Caleres Inc (CAL) 2006 Q3 法說會逐字稿

Welcome to the Brown Shoe Company's third quarter 2006 financial results conference call.

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

Before we begin I'd like to remind you of the Company's Safe Harbor language. During this conference call the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

Discussion of the Company's future plans and other statements in this call that are not current or historical fact are forward-looking statements. These involve known and unknowns risk and uncertainties that could cause the actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statements.

Factors that could cause actual results to differ materially include those listed in our press release issued this morning and available on our [inaudible] 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 plans to update these forward-looking statements even though its situation may change.

And now I'd like to turn the call over to Ron Fromm, Chairman and CEO of Brown Shoe Company. Joining Mr. Fromm are Brown Shoe's Chief Operating Officer, Diane Sullivan, CFO, Mark Hood, and Joe Wood, President of Brown Shoe's Famous Footwear Division. Please go ahead.

Good morning and thank you for joining us to discuss our third quarter fiscal 2006 results.

First off, I would like to introduce the newest member of our team, Mark Hood, our newest Chief Financial Officer. Mark rejoins the fashion industry after a few years at Panera Bread Company.

Previously he had spent time with Saks Fifth Avenue and the May Company. We are excited to have Mark join our team and we look forward to introducing him at upcoming events.

Now on to the review of the quarter. As I've said over the past few quarters, it truly is a great time to be in the shoe business. Clearly, the environment was conducive to shopping during the fall and back-to-school season and we effectively capitalized on this strength with terrific product and successful marketing, while adhering to our strict inventory and sell-through model disciplines.

As a result, we surpassed the expectations we set with each of our divisions with Famous Footwear, Brown Wholesale and Specialty Retail leading to our all-time results on a consolidated basis.

In total third quarter sales rose by 9.6% to $676.8 million above our guidance of 645 to $655 million. We achieved strong sales gains throughout the quarter.

On a GAAP basis we earned $0.93 per diluted share in the quarter compared to $0.70 a year ago. On an adjusted basis net earnings per diluted share were $0.97 inclusive of $0.04 per diluted share for the stock option expense, well ahead of our guidance of 81 to $0.86.

We also ended the quarter with a stronger balance sheet with cleaner inventory and lower borrowing versus the third quarter last year. During the quarter we executed well against our strategic initiatives across all of our Brown Shoe divisions.

At the same time, as we had previously mentioned last quarter, we embarked on an enhancement program to elevate our brands and position our company for long-term growth at increasing rates of profitability.

I'd like to spend a little time to speak about these initiatives specifically. First of all, let's talk a little bit about Naturalizer.

It achieved broad-based strength across each of the categories we sell. The brand maintained its number one position in department stores for the third consecutive quarter.

While enduring considerable disruption from retail consolidation, Federated and Saks as examples, the initiatives we began a year ago to reposition the brand has proven to be very effective as we increasingly satisfied our customer's needs for fashion, value and comfort. This is also evident in our Specialty Retail segment which reported a $1 million operating profit during the quarter driven by our Naturalizer stores.

As you know, Speciality Retailers reported operating losses for some time now and the decision to close stores, consolidate our Canadian and U.S. operations while we continued upgrading our product offerings has worked. It's worked by selling more shoes and lowering our costs and our ability to focus on adding more profitable sales.

We also were successful in marketing these changes to consumers which served to broaden awareness and increase traffic to our Naturalizer concept stores.

We also are slowly increasing Naturalizer's global presence. Outside of North America we offer more that 50 points of distribution through independently operated locations in 15 countries.

It's an exciting time for Naturalizer. The brand is strong and we have more initiatives in place to take this business to the next level as we expand into new categories and price points. Diane will provide additional insight into this progress shortly.

Now let me take a little time to talk about Famous Footwear which delivered an 8.2% comparable store sales gain with operating earnings up 51% from the third quarter last year. I applaud our team for having delivered an excellent back-to-school season, as a recognized and aggressively pursued leading fashion trends provided the differentiation that customers desire of us and stayed true to Famous Footwear's value proposition.

As we begin the fourth quarter we are seeing continued momentum and believe that we are well positioned for the upcoming holiday season. And although our comparison is more difficult in the fourth quarter than the third, Famous Footwear is well on its way to delivering its fifth consecutive year of double-digit operating growth.

In addition, I'd like to spend a little bit of time speaking of the progress we've made on our earnings enhancement goals that we announced last quarter. While we are still early in the process, we are, we believe, on track to achieve the after-tax benefit we expected of 10 to $12 million next year.

Included in this plan is the transition of our Bennett business to our very successful Brown Shoe Wholesale business model which is focused on sell-through and inventory discipline. As we have indicated previously, we expect to improve the performance of our Via Spiga, Franco Sarto and Etienne Aigner brands as we transfer the operating model, which has proven successful at both LifeStride and Naturalizer, to these brands while making investments in talent and infrastructure.

We remain excited by our growth opportunities that these brands afford us and provide the Company as we fill an underdeveloped area in our portfolio with better and bridge brands. As we move forward, we will talk about Brown New York as the exciting new division for Brown Shoe Company.

In summary, we are pleased to have delivered third quarter results that surpassed our expectations. We achieved strong results in both our Wholesale and Retail divisions and I couldn't be more pleased with the position that we uniquely have in the marketplace.

As we begin the fourth quarter we expect the business to remain solid yet we are not planning the business to continue at a record pace we experienced during the third quarter.

With that said, we are enjoying a very strong start to the fourth quarter. We also expect earnings growth in the short-term to be impacted by the changes we are implementing at our Brown New York brands and costs related to our efforts to pursue additional insurance recoveries related to Redfield.

In total we believe fiscal 2006 will represent a year of strong growth and significant accomplishments for Brown Shoe Company.

Given the better than expected results in the third quarter we now expect full-year adjusted earnings between $2.38 and $2.43 per share which includes about $0.15 in expensing stock options. This is above our previous guidance of $2.25 to $2.30.

Mark will provide you with some additional detail on our outlook. And now I'd like the turn the call over to Mark to review our financial results.

Welcome, Mark. Thank you, Ron. Good morning, everyone.

I'm excited to have joined the Brown team and I'm pleased to comment on very strong financial results achieved in the third quarter. Beginning with a review of the income statement, for the third quarter of fiscal 2006 consolidated net sales totaled $676.8 million increasing by $59.1 million, or 9.6% from $617.7 million during the third quarter of last year.

Gross profit margin was 39.9% increasing 110 basis points as compared to the 38.8% margin rate achieved in the third quarter last year. This increase primarily reflects the lower markdowns at Famous Footwear and improved performance of our Naturalizer brand both at wholesale and retail.

SG&A totaled $228 million, or 33.7% of net sales versus $208.1 million which also represented 33.7% of net sales last year. The SG&A expense ratio was even with last year as the expense leverage from the sales gain was offset by a shift in timing of incentive compensation accruals to match the flow of our expected earnings, the increased share-based compensation including options expense recorded in the current year, as well as higher professional fees.

Strong sales and gross profit margins gains enabled consolidated operating profit to increase 33.8% to $42 million, or 6.2% of net sales versus $31.4 million, or 5.1% of net sales last year.

Net interest expense totaled $3.7 million in the third quarter compared to $5.0 million last year. The decrease in interest expense was due to strong cash flow of $58.5 million in the third quarter and $95.2 million year-to-date along with cash repatriated last year. For the year we expect net interest expense to range between 16 and $17 million.

On a GAAP basis net earnings for the quarter were $26.9 million, or $0.93 per diluted share inclusive of $0.04 per diluted share in stock option expense. This compares to net earnings of $19.8 million, or $0.70 per diluted share in the year ago quarter.

Third quarter 2006 net earnings reflect charges of $1.4 million, or $0.04 per diluted share for costs related to the withdrawal from our Bass license. In the third quarter 2005 net earnings were lowered by $3.2 million, or $0.11 per share for costs related to Naturalizer store closings, all of which is outlined in Table 1 of our press release.

So on an adjusted basis we achieved EPS of $0.97 per diluted share this year versus $0.81 per diluted share in the third quarter of last year, an increase of 20%, 24% when one includes options expense in both years. This was above our guidance of 81 to $0.86 per diluted share on an adjusted basis.

Turning to the balance sheet, total inventory levels at the end of the third quarter were $433.9 million, increasing only 1.1% from $429.1 million in the prior year quarter. Our inventory remained well controlled and reflects the benefits of our sell-through model and the financial discipline within our Wholesale and Retail segments.

We were also successful in continuing to bring down total debt. To this end total debt decreased by $29.5 million in the quarter and by $97 million from last year's third quarter. Total debt outstanding was $170.5 million at quarter end resulting in debt to total capitalization of 25.4% compared to 39% at the quarter end last year.

Year-to-date capital expenditures totaled $37.5 million and we now expect capital expenditures for 2006 to range between 45 and $50 million excluding the acquisition payment we made earlier this year.

As to forward guidance, we expect fiscal fourth quarter diluted earnings per share to be in the range of 48 to $0.53 inclusive of $0.04 per diluted share related to stock option expense. This reflects estimated charges and costs related to our strategic initiatives of $0.14 per diluted share in costs and losses to exit the Bass license of $0.03 per diluted share.

Excluding these costs we expect adjusted fourth quarter diluted earnings per share to be in the range of 65 to $0.70 per share which includes $0.04 related to stock option expense. This compares to adjusted earnings per diluted share of $0.71 in the fourth quarter last year.

I will refer to you Table 3 in our press release for a reconciliation from GAAP earnings to adjusted earnings and a discussion of non-GAAP financial measures.

Our fourth quarter guidance include expected net sales in the range of 620 to $630 million compared to $599.6 million in the fourth quarter last year. The fourth quarter includes an extra week as fiscal 2006 is a 53-week year under the retail 4-5-4 calendar. The profit impact of the 53rd week is not expected to be material.

For the full fiscal year 2006, as Ron mentioned, we are raising our guidance to reflect the better than expected third quarter results and now estimate diluted earnings per share to be in the range of $2.28 to $2.33 inclusive of $0.15 per diluted share for stock option expense. Our guidance range also includes estimated costs for implementation of our strategic initiatives of $0.18 per diluted share and costs and losses associated with the exit of the Bass license of $0.07 per diluted share, offset by net recoveries from our insurance companies related to remediation costs with our Denver, Colorado facility of $0.15 per diluted share.

Excluding these costs and recoveries, we now expect adjusted fiscal 2006 earnings per diluted share in the range of $2.38 to $2.43 inclusive of the $0.15 per diluted share for stock option expense. This compares to adjusted earnings per diluted share of $2.22 in fiscal 2005.

The guidance assumes, would be an increase of 13 to 15% when including options expense at both years. I'll again refer to you Table 3 in our press release for a reconciliation of GAAP earnings to adjusted earnings and a full discussion of non-GAAP financial measures.

I'd now like to turn the call over to Diane who will review our third quarter performance in more detail and give us some highlights of our key initiatives.

Thanks, Mark, and welcome to you, too. I'm delighted you're here. Good morning, everybody.

Let me begin by highlighting our third quarter performance in our Wholesale segment. Third quarter sales rose 7% to $242.3 million from $226.5 million last year with particularly strong results in our Naturalizer, Dr. Scholl's and children's divisions.

Total Wholesale operating earnings were $20 million as compared to $19.2 million last year. These operating earnings include $2.3 million of costs and losses associated with the announced exit of Bass. Excluding this, Wholesale operating earnings rose by 16.1%.

We were pleased to experience solid strength in our brands and channels of distribution which led to strong sell-through rates and earnings growth that was well ahead of the rate of sales growth.

Expanding on our Wholesale business a little bit further, during the quarter we also exceeded our expectations that we set at Naturalizer a year ago when we developed our strategic road map. Our new business model, which includes a continuous flow of deliveries while maintaining tight inventory control, has led to improved performance of the brand at Retail.

As Ron mentioned, we maintained our number one position in department stores according to NPD for the third consecutive quarter. We accomplished this with broad-based strength in our core categories of casual basics and casual and direct tailored shoes. Importantly, our average unit retails are up as well $2 year-to-date.

Consumers seem to be responding favorably to our assortments and we expect to continue to build on this solid performance. And our research also shows that women are increasingly trusting Naturalizer because the brand consistently delivered versatile, high quality and stylish footwear that's comfortable and well priced.

We believe this recognition and trust will position us and allow us to enhance our sales and earnings growth in the upcoming years as we extend the brands to new categories and price points in order to reach a broader customer base.

You may recall that Natural Sport, our first brand extension, was launched during the fourth quarter of 2005. This sport line has had good success to date going from zero presence a year ago to over 600 doors today.

Additionally, we are working to develop a leading or aspirational halo collection of shoes at higher price points for Naturalizer for a more sophisticated consumer. For holiday, this new collection, called Naturalizer Signature, will be introduced to twenty of our Naturalizer retail locations and Naturalizer.com.

Other extensions to fulfill more of her closet and reach more potential Naturalizer consumers are in development, and we look forward to showing these to you over the next twelve months.

Also in the quarter, our Dr. Scholl's brand distributed in Wal-Mart North America and Famous Footwear performed well. The line now includes men's and women's casuals and athletics and has been a solid performer for quite some time now.

LifeStride also delivered a strong performance during the quarter. Despite retail consolidation LifeStride remains the dominant opening price point in department stores.

We plan to continue to upgrade our product offering to reflect consumer preference and the desires of our retail customers. This is expected to lead to higher average unit retail over time.

Now, let's turn to our New York-based brands which include Via Spiga, Franco Sarto, and the Etienne Aigner brand. As discussed with you previously, these brands had a challenging quarter and we're implementing initiatives to improve this segment of our business.

The first step in this effort is to transition these brands to the successful Brown Wholesale platform which focuses on sell-through and employs more stringent inventory disciplines. We also expect these businesses to benefit from a number of actions we've taken including the consolidation of our East Coast offices into our New York City location which will facilitate increased efficiencies and promote brand building.

Secondly, we've infused a great deal of talent into our organization. As you know, Rick Ausick was recently appointed President of this division. We've also added to our talent base in the design and development areas in both our Via Spiga and our Etienne Aigner brands, and even have new talent such as Dylan [Plater] from Cole Haan, and we expect he and others will bring fresh new ideas to our company.

And third, we're shifting our sourcing mix as we focus more towards lower cost regions such as China and Brazil while maintaining our high quality standards. While we will continue to source certain items from Italy, we believe we can reduce costs and improve the quality and level of detail in our merchandise with this initiative.

Dan Friedman, formerly of the Camuto Group, who is Senior VP of Product and Sourcing, will be instrumental in leading the sourcing and product development efforts at Brown New York and all of our divisions.

And then finally turning to our Speciality Retail division, which includes our Naturalizer, Via Spiga and our first Franco Sarto store as well as our Shoes.com e-commerce business, sales for this segment totaled $68.2 million in the quarter, up 8% from $63.1 million in the third quarter last year. Comp store sales increased 6%.

The Speciality Retail segment generated operating profit of $978,000 this quarter versus a loss of $7 million in the year ago quarter which included store closing charges of $5.2 million. This performance was led by great execution at our Naturalizer retail stores in the U.S. and Canada.

Our initiatives, which included the closing of underperforming stores, consolidation of the merchandising organization into the U.S., and rebalancing our assortment to a more favorable mix that includes 60% fashion and 40% core products, have definitely paid off. All key metrics, including turn, our currency of inventory and gross profit margins were ahead of last year.

All in all our Wholesale and Specialty Retail businesses are responding well to the strategies we outlined twelve to eighteen months ago. The same thing can certainly be said about our Famous Footwear brand where Joe and his team have delivered a fantastic quarter also having executed well to their key strategies.

And now I'd like to turn the call over to Joe who is going to discuss Famous Footwear in more detail.

Good morning and thank you, Diane. Good morning, everyone.

Famous Footwear did deliver a record third quarter reflecting an exceptional back-to-school period. We attribute our strong performance to four key initiatives.

First of all, the merchandise team did a great job in identifying key trends and backed these up with appropriate inventory. Second, our in-store messaging and merchandising was better than ever, and we presented the key stories with a "bring it" value message very well.

Thirdly, Famous' marketing was well timed and effectively aligned with the timing of back-to-school in all of our DMAs. And finally, our store sales team was well trained to ensure that our service, merchandising and marketing message was consistent during this selling period.

We managed our business well and capitalized on consumer demand that goes along with the back-to-school and fall selling period.

During the quarter total sales rose by 11.7% which was driven by an 8.2% increase in comparable store sales, and the opening of 35 net new stores since the third quarter of last year. Our sales metrics were up in all categories with our AURs, conversion rates, traffic and pairs per transaction all ahead of the prior year.

Operating earnings rose 51.1% fueled by better than expected sales and lower markdowns. We also continued to advance our inventory management strategies driving freshness and velocity. As a result, inventory at quarter end was well controlled and positioned extremely well for the holiday selling season.

We opened a total of 26 new stores and closed ten ending the quarter with 979 total locations, up from 944 stores at the end of third quarter last year. We remain on target to open a total of 90 new locations for the fiscal year while closing approximately 45. Currently we anticipate opening 110 new stores in 2007 while closing approximately the same number as we did during this current year.

Now that I have summarized the numbers side of our business, let's quickly review our performance during the quarter by major categories. I believe the encouraging news was that our growth was very balanced across all businesses with women's, men's, kids, plus our accessories all contributing to our growth.

Our kids business did lead in performance for the quarter with strength across all its categories. Our women's business continued its exceptional performance driven by juniors, dress, and the casual categories.

In men's, all categories posted increases led by dress footwear. Our men's products sold extremely well and with margins that were nicely up from last year.

Finally, we were extremely pleased that our athletic business comped up 3% led by [State] and Nike Reacts product. We believe this performance was contrary to what has been referred by some others in the footwear business during this time frame.

In total, we enjoyed an exceptional back-to-school season. We believe we correctly prepared for the shift favoring low profile and skate styles and our assortments in women's, men's and kids were right on target with the consumers expectations. We believe that this and in addition to our marketing in-store presentation enabled us to out perform expectations.

Now as we begin the fourth our business continues to be good. [inaudible] Our comparisons, as Ron mentioned are tougher as we experienced a strong [inaudible] quarter in 2005. However, we continue to believe that our efforts to apply differentiation, compelling brands and a value proposition continues to lead us to market share gains for Famous Footwear.

Now I'd like to pass the call back to Ron for closing comments.

Thanks, Joe.

I understand that we had a little technical problem with some of you hearing my opening remarks. I'm not going to repeat all of them, I think that the depth of Diane's remarks and Joe's comments got at most of it.

I just would probably repeat, you know, my opening line that, as I said many times this quarter, it's a great time to be in the shoe business. Clearly, the environment was conducive to shopping during the fall and back-to-school season, and we effectively capitalized on this strength with terrific product and successful marketing, and as you can tell, we continued to adhere to our strict inventory and sell-through model disciplines.

In summary we had a terrific third quarter results, surpassed our expectation, and we achieved those results in both our Wholesale and Retail division and I couldn't be more pleased with that unique position that we have in the marketplace, you know, once again the strength and the breadth of our portfolio. The breadth of our customer base which allows us to draw those insights into our business has proven to be very effective.

You know, the strong quarter was certainly driven by solid execution and, of course, with our stylish offerings leading to product weight. As we look ahead, we are intently focused on capitalizing on these many opportunities that exist to further develop our platform both at Wholesale and Retail.

The implementation of earnings enhancement plan is expected to increase sales at higher rates of profitability. You know, our achievements motivated eager to build on our success to date and improve the challenged areas of our business and grow our leadership position in the footwear industry even more.

With that said, I think I'll turn it over now to the operator so we can begin the question-and-answer period.

[OPERATOR INSTRUCTIONS] We'll go first to John Shanley at Susquehanna.

Good morning and congratulations on a nice quarter, guys.

Joe, really good solid performance by Famous Footwear again. I wondered if you can give us a breakdown of approximate how the major product categories balanced out in terms of their percent of sales volume for the Company? In other words, men's, women's, athletic, just a percentage of what they represented so we get an idea of how the sales are generated.

John, it really didn't change that much. I mean we struggled, I say we struggled, I was very pleased with the athletic and athletic during the back-to-school season usually represents about 55% of our total business, obviously, driven by late August and September.

It only dropped a couple points, John and the balance of that business about 13% was in kids. The balance of business was split in Brown between men's and women's with women's holding a little bit larger percentage than our men's business. You know, I think I a lot of success of our back-to-school was driven by our athletic business which held its own.

Great.

Can you give us a sense of the product margins that you're getting in the women's product category, the non-athletic women's category, is that still the main profit generator for the chain and maybe you compare it against the athletics so we get a sense of how one is stacking up against the other?

John, I don't think we're too much different than a lot of people at retail. I mean, one of the advantages of this is we're looking at a margin of about 5 points higher than athletic, so as that performed much better during back-to-school time frame, it drove a lot of our margins to a higher rate than we had experienced in the past.

Do you see that change -- that trend continuing as you get into next year, will women's likely continue to be a more profitable portion of your business?

I think there's some opportunities there, John, both in women's, but also, you know, I consider we have a relatively large men's and an extremely quick growing kids business in non-athletic, so we do see that following the same pattern through fourth quarter and through the first quarter of '07.

Okay. Great. Then I have one quick question for either Ron or Diane.

Can you give us a sense of the possible impact to your kids Wholesale business from the announcement of yesterday that Payless and Disney have entered into a joint agreement to market Disney cartoon character footwear in Payless stores. Will that impact your wholesale kids business to any degree?

You know, John, we haven't, of course, had much time to look at the details of that but, as you know, Payless is a terrific partner with us, and I would draw an example that as they acquired the Champion license, we continue to develop product and styles for them under the Champion name as well. So it takes a breadth of product offerings in that licensed arena to be able to meet a very, very shifting customer base.

So for example a year ago I would tell you that no one in my shop would have thought Cars would be as successful in kids footwear as a character as it has been. If you recall the year before we were going up against Spiderman or Spiderman 2, and we would have thought that was a property that would be just extremely difficult to offset, and so come along a license like Cars and it can meet and can exceed expectations, and so I think that Payless continues to build their model trying to reduce their costs by taking more direct.

I think we continue to be a valued partner in specifics, so I think in our business we'll probably have impacts. I think that's the beauty of Brown Shoe Company is no one customer, no one category is that significant that we can't go and look to make up that business with other opportunities.

Okay. Fair enough.

And I may have missed this on your earlier comments, Ron, but can you give us a sense of the Bennett group's performance in the quarter and outlook in terms of the demand for their product category with the strength going on in the overall footwear sector right now in women's, dress and casual areas, Bennett participating in that as well as some of your other brands are doing right now?

I'm going to turn it over to Diane in a second.

Let me just give you a little flavor on Bennett, and you probably did miss my comment on I think, John, we're shifting to creating the Brown New York division. I think you probably saw announcement that said we're going to be moving the [Wasson] operation up to New York.

We also are consolidating a variety of our makeup division, parts of Bennett that will be incorporated into our makeup group in St. Louis, and so as we move forward the consolidation of those operations we've consolidated the distribution function, and so I think as we go forward as Brown New York and that's how we'll market it to our major customers as well, dropping sort of the Bennett nomenclature as a per se.

With that said, I think we actually, the third quarter typically is a good quarter for those Bennett brands and that continued, but as we look at the model going forward, as we shift to the consumer driven Wholesale model that's been so successful for Brown with the Naturalizer and LifeStride, as we shift building up on those disciplines, we would expect that the fourth quarter will be slower in sales, and that as we move throughout '07, particularly in the second half of '07, we would see less markdown costs, et cetera.

But Diane can talk a little bit about what she sees with each of the brands and the customers.

Generally, John, we actually are feeling continuing to be encouraged. We think we've taken the first right step it was all really about number one, getting the right leadership in there, and we feel very good with Rick Ausick there transferring it to the Brown Wholesale model. As we talked about that really is all about much tighter discipline around our inventory, consolidating our offices into New York and other areas and leveraging our operating efficiencies.

And then as we've taken the next step with a new design team on Via Spiga, new talent on Etienne Aigner, and we've combined that now with more research around those brands, stronger designs team as well as sourcing and our ability to really commercialize those brands in much more effective way going forward, so we're delivering really on the promises of each one of those businesses.

We really see as we turn the corner into '07, you know, it will continue to improve and particularly from a profitability perspective and only see, you know, continued good opportunity and progress against each one of those businesses.

You remember, John, that we had an extremely strong fourth quarter last year as the Bennett team really pushed for the earn out, and as we continue to look at that, we clearly over shipped the sell-in and didn't practice as good of disciplines around the whole sell-through process which I think hurt us in all of the first half of '06, and so we'll start to anniversary that as we get into the second and third quarter.

So is it fair just to say that expectations in our fourth quarter are still a little tough?

Yes, yes, right.

Yes.

Thank you very much. I appreciate it.

We'll go next to Susan Sansbury with Miller Tabak.

Hi. Thanks very much. And Mark, welcome.

Thank you.

I have two questions. First for Joe.

Footlocker announced, I guess it was last week, that they are going to move into the value footwear retail space.

Yes.

Should this be viewed, and apparently this is well known within the trade. Should this be viewed the same way as Wal-Mart entering someone else's backyard? And, Joe, can you talk about what initiatives you expect to put in place to protect your share and margin? The second and then I'll ask the second question if I may.

Okay. I'm not sure whether it's Wal-Mart joining our backyard. Let me respond this way.

I came out of specialty athletic business in the mall. I've always admired Footlocker. They've always been a great company. By them bringing or launching a new business in the family footwear category, I think it does nothing for us other than elevate our expectations of ourselves and our performance going forward.

So again, highly respect them but, again, I think it just makes us a better retailer as we better understand what those stores look like when they come out of the chute.

Could you elaborate on why you expect Footlocker to elevate the space?

Again, as we take a look to competition that's currently in the channel that we compete in at the current time frame, I think if you take a look at where Famous came from four years those familiar with us, we've elevated and the performance of elevating this company has definitely shown itself over the last five years.

With Foot Locker coming into this channel, we don't expect that really to change. It will continue to elevate our business above those but as Foot Locker and everyone else competes in this channel.

Okay. Second question for Mark if I would.

The shift in bonus accruals, can you be specific about what the dollar amount was just so I'm not comparing apples to oranges?

Yes. I think that the earnings -- the accounting theory for accrual of bonuses matches the bonus accrual with the earnings, so while we had a very strong third quarter it has shifted some of our bonus accrual out of the fourth quarter into the third, just as fourth quarter had perhaps a disproportionate share last year, and I think in the aggregate our expectation of full-year bonuses is not significantly different year-over-year.

Okay. But can you tell me the base point impact on SG&A in terms of --

It was about 50 basis points.

Okay. So 50 basis points heavier in the third quarter, 50 basis points lighter in the fourth quarter? Is that?

I haven't calculated the basis impact in the fourth quarter. It might be a little less than that because you got lower sales.

Okay. Great. Thanks very much.

We'll go next to Raj Shastri with Thomas Weisel.

Good morning, guys.

Hi, Raj.

This is Joseph George calling on behalf of Raj. I have a couple of quick [inaudible] questions.

First one is on Famous Footwear. What is the target sales per square-foot that you're looking for and [then] leverage in the business model, what is the optimum sales per square-foot in Famous Footwear that would enable you to operate on a good leverage model?

Raj, I think a couple of things as you think about the Famous Footwear model. First of all, the square-foot per store is significantly affected by each segment of the business, so sales per square-foot in all [inaudible] centers is a few hundred dollars per foot larger than square-foot per dollars in the power centers and different again in our mall centers.

The other element is sales per square-foot is different as maturity in the markets we serve changes, so our model would say that in average, which is always a hard market to find, in average market sales per square-foot grows about 10 to $15 per square-foot over the first three years of its life and its opening.

I think that, Mark, if you give Mark a call later on, we talk a little more. I know that you've been spending some time with us to get a better understanding of the total model, so if you give him a call I think we can talk a little bit more about specifics.

Right now I would say this that, you know, our initiative as part of our whole focus on the deep dive at Famous Footwear around the profit market optimization plan that allows us to leverage our real estate better is moving in place and we continue to build upon that for the growth in the future.

I think we said on the call somewhere here we would probably expect to up our openings next year to maybe 110 stores, something like that, up net a group another maybe 50 or 60 stores next year. So I think that we're doing that because we continue to see the benefits of our growth strategy in the marketplace, in our new store development, most recent new store development higher average per square-foot sales and earnings answer, significantly driven by a change in the square footage or adhering to a discipline of a Brown, Joe, 6500 square feet I think is where we're at.

Thank you. You were continuing?

Yes, no, I'm done.

The next question was in connection where Naturalizer, because when I'm looking at Naturalizer, it's been quite patchy in, say, whole of '04 and the first half of '05 and, again, in the second half of '05 you had a good performance and it was down again in the first half of '06, now again it's picked up in Q3.

So do you view this Q3 performance as a turnaround which is going to stay or is it part of the ups and downs we have seen historically? And if you view this as a permanent turnaround, what are the reasons that you would attribute to it?

Okay. Hi. This is Diane.

I'm not sure if you're looking at the Wholesale segment, the [entire] one or Retail, but let me sort of speak to all-in.

We developed a plan about a year-and-a-half ago to address both the Retail and the Wholesale segments of our Naturalizer business. On the Retail side it was really about closing underperforming stores, shifting our focus to more fashion and less core, consolidating a number of operations, all designed to improve store per store in operating profits and leverage. And as you heard, that improved.

Same thing with Naturalizer Wholesale. A year-and-a-half ago, same idea. Really focus on sell-in, stronger inventory discipline, cutting SKU basis, focusing on right product, right time, and that, actually, that's delivered a, again, number one position with NPD in department stores for the last three quarters.

So when we look at the Naturalizer brand all-in, both Retail and Wholesale together, through the quarter I know for the quarter we're probably at about a 12, a little over a 12% return, operating return on sales for the brand all-in. So we feel fairly confident that we have developed the right strategies and have those in place and while we know we need to earn that stripe every day, we're not resting on our laurels where we continue to believe that Naturalizer is a good growth opportunity and has strong potential for the future.

Okay. Thank you. And I had just one last question.

The gross margin improvement that we see here, how much of it would you attribute to better inventory management which would in turn develop in lower markdowns and a change in the product mix on the other hand. So between these two factors which are the ones to which you would attribute a major sale?

I think it's probably, it's hard to say. It's always a blend of a lot of different things, but I would tell you I really think it's about the focus on inventory management and having delivering the right product at the right time.

Okay. Thank you. That's it.

We'll go next to Heather Boksen with Sidoti & Company.

Good morning, everyone. A couple quick questions.

Can you share with us what kind of comp you're looking for in Famous Footwear for the fourth quarter, what that guidance assumes?

It'd be 3 to 4%.

And within this Speciality Retail segment, you had operating income actually here in the third quarter. Should we read anything into that in terms of maybe will we be seeing operating income in '07 out of the segment? I know originally you were, in the past you hadn't been too optimistic with regards to that.

I think we have three elements in that segment, so let's make sure we introduce or talk about all of them. So first of all, the increase in profitability was driven by our Naturalizer concept stores. That's the turnaround, that's where the increase has been, and that's what's been driving the business.

Additionally, that's where our Shoes.com element of the business is. Again, we continue to see strong growth there. Growth was slightly less in the third quarter than it has been as we shifted and added on a new distribution center capability that we're utilizing some UPS third party opportunity there that we're pretty excited about, but that had a little bit of growing pains in the third quarter as we go in there.

So we continue to look at Shoes.com as an opportunity to consistently get 50 to 75% growth out of quarter-over-quarter if not more, and we continue to be excited about that opportunity and don't see that waning.

We manage investment in Shoes.com. I think that when you get to Qs in the third quarter, we probably did not have profitability, but it's probably pretty close, pretty close, but that's all about investing and continuing to grow that model and we continue as we build our plans for the future have high expectation there.

The third element of that business is our specialty, sort of our specialty group, and we have some FX sales stores in there and they're pretty solid, followed Naturalizer a little bit, but we're also closing down a handful of Via Spiga stores that we had in there. We ultimately will reposition the Via Spiga chain appropriately but so you have losses associated with closing down those stores appropriately as well.

So you got a number of moving balls in there, but it's our goal to operate these businesses, at breakeven, we've told you that. We're very thankful for the strong quarter and we'll build from there.

Okay.

Switch willing gears just a little bit here, you paid back almost $30 million in debt in the quarter. Can you remind us when the, I guess, what the plans are for payment of the rest of it? Are there any prepayment penalties and et cetera?

No, there's nothing like that. I wouldn't look at it as debt payment at this point. We've already moved our debt from close to 50% when we did the acquisition at its peak days, and then we're now closing in on 25%.

As we look toward our future, we're very comfortable in that 20 to 25% range. We actually certainly are considering other ways to grow our business and look at a marketplace that's, as everyone knows, is ripe with consolidation and opportunities, and so we're well positioned, we got our borrowing down, our total borrowing capacity has never been stronger, so we're feeling pretty good about that.

Mark can maybe add a detail on the debt paydown, but it's --

Yes, I just think the, obviously, under the revolver we have seasonal requirements where that borrowing builds and then starts to turn back around. We should be largely out of the revolver by the end of the year, and then as we begin to build for next year, we'll have some borrowings likely seasonally.

Okay. One last very quick question here. Touching back on, and maybe Joe can help with this.

Opening 110 new stores next year in Famous Footwear, why the ramp-up, and yes, I guess that's it. Why ramping up now?

Well, I think if you take a look again at our history, I think we've earned -- we feel comfortable now we've earned that [rate]. Ron mentioned earlier this will close out our fifth year of double-digit operating profits. Each one of those years has become stronger, especially the current year we're in.

So I think it's a primetime. We set the foundation four years ago to continue to evolve this business concept. I think the timing is perfect to start ramping up our growth a little faster than we have the previous years, so I think our timing is perfect.

Have you guys started signing leases for any of these spaces yet and if so, can you comment on the availability? There's availability out there for this?

Well, two questions. So we already have 84 of the 110 locations signed for '07. You know, we still look at opportunities above the 110 but, again, we're not in a rush to sign real estate for the sake of signing real estate.

If there's an additional 10 or 15 locations above the 110, and those are the right locations, then we'll do so. There are some limitations to what I consider the right real estate.

Okay. Got you. That was kind of what I was getting at. All right. Thanks, guys.

We'll take our last question from R.J. Hottovy with Next Generation Equity.

Good morning, guys. Congratulations on a nice quarter.

Really I just wanted to ask a couple follow-up questions on the e-commerce and the Shoes.com business here. First of all, and I apologize I missed it earlier, but I was wondering if I can get an actual number for the e-commerce side of the business for sales for the quarter.

Secondly, I was hoping to get a little bit of a sense of what you guys are looking for out of the new athletics site that you rolled out during the quarter.

And then thirdly, was trying to get a sense as to just your outlook. It seems like there was a number of new e-commerce sites rolled out within the industry over this past quarter. I am just trying to get a sense of how you guys feel you compete in the heightened environment of competition here?

Okay. I think Mark's looking up the number exactly, so we'll get that in a second.

You know, we just came off of our planning meeting, so otherwise I would tell you that I think most of your questions would be sort of below the Chairman's view, if you will, except that we look at the e-commerce area as a real growth opportunity for us as well. We also envision ourselves as becoming the leading e-commerce site for shoes.

We think that the ability to lever our broad-based infrastructure is what's going to give us the opportunity to build a very profitable and growth oriented model. I think that the addition of unique Web site opportunities such as the athletic is all part of trying to make sure that we stay close to that e-commerce consumer and speak to each community of users that they're trying to enlist.

We won't -- we're not in a position where we're sharing information about each one of the sites and its benefit and its errors at this point. Partially I would say because we're continuing to learn at rapid rates here.

You did mention that there's a breadth of new entries into the marketplace. They'll be continuing breadth. I certainly think that the E-space for shoes is clearly something that the consumer's comfortable with.

I would tell you that our inventory disciplines and our planning and allocation disciplines allow us to service that consumer in what we believe is an extremely efficient manner. While I won't give a number, it is our belief that we are able to manage the ship and return process by making sure that she gets the right pair more often the first time as a true opportunity for us to show differentiation and profitability in the channel.

So I repeat, we think it's a growth opportunity. We think each one of those unique segments the ability to talk to unique consumers and neighborhood of consumers, community consumers is important.

I don't think that this business would be anywhere near as interesting for growth if we didn't have the broad-based leverage capability of our platform. Again, we leverage all of these sites from the Famous Footwear site to the Shoes.com site to our branded sites on the same motor, and distribution capability as well.

I think without that sort of collection of infrastructure capabilities this is a hard business to scale. I think that we're in a unique position.

Mark will give us a number for the quarter.

For the quarter as well as year-to-date our sales at Shoes.com are up around 80%. We're just under $40 million year-to-date in sales, and we had in the quarter just under $16 million in sales.

And I think, Joe, for FamousFootwear.com, those numbers are right about the same, right, 80%?

Yes, they are.

Okay. That was helpful. One last follow-up question for Mark if I may.

I thought, if memory serves me, that there was a floating to fixed swap agreement in place that ran through October. I was just wondering if it was renewed or have you guys just let that go? Just a better sense of what we should look for in terms of interest expense going forward here?

Again, I think we commented in our remarks about a full-year expectation of interest in the 16 to $17 million range that the swap that we had out there has expired and was not renewed.

Okay. Thank you.

Thank you, everybody.

We appreciate your interest in us. We certainly are pleased with the growth opportunities we believe we created for ourselves, and we look forward to speaking to you next quarter.

Thank you, everyone, for joining us. This concludes today's conference. You may now disconnect.