Caleres Inc (CAL) 2006 Q2 法說會逐字稿

Good day, everyone and welcome to the Brown Shoe Company second-quarter 2006 financial results conference call.

As a reminder, today's call is being recorded.

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

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

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 and uncertainties that could cause the actual results to materially differ from the historical results or from any future results expressed or implied by any forward-looking statement.

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

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

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

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

Joining Mr. Fromm today are Brown Shoe CFO, Andy Rosen, and Joe Wood, President of Brown Shoe's Famous Footwear division.

Please go ahead.

Good morning, everyone.

Thank you for joining us today on our second-quarter 2006 conference call and results.

Diane, who is usually on the call with us, today is traveling and could not join us.

So I will touch on the sales highlights in addition to my typical comments.

We're extremely pleased with our second-quarter results.

As we've talked a number of times over the last year, it's really a terrific time to be in the footwear business with all the style that continues to drive the business.

We achieved earnings at the higher end of our guidance which we attribute to our operating disciplines and the benefit of our sell through focused business strategy.

And I will tell you that our performance at Naturalizer, Dr. Scholl's and in our private-label business was just terrific.

We also achieved double-digit earnings growth at Famous Footwear.

Naturalizer is now solidly the number one position in department stores year-to-date according to [AD BD].

We have improved operating performance on the wholesale side reflecting strong sell through in Naturalizer and we greatly enhanced our inventory management.

Additionally, consumers are favoring our assortments.

We have a series of initiatives in place as we move throughout the year to enhance the brand even further and we are very excited about those opportunities.

We have identified continuing opportunities for further growth.

We are also encouraged with our Naturalizer retail results.

Our efforts over the past year are beginning to bear fruit.

And while there is more work to be done, we are pleased with this initial progress.

Our double-digit earnings growth at Famous Footwear demonstrates the strength of our product portfolio and our ability to broaden our appeal to younger customers.

This should assist us with the back to school season and, as Joe will share with you shortly, back to school has started out quite nicely, strengthening as momentum has built along the month.2

On the other hand, we are, as I'm sure that others have reported, disappointed with the sandal season for all of our brands at wholesale and retail, but particularly as it relates to our Bennett division.

Having said that, our overall sandal inventory position is now below last year.

As I said, sales at Bennett were below our expectations which we attribute to a number of things -- the sell through obviously didn't meet those expectations.

And as I said, assortments were heavily skewed towards sandals.

And quite frankly, that's different than how our typical model at Brown wholesale works in assorting a more balanced product offering.

Earlier this month we announced new leadership that has been appointed -- Rick Ausick as President of Bennett started this June.

As I'm sure you know, Rick played an integral role in repositioning the Famous Footwear division and we certainly look forward to his contributions here on the wholesale side.

We are working diligently to bring the very successful Brown Shoe wholesale winning operating philosophy to our Bennett brands as well.

Additionally, we are shifting a significant amount of the Bennett brand sourcing to Brazil and China which used to be primarily in Italy.

This will obviously help us on the pricing side.

Our recent addition of Dan Friedman, formerly of the Camuto Group, as Senior Vice President of Product and Sourcing, also will be instrumental and he will be working to develop efforts across all of our divisions.

Given the continuing struggles with the Bass brand I'm sure it comes as no surprise that we have decided to discontinue this license at the end of the year.

A couple of comments on some of the other parts of our business that I know you're always interested in.

LifeStride delivered solid growth with sales and earnings nicely ahead of last year as the brand performed solidly in department stores and, quite frankly, exemplifies the standard of our new wholesale business [filing].

Our Shoes.com business continued to excite us, continues to grow significantly and we will continue to make additional investments to support the growth opportunity this affords Brown Shoe Company.

Our kids business was in line with our expectations, quite frankly, with stronger than anticipated contribution from the Cars product.

And we're pretty excited -- Go, Diego, Go! licensing agreement with Nickelodeon is on schedule to ship in the third quarter now and will help drive our second half performance.

When you look overall in total the second-quarter sales rose by 5% to $579.3 million, substantially in line with our guidance.

Diluted earnings per share adjusted for the 3 to 2 stock split earlier on were $0.52 or $0.41 on an adjusted basis, at the upper end of our $0.37 to $0.43 range.

This includes $0.04 per share of the stock option expense.

This compares to $0.14 in the year ago period on a GAAP basis or $0.20 excluding charges.

As you saw in the press release, the second quarter also marked an important period for us.

Over the past year we have begun the process of reviewing all areas of the Company's operations to ensure that we are employing best practices across divisions and brands and running at optimal efficiency.

Our goal was to align our expense base -- to better align our expense base with our industry peers and, more importantly, to grow our brands as we reinvest savings into talent, product and marketing.

While this was in enterprise wide review, we certainly took the time to study both the effects and opportunities associated with the Bennett acquisition and our decision to exit the Bass business.

While in the early stages of implementation I'd like to highlight some of the processes and some of the expected outcomes you should see.

We'll be restructuring our administrative and support areas, redesigning our logistics and distribution platform, and reorganizing internally to eliminate redundancies, and realigning our strategic priorities, as symbolized by the Bass decision, and refining the supply chain process even further.

As you can probably tell by (indiscernible), we're very enthusiastic about these initiatives that we're implementing and we fully expect to enhance sales growth at a higher rate of profitability going forward.

Andy is going to update you during his part on the financial impacts later in the call.

It should be noted that this marks another phase of the transformational journey of Brown Shoe Company.

Over the past six years our shareholders have enjoyed the benefits of this pursuit -- with the benefits coming from project impact in the hundreds of basis points of improvements in Famous Footwear; with the benefits coming in our sell through model which has enhanced our ability to particularly compete effectively at the department store level; and most recently with the significant turnaround and change of results at the Naturalizer brand which has boosted it to number one in the marketplace.

We fully expect this set of initiatives to generate more sustainable growth in profitability and sales for Brown Shoe Company.

In conclusion, overall the second quarter marked another period of solid performance and as we begin the third quarter, which you know is our largest; we are certainly encouraged by Famous Footwear's early performance.

Before I turn the call over to Joe I'd just like to make a comment -- a couple of comments about the press release regarding Andy Rosen's decision to retire as CFO at the end of the year.

Many of you know Andy and I (sic).

Andy has been part of Brown for 33 years and Andy has been clearly a dedicated and highly valued employee.

Since I've been CEO I had the opportunity to partner with Andy early on as I appointed him CFO in my first year.

He's been with me every step of the way, assisting us to achieve our goals and objectives.

Andy has been integrally involved in this next set of initiatives and will be a driving force as we begin the implementation process.

I have no doubt that Andy will remain fully engaged in the business strategically and with our day-to-day operations as we watch the search process progress.

Andy has agreed to stay with us for a period of time following the announcement of a new CFO to also help with that transition.

So I have to tell you that it's sort of a little sad, but he will be around for quite a while yet -- but it leaves me a little bit sad but we certainly wish him well and his family well with great happiness for his future plans.

And now I'd like to turn the call over to Joe to review Famous Footwear in a little more detail.

Thank you, Ron and good morning, everyone.

Famous Footwear did deliver a solid second quarter including increased sales and earnings.

During the quarter total sales rose by 2.2% which reflects the opening of 30 net new stores since the second quarter last year and a modest decline in the comparable store sales of 0.1%.

Operating earnings did rise 28% and this was fueled by better initial margins and lower markdowns.

We also continue to advance our inventory management strategies driving freshness and velocity.

As a result inventory at quarter end was down slightly under last year and, as I mentioned, that included 30 additional stores.

We're also a pleased with other key metrics during the quarter.

Even though when store traffic was down compared to last year for the quarter average unit retails were up as were customer conversion and purchase ratios which had increases over the prior year's second quarter on a store-to-store comparison.

We opened a total of 28 new stores and closed 17, ending the quarter with 963 total locations, up from 933 stores at the end of second quarter last year.

And we remain on target to open a total of 90 new locations for this fiscal year while closing approximately 40.

And now that I've quickly summarized the statistical end of our business, let's quickly review our performance during the quarter by major categories.

Our growth was very balanced with the exception of athletics across all major categories -- women's, men's, kid's and accessories -- all contributing to our growth.

Our kid's business actually led in the performance for the quarter with strength across all segments.

Our women's business continued its strong performance driven by juniors, dress and the casual categories.

And not unlike the rest of the industry, our sandal business was soft.

In men's all categories posted increases led by dress and casual footwear.

We're pleased that our men's product is selling extremely well and our margins here are up nicely from last year.

Finally, in athletics -- it did comp down for the quarter.

Athletics continued its soft sales trend from earlier in the quarter, especially in July which we did anticipate.

The good news here is we were prepared for this and adjusted our assortments early and accordingly to meet the consumer demand for low-profile, skate and junior trends.

We anticipate that these three businesses will continue performing well in the coming quarters.

With the start-up back to school our athletic business has picked up very nicely.

I'm proud of our merchants in doing a good job of anticipating that these sales would come later this year and flowed the merchandise receipts accordingly.

Our Nike [React] product performed as we expected it to creating excitement, driving traffic and transactions.

And finally, our marketing was better targeted to capitalize on sales when consumers are actually shopping rather than leaving these purchasing windows.

As quickly as we look ahead, I think we are very optimist regarding the fall season.

Currently each of our categories is contributing to our growth and each being influenced by a young attitude toward design.

Business strengthened in the first week of August and is continuing.

Here I think a pleasant surprise has been the strength of shopping and sales after the early back to school markets ended.

We see no reason why this trend should not continue as additional markets enter their back to school selling season.

Athletics, which naturally is becoming a larger percentage of our business for back to school, continues to gain momentum while the balance of our [genders] remain positive in their contribution.

But I believe all this has Famous Footwear positioned to gain market share as we begin to enter the fall season.

Now I'd like to turn the call over to Andy to go over the financials.

Thank you, Joe.

Good morning, everyone.

Before I review results this morning I did want to comment on my plans to retire.

I do believe the timing is right to retire at this time from Brown Shoe having achieved the goals and objectives I set when I began working with Ron in this position in 1999.

Brown Shoe Company today is a stronger company both financially and operationally.

We possess leading brands and have strategies in place to maximize our profit and sales potential.

I look forward to working with my successor to ensure a smooth transition.

With that said, we are pleased to have delivered on-plan performance in our second quarter, demonstrating the solid results from our wholesale division and Famous Footwear as well as improvements at Naturalizer retail.

Beginning with a review of the income statement for the second quarter, consolidated net sales totaled $579.3 million, increasing $27.8 million or 5% from $551.5 million during the second quarter of last year.

By division our wholesale sales were $227.2 million representing a 9.5% increase from second-quarter sales of $207.4 million last year.

Specialty retail, which includes our 305 Naturalizer stores and our F. X. LaSalle, Via Spiga and Franco Sarto stores as well as our Shoes.com eCommerce business reported sales of $59.5 million compared to $57.9 million in the second quarter last year.

Within that segment Naturalizer comparable store for store sales declined 3.2% for the quarter.

And at Famous Footwear sales totaled $292.7 million, up 2.2% from $286.2 million in the second quarter last year.

Comp store sales were down very slightly at 0.1% compared to a 2.2% comp store sales increase in the second quarter last year.

Turning to gross profit, consolidated gross profit margin was 38.7% in the second quarter versus 39.1% LY.

Naturalizer and Famous Footwear reported solid increases in gross profit margin for the quarter.

This was offset by higher markdowns at Bass and our Bennett brands as well as a mix shift as wholesale division sales increased at a greater rate as compared to the second quarter last year.

SG&A totaled $197.8 million or 34.1% of net sales compared to $204.9 million or 37.1% of net sales last year, representing a 300 basis point improvement in SG&A as a percent of sales.

The improvement reflects the elimination of costs associated with closed Naturalizer retail stores, insurance recoveries and good expense control across the businesses.

This was partially offset by higher costs related to stock option expense.

As a result, consolidated operating earnings increased 144% to $26.3 million or 4.5% of net sales from $10.8 million or 2% of net sales in the second quarter last year.

By division, beginning with wholesale, we achieved a 17.2% increase in wholesale operating earnings to $19.1 million or 8.4% of sales as compared to $16.3 million or 07.8% of sales last year.

This increase reflects the success of our wholesale sell-in strategies, especially our Naturalizer brand.

Specialty retail reduced its operating loss to $1.5 million in the quarter from a loss of $5.5 million.

Last year's results included a pretax cost of $2.3 million to close underperforming Naturalizer stores and consolidate our Canadian operations.

And at Famous Footwear operating earnings rose 28.4% to $11.9 million or 4.1% of sales from $9.3 million or 3.2% of sales in the second quarter last year.

Turning to interest expenses, net interest expense was $3.9 million in the second quarter compared to $5 million last year.

The $1.1 million improvement reflects our reduced borrowings.

For the year we expect interest expense to approximate $18 million.

Net earnings were $15.2 million or $0.52 per diluted share inclusive of $0.04 per diluted share in stock option expense as compared to net earnings of $4.1 million or $0.14 per diluted share in the second quarter of fiscal 2005.

Net earnings adjusted to exclude costs related to strategic initiatives and to exclude net recoveries from insurance companies related to remediation costs associated with the Company's Denver, Colorado facility for the second quarter of 2006 were $12 million or $0.41 per diluted share inclusive of $0.04 in stock option expense.

On an adjusted basis this represent a 104% increase from second-quarter fiscal 2005's adjusted net earnings of $5.9 million or $0.20 per diluted share and does represent the upper end of our previous guidance of $0.37 to $0.43 per diluted share including stock option expense.

Turning to the balance sheet -- total inventory at the end of the second quarter was $480.4 million, decreasing 2.7% from $493.7 million in the prior year.

We continue to manage our inventories well, reflecting the benefits of our sell-in model and the financial discipline within our wholesale and retail segments.

We were also successful in bringing down debt.

Total debt decreased by $79 million to $200 million compared to $279 million in the second quarter of LY.

As a result, at quarter end debt to total capitalization was 29.9%, down from 41.2% at quarter end last year.

The improvement reflects strong cash flow, increased retained earnings and the repatriation of foreign cash at the end of fiscal 2005.

CapEx for the quarter totaled $23.7 million and for fiscal 2006 we are planning capital expenditures of approximately $50 million.

For the first half of fiscal 2006 net sales totaled $1.155 billion compared to $1.075 billion during the first half of fiscal 2005.

Total operating income increased 32.6% to $44.9 million or 3.9% of sales compared to $33.8 million or 3.1% of sales in the first half of last year.

Net earnings were $25.2 million compared to $7.9 million last year and diluted earnings per share improved to $0.87 compared to $0.28 during the first half.

Net earnings adjusted to exclude costs related to strategic initiatives aimed at enhancing earnings, and to exclude net recoveries from insurance companies related to remediation costs associated with the Company's Denver, Colorado facility were $22 million or $0.76 per diluted share for 2006 inclusive of $0.07 per diluted share for stock option expense.

This compares to adjusted net earnings of $19.9 million or $0.70 per diluted share for the first half of 2005.

As to former guidance, as Ron mentioned and as we detailed in our earnings release this morning, we have begun to review and implement a strategic earnings enhancement program with the goal of increasing earnings and reallocating resources and investment to drive consumer preference.

We are in the early stages of developing these earnings improvement initiatives.

Accordingly, our guidance includes a preliminary estimated range for expected costs and benefits.

We expect to refine this information in the upcoming quarters providing updates as appropriate.

That said, our strategic initiatives are currently expected to yield the following -- in 2006 benefits related to the strategic initiatives are expected to be minor with after-tax implementation costs estimated at 6 to $7 million.

In 2007 after-tax benefits are estimated to be 10 to $12 million with after-tax implementation costs estimated at 14 to $16 million.

And beginning in 2008 go-forward annual benefits are estimated to be 17 to $20 million after-tax or approximately $0.60 to $0.70 per share.

Now turning to guidance for fiscal 2006 -- we estimate net sales of approximately $2.46 billion compared to actual fiscal 2005 net sales of $2.29 billion.

This estimate is predicated on a same-store sales increase of 2 to 3% at Famous Footwear for the back half of 2006.

As set forth in schedule 4 of this morning's press release, fiscal 2006 diluted earnings per share are estimated in the range of $2.08 to $2.17 inclusive of $0.15 per diluted share for stock option expense.

This guidance also reflects -- one, preliminary estimated charges and costs related to the early stages of implementation of the strategic initiatives of $0.21 to $0.25 per diluted share; two, estimated incremental losses and costs associated with the decision to exit the Bass license of $0.07 per diluted share; and three, net recoveries from insurance companies related to remediation costs associated with the Company's Denver, Colorado facility of $0.15 per diluted share.

Excluding these costs and recoveries we expect fiscal 2006 earnings per diluted share in the range of $2.25 to $2.30 on an adjusted basis inclusive of $0.15 per diluted share for stock option expense.

This is in line with our prior guidance and compares to adjusted earnings per diluted share of $2.22 in fiscal 2005.

Regarding guidance for the third quarter of fiscal 2006, we expect net sales in the range of 645 to $655 million compared to $617.7 million in the third quarter last year, an increase of approximately 5%.

We estimate third-quarter net earnings per diluted share to be in the range of $0.73 to $0.78 inclusive of $0.04 per diluted share related to stock option expense.

This guidance range also includes estimated charges and costs related to the early stages of implementation of our strategic initiatives of $0.04 per diluted share and estimated incremental losses and costs to exit the Bass license of $0.04 per diluted share.

Excluding these costs we expect third-quarter diluted earnings per share to be in the range of $0.81 to $0.86 which includes $0.04 related to stock option expense and compares to adjusted earnings per diluted share of $0.81 in the third quarter last year.

I'd now like to turn the call back over to Ron for some closing comments.

As I said early on, our business is very healthy.

The majority of our wholesale brands are performing well, partially attributed to the transition to the Brown Shoe wholesale platform which is sole focused on sell through verses sell in.

We expect this strategy to equally benefit are Bennett brands as we move forward.

We remain extremely excited about the potential of the Bennett brands.

We're very confident that we will successfully reinvigorate the growth in the important segment of our business that this represents.

Additionally, retail consolidation is largely behind us and, as anticipated, Naturalizer and LifeStride continue to hold prominent positions in ongoing department stores which, once again, validates the strength of our operating strategies.

Lastly, we are embarking on a multiyear program to enhance our operations and drive brand power and brand growth.

We believe the strategies we are implementing combined with the solid foundation currently in place we truly have poised ourselves for sustainable growth in sales and earnings.

Now I'll turn the call over to open it up for questions.

(OPERATOR INSTRUCTIONS).

Sam Poser, Mosaic Research.

Joe, I've got a couple.

What do you mean when you say it's gaining momentum on the athletic end?

Has it turned around?

Are you comping up and how do you see the athletic business filling out for the rest of the year?

Sam, when I said our business was gaining momentum -- athletics is performing much better.

It's performing up to our expectations in August.

It's gaining momentum simply as we're right in the middle of most of our back to school openings by markets.

So let's just say, Sam, I have been very pleased.

As you know, the end of July wasn't good at retail in athletics for anybody.

But it's like they opened the door at the beginning of August and as we've hit the middle part of our back to school openings it has continued to get better.

So sitting here for the early part of back to school we're just halfway through it and have no complaints of how our athletic business is performing right now.

Joe, tell me if I'm wrong, but we're comping up on the athletic side right now early in the back to school market, right?

From the beginning of August through yesterday, yes, we are comping up.

How do you see the athletic market going forward, Joe?

Sam, I wish I had that crystal ball.

I don't see any reason through September why we should see a change in the current performance of athletics.

Past that I think it's anyone's guess, Sam.

But it's just been a nice -- it's been a pleasant turnaround for August so far, should continue through September.

Okay, great.

And then Ron, can you talk a little that about how the Federated/May merger and so on is affecting your business going forward and right now?

Again, we've always had a terrific relationship with Federated and May on a combined basis; that continues to go forward very well.

As we've gone through this whole series of transitions with that process -- quite frankly, I think we've actually added momentum and built some marketshare with them primarily because the model in which Federated is moving to is really built on the same principles of our strategy of focusing on sell through versus sell in, and really focusing on how you eliminate unnecessary markdowns by selling shoes more often, changing styles more often in season and continuing to move forward.

We were particularly pleased but not surprised by the great response to our Naturalizer product.

We were particularly pleased and a little surprised at the strength of our LifeStride product as Federated moves forward.

Again, I think as we look through the brands -- Carlos, original Dr. Scholl's -- we'll see some interesting things there.

Our Natural Sport product has been well accepted at Federated perhaps the broadest.

So I think we're sort of a beneficiary in the early going and we're going to work real hard to make sure we keep that position.

And clearly our long-standing ability to deliver and work at the detailed level division by division with our own people going to the stores to make sure our product was well-positioned and to flow and the (indiscernible) -- all of that, being able to work that, knowing all the doors as well as we do I'm sure benefited us early on.

And I think Diane has done a fabulous job of making sure everyone is focused on keeping that lead.

So it's pretty promising.

Just two things.

Do you need to put extra costs and extra personnel against this to ensure your positioning there -- is the first one?

You mean with the Federated situation?

Correct.

No.

I'm going to tell you no.

If you think about it they're going to close or have closed 100 doors, okay?

And as we do our next work on building a more effective and efficient model, one of the opportunities that we have is to take a look at how our product lines and who works our product lines at the detailed level.

And we see synergy actually from that activity.

So I think we'll continue to put significant resources against arguably our largest opportunity.

Two more things.

How are used seeing -- Joe -- how are you seeing the Skechers business and are you doing any other tests with any other boot brands like Dickies or Wolverine or Caterpillar, things like that?

Two questions I guess there, Sam.

Number one, our Skechers business remains exceptional through back to school, so that trend has not changed from the end of last year through the first and now through the second and entering the third quarter.

And that's in all genders -- kid's, men's and women's.

So extremely pleased with Skechers and its performance.

You know, it's a little early.

We will be in the boot business.

We carry that very lightly, only in Northern stores, that's where it's being tested currently and we'll make decisions as we go into the end of October, November how aggressive we get with that boot business both in casual and in work.

Thank you.

And Andy, congratulations; and we're sorry to see you go.

Thanks, Sam.

Heather Boksen, Sidoti & Co.

First, Andy, congratulations on the retirement.

You'll be missed.

Real quickly, you mentioned the challenging sandal season for Franco Sarto and Via Spiga.

Can you talk about how those productlines are shaping up for fall, maybe what the response has been from some of your accounts?

First of all, I think the sandal season was pretty tough everywhere including our Famous Footwear division.

We have that insight into both retail and wholesale there, so it's pretty deep.

And the types of brands Franco Sarto tends to represent -- I think we saw a little bit the same issues with original Dr. Scholl's sandals and Carlos sandals as well in that zone.

There was I think some overselling in and just -- the season just opened up so slowly and sandals just weren't not on point or on target there.

So we've worked hard with all of our inventory processes to keep our metrics in good focus in making sure we cleaned that inventory.

I know that the guys at Famous are using private logic to make sure their sandal inventory keeps on track.

And on the wholesale side we're doing this well.

As we go into the fall here -- you know, with Franco and those brands, they quite frankly are very strong in the fall season and so I think the third quarter particularly it will be important to see how well that goes.

And then, Heather, as you would know, I think Rick and Diane and Dan, Jeff [Sunday], Charlie as a team at Bennett and the sales team of Donna, [Jerilyn] and Matt and those guys all formed together, they're really focusing on making sure that spring of '07 is back on track.

And a lot of meetings over the last month since the show and a lot of good solid response.

Right now that business actually is tracking pretty good but it's so early in the season I wouldn't attribute that to -- I think we're focused on making sure we've got a great '07.

Okay.

And I know it's still early with respect to these strategic initiatives to really speak about '07, but can you give maybe any guidance in terms of how these costs will be weighted in '07 in terms of what quarters the costs will be heavier and what quarters maybe the benefits will be greater?

Heather, I think we're sort of right in the middle of that planning and I think we'll share that with you as it becomes more clear to us and then we can be more definitive with you.

But to break out specifically by quarter, we're still a little early.

You know, Heather, we're learning I think like a lot of companies to operate in a very transparent environment and I think Brown Shoe Company is -- very much wants to be in a leadership position -- in a position of transparency, that's why we announced Andy's decision early rather than later.

That's why we tried to take you through our thought processes as we're still early in that process.

And we've got execution teams being developed for each one of the initiatives at a pretty detailed level.

I suspect that work will be sort of hot and heavy over the next 90 days and by the next quarter call we'll be able to give you more clarity.

Okay.

Thanks, guys.

I'll let somebody else ask questions.

Susan Sansbury, Miller Tabak.

A couple of questions.

I guess primarily focused at Joe at Famous Footwear, if I may.

First of all, Joe, the resilience in the athletic sector currently, can you give us your -- how important is the new Nike product to that resilience?

It is important, but again, I don't want to mislead you.

As to the total, it was a minor portion of our business.

I think what it did for us initially, it was their first entry into allocated product into this marketplace; it drove through our stores with a very good marketing campaign, a lot of excitement, drove a lot of traffic through our stores.

But again, this is only the first step.

We continue as we go forward with Nike to deliver new styles both in September and in holiday in new categories as we go into holiday.

So this is just a first step in a program that I think is going to become extremely important in designating us as a place to shop other than just specialty store in a mall.

I'm not sure that answered your question.

Well, yes.

Is Nike going to be a dominant brand in this athletic mix now?

Well, it already is, Susan.

If you take a look, Nike is our largest vendor in our stores.

I think it becomes more dominant as they introduce -- continue to introduce allocated product into this channel.

So I anticipate them becoming very dominant in this channel just as they had in specialty store.

Okay.

Second question about the sports fusion business, if I may.

As low-profile shoes or sports fusion shoes -- I'm not sure exactly whether I'm using the correct definitions here -- but as they become more broadly distributed do you foresee any marketshare -- major marketshare shifts among brands or distribution channels?

Susan, I'm not quite sure about distribution.

It's going to continue.

It's being led by Skechers but we have a lot of other people in there.

I don't care whether we call it low-profile or sports fusion, it's all the same footwear.

But there has been a change into more street lifestyle casual and that's still going to be driven by the Skechers.

But you have other people involved and very successful in that and being driven out of skate -- whether it's DC -- snow, Vans, Puma is obviously still very important to us.

But I think we're in for a long run.

It is a lifestyle change to their closet and what they're currently wearing.

Okay, so you don't think that, for example, that -- well, all right.

That's great.

Back to the department store business, was this really just a sandals issue or a fashion change?

In other words, I keep hearing that the peek-a-boo wedge was an important category in spring.

Absolutely.

I think peek-a-boo and the sort of closed up opened up look was really where the heat of the business was.

You continue to see, as I'm sure you have, Susan, that ballet -- again, sort of an unusual/usual look, but a real fashion trend going on there;

I think we'll see that continue for a while.

And then I just think the timing a how spring all laid out from warm weather, cold weather, storms on storms -- all that type of stuff did not entice a lot of customers into the sandal market.

But you know, the seasonal products are always some challenging products to figure out if you're right on the mark.

And in this case I think that -- I don't think Brown was unique.

I think that the industry all pretty much had the same challenges and I think we'll come through it.

As we announced in the quarter here, I think all in we're in good shape as we go forward.

That's great.

Andy, congratulations.

Best wishes.

Thanks very much.

Thank you, Susan.

Scott Krasik, C.L. King.

Good morning.

I guess, Joe, I'll start with you as well just to follow-up on the low-profile.

Low-profile is not included in athletic, correct?

Low-profile -- some is included in athletic, some is not.

But when I say low-profile, no, the Skechers is not low-profile (multiple speakers).

It's really not in the athletic.

Right, okay.

And then is skate in athletic?

Skate is in athletic, yes.

So how much of the positive comp in athletic is being driven by skate right now?

Actually quite a bit.

There are three vendors -- not vendors it's skate as a category in our Nike business and our Asics business.

So it's being driven by three or four vendors in skate and then Nike and Asics.

Okay.

And then when you say Nike, it's really the Nike running and Asics running and skate as opposed to basketball or classics?

That is correct.

Now you know, one thing we still have an advantage of, if you take a look at our classic business, as a general statement across the board our classic business was flat.

Again, in this channel we usually get a little more life out of it than what specialty stores get.

So our classics were flat, we gained in skate, Nike and Asics.

Okay.

And then just to follow through on the low-profile, I think you guys have done pretty well with it for about a year now nationally.

Are you seeing the momentum in low-profile slow at all, that people have let's say two pairs in their closet and they don't need three or four?

You know, we haven't seen it slow.

We don't anticipate seeing it becoming any slower, still building strength in third and fourth quarter.

The difference in low-profile obviously is the styling changes much more quickly than athletic.

So it's obviously a much trendier business which the consumer has a tendency to put that in their closet on a more frequent basis.

So as long as the styling changes quickly I think we still have a lot of legs left in that business.

Okay, great.

And then, Ron, a question related to the sandal issue, but more importantly, the fact that you were still able to put up a pretty good operating margin improvement in that division, is that more attributable to the fact that you're able to flow merchandise more regularly and then sandals become a lesser part of the equation a couple months down the road?

I think that will be true as we do flow more often on that side of the business.

And again, I probably would say more than anything is that by controlling the sell in you build in a valve if you will so that you don't get yourself in such a bloated positioning and I think the recovery time is quicker.

I think our teams are also learning how to I like to say move on.

The historical way of managing business in department stores is somewhat look back, project the history base and move on -- and move on slowly.

And I think that our teams are really focused on what are the next products for the next quarter and how do you get those -- momentum behind those right away.

And so I think it takes a little bit out of that.

I think in the case of Bennett -- you know, again I think Bennett management, coming from a private company mentality, they tend to work in a little bit different way.

That's why we think the -- our model as we put this in place will be so beneficial.

So are you at the point now where you're flowing product monthly?

I think it goes -- it's brand specific and brands like Carlos, Via Spiga and those I'd say that you've always got something in the pipeline, but rather than monthly I'd probably tell you six weeks, a little bit more and then quarterly for the rest.

But always trying -- when we're meeting with vendors, it used to the interim was sort of a ho-hum time period.

I would tell you that as we get ready for October we'll have a lot of presentations with some key vendors as we get in there.

And given how spring worked in '06 year, there's a lot of interest on the retailer side of us working timing for next spring and even working harder to make sure you've got new product flow that takes you north or south in the country as well as closed up, opened up as we move forward.

Okay.

And just lastly, on the Naturalizer marketshare gains in the department store channel, do you get a sense that you're actually taking share of older consumers or younger?

I know some junior brands are actually going up in age so maybe they're grabbing some of that younger customer that you had in Naturalizer.

Are you grabbing the older consumer, have you looked at that at all?

We're pretty research intense over here, but I don't want to give any misinformation.

So give us a call back here on the next call when Diane is on; she knows that stuff inside and out.

She really lives with that consumer and her team does and I'd probably guess a little bit and be wrong.

Okay.

Thanks, guys.

And Andy, I echo everybody here wishing you good luck.

Thanks.

Chris Svezia, Susquehanna Finance.

Good morning, gentlemen.

I have actually a bunch of questions.

I guess first quickly I'll start with you, Joe.

I guess first to just go back to this kind of fusion athletic question for one second here.

Are you continuing to shift some of your merchandise mix continued to those categories whether it's brands like Diesel or Skechers or Steve Madden, whatever the case might be and away from athletic?

And is this shift to some degree helping your gross margin improvement year-over-year?

A couple questions there.

We continue to slowly shift our inventory commitment to more of the sport fusion type of business from quite a few vendors.

And again, I guess it's where the consumer says that they want to shop and it reflects the flexibility of our concept.

So we are shifting some of those dollars away from athletic but we'll do that as the consumer tells us they want to.

It does afford us some higher margins on nonathletic -- typical nonathletic companies.

So we expect some type of impact on our initial and realized margins as we go forward.

Okay, that's good to hear.

And then just as you look to spring, any major changes at all in terms of how you're looking at any of the categories at all?

We don't think so.

We see the trends continuing into first quarter of next year.

As you know, we've already bought athletic, nonathletic comes a little closer.

But we don't see a trend change or anything new in that business as we go into first quarter of '07.

Okay, that's good to hear.

Shifting just on the wholesale side of the business.

I guess, Ron, can you give any indication what your wholesale order book looks like going into the back half of the year?

Yes.

Andy maybe knows it right off hand.

I think we're up in total 3 to 4%, Andy?

Yes.

Low to mid single with strength at this point -- Dr. Scholl's, Naturalizer, Franco -- those are the stronger components.

LifeStride?

LifeStride is very solid.

Via's off a little.

Bass obviously if off some.

Those are kind of the highlights.

It's up low to mid.

And then just going to Naturalizer for a second.

The improvement you saw during the quarter in terms of topline growth and obviously the outlook as you go into the back half of the year with the order book being up, comment basically on the Naturalizer retail component with comps for the overall I guess retail business down 2.7 -- I assume Naturalizer retail was down as well.

I guess maybe can you talk about the difference between what you're seeing at wholesale in terms of marketshare and sell through in relation to your own retail business?

Actually they're pretty comparable as the same styles seem to be working and we continue to feel pretty good about -- as a matter of fact, our team -- our wholesale/retail team as we go throughout next year, we're pretty pleased with what's going on.

And as you know, in almost every area we continue to add some new talent and so we're excited about some of the talent we've added up in those areas as well.

I think the biggest difference -- and Andy can tell if I'm wrong -- is that really Canada, our Canadian business on a store for store basis was where we saw the biggest drop.

And I think on the domestic business it was relatively flat -- up a hair I guess as Andy points to me, but up a hair.

And so some of that was same type of issues as satellite product did not work well as we went up north and worked through that.

So we're pretty pleased.

When we look at the detail, and we meet weekly on this, we continue to see the progress on that Naturalizer retail model.

With that said, we set out a year ago, we've met every metric that we set for ourselves at that time.

We have another series of metrics in place as we go out the next 12 months and we know we need to continue to see that improvement to get this thing to transparent profitability, if you will, as you go along.

I think the other thing is that in that segment there's always some challenge associated with it.

But right now with Shoes.com we did some significant movement to a third-party distribution capability with UPS that had some cost in there, but mostly some interruption of those processes.

So all in, I think we are feeling very good about where Naturalizer [regionally] is.

One of the other things we look at when -- we wish we could report this way sometimes, but when we look at the Naturalizer brand all in, it has improved a significant number of basis points year-over-year here.

I mean very significantly.

The other thing I'd add, Christopher -- I'm not sure we fully understand it, but again don't look a gift horse -- throughout the second quarter we struggled with traffic counts at Famous.

While average units were up, conversions were up, etc., consumer didn't seem to be out.

As we hit the back-to-school period coincident with third quarter, our traffic counts are rising nicely and that is contributing to these same-store sales performance that has opened up nicely as we cited earlier in the release and in the call.

So that is also helping in Naturalizer retail as well?

I can call you back with that.

I suspect it is;

I just don't have those numbers in front of me right here.

Just lastly, in the interest of time here, just on the strategic initiatives that you are kind of laying out as you look over the next two years and some of the things you're talking about like reducing administrative staff and investing in supply chain, etc,.

I guess to some degree seem like normal cost of business initiatives that I guess would flow through the P&L and through capital expenditures and cash flow.

Can you maybe add a little bit more color on what you are thinking in terms of is this a lot of headcount reduction?

Are you possibly thinking about maybe closing down one of the brands, because you put a comment in your release about evaluating the performance of your wholesale brands.

So I was wondering if maybe you'd add a little more color in terms of what exactly you guys are thinking about.

Yes, I will take a stab, Christopher.

It does not at this point contemplate closing down at brand, although we always are evaluating contribution from brands.

It is a fairly broad-based program.

We know our operating margins lag a competitive set that we aspire to participate at those sorts of levels.

When you talk about organization redesign, there are obviously elements of headcount that come into play.

But I do want to emphasize this is not a pure and simple headcount reduction program, not by any means.

The breadth of area that we are tackling, and I can site some for example, would range from sourcing processes, sampling processes, to things as I will call them mundane as trade show expense, but also continuing work around inventory optimization, shipping efficiencies, logistics network restructuring, and the like.

So by its nature, headcount comes into play because you have some redundancies, but there's a significant portion of our effort that is directed at process and reallocation of resources, if you will, so it is much, much broader than that.

But some of those things you mentioned like sampling process and tradeshow expenses, things of that nature, did that I guess flow normally through the P&L, not be I guess considered as a separate onetime kind of charge?

That's what I'm trying to figure out.

I think there are impacts that will affect both potentially gross margin, that will affect SG&A, and that would also affect interest expense.

Those effects that would hit us in '06 and '07 should go away in '08, as the implementation and the cost associated with those implementations, those costs aren't sustained in out years.

I don't know if I'm answering your question.

We are not taking a discrete charge for these future actions, because accounting disciplines don't allow us to do that.

So we are providing estimates of the impact in '06 and '07 for these future actions, but they will not be sustained costs.

Okay.

I'm sure you guys will provide additional information as you guys get a little more clarity in terms of what you guys are looking to do specifically.

Thank you very much.

Andy, wish you the best of luck.

Thank you.

Thanks, Chris.

Thanks, Chris.

We've probably got time for one more call.

Virginia Genereux, Merrill Lynch.

Ron, I just want to say you and the Board have some very big shoes to fill there with Rosen's departure.

Absolutely, Virginia, absolutely.

I know you know that.

Andy, I'm going to call you.

Call me.

I will.

But just a couple of questions for you, Ron, if I may.

Can you tell me what of the senior Bennett executives -- I think did was three, which of those guys or are they all still with Bennett?

No, they are not.

I think it's pretty simple.

A year into the process we took a look at the model, we worked with them, they recognized, we recognized that their skill set while running a private enterprise did not match with the way we would manage inventory, assets and focused on return a lot more than just on making money wherever you can and sort of do that.

So over the course of the last six months they've left at discrete times and we've got a team in place there which includes all of their key sales management people that are working with us.

And as we consolidated and Charlie Gillman who runs our worldwide sourcing took over all the sourcing things.

Some of those things were pretty key touch points for those guys on the private side as they could make a penny here or make a penny there.

And we just take a much longer term attitude and partnership approach that they came to us, we certainly did not ask any of them to leave.

They came to us one by one and said we're just not interested in going forward here.

And they took a lot of money out to be honest.

And so we moved forward and I think we're going to be better off for it as we go forward because you've got a team that's going to embrace the way we manage the business.

That's great.

That's inevitable.

Second question for you, Ron.

Federated/May, I think they've closed or are closing the stores; the clearance began at the end of January '06 I think.

Do you anticipate that their buy will be flat or down, flat to down year-over-year for spring '07?

I'm just trying to figure out where they are.

If you looked at the combined buy when does that bottom?

You've got three moving pieces, if you will.

First of all I think that Terry Lundgren and the Macy's people particularly and I know that Michael [Gulop] also is a big proponent of -- they believe they can operate this business on less inventory and higher turns.

And again, with the work we've done over the last two years with EXCEL as the guiding light in terms of our belief in the same principles, I think we sing a song together and I think that's helped us.

Having said that it means you're going to buy less inventory and bring it to market more often and so it's a little hard to read some of those forward orders and things.

As we've worked with them at the show though -- and I'm going to say a broad statement because I don't want to be misread, but I believe all of our key brands we expect to have increases in that sell in that our plans -- as you know they're very good on planning so the planning of those sales go in -- and that's in total so that includes the short -- the less stores.

Now that's Brown and I think, again as I said earlier in the call, we benefit from working with them as we've worked through that.

But I think in total -- you've got to ask them -- but I think they're very committed to running the business on less inventory and (indiscernible).

So somewhere along the line they've got to be in a position to do that.

Okay.

And then -- that's helpful.

Then Joe, maybe for you, everybody has talked a lot about athletic, but -- and I don't even know if you're in a position to have an accurate read on this.

But do you see your urban consumer, the sort of African-American, Hispanic kid -- or family, do you see that consumer doing something different in terms of fashion?

Right now, no, Virginia.

It's I think the first time in a while where you take a look at not only us, but as we fall with specialty store business I think we're all still trying to getting a handle on where that urban customer is right now.

There's no particular trend as to what vendors and categories they're picking on.

It's kind of a gray area currently.

Okay, but it's not -- you're not seeing sort of a tangible shift away from athletic for that customer?

No, no, we're not.

Thank you all so much.

Thank you all.

Really appreciate your support and see you next quarter.

That does conclude our teleconference for today.

We'd like to thank everyone for your participation and have a wonderful day.