Caleres Inc (CAL) 2005 Q1 法說會逐字稿

Hello and welcome to the Brown Shoe Company first quarter 2005 financial results conference call.

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

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

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

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

These are subject to known and unknown risks and uncertainties that could cause the actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statements.

Factors that could cause actual results to differ materially include those listed in our press release issued this afternoon, 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 on the Company's website, BrownShoe.com and from the Company's Investors Relations department.

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

Also, SEC regulations require us to provide information on any non-GAAP financial measures covered in today's conference.

Such non-GAAP information consists principally of earnings per diluted share, which have been adjusted to exclude certain charges, and information regarding components of the Company's operating segments.

Information regarding such non-GAAP financial information is contained in today's earnings release which is posted on Brown Shoe's website in the news section.

Now I'd like to turn the call over to Ron Fromm, Chairman and CEO of Brown Shoe Company.

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

Good afternoon.

Thanks, everyone, for joining us to discuss our first quarter 2005 results.

You know, we are pleased to report that results exceeded our expectations this quarter, as sales were up 6.4%.

And while diluted earnings totalled $0.20 per share, versus $0.45 in the year ago period, on a GAAP basis; if you look at this on an apples-to-apples basis, that is before the charges listed in the press release, we earned $0.74 per share, up from $0.56 in first quarter of 2004.

We also made, importantly, progress toward attaining our four targeted operating goals for 2005.

These goals, I'll remind you, include: maximizing our newest asset Bennett Footwear.

In late April, we closed on the acquisition of Bennett.

The owner of the prestiged better footwear brands, Franco Sarto, Via Spiga, and Etienne Aigner.

While we have owned Bennett for only a month, I'm pleased to report that the integration is going smoothly.

Both organizations are benefiting from one another, and we are excited to capitalize on the opportunities offered by the Bennett portfolio of brands.

We certainly see significant growth ahead for the Bennett brands, especially given the power of Brown Shoe's operating platform.

As we have indicated in our press release, we expect this acquisition to be accretive to nine months of our fiscal 2005 earnings by $0.15 to $0.20.

And, more importantly, we estimate that it will add earnings of $0.30 per share to fiscal 2006.

Our second goal is to improve the performance of our Naturalizer wholesale and retail organizations.

As you know, Naturalizer continues to be the number two fashion brand in department stores and we feel we have further opportunities here, as we build naturalizer's brand preference among female shoppers.

Third, we're focused on elevating our design, product and marketing.

This initiative encompasses all of our brands.

We recently centralized both our design and marketing organizations with a goal of more clearly differentiating our brands and product assortments.

We also are implementing supply chain initiatives so that we can react to trends with increased speed.

These initiatives are still in their infancy, but we believe that they will be key to our future success.

And finally, maximizing the profit and growth opportunity at Famous Footwear.

Famous Footwear reported a 34% increase in an operating profits this quarter, achieving a 5.7% operating margin.

Key to this success was the work we're doing to differentiate the chain from competitors, making it a preferred shopping destination.

Toward that end, we are continuing our programs to bring customers more exclusive styles, continuing to invest in updating our stores and we're expanding our customer base through great marketing campaigns.

While the first quarter was terrific, looking ahead, at the second quarter, we remain cautious, given the retail environment and consolidating department store sector.

As you've seen, we've taken a more conservative stance with regard to our forward guidance in the second quarter.

Andy will discuss this more later on.

Let me say, this by no means dampens our enthusiasm for the full year.

If you've watched us over the years, you know that our wholesale retail platform often protects us in times like these.

As we look to the balance of 2005, we see our wholesale segment gaining momentum, as evidenced by our forward order position that is up 15%.

Note that this excludes any Bennett orders.

At wholesale, we are also in a good position from an inventory standpoint, having recognized the slowing demand for sandals early and having taken appropriate steps to back down our inventories early in season.

And as Famous Footwear, while we may have a difficult or tough second quarter, we have proven our ability to gain share in peak selling seasons and this year should be equally successful as upcoming assortments and as the current trend favoring athletics bodes well for a good back-to-school.

Now I'll turn the call over to Diane Sullivan to further review the quarter and our ongoing business initiatives.

Thanks, Ron.

As Ron mentioned we're pleased to report solid results across our wholesale platform and at Famous Footwear.

Starting with our wholesale segment, we increased sales over last year, led by Dr. Scholl's and Naturalizer; which is very much the direct result of the strategies and initiatives we implemented late last year, and into 2005.

These included key additions and realignments to our talent base.

If you've followed some of our announcements recently, you've seen that we've made some key hires, as well as made some reassignments over the past few months.

And it's really infusing our organization with energy and some new talent.

Now, looking at the financials.

In the first quarter, wholesale sales were 183-- 181.3 million, up 5.7%, from 171.5 million last year.

I should mention that Bennett contributed 5.8 million of that increase in the nine days we owned them.

Total wholesale operating earnings improved to 17.5 million from 12.8 million last year.

This increase in operating income was due to the increase in sales, as well as the fact that in the quarter of last year, we had incurred 3.3 million in expenses to transition Bass.

During this quarter we focused primarily on a number of things.

The first one was really about improving the profitability within our Naturalizer wholesale segment.

We also were focused on capitalizing on the positive momentum for our LifeStride, Carlos Santana and Dr. Scholl's brands and also, obviously, continuing to work to stabilize our children's original Dr. Scholl's and Bass segments.

While we're not there yet, we have made progress on each of these key focus areas.

In fact, at Naturalizer, we've made real progress in tightening our wholesale business model, using LifeStride as a benchmark.

We focused our future assortments to be more style and trend current, and we've also trimmed the number of styles that are going to be carried on the retailers floors, positioning ourselves to introduce new product, more frequently, thereby keeping our assortments fresh to the consumer.

Every time she shops we believe it's important that this consumer sees new product from Naturalizer.

And our intent with these moves is to strengthen sellthrough rates at retail and lower our markdowns, all to achieve higher profitability.

We believe the positive contribution from these actions are just beginning and we're encouraged that the wholesale sales for the Naturalizer brand were up 6.1% for the quarter.

Our Carlos business and Dr. Scholl's businesses achieved good results for the quarter, as well.

Carlos sales were up 81% as the brand continued its momentum from last year.

With Carlos, it's all about exciting and fresh product, and we're really starting to see the brand become very important in the department store sector; as numerous accounts are expanding the penetration and opening up new doors.

Our Dr. Scholl's business was very solid, driven by mens and athletic products and introducing more women's styles.

Our business model is working well and we're pleased to begin the year on a strong note.

And while the numbers don't show it yet, as I mentioned, we are making progress in stabilizing our children's original Dr. Scholl's and Bass businesses.

In children's, we believe we've stabilized sales with new licensed properties from Disney and Star Wars replacing the Spider-Man license.

At original Dr. Scholl's we have solid sellthroughs and much tighter inventory control, and at Bass our focus continues to be on improving the product and expanding distribution.

Of course, the proof will be not in this quarter or the next, but how we finish the entire year for these three businesses.

Finally, though we've only owned Bennett for 34 days now, the integration, and I'm sure you'd be interested to hear that it's going very smoothly.

The teams are getting together and we're very excited about our combined prospects.

Turning to our specialty retail division for a minute, which includes our 366 Naturalizer stores in the U.S. and Canada, our shoes.com e-Commerce business and the newly acquired eight Via Spiga stores.

Sales for this segment of our business totalled 53.3 million in the quarter, compared to 48.2 million in the first quarter of last year.

Combined comp store sales were basically flat in the quarter.

The operating loss for the specialty retail segment was 3.5 million this quarter, versus a loss of 2.5 million in the year ago quarter.

That said, the higher loss this quarter was primarily due to lower gross margin rates as the result of aggressive clearance sales of fall product in our Naturalizer stores.

And I'm sure you remember that last quarter we told you we were conducting an evaluation of our Naturalizer retail segment.

We're making very good progress there and should be in a position to discuss our plans with you in the near future.

And at Famous Footwear, which Joe will talk about momentarily, we posted a strong first quarter.

But no-- but know that we do have a note of caution if sandals don't start moving soon in a meaningful way.

In summary, we've made important progress this quarter, especially within our wholesale segment.

Famous Footwear had a great quarter but may give some back in the second and we are continuing to be focused on integrating Bennett with learnings happening on all sides.

And now I'll turn the call over to Joe.

Thanks, Diane, and good afternoon, everyone.

Famous footwear continued its positive momentum of last year.

We reported sales of 288.7 million, up 6.1% from 272.1 million in the first quarter of last year.

Our comp store sales increased by 1.5%, which was in line with our expectations and compares to a 2.6% comp store sales increase last year.

Solid sales gains enable to us leverage our expenses and this along with gross margin expansion, drove a significant increase in earnings during the quarter.

Specifically, first quarter operating earnings were 16.5 million, or 5.7% of sales, a 34% increase over last year's first quarter operating earnings of 12.3 million, or 4.5% of sales.

For the quarter, we opened a total of 20 new stores and closed 12, ending the quarter with 927 total stores.

We remodeled 73 during the quarter and we now have 60% of our go-forward Famous Footwear store base currently in the new format at quarter end.

We still remain on track to remodel 110 stores in the current year, with the majority of this work completed before the back-to-school season gets underway.

And our intent is still to have all of our go-forward stores in our new format completely done by back-to-school of 2006.

I believe that our first quarter results demonstrated that the strategies we have implemented over the past two years in the areas of product, marketing, store design and layout are working.

In fact, we drove increased traffic through our ability to satisfy consumers with differentiated and trend current footwear and an easy-to-shop format.

We also benefited from higher average unit retails this quarter, and we generated sales growth across several key categories.

And in athletics, specifically, which represents the largest percentage of our sales, business continued its positive performance.

We experienced double digit increases in both men's and women's and a high single digit increase in our children's athletic business.

Our non-athletic kids business was also healthy, generating a mid-single-digit comp increase.

And we also saw-- saw solid comp growth in men's non-athletic driven by the dress category.

However, you know, we did experience softness in the sandal category across all genders.

The season did not open up the way it typically does driven, we believe, by unusually cold spring we've-- we've had.

This will likely result in additional markdown activity as we clear seasonal products, making comparisons challenging for us during the second quarter.

Finally our women's business in total for the quarter was flat to last year.

In addition to sandals, sales did not meet expectations in the casual and dress categories.

While the second quarter is proving to be a bit challenging for us, we believe that Famous Footwear continues to be poised in its trend of positive earnings for the year.

To this end, we believe we are positioned well during the second half of the year, when traffic traditionally increases for the back-to-school and holiday selling seasons.

We plan to drive our sales with a focus on exclusive product to continue to drive differentiation, a trend right product at a value and continued support by an aggressive multi-channel marketing initiative.

And also currently encouraging to us is the athletic business continues to be robust, which is typically a very good sign as we head into the back-to-school season.

This trend has continued from last September, and we presently don't see anything on the horizon to change that momentum.

At the same time, we are cognizant of the retail environment, which has been uneven with a few strong months and then followed by weaker ones.

Despite that, we believe the Famous Footwear will report another successful year as we continue to benefit from the implementation of our core strategies.

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

Thank you, Joe.

Good afternoon, all.

Brown Shoe achieved much success this quarter.

We reported results that, as adjusted, were ahead of our expectations, closed on the Bennett acquisition, and completed a debt financing providing us with net proceeds of $150 million that we used to fund our acquisition of Bennett.

We were pleased to conclude this offering, given the tough environment for debt issuance this spring.

Before I summarize the financials, I would like to highlight certain costs that impacted us this quarter.

First, a $9.6 million incremental tax provision, or $0.51 per diluted share, related to the repatriation of $60.5 million of foreign earnings under the American Jobs Creation Act of 2004, that were used to help fund the Bennett acquisition.

And, second, after-tax costs of $600,000, or $0.03 per diluted share, incurred for a bridge loan fee for an undrawn bridge loan in connection with the acquisition of Bennett Footwear.

Excluding these items, adjusted diluted earnings per share totalled $0.74 for the first quarter.

Please note that as a result of the Securities and Exchange Commission's April 15th ruling, which delayed the stock option accounting implementation date for Accounting Standard number 123, we decided to delay adoption of the new rule until fiscal 2006.

Now, turning to the full income statement for the first quarter.

Consolidated net sales for the quarter totalled 523.3 million, increasing 31.5 million, or 6.4%, from 491.8 million during the first quarter of last year.

Total operating income increased by 8.2 million, to 23.1 million, or 4.4% of sales from 14.9 million, or 3% of net sales last year.

Breaking the numbers down further, gross profit margin decreased by 30 basis points to 40.2% from 40.5% last year.

This decrease was primarily due to increased markdowns in our Naturalizer retail operations, partially offset by margin improvement in our Famous Footwear segment.

SG&A increased by 1.6%, to 187.5 million, compared to 184.5 million last year.

Notably we reduced SG&A was a percent of sales by 170 basis points to 35.8% from 37.5% in the first quarter of last year.

This was due to improved leverage in each of our segments driven by sales gains, as well as Bass transition costs that increased SG&A in last year's first quarter by 3.3 million.

Net interest expense totalled $3 million in the first quarter, compared to 2.4 million last year.

The increase in interest expense was due to the previously mentioned bridge loan fees related to the Bennett acquisition.

For the year, we now expect interest expense to approximate $20 million.

Our consolidated effective tax rate was 81.2% in the first quarter of 2005, as compared to 31.8% in the first quarter last year.

The higher rate reflects a charge -- excuse me, the higher rate reflects the incremental tax expense related to the repatriation.

Excluding the 9.6 million charge, our effective tax rate for quarter one was 33.7%, versus 31.8% in the first quarter of last year.

Net earnings were $3.8 million, compared to 8.5 million last year, and diluted earnings per share totalled $0.20 versus $0.45 in the year-ago quarter.

On an apples-to-apples basis, that is excluding the tax associated with the cash repatriation, the bridge loan and the Bass costs I mentioned earlier; adjusted diluted earnings per share were $0.74 for the first quarter, versus $0.56 in 2004.

Turning to the balance sheet, total inventory levels at the end of the first quarter were 423.7 million, rising 15.5% from 366.9 million in the prior year; 26 million of this increase is due to Bennett, with the rest of the increase attributable to our retail business.

Total debt increased in order to fund the Bennett acquisition and rose by 1 -- rose by 136.5 million to 279.5 million, compared to 143 million in the first quarter last year.

As a result, at quarter end, debt-to-total capitalization was 41.5%, up from 28.5% at quarter end last year.

CapEx totalled 8.5 million, and for fiscal 2005, we are planning CapEx of about $40 million.

As to forward guidance, while the full year looks good, we do see tough comparisons for the second quarter.

We estimate diluted earnings per share will be lower than last year, in the range of $0.27 to $0.32, versus $0.40 for the second quarter of last year.

This estimate includes $0.06 of negative gross margin impact from writing up Bennett's inventories to fair market value as of the acquisition date.

Also our expectations of lower margins and higher expenses at Famous Footwear, as we'll probably need to clear sandalized footwear.

Also note comparisons to last year are difficult due to the fact that in the second quarter of 2004, we reduced our compensation cost associated with stock-based and incentive compensation plans when we reduced our projections for the year.

Our incentive plans worked, as they were designed but it does skew comparisons for this year.

For full year fiscal 2005, we currently estimate diluted earnings per share in the range of $2.30 to $2.45, as compared to our previous guidance of $2.55 to $2.65, and last year's diluted earnings per share of $2.30.

Our current estimated range is not comparable to our previous range given certain costs and benefits.

Let me explain the various impacts so that we can compare on an apples-to-apples basis.

The current estimated range has been increased by $0.20 per share of stock option expense which has been delayed.

Further increased by $0.15 to $0.20 per share, associated with the accretive impact of Bennett, and reduced by $0.55 per share, for estimated incremental tax expense associated with the tax repatriation.

Excluding the estimated incremental tax charge of $0.55 per share, the estimated 2005 diluted earnings per share from operations are anticipated to be in the range of $2.85 to $3 per share.

This guidance is predicated on an assumed store-for-store sales increase of 1 to 2% for Famous Footwear over the full year, and achieving a 10% operating margin in our wholesale segment.

Fiscal 2005 net sales are currently estimated at 2.3 billion versus fiscal 2004 net sales of 1.94 billion.

This includes about $225 million in anticipated additional revenues as a result of the Bennett acquisition.

And, as Ron mentioned, on a go-forward basis, we believe Bennett will be accretive to our earnings in 2006 by $0.30 per share.

And now we'll turn the call back to the operator to take questions.

[Operator Instructions].

Virginia Genereux, Merrill Lynch.

So, Joe, would -- just so I sort of understand, where you're coming from, I think you said that-- that the quarter, your July quarter has started out -- May started out difficult, not surprising with weather.

Is that fair?

That's fair, Virginia.

Okay.

And would you say your -- does the current sort of outlook for the second quarter -- I think Diane you said maybe you guys might be cautious, that you want to sound a note of caution on retail.

Does your current outlook -- does your current EPS outlook for July, does that reflect -- I mean, is that -- is that -- is there sort of risk to that?

Have you assumed that sort of current conditions continue?

Or if things don't get better could that be a risk?

We-- we are assuming that-- it's -- it's-- most of it is in the forecast.

If things continue on the trend that it's on right now, there could be more concern.

We're starting to see a bit of improvement.

We're taking action on what we need to do in terms of driving some sandal inventory.

But most of our concern is already highlighted in the go-forward guidance.

Okay.

And Joe, I mean, back when you guys reported -- when you used to do monthly comps, I'm looking here-- I mean, the bigger quarter -- I mean the bigger month of the quarter is-- is June.

Is that -- is that right?

Out of the three months, yes.

Okay.

And then if I -- just sort of on the full year maybe, guys if we're at -- I mean, you're at -- as you said, you're sort of at $2.93, ex all of these charges, at the midpoint of the range and your EPS for the first half looks like it's going to kind of be up -- your EPS for the first half is going to be up $0.08, but you're talking a year -- you're talking a gain for the year, I mean ballpark, you're talking about a gain for the year of sort of high $0.40s.

So by my math you've got another $0.40 sort of year-over-year to gain in the back half.

So, Andy, can you tell us sort of where -- you know, broad brush, what either -- maybe by business segment.

What gets -- what gets better in the back half of this year relative to where it was in the back half of '04?

Yes, I think -- I think first of all, the -- the accretive value-- the bulk of the accretive value of Bennett -- and understand we've only owned this business a short period, but the bulk of the accretive value of Bennett takes place in the second half of the year.

So second quarter is not as significant an earnings quarter for them, as -- as-- as-- as third and fourth quarter.

So I think you can expect to see that.

I think that the -- some of the plans that -- that the team has put in place at wholesale, particularly with allowance exposure that we had at the end of last year;

I think we're running the businesses much different and, as you know, a lot of the allowance pressure and risk that -- that played out for us in 2004 took place in the second half.

I think we're running the business in a different way without that -- without that sort of downside exposure.

At the same time, I think -- you know, at this point, the athletic business continues strong and that-- that bodes well for good back-to-school at Famous Footwear.

So I don't know that it's isolated to any one particular segment.

I think it flows from the three examples I just cited, kind of in that order.

Okay.

And then when -- when do you guys think you'll have something for us on the -- on the Naturalizer retail side, in particular, as far as kind of a plan for what you do with that group?

I would tell you in the very near future.

Okay.

Would you -- Diane, would you guys do something separate from a quarterly call to articulate that?

I think we need to do the work.

I think we're getting close to -- to polishing and refining and I think when we complete the work, we'll share it and I don't know that it necessarily relates to the timing of other releases.

I think we have to finish the work and, as Diane said, we're getting close, very close.

Deena Friedman, Brean Murray.

A few questions.

You talk about sandals being a tough area.

Could you give me a sense of how much of your assortment is exposed to sandals, what percentage, approximately?

I'll answer that several ways.

You know, currently, it's about -- this time of year, first quarter, it's not that high.

It's around 8%.

Discouraging in one respect, it's not only sandals.

It's basically what you consider sandals and open-toed footwear, simply did not perform that well in the first quarter.

I think probably more encouraging, are second quarter sales in May, June and July.

Then as we go into the first month of third quarter, August, our sales are actually much higher in the second quarter than they were in the first; although it had a huge impact, we're fairly positive about our sandal business as we go into the second quarter.

So we're starting to see flat sales against last year.

Give us a couple more weeks and I think we'll have a more positive approach to that.

But we have seen sandal sales go from deep negatives into flat over the last five to seven days.

So even though it impacted the first quarter, we're still somewhat positive that the second quarter will at least meet last year's sales.

Every sales indication over the last week has indicated so.

And then one other question, you talk about strength in athletic.

Are there any brands that are stronger that you can highlight?

And can you comment on how the classics are doing?

Okay.

You know, I think our business continues to be run no differently as far as what we've experienced in the past.

I mean, if we take a look at the-- our Nike business, continues to be extremely strong.

Our -- both our Nike and Adidas business.

Our Reebok business for the first time in quite a few quarters.

We have a new initiative with Reebok and the NBA which launched in May has shown nice gains.

But, across the board, if you take a look at what you consider smaller vendors, but very important to us.

Asics, K-Swiss-- and I say smaller, not of Nike size; they continue to perform extremely, extremely well.

We have not seen much of a slowdown, nor do we anticipate through back-to-school to answer your classics question.

We have not seen a slowdown in that product.

We still remain very aggressive in presenting in with our future orders.

So even though there continues to be a lot of discussion in the industry about it, I don't think many of us are experiencing a slowdown in that.

Now, is it flat?

Somewhat in-- in April, as we continue to look for an increase over -- in second quarter, we did experience it in first quarter.

We're just not going to see the 10s and or 12% increases we're going to see more of the 5s and 6s.

Heather Boxan, Sidoti & Company.

Quick question, are you guys still expecting Famous Footwear to open 80 stores for the year and close 35?

That's the most recent guidance I have there for the fiscal year.

Yes, we continue to have the same plan, 35-- 35 to 40, that'll fluctuate but, no, open 80 and basically close 35 to 40.

Okay.

And as far as Naturalizer retail segment goes, you mentioned there were increased markdowns this quarter there but they were basically on the clearance of fall footwear.

With the cold, wet spring that we've seen, do you foresee possibly going into the second quarter, some increased markdowns on the spring merchandise as well?

No, I think we've got those pretty well planned and, you know, we really expect that our sandal and opened up footwear inventory should be in pretty good shape by the end of the second quarter.

So it's-- whatever we had planned, we feel we've reflected in our forecast.

Can you maybe give some color then on how that risk exists at Famous Footwear but not at-- in the Naturalizer stores.

Well, I guess -- and I'll let Joe jump in, but I think what-- with Naturalizer, you know, where we are -- have sold through some sandal inventory pretty-- pretty decently in the first quarter, and we continue to have events planned through the second quarter to get us back on track by the end of July.

And we cut off a lot of the replenishment of that inventory, you know, from-- from our wholesale segment.

I think in Joe's case, he's been really affected by the wet weather in different parts of the country and it was really -- sandalized footwear across all different classifications and and brands.

That's correct.

It was not across-- it's not only across the brands but obviously, men's women's and children's.

The only-- as you take a look at maybe the positive side of it, if you really split your southern tier stores versus your northern tier stores.

Our southern stores have performed extremely well in that product.

The unfortunate part is -- it is the northern stores have just been terrible.

And even up through, I'll say, yesterday and today, if you take a look at the New England area, the weather's still in the-- in the high 40s, low 50s.

So we have yet to get a weather break in northern tier stores.

My last question, trying to get the full year fiscal guidance on an apples-to-apples basis.

I know you said about 2.85 to $3 if you exclude the taxes.

I'm looking back at what fiscal '04 was when you take out all the extraordinary items.

I know the GAAP number was $2.30.

There was about $0.11 of charges, though that were backed out and those did not include the $0.11 in Bass charges.

Is it correct, I guess to use a 2.52 as a -- as an apples-to-apples comparison number for F '04, rather than $2.41, if you have that around?

I was just looking at the fourth quarter release.

I have to -- I'm at a loss here, Heather.

Let me check and get back with you.

I think the appropriate comparison is-- is the $2.41.

It's complicated because, you know, we had the one-time stuff.

We also had a significant shift in compensation expense that impacts the year, and it's tough to isolate any one without looking at the total, because you've got big shifts going on that get skewed by-- by-- by those sorts of things.

I'll -- I'll call you -- I'll call you -- I'll call you with respect to, you know, what makes up that $2.41 and what the appropriate apples-to-apples is.

Scott Krasik, CL King.

Joe, I guess first question for you, I think the -- some of the non-athletic women's categories had been-- either comping positively or been exceeding plan in the fourth quarter.

What do you think happened there?

I mean was it just a traffic issue or why do you think they didn't make plan this quarter.

Well, again, it takes a little more time than just a conference call.

So let me just summarize it from a top level.

If you really take a look at our junior business, other casual businesses, if you take everything that is closed-toe footwear; so take sandals out but even in dress and casual, which is non-sandal business, that business was flat until you take anything that was open-toed out of that and everything else showed an increase.

So anything that was open-toed or sandals showed a decrease in the first quarter.

Anything that was not, we're very pleased with.

Okay.

So nothing's really changed from the consumer perspective, other than it's cold weather and they don't want to buy --

I hate-- I hate using that as a reason, but I mean I can't-- because-- I hate using the same time frame, all I want to do is take my Florida, Texas, California, Arizona stores and look at what they're selling and we're shipping it there as quickly and we can and I can't give it away in the north.

Okay.

Diane, do you want to talk a little bit about pricing on some of your brands Bass, Naturalizer for the fall, LifeStride, have you bumped up the price points at all?

Are you seeing pushback if you have?

Really, I would say with Bass and Naturalizer, in particular, yes, we have seen -- you know we have taken price increases, and in particular for Bass it was really all part of the strategy to get us to stronger gross margin rates, really reflect, you know, exactly what we wanted to and enhancing the product and we have not had any pushback on that.

With respect to Naturalizer, same thing, we've been really looking at how do we price layer in Naturalizer a little bit and also making sure with-- costs going up-- product costs going up, we wanted to make sure that we-- we covered that, we got some of the gross margin rates that we needed and also still continued to deliver great product to the consumer.

So we have not had resistance, you know, those price increases and I think in general, the market is moving a little bit that way as well.

And LifeStride too, because I think that was where you were going to get some growth this year?

Yes, again, they've been also price layering for probably the last 12 months.

And I think that's working actually very effectively.

And they're already at very popular prices.

So even when we say price layering there, we're at 39.9, really, and 49.9 at the top end.

And then the growth in Carlos was pretty fantastic.

Who do you think you're taking market share from there?

Well, I think it's coming from a lot of different-- different pieces.

That whole sort of more contemporary segment, or the impulse segment as we talked about it, is growing extremely rapidly.

So it's-- we think it's coming from a lot of places and it's being driven by the woman who's really looking for a lot more in -- a lot more flash and a lot more sex in the shoes and we see that as being a key opportunity for us going forward.

We see more-- more doors, better sellthroughs, it's actually on a really nice little run.

So retailers are just keeping more dollars to buy in that classification?

Yes, I think, you know, as you look at -- exactly right.

As you look at, you know, each of the different segments, moderate has, as you know, been on a little bit of a downturn the last 12 to 18 months, and so they've been shifting-- and better too.

So they have been shifting dollars to fund in different categories and Carlos just fits in-- in a -- in a business-- in an area of the business that they really want to fund as well as the bridge category.

Okay.

And then I guess just lastly, has there been anything -- I know you haven't owned the Bennett business for that long, but has their business generally been tracking similarly to your department store business?

Has there been any sort of standouts one way or the other?

Have they managed their sandal inventory as well as have you?

I would say that, yes, we've -- we think they're doing a terrific job with their business.

They're tracking very much in line with where we are.

And don't see anything, you know, inconsistent at this point in time.

Reade Kem, Banc of America Securities.

Just a couple questions.

Going back to Famous Footwear, Joe, I was wondering if I could ask another question about the comps whether you notice any difference or whether you could put a figure out in terms of what you experienced at remodeled stores versus the old formats, if you have any data along those lines?

Well, I -- you know we do have some data but, you know, I'd rather approach it this way; there's a cost of being in business and changing your format and how it looks today.

So we were going to invest in those-- that phase of stores and bring a new face to Famous and that was part of the strategy from-- from three years ago when we started.

So that's just a continuing process.

The stores, we're pleased with and we're going to continue to invest that money and by the time we get to back-to-school next year, it will be one face of Famous.

So let's say we're pleased-- pleased with the stores.

And were the-- the remodels you did in the quarter, and the store openings and closures, were they spread throughout the country or were there any -- was there any region that was kind of a focus there?

Well, we continue to focus by region.

So when we remodel stores and we open stores, it is with-- with the intent of doing that by region, by city.

So it's not spread, we will go in and do cities at a time.

Okay.

Which -- which ones were you active in this quarter?

In quarter, it was more so in the southern -- in the southern stores-- southern stores being Texas.

It was Florida and Arizona.

Okay.

And it's obviously a small piece and you just acquired it, but I was curious if you the-- what the Via Spiga stores comped at.

You know, I --

We had them for nine days.

You know, I'm really not sure how they did.

Okay.

And did you-- did you mention what the sales were for-- for the Bass product line for the quarter?

No.

We didn't.

Generally speaking we don't break out sales or earnings by brand.

Okay.

Because I think you were rolling out new product on that brand and I was curious how that went.

Sellthroughs some of the new products has been good.

The real growth and opportunity for that in distribution is the back half of the year.

And Andy on the-- on the guidance, you know, obviously there's some-- some risk to the -- to the second quarter piece but, assuming you hit that guidance, would you -- what kind of a -- what kind of a free cash flow figure do you think you'd be comfortable with for the year, would it still be kind of in the -- would it be like in the 20 to $50 million range?

Help me with your definition of free cash flow.

Just cash flow from ops less CapEx.

Before dividend, I think you're-- you're in the 20 to 30 range for this year.

Jeff Feinberg, JLF Asset Management.

Two quick questions.

One is with regard to Famous Footwear if you could talk a little bit, Joe, about the longer-term potential in terms of the number of stores that you see, given the success with some of the remodelings and the like?

And what type of footage growth we might be able to think about into '06 and '07?

And for Andy, if you could talk about what the normal tax rate should be going forward?

As far as the growth pattern in-- at Famous, I think we've always stated before that 1,500 stores is-- is not something that-- that's unreasonable at all; over the next-- next three to four years but, again, you know, it depends on -- a lot of it really depends on the right real estate.

You know, we're opening up 80 stores this year and we think we have 80 great stores.

If we could find 150 great real estate locations we would open up 150.

But to me it's driven by a real estate strategy as to where we want to put those stores.

And then the quality of real estate that is available.

So that's really driving it.

But 1,500 stores is not pie in the sky, very realistic; probably on the short end.

He asked also about square footage.

You asked about square footage by year or just in total.

Just, for example, in '06.

I think if I take the 1,500 comment, and we're running a little over 900 now; it looks like we'll be opening roughly 130 to 150 stores.

That they-- basically the square footage should be double-digit-- or the store growth should be double-digit starting next year is what the math would imply.

Well, the math would imply, again, I think we're probably-- I'd rather be more conservative and stay in the 4% range, and I would like to readjust that if I find some great real estate and take it up from there.

Again, this is going to be real estate driven, I'm not going to sign B & C locations.

Maybe what I meant -- are there many closings anticipated next year.

Well, I think we'll always-- both next year and foreseeable future, you always take a look at closing 5% of your store base.

So -- and 4 or 5%.

So that looks at 40, 50 stores a year.

So, again, if I could find 125 great locations -- I've always been in retail companies you always take a look at the lower 5% of your stores and try to close those.

A lot of those come about because the leases are coming up.

So I think we'll always look at 40 to 50 stores a year.

Jeff, with respect to tax rate, excluding the -- the tax associated with the repatriation this year, we're probably looking 33 to 34% for '05, which is as good a proxy for '06 as anything else.

Now the net tax for '05 will probably be about 45%, but that's because of the taxes associated with bringing those foreign earnings back.

On the steady state go-forward, 33, 34%.

That's always a function of mix, as you know.

Okay.

And just one final question.

The wholesale book looked like it improved dramatically.

I was very impressed with that 15% backlog.

When will majority of that ship?

That's really from starting in really June through September.

We have a little bit of September in there too.

Okay.

At least from my perspective, that gives a lot of confidence in the guidance you've given here because sort of on to Virginia's comments, of course; if you add back last year's non-recurs you really only need like $0.10 or $0.15 increase in the back half, excluding Bennett, and probably a good chunk of it's right there.

So that's helpful.

Sam Poser, Mosaic Research.

Joe, I just wanted to follow up with you on a couple-- on a couple of loose ends.

On -- one thing we've heard a lot about is the fashion athletic business.

Could you discuss -- can you discuss what you're seeing on that side of it, and especially on the woman's side on athletic?

You talked about some of the brands.

Oh, yes.

Sam, actually, it's kind of easy to -- we just came out of the NFGA conference in-- in Tucson, spent a morning on that basically as an industry.

I don't think we're experiencing anything different than the whole industry is.

Tremendous growth not only currently but I think over the next -- I think we see over the next year or so, on-- continued on running, a little more pressure on basketball, we see continued growth in running.

And, again, Sam it's more-- more street.

We say it's technology driven, it's really design driven for street, for blue jeans; and that's being experienced not only at Famous but also at specialty-- at specialty stores.

So we just don't see that slowing down as an industry.

We're growing more quickly in women's right now than in men's, but both businesses are extremely healthy.

Kind of give you a-- a quick -- if you take a look at our business in first quarter, our men's running was up 14%.

Our women's running was up almost 19%.

Average retails are up, margins are up.

I mean, it's just an extremely healthy business.

I think ours moreso than a lot of people, but it's across the board.

So we really don't see that changing this year into next currently.

And what about brands like Puma, Sketchers, and so on in that picture?

I mean, are those important or is this happening much more in the, quote, technical design group?

Well, we actually take a look and we split that business between what I consider true athletic, when I take a look at, let's say a Nike, an Adidas, an Asics, Saucony, Brooks; that business is very healthy, but just as healthy is what I consider somewhat the more street fashion, when I take a look at a-- a Pony, Puma, Diesel, also take a look at Sketchers, more of a Euro casual athletic look.

Two separate businesses.

But I think what we're finding right now and really like is both those businesses are very, very healthy.

So -- and I don't -- you know, we don't put the -- I don't put the Sketchers in-- in an athletic business.

So those aren't reported in numbers as athletic, that's non-athletic.

Diane, are you looking -- I've noticed a lot of-- of the Carlos goods all over the place, you know, getting better placement.

Is the demand for that where you might set up a second part of that and tier up the price point a little bit to increase distribution?

You know, we thought a little bit about that, but we're -- you know there's so much opportunity, Sam, right now sitting in front of us with the brand that we have and really continuing to get better placement, and really make sure the breadth and the balance of the assortment is right and--and-- and-- and sort of getting it really well anchored.

We're kind of focusing on that now, but we have-- we have talked about that.

You know, a price layer, even above that, for-- for different-- different segments.

So we are thinking about it, but really pretty much focused on that core business and getting that right.

And then on the -- on the Bennett part of the business, that's going to reduce the margins somewhat-- or potentially reduce the margins in Q2, where is that -- is that mostly out of Franco Sarto, or is it throughout -- or can you give us an idea of how that's broken out by brand within Bennett?

Well, is your question the inventory write-up, what brand does that affect the most.

No, you said it would be a $0.06 per share margin hit in Q2.

Because of the inventory, the acquisition accounting and inventory write-up, et cetera?

Right, is that-- is that particular to a specific brand or how does that work?

Well, the bulk of the brand-- the bulk of the inventory, I think, is Franco, but it's going to be on all the inventory we acquired; so it would be across the board.

And ladies and gentlemen, we have time for two more questions.

Chris Svezia, Susquehanna.

Couple questions.

I guess the first for Joe.

Just going to Famous Footwear, and as you look in the back half of the year, and I think previously you had talked about the importance of the exclusive athletic footwear.

And I think you had mentioned previously that you would expect it to be about 20%, 22% in terms of dollar volume of your athletic business the back half of the year.

Is that still a safe assumption as we look to the back half of the year?

Now, let me answer this a little bit differently this time but, you know, exclusive products continue to be an important and will continue to be even more important in our product assortment, moreso to differentiate us from the other people that we compete with.

So that's going to continue to grow, continue to grow in accordance with all of our vendors.

And, you know, the first objective there is not so much margin puritan, the first objective there is to rally differentiate our concept and our stores from others and I think that's where we're seeing success.

Yes, it'll continue to grow in our total assortment not only this year, from last year, but as we go into '06 and '07.

Okay and is most of that going to be in some of the technical and some of the running categories that you talked about?

Well, of course.

Whatever drives-- drives our business, especially as we zero in on-- on a running category.

I think that's why we're looking.

I just mentioned the percentage we ran first quarter.

So we obviously saw that trend coming last year, we've adjusted our exclusive product to address that in first quarter this year and as we go into second quarter and third quarter of the year we're in.

Okay.

And Diane, a question for you.

Just in terms of the Naturalizer business, it looks like inventories are pretty clean here, specifically on the wholesale side.

As you look, I guess, just in terms of the dollar growth that you saw in the first quarter, are you pleased with the level of margin that you saw in terms of that sales growth in the first quarter?

Yes.

I -- I would say generally speaking, we are -- we are pleased.

I think they've done a very good -- the team has done a great job in overall managing, you know, the business in total.

We're really focused on how we're flowing those goods, we're very careful about that.

So, yes, I would say we're-- we're comfortable with where we're at, and see that we could continue to improve that.

Okay.

And as you look at that forward-order increase roughly up 15% as you look towards the back half of the year; can you give us an idea in terms of how much of that is drive by higher prices because you've been moving and improving and increasing your average prices on your product and how much is roughly driven by unit growth?

It's primarily driven by unit growth, very, very little in-- in terms of the average price growth.

And is it pretty much across the board in terms of most of your brands?

Yes, I would say it's across the board, all brands and really all channels.

And you didn't talk anything about your mass business, your business with Wal-Mart, Target, Payless.

Any thoughts or commentary with regard to Starter entering into Wal-Mart on the athletic side.

Any thoughts on how the business is trending and any commentary at all on the athletic side in that channel?

I would say it's very early to really tell how that business is going to perform and our business with them, with Dr. Scholl's has just been sensational.

Susan Sansbury, Miller Tabak.

I just have a couple questions.

First, do you expect to-- to repatriate any more foreign income?

Yes, we brought back, as you know, as we disclosed-- and I think there'll be an additional amount late this year, late third, early fourth, probably somewhere in the 20 million range.

And the additional tax expense has been affected in our release and it's incorporated in our full year guidance.

As you know-- as you know, Jobs Creation Act provided a window to bring back cash and essentially it was for calendar year 2005.

Okay.

Second question is, I -- I missed what you guys are evaluating with respect to Naturalizer retail; spinoff, divestiture, closure?

You mentioned some action, and --

I think we're taking a broad -- a broad approach to-- to bringing some meaningful improvement in the operations.

And as we said earlier on the call, we're close to completing much of our work, and hope to be in a position to share that with you all shortly, and that's our intention and I think we feel good about where we are, and I think we're getting close.

So we'll share all of that with you.

We haven't provided anyone with any specific details, just because we haven't completed the work yet.

But you're focusing on improving the operations as opposed to do something more dramatic with it?

We're focusing on improving the contribution from the broad Naturalizer platform to Brown Shoe Company.

Okay.

And I guess the final question or if I can keep going, how fast do you expect to repay the debt that you borrowed to finance Bennett?

The Bennett acquisition?

And/or are there any restrictions on -- on paying off this debt?

I apologize, I haven't looked at the public documents.

Yes, it's I'd answer it this way, Brown Shoe Company, as you know, generates good, positive cash flow when we run this business right.

Bennett Footwear is an earnings rich company that will also generate positive cash flow.

And as you look out over the next few years, we'll work hard to improve our debt-to-cap ratio.

Now, with respect to paying back the debt, it was the seven year issue, four year no call.

Four year no call?

Yes.

But we still have borrowings under a revolver facility and we'll work to bring those down, we'll work to improve our leverage.

And we're pretty confident if -- if prior year's performance is an indication of the future, our ability to generate ample cash flow is there, and we'll work hard to improve the balance sheet and -- and improve our leverage.

Okay.

One question relating to options expense.

You indicated that the former guidance included -- what did you say, $0.20 a share of options expense and now it no longer includes that.

Would that also be included in the consensus estimates for '06, meaning the options expense?

I can't speak to the consensus estimates.

I can tell you that our prior guidance included the cost and prospective guidance now excludes it, because we'll reconsider it in 2006; which we understand now is the date for adoption.

Okay.

And in 2006, all other things being equal, it wouldn't be materially different than-- than the original $0.20 a share annualized expense for this year?

We really haven't done the work yet, but I wouldn't anticipate that.

That will conclude the question-and-answer session.

Again, thank you all very much for your questions and participation.

I will turn things back over to our hosts for any additional or closing remarks.

Thanks, everyone.

Really appreciate you joining us this afternoon.

You know, while we've expressed some caution, regarding the retail environment, let me say that I've never been this excited about our business.

You know, we believe that we are building a consumer marketing-focused, product design-focused organization here at Brown Shoe today; and that positions to us grow our market share in the marketplace.

And we've embraced the complexity and, quite frankly, I think we've learned how to harness the power of our unique wholesale retail platform.

And we're really starting to have this work with us as we really learn to partner better, both on wholesale and retail side of the business.

You know we've learned also, quite frankly, a great deal from a rough ride in 2004, and we are determined to keep our inventories in check, balance, continue to focus on the freshness of our inventory, and make sure that we're constantly aware of the sellthrough numbers and managing it on a go-forward basis.

So really appreciate your time.

Thanks for joining us, and we'll see many of you in a couple of weeks at Fanny.

Thank you.

Thanks again, everyone, that will conclude today's conference call.

Have a good day.