Caleres Inc (CAL) 2005 Q4 法說會逐字稿

Good day.

Welcome to the Brown Shoe Company Fourth Quarter 2005 Financial Results Conference Call.

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

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 that are not current or historical facts are forward-looking statements.

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

The factors that could actual results to differ materially include those listed in our press release issued this morning and available on our 8-K file prior to this call and other risk factors listed from time to time in the Company's SEC reports.

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

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

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

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

Good morning.

Thank you for joining us to discuss our fourth quarter and our fiscal 2005 results as well.

We're certainly pleased to report a terrific fourth quarter which concluded an outstanding year where we advanced many of our strategic goals.

Before we're reviewing many accomplishments we've had this year, let me first highlight the financial results which we reported this morning.

For the fourth quarter, sales were $600 million, up 26% over last year.

Net earnings rose 56% to $13.4 million or $0.70 per diluted share.

On an adjusted basis, that is excluding the charges set forth in Schedule 4 of the press release, our earnings nearly doubled to $1.05 per share compared to the $0.53 last year.

That means for the full year, sales rose 18% to a record 2.3 billion and earnings totaled $2.17 per share or on an adjusted basis, this was $3.32 per share, up 29% over last year's adjusted earnings.

We attribute this strength to several accomplishments.

First, the acquisition of Bennet Footwear.

In April, we consummated this acquisition and it represented a great strategic fit for our Company.

Bennett added compelling brands in the better and bridge footwear segment which we all know are growth sectors.

We are pleased to report our Bennett business was accretive, $0.17 to earnings.

And this was in line with your shared expectations.

Secondly, we had record performance at our Famous Footwear division.

Famous has successfully capitalized in the very strong footwear cycle.

We continue to see sales and earnings growth with differentiated products, focused execution, and improved awareness and continue to be very pleased with the strategic growth of how we compete for that business in the family channel.

Our wholesale business improved from the prior year as well.

Naturalizer and our kids business made solid contributions during the year as our initiatives took hold.

On the other hand, Bass continues to be a challenge and disappointment as we were unable to garner the improvement that we had expected.

Fourth, with regard to our Naturalizer retail business, as you know we completed our restructuring both on time and on budget.

We currently, therefore, have a better base of stores.

From an overall financial perspective, the consolidated Naturalizer model will contribute material earnings improvement on a go-forward basis.

Fifth, we also strengthened our balance sheet by reducing inventory and generating terrific cash flow.

Finally, our E-commerce platform, our E-business delivered impressive performance led by shoe.com site which contributed positively to our bottom line.

Collectively, we're pleased with the progress we made in 2005, yet we are very focused on the future.

As we look ahead to 2006, while we face some near term challenges in the first quarter, the second quarter looks good, and we expect 2006 to represent another year of accomplishment for Brown Shoe Company.

For the full year, we have provided earnings guidance of $3.35 to $3.45, which includes the stock option expense of $0.20 per diluted share.

With that, I'll turn the call over to Diane Sullivan to review our fourth quarter and some of the business initiatives for 2006.

Thanks, Ron, and good morning, everyone.

As Ron mentioned, we delivered nice results for both the fourth quarter and full year with terrific contributions from across our Company.

This performance was driven by the core strategies that we've been working on for a while now at wholesale, as well as by a solid contribution from our Bennett brands and the strength of our Famous Footwear business.

As a result, it allowed each of our businesses to capitalize on what has been very robust transfer of industry.

Let's talk for a minute about wholesale first.

As mentioned during prior calls, our core strategies in this part of the business have been to first focus on sell through, making sure we're delivering the right styles and quantities at the right time.

This led to nicely reduced markdowns and allowances, thereby improving margins.

Secondly, a better flow of product which created more reasons for consumers to shop and buy our brand.

We increased deliveries by season, and with better product and fewer selling weeks on the floor, we were able to increase regular price selling.

Third, our speed to market initiatives have begun to enable us to respond smarter and faster to consumer demand.

At year end, our wholesale inventories were down 27%, excluding Bennett, and they are about as lean as they've ever been, which places us in a great position as we enter the spring season.

Let me give you a few examples as to how some of these strategies are working.

Let's start with Naturalizer.

Naturalizer achieved solid results.

Our brand repositioning and even more importantly, our shift in the business model has begun to take hold, as evidenced by the strength of our performance during fall and in particular the fourth quarter.

We're also pleased with the initial results of our Natural sport line which launched at retail on time for holiday.

This line extension of sport inspired product enables us to broaden our appeal with our demographic and we expect an expanded door count for fall of '06.

As we turn to '06 for Naturalizer, we have continued to build more intrinsic value in our product offering, are supporting it with stepped up marketing and advertising, and believe Naturalizer is poised to report a solid year.

Notwithstanding some of those first quarter challenges associated with the tough comparison to the first quarter of last year.

Essentially we delivered too much product in Q1 '05 and paid for it with markdowns in Q2 of last year.

As you know, this led us to make the needed business model changes that helped us in the back half of 2005 and should lead to a good 2006 for the brand.

Also at Life Stride, they delivered to our expectations and continues to represent one of the most profitable brand in our portfolio.

Life Stride reported sales growth across all major categories and increased sell-through at retail.

Partially offsetting this were higher sourcing costs for non-leather products.

In 2006 we believe our that business model will continue to deliver strong profitability.

We also expected to benefit from higher average unit retails as we adjust our assortment strategy for the combined Federated and May Company.

Our Bennett brands also performed well.

We experienced strong results in fashion boots, particularly dress and wedge styles, while Franco Sarto saw increases across all categories as the teams worked to expand this into a lifestyle brand begins to show promise.

As we look ahead, our priorities are to continue to reposition Aigner as a staple for women who love classic styling.

So in total for wholesale, our fourth quarter wholesale sales were $250 million, up 57% from the prior year quarter, including $71 million in sales from the Bennett business.

Excluding Bennett, wholesale sales were up 12.5%.

Total wholesale operating earnings rose to $27.1 million, an increase of 113%.

Bennett contributed $5.9 million to operating earnings.

Excluding Bennet, wholesale operating earnings were up about 67%.

Now, let's turn to specialty retail which includes our 314 Naturalizer FX LaSalle and Via Spiga stores in North America as well as our shoes.com E-commerce business, where we achieved growth of 20% during the quarter.

Combined comp store sales were up 4.5% for the quarter, but operating earnings were down, however, due to our Naturalizer restructuring, which we completed at year end.

Regarding Naturalizer retail, we closed 95 underperforming stores during the year and enter 2006 with a well-positioned store base and a clean inventory position which sets us up well to capitalize on our product and marketing initiatives.

While we still have work to do, we're already seeing some progress as our ongoing store base posted a 5.1% same-store sales increase.

That is versus a negative 1.2% for the closing stores during the fourth quarter.

And we ended the year with inventories down 17% in our go-forward stores.

As Joe will comment on momentarily, the Famous Footwear team delivered another strong quarter to make it five consecutive quarters of store-for-store gain.

As we begin 2006, we'll continue to focus on the strategies that enabled us to report better than expected results in 2005.

First, in adhering to that sell-through product flow and speed to market disciplines that will increase full price sales and protect us against markdowns and help us really manage inventory as well.

Secondly, with the strength in product design team in place, we've improved our abilities to be trend right more often for our branded portfolio.

Third, we're going to continue to work to build more differentiation in our brands to create different growth opportunities within the portfolio.

And then the continuing momentum in our Famous Footwear business places us in a good position to achieve our overall goals.

With respect to the first half of the year, we do expect to see a shift in sales and earnings from the first to the second quarter, resulting from our new Naturalizer business model which is built around quality sell-in and reduced markdown and allowance exposure.

Additionally, shipments in our children's business will shift towards the latter part of 2006 due to timing of movie releases.

Lastly, our wholesale businesses in the fourth quarter did benefit from a shift forward in certain shipments that were expected to occur in the first half of 2006.

These factors combined led to a 2.5% decline in our order backlog at year end, excluding Bennett.

In closing, for the full year, as you would expect, we anticipate some impact from retail consolidations.

And this is reflected in our guidance.

That said, we are excited about the strategic initiatives we've been implementing across the company as they position us well for these changes.

And as you saw with Q4, these are beginning to produce the type of results that bode well for delivering long-term performance.

So now, Joe, I think you're up.

Thank you, Diane.

Famous Footwear delivered a record fourth quarter which included strong sales and operating profit gain.

Specifically fourth quarter sales rose 8% to $284 million, with comparable store sales gaining 4.4%.

This compared to sales of $263 million and comparable store sales of 4.1% last year.

The consumer continued to give us good marks as we recorded another quarter of comp store increases, demonstrating the effectiveness of our strategy.

That has repositioned Famous Footwear towards marketing brand name trend right product at a value versus just selling footwear at a price.

We're also pleased with two other important sales metrics.

Our average unit sales, our average unit retails were up for the quarter.

And our store traffic count was higher than last year for the quarter.

Our fourth quarter operating profits continue to improve, 34.4% to $15 million or 5.3% of sales.

And this compared to 1.2 million or 4.3% of sales in the year -- last year's fourth quarter.

Here we not only benefited from strength in sales increase gross profit margin, but we also experienced a slight improvement in SG&A as a percent of sales.

I believe the numbers clearly indicated we executed very well during the quarter, while capitalizing on the heightened interest in footwear.

In looking at our performance during the quarter by major categories, our women's business certainly led our results with double digit increases over last year.

Within women's, casual, dress, junior, sandals, and update showed very sold increases.

Boots were down but just slightly last year, because of the warm December and January weather.

However, I believe the good news here is our ending boot inventory was much lower than last year while realized margins on these sales was 5 points higher than the previous year.

Our kids business rose to high single digit increases on same-store basis.

And was almost as impressive as our women's business delivering increases in all categories, including boots.

The men's business was very healthy, up over last year with strong sales realized in casuals, sandals and with modest gains in boots and dress.

And in our athletic business, we experienced a slight comp increase in our men's, women's and girls business over last year with skate and trail leading this category.

The athletic business was soft early in the quarter when we experienced cold weather and we rebounded as unusually warm weather in late December and January reversed the sales trend.

And this really isn't an unusual phenomenon.

Overall, a solid sales performance across almost all genders and categories of our business.

And finally, we were pleased at our year end inventory came in substantially under budget and under last year while operating 34 more stores than we did this time last year.

Good position to be in as we enter our first quarter of '06.

We currently operate 953 stores in our base.

Our commitment to reinvesting and remodeling of our stores continued.

An additional 44 stores were converted to our new format.

And I believe we should virtually be completed with all of our go-forward stores by the end of our current fiscal year.

We take a look at the full year, Famous reported sales up 6.3% to 1.2 billion with comps of plus 2.5%.

While our operating earnings rose by 11.2% to 67 million, and that was up from $60.3 million last year.

As we begin our fiscal year '06, I believe that Famous is positioned well.

As we enter this year, we'll continue to focus on our store expansion plans.

For the year, we expect to open about 90 stores and close between 40 and 50 as part of our productivity enhancement strategy coinciding with natural lease expirations.

So we'll end the year with about 1,000 stores and will increase our square footage by approximately 4%.

We also believe our marketing efforts will continue to be more effective as we showcase new product receipts and footwear trends and we tie these into our media and in-store story telling presentations.

Our plan is to allocate our marketing dollars more towards TV and radio.

As we take a look at our research, it has indicated these vehicles are more productive for us right now with today's consumer.

When looking at categories, we're investing in strong trends that carry over from third and fourth quarter of last year, such as men and women's and kids skate brands.

We see a huge uptrend in this segment for spring of '06.

We expect to see a continuation of strong momentum in our junior business.

Led by sports, sandals and clogs.

Low profile, athletically inspired silhouettes will continue to gain strength in all genders and spring of '06.

We look forward to Nike's release of Reac, a new allocated technology designed for and launched for the first time in our trade channel during July of this year.

Lastly, I believe we'll continue to see our average unit retails continue to rise as we go into this fiscal year.

And we will continue to be less dependent on promotions to drive sales.

I think bringing better and higher priced brand named footwear into our stores.

While the late Easter will mean sales for Famous will come later in the quarter, we are confident our continued strategies to focus on product marketing and an improved store shopping experience will enable us to report another year of strong sales for Famous Footwear.

At this point, I would like to turn the call over to Andy Rosen to go over the financials.

Thank you, Joe.

Good morning, everyone.

As I review the income statement, I refer you to Schedule 4 in our press release as it provides a reconciliation of our GAAP earnings to adjusted earnings after charges related to our Naturalizer restructuring and repatriation of foreign earnings.

Joe and Diane have reviewed divisional financial performance.

So I will turn to the full income statement for fourth quarter.

Consolidated net sales for the quarter totaled $599.6 million, increasing 25.8% from $476.5 million during the fourth quarter of last year.

Total operating income nearly tripled to $23.4 million or 3.9% of net sales from $8 million or $1.7% of net sales last year.

The fourth quarter this year includes a contribution of 5.9 million in wholesale operating earnings for Bennett.

Breaking the numbers down further, gross profit declined by 60 basis points to 38.8% from 39.4% last year.

This decline was primarily due to the impact of clearance sales at the closing Naturalizer stores and a greater mix of wholesale business which carries a lower gross margin rate than retail.

At Famous Footwear, margins were up slightly from the fourth quarter of last year.

SG&A increased by 16.8% to $209.2 million.

With SG&A as a percent of sales improving 270 basis points to 34.9% from 37.6% in the fourth quarter last year.

Again, we benefited from prudent expense control and a greater mix of wholesale business as well as the growth in revenue which leveraged our expense base.

As a result of strong sales and expense leverage, net earnings rose 56.4% to $13.4 million compared to 8.5 million last year.

And diluted earnings per share totaled $0.70, up 52% versus $0.46 in the year-ago quarter.

Bennett contributed $71.2 million in revenue and $0.11 per diluted share fourth quarter fiscal 2005 results.

Looking at the fourth quarter, excluding charges for both years, which are summarized in Schedule 4 of our press release, adjusted net earnings more than doubled to $20 million or $1.05 per diluted share versus $9.7 million or $0.53 per diluted share in the fourth quarter of 2004.

Net pre-tax interest expense totaled $4.5 million in the fourth quarter compared to $1.4 million last year.

The increase in interest expense reflects borrowings to fund the Bennett acquisition.

Brown Shoe Company ended the year with a strong balance sheet.

Cash flow from operating activities was $146.8 million versus $53.3 million last year.

Inventory at year end totaled $414.3 million, declining 1.7% from $421.5 million at year end fiscal 2004, demonstrating the effect of our inventory management programs at both Famous Footwear and as wholesale, as well as improvements from our Naturalizer restructuring program.

Total debt increased by $58 million to $200 million compared to $142 million in the fourth quarter of last year.

The increase in debt reflects the issuance of $150 million in long-term debt to fund our Bennett acquisition, partly offset by lower short-term borrowings due to our strong cash flow.

Debt to total capital was 31.5%, improving from 45% earlier in the year and compared to 26.6% at the close of last year.

Capital expenditures total 36.8 million which reflects spending for the investment in our Famous Footwear store base.

For fiscal 2006, we are planning capital expenditures in the range of $45 to $50 million.

Turning to our full-year financial, net sales totaled $2.29 billion, increasing 18% from $1.94 billion in fiscal 2004.

Total operating income increased 38.9% to 88.6 million or 3.9% of net sales compared to $63.8 million or 3.3% of net sales in fiscal 2004.

Net earnings on a GAAP basis were $41 million compared to $43.3 million last year.

The decrease, owing to tax repatriation charges and Naturalizer store closing costs.

Diluted earnings per share totaled $2.17 compared to $2.30 in fiscal 2004 on a GAAP basis.

Again, Bennett contributed $186.2 million in revenue and $0.17 per diluted share to earnings in line with our expectations.

Excluding charges, adjusted diluted earnings per share were $3.32.

This compares to last year's adjusted earnings of $2.57 per diluted share.

As to forward guidance, for the 2006 fiscal year, we currently estimate net earnings per diluted share $3.35 to $3.45 on sales of approximately $2.48 billion.

Excluding estimated option compensation of approximately $0.20 per share, our adjusted earnings guidance is $3.55 to $3.65 per share.

This estimate is predicated on a same-store sales increase of 2 to 3% at Famous Footwear.

In addition, our estimates reflect some shifting of earnings between the first and second quarters, resulting in part from the new Naturalizer business model which is built around quality sell in and reduced markdown in allowance exposure.

Additionally, our expectations take into consideration the later timing of 2006 children's license sales as well as the impact from the shift in wholesale product flow following strong 2005 year-end shipments which are expected to impact order timing in the first half of 2006.

As a result, for the first quarter we estimate net sales in the range of $560 to $570 million as compared to $523.3 million in the first quarter of fiscal 2005.

Net earnings for the first quarter are estimated in the range of $0.45 to $0.50 per diluted share, including stock option expense of about $0.05 cents.

This compares with quarter one 2005 EPS of $0.20 or $0.74 per share after adjustment for charges which are detailed on Schedule 5 of our press release.

For the second quarter, we anticipate net sales in the range of $580 to $590 million as compared to $551.5 million in the second quarter of fiscal 2005.

Net earnings are estimated at $0.55 to $0.65 per diluted share, including stock option expense of approximately $0.05 per diluted share.

This compares to second quarter 2005 diluted earnings per share of $0.22 or $0.31 adjusted for Naturalizer restructuring charges.

Again, detailed in Schedule 5 of our press release.

That concludes our prepared remarks with respect to the financial performance of 2005.

And now, we will turn the call back to the operator, and we will take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Deena Friedman at Brean Murray.

Good morning.

Congratulations on a very nice quarter.

Questions for Joe, I was wondering if you could give me your thoughts on what you're seeing in the athletic area and what the outlook is in terms of that area.

I think we're seeing a continuation of late third quarter, and fourth quarter of last year.

Our business is still where we're seeing a lot of increases in what I had mentioned in is what I would consider street casual.

And a lot of that is also -- I mentioned the skate business.

If we take a look at what is driving our athletic business, between skate and skate looks and a continuation of the low profile business.

When I say low profile, those are driven more so by companies -- if you take a look at SKECHers, Puma, Diesel, those types of companies, which are really a jean, streets, sport business.

That's where the excitement is in our business from late third and fourth quarter and that continues into spring of '06.

Excellent.

Thank you very much.

Congratulations again.

Thank you.

Next we will hear from Michelle Graham of Merrill Lynch.

Good morning.

How are you?

Good.

How are you?

On the wholesale side of the business, your guidance for Q1 and Q2, the timing of orders and also the shifting of kids, is the wholesale business down in the first half?

Is that how you're planning it?

I'm not sure we're going to guide for specifics.

But I think what you're going to see, Michelle, is that the shifting of profitability, primarily driven -- or in large part driven by the change in the Naturalizer model, reduces exposure in the second.

So when you look at it on a rollout basis for wholesale, what you're seeing is what we give back a little in the first we make up in the second.

Okay.

I see.

I was looking at the guidance you gave versus sort of where the street is at and relative to how you flowed -- EPS has flowed historically.

Generally we don't guide by division or by segment.

Overall, because you've got a lot of moving pieces, particularly at wholesale as we're changing that business model.

But for this conversation, I think I would look at it as what we give back in the first we'll make up in the second.

It is primarily driven by that shift in the model.

Okay.

Thanks.

I was wondering if Diane could talk a little bit about the consolidation.

How that's effecting the business into next year and if there's any change in how you're planning and what you've said in the past.

Well, I have to say that we are actually very encouraged with our wholesale business, particularly as it relates to a lot of the challenges around retail consolidation.

We feel that our Company strategies with Federated lines up well.

They are all about driving that brand, using consumer insights to do that.

And continuing to bring fresh product to market on less inventory.

How they are thinking about driving their business, how we're driving our business, seems to line up pretty well.

And so we're really focused on making sure that we continue on the strategies that we put in place.

And I also look for other opportunities across our platform and other channels as well to drive additional growth in the Company.

Okay.

And as you look out long-term, the mix of the wholesale business, where do you see that going versus where it is now?

Wholesale versus retail?

We continue to believe there still remains significant opportunity in our wholesale platform.

The fabulous acquisition that we made this year with the Bennett business allows us to get into new zones and new sectors in the marketplace and the veteran bridge categories.

And we're looking to make sure that we continue to drive that.

In the moderate side of our business, the complete repositioning in Naturalizer and working to improve the overall profitability of our store base, a key opportunity for us as well.

And we have that fabulous asset in Dr. Scholl's that we are also making sure that we look at how we leverage that across our platform as well.

We remain very comfortable and confident that we have the brands and strategies that place in order to do what we need to do to drive the business.

Okay.

And then on Bass, for this past year, how dilutive was that to the margin, the wholesale margin.

Generally we don't speak to, Michelle, specific profitability per se of by division or by brand.

Other than the fact that Bass did leak value continues to leak value.

And we haven't garnered the sort of improvement there that we had charged ourselves with and certainly margins are an element of it.

Okay.

And what is driving the CapEx increase next year?

It is primarily driven by investment and new point of sale registers in our retail stores that we basically have outgrown the current system.

It is the cost of doing business to upgrade those registers.

I don't know exactly.

But they are probably close to ten years old.

Thanks.

Next we will hear from John Shanley of Susquehanna International Group.

Hi, this is Muira Lohr for John Shanley.

Congratulations on the quarter.

My first question is for either Ron or Diane.

Just some clarification on the unfilled orders at your wholesale operation, it seems that you guys listed a 2.5% decline, which I think is primarily attributable to the new selling strategies that you're trying to implement in Naturalizer.

Excluding Naturalizer you said the unshipped order is up 7.5%, is that correct?

That's correct.

Does that include Bennett?

No.

So can you just add some color on where that increase is coming from?

You guys typically go through a lot of your brands, either Carlos or Dr. Scholl's and Life Strides and how futures are for those brands.

Can you just add color on that?

You've got it in front of you.

Go ahead.

For the most part, you've got continuing gains at Dr. Scholl's.

Continuing gains in our women's specialty business.

You've got strong gains at Santana, as you would expect.

Offset by difficult comparisons at Naturalizer.

How about your Pagoda business?

Women's specialty is a good element of the Pagoda business.

And that's up.

Dr. Scholl's right now is up slightly.

But I think that's more of a timing issue than anything else.

Okay.

That's all I have.

Thank you.

Next we will hear from Sam Poser of Mosaic Research.

Good morning.

Congratulations.

Morning, Sam.

Good morning.

Joe, can you talk a little bit about the fusion business and where that is being driven from these days?

I've heard maybe there is a shift from athletic to fashion, as far as that business.

Sam, I'm not quite sure.

When you say the fusion business --

Low profile kind of stuff.

The low profile.

I don't know if we've seen much of a shift.

We've seen obviously what you consider the athletic companies are coming in with their versions of the lower profile silhouette shoes.

I don't think it is any secret they did not get on the bandwagon earlier.

We still see gains -- you've got to give SKECHer's credit.

That's where a lot of it came from, SKECHer's, Puma and Diesel.

We see that business continuing to increase in spring of '06.

We now have our existing athletic people coming on board.

If you take a look at Nike, even if you start taking a look at [Akay] Swiss and Adidas, they are coming out with their version of lower profile silhouette shoes.

So the people that brought us to the game initially are continuing to grow in '06.

The whole category is growing.

Then we'll start playing with our spring orders that we see coming in on our athletically-based companies.

And then going back to the boot business, for holiday, I mean, was this a fashion miss by not having a good boot year?

Do you think it was completely weather related?

I can only take it -- and Diane can address wholesale.

I'm talking about your retail.

It wasn't a fashion miss at all.

We were actually -- Sam, I was very pleased with our business.

It wasn't a fashion miss.

It was all weather related.

Take a look at our business over the quarter early, our boot business was just absolutely on fire.

And when you take a look, especially late October, November, the first week of December.

As soon as the weather changed, that went in the toilet.

And athletic just took off.

We're not geniuses.

It is driven by weather.

Fortunately our inventory was in line and we gained margin.

I'm extremely pleased with our boot business considering the weather we had.

It was in the 50s in Madison in January.

But athletic more than made up for what the boot business dropped in December, late December and January.

Overall I was pleased.

One last thing, on your inventory levels, Joe, right now, as far as flowing goods, how have you really changed that?

I assume you're going to be flowing good more goods a lot more quickly than you have in the past.

We will, Sam.

It wasn't a surprise.

We planned it that way.

When the inventory came in where we had planned to at the end of January a lot less than last year, especially with 34 more stores, it puts us in a position to bring in a lot more fresh inventory into the first quarter and turn it more quickly.

We're excited about the amount of product we can take to our consumer on a more frequent basis as we enter the first quarter.

That's a plus side for us, we're excited about that.

That should maintain throughout the year with this kind of start.

Yes.

Once you establish yourself coming out of the end of the year, going into the first part of the year, you roll that through the balance of '06.

It puts us in a great position all year.

Thank you very much.

Next we hear from Heather Moxon of Sidoti and Company.

Quick question to make sure I'm understanding this right.

I understand the concept.

You said you shipped possibly too much Naturalizer product last year in the first quarter.

Paid for it with margins in the second.

I understand that is part of the reasons why wholesale sales should probably be weak here in the first quarter.

The second aspect of it was you mentioned the wholesale product flow from the fourth quarter of '05.

Into the first half.

Should I take that to mean that orders that were meant to ship in the first quarter shipped in the second -- shipped in the fourth?

I think I'll let Andy comment after this.

I think what we said was, the first quarter is impacted clearly by the shift in the business model at Naturalizer.

And it is going to be the right thing to do, because it will improve the product flow and velocity at retail and reduce our markdowns.

The second piece of it was we did have some product that was pulled forward into the fourth quarter that was shipped early because there was open to buy out there in the marketplace.

We thought it was a prudent smart thing to do to continue to drive our retail sales.

The third big piece of it was the shift in the children's business as the timing of movie releases and licensing and some shifting between Spiderman and Star Wars with cards and the new Nickelodeon properties are shifting the way the order flow is coming in right now.

So those were the three biggest factors that impacted the first and second quarter.

And the expectations across all of our retail partners that there is higher turn expectations and we have to be really smart about the way we flow.

And people are buying goods a little bit more closely.

There's a little bit -- there's a few moving parts there that I think are affecting our business.

Okay.

And shifting gears a little bit.

Especially retail, the closure of stores is complete at this point.

What is the mindset in terms of growth for those concepts going forward, whether it be Naturalizer stores or Via Spiga stores or whatnot?

I think at this point right now we are absolutely focused and committed on making sure that we get the stores we have running right and showing good comp-store sales performance and improved operating margins.

Our plan in the short term is really to make sure that we focus on executing well again, the plans that we've laid out in front of us.

And as we continue to hit our own internal hurdle rates on that, we'll decide what the next step on that segment of our business is going to be.

As you know, we did open a Franco store as a test store on the West Coast.

That probably opens this month.

And while -- I think we're in the test and learn phase with respect to specialty retail in some of these new brands.

So that remains to be seen.

Other than that, I would echo everything Diane just said.

Thanks, guys.

Next we have a follow-up question from Michelle Graham of Merrill Lynch.

Just a follow-up to the last question.

How much sales from the wholesale shifted into that quarter, into the fourth quarter?

I would say it was a modest amount.

We cited a number of drivers of that shift between first quarter and second.

The primary driver of it, Michelle, was the change in the Naturalizer model.

The change in the Naturalizer model really was put in place in the second quarter of 2005.

So it has not anniversaried yet for first quarter 2006.

That is the majority of the driver.

The consumer demand for product in the fourth quarter higher than we had anticipated we think pulled some out of Q1.

But relative to the naturalizer model change, that is small in comparison.

Got it.

Thank you.

Next we will hear from Susan Sansbury of Miller Tabak.

Hi, thanks.

I think you guys should be congratulated on fabulous numbers.

And it looks like you're going to make a lot of progress this year.

Can we talk a little bit about -- going back to the specialty retail sector and Bennett footwear.

How much progress do you think you're going to make in terms of eliminating or reducing the losses in specialty retail this year or when we might expect this division to break even.

And Andy, you didn't -- not to be a nudge, but is the contribution from Bennett footwear this year unchanged from prior forecast?

I'll take the specialty retail question and then Andy, Susan, can talk to you about the Bennett piece of it.

We have completed the repositioning of the store base.

We did close those stores on time and on budget.

We feel very good about the stores on a goo-forward basis as I highlighted earlier with the 5.1% store-for-store on the first quarter and much reduced inventory as well.

As we look at Naturalizer as a brand a combined wholesale and retail all in, I can tell you that in '06, we are going to be basically doubling the operating margin percent from a year ago.

So all in, that's kind of how we look at it.

For Naturalizer retail alone, we expect to report reduced losses in '06.

All in, operating margins are going to double for the brand.

And really, that's what we're looking to really drive.

Susan, we think about the brand and we -- we really try to focus on more of an EBA model gain type of thing.

Clearly a couple of years ago we were leaking value on the combined portfolio there.

The action we took this year absolutely takes us out of that position and gives us opportunity to create positive value as we go forward.

Give us a little time to prove how, when we can get the focus on the Naturalizer customer, we start to build some brand preference there, we start to build the productivity, both inside the retail shops that we own, but just as importantly, we believe you get crossover into the wholesale business as well, because we'll be better at the whole product mix.

So we constantly bring everybody back to think about how we managed to brand.

Because quite frankly we don't manage to brand about how it gets reported as retail wholesale.

You raised the question on Bennett, and I presume you're talking about '06 guidance.

Yes, sir.

As you know, generally we don't -- we generally don't provide specific guidance by brand within Brown Shoe Company.

And I wouldn't expect that that would change other than the fact that we made a significant acquisition and wanted to speak to the accretive performance or lack of such for Bennett.

Therefore, it was $0.17 cents accretive last year, which was in line with guidance.

We had provided guidance on a consolidated basis with respect to Bennett in the $0.25 to $0.30 range for fiscal '06, we did not speak to it, but I will say the performance of Bennett that we built into our plan for '06 is very consistent and in line with prior guidance.

Great.

Diane, another -- can you just add a little bit more flesh to your comment that you're investigating opportunities in other channels.

Yes.

As we look across the landscape and as there is retail consolidation in the department store sector in particular, you know we really look at where are the right places to be having our brands presented.

And so we look at other opportunities not only in department store, but increased penetration in the mid-tier.

And we're also looking at E-commerce, Internet sites, and other channels to diversify our portfolio and where our brands are showing up.

So it is really about making sure we've got our brand in the right places where consumers are shopping and diversifying our risk a little bit.

Not to leave Famous Footwear out of the equation here, fashion footwear is strong right now, Joe.

How long do these cycles usually last between athletic and sports fusion and/or fashion footwear?

When might -- do you anticipate seeing a shift back to traditional athletic anytime soon?

You know, we don't.

At least through back to school.

If we take a look at our business, which it is hard to tell when cycles come.

We had several cycles last year in our business.

Not in a fashion trend.

Only in a sales trend.

As a fashion trend, that business was extremely good first quarter of last year, got soft second quarter, a strong end of a third quarter and the fourth.

But we see the current trends especially as I mentioned in the low profile look of footwear continuing through back to school of '06.

We don't anticipate for what we have seen and what we think through third and fourth quarter of '06, if that's going to change, either.

We see a continuing trend through all of '06 at this point.

Again, congratulations.

Keep your eye on the ball.

You're doing a fabulous job.

Thanks very much.

And our last question will come from Sanjay Ramakrishna of ING Clarion.

Good morning.

Looking at your deleveraging that you've done since the Bennett acquisition, my question for you, for your use of cash in the current year, do you see yourself continually deleveraging or putting that cash towards shareholder initiatives?

I know that your share float has been relatively flat over the past years.

So what is your thinking when it comes to that?

Well, I think we had a very strong cash flow year in '05.

In large part driven by earnings and management of working capital.

The accretive impact of Bennett will result in healthy payout of the earn-out we had associated with that.

So I can't answer specifically what we might or might not do, other than the fact that the cash flow performance of the company in fiscal '06 in and of itself will not be as strong as it was in '05 due to the earn-out and due to some increased capital investment.

Beyond that, it would be a stretch for me to go any further.

And the payout would be in the current quarter.

First quarter, this year, I think?

I believe that's correct.

Have you been in touch with the rating agencies at all?

I know you have a negative outlook at S & P. Do you have like an annual meeting when you sit down with them?

We meet with them on a sporadic basis.

We have not met with the rating agencies since we went to market last spring.

I suspect they have more significant items on their plate than companies that are doing well like Brown.

How about the acquisition environment?

Still seeing quite a bit of consolidation out there at both your customers as well as some of the sources.

Do you see any changes in acquisition environment in terms of pricing?

Are you guys starting to look again at tuck ins?

Any comments?

I couldn't speculate on pricing.

I think it is an industry that continues to lend itself to consolidation.

And I can't give you specific answer other than it is an industry that continues to be ripe for consolidation.

And I would expect that that will be the name of the game over the near to intermediate term.

Last question.

Any incremental impact you get from the May divestiture of Lord & Taylor?

Anything you're seeing outside of the other federated comments you said?

No, I wouldn't say so, at all.

And I think anything that we've seen we've really reflected in our guidance.

Excellent quarter.

Thank you.

We have no further questions at this time.

Mr. Fromm, I'll turn the call back over to you for additional or closing remarks.

Thank you.

Thanks, everybody, for joining us. 2005 certainly marked a year where we had some significant progress.

We strengthened our retail and wholesale operating platforms.

You know that we consistently are working on implementing and strengthening our ability to be more competitive with product sourcing and distribution enhancements in place.

And obviously we're very pleased with the Bennett acquisition, a very strategic one as we added of market premier brands.

You know, we do believe that we're building momentum in the business.

We believe the consistent message of improving and investing in our talent, in our systems, in our stores and in our marketing efforts continue to pay off for us.

I think you'll continue to see us do that as well.

You know, our core acquired brands are increasing in points of retail, Famous Footwear is enjoying great traction with the consumers.

Our efforts around Naturalizer retail and then the improved productivity from that restructuring all are terrific initiatives that we have underway and put in place.

But more importantly, we believe that -- we have an opportunity to increase our ability to compete in the marketplace.

And our ability to win in the marketplace.

And we truly believe that it comes from our unique way of partnering with the key retail and wholesale people in the marketplace.

And we'll continue to focus our efforts around improving that market, improving that partnership because we believe that ultimately yields improvement in our shareholder value.

Look forward again to talking to you in May.

Thanks a lot.

That does conclude today's teleconference.

We thank you all for your participation.

Have a great day.