Caleres Inc (CAL) 2005 Q2 法說會逐字稿

Welcome to the Brown Shoe Company second-quarter 2005 financial results conference call. This call is being made accessible to the public via webcast in accordance with SEC Regulation FD. Also, today's call is being recorded.

Before we begin, I would like to remind you of the Company's Safe Harbor language. During this conference call, the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook. Discussion of the Company's future plans and other statements in this call or not current or historical facts are forward-looking statements. These are subject to known and unknown risks and uncertainties that could cause actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statements. Factors that could cause actual results to differ materially include those listed in our press release issued this morning and available on our 8-K filed prior to this call and other 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 Web site, BrownShoe.com, 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.

Also, SEC regulations require us to provide information on any non-GAAP financial measures covered in today's conference call. Such non-GAAP information consists principally of earnings per diluted share, which has been adjusted to exclude certain charges, and information regarding components and 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 Web site in the News section.

Now, I would like to turn the call over to Mr. 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.

Good morning, everyone. Thank you all for joining us to discuss our second-quarter and first-half results. Andy Rosen is with me at corporate headquarters this morning, and Diane is at the Bennett headquarters in Boston, and Joe Wood has been up traveling stores in the Seattle area and is on the line as well.

You know, we are very pleased to report real, firm progress toward improving the earnings power of Brown Shoe Company. For the second quarter, net sales rose by 20.2% to $551.5 million, inclusive of $45 million in Bennett brand sales, which we acquired in April.

We also met our earnings guidance for the quarter with diluted earnings per share at $0.22. The earnings numbers include $0.09 in charges associated with our Naturalizer repositioning efforts and $0.07 in acquisition accounting costs. This compares to second-quarter 2004 earnings per share of $0.40, which included Bass transition costs of $0.05 per share.

To give you a quick overview of our business focus, you know, over the past six months, we've been working to strengthen our wholesale and specialty retail operating platforms while continuing to invest in growing footwear -- in growing Famous Footwear. Specifically, we executed well on initiatives to strengthen our children's and Bass businesses, and it's good to see initial improvement of these efforts. We also undertook a large program to evolve Naturalizer and take the brand, which is currently number two in department stores, to the next level.

While not evident in this quarter's numbers, we are extremely excited with the fashion direction, consumer appeal and new marketing for the Naturalizer brand. We believe, and retailers seem to agree, that the spring, 2006 line is one of our best ever. Earlier this month at WSA, we received very encouraging reviews from retailers that previewed this product and the new marketing campaign as well. Consumers will see these styles and the new marketing in the spring of 2006.

Second, we strengthened our team by recruiting top footwear executives. We recruited new leadership at Naturalizer and added senior talent in the areas of product element, marketing and sales. We attracted new talent around our Carlos brands, and made some key promotions at LifeStride. We are already seeing a positive impact from the vision and fresh thinking from these key hires, especially as they focus on consumer marketing to build our brands. Again, if you saw us at WSA, you could see that the investment in brand building, design and marketing is beginning to come to life.

Third, we successfully acquired and are in the process of integrating Bennett, which as you know operates Via Spiga, Franco Sarto, and Etienne Aigner brands. The integration, which involves mostly back-office functions and systems, is going very well. We continue to expect Bennett to add $0.15 to $0.20 to our earnings this year.

Finally, we announced and began to implement a plan to improve our Naturalizer retail division. During the quarter, we closed nine underperforming stores and remain on track to exit a total of 80 locations by April of 2006. This move, long with the consolidation of all the buying, merchandising, planning and allocation functions for our U.S. and Canadian locations is expected to result in incremental earnings of $0.15 per share beginning in fiscal 2006.

In total, we are excited to see the initial benefits of our wholesale strategies and we remain on track with our retail repositioning. While Famous Footwear's back-to-school season has begun slower than we expected and consumers continue to shop later, much closer to their need, our expectation is that the business will start to peak during the last week in August and we will see back-to-school business continue throughout September.

That said, our third-quarter guidance range takes into consideration a comp range that is flat to slightly down -- assumptions at Famous Footwear? With vibrant brands and a number of growth initiatives in place, we believe we are well positioned to achieve our annual sales and profit goals. We now believe that our wholesale and retail platforms are working well together.

With that, I'd like to turn the call over to Diane to review that business.

Thanks, Ron, and good morning, everybody.

As Ron mentioned, we did deliver results in line with our guidance for the first half and second quarter of 2005 and are encouraged by the positive direction of our wholesale businesses. This quarter's results demonstrate that our wholesale product and marketing initiatives are beginning to take hold and answer you know, we've taken action to begin to improve our Naturalizer retail operating platform and at Famous Footwear, we manage the business well despite a somewhat more difficult environment. Importantly, we met our expectations while advancing our key initiatives.

Let me start with our wholesale businesses. In the second quarter, wholesale sales were 207.4 million, including 44.1 million in sales from our newly acquired Bennett business. This represented a 51.5% increase from second-quarter sales of 136.9 million last year or, if you exclude Bennett, the St. Louis wholesale team delivered a 19% sales increase for the quarter.

Total wholesale operating earnings rose by 81.4% to 16.3 million from 9 million last year. If you look at this on an apples-to-apples basis after adding back acquisition costs this year and Bass transition costs last year, the wholesale division rebounded to a 9% operating margin from 7% last year, and we believe we can attain a 10% operating margin at wholesale this year. This increase in operating income was broad-based with almost all but our Naturalizer brand contributing to the gain. This was accomplished with an unrelenting focus on working to improve our sell-throughs at retail, delivering fresh product and the right quantities, and listening and reacting to our customers' needs.

To give you a flavor of our performance during the quarter, LifeStride reported a 15% increase in sales; Carlos Santana continued its sales growth, reporting a 30% increase in sales as the brand expanded its penetration at retail; our Bass business was strong with all three major retailers being driven with significant contributions from Dr. Scholl's as well as private-label offerings; and our kids business improved; we saw good contributions from new licenses as well as long-time staples such as brands like Barbie. We also saw, in the quarter, improvement in sales at Bass, as the brand more closely returned to its heritage with a classic, preppy lifestyle and as we invested in a new image campaign for the brand that presented our men's and women's lines together. Again, while it's very early in the turnaround of this brand, retailer reactions at WSA were positive.

At Naturalizer, we intentionally reduced sales as we edited our assortments to be more style and trend current. The brand did incur additional allowances this quarter as we began to add just our business model. However, we expect to show initial improvement emanating from this change beginning in the second half of the year with further improvement expected in spring, 2006.

Let me expand for a minute on the -- Naturalizer's new branding initiative that we will roll out to consumers next spring. We took a comprehensive look at the brands, including extensive consumer research, and determined we had opportunities to expand our target customer base, reaching women who sought a higher level of style while still demanding comfort. Our new Naturalizer initiative gives the brand a new sense of style with an updated iconic logo, new packaging, new imagery, and most importantly the shifting of our product to have a higher level of attention to design detail, improved quality and ensuring that Naturalizer reflected the season's trends in the appropriate way for that consumer. As Ron mentioned, retail reaction was very positive, as they see it broadening our brand appeal while continuing to satisfy our loyal, core customer.

On other Naturalizer news, we will introduce a product extension to extend the Naturalizer brand. At Fanny in June, we unveiled Natural Sport, an athletic-inspired line that we expect to ship to nearly 500 doors for holiday. Our Natural Sport shoes will include Dr. Scholl's massaging gel insoles, a key selling feature, as it provides us with a very strong point of differentiation on retailer selling floors.

So in summary, at Naturalizer, it's been -- and a lot of effort over the last six months but we remain on track to improve sales trends, strengthen sell-through rates and lower our markdowns, all designed to achieve much higher profitability for the brand.

Finally, our Bennett brands reported on-plan results, contributing 44.1 million in sales during the quarter. Specifically, Franco Sarto reported a solid performance, and our initial read on fall product is good. At Via Spiga, we are expanding into new lifestyle categories, such as boots and casual footwear, to complement the brand's strong base of business in the direct category. As Ron said, the integration is going smoothly and we are already benefiting in many ways from the collaboration and teamwork with the Bennett gang.

Turning to our specialty retail division, which includes now 369 Naturalizer, F.X. LaSalle and Via Spiga stores in the U.S. and Canada and our Shoes.com eCommerce business, sales for this segment of our business totaled 57.9 million in the quarter, compared to 52 million in the second quarter of last year. Combined comp-store sales were basically flat, just up a little bit for the quarter. The operating loss for the specialty retail segment was 5.5 million this quarter versus a loss of 2.4 in the year-ago quarter. The operating loss this year includes pretax costs of 2.3 million to close underperforming stores at Naturalizer and the cost associated with consolidating operations. We are executing our Naturalizer retail action plan, including exiting unprofitable locations and reducing costs.

On the timing for store closings, the majority are now expected to occur later in the year, but we believe we have sized this charge correctly at $0.45 to $0.55 for the year. At Famous Footwear, which Joe will talk about momentarily, we met our sales expectations for the second quarter. While increased clearance caused earnings to come in below a year ago, we do enter the third quarter positioned well to capitalize on the back-to-school season.

So in conclusion, we really feel we're making solid progress this year and are pleased and look forward to the opportunities that lie ahead for our brands and our retail segments.

Now, I will turn the call over to Joe, who as you heard is up very early this morning and out in Seattle. It's all yours, Joe.

Thank you, Diane, and good morning, everyone.

Famous Footwear did experience a 6.1% sales increase for the second quarter. Sales were 286.2 million, a 2.2% comp-store increase, which compares to a 2.5% comp-store sales decline last year. The comp-store increase was driven across all categories of business, resulting in positive gains in women's, men's, kids' and accessories.

We were pleased to see positive results in other metrics of our business during the second quarter. Famous realized increased store traffic this quarter over the previous year. Our initial product margins were slightly higher, as were our average unit retails and even when taking into consideration a shift toward lower-priced sandal sales. Our operating expenses were under budget, as were our July ending inventories.

For the quarter, we opened 15 new stores and closed 9, bringing our total operating units to 933. We remodeled 26 stores during this time frame, which now brings our new format base to over 60% completion in all of our go-forward stores. We currently remain on track to have this transition completed ending fiscal year '06. While we did a good job of driving traffic and sales in our stores during the quarter and improving our other metrics by which we gauge our business, we were somewhat disappointed in our second-quarter operating earnings, which declined to 9.3 million, which was 3.2% of sales, from 12.4 million, 4.6% of sales last year. The operating earnings, which were less than our original expectations, were the result of additional markdowns taken on closed-toe inventory, which sold at a slower pace during the second quarter, so as compared really to our open-toe inventory. So with intent, we took additional markdowns on this product to keep the integrity of our internal inventory metrics, which is project impact that we put into place over three years ago to ensure our customers fresh and trend-right product as we prepared for our back-to-school season.

You know, as we begin our bulk of our back-to-school selling season, we believe we are positioned where we want to be. As in prior years, our back-to-school business is skewed to athletics, which represents almost 60% of our total, versus approximately 45% during other times of the year. From a marketing and product standpoint, we feel comfortable that we're in a better position than last year in regards to our compelling offerings of differentiated product, especially in our athletic brands, whether it be Nike, Reebok, Converse, K-Swiss, Adidas, New Balance, and many others and how this is being communicated.

We also understand that we need to show patience in our expectation of sales results yet to materialize. Our customer continues to buy ever-closer to their needs. Last year's purchasing patterns we believe will continue this back-to-school with the last week of August and month of September dictating our success. With that said, we do expect to capitalize on our back-to-school season. We continue to believe that Famous is positioned well with the right branded offerings and marketing plans in place to allow us to deliver the sales plan we budgeted.

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

Thank you, Joe. Hello, everyone.

As Ron stated, we were pleased to have met our expectations for the quarter. We achieved solid results, including strong momentum for the majority of our wholesale brands and our newly acquired Bennett business. At Famous Footwear, our first-half results exceeded last year but did lag in the second quarter.

Before I summarize the financials, I'd like to highlights certain items that impacted us this quarter -- first, costs of 1.8 million, or $0.09 per diluted share, related to the previously announced Naturalizer repositioning; and second, additional costs of sales of 1.3 million, or $0.07 per diluted share, on the required purchase price accounting adjustments to write-off inventory associated with the acquisition of Bennett Footwear.

Our second-quarter EPS was $0.22 versus $0.40 per diluted share last year. To reconcile this to prior guidance, we had projected our Q2 earnings, excluding the store closing charges, at $0.27 to $0.32 per share. When we add back the Naturalizer repositioning costs, adjusted EPS was $0.31 per share, which was at the higher end of our guided range. Due to the slightly later timing of the store-closing charges, we booked $0.09 per share this quarter of our estimated charge, versus the $0.14 to $0.16 we had originally projected. By comparison, in the year-ago second quarter, results included $945,000 after-tax, or $0.05 per diluted share, for the transition of the Bass footwear license, which Brown Shoe acquired at the beginning of 2004.

Turning to the full income statement for the second quarter, consolidated net sales for the quarter totaled 551.5 million, increasing 92.8 million, or 20.2%, from 458.7 million during the second quarter of last year. Total operating income decreased by 2.2 million to 10.8 million, or 2% of net sales, from 13 million or 2.8% of net sales last year.

Breaking the numbers down further, gross profit dollars increased by 14% to 215.6 million from 189.2 million in the quarter, while gross margin rate decreased by 220 basis points to 39.1% from 41.3% last year. This decrease was primarily due to our Famous Footwear segment, where we experienced higher markdowns on closed-out (indiscernible) athletic footwear and at wholesale due to the impact of acquisition accounting related to Bennett.

SG&A increased by 16.3% to 204.9 million, compared to 176.2 million last year. We reduced SG&A as a percent of sales by 130 basis points to 37.1% from 38.4% in the second quarter last year. This was due to improved leverage in our wholesale segment, driven by sales gains and the addition of Bennett, as well as Bass transition costs that affected SG&A in last year's second quarter by 1.5 million pretax.

Consolidated pretax net interest expense totaled 5 million in the quarter, compared to 2 million last year. The increase in interest expense was due to debt incurred in connection with the acquisition of Bennett. For the full year, we expect net pretax interest expense of approximately $19 million.

Consolidated net earnings were 4.1 million, compared to 7.7 million last year. Diluted GAAP earnings per share totaled $0.22 versus $0.40 in the year-ago quarter. On an apples-to-apples basis, that is excluding the cost of Naturalizer store closing and Bass costs I mentioned earlier, diluted earnings per share were $0.31, and parenthetically -- which were reduced by the write-up of the Bennett inventory of $0.07. This compares to $0.45 in 2004's second quarter.

Turning to the balance sheet, total inventory levels at the end of the second quarter were 493.7 million, rising 9% from 453 million in the prior year. This increase was due to the acquisition of Bennett and the addition of new Famous Footwear stores. Total debt increased by 151.5 million to 279 million, compared to 127.5 million in the second quarter of last year, again due to the Bennett acquisition. As a result, at quarter end, debt-to-total capitalization was 41.2%, up from 25.8% at quarter end last year but down from the first quarter. CapEx totaled 16.4 million in the first half of the year. For fiscal 2005, we are planning capital expenditures of about 40 million.

For the first half of fiscal 2005, net sales totaled 1.075 billion, compared to 950.5 million during the first half of fiscal 2004. Total operating income increased 21.3% to 33.8 million, or 3.1% of sales, compared to 27.9 million, or 2.9% of sales, in the first half of last year. Net earnings were 7.9 million compared to 16.2 million last year. Diluted earnings per share, on a GAAP basis, declined to $0.42 compared to $0.85 per share during the first half of last year.

Looking at first half on an apples-to-apples basis, that is excluding the $0.51 per share of repatriation tax charge, excluding bridge loan costs of $0.03 per share and excluding the $0.09 per share cost for Naturalizer closings, diluted earnings per share were $1.05 first half this year versus $1.01 in the year-ago period. If you will recall, our GAAP earnings for the first half of 2004 were $0.85. Excluding the Bass transition costs of $0.16 per share, earnings were $1.01.

To update you on the financial impact of the Bennett acquisition, year-to-date, Bennett has generated operating earnings of 1.8 million for us. This includes 2.3 million of lower-than-normal gross margins from selling inventory that was written up to fair market value. After inclusion of all interest costs incurred to finance the acquisition, the after-tax net earnings impact was a loss of 1.85 million, or $0.10 per diluted share. We do, however, continue to expect that the acquisition will be accretive by $0.15 to $0.20 per diluted share for full fiscal 2005.

As to forward guidance, as you know, Famous Footwear accounts for a larger percentage of our sales and earnings in the third quarter. Much like last year, we expect the back-to-school season to develop late in August and continue through September. Given this, we currently estimate GAAP earnings of $0.80 to $0.95 per diluted share in the third quarter. The high end of this range is predicated on a continued strength in our wholesale business and a same-store sales increase of 2 to 3% at Famous Footwear. The low end would reflect the same-store sales decrease of around 1%. This range also reflects an estimated cost of $0.20 per diluted share for lease buyouts, severance, and inventory markdowns in connection with our plan to close underperforming Naturalizer stores. Excluding this cost, the estimated diluted adjusted earnings per share are expected to be in the range of $1.00 to $1.15 versus earnings per share of $1.00 for the year-ago third quarter.

Turning to the full year, we continue to remain comfortable with our previous estimate for fiscal 2005 diluted earnings per share in the range of $1.75 to $2.00. This compares to last year's diluted earnings per share of $2.30. The current estimated range includes, one, incremental tax expense of $0.55 per diluted share and tax provision related to the repatriation of foreign earnings, and two, reflects the Naturalizer costs of $0.45 to $0.55 for lease buyout, severance and inventory markdowns.

Looking at earnings from operation and excluding the tax of Naturalizer cost items just mentioned, the estimated 2005 diluted earnings per share are anticipated to be in the range of $2.85 to $3.00. This guidance includes the anticipated accretion of $0.15 to $0.20 per share from the acquisition of Bennett and is predicated on store-per-store increases of 1 to 2% for Famous Footwear over the full year. In fiscal 2005, net sales are currently estimated at 2.3 billion, versus fiscal 2004 net sales of 1.94 billion. This includes about 220 to 225 million in additional revenues as a result of the Bennett acquisition.

Now, we will turn the call back to the operator to take questions. Operator?

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). From Merrill Lynch, Virginia Genereux.

Good morning. So, Andy, just to be clear, because U think you went through it, which was helpful -- but you're maintaining your guidance for the year, adding back all of these -- all the charges, chiefly the earnings repatriation and the Naturalizer store closures?

We're maintaining our guidance. I think we've imposed a slightly broader range than we normally would on the third quarter, just due to the fact that it's still very early. But the answer to your question, yes, we are maintaining guidance for the back half.

Let me ask you, it sounds like, to your point, October could be -- October may be a little lighter than you initially expected, given a slower back-to-school start, which is not surprising. Has something gotten better at wholesale, or do you see Q4 being a little better? I mean, what lets you kind of pick up the balance?

You said October. I'm not sure --.

I'm sorry, the October quarter. It sounds like Q3 is a little lighter than you had initially anticipated. You know, as you said, it's your biggest quarter at Famous.

I think, as we said, it depends upon Famous. I think one of the benefits that Brown Shoe has, though, is we've got a balanced model here between wholesale and retail, as you know. Right now, we are seeing -- I don't know about robust but very good business on the wholesale side, in particular Dr. Scholl's, private label, Bennett, LifeStride. I think we'll see better performance in the back half from Naturalizer compared to last year. So you've got a balancing effect here and depending upon back-to-school will determine how successful we are in the quarter.

You know, Virginia -- this is Ron. Just to add a little bit there on how we continue to look, on the wholesale side of the business, we do continue to see some strength. I think that the way that the month closes and how our shipping performs, relative to the business and as we get the shipping shipments actually out the door, you know, how that falls over the end of the month and into the (indiscernible) month, you know, so much of that shipping just occurs in the last week and the first few days, that could slide from third to fourth, so we just want the range to give us that opportunity.

Okay.

Virginia, the other thing I had -- remember we said Bennett would be nicely accretive for us this year, and we also said it would be back-half loaded.

Right, that makes sense if it's been $0.10 dilutive to the first half.

Maybe Joe Wood, if you can hear me, let me ask you sort of two things. Do you think even -- there is this later back-to-school phenomenon, but there seems to be, underneath that, maybe a little subtext that athletic is weakening, relatively. Can you comment on that?

Yes, Virginia. I don't think we are any different than what you hear from the rest of the industry. I think we are a little disappointed, whether it's family footwear stores or specialty stores, and athletics came out of the -- shoot -- the last week of July and the first two weeks of August a little softer than any of us had anticipated. Now, whether that's a trend or not, to us, it's still a little difficult a call. If you remember, last year, the last week of August and the month of September were so strong; I don't think that's going to change. I think it's going to take us awhile to look back yet. If you believe in all the research that the NSGA sporting goods business and sports trend does, and we just came out with those conferences in late spring, they still anticipate a healthy athletic business through '06. Now, I can't sit here and say that they are correct, but I think it's really going to take, Virginia, the amount of business that we do at the end of the month and September -- and we don't expect that trend to be different than last year -- is extremely strong compared to the first two or three weeks of August. So, I don't know if we are into an athletic trend that is going to continue soft or not. I think it's really a question we need to ask after we get through back-to-school. But yes, we have I think always been somewhat disappointed of the early softness of athletic.

Okay. I mean, that just sounds to me, Joe, like it's in contrast to -- the whether or not withstanding, which we know has been very hot, it sounds like it's in contrast to what you guys have been historically -- you know, have seen in the prior past 24 months, certainly.

Absolutely. I mean, athletic has not only carried us, it's carried the industry with a lot of excitement and with sales results. Again, the hardest thing right now is we've got our stores split up into early, national and late, and we're just going into -- we've come through the early portion of back-to-school; we still have the national and late markets, which are the back two weeks of August, and then the late markets starting after Labor Day, so I don't think we see this any different than we experienced last year. The next 30 days will really tell us whether we have a softness in athletic going forward or a total business. So we're still somewhat optimistic. The big stores that kick in and the big markets are yet to come.

Joe, you haven't seen -- have you seen any improvement in the earlier back-to-school markets?

You know, and I hate to get too optimistic about things, but if you take a look at the trend of the early markets, do you anticipate the same thing happened to the national and late markets? As the early markets closed out their back-to-school selling period and it's basically those schools that started the last of July through the first two weeks of August, those improved. So then you say, well, I've got two-thirds of my stores yet to come and will they follow the same trend as the early markets? That's what we are anticipating.

Okay. Then just lastly for Andy, later store closings on the Naturalizer Retail side aren't going to cost you more. Why would that be?

They're closing -- we're taking the charge or we are incurring the cost when we actually sign off on the closing stores. It should not cause the cost to go up any greater than the range that we have. Some of the stores will close in early '06, but those are normal expiries. I think we said all along it would be later in the year, third quarter, primarily fourth quarter. How the operating losses play out with respect to the stores that are open a little longer is difficult to judge, but it shouldn't be material and it shouldn't affect the charge per se, because that's not included in there. I hope I'm answering your question. I don't see any risk to that charge because stores are going to close a couple of weeks later into the third quarter than maybe we had thought.

Okay. Thank you. We will get back in.

John Shanley with Susquehanna Financial.

Diane, I wonder if you can tell us if the Bass Pro and children's wholesale operations are currently performing on a profitable level? Are you expecting those two businesses to be accretive to earnings in the back half of the year?

Well, we have seen significant improvement in the Bass business, particularly in the second quarter of this year. Our sales were up relative to where we were last year and we have seen improvement in the overall profitability of the brand as well. You know, we're going to have to see again, John, how the rest of the year shakes out and whether or not we continue to demonstrate the progress that we've shown in this quarter. You know, early indications are that it should continue to get better.

Well, are the profitable? That was my question.

John, normally we don't speak to profitability on a division-by-division basis. However, because I know the concerns a number of you have with respect to Bass, I can tell you, at this point, that, for the back half, we have a good shot at at least being breakeven at Bass here. I don't think it should leak value from us in the back half of the year.

That's also true with the children's wholesale, Andy.

Yes.

Just we did some calculating and I just want to make sure we are correct. After all of the closures of the specialty retail stores, you're going to wind up with about 270 left, Diane? Is that correct?

That's right.

Will those stores likely be profitable stores on an ongoing basis?

You know, we obviously selected the 80 closings that we did based on the fact that we thought those remaining stores, go-forward, could demonstrate strong profitability, and we are in the process right now, John, of tracking those stores and segregating those from the ones that we're closing to make sure that it's in the appropriate direction. So far, that looks good. Our expectations, yes, is that it would get very close to breakeven and show a profit next year.

Okay, so the 80 that you are closing represented the lion's share of the -- (multiple speakers) -- million loss?

Yes.

Joe, I wonder if you could give us a little further clarification on the back-to-school business. Is it as promotional as you anticipated, now that you've got three weeks into August? Also, I wonder if you could clarify some of your comments about the athletic business. Is it weak across all brands and all merchandise categories, or is it more isolated than that?

I'll take your two questions, John. One, promotionally, I don't see it any more promotional this year than we did last year back-to-school. Actually, that's been a pleasant surprise so far, so price-wise, it's not getting beat up any more than it was last year.

Across the board, I think what we're seeing, not only in the family footwear but also in other channels of retail, is it's not in any one category. It is -- if you take a look at the category performance and by vendor, John, it is just slightly off on all of them, whether it's Nike or Converse or Adidas or Reebok. So, it's not being picked on in any one category; it's just lighter sales across the board than what I think initially what we had anticipated or what some other retailers had anticipated, so it's not one category or brand that's driving that. So I'm not sure if that answered your question.

Yes, it does, exactly. You also mentioned store traffic was up. Is that correct?

Yes, store traffic actually in second quarter was up. I mean, overall, John, I'm not that disappointed with second quarter. I mean, we missed earnings by 3 million. You know, we could have made the earnings but we just -- I thought it was prudent to keep my inventory fresh, so I think, for a longer-term look at the business third and fourth quarter, it was the right thing to do. But traffic was up during -- if you take the whole quarter, it was up for the quarter.

Traffic was up and sales were not as robust as you anticipated. Are consumers being a little bit more selective, perhaps, in terms of the price points that they are willing to pay or is it just a reflection of the higher sales of the open-toe footwear, which generally has lower ASPs?

Well, that -- and John, you hit it; we continue into August -- can't believe the -- when you say open-toe, that's not only sandal; that's the slide business, the amount of business we're doing there. But the average retail there is almost 15 to $18 less than athletic and nonathletic.

Okay, that really helps clarify (inaudible). We anticipated that's what it probably was but thanks for pointing that out.

Then lastly, any specific areas that seem to be generating higher consumer interest as you get further into back-to-school than you may have anticipated? Are there anything really standing out in your mind in terms of the current trends for back-to-school?

Well, the only thing -- and I just mentioned I think the two things -- one is a silhouette issue and what we consider a silhouette in a lower bottom insole -- or not insole, outsole, which is driven mainly by Sketchers, Diesel and Puma. That has performed much better than we had anticipated. John, I probably won't go over the numbers but the sandal business continues, in mid-August, at a level we really hadn't anticipated.

Do you have inventory to support it?

Yes, we do. We actually went back, as we did not take markdowns, heavy markdowns on the sandal business in April and May when most people did; we went back in and re-ordered and played our cards there, so we have inventory to fill that need, so we feel very comfortable there. We're just waiting for athletic. It's just ever so slightly off a pace that we anticipated.

John, you know, what we're seeing also, in terms of consumer interest, is boots. Boots certainly seem like they are going to be stronger than what everybody expected this fall season, in particular the tall shaft boots, the Western and the equestrian looks, too, so early read across all of our brands is that segment looks like it's going to be stronger than what people thought.

Great. Thanks again. I appreciate it.

From Miller Tabak, Susan Sansbury (ph).

Good morning. Actually, John's questions pretty much covered what I wanted to touch on, but with respect to the forecast of accretion for Bennett in the second half, can you give us some indication of how you expect the $0.15 to fall, third quarter versus fourth quarter?

Susan, I think it's going to be slightly higher in the third. I don't have it in front of me, but I would suspect it's probably 60, 65% of the accretion would occur time in the third with the remainder in the fourth.

Can someone give the same type of analysis that we gave to back-to-school at Famous Footwear for what's happening at your major for example department store customers or other major customers in the fashion footwear area?

Yes, Susan, as I had said, definitely boots certainly seem like it's going to be a stronger category than people anticipated. Really, tall shaft boots, Western-influenced, equestrian looks, that certainly seems to be stronger than what everybody had anticipated. In addition to that, anything early -- all the early reads center around strong fashion trends, so anything that has, again, continuing embellishments, velvet material, texture, that sort of thing, seems to be pretty strong as well. Tailored looks are coming on a little stronger than they had as opposed to dress, so there's a little more versatility in the footwear that's selling through. So, that would probably be the best of the early reads right now.

Finally, you know, people right now are very sensitive to the potential impact of higher oil prices on consumer spending trends. Do you think that most of your retailer customers, and including Famous Footwear, were sufficiently cautious about inventory levels in the second half, to begin with?

Yes, right. I think certainly, Susan, I think that's true; everyone has been, again, buying as close to need as possible. The consumer, the retailer, the turn expectations for everybody is higher, so I think, without question, people are cautious and really trying to deliver fashion in the best way possible. So, it's a continuing effort on everybody's part, I think.

(OPERATOR INSTRUCTIONS). Deena Friedman with Brean Murray.

I just had a few questions. In terms of -- you talked about trends in boots. Could you give me a sense of what your exposure is to boots this season, you know, versus last year at this time?

Exposure in terms of what?

You know, are you -- do you have a bigger percentage of boots in the assortment, both at Famous Footwear as well as any wholesale brands?

No, I would say that our total plan or penetration for boots in terms of our back half was pretty consistent with where we planned it last year. It was really in the mix of how we planned boots, whether it was dress or full shaft or booties or whatever. So more of a mix and taller shafts and in Western in more of the fashion looks and the fact that we're delivering more basic boots later in this season. So, pretty much the way we had planned it last year, just a shift in the mix in timing.

Again, I think that you have heard us talk about the fact that we continue to shift the model of how we do business, particularly in the department store arena, where we expect to flow goods in sooner to need, sell them through with bigger sell-through rates and get onto the next season more rapidly, so just continue to reduce that cycle time as well. So, I think we continue to believe the model we're building is more efficient in terms of profitability and a lot more efficient in terms of reducing markdown risk.

Great. One other question -- in terms of the new Naturalizer store prototypes, the test stores that you have out there, could you give me a sense of how they are performing?

It's very early right now. We've just had the two stores up really for I would say the last 30 to 60 days, so really too early to draw any kind of conclusions yet, you know, other than anecdotal ones. So, we need a little bit more time.

Sidoti & Company, Heather Moxon (ph).

Good morning, guys. Most of my questions have been answered but the outlook for Naturalizer wholesale. You had mentioned it's down year-over-year and I understand that that's the result of the switch to sell-throughs, to that focus. But can you tell me where you forecast, where you see that turning around, where we could start to see some year-over-year increases there?

Right now, the way that we really are taking a look at that is that third quarter is probably still going to be a little off relative to last year and it will be in the fourth quarter of this year where we will start to see some sales increases relative to last year. But again, this is a journey and a process. It's feeling good to us; it feels like we're making the right choices and driving the business in the right way, but it really is going to be fourth quarter of this year and then into spring of '06 when we're going to see the significant change.

Okay. Really, it's still very early on but as the Federated/May merger gets closer to nearing its close, can you comment any on the impact so far that you think it might have on your brands and your sales outlook?

You know, our sort of defense is the best offense, and we're just right now focused on driving each of our brands and making sure that they perform and that we deliver good sell-through rates. There isn't any new news on that horizon yet, so we are kind of waiting to see and planning our business appropriately and getting our teams lined up, but again, we feel the best offense is really making sure that we drive our business today in all of those stores.

Okay. This is I guess a last question just for Andy. What is the tax rate, the guidance you're using at this point? Can you say?

Yes, let me take a look. You're talking about full year now?

Full year, the back half of this year. It's just been all over the place in the first two quarters.

Third quarter, we're looking at low to mid 30s; fourth quarter, probably pretty close to that as well. Then, of course, the full year will be slightly under 50%, but that reflects the repatriation that we took and the large repatriation that occurred in the first quarter. There will be a little bit that will probably take place in the third or the fourth -- so all in, about mid-40s. The big swing, as you know, was in the first quarter of last year, and I would say low to mid 30s in third and fourth. Does that help?

Yes. All right. Thank you, guys.

Sam Poser with Mosaic Research.

Joe, I'd just like to follow-up on some of the nonathletic businesses that you have going on there and if you could talk about, on the men's and women's side, what's working category-wise and so on and so forth.

Sam, actually, if you take a look, the nonathletic business has been very healthy, other than the casual end of the business, casual in women's and casual in men's. The junior business has been very, very healthy, especially over this last quarter, along with our kids business. Men's has been a little less. Again, it's running up in low single digits, but it's all being driven by our junior business, by a younger look, both in men's, ladies and kids. So the nonathletic business has been very, very healthy. As I said before, it's also being driven by sandal business, and that's across the board.

Then, on the non-sandals and sort of that non I guess call it the fusion -- Sketchers, Diesel, Puma kind of businesses -- is there anything going on in sort of the men's side, black shiny shoes or wedges, and maybe which brands are really driving there?

Well, again, most of that is in -- actually we're seeing a nice business in our -- if you take a look at our men's, actually in our Bass business has been fairly healthy. If you take a look at what we consider more of our dress shoe business, it's becoming more of a -- less of a casual and running in men's more of a dress business. That business remains very healthy and growing, although the base isn't huge. I think what we're seeing, as we look through this same, it will be more interesting taking a look at October back -- is -- are the lower silhouette styling of footwear, whether it be athletic or it be nonathletic -- is that taking something away from the traditional athletic shoes? I think that's yet to be seen.

Okay. Then Diane, at WSA, can you talk about -- based on the response with Franco and Bass and Naturalizer, can you just go into a little more detail as to how the retailers may be changing the way they are approaching the brands and positioning the brands?

Not a significant shift in terms of how they see where each one of those brands line up. Our Naturalizer brand really does appeal to more of that classic customer, more traditional. They are looking for style and comfort; they want as much or more style (indiscernible) than we've been delivering, and that's been a key thing for us to make sure we keep that moving as far ahead as we can and bringing in even more quality and detail into the product. So, it's clearly for a more moderate kind of customer.

In terms of our Franco business, you know, that business has been very good, but the team has been working on, again, dialing up the sell relevancy there as well, as the consumer is really looking for more and more style all the time and looking at ways to differentiate it beyond just for those -- the classic, tailored, casual looks that Franco has been known for. (indiscernible) that is most retailers continue to see an opportunity for growth within Franco Sarto, and we expect that that is not going to change in the next 12 to 18 months.

With our Bass business, again, it's still early but much more casual, very sort of preppy in its look and very much back to sort of the roots and the heritage of where Bass used to be, so they see them really as very distinct propositions.

Can you talk about -- I mean, as you look forward, Diane, just what kind of trends you see coming forward into 2006, as far as from a fashion perspective?

Well, it certainly seems that fashion is going to be a little bit more balanced, not as much as dress and very much balanced across the lifestyles, some more tailored casual and more casual, a lot cleaner look as we go forward, a little bit sleeker and simpler, not as much of the embellishments as we've seen. You know, everybody -- it almost sounds funny but everybody is talking about how black is back. I didn't know that it wasn't there, but certainly black is coming in and I guess in a different way than it had been in the past. So it seems like there's more diversity in the wearing occasions and a little more casual look and cleaner look to everything.

Thank you very much.

It appears there are no further questions at this time. Mr. Fromm, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks a lot.

You know, we really appreciate you all joining us. You know, we clearly believe we've made some solid progress here in the second quarter, and I thing you can get a sense from everyone that we really think we're getting ahead of a healthier balance to our business at our retail and wholesale as we go through those things. I think I started off the call by talking about, personally, how excited I am about the continuing influx of talent in the organization, both in the fashion side, the marketing side and the sales-driven side as well.

I want to make a little special thanks to Andy and his finance gang, Dick and company, as we know that a lot of moving parts on the call today and appreciate everybody's help and patience in talking through that.

Now, with that, as always -- and I think we mentioned earlier that Joe was out on the West Coast, Diane is on the East Coast, and so we're not -- we can't see or talk to each other through the call, so just a couple of things to make sure we are all on the same page as we go through there, so I think I just turn it back quickly to Andy to sort of just make sure we are clear on guidance. I think that Virginia opened up with as clear as we can get but get right there. I think we want to make sure -- and then probably most of that is because I think I stumbled on my own guidance, so I want to make sure Andy brings it clear up first.

Then secondly, I want to make sure we are clear on expectations on specialty retail. As that platform continues to evolve and grow with the addition of Via Spiga and continue with our Shoes.com business, I want to make sure we maintain expectations in terms of how that business works. The fact that as we change the platform, we continue to build solid profitability on both the wholesale and retail side to that business. Often, on this call, we just talk about retail, so when we manage the business, we look at the whole-in profitability of that. So Andy, do you just want to --?

Yes, thanks.

It's a complicated quarter, a lot of moving pieces, comparisons to last year are also complicated because we had moving pieces there as well. I encourage you to call me just if there are questions or you need verification on the different moving pieces.

I didn't want the call to conclude without a comment also on specialty retail. I did not want anyone to draw an inappropriate inference. We included our specialty retailing group, our Naturalizer retail store performance -- and John Shanley asked about this earlier -- our specialty retail performance, and that includes both the United States and Canada. We also include our Via Spiga stores, and we also include most Shoes.com.

We've worked hard and feel good about the improvement plans that we announced this year and the charges associated. We stated that the improvement, on a go-forward basis, specifically in '06, would reduce those losses by $0.15 per share. We're working hard to get it to break even. I don't know that we're going to get there next year. We're working hard; we're going to see improvement in Naturalizer retail. You should see it year-over-year but I didn't want you to walk away thinking that we would be break even next year. That is a steep hill to climb. We're making a lot of progress, and as we said earlier, we're sticking with $0.15 per share improvement in '06. So that's only point I wanted to make.

Thanks, Andy.

You know, we believe that we're building a consumer marketing focus, product design-focused organization here (indiscernible) today and it really gives us an opportunity to grow and take market share in the business. You know, we've embraced the balance between our wholesale and retail business model. It allows us to harness the greatest earnings potential for the Corporation while at the same time adding value to our business partners as well.

So, I truly appreciate taking your time this morning. Thank you for your continued support, and we look forward to speaking to you when we report the third-quarter results. Thank you.

That does conclude today's teleconference. We thank everyone for their participation, and have wonderful day.