuring what that consumer is buying every day and every week, not just what we sold.

And going forward we're going to continue to work to assort the right styles and tighter quantities, thereby limiting Naturalizer's markdowns and end-of-season inventory.

As you can imagine, this work is ongoing.

And we expect it will take the spring season to get the cadence of our flow of goods right.

Turning to the rest of our wholesale business, LifeStride was on plan for the quarter, showing double-digit gains at retail according to NPD, as it benefited from delivering compelling assortments in the right quantities of dress, tailored and casual styles.

Carlos Santana also performed well.

Sales nearly tripled during the quarter as we continued to benefit from strong sell-through rates, increased penetration in the doors that we're already (technical difficulty) new doors for the brand.

And at mass, our Women's Private Label and Dr. Scholl's casual and athletic product for men and women continues to perform well.

And we expect this growth will continue.

In children's, as Ron mentioned, we believe we have stabilized sales within this division, especially given our actions to infuse new license properties from Disney and Star Wars to our stable of character licenses.

That said, we are planning this business very conservatively as we face tough comparisons given that we chose not to renew the Spiderman license.

And at Bass we also believe we have stabilized sales.

Our focus has been on improving the product assortment.

In fact, our return to a modern and enduring all-American look is starting to prove successful.

With the transition year behind us and a full team in place, we are in the process of introducing Bass men's and women's product into an additional 100 to 200 doors.

Let me conclude with an initiative we're very excited about.

In original Dr. Scholl's we're leveraging innovation (technical difficulty) Schering-Plough to incorporate memory fit into great looking product, carving out a new position we're calling Hip Comfort.

While I can't yet speak to consumer reactions, retailers at WSA were enthusiastic.

With this innovation, we know we will further separate original Dr. Scholl's from competing brands.

So in summary, while our wholesale sales results were mixed, we believe we have made considerable progress.

The initiatives we're implementing today, along with the positive momentum of Famous and our LifeStride and Carlos brands, position us well to report strengthened results in 2005.

Now I would like to turn the call over to Joe.

Thank you, Diane, and good morning, everyone.

Famous Footwear delivered a strong finish to a successful year.

We reported sales of 263.1 million, up 8.7 percent from 242 million in the fourth quarter of last year.

Comp store sales increased by 4.1 percent, and we were certainly pleased to report the fifth consecutive month of comparable store sales increases with this positive trend continuing to February, the first month of our fiscal 2005 year.

Strong sales gains and expense leveraged enabled operating earnings to rise significantly during the quarter.

Specifically, fourth-quarter operating earnings were 11.2 million, or 4.3 percent of sales, approximately doubling last year's fourth-quarter operating earnings of 5.2 million, or 2.2 percent of sales.

For the year we opened a total of 70 new stores and closed 44, ending our fiscal 2004 year with 919 stores.

We believe the improved performance at Famous was affected by strong broad-based consumer demand for footwear, as well as the cumulative impact of the initiatives of the last two years targeted at our positioning and strategies of differentiation of the Famous Footwear brand.

Our fourth-quarter sales performance was very encouraging as we experienced comp sales increases in all genders of our business.

Athletics (technical difficulty) slightly less than half of our total business, continues its impressive gains, followed by a strong children's performance.

Our men's and women's non-athletic businesses experienced modest fourth-quarter comp increases.

And it was a pleasant surprise since these categories struggled earlier in the year not only at Famous but at retail in general.

During the fourth quarter, as with previous quarters, we continued to aggressively focus on several key areas.

First, Famous remodeled 50 stores during the fourth quarter and 200 for the year in our new format.

We opened 15 new stores in the quarter, which brought our new store count to 70 for the year, as I mentioned before, also in our new format.

We now have over 60 percent of our stores representing the new face of Famous Footwear and intend to have all stores completed for a consistent presence by back-to-school of 2006.

We continue to improve our product offerings with a focus on exclusive product in both athletic and non-athletic to enhance differentiation in our stores.

We've also continued our investment in our current company's brands, which has helped accelerate our top-line growth, as well as bottom-line operating profits.

In our marketing message, it continues its focus on trend current brands and styling at a value, not at a price.

And it certainly has our consumers responded favorably to our stores.

We believe the platform we have created places Famous Footwear in a good position as we begin the '05 fiscal year.

The key metrics of driving our performance, whether it be consumer counts, purchase ratio, pairs per transaction or average retails, all have positive gains.

So we enthusiastically look forward to the coming months.

With that, I'd like to turn the call over to Andy to review the financials.

Thank you, Joe, and I will echo my good morning to everyone as well.

Before reviewing our performance, I'd like to first discuss changes to our accounting treatment of leases and also to review certain fourth-quarter charges and recoveries that impacted our reported results.

Beginning with the accounting treatment of leases, in light of a clarification issued by the SEC in February of this year, we determined, like many other retail companies, adjustments were required for our method of accounting for leases, reclassifying construction allowanced received from landlords as deferred rent liabilities.

Previously we reflected these allowances as a reduction of fixed assets.

We will also record rent expense over the entire length of the lease period, including the build-out period of the stores.

Due to these changes, we have restated our prior-year financial statements, and these adjusted results will be reflected in our Form 10-K for the fiscal year ended January 29, 2005.

All financial data that we will discuss today now conforms to the accounting changes.

As noted in our press release this morning, our fourth-quarter fiscal 2004 results include the following charges and recoveries.

First, a $300,000 after-tax charge or 2 cents per diluted share of non-cash expense related to lease accounting issues.

Second, a cash charge of $2.2 million after-tax or 12 cents per diluted share to satisfy our guarantee of a bond financing for a business we divested in 1985 and which has since filed for bankruptcy and is unable to meet its financial obligations.

And third, a non-cash recovery of $1 million or 5 cents per diluted share that is a recovery of a valuation reserve against our foreign tax credit carryforward resulting from the American Jobs Creation Act of 2004.

Both Joe and Diane have reviewed divisional financial performance, so I will turn to the full income statement for the fourth quarter.

Consolidated net sales for the quarter totaled $476.5 million, increasing 9.8 percent from 433.8 million during the fourth quarter of last year.

Total operating income increased by 1.2 million to $8 million or 1.7 percent of net sales from 6.8 million or 1.6 percent of net sales last year.

Breaking the numbers down further, gross profit declined by 230 basis points to 39.4 percent from 41.7 percent last year.

This decline was primarily due to increased markdowns taken within certain of our wholesale brands and specialty retail segment.

Famous Footwear margins were down slightly from the fourth quarter of last year.

SG&A increased by 4.7 percent to 179.1 million, but with SG&A as a percentage of sales improving to 37.6 percent from 39.4 percent in the fourth quarter last year.

Net earnings were $8.5 million compared to 4.7 million last year and diluted earnings per share totaled 46 cents versus 25 cents in the year-ago quarter.

Now if we look at it on an apples-to-apples basis, that is excluding charges and recoveries for both years, diluted earnings per share were 55 cents for the fourth quarter versus 53 cents in the fourth quarter of 2003.

Net interest expense totaled 1.4 million in the fourth quarter compared to $2 million last year.

The reduction in interest expense reflects lower interest rates as we renegotiated our revolving credit agreement.

The Company ended the year with a strong balance sheet.

Cash flow from operating activities was $53.3 million.

Total inventory levels at year-end fiscal '04 were 421.5 million, rising 12 percent from 376.2 million at year-end fiscal 2003.

This increase is primarily due to a shift to landed business from first cost for specific customers, from additional inventory for Bass, and due to growth at Famous Footwear.

Importantly, inventories remain clean and current.

Total debt increased by 22.5 million to 142 million compared to 119.5 million in the fourth quarter of last year.

And debt to total capital was 26.6 percent, increasing slightly from 25.4 percent at quarter end last year.

CapEx totaled 46.2 million, $9 million of which was due to the change in lease accounting.

For fiscal 2005, we are planning capital expenditures in the range of 35 to $40 million.

For the full year, before I highlight the financials I will again summarize the charges and recoveries impacting our earnings.

First, an $800,000 after-tax or 4 cents per share of non-cash expense related to the full-year effect of lease accounting issues.

Second, a cash charge of $2.2 million after-tax or 12 cents per diluted share to satisfy our bond guarantee, which I discussed earlier.

And the non-cash recovery of $1 million or 5 cents per diluted share related to the income tax reserves as part of the American Jobs Creation Act of 2004, which I also discussed earlier.

Excluding all these items, our results were in line with prior guidance.

Our earnings this year also benefited from reduced compensation costs associated with stock-based and incentive compensation.

These plans worked exactly as they were designed to work and very reduced incentive costs were incurred in 2004 as we did not meet our goals.

Now turning to our full-year financials, net sales totaled $1.942 billion, increasing 6 percent from 1.832 billion in fiscal 2003.

Total operating income decreased 12.5 percent to 63.8 million or 3.3 percent of net sales compared to 72.9 million or 4 percent of net sales in fiscal 2003.

Net earnings were 43.3 million compared to 46.2 million last year.

And diluted earnings per share declined to $2.30 compared to $2.48 in fiscal 2003 on a GAAP basis.

As I mentioned, excluding charges and recoveries, diluted earnings per share were $2.41, which was in line with our most recent guidance of $2.40 to $2.42 per diluted share.

As to forward guidance, looking ahead for fiscal 2005 we estimate net sales of approximately $2 billion flat compared to actual 2004 net sales of 1.942 billion.

Net earnings per diluted share are estimated in the range of $2.55 to $2.65 compared to GAAP reported net earnings per diluted share of $2.30 in fiscal 2004.

Now, our 2005 estimate includes projected cost of 20 cents per share related to the expensing of stock options as we plan to adopt FASB 123 in the first quarter of 2005.

We are also evaluating the provisions of the American Jobs Creation Act of 2004, and anticipate we will repatriate up to approximately 70 to $80 million of offshore cash during the year.

We currently estimate that this repatriation could cause income tax expense of approximately $10 million, which is not included in the fiscal 2005 guidance range I just provided.

Net sales for the first quarter of fiscal 2005 are projected in the range of 500 million 505 million compared to actual first-quarter net sales of 492 million in 2004.

Net earnings for the first quarter are estimated in the range of 68 to 70 cents per diluted share versus 45 cents in the first quarter of fiscal 2004.

Now, in the first quarter last year we incurred 11 cents per diluted share in Bass transition costs.

This estimate for 2005 also includes approximately 5 cents per diluted share for the expensing of stock options.

Included in our guidance is an expectation of 1 to 2 percent increases in same-store sales for our Famous Footwear division.

We also believe that our wholesale operating margin will improve as we better manage our sell-in and strengthen our inventory disciplines.

Now I will turn the call back to Ron.

Thanks, Andy.

In conclusion, while fiscal 2004 represented a difficult period for Brown, we believe that we've identified the strategic initiatives and begun to implement the strategies to improve our business in going forward.

We will run this business smarter and tighter as we go forward.

We have instilled more disciplined into our planning and operating model.

And importantly, we will continue to invest in the long-term in talent, systems, marketing and stores.

We will continue to adhere to our impact inventory metrics, flowing fresh product at even faster rates.

We will stay focused on achieving our growth targets.

And of course we will continue to have our four enterprise-wide initiatives be at our forefront -- differentiation, setting our stores and brands apart from the competition and giving us clearer differentiation in white space; compelling product; speed to market; and growing our portfolio beyond the moderate zone.

Ultimately, our goal is to increase shareholder value by being recognized by consumers and our retailer partners as the fashion and value leader in footwear.

Thanks for joining us, and we will open it up for questions.

(OPERATOR INSTRUCTIONS) Virginia Genereux, Merrill Lynch.

It's Michelle Graham (ph) calling in for Virginia.

We were sort of wondering what's your outlook on the moderate consumer?

What are you seeing right now around Naturalizer since that has contributed some of the weakness there?

I think tickets improving, I think its improving because we've got some casual influence in the marketplace again.

And I would say that the very big strong dress run, we've dressed up the casual looks as well, so sometimes it's not classification.

But clearly I think as we move through the fourth quarter and into the early part of the year, I think the prospects have definitely improved.

In the Naturalizer reorg or retooling, how does Naturalizer Canada fit into that plan?

The Naturalizer retail is now converted to what we call the specialty retail division, and that includes all of the US and the Canadian-based stores.

So it's included as part of the specialty retail division under John Mazurk's leadership.

Right.

These 20 closures, does that include Canada also?

Those closures are primarily in the US.

Thanks.

Steve Martin, Slater Capital.

Congratulations on some good effort there.

Can you talk about the first cost business and some of the non-branded businesses within wholesale this year and what you're expectation is fourth quarter and going forward?

I would say that actually our business this past year ended up being just exactly where we expected it to be, and almost a little bit better as we got into the fourth quarter.

Looking into '05, our Dr. Scholl's business at Wal-Mart continues to be very, very strong across the US and in Canada as well.

Our mass business, our Women's Private Label business, also continues to be good.

There's still margin pressure hear and there, but overall the performance of our products with our key customers has been very good.

And the business in general with those customers, if you noticed the February comp store sales performance, their performance is better as well.

So generally speaking, we feel pretty good about where we are at and don't see any dark clouds today on the horizon there.

I've heard some speculation or rumor that Payless, FootStar etc. are pushing back on their first cost vendors in terms of what they're allowing you guys or the industry to make in commission and also demanding better credit terms.

Is there any truth --?

No, we have not had that experience at all.

Since you're the Bass expert, can you comment on your expectations for '05 and where you see the turnaround and placement?

A couple of things.

I would say we are being extremely cautious given the year that we had last year.

We disappointed so many people on that, so that we are being extremely cautious in our outlook for '05.

We do see that it has stabilized.

We're not seeing any concern in our top-line and our margin rates are improving.

So I would say that the proof will be in the pudding this year, but our feeling is that it's looking quite positive.

Joe, can you comment on sort of your outlook for '05 in terms of trends -- what you're seeing for spring, back-to-school; what's working, what's not -- in a little more detail?

A little more detail?

You know I wasn't going to let you get away with such general comments.

I guess the one comments I made, I have said before on conference calls that it's unusual that you find all businesses that are working the same time frame.

So we are a little taken back and pleasantly surprised that all genders are working.

It is still being led by athletics.

The strength is in the same vendors that have driven it, whether it becomes Nike, Converse (indiscernible) non-athletic, And sketchers.

What I find interesting right now, we're showing that person's closet not only in athletic, but the casual business has come back in our non-athletic business.

And that has been a real pleasant surprise since that business struggled through September of last year.

Are you talking missy or younger?

I'm talking more -- what we're seeing is we have looked at our business, you're getting both segments.

We're getting a teen casual customer that is getting in more of the European athletic inspired looks that are coming from non-athletic vendors.

We also take a look at what I consider more of a missy customer.

If you want to take a look at whether that becomes Jones New York even down through Clark's.

That business has come back very nicely.

So I can't point at any one thing.

It is being driven by athletics, but across the board whether it's women's business in junior, women's more mature, and even our men's and children's business across the board right now is very healthy and I think you're finding that in the industry, which is encouraging.

Why such cautious guidance for '05, or you are just being cautious?

I think we're prudent in being cautious.

We've seen things change in previous years, so I think we're just being cautious.

Business is good right now.

When you look out to the back half of the year in terms -- because you're sort of bought now probably through back-to-school, when you look out at back-to-school what are you seeing out there in terms of trend?

Any change?

The only change that we see -- I don't see any change in athletic.

It's going to continue.

Yes, we have bought through back-to-school, especially in athletic.

We see that being as strong or stronger than we experienced last year.

We had a very good year in athletics.

I think what we're seeing is a trend in the non-athletic area that is becoming more casual-driven, athletically-inspired product for the casual consumer, while our dress business still stays very healthy.

So the athletically inspired dress, what are you talking about specifically?

Is that Sketchers?

That's Sketchers.

That runs through Sketchers, Madden, Mudd, LEI.

So it gives that consumer a reason to stick an additional pair in her closet.

And what are you expecting average price point-wise, average ticket?

What we have experienced at the end of fourth quarter, and going into first quarter this year, and looking out, our average cost product is up, our average retails are up.

We anticipate that for the balance of this year.

They are up moderately, but we expect that to continue.

Good.

On the balance sheet, you invested a lot this year because of the acquisition of Bass -- the assumption or acquisition of Bass last year.

Andy, what are you expecting in terms of cash flow, debt pay down, etc. this year?

Any major capital expenditure programs away from stores?

No major capital expenditure programs outside of the store programs.

I think we talked about CapEx in that 35 to 40 sort of range.

And I think you're looking at net cash after CapEx, after dividend probably in that 15 to $20 million range in terms of net positive cash flow.

Does that answer what you --?

Yes.

You're CapEx's now restated for excluding vendor allowances?

Yes.

Thanks.

Scott Krasik, CL King.

Joe, I guess I will just pay you back a little bit on Steve's questions.

Famous, you gave some good color on the non-athletic, but is it really a change in your customers' attitudes?

Do you think it's just sort of style or key item driven?

What do you think changed?

I think it was really more of a change in our customers' attitude.

If you take a look at '04, other than athletic I think we had a consumer change in attitude toward purchasing.

It was driven definitely, we feel here, by styling; an excitement in the styling coming back through our non-athletic vendors.

We struggled at the end of '03 and early '04 in our non-athletic business.

That was just dullness at retail.

Here's a business that can change much more rapidly and deliver product much more rapidly than athletic.

So we fell it was definitely the styling that changed that consumer trend that was flat or below flat.

We were losing market share as an industry.

Just the comment about ASPs; you think it should increase.

Is that both for non-athletic and athletic, or is that --?

That's for athletic and non-athletic.

If you could just give a sense -- I don't know if you have ever disclosed what your longer-term plans are, but Famous is running right now at about a 5 percent operating margin.

Andy mentioned a little bit about tighter buying.

But what do you think operating margins really should be in Famous?

Improved.

If you take a look at where we have been three years ago to where we are now, we've seen continued improvement every year.

We anticipate and expect better earnings as we go through the balance of this year and '06.

So I'm not going to get into stating what percent.

They've improved three years in a row, they will improve a fourth year in '05 and they will continue to improve again in '06.

I think there's a lot of room yet to move.

That wasn't much of an answer, but okay.

I was being as vague as I possibly could.

Diane, I guess the issue probably doesn't hit you this year, but I think Bass is a much bigger May business than Federated.

Yes.

What's your thinking?

Have you started discussions in terms of what the strategy is for Bass in the department store?

I guess what I would say is I would speak to maybe the Federated-May point to begin with.

We have great relationships with both Federated and May.

And it's kind of unclear yet.

It's a little the early as to how their Federated reinvent strategy is going to affect the May stores.

And we don't see it -- to your point, it's minimal impact in '05.

We do see margin impact for a number of our brands potentially in '06.

But we really believe that if we -- we have as much right to win, I guess, as anybody else does out there.

So we're really looking at not only just Bass, but the entire portfolio of brands and what that implications are with this acquisition for us in '06.

So it's really not only Bass; it's really of all of our businesses, how do we really optimize our total market share.

Is part of the strategy to try and lift ASPs at Bass and some of your other brands to make them more attractive to a Macy's?

Yes, we're evaluating all of those sorts of things.

In Bass already this year we've taken prices up probably 15 percent over the last 12 months.

So that's fairly significant.

And the same thing in our LifeStride business too, where we are continuously moving the price points up.

So that's one part of the questions I guess that we have to ask ourselves in how do all of these things -- all of these brands interrelate for Federated next year.

Just lastly, you talked on your specialty retail store strategy, you mentioned trimming expenses.

Can you delve into that a little bit more and give us an idea of really how much and where the cost cuts are going to come from in the Naturalizer and LaSalle store base?

We're working through that right now in terms of how that is all going to look.

And actually we're taking a pretty aggressive posture in terms of looking at a number of strategic alternatives along the way, everything from modeling out if we continue sort of on our current path with additional cuts in expense base and store closings, what would that look like.

We're evaluating whether or not we need to dramatically reduce the store base and see what that looks like.

We're looking at whether or not we have to consolidate it under an entire retail platform in order to get the expense base done even more.

And we are even evaluating whether it is something we need to close in its entirety.

So we are looking at all of those sorts of options.

Thanks.

(OPERATOR INSTRUCTIONS) Sam Poser, Mosaic Research.

Diane, you mentioned managing the sell-through process and the changes you're making at Naturalizer wholesale.

Could you go into that in a little more detail for me?

Yes, it's not unlike the way that frankly we have managed the businesses like LifeStride and Carlos and others across the Company.

So what we're doing is the same thing as applying those disciplines around how we flow good, looking at how much inventory we ship in, what's the flow of it during the course of the year; making sure that we're not over distributing to too many doors; making sure that the assortments are balanced.

It's really taking the disciplines (technical difficulty) we've had on other brands in our portfolio and making sure we apply that to Naturalizer.

And then also I would add to that really sort of upping against our management intention around this whole retail planning and analysis side of our business and how we actively look at each of our brands and how they're performing in our major department store customers on a week-by-week basis.

So it's really a combination of a lot of different things.

You had mentioned that Bass was going to go to 100 to 200 more stores.

Is that for spring, or are you talking later on in the year?

It's a combination of spring and fall.

Both spring and fall.

What was the response to the women's Bass product?

Very strong.

Really like the direction of getting back to the sort of American classic look.

Casual, I think everybody's feeling strong about the casual segment becoming a more important piece of the wardrobe, given we've gone through the dress cycle.

So overall, very good.

And is the men's line going to continue to evolve in that direction?

Yes, same thing.

Again, more American classic styling.

Great reaction to that.

And a lot of that product that is out at retail right now is really starting to sell-through well.

Joe, how many stores -- what's your store opening and closings -- I may have missed that -- for 2005?

For 2005 right now our plan is to open up 80 stores and we will close between 30 and 40.

Is there a timetable for that or will it mirror last year?

I'm sorry.

Say that again.

Is there a timetable for that or will it mirror basically the same kind of flow as 2004?

Basically the same flow as last year.

Thank you.

Kyle McLaughlin (ph), JLM Asset Management (ph).

Just a quick question (indiscernible) with respect to the guidance for Q1.

If you look at the number you obviously -- if you kind of keep it on an apples-to-apples basis, I think the midpoint is like 70 cents.

If you look back in '03 when we made just under 2.80 a share for the full-year, around Q1 we did like 49 cents.

I think you can kind of see where my logic is going here.

I was just wondering if I'm thinking about this the right way.

Ask your question again.

I was noticing -- I was making an observations if you look back in 2003, when we made for the full-year -- our earnings, we made about 2.77 in EPS.

In that year, in our Q1, when you look the seasonality we made about 49 cents in EPS.

If you keep it on an apples-to-apples basis, when you look at where our guidance is for Q1 of '05 that you gave, which I believe if you add back the stock comp it gets you to like 70 cents at the midpoint.

We are saying in Q1 this year we're going to do about 70 cents, whereas back in '03 we did roughly 49 cents.

It's hard to compare years, and I will tell you why. '03 was a strong year for us, but if you will recall '03, spring business in '03 suffered mightily.

The weather was very difficult.

In particular athletic sales were very slow.

It didn't really strengthen until much, much later in the year.

So you always have tough comparisons when you try to glean a whole lot from first quarter.

Lots of things are going on -- the timing of Easter; the specifics of what's going on weather-wise.

And it really impacted '03 in a major way, if you'll recall.

We started '03 relatively slow; we closed very strong.

We're starting '05 nicely, but February is a light month and I don't know that it's a real indicator of a full-year's performance.

So it's tough to glean meaning and direction out of a month of business or a first quarter of business just because so much of our performance is driven later in the year.

We're happy with where we have started, but you don't want to glean too much out of it.

In particular, when you compared '03 as I said, you had the reverse thing going on between athletic vendors and athletics now.

The bottom line is nothing really structurally different; obviously it's just early.

I think we're running our business a lot better, but I think you're correct, it's early.

Thanks.

Good job guys.

Dena Friedman (ph), Brean Murray.

Diane, you had mentioned that Carlos was placed in additional doors during the quarter.

Which chains were those predominantly in?

It's primarily in both Federated and May.

And it's really again expanding the doors within those accounts and then increasing the penetration, the assortment in those accounts as well.

Dena Friedman Great.

Thanks a lot.

Chris Vazia (ph), Susquehanna.

Good morning everyone.

I have a couple of quick questions, first I guess on the wholesale business.

Is there any way that you can separate -- you saw improvement in the fourth quarter wholesale business.

Can you ex out I guess the improvements or the addition from the Bass business to your wholesale business?

I'm just getting trying to get an idea in aggregate did your wholesale business ex-Bass grow during the fourth quarter?

We don't look at it that way, in that detail.

Let us get back to you.

We're looking up some data there, see if we can (technical difficulty)

I do.

The other question I guess is for Diane.

Given all the changes you're making to the Bass business as you head into 2005, and given I guess some of the positive feedback you've heard from the women's business and the men's business at WSA, given the changes in pricing and the additional doors and additional penetration, should we anticipate growth in that business as we look to 2005?

There will be some modest growth, but again this takes time.

And we've got to earn our way every step of the way.

So very modest growth.

We're taking a very cautious stance.

We're going to make sure that what we do every step of the way is the right step.

So yes, cautious outlook.

Are you pleased at this point?

Are you comfortable at this point with the inventory position of Bass heading into 2005?

Yes, we are very comfortable with that.

So you've gotten out of most of that product once you did the acquisition.

At that point you've moved out of most of those doors and out of that product at this point?

Yes.

That's right.

I think more importantly the product at retail is clean.

I guess another question just off of that.

Just in general in your wholesale business, at retail is it pretty much across the board in terms of the quality of the inventory at retail?

Is it clean at this point at retail?

Yes.

The quality of the inventory across the board with all of our retail partners is very good.

Again, just on the Naturalizer division as a whole, wholesale and retail, you mentioned a lot of initiatives to improve that business -- closure of stores; you hired some additional people; cutting expenses; a new marketing campaign.

I guess at what point in time would you feel that you have turned the corner, there is some light at the end of the tunnel, specifically on the retail side of the business?

Can we anticipate seeing some of that at this point in time during 2005?

Or is this something that's going to be longer-term?

And if you did -- you threw it out there in terms of potentially shutting this business -- at what point in time would you make that decision?

Let me split the two pieces.

I would say on the Naturalizer wholesale business, while we know that this year is going to be better, all the indications point to the fact that our overall operating performance will improve.

We do see during the spring season it's going to take a little bit of time as we adjust the way we're flowing goods to retail, there will be a little bit of a shift in the way the cadence of that business.

But as we turn the corner to fall '05, that's where we really believe on the wholesale side of the business you will see improved profitability, and that is the key thing.

We're not focused on driving market share this year on that (indiscernible).

We're focused on improving, getting the product right at retail, the inventories right at retail, and improving the profitability.

On the retail side, that one is a little trickier and a little more complex and it is going some time to I guess reap our rewards.

If you just go back and think about the terrific work that Bill and his team did on Famous Footwear, it took three years to get that turned around.

We're not saying we're going to take three years, but I think it's going to take us a little longer to sort of assess when we should see some of these direct results.

Just two additional add-ons onto that.

I guess first for Naturalizer wholesale, I guess it's safe to assume that I guess in the first half it's kind of a flat business and hopefully you'll see some improvement in the back half in terms of top-line, but more specifically we should see improvement in the bottom line in Naturalizer wholesale?

Correct.

I then guess for Canada, Naturalizer retail Canada, are most of those stores at this point I guess being merchandised and inventoried as they are here in the United States in terms of product?

Yes.

During really the latter part of '04 we spent an awful lot of time working with both merchandising teams.

And approximately I would say it's about 70 percent of the assortment is the same in the US and Canada.

There are some seasonal differences and just some market differences that we needed to address.

So we are right now about 70 percent and expect that over the course of this year to get to 85 or 90 percent.

Two more quick questions.

One more for you, Diane.

I guess looking out we've heard that Dillards has decided to remove Nine West from its stores.

Is there any opportunity as you see it through your Naturalizer business and/or for Carlos as well to get some additional shelf space at Dillards?

We are always working very hard to try to do that.

But I think Dillards clearly is on the path of growing their internal brands.

So it's really hard to see right now said there will be a significant pick up for either one of our brands that is there at Dillards right now.

The last question is for Joe.

Just at Famous Footwear, can you give us an update in terms of roughly what the percentage of your, if you want to call it athletic and pseudo-athletic/casual style footwear is exclusive at this point in time?

And can you give us any outlook in terms of what you're looking for the back-to-school selling season in terms of what percentage of your footwear business will be in the exclusive category?

Exclusive -- and I will kind of split the business a little bit.

Right now in athletic approximately 14 percent of our business is represented in exclusive product.

Again, it continues to grow.

That process was just started two years ago.

In non-athletic we're probably more in the 18 to 20 percent range.

And that is continuing to grow also.

I see those percentages as we go into back-to-school, because we've just finished the exclusive line review for and placed those orders for back-to-school in athletic, it should be in units closer to 20 percent to 22 percent for back-to-school.

I don't have that same calculation in non-athletic because we have not placed those goods in the current timeframe.

Just to be clear on our definitions, I guess when we talk about athletic that's your core, that's the Nike product for the most part.

And I guess when you talk about the non-athletic is that more like the Sketchers and Steve Madden and stuff like that?

That is correct.

Thank you very much.

Appreciate it.

With respect your prior question, we really look at our -- we report the wholesale division, but we look at it by brand.

For the most part -- this is pretty accurate -- every brand label/division that we have on the wholesale side in the fourth quarter of '04 compared to '03 was up with the exception of children's and Naturalizer, although I would say that the children's shortfall was less than it had been.

But every other division was up.

And I would say operating profitability pretty much corresponded with those kind of sales increases as well.

Thank you.

Brett Hendrickson, Bonanza Capital.

Just a couple of things that I missed.

Joe, congratulations on a great performance.

Can you just go over the last gentleman's question?

You said 14 percent of your athletic is now exclusive?

I wasn't writing fast enough.

That's correct.

Did you give a number on your non-athletic for how much is exclusive?

Non-athletic is about 3 or 4 points higher than that.

So you're looking in the 16 to 18 percent range.

Did you say how high the think they will be kind of run rate at the end of this year?

We anticipate the run rate really closing in on the 20 percent range.

It's not a number we force.

We let the consumer somewhat determine that.

And it's a slow growth process.

We're not going to force something that's not there.

We have had success by moving slowly.

But I say slowly -- that program did not exist 24 months ago here.

We expect it in the 20 percent range and continue to grow slowly in the coming quarters.

One other thing I missed that you said.

Did you say that the entire store base will be updated by back-to-school '06?

Is that what you said?

Yes, '06.

So we have about -- a little over 400 of the stores done now.

And again, you have to pull out the outlet stores.

There's 200.

So we're taking a look at a little over a 700 store base.

Okay, and then a question for Diane.

What was thinking on -- or whoever wants to answer this -- on the Spiderman license?

Was it that Marvel wasn't wanting to give you guys an exclusive so you didn't want to mess with it?

Or what was the thinking with not renewing there?

Ron or Andy, maybe, that was prior to my time here.

I don't recall what the details of that were.

With all licenses as we look forward we take a risk-reward proposition.

And I would tell you that we felt that the cost of -- when you get in the renewals of movie licenses and the third time around, we just believed that the expectation was not going to be met.

I really -- we continue to hold that license in some of the smaller sizes and categories, Spidey, etc., and we see some life there.

We just simply looked at the portfolio and said we didn't see upside anymore.

So just to be clear, when I'm trying to model out all the changes that's going on in the wholesale, you did keep Spiderman for I guess the youngest kids, if you will?

Yes, I think Spidey is still in there for the rest of this year.

So when you look at the total children's business I think we've said that we've flattened that business out and we expect to see some growth.

And we've got a number of new licenses coming out of the Disney thing; one in spring here and a couple more coming down the pipe.

But I think it's pretty fluid.

I think the Cars (ph) Disney promotion, actually just the movie release just swept through '06, I think.

So there's some fluid motion on those types of (indiscernible) events.

So we look at the total portfolio there and somebody's got to be taking that shelf space (indiscernible) we think in '05 we will show improvement over our '04 sliding results, but pretty flat.

Thanks everybody.

Sam Poser, Mosaic Research.

Diane, you had said about the retail on Naturalizer retail being more complex to reap the rewards, I think, as you put it.

If the product is improving on the wholesale side, wouldn't that be the -- how much of driving sales there is just fixing the product as you would at wholesale?

And as you expect improvement of the back half why wouldn't you expect it on the retail side as well?

I think on the retail side that there are a number of challenges just within the overall business model there, the expense structure, how we are organized, how we're accounting the business, what the operating philosophies and disciplines are in there, and how we need to change some of those things.

So while -- it is a little bit more complex.

It's going to take us probably, as I said, through the back half of this year to really understand some of it.

But that said, though, Sam, I will sort of restate what I said.

We're taking a hard look at three or four things.

We're going to model out if we continue to show operating improvement and implement the sort of initiatives we have how fast we think we can get this thing turned, number one.

Secondly, we're looking at a significant reduction in the store base.

Modeling that out, what are the implications of that, not just for retail, but for the entire brand, and what that's going to look like.

We're thinking about creating and evaluating whether or not we need to create an entire retail platform for the Company; would that help leverage the expense base; would that help build the Naturalizer brand; how do we do that.

And lastly, right down to is this a business that we want to continue going forward with?

We believe that it is, but we are not going to leave any stone unturned to make sure that we're making the right decision long-term for the health of this brand and for the shareholders of the Company.

Hopefully we can get through this challenge in Naturalizer retail hopefully behind us once and for all on a foundation that we can live with for a long time.

So you think you'll have some more answers for that on your next call?

I do.

Yes I do.

Scott Krasik, CL King.

Joe, since you have back-to-school set, can you give us a sense of how your boot presentation is going to differ in '05 versus last year?

Boot and non-athletic?

I've been hearing that in general boots are going to come later; that you are really just not even going to show them in August and September.

We didn't this past year.

So we really didn't bring out our boot presentation until the end of September, so I think the first week of October.

I don't think we will change that timing again this year.

Two businesses -- the boot business within the athletic vendors or athletic world, whether that becomes Timberland, Bugs (ph) and some other people, actually performed fairly well; had nice increases there.

Non-athletic or the dress boot business, I think we probably trended with everyone else.

It was not a good boot year.

So obviously we will cut back our commitments financially in the non-athletic boot business.

But we will still bring it out at the end of September, first of October.

So we will not show it in back-to-school timeframe.

Diane, conversely because of what you're hearing really from retailers it seems across the board are you planning your Naturalizer and other brand boot business down year-over-year?

We are actually planning it down a little bit.

But we are sort of -- I guess sorting our more I guess fashion boots and mixing that with commodity-oriented boots.

We're kind of I guess blending the assortments a little bit differently than what we did last year.

And we're also making sure that we ship fashion early and then more of our commodity business later in the season as well.

And making sure that -- again, back to this freshness and velocity point, making sure that we ship a minimal amount of boots and really look at our history there, and make sure we don't have any -- as much as we can anything left over at the end of the season.

You're saying more of the basic boot later just in case demand warrants like a late winter?

Yes, basic boots later.

She's looking for fashion earlier in the season and is really not getting to buying the more basic boots until later, so why ship it all early, have it sit there not getting the turn and then frankly just shipping in too much up-front?

Okay, thanks.

(OPERATOR INSTRUCTIONS) Chris Vazia, Susquehanna.

Just two quick follow-up questions.

Joe, just on Famous Footwear in terms of the exclusive product, I think you gave it in units 14 percent for the core athletic business and the non-athletic I think was 18 to 20 percent.

I think you mentioned as you look for back-to-school the non-athletic being up somewhere around 20 to 22 percent as a percent of the business.

Is the units pretty comparable in terms of dollars as well?

Is that much of a difference?

There is a difference.

It depends on when you get into different price points.

But if I misled you a little bit, hopefully it wasn't on purpose.

If we take a look at the athletic business being 20 -- let's use a round number -- 20 percent -- of our business, it will represent about the same percentage in number of units also.

Okay.

I guess the other question is as you look to the back half of the year, you talked a lot about the athletic business and the pseudo-non-athletic business, athletic-inspired business being somewhat of a focus as you look to the back half of the year.

Any other categories that you're looking to kind of increase your allocation towards the back half of the year outside of some of the athletic categories?

Yes, two areas.

One, our children's business has been extremely healthy.

So additional investment in first quarter of this year through the balance of the year.

And our men's casual business has shown some nice results at fourth quarter last year and beginning of this year.

So the other focus on men's business and more casual, less dress, and in on children's business.

Both of those have been financed for nice growth.

Is most of the children's business typically just take downs of the core kind of a more adult product?

It is in athletic absolutely.

Non-athletic, no.

That's a completely different business.

One huge focus other than just children's in general in non-athletic has been in the Buster Brown product, which has been absolutely wonderful.

And we intend to focus even more so on that this year.

Thank you.

There are no further questions.

At this time I will turn it back over to our speakers for any additional or closing comments.

Thanks everybody.

Looking ahead, I think you can tell from all of our tone we believe Famous Footwear is going to continue to have strong performance and the strategies we've put in place in our wholesale division will lead to improved earnings results in '05, starting with the first quarter.

We remain committed to continuing investment, as we talk about in our platform, to differentiate our Famous Footwear stores, build greater preference for our wholesale brands, deliver more compelling product, strengthen our talent base, and further our enterprise-wide speed to market initiatives to improve our global supply chain.

I think another thing I heard a lot on this call has to do with the fact that Brown is a preferred supplier.

We're a preferred supplier, and as May and Federated make plans for the future I expect us to be at the forefront understanding where that is going to go and how we're going to participate and build that business.

We're a preferred supplier as you know in the mass channel, and we know the industry issues there; we know that from labor prices and raw materials; we know the elimination of quotas in Europe.

Lots of things are going on there as well and we're at the forefront of that.

And again, you'd rather be in the leading position as the number one or two supplier there.

We believe there's a lot of enthusiasm for footwear right now.

I think we see that both at wholesale and retail.

We see it in our business and we see it in our customers' business.

So we have come off a real tough year.

We've built some great plans.

I think the team has done a tremendous amount of solid work.

And we're looking forward to talking to you in the future about our progress and our success.

Thank you very much.

That does conclude today's conference call.

We thank you for your participation.

You may now disconnect at this time.