Caleres Inc (CAL) 2007 Q3 法說會逐字稿

Welcome to the third-quarter 2007 Brown Shoe Company Incorporated earnings call.

I would now like to turn the call over to Ken Golden, Director of Investor Relations.

Thank you, Dennis, and good morning.

Welcome to the Brown Shoe third-quarter 2007 financial results conference call.

This call it 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 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 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'd like to turn the call over to a Ron Fromm, Chairman and CEO of Brown Shoe.

Good morning.

Thank you all for joining us this morning.

With me today is Diane Sullivan, our President and Chief Operating Officer, Mark Hood, our Chief Financial Officer, and Joe Wood, President of Brown Shoe Retail.

Clearly, we're not satisfied with our third-quarter results which were slightly below the expectations we set when we began the quarter.

Much like the entire industry, we are operating in a challenging environment for consumer spending.

Confidence was obviously down, weather was unseasonably warm and dry, and there was quite possibly a style lull.

On that last point, I think it has been yet to be determined whether there's a definitive pause in the fashion cycle, or if it is really driven by the abnormal weather, because without the weather catalyst, there has been no compelling need for her to update her wardrobe, particularly in footwear.

While Brown Shoe stood up to these challenges by relying on our key brand strengths of solid execution, [trend-right] product, this is not enough to offset the lower levels of traffic at retailers across the country.

I think, this morning, we will change it up a little bit.

On that note, I think it would be fitting to start off with Mark Hood, who will walk us through the financials and then update guidance.

Then Diane will provide an overview of our performance by operating division, and Joe will provide further details of Famous Footwear's quarter.

Go ahead, Mark.

Thank you, Ron.

Good morning, everyone.

I will focus my remarks on consolidated results, and as Ron said, Diane and Joe will provide color on Retail and Wholesale segments.

Beginning with the review of the income statement, consolidated net sales for the third quarter totaled $645.5 million, compared to $676.8 million in the third quarter of last year.

Much of the sales decline was due to the exit of the Bass license and planned reductions in private label.

However, results were also impacted by unseasonably weather, where the current year's warm temperatures follow last year's, which were the coldest in decades, and consumer reaction to macroeconomic forces.

Gross profit margins increased 40 basis points to 40.3% from 39.9% in the third quarter last year.

This reflects a greater mix of retail business versus wholesale business, 67% in 2007 versus 64% in 2006, and improved gross margins in our wholesale division offset in part by lower absolute margins at Famous Footwear and specialty retail.

SG&A decreased by 4.8% to $217 million or 33.6% of net sales, a 10 basis point improvement as compared to $227.9 million or 33.7% of net sales in the third quarter last year.

The decrease was driven by lower incentive and stock-based compensation cost and savings from the earnings enhancement plan.

This is offset in part by the shift of mix of wholesale versus retail and $4.5 million in earnings enhancement plan costs primarily related to the relocation of our Shoes.com business from Los Angeles to St.

Louis, as well as [reducing] (technical difficulty).

Consolidated operating income for the third quarter of 2007 increased to $42.8 million or 6.6% of net sales from $42 million or 6.2% of net sales in the third quarter last year.

Net interest expense totaled $2.8 million compared to $3.7 million in the prior-year period.

The decrease in net interest expense was due to higher cash balances over the year-ago period.

We had no outstanding borrowings under our revolving credit facility at the end of the third quarter.

On an adjusted basis, excluding the earnings enhancement plan charges in the current quarter and costs related to the exit of the Bass business in 2006 which are summarized in Schedule 4 of our press release, we achieved net earnings of $29.9 million or $0.67 per diluted share, compared to $0.65 last year.

We ended the quarter with a strong balance sheet.

Cash and short-term investments were up 68% to nearly $80 million from $47.5 million at the end of last year's third quarter.

Total inventory at quarter end was $441 million, up from $434 million in the prior-year period.

Inventory at Famous Footwear was up $18 million or about 6%, while our store count was up 8%.

Thus, on a per-store basis, inventory was down 2% at Famous Footwear.

Inventory at wholesale was down 24% from a year ago, versus an 11.8% sales decline.

Total debt outstanding at the end of the quarter was $150 million compared to $170.5 million in the prior-year period.

As a result, total debt capitalization at the end of the third quarter was 20.2% compared to 25.4% at the end of the third quarter of 2006.

Capital expenditures in the quarter totaled $13.1 million, which reflects spending for new stores and remodels, as well as infrastructure.

For fiscal 2007, we are now forecasting capital expenditures to be approximately $40 million to $45 million, down from our prior estimates.

Regarding guidance for fiscal year 2007, for the full year, we now expect diluted earnings per share on a GAAP basis in the range of $1.40 to $1.45 per share.

This guidance includes the estimated cost related to our earnings enhancement plan of $0.25 per diluted share.

On an adjusted basis, excluding these costs, we expect earnings per diluted share to be in the range of $1.65 to $1.70 per share.

This represents growth of 1% to 4% over adjusted earnings per diluted share of $1.63 in fiscal 2006.

Net sales have been adjusted to be in the range of $2.38 billion to $2.39 billion, which is predicated on the same-store sales of flat to down 1% and an addition of approximately 110 new store openings and 30 to 35 closings at Famous Footwear.

We not estimate wholesale sales to be down approximately 14% to 15% versus 2006 levels.

However, as we detailed on the last call, we expect full-year 2008 wholesale sales to be up in mid single digits over 2007.

We now expect a 300 basis point increase in our effective tax rate in 2007 due to a lower mix of foreign earnings.

For the fourth quarter of 2007, we expect diluted earnings per share on a GAAP basis to be in the range of $0.36 to $0.41 per share, as compared to $0.31 in the fourth quarter of last year.

This guidance range includes estimated charges related to the earnings enhancement plan of $0.03 per share.

Please note that the earnings in the fourth quarter of 2006 included charges of $0.16 per diluted share for cost related to exit of the Bass license, the earnings enhancement program, and environmental remediation.

On an adjusted basis, excluding the earnings enhancement charges, we expect fourth-quarter 2007 earnings per diluted share in the range of $0.39 to $0.44 per share, versus 2006 adjusted earnings per diluted share of $0.47.

It is important to note that Q4 2007 will be 13 weeks, whereas the fourth quarter of 2006 was comprised of 14 weeks.

Net sales are estimated to be in the range of $595 million to $605 million, which is predicated on a same-store sales change of flat to down 2% at Famous Footwear.

Wholesale sales in the quarter are expected to be down 16% to 17%.

Now, I'd like to turn the call over to Diane.

Thanks, Mark, and good morning, everyone.

We are pleased with how we managed the business in the quarter, and I will provide some details momentarily.

But I would like to first address the weaker sales performance.

Sales were roughly $30 million below last year.

As we've discussed previously, this was driven in part by what we knew when we planned the quarter, namely the gap left by the Bass business and lower private-label sales.

However, what was unanticipated was the softness at retail which contributed to our disappointing results at Famous Footwear and fewer in-season reorders from our retail partners on the wholesale side of the business.

Some of this was offset with a good quarter from Dr.

Scholl's, Aigner, Franco Sarto, and pretty solid results from Naturalizer and LifeStride as well.

On the other hand, we had a number of things to be pleased about in the quarter.

Clearly, the results speak to the fact that we managed the business extremely well.

Inventory at Famous Footwear was down on a per-store basis and down significantly at wholesale, and we're well-positioned from an inventory standpoint as we enter the fourth quarter.

This altogether resulted in stronger margins overall.

In particular, Wholesale registered its third straight quarter of at least 110 basis point improvement in gross margins, attesting to the success of our repositioning of the Wholesale portfolio towards higher-margin businesses.

Our international expansion got underway as well in the quarter as we opened our first stores in mainland China with our joint venture partner, B&H, Brown Shoe and Hongguo.

As you know, we plan to open a total of 500 points of distribution over the next five years and we look to continue to explore additional means to grow our brands globally.

We also made progress this quarter on our earnings enhancement plan initiative as we moved Shoes.com operations from L.A.

to St.

Louis with the intent of leveraging resources to grow this business more profitably.

We really are very thrilled with some of the new talent that has joined the team there in Shoes.com; we're very excited about that.

But now, let me provide a little color to the quarter on a segment basis.

Beginning with our flagship brand, Famous Footwear, which generated total sales of $361 million in the quarter, this was down 1.4% over the quarter last year, while same-store sales were down 6.2% for the quarter or down 2.6% on a comparable calendar basis.

That was a tongue-twister!

As many of you know, third quarter last year was an all-time high for the brand, so comparisons were difficult.

Joe will provide more detail shortly, but it was really a tale of two halves in the quarter.

Sales during the back-to-school season in the first half of the quarter were markedly better than in the second half, which we attribute to both the economic factors and the unseasonable weather discussed earlier in the call.

But the team managed margins and inventory well, and we are positioned to execute very well in the fourth quarter.

Moving on to our 278-store specialty retail division, which primarily consists of our Naturalizer retail stores and Shoes.com businesses, we continue to be pleased with the progress this segment has made during the last several quarters.

Sales were up 3.8% in the quarter to $70.8 million, as Shoes.com grew 29% in the quarter and we also benefited from the effects of the exchange rate in our Canadian stores.

In our retail stores overall, same-store sales were down 1.9%.

We experienced a solid start to the quarter in August, but like others, struggled in September and October.

The team also managed margins well during the quarter, resulting in an operating loss of $1.9 million, which included costs of $2.8 million from the earnings enhancement plan.

This was primarily related to the relocation of the Shoes.com offices from L.A.

to St.

Louis.

We relocated 50 positions to our headquarters, and we expect the repositioning of this business and the ongoing integration to the Brown platform to continue through the end of the year.

Our expectations continue to be high for our [D to C] business, which we believe will contribute significantly to the top line over the next several years while generating mid single digit operating margins.

I just have to say the teams did a great job of moving the business and limiting the disruption during the quarter.

Turning to Wholesale, sales for the quarter totaled $213.7 million, a decline of 11.8% from the same period last year, which was below our expectations, driven as I mentioned by lower in-season reorders at retail and a planned reduction in private-label as well as the exit of the Bass business.

The key story here is the excellent margin and inventory management this team produced during the quarter.

Trends and risks were identified and action was taken quickly to deal with the soft retail environment and to mitigate as much risk as possible.

As a result, gross margins increased 110 basis points in the quarter to 30.5%.

Operating profit increased 15.6% to $23.1 million on roughly $30 million less in sales.

This resulted in an operating margin of 10.8% versus 8.3% of sales last year, which also included costs related to the Bass exit.

Pulling out the earnings enhancement costs in the third quarter this year and the Bass exit costs in Q3 of '06, operating margins grew 11% versus 9.2%.

Also, impressively, inventory was down 24% in the quarter overall, which is a testament to our consumer-driven model, the hard work of our team, and the shift in buying patterns of our customers.

Our inventory position as we look too the pipeline is clean and boots have been managed well all season.

Just a quick update on Brown New York, where we are continuing to see progress with these brands.

In particular, feedback on the product has been exceptional, reflecting the changes we continue to make to our management and product and design teams at Brown New York.

We expect to see double-digit growth from this group in the fourth quarter.

Additionally, the third quarter also saw the launch of natural sole in Kohl's, which has met our expectations.

In closing, we're focused on managing the year to the best outcome possible while setting ourselves up well for 2008.

We continue to move our portfolio towards a more profitable mix of businesses while at the same time increasing investments into our growth vehicle.

Now, I'd like to turn the call over to Joe, who is going to review Famous Footwear's quarter in more detail.

Thank you, Diane, and good morning, everyone.

As my colleagues comment, Famous Footwear endured a tough quarter and back-to-school period.

As we began the quarter, we knew we faced headwinds due to the retail calendar shift and the tough comparison to last year.

We expected to offset this with strong assortments and a sharp marketing message.

However, lower traffic counts, especially in September and October, caused both sales and earnings to come in below the prior year and our expectations.

Despite the reductions in traffic, we maintained our operating philosophy for markdown cadence, as we knew it would not be productive to increase promotions in a lower-traffic environment.

We also kept to our strict inventory disciplines and only increased promotions the last weekend of October and our merchants worked to maintain clean inventory levels.

In total, Famous Footwear sales of $361 million were down from $366.3 million for the third quarter last year.

Same-store sales for the quarter decreased 6.2% or 2.6% on a comparable calendar basis, which compares to an 8.2% same-store sales increase in the year-ago period.

Lower sales, along with the slight decline in gross margin rate and a lack of leverage on expenses, led to a 22% decline in operating earnings to $30.8 million or 8.5% of sales, compared to $39.6 million or 10.8% of sales last year.

To review the metrics, lack of traffic was a story.

While the average (inaudible) retails were up about 1%, conversions were down 1.9%, a traffic decline of 6%, which was 3% on a comparable calendar basis.

All channels were affected during the back-to-school timeframe, both mall, strips and outlets.

By category, our kids business performed well with sales up 3% store-for-store.

Accessories also continued its pas trend and it was up 5% on a store-for-store basis.

Athletics during the time frame was basically flat.

However, these increases were more than offset by a same-store sales declined 8% in our women's business and 10% in men's.

Regarding our stores, we continue to be pleased with our new store and remodel programs.

Our remodel initiative remains on track with over 80% of our go-forward stores now complete.

During the quarter, we opened 51 stores and closed 15, ending the quarter with 1,060 locations.

For the year, we remain on track to open a total of 110 locations while closing 35.

As we enter the holiday season, we believe our inventory is in good shape and our assortments are reflective of key trends.

Now, that said, we expect this period to be promotional, and we believe we are prepared for such.

To maximize our traffic and sustain and grow our market share, we started our November holiday promotions earlier this year, with favorable results.

As we look at January promotions, we're focused on two distinct and different customer profiles.

The first is the clearance customer looking for a good deal.

The second is targeted at a younger consumer who comes in after the holidays with cash to shop for new.

Additional marketing efforts will be placed to maximize their spend while they are in our stores during this time frame.

We will continue our prudent control of expenses and adhere to our (inaudible) philosophy inventory metrics as we always have.

As we look to fiscal 2008, our key priorities are to maintain the flow of newness.

We remain excited by the number of new offerings that Nike is introducing to our channel next year, along with many of our other vendors.

We remain committed to our store expansion plans for 2008.

To date, we've negotiated leases on 128 of the targeted 130 sites that we will open.

In summary, I am confident that Famous Footwear possesses the talent and discipline to manage its business well during the fourth quarter, concentrating on maximizing our sales, product flow, ending inventory, and expenses.

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

Thanks, Joe.

Just a couple of additional comments on Joe's remarks here.

Early November business driven by strong promotion -- we did produce the type of sales increases we had expected and we are pretty pleased with that.

Coming on Cyber Monday -- because we did just move all our operations to St.

Louis and we were extremely pleased with Cyber Monday, had a record Day and I think Diane or Joe can comment.

It was 60%, or 70% --

Diane Sullivan 89% up.

-- 89% up, but there's a little compatibility with where we are in the cycle there as well.

But again, as we look forward, we continue to be thoughtful and cautious about the amount of activity, both promotionally and trying to drive customers and customer traffic into a store causes us to be thoughtful about the business as we guide and drive the business in the fourth quarter.

While we are disappointed with the results, you know, it really was a difficult environment and I think the team does a great job and I think it continues to show.

We manage the business well.

I also think it speaks to the power of our multi-channel platform leveraging the synergies between retail, wholesale and eCommerce across the enterprise.

I think this model has shown it stands up well in difficult times but more importantly, it will provide us with the opportunity to grow in better times.

As such, we're focused on delivering the year but equally focused on continuing to build the infrastructure and executing against the initiatives designed to assist us in our goal of doubling sales and the rate of profitability over next five years.

While the wind may be in our faces now, after a number of strong quarters for the footwear industry, we continue to be encouraged.

I can show you that we still have the passion and energy, as well as our teams, to drive the enterprise success.

Now, why don't we take the time to turn the call over to you and the operator so we can answer questions?

Please ask one question and a follow-up.

If you've got additional questions, please return to the queue.

At this time, we will conduct the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Mr.

Shanley, Susquehanna Financial Group.

Thank you and good morning.

Joe, I wonder if you can give us some details in terms of the poor traffic levels that you mentioned.

Did the store traffic levels decline pretty much in sync with the sales decline, particularly in the back end of the quarter?

Have those traffic levels improved to any degree, since we note that some of the recent visits to your stores, that you're running BOGO and it seems to be a lot more promotional here in November than it had been earlier in the quarter?

Is the traffic level coming back to any degree?

Let me -- I think there were several questions in there, John, so let me see if I can kind of answer them -- was that during back-to-school, traffic was okay, really, in August.

I mean, it was down a little bit but August was a fairly decent month.

You know, we are -- traffic really declined, John, in all three channels.

It was obviously in September, then October was very poor.

What we did see come back -- and traffic continued to decline from in September into October.

We have seen traffic come back slightly.

It's still in the negative in November, so we are still experiencing a customer decline, especially as we look at the first couple of weeks, but again, not as severe as November.

Promotionally, John, the only thing we did is we usually started our promotions mid-November.

We moved them up by two weeks.

It made sense to do so.

We received favorable comments and sales results from that, but we really haven't gotten any more aggressive with our promotions, other than starting it two weeks earlier in November.

I don't remember, Joe, whether last year you did the promotion across all product categories that seems to be going on now.

Was that the case last year as well?

Yes it was, John.

(multiple speakers)

Then one quick question -- the expectation that the private-label business is going to return to a sales increase next year -- is that based on actual orders that you've booked, and have you been able to fill the gap based on the loss of some of the Payless business with other value channels?

We believe that we have stabilized the private-label business, John.

We don't necessarily believe that it's going to grow next year.

We are really shifting the mix in the entire portfolio towards much higher-margin businesses.

So we believe we have stabilized that piece of it, which will allow us to grow next year.

Ms.

Boksen, Sidoti & Co.

Good morning.

John already kind of touched on it, but with the comp decline accelerating in the back half of the quarter, how much of that -- and since improving in November when it got colder -- how much of that would you say was weather-related and how much would be the other factors?

You know, I think, whether it's us or anyone else, that becomes speculation but speculation only from the fact, if you take a look at our boot sales as weather got colder and you take a look at athletic, historically, as sit gets colder, our colder weather inventory sells well; athletics have a tendency to take a back seat.

That has happened especially over the last two weeks as we have gotten some colder weather.

So, the trend has always been the same.

We have seen an increase in our boot business especially in the last two weeks.

Okay.

I guess a follow-up with that and I guess this could be for Joe and Diane -- looking ahead to spring, what are you seeing in terms of trends and particularly for the wholesale business, you know, obviously the department stores have been struggling this half?

What are you seeing from them in terms of I guess what's their -- you know -- what is their outlook going into spring and what's the sense you're getting from them?

The sense that we're getting from them is that they continue to be cautious, cautiously optimistic that, as we move our way through the fourth quarter turning into 2008, things will stabilize a little bit.

I think everybody is still trying to wait and see what the consumer is going to do and how traffic is going to be affected, but I wouldn't say we are looking at things in a dire way.

I think everyone is trying to be really smart about the way they are managing their business.

As Joe indicated in the way he is thinking about it, continuing to bring in new goods and flow goods smartly and give the consumer choices and maintain that freshness is going to be key in order to get to move out of the lull that we're in.

Then in terms of categories, we are seeing a little bit of a shift towards more casual and casual-dressed type product and less dress in the marketplace, and continuing interest in low-profile and sport kinds of products too.

So that's kind of the shift that we are seeing out there in terms of the way purchases are looking.

Joe, I don't know if you would add to that.

No, I would agree.

As we take a look, as we get to the first of year -- when I say first of the year, retail-wise, especially January, then the product flow changes more toward athletic as we take a look at spring with large receipts both at the end of January and the beginning of February.

So on top of your comments, Diane, it's also the athletic business really kicks us into spring looking forward to the new deliveries, both from Nike and our skate vendors as we get to the first of the year.

Mr.

Hottovy, Next Generation Equity Research.

Good morning, everyone.

The first question I had just had to do with the international operations.

Obviously, it's a bit early with just having opened up the china stores as well as the Japan stores, if you could give us a little bit more than update as to what you see in terms of next year, how many stores you might be looking at in China, and maybe possibly just other, just any detail you could give us there?

Sure, I will start and let any of my colleagues chip in on that.

We have about 15 to 20 points of distribution at this point in time and expect to add another 10 to 15 through the end of this year and as we turn to next year.

I think our expectation is another 50 or so.

You know, it's a little early to tell exactly how that's all going to play out and when that's going to happen because we are really just finishing up really the first 60 days of product in the stores.

The reaction so far, in terms of the Naturalizer brand in China, has been solid.

Their retail performance has been good.

As you can expect, we are learning a lot about how the consumer is going to respond to the brand and the products and making the changes along the way as we need to.

We are very excited by the team of people that we have there.

A terrific guy named Howard Herman is heading that operation up over there in China.

He's a guy that has been around Brown Shoe Company now for a while and is just doing a terrific job there.

I don't know if Ron or Mark would want to add anything on China.

No, I think that sums it up pretty well, Diane.

I think we are very optimistic that we've gotten off to a good start, and the work is ahead and we will be opening as fast as it makes sense to do, but focusing more on the quality of locations and space than absolute numbers.

I think probably a couple of important differences -- a lot more focus on the product development cycle in China.

We have the ability, in our offices in DongGuan to do (inaudible) production and get in test and (inaudible) product on a regular basis.

So I think,0 as these stores open, that inventory turn, etc., is expected to improve dramatically, and I think we are very excited.

But mostly, we are excited because we have a very seasoned team.

As Diane said, Howard has actually worked for us now I think 15 or 16 years, and speaks fluent Mandarin and has spent the last couple of years working in our St.

Louis office and now is over there.

So I think we are in capable hands.

We have spent a lot of time with the Hongguo team this last month.

Again, I think Mr.

(inaudible) is just absolutely a first-rate retailer, is operating over I believe 700 doors of retail distribution right now.

So I think we're in good hands and it's early, and we will report back to you as we get a little more.

Okay, it sounds like it's off to a great start.

My follow-up question just has to do with some of the brand expansion opportunities you might see in the brand, New York group.

Just with valuations coming in, particularly in the footwear industry over the past couple of months, are you seeing any more opportunities arise to kind of build out that portfolio?

Any commentary you could give us there?

Well, I think, as we probably say quite often, I think our team takes a very good look, we have a lot of open to look.

There's a lot of moving parts, as everything in the industry always seems to be available.

I think we've designed a nice pipeline review, as we can understand which things are sort of being discussed out there and continue to look.

I think we've been very focused on getting the Brown New York team in place and making sure the product is right first.

We certainly have made great progress and I think we are looking forward to '08 to verify that.

We don't have anything that we would obviously be discussing with you if we had anything imminent, and we continue to think there are opportunities and we certainly expect to pursue them.

Okay, thanks.

Ms.

Caruthers, Johnson Rice.

Good morning.

I was hoping you could talk a little bit more about, on the wholesale side, fewer reorders in season, if you could perhaps quantify that and maybe talk about when do you get the bulk of spring orders and how we can look for timing on that.

Sure.

The reorders -- the third quarter, when we look at the fall season, is really the quarter where we get the most immediates of reorders.

Because of the way -- two reasons -- because of the way we manage the inventory and obviously the retail environment, reorders were down substantially.

It depends on the brand, but we manage that we think exactly right.

Anywhere between 10% and 20% we were down, in terms of our reorders.

Again, we think that was the right play because we have been able again to really make sure we continue to expand margin and within the operating margins also obviously for the quarter.

We are a lot better had we not managed the flow of product prior to retail.

Our order base, actually I don't know where we stand right now, you guys.

We are getting -- obviously we've got a lot of first quarter (inaudible) really through, I would say, February-March right now, and in terms of any other numbers (inaudible) on backlog and where we (multiple speakers).

Backlog I have in front of me, Diane -- is as of the end of October, so it's a little bit stale in terms of that.

But I think where we ended the quarter, I think our fourth-quarter portion of an order was in line with our expected sales for the fourth quarter.

It's a very solid start to the 2008 first quarter, you know, up decently over the prior year, but it's a little thin, so I won't give the exact number (multiple speakers) percentage increase there.

Okay.

Okay.

Maybe a follow-up is, on the earnings enhancement plan, I know you've quantified costs that flowed through each quarter.

Now, it looks like it you are seeing more benefits materialize from these initiatives.

Maybe you could just talk a little bit more about that, some of the key areas where you are seeing these benefits materialize.

Thank you.

Yes, I will take that one, I guess.

Again, I think the benefits clearly come over time.

I think we remain on track to deliver the results that we've promised through the end of '08.

I think certainly, when you look at the performance in the third quarter, one of the reasons we were able to deliver our profits or nearly deliver our profits while missing significantly on the top line is we have had the program going on, and it is ready broad-based in terms of where we are getting the savings and the reductions in headcount associated with consolidation activities.

You know, the warehouse combinations, etc.

just continue to benefit us as we get deeper into the year.

Mr.

[Sole], Morgan Stanley.

I just have a question on the -- Mark, you mentioned the debt-to-cap this quarter is down to about 20%.

With the stock probably right now trading around five times EBITDA, what are your current thoughts about the capital structure, in regards to the debt, maybe a buyback, the dividend?

Can you talk about that a little bit for us, please?

Yes.

I think obviously we've continued to work on maintaining our balance sheet flexibility following the Bennett acquisition and have been in a strong cash-generation over the last 12 to 18 months.

I think, as we've continued to talk about, we have some upcoming infrastructure capital expenditures that will be a use of some of the cash.

We remain, as Ron indicated earlier, interested in adding wholesale brands, and we continually review with our Board opportunities relative to share repurchase.

We have a 2.4 million share repurchase program authorized but we have not utilized that over the last couple of years.

Okay, well, great.

With regard to CapEx, you mentioned it would be down.

I think the new guidance was about maybe $15 million, roughly, to $20 million lower than it was previously.

Where is the change there?

Can you talk about maybe what's not (multiple speakers)?

Yes.

Really, it's a delay in an execution on a couple of our POP initiatives relative to logistics and IT, where the work of determining exactly what we are going to do and the timeframe we're going to do it is taking a little bit longer than we would have contemplated when we set our capital expenditure target.

Ms.

Montgomery, Cowen.

Most of my questions have been answered, but I wondered.

Diane, could you speak to the difference in the relative strength of the comp business during the quarter between Naturalizer and Famous Footwear?

Then, Joe, is there anything you guys can do through the Frequent Shopper program that you have at Famous Footwear to maybe help drive some traffic in Q4?

If so, are you doing it?

Thanks.

Okay, let me talk a little bit about traffic and comps and get this Naturalizer retail stores, which are adding about (inaudible) versus Famous Footwear.

You know, I think, in Naturalizer, it was we were really fortunate.

You know, it was the flow and the way that the sort of month came through, whether it was -- August seemed pretty strong and then a little bit weaker in September and October.

It wasn't quite as impacted in the same way as Famous was during that time period.

I think, additionally, the customer that we have for Naturalizer and Naturalizer stores is a little bit different, too.

That customer is very, very loyal to the brand.

I think we've benefited a little bit in terms of traffic to the stores, relative to Famous, because of that, that loyalty.

I think Joe maybe, just in terms of -- in Famous, I think the other point that my friends here are reminding me -- so that was a much easier comparison for Naturalizer versus Famous Footwear without question.

If you recall, I think it was a little over 8% last year comps at Famous, versus Naturalizer was probably 2%, 1% or 25, so that's another major, major difference, clearly, between the performance of the two businesses.

I think, answering -- trying to answer part of your question is that focusing on our rewards consumers and talking to her directly, that now represents -- that customer now represents over 50% of our sales.

We obviously are focusing on additional focus on December and January, talking directly to her to change the traffic trend and the sales trend that we saw during the third quarter.

As a follow-up, could I just ask what percentage boots are normally in Q4?

Yes, probably -- I would tell you, it's probably somewhere between 30% and 35%, in total, normally.

That was in total for wholesale.

For Famous, I know it's quite a bit less than that.

It's important number but not a significant number to change our business one way or the other.

Mr.

Poser, Sterne Agee.

Good morning.

I just have a couple of follow-ups.

Number one -- you mentioned that your inventory per square foot at Famous is down.

Can you give us what the total square footage is right now, Joe?

(LAUGHTER)

No --

One of our folks will look it up.

We will either get back to you while you're still on the call, or we will get back to you there.

Our square footage, Sam, was about 7.4 million square feet at the end of the third quarter.

Okay, thanks.

Can you talk about what the -- Joe, the gross margin, SG&A was and could you give us the specifics for that for Q3 right now, and also what your assumptions are looking ahead to Q4?

Well, Sam, I'm sorry, repeat again?

The gross margins for Q3 versus Q4 or SG&A?

The gross margins, the actual gross margin and SG&A for Q3, and then how you are looking for that for Q4 as well?

Again, the details of the gross margin will be out in the 10-Q in a week or so, but I think, on a relative basis, the gross margins (inaudible) payments in the quarter were down about 70 basis points year-over-year.

We had a little less benefit from the freshness of inventory in the current year, as we were going up against those stronger numbers from a year ago.

The operating expenses were down about 120 basis points, I think -- or excuse me, I think they were up.

The leverage from the lack of sales drove the expense ratio up there about 120 basis points.

Sam, I don't expect erosion on the margin in the fourth quarter, so right now, my inventory is clean.

I don't see a lot of pressure there going in the fourth quarter.

We really don't give line item guidance in the fourth quarter.

Mr.

Shanley, Susquehanna Financial Group.

I just have one follow-up question.

Joe, are there any brands or styles that you are anticipating bringing in for the spring '08 selling season that you think may help to reintegrate the men's and women's nonathletic footwear segment of your merchandise mix?

You know, we are right now but I really don't want to comment on that, but we do expect some additional brands into spring of '08 to enhance some of our business, especially taking a look at the dress and casual that we have been struggling with during the third quarter.

Maybe you could just give us an idea.

What seems to be the problem with those two product categories?

Is it just the lack of interest on the part of the consumer, or is it related to a dis-interest in some of the apparel products that would stimulate footwear sales that would go with those apparel wardrobe items?

John, you know, I don't think that the wardrobe right now is a major factor.

I mean, it is more so.

If we took a look by total categories, especially in women's demands, it was more or less the same story this year as it was last year, although those categories were expanded even further in number of styles.

So I think it's more so that we filled their closet and they are looking for something new, so it was last year in '06, it was a great story.

It was the same story but bigger in '07.

At some point, you fill the closet and they are looking for something new.

So, I think it's a newness of styles coming in the first quarter of next year that's going to turn that consumer trend around.

Mr.

[Sole], Morgan Stanley.

Hi.

I just had one follow-up question.

Just looking at it big-picture perspective, the EBIT margin on an adjusted basis, the way I'm calculating it, was about 7.3% this quarter.

That's the highest it's been in quite a few quarters, at least ten or so.

Because that -- you know, it's such a tough retail environment, being able to have such a high margin, have you rethought any of your margin goals for where you see this business being able to go down the road, maybe two, three, four or five years?

Again, I think we have been pretty consistent in saying that our objective would be to double our operating margins.

I think, obviously, the results in the quarter speak to a progress towards that goal, but we haven't changed the goal.

Ms.

Boksen, Sidoti & Co.

I just wanted one quick follow-up with regards to the earnings enhancement plan.

Maybe this is just a change in the way you are wording it but you mentioned, in the press release, after tax benefits, upon completion in late '08, continue to be $17 million to $20 million.

Are we going to see $17 million to $20 million in benefit in '08, or will that be late '08 into '09?

Again, I think we -- I don't think we consciously changed the wording there, but the intent remains the same, and that's cumulative from the beginning of the program to have been completed by that point in time.

I think we would have some ongoing run-rate benefits beyond that.

But that would be what would be realized.

All right, thanks.

Mr.

Fromm, there are no further questions at this time.

Please continue with any closing remarks you may have.

Thank you all for joining us.

We look forward to seeing you next quarter.

Hopefully, we will have a better story and better results.

I'm sure we will see a lot of you next week at Fannie as well.

This concludes today's third-quarter 2007 Brown Shoe Company Incorporated earnings call.

You may now disconnect.