Caleres Inc (CAL) 2006 Q4 法說會逐字稿

Welcome to the Brown Shoe Company fourth quarter and fiscal year-end 2006 financial results conference call. I would now like to turn the call over to Ken Golden, Director of Investor Relations.

Thanks, and good morning. This call is being made accessible to the public via webcast in accordance with the SEC's Regulation FD. Before we begin, I would like to remind you of the Company's Safe Harbor language. During this conference call the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

A 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 historical results or from any future results expressed or implied by any forward-looking statements. Factors that could cause the 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.

Now I would like to turn the call over to Ron Fromm, Chairman and CEO of Brown Shoe Company. Joining Ron are Brown Shoes' President and Chief Operating Officer, Diane Sullivan; Chief Financial Officer, Mark Hood; and Joe Wood, President of Brown Shoe Retail.

Good morning. Thanks for joining us today. As many of you have heard me say throughout the year, fiscal 2006 was a great year for the footwear industry. Brown Shoe delivered a terrific performance as well. Without a doubt our ability to satisfy consumers at each channel of distribution that she shops in with compelling assortments in brands worked and drove the solid results that we reported this morning.

As a result of our strong performances from the year and confidence in the outlook for 2007, our Board of Directors authorized a 3-for-2 stock split and a 31% increase in the quarterly dividend on a post split basis. This is the second time in the past 12 months we have split the stock and raised the dividend.

Turning to our fourth quarter results, net sales increased 6.6% to $639.3 million on the strength of Famous Footwear and our Naturalizer, LifeStride and Dr. Schulz brands. Gross profit margin increased by 90 basis points to 39.7%. On a GAAP basis, our diluted earnings per share was $0.46, which includes $0.12 per share in charges related to the environmental remediation of our Denver, Colorado property; $0.09 per share for the cost of implementing our strategic initiatives; and $0.03 per share in costs related to the exit of the Bass business. Excluding these items, adjusted diluted earnings per share were $0.70, at the high end of the guidance range established back in November.

For the fiscal year net sales increased 7.8% to $2.47 billion, and GAAP diluted earnings per share were $2.26. On an adjusted basis, diluted earnings per share were $2.44 compared to an adjusted $2.22 in 2005, or $2.08 including footnote stock option expense to be on a fully comparable basis. This represents an increase of 17.3%, and exceeded the high end of our guidance range as we began 2006 by $0.14 per share, and $0.01 greater at the high end of the guidance established on the third quarter call.

We're very pleased with our accomplishments in 2006. Famous Footwear reported record sales and earnings. Naturalizer delivered a strong year across the brand, and Dr. Scholl's continued its strong performance.

We significantly improved results within our Specialty Retail group, following a year of repositioning Naturalizer retail stores and growing our Shoes.com e-commerce revenue by 81%.

We added significantly to our talent base in the product development area and function especially, nearly doubling our staff in this area. We made the strategic decision to exit our Bass license in order to focus on those brands and businesses in our Wholesale portfolio that maximizes our growth and profit potential.

We proactively addressed changing needed in the management of our acquired Bennett brands, which we have renamed Brown New York, and implemented our consumer driven model. We began the implementation of our earnings enhancement plan, which we expect to lead to a more efficient Brown Shoe Company, thereby positioning us to capitalize on the significant opportunities that exist to further develop and grow our portfolio of brands. Finally, we ended the year with a strong balance sheet and increased cash flow and reduced debt.

We're are well positioned as we begin 2007. Our brands are performing well, and we have initiatives in place to continue to drive sales growth and operating margin expansion. Also, the footwear industry, both at wholesale and retail is healthy. Retailers are operating with less inventory, and there continues to be a lot of consumer interest in footwear.

We continue to put more resources to becoming a world-class marketer of footwear brand. And we believe 2007 will represent another year of progress toward achieving this goal.

During the quarter we also advanced our earnings enhancement plan. Specifically we completed the move of the Bennett brand to New York. We announced and executed in February 2007 the closing of our Needham Massachusetts office and Dover New Hampshire distribution center.

We transitioned to an outsourced model in our Canadian Wholesale business, and expect better profitability and reduced inventory investment there going forward. And we announced the closing of our Italian sales office, again lowering our cost as we go forward. Combined, these actions allow us to reduce cost, while providing us with an improved platform for growth.

Now I think I will turn the call over to Diane to have her give you some of the highlights of our performance in more detail.

Good morning, and thanks Ron. As Ron mentioned, we are pleased with our fourth quarter results, and equally excited by our solid positioning and growth outlook as we start fiscal 2007.

I will begin my comments with our Retail segment. Famous Footwear generated strong increases in sales and profitability during the fourth quarter. Total sales rose 13% to $320.9 million, with same-store sales on a 13 week basis increasing 2.9%. Sales growth was well-balanced, up in all categories and genders, demonstrating the broad-based strength of our Famous Footwear brand. All metrics were favorable as well, with average unit retail, conversion rate, and transactions increasing over the prior year. Operating income rose an impressive 49.2%. Let me thank Joe Wood and the entire Famous Footwear team for the great fourth quarter and outstanding fiscal 2006 performance.

Turning to our Specialty Retail, which primarily includes our Naturalizer retail stores and our Shoes.com e-commerce business. Sales for this segment totaled $73.9 million in the quarter, up 12.4% from $65.7 million in the fourth quarter last year. Same-store sales increased 4% for the comparable 13 week period.

The Specialty Retail segment recorded an operating loss of approximately $400,000, which includes $900,000 in pretax cost related to the closure of all but one of our Via Spiga stores. These closures were an element of our earnings enhancement plan announced back in the second quarter. This compares to a loss of $6.7 million last year, which included pretax cost of $6.5 million to close under performing Naturalizer stores, and to consolidate our Canadian back office operations.

We're very pleased with our progress and the improved performance of our Naturalizer stores. Our current store base is more productive following a period of repositioning, having closed under performing stores and upgrading our assortment and improving our business model. Currently our assortments are performing well, and we believe we're positioned to increase brand loyalty and consumer preference going forward. We're also beginning to address brand marketing, which I will comment further in a few minutes on those initiatives.

Now turning to our Wholesale business, in total sales were $244.5 million, a decline of 2.1% from the fourth quarter last year. Sales of our Naturalizer LifeStride and Dr. Scholl's brands, along with our Children's division where strong, increasing at a double-digit pace, reflecting the consistency in our ability to provide consumers with trend right footwear.

This strong performance was offset by a couple of factors. First, we experienced a decline in our Brown New York brands as we transitioned these brands to the consumer-driven model and deemphasized nonbranded product distribution. We remain very excited by the potential of our Brown New York brands, and expect our initiatives to result in higher sales and profitability beginning in the second half of 2007.

Second, lower sales of Bass product also contributed, as we eliminated the Bass license from our portfolio of brands. And third, a reduction of private-label sales as we transitioned our focus to a more profitable branded and private brand sales opportunity.

Total Wholesale operating earnings were $17.8 million compared to $27.1 million in the fourth quarter of 2005. In the fourth quarter 2006 earnings include $4.7 million in costs associated with exiting Bass, and cost related to our earnings enhancement plan. The remainder of this decline is attributable to our Brown New York brands offsetting the gains by Naturalizer, Dr. Scholl's, and our international business.

So in total fiscal 2006 was a good year for Brown Shoe. Our Wholesale brands rose about the challenges of consolidation in the department store segment of the industry delivering a solid year. This performance was led by our flagship Naturalizer brand, generating a double-digit operating profit margin on an all-in basis with growth of more than 30%. And our Retail performance was led by the record year at Famous Footwear.

As we look ahead, we fully expect our strategies across the entire platform to gain traction and momentum. As we move through 2007 there are three major -- contributed to our continued good performance. Number one, we expect our branded business to continue to grow. Naturalizer, both at retail and wholesale, is expected to continue its positive momentum. We expect sales increases from existing product categories, and through the extension of the brand into new categories such as Naturalizer -- Natural Sport and Naturalizer Signature. And we have also received early positive signals on our repositioning effort with Brown New York.

At the February WSA show reaction was positive towards our brand positioning strategies, and in particular the improvements that everyone saw in our product styling and quality. LifeStride has also solidified its position in the moderate segment. And our Dr. Scholl's brands is expected to continue with growth at both [a max] and family channels. And finally, as mentioned earlier, our plan is to reduce the emphasis on the private-label business and focus our attention towards building our branded businesses.

Secondly, in addition to growth in our Wholesale brand is Famous Footwear's continued growth. We plan to accelerate the square footage growth in fiscal 2007, opening 110 doors versus 92 last year. The success that Famous has had in recent years have not gone unnoticed. And there is a growing interest in the family channel, and believe we're poised to handle the competition in our market as we increase our marketing and continue to emphasize our strategy of branded product offerings, while making sure we correctly interpret trends.

And third, supporting all of this is our marketing and branding initiatives. We believe the time is right to allocate additional resources towards marketing. To this point our marketing budget is planned to increase at a double-digit pace, which includes some reinvestment of our earnings enhancement plan savings. And the additional marketing spend is directed towards the support of our flagship brand, specifically Famous Footwear, Naturalizer, Franco Sarto and Via Spiga. All of these three drivers together should position our Company well for 2007 and beyond.

And now I would like to turn the call over to Joe to highlight the terrific performance at Famous Footwear this year.

Thanks Diane, and good morning everyone. Famous Footwear delivered another record quarter, including a 13% increase in sales, and nearly a 50% increase in operating profit. The fourth quarter concluded a record year at Famous Footwear.

We attribute much of Famous Footwear's strong performance to several key initiatives. First are merchandise team continued to do an excellent job of identifying key current trends and vendors in the marketplace, and backed this with sufficient inventory to drive our sales.

Secondly, we continued to deliver relevant in-store messaging which was supported by a marketing strategy that reflected additional radio advertising rather than print and inserts, and believe that this was instrumental to driving the quarter results. Lastly, our in-store sales team remained focused on delivering consistent, quality customer service.

Total fourth quarter sales rose 13% to $320.9 million, led by a 2.9% comparable store sales increase compared to the fourth quarter of last year. Comps were driven by healthy year-over-year gains in average unit retails, customer conversion rates, and pair per transaction across most of the categories.

Operating earnings, as mentioned, increased 49.2% to $22.5 million. And this was fueled by strong topline growth and increase in regular price sales, which led to year-over-year gross margin improvement of 110 basis point. Continued improvement in the freshness and velocity of our inventory, as well as growth and preference for the Famous Footwear brand, enabled us to achieve these outstanding results.

We entered the fourth quarter with our inventory clean and well-positioned. And therefore ended the month of January with less aged product than we had in the prior year period. This allowed us to reduce our markdown activity and thereby improving margins and positioning us well for early spring deliveries and the selling season. I think all we need now is some improvement in our weather.

We opened a total of 28 stores and closed 8 during the quarter, ending the year with 999 locations, up from 953 stores at the end of last year's fourth quarter.

Now I have summarized the numbers side of our business, let's quickly review our performance during the quarter by major categories. Growth during the quarter was very broad-based with comp sales up year-over-year in all categories. Athletics was up 1.7%, our women's business was up 4.3, men's was up 2.9%, and our kids business was up 6.5%. Our athletics business once again was led by Nike, Asics and our skate vendors. Our women's business remained impressive as momentum from the third quarter continued into the fourth, led by Skechers in the junior casual categories. In men's all categories posted increases, and this was led by dress footwear. Our man's product continues to sell very well with our margins up nicely from last year.

Our kids' business once again captured our largest gain in regards to percentage growth. We believe this sales trend is a direct reflection of our successful positioning against our trend current female consumer, thus capturing her children's share of wallet. In summary, we did enjoy good, if not a great, holiday season.

As we begin fiscal year 2007, I believe that Famous continues to position itself well. The merchants have purchased and delivered great assortments that identify categories and brands for spring, which are expected to continue our strong performance this year. We do expect the categories and vendors that drove our 2006 success continue to grow in 2007. We continue to be excited about the Nike [Retro X] productline, with a launch of a second generation this spring.

In recognizing the increasing competitive set of footwear in our channel, Famous is committed to its priorities of increasing our differentiation, to recognize brand product and increased communication campaign that supports that product differentiation, continued capital investment that provides our consumers with a preferred in-store shopping experience, and a targeted real estate strategy that positions Famous to gain market share.

Now I would like to turn the call over to Mark to review our financial results.

Thank you Joe. Let me add my good morning to everyone. Before I begin a review of the income statement, I would like to point out that fiscal 2006 included 53 weeks and compares to a 52-week period in fiscal 2005, with the additional week occurring in the fourth quarter. Although the extra week was positive in our retail business, generating approximately $22.5 million in sales, it did not have a material impact on net earnings in the fourth quarter, as it is a negative in our Wholesale business and corporate fixed costs, particularly the inclusion of the WSA shoe show and lower leverage in the low-volume fleet. So overall the impact on earnings was not material.

Consolidated net sales for the fourth quarter totaled $639.3 million, increasing 6.6% from $599.6 million during the fourth quarter of last year. The strong growth in our Retail business and in our St. Louis brands was offset in part by declines in our Brown New York brands, the exit of the Bass license, and lower private-label sales.

Gross profit margin increased 90 basis points to 39.7% from 38.8% in the fourth quarter last year. This increase primarily reflects increased gross margins at Famous Footwear, and Naturalizer and Dr. Scholl's wholesale offerings, including their mix impact. This improvement is net of $322,000 in costs associated with our earnings enhancement plan.

SG&A totaled $232.6 million, or 36.4% of net sales, and includes approximately $4 million in costs, primarily severance and asset write-offs associated with our earnings enhancement plan; $5.6 million in costs associated with the long-term remediation of our Denver, Colorado property, Redfield; and $1.5 million in costs associated with the exit of the Bass license.

Fourth quarter 2006 SG&A also included $1.2 million in costs related to stock option expense, and $1.3 million of legal fees relating to our ongoing efforts to recover environmental costs from our insurers in the Colorado Department of Transportation.

SG&A was $209.2 million, or 34.9% of sales in 2005, including costs of $4.5 million for the closure of under performing Naturalizer stores, and no cost for stock option expense.

Net interest expense totaled $2.9 million in the fourth quarter compared to $4.5 million last year. The decrease in net interest expense was due to higher cash flows year-to-date and paying down of the revolver portion of our acquisition borrowings.

On an adjusted basis, excluding special charges for both years, which are summarized in Schedule 4 of our press release, we achieved adjusted earnings per diluted share of $0.70 in the fourth quarter of 2006 compared to $0.71 per diluted share in the fourth quarter last year. I might note that last year would have been $0.67 is you included footnote option expense of 2005. This was the high end our adjusted earnings guidance range of $0.65 to $0.70.

We ended the year with a strong balance sheet. Cash and short-term investments increased by $19.4 million to $53.7 million from $34.3 million last year. Totaled inventory at year end was $420.5 million, up only 1.5% from $414.3 million in the prior year. Our inventory remained well-controlled and reflects the financial disciplines within our Wholesale and Retail segments.

Total debt declined by $19.5 million from the third quarter of 2006, and by $49 million from the fourth quarter of last year. Total debt outstanding was $151 million at the year end, resulting in total debt to capitalization of 22.4%, compared to 31.5% at the end of fiscal 2005.

Capital expenditures totaled $23 million in the quarter, which reflects spending for new stores and remodels as well as infrastructure needs. This brought full year CapEx to $60 million. Additionally, we spent $22.7 million for the earnout payment on the Bennett acquisition. For fiscal 2007 we are planning capital expenditures to range between $60 million and $65 million.

Fiscal 2006 net earnings on a GAAP basis were $65.7 million, or $2.26 per diluted share, including $0.14 per diluted share related to stock option expense. This compares to net earnings of $41 million, or $1.45 per diluted share, in the prior year. Fiscal 2006 earnings include the following items, $0.13 per share -- diluted share in costs of the earnings enhancement plan; $0.08 per diluted share in costs related to the exit of the Bass license; and a net gain of $0.03 per diluted share related to the environmental insurance recoveries net of charges.

Fiscal 2005 included $0.42 per diluted share in tax costs related to the repatriation of foreign earnings; $0.02 per diluted share in costs related to bridge loan associated with the Bennett acquisition; and $0.30 per diluted share associated with the closing costs of our Naturalizer stores. Excluding these costs from both periods and on an adjusted basis, net earnings for fiscal 2006 were $71 million, or $2.44 per diluted share, compared to $62.9 million, or $2.22 per diluted share last year, up 17.3% inclusive a footnote stock option expense in the prior year.

As Ron indicated earlier, this exceeded our beginning of the year guidance range by $0.14 per share, and by $0.01 per share our full year guidance range back on the third quarter call.

See Schedule 4 in our press release for a full reconciliation from GAAP earnings to adjusted earnings and the discussion of non-GAAP financial measures.

Regarding guidance for fiscal 2007, we expect diluted earnings per share on a GAAP basis to range between $2.28 and $2.33 per share on a pre-split basis. On an adjusted basis, we expect earnings per diluted share to be in the range of $2.75 to $2.80 per share, excluding $0.47 per diluted share related to estimated costs of implementing our earnings enhancement plan. This represents a 13 to 15% growth over adjusted earnings per diluted share of $2.44 in fiscal 2006.

Net sales are estimated to be in the range of $2.48 billion to $2.52 billion, which is predicated on same-store sales increase of 2.5 to 3.5%, and an addition of approximately 110 new stores and 45 closings at Famous Footwear. In addition, our guidance reflects solid growth in our brand portfolio, the exit of our Bass license, and an anticipated sales decline in private-label business.

Additionally, we plan a double-digit increase in marketing investment, and an increase of our tax rate to 31.7%, which adds $0.07 per diluted share of cost. For the first quarter of 2007 we expect diluted earnings per share on a GAAP basis to be $0.27 to $0.29. On an adjusted basis we expect diluted earnings per share to be in the range of $0.37 to $0.39 per share, excluding $0.10 per diluted share related to the estimated cost of implementing our earnings enhancement plan. This represents growth of 6 to 11% compared to first quarter 2006 adjusted earnings per diluted share of $0.35.

Net sales are estimated to be in the range $575 million to $585 million, which assumes a same-store sales gain of 2.5 to 3.5% at Famous Footwear.

This guidance reflects our expectations for combined Wholesale sales to be lower than the first quarter of last year, with growth of our branded businesses offset by the exit of the Bass license, and a sales decline in our private-label business.

I would now like to turn the call over to the operator to begin the question and answer portion of the call.

(OPERATOR INSTRUCTIONS). Chris Svezia, Susquehanna Financial Group.

I have actually a couple of questions. I don't know if I can do the one question, but I will try to keep it concise. I guess first on the backlog, I wonder, Ron or Diane, if you could talk a little bit about just kind of what your thoughts are here at year end in terms of backlog, and maybe a little bit of color by each one of the key brands in terms of what you're seeing from a backlog perspective, given it looks like you are expecting overall wholesale business to be down again -- or excuse me, down for this year? Just a little bit color in terms of what is going on.

Sure. I would be happy to. Actually at the end of February our backlog for our total Wholesale business, excluding any comparisons last year to Bass, is up 7.1%. So as we look at the backlog across our branded portfolio, we are actually feeling quite good about the brands that I talked to you about, about Naturalizer, about LifeStride. Also we're showing significant improvement in our Brown New York brands, including Franco and Ona, and Via Spiga as well. So in total I would tell you we're feeling like we're exactly where we need to be to deliver what we have talked about in the forecast that Mark just gave you.

Then correct me if I'm wrong, Diane. You had mentioned -- I think in the press release you commented that you expect the Wholesale business to be down for the fiscal year, is that correct?

Yes. It is going to be flat to slightly down. That really is a comparison again because of the exit of the Bass business, and then also our private-label business or private brand business is down and being offset by the positive gains on the branded side of it.

How much did Bass -- just to remind us -- how much did Bass contribute in '06 to the numbers, or to softline?

We generally don't give out individual brand sales performance, but at one time the Bass brand was in excess of $40 million.

I have a question just on your guidance and on your outlook for the year. You're talking about in terms of your guidance, you did roughly $71 million in net income in '06. And I guess if I look at the cost-saving initiatives, $10 million to $12 million after-tax for the Company, and just kind of simple math, just adding that on in terms of what you did in '06, it looks like you get to the -- just eclipsing the high end of your guidance of $2.80, using the new tax rate.

I'm just curious what other initiatives are going to improve profitability? It seems like a lot of the gains that you're getting in '07 are being driven primarily by this cost-saving initiative. What else is going on? I know you're spending a little bit more on marketing, but where else are going to be the drivers to improve profit?

Again, I think the guidance is somewhat straightforward. I think we have given you -- and established our plan with a conservative revenue assumptions in terms of same-store sales to make certain we manage our expenses appropriately. I think we do face the challenge that we've talked about in terms of overcoming the year-over-year less Wholesale revenues. Those brands absorbed overhead, and part of the earnings enhancement plan is getting our organization efficient to the size of our business for growth.

I think the -- we did earn $244 million this year. And if you take the savings from the earnings enhancement plan, it does get you to the lower end of our range. Offsetting that, you've got the incremental marketing spend, which translates into $0.08 per share and $0.07 on tax. I think you kind of get to apples-to-apples there we planned appropriately.

It looks like, if I understand you correctly, on the Wholesale side of the business obviously you have incremental challenges there, but it seems like incremental benefits and continued comp growth at Famous should organically, I guess, kind of offset that. Is that to some degree how we should be looking at?

Yes.

The last thing, is for Joe. My congratulations to you and your team for a great job at Famous. I'm just curious in terms of the trends that you're going to see I guess over the next six to nine months as we head into early back-to-school. It doesn't seem like there is going to be too much of a change. I was just wondering if maybe you could add a little bit of color in terms of what you have seen as far. Does it continue to be low profile and skate and sandals continue to be the drivers for the business as it unfolds into 2007?

There is not going to be that much change. The biggest change, and you hit most of it, is is going to continue to be in the low profile and product. You're going to see more out of what we consider the nonathletic end of the business, whether that becomes flat from several different vendors. Probably one of the biggest changes we will see, or additions to -- or a continuation is the vulcanized business from an a lot of our vendors. But it will remain in flat vulcanized. And skate will be, along with the continuation low profile, will be the four areas that will continue to push our business into '07.

Are any vendors increasing as a percentage of your business? In other words, incrementally it looks like a little bit more vulcanized. And you talk about maybe a little bit more skate product. Is it being offset by some the more I guess traditional basic running, cross training, classic kind of categories?

It continues to come out of the broad base of athletic., As far as finance there is two parts of that. Additional financing to support the growth in that area, and athletics continue to remain somewhat flat overall as we go into spring of '07. So there are a lot of vendors between Report, Rocket Dog, Rampage, Madden, Roxie, and the list goes on in skate, DC Van Ness, Snow, Hurley and Nike. But those areas of more athletically inspired product continue to gain market share.

Heather Boksen, Sidoti & Co.

You mentioned -- we just are trying to get a handle on these charges. You had $0.10 in earnings enhancement plan charges in Q1, $0.47 for the year. First, can you give us any timing on how those might pan out over the remainder of the year? And also kind of part two of the question would be the benefits for the year. Are any of those going to be realized in Q1, and how will those pan out over the remainder of the year as well?

That is a lot of question in there. I think our guidance, we don't want to get into giving quarterly guidance. And the flow of both those costs, as well as the savings, is an ever-changing process as we go through the details of the more than 20 initiatives. But I think that we reasonably confident that the first quarter breakout is there. And we would probably expect the second quarter to be probably similar to maybe a little heavier. And probably relatively even throughout I guess would be the best way to say it. It could vary gay couple of cents in any quarter.

Let me comment a little bit. This is Ron. I think that sometimes it is hard for you and it is hard for us to sort of communicate, and this is even crisper. But I am trying to give you an expected -- I think we have something like 155 different people working on these projects, which is probably about 40 to 50% of their time.

Each one of these projects is going again charge phased in, phased out. And because we're always talking about projects that are integrated and interloping between, as we said about our distribution and logistics network, as we think about our IT network, and so we continue to balance and phase the work and continue to refine our understanding of how this is all going to continue to work out.

I would tell you this, we meet regularly on this these projects. We have a project management officer who does nothing but meet on these projects every day. And brings back to Diane and Mark and myself and Doug all the different flavors that are going on here. And what I would say here is we're very comfortable and confident with what we thought we laid out last year. We probably did a little better than that as we went through the project, and we probably expect to continue that process.

I think that we are probably looking more in the early second half of the year before I think we bring maybe even greater clarity. Because I think, as Mark said, the work and the progress of the first two quarters is sort of like things that are already in the queue and being worked on and we see that happening. But I think how those go will affect the timing on some of the other initiatives as we go down.

I hope that brings a little flavor for you. But I know it won't bring any more clarity, because the clarity will come as the work gets down.

Just a second question here. Maybe you can give us some more color with respect to what is going on with the private-label part of the Wholesale business. Obviously getting smaller, why strategically I guess do you think it is good idea to focus more on the branded product and to get out of this business? Was it profitable? Maybe just some color.

And I may have Diane join in in a second here as well. Let's see if we can't rewind a couple of years back to before the acquisition at Bennett. Strategically, as we talked about, we began at that time to focus on building a broader portfolio with upmarket opportunities to build upon.

As everyone knows, the farther out market opportunities you had gives you broader breadth to build more product down throughout the filter as we work. That process really started two years ago, and somewhat gets culminated, at least in the current stance, if you think with the work we have done around Brown New York to bring that altogether and to move forward.

Within all of that work was a decision when we acquired Bennett to really shift how they were distributing product, particularly in the Bennett brand, and how much of it was going to lower valued products as well there. That is one piece.

The other pieces of it is clearly we're affected by the continued development at Payless as they look at where they take their business. We have been a partner a long time. And they continue -- as they have announced, they continue to take their business more and more direct. And we certainly have planned for those elements. I think maybe I will stop there and let Diane add any flavor she wants.

I think again it is something that this is not new to us. It has certainly been impacting our business for the last couple of years, and we have managed our way through it. We have really been focused on building what we call our private brand business. So our businesses with Isaac Mizrahi, or Jay-Z, or George or Champion, we're really focusing on making sure we are building those kinds of strategic partnerships on that kind of business. And believe that there continues to be some opportunity there, but it is important again that we really come back and focus on the branded side of the business where there is really higher margin opportunity.

Susan Sansbury, Miller Tabak.

I think you guys addressed what I wanted to talk about, which was the size of the private-label business and the relative profitability. But --.

You know, just a little bit more on that. Again, as we keep looking at our business ahead for quite a while, it really does follow the food chain. As we think about the food chain from a strategic perspective, the lower part of the food chain is what we actually call private-label, meaning it all labeled, and it is all private, and is all about items, and it all out there. And the margins in that segment have always been thin. And given the continued change in the marketplace, we choose not to do more business where there is no margin.

We have a lot of opportunity in our branded portfolio. We don't need to get volume. We are going to do, I think -- one of the guys could probably help me -- I think close to 90 million pair total is there. So we don't need the volume at those low margins elements.

Then again I will go back to what Diane said, there has been a focus over the last couple of years to partner with people who are using private brands to drive some of their elements. We distinguish between private-label and private brands.

And then, in addition to that, with the increased brand preference that our portfolio of nationally recognized brands serves us with, we continue to get greater distribution at the mid tier level, as well as the better grade department store level. So the way we look at the business there is really five channels of distribution and profitability and they somewhat go in order.

Will this affect your Wal-Mart business or your Target's brand, or business done through the discounters, or is this all concentrated at the department store level?

Yes. Hi, Susan, it is Diane. No, not at all, not with Wal-Mart. We obviously -- I think you remember that we do a significant business with Wal-Mart with our Dr. Scholl's brand, and also have done some business with them with George as well. No, it will not affect that at all.

Ronald Hottovy, Next Generation Equity.

Congratulations on a great fourth quarter and 2006. First question had to do with some of the specialty store concepts. And I was wondering if we could first get update on some of the newer concepts you have been testing, namely the Brown Shoe Closet concept? And just generally get a sense as to what you're planning for store openings for 2007. It may be a little bit early, but just directionally which way you may be headed there.

I think that we would refer to all those as pilots at this time. That is where we're at. I think in total we're going to add or decrease -- we probably had some rollover of regular Naturalizer stores that are plus or minus 3 or 4.

We're probably going to be net down about five in Naturalizer, and then on Famous obviously the 110 that we plan to open next year. And then, as Ron said, that our intent is really to continue to test and pilot concepts like Brown Shoe Closet until we have a degree of comfort level that they are concepts that resonate with the consumer, and obviously to our Franco Sarto store as well. We're really making sure that those resonate.

I would tell you that we like what is going on in the pilots, and we're tweeting them. And we think that out of that we ought to have some growth opportunities as we get into '08.

Thank you. That was very helpful. My second question has to do with just the increase in marketing spend. And obviously it seems like there's a bigger focus on increasing brand awareness. I was just curious if you can help us out in terms of what types of media you're looking at on that particular additional advertising spend -- what is new in the pipeline for that?

Sure. It is really sort of split. On the retail side with respect to Famous, our focus is really to put more marketing dollars and more media against the mass communication. We really think that -- we really want to make sure that we're driving awareness of the brand and drive traffic into the stores. So that is primarily what you're doing with Famous.

And on the wholesale side it is a little bit different. It is a little bit more of a focus targeted types of media. So for Naturalizer we are focused with a couple -- actually a core magazine, and a number of others that we're driving all the way through to public relations, and a number of other events that we can work through with people like Self Magazine.

And then with Via Spiga we're working with actually with Vogue. And we've got a fantastic program planned for the back half of this year to really reposition and show case Via Spiga in a really fresh new way. And then on Franco Sarto most of our programs there are directed to more retail specific kinds of activity.

But depending upon what the right need is for each one of those brands, we are trying to tailor our thought process and our efforts to make sure we really get to the right customer base.

Raj Shastri, Thomas Weisel.

First question which I wanted to clarify was if I see your Famous Footwear sales growth, which was around 13%, while comp store was up around 2.9%, so what is fact that the average store size that you opened was much higher than what you did last year? And is that going to be the trend going forward?

Our average store size really didn't increase in '06. If I understand your questions correctly, our footprint averages just under 7,000 square feet in '06. And we will continue that size footprint as we go forward in '07. Did that answer your question?

The difference in the sales growth, which was 13%, and the comp growth I believe was around 3%, so is that -- why is that different? If you can help the do understand that?

Again, I think the -- we had additional stores -- again, the full year affect in '06 of the '05 openings. And I think the average weeks that the '06 stores were open in '06 versus the '05 stores in '05 was up on a year-over-year basis, as well as we were out in front of our opening program for most of the year.

I think it was probably because also because of the additional legal thing, $2.5 million, which you mentioned before.

Yes, that would -- that obviously has some impact on --.

Yes, especially on Famous Footwear.

Right.

Thanks. One more thing which I wanted to discuss. When you talk about the vulcanized footwear, which are the brands are you seeing have more sell-through, and you plan to go forward with in '07?

'07, as far as vulcanized, there are several companies that we're looking at leading that charge. Right off the top of my head, a nice vulcanized program obviously with Skechers, but also with Rocket Dog, Roxie and Keds would be our forward leads going into spring of this year.

Elizabeth Montgomery, SG Cowen.

Congratulations on the great year. I think most of my questions about the private-label business got answered. But, Diane, I guess I have a question longer-term what is your target for what the operating margins should be in the Wholesale business after making these changes, and in the Specialty Retail division?

Let's see how best to answer that. I would say that certainly on our Wholesale business we would be looking to target operating margins in the 8, 9, 10% range is sort of what seems right to me.

We think we're actually -- we have shown significant improvements on our Specialty Retail side of our business. And as we look -- as I mentioned, as we look at the operating margins all-in on Naturalizer, we have been really pleased with that. I would say on the Wholesale side it varies, but all-in somewhere in the 8 to 10%. And I would like to think we could do better than that.

And on Specialty Retail, we really look at that on an all-in basis. And when we look at that on an all-in basis we're now over double-digit on that too. It is hard to tell right now, but that would be my guess overall. That is when I roll in -- actually on the Wholesale side when I roll in all brands, not just the branded portfolio.

The way I think about that now from a strategic sense, as we continue to really help all of us here focus on profitable growth for the future, we continue to believe that the progress that we have made over the last three or four years, while meaningful, still puts us only in the middle of the pack. Our aspiration is to be made top quartile performer.

When we think about that, and we think about the benefits of the earnings enhancement plan three or four years down the road, and the benefits of our branding initiatives that are going to drive more brand preference three or four years down the road, our aspiration, if we get to that upper quadrant of performance, that gets us in that range of increasing operating margins between 150 and 300 basis points over time. And that is really what we use as a planning mindset behind the details.

And I would like to get that out there, because I would like everyone to understand. Our aspiration is to get to that top quartile performance. And we believe a continuing series of initiatives is going to be necessary to get there.

And then bring it back your opening question, and what Diane said, we think top quartile performers in the Wholesale business get over 10%. And we think top quartile performers in the Retail business get over that 8, 9% hurdle. That is where we keep charging ourselves with on a long-term basis.

Thanks. That's really helpful.

Thank you all. I really appreciate your support, and look forward to the call next quarter.

This concludes today's Brown Shoe Company fourth quarter and fiscal year end 2006 financial results conference call. You may now disconnect.