Caleres Inc (CAL) 2007 Q4 法說會逐字稿

Welcome to the Brown Shoe Company fourth quarter and year end earnings call.

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

Thank you, Regina.

Good morning, everyone.

Welcome to the Brown Shoe fourth quarter and full year 2007 financial results conference call.

This call 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 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 Ron Fromm, Chairman and CEO of Brown Shoe.

Good morning.

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

Following my opening remarks, Mark and Joe and Diane will cover the quarter and then we'll open it up for questions.

Let me begin by stating the obvious.

Our fourth quarter results were disappointing, reflecting the tough consumer spending environment and an uninspiring fashion season, which followed the two solid years of growth.

During the quarter, our efforts were focused on maximizing profitability, applying our successful operating disciplines of inventory management and expense management while continuing to implement the initiatives to position Brown Shoe for a long-term growth.

As a result of these efforts, all in, we were able to deliver adjusted earnings at the low end of our guidance range.

Looking ahead, we continue to expect this environment to be difficult, certainly through the first half of the year.

However, we have seen difficult times in the past, and while we are planning the year cautiously, we believe that we have positioned ourselves to succeed in the current marketplace due to the following factors.

Our retail integrated wholesale platform and portfolio brands are built to mitigate risk.

By owning multiple channels of distribution, we capture numerous consumer insights that can be leveraged across our enterprise.

Our vertical integration of distribution and supply chain provides faster and more complete reads from the register to materials procurement.

Secondly, our portfolio of brands and retail concepts spans price points, categories and channels providing unique diversification, thereby creating added resiliency during uncertain consumer markets like we currently have.

Next, our scale helps us navigate through more turbulent times due to our long-term partnerships on both the supply and retail sides and provides both flexibility and controls.

Certainly given the circumstances that we are facing in the Far East, our sourcing capabilities and our external partners' capabilities will allow us to assure a solid supply to footwear to the market.

And we have a history of being a reliable business partner.

Quite frankly it's a beacon of comfort to our customers in uncertain times.

While we will work to tighten our belts, we also will continue to invest and build for our future.

We are developing new ventures internationally.

Brown Shoe brands are distributed in 35 countries around the globe through multiple vehicles, and we announced new initiatives in 2007 to grow our presence, including B&H Footwear in China, additional Naturalizer stores in Japan, and we have entered into an agreement with SLL International to market our Dr.

Scholl's brand in Japan as well.

We continue to add new businesses to our brand portfolio with Reba and our minority interest in Sam Edelman coming during the course of the year.

Likewise, we continue to make investments into our enterprise to position ourselves for future success.

These investments include product development and design talent and processes as well as samplemaking capabilities, initiatives to make our supply chain more efficient, increasing our distribution and logistics capabilities, store investments to improve the retail experience for our customers and developing the next generation of formats and concepts.

And we continue to enhance our marketing capabilities as we focus on our higher growth brands, Famous Footwear, Naturalizer, Via Spiga and Franco Sarto while improving the efficiency and effectiveness of these marketing efforts.

So while the marketplace is certainly difficult, I believe history shows that Brown Shoe Company performs well in these difficult times.

Looking to the immediate future, you should expect that we will continue to focus on strong execution to deliver the year while at the same time we are aggressively looking for opportunities to take share in the marketplace.

On that note, I'll turn the call over to Mark, and he'll take you through some of the financials.

Thank you, Ron.

Good morning, everyone.

I will focus my remarks on consolidated results.

As a reminder, the fourth quarter of 2006 included an extra week because of that 53-week fiscal calendar in 2006.

The additional week resulted in $22.5 million in sales in 2006, but did not materially impact net earnings or net earnings per diluted share.

Beginning with a review of the income statement, consolidated net sales for the fourth quarter totaled $571.4 million, down 10.6 compared to $639.3 million in the fourth quarter last year.

The sales decline is attributed to a larger than expected decline in wholesale sales.

Sales were down 22% from fourth quarter 2006 levels versus our expectations of down 15% to 16%.

While we planned for additional reductions in private label sales as well as the comparison with the exited Bass business, most of our brands were affected by the difficult consumer environment and tighter shipping windows as retailers managed their inventory cautiously.

The impact of the 53rd week is previously discussed.

Lastly, the impact of the 1.7% decline in same-store sales performance at Famous Footwear.

Gross margins decreased 70 basis points to 39% from 39.7% in the fourth quarter last year.

This decrease was largely the result of higher promotional activity at Famous Footwear as we moved to aggressively clear inventory and maintain freshness.

Our wholesale gross margins were up about 20 basis points in the quarter.

SG&A declined by $27.8 million to $204.8 million or 35.8% of net sales compared to $232.6 million or 36.4% of sales in the fourth quarter last year.

The decline in the quarter resulted from one less week of costs due to the comparison to the 14-week quarter in 2006, lower incentive compensation costs and lower non-recurring costs from both the Earnings Enhancement Plan and environmental remediation costs incurred in the prior year.

As a result, consolidated operating income decreased to $17.5 million or 3.1% of net sales from $21.3 million or 3.3% of net sales in the fourth quarter last year.

Net interest expense totaled $2.9 million in the fourth quarter, flat with last year.

The Company's tax rate in the fourth quarter was 4% versus 25.9% in the fourth quarter last year.

The lower tax rate resulted from the continuing shift of efforts of our Far East operations to support our branded product business resulting in greater cost deductibility and higher tax jurisdictions, as well as the business impact of lower retail earnings, which operate at a higher tax rate than the Company's wholesale business.

Net earnings in the fourth quarter were $14 million or $0.33 per diluted share versus $13.6 million or $0.31 per diluted share in the year ago quarter.

On an adjusted basis, excluding the Earnings Enhancement Plan charges in the current year and year-ago quarter as well as costs related to the environmental remediation activities, and the exit of the Bass business in 2006, which are summarized in schedule 4 of our press release, we achieved adjusted net earnings of $16.5 million or $0.39 per diluted share compared to $20.6 million or $0.47 per diluted share last year.

Looking at the full year, our team executed well controlling costs, maintaining inventory discipline and adjusting quickly to changing business conditions which allowed us to meet the low end of our revised expectations.

We delivered earnings per diluted share of $1.65 on an adjusted basis versus $1.63 per diluted share in 2006.

Moving to our financial condition, we ended the quarter with a strong balance sheet.

Cash and cash equivalents were up 11% to nearly $60 million from $53.7 million at the end of last year.

Total inventory was $435.7 million, up from $420.5 million at the prior year end.

Inventory at Famous Footwear was up 3.9% to $306.7 million, however, on a per store basis, inventory was down 3%.

And although our inventory of wholesale was up 5% from a year ago it is well below our on-order backlog which was up 11% at year end.

Total debt outstanding at year end was $165 million, as compared to $151 million at the end of 2006, reflecting higher borrowings from our credit facility.

This increased borrowing results from the $41.1 million of cash used to repurchase 2.4 million shares of our common stock in the quarter.

Total debt to capitalization at the end of 2007 was 22.8% compared to 22.4% at the end of 2006.

Capital expenditures in the quarter totaled $7.1 million, which primarily reflects spending for new stores.

Regarding guidance for fiscal 2008, for the full year, we expect earnings per diluted share on a GAAP basis in the range of $1.52 to $1.62 per diluted share.

For the first quarter, we are targeting EPS of $0.07 to $0.11 per diluted share.

Net sales are estimated in the range of $2.5 billion to $2.55 billion for the full year and we are targeting $575 million to $585 million for the first quarter.

These estimates are based on the following.

Same-store sales at Famous Footwear of flat to down 2% for the full year and minus 3% to minus 5% in the first quarter.

At Famous Footwear, we are planning approximately 100 to 110 new-store openings with 40 closings for the year.

New stores at specialty retail are planned to be in the range of 35 to 40, which includes 20 to 25 stores in China.

Additionally, our partners in the B&H Footwear joint venture are also expected to open an additional 70 to 75 franchise stores in China next year.

We estimate full-year wholesale sales to increase mid-single digits versus 2007 levels.

In the first quarter, we expect wholesale sales to increase in the low single digits as we believe retailers will remain cautious on reorders and shipping windows.

We expect our tax rate to be between 30% and 31%.

Average shares are expected to be 42 million.

Capital expenditures are estimated to be $75 million to $85 million, reflecting new and remodeled stores, infrastructure costs including material handling equipment for a new West Coast distribution center and non-ERP systems upgrades.

Additionally, we are planning an increase in marketing spend of $16 million during the year and we are targeting annual incentive compensation costs of $21 million in 2008.

We have also revised our Earnings Enhancement Plan estimates.

After-tax costs are now estimated to be $2 million to $3 million in 2008 versus prior estimates of $8 million.

We also expect benefits from the Earnings Enhancement Plan to come in at the low end of our previously guided range of an incremental $5 million to $7 million in 2008.

These adjustments are due to the timing of opening a West Coast distribution center.

I'd now like to turn the call over to Joe Wood.

Thank you, Mark.

Good morning, everyone.

The fourth quarter did prove difficult for Famous Footwear, attributed to a slowing consumer spending environment and a fashion footwear lull following two robust years of growth.

This affected footwear sales and prompted higher promotional activity at Famous and across the industry.

At Famous Footwear, we did maintain our operating disciplines, prudently controlling expenses and inventory allowing us to preserve profitability.

We ended the quarter with age inventory below the year ago period and we feel very comfortable about our inventory position at the start of fiscal 2008.

In total for the 13-week fourth quarter, sales were $311 million, down 3% from the 14-week period last year.

Adjusting for the non-comparable week, sales rose almost 3%.

However, same-store sales decreased 1.7%, which compares to a 2.9% same-store sales increase in the year-ago period.

Total sales on an adjusted basis benefited from operating 75 more stores since the fourth quarter of last year.

Lower sales along with the decline in gross margin rate as a result of our aggressive approach to staying competitive and reduced inventory in the latter part of the quarter along with the lack of leverage on expenses led to a 40% decline in operating earnings to $13.4 million or 4.3% of sales compared to $22.5 million or 7% of sales last year.

I do want to note here that roughly half of the earnings drop during the quarter was related to the 53rd week of sales that we had in January of the prior year.

In reviewing the selling metrics, it was a combination of declines in traffic, average selling prices and conversion rate that drove the comp sales decline.

Traffic during the quarter declined 1.9%, our average unit retails in footwear declined 3.7% and our conversion rate declined 1.7%.

On a positive side, in our [pairs per] transaction they increased 5.5%.

However, all channels were affected during the holiday time frame, malls, strips and outlets.

By category, there was some good news.

Our accessories and kids business performed very well.

Accessories up 9% and our kids business up 7% on a same-store basis.

However, the increases were more than offset by the same-store sales decline of 6% in men's, 3% in the athletics while our women's business was basically flat during the quarter.

Regarding our stores, we opened 19 and closed five in the quarter ending the year with 1,074 stores versus 999 last year.

The net 75 new-store openings for the year were in line with our original plan.

We did not remodel any stores in the fourth quarter yet remain pleased with our new store and remodel programs overall.

At the end of January, 716 stores, excluding our outlets, are operating under the newer format, which now represents over 80% of our total store base.

Inventory declined in line with sales on a per-store basis.

As I mentioned, we took aggressive actions toward staying competitive and clearing product.

As a result, we ended the quarter with age inventory below last year.

Once again, I was very pleased that the merchants did an excellent job in managing the inventory during a difficult quarter.

As we look at fiscal 2008, we expect the environment to remain challenging.

Our primary focus will be on controlling inventory and expenses, and I think just as important, the flow of new inventory into our stores.

The current environment, however, has created some opportunities in which we are excited about.

We now have greater access to additional brands in our portfolio that will be flowing into our stores beginning late in the first quarter.

Our belief is that this could have a meaningful impact on our back to school season and the fourth quarter.

This year, we will increase our marketing presence with our consumers, planning advertising expenses up moderately from last year.

Currently, we don't see much on the near horizon to improve visibility in the first half, so we are planning cautiously, and we believe that the promotional environment that will remain high and an early Easter has historically not been a positive for business.

In light of these developments, we are moderating our store plan, opening plan this year, as Mark mentioned, to a range of 100 to 110 new stores from the original plan of 130.

During the first quarter this year, we plan to open around 30 new stores and close about 12.

In summarizing, while it looks like the environment will remain challenging over the near term, I remain confident in our abilities to manage our assortments, keep the stores looking fresh and maintaining exciting yet appropriate inventory levels.

Finally, I feel we have some opportunity to capitalize on fall and holiday seasons during '08, given the greater excess store brands and obviously an easier comparison.

I'd now like to turn the call over to Diane.

Thanks, Joe and good morning, everyone.

Looking at the full year.

Sales and earnings were below the expectations that we laid out a year ago.

While we enjoyed continued success in the first half of the year following a great 2006, weak consumer spending and traffic as you've heard in the second half had a negative impact on our performance, particularly in the fourth quarter.

So let's get right to it with a review of the fourth quarter numbers by segment starting with our wholesale business.

In total, sales were $190.6 million versus $244.5 million in the fourth quarter last year.

This 22% decline in sales during the quarter was driven by a number of factors.

First, both we and our retail partners managed our inventories tightly during the quarter, which resulted in a shift in the timing of some shipments as well as fewer reorders in the quarter.

However, we do expect to realize these shifted shipments in the first quarter of this year, which is supported by the 11% rise in our on-order backlog at year end.

That said, we will remain cautious in our outlook, especially with our expectations for reorders which we believe is prudent given the environment and certainly given our recent experience in the fourth quarter.

Secondly, the overall retail performance within our portfolio of brands was a mixed bag.

On the positive front, Franco Sarto continued to perform well at retail which has created expansion opportunities that we're excited about going into 2008.

Additionally, Aigner and Dr.

Scholl's also performed well in the quarter.

On the other hand, we believe our performance with our flagship Naturalizer brand would have been stronger with a broader and deeper assortment in a casual category.

Nonetheless, the product development and sales teams did a terrific job in responding to this opportunity and we will be in a more balanced position as we go into the second quarter.

And finally, as planned, our private label sales declined year-over-year as we reposition our portfolio towards more higher margin branded businesses.

But the real story within the wholesale division continues to be the improvement in operating performance.

While we are not at all pleased with the sales decline, the division did increase operating margin by 240 basis points, which as Mark pointed out, included benefits from lower Earnings Enhancement Plan and incentive plan costs.

On an apples-to-apples basis, operating margins increased 110 basis points.

As we look out to 2008, we expect mid single-digit growth in the wholesale segment.

With the effort spent repositioning the portfolio towards more higher margin branded businesses, with the newly launched initiatives of Reba and Sam Edelman and China, as well as additional pipeline opportunities that we hope to discuss in future calls, we are confident that we are positioning the wholesale business well for the future.

Turning to specialty retail, which primarily includes our Naturalizer retail stores and our Shoes.com e-commerce business.

Sales for this segment totaled $70.1 million in the quarter, down 5% from the fourth quarter last year, but flat when you exclude the extra week.

Same-store sales decreased 0.5% for the comparable 13-week period.

We have made a number of changes to our store operations over the last few years and their performance has improved significantly.

For the year, the store's operating performance improved by $1.5 million, close to break-even level, which is in line with our expectations for this business.

And while we are experiencing the benefits of our work with the stores, we have recently begun to make key changes to the Shoes.com business to better position it for growth and profitability.

Some of these things include our recent relocations to our headquarters here in St.

Louis as well as initiatives to optimize merchandising, inventory management and marketing.

And we will soon be launching a new e-commerce platform and reskinning and rebranding the site which you will be able to see much later in the month here in March.

Sales at Shoes.com decreased 1.3% in the quarter, but grew 4.4% excluding the extra week.

Overall, the specialty retail division recorded an operating loss in the quarter of $1.5 million versus a loss of $400,000 in 2006, which was driven largely by the Shoes.com consolidation.

And finally for Famous Footwear, as Joe outlined well earlier, lower traffic and conversions as well as increased promotional activity led to a 1.7% same-store sales decline.

As you heard, the team just did a terrific job managing inventory well with average inventory on a per-store basis down 3% at year end.

Now, I'd like to take a minute to give you a little more color on fiscal 2007 which included a number of accomplishments that don't necessarily show up in the financials but advanced the goals of the corporation.

A couple of these would include the increasing of the diversification and our channels of distribution and our geography served and in our brands.

This will increase our growth potential and improve our resiliency during market uncertainty not unlike what we are experiencing today.

Examples of this include the B&H Footwear joint venture to open Naturalizer and be its biggest stores.

The Natural Sole initiative launched in the second half of this year at Kohl's and is now a national brand and we're getting ready to launch Natural Sport there as well.

We also added a new celebrity brand to our portfolio with Reba at Dillard's and early indications at retail have been positive.

Secondly, we've been working to strengthen our partnerships, and as you heard Ron mention, this has always been a core competency here at Brown and is extremely important in these challenging times.

Becoming more meaningful to retailers who sell our brands and providing them with differentiation, utilizing exclusive brands and offerings is critical.

The new businesses mentioned a moment ago clearly add to this strength and going forward we expect to add new brands to our portfolio through license as well.

Our partnership with Sam Edelman is another example of this.

Through the Sam Edelman partnership we've added product design, marketing talent to our Company, and at the same time we've been able to reach new consumers and channels.

From Sam's perspective, he can grow his business more profitably as we leverage our sourcing and distribution infrastructure.

We've continued our store growth.

110 new Famous Footwear stores opened during the year and we continue to see significant opportunity for growth at Famous and have not altered our long-term target of an additional 500 doors.

As Joe said, we plan to open 100 to 110 in 2008.

Lastly, we've really worked to increase our efficiency, reduce our costs and improving our profit potential by implementing the initiatives included in our Earnings Enhancement Plan.

As Mark outlined, we recognized $21 million in cost savings this year and expect additional savings of $5 million to $7 million in 2008.

During the year, we drove a new product development and design process.

We created new sample rooms in a Franco designed studio in China, consolidated the specialty retail and Famous Footwear field operations and store support functions into Brown's Retail.

We transitioned Shoes.com from L.A.

to St.

Louis, as well as consolidated our New York office.

So with all of these things combined, we believe we begin 2008 with more efficient operations.

Now, looking forward to 2008, we have seen and expect to see a continuation of the current consumer softness in the early part of the year and suspect that the environment will likely remain unchanged in the first half of the year.

We are also anticipating price increases from China to take effect in the second half of the year at both retail and wholesale, and the consumer response to that is not yet known.

However, we believe we can win in this environment and plan to take a multi-length approach to the year, focusing on our core operating principles to deliver the year and at the same time continuing to invest in our infrastructure and execute our long-term growth plans.

In doing so, we will adhere to the following guiding principles.

First of all, we will stay true to our competencies of partnering and tightly managing our inventory, our assets and our supply chain.

Secondly, we'll stay focused on providing the consumer with trend right and differentiated product across our portfolio of brands at different price points and within multiple categories.

We will also make sure we apply our resources to our developing businesses so that we continue to feed our pipeline.

As we all know, there's always going to be some wins and losses just like we saw this last year with Isaac moving from Target and going to Liz.

So we need to continue to feed our pipeline and maintaining and increasing our commitment to consumer marketing, while making sure that we continue to maximize the intraplatform synergies that are inherent in our business model.

So we do remain enthusiastic regarding our long-term outlook.

We have a strong business model and brand and we have a great team that's executing well in a tough environment and have identified a number of opportunities that we expect will be incremental to our brand portfolio in the current year and beyond.

Now I think what we're going to do is turn the call over to the operator and open up the call for questions.

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

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q & A roster.

Your first question, Mr.

Svezia with Susquehanna Financial Group, please go ahead with your question.

Good morning, everyone.

A couple questions, actually.

I guess, Joe, first to you.

Can you give us an idea of the sort of current promotional environment, particularly for Famous Footwear given your current inventory position?

Is the promotional calendar similar to a year ago, or is it higher than a year ago?

Can you just remind us when the business for Famous started to become challenging in '07?

Was that going into back to school or prior to back to school?

Let me -- I'll take a promotional part first and the fourth and then where we currently are.

It really started more so for us.

We came out of our back to school promotion while at the third week in September, I think, the balance of the industry basically stayed on promotion through October.

We did not.

It became much more promotional for us just probably the first week of November and the comparisons and the results of this has really got tough and remained so from mid-November all the way through the end of January.

As the quarter progressed through December and especially in January, you can't keep your head in the sand.

We followed the market.

We became more promotional, also, mid-December, more so in January to not only compete, but to make sure that our inventories were appropriate as we entered first quarter which we did.

First quarter this year, spring so far our promotional events are the same as last year.

We have not increased those.

Our emphasis is still on current trend new product, and, fortunately we positioned our inventory to end the fiscal year to be able to take that approach as we went into first quarter this year.

We are no more, even though I think the arena is through February anyway is more promotional.

At least our approach is to be basically same events as last spring through the first two quarters.

Okay.

That's good to hear.

I have two more questions, one additional one for Joe and then one on the wholesale end.

I guess just when you look at the product and just kind of the trends that you're seeing for 2008, and you mentioned getting access to some newer product that should help your back to school business, any other color on drivers to the business as you look to '08 is from an ASP perspective?

Maybe talk about classics, fashion casual, athletic into the business.

Just some additional color in terms of what's going on there would be helpful?

It's a little bit difficult with the first week or first month of the quarter.

However, what we have seen at least through February if you just from 40,000 feet, you can take a look at our women's business, everything that we're doing in bright colors and accents is going extremely well early, and obviously an extremely cold and winter atmosphere.

So it's in colors.

It's in wedges, strong early performance.

It's in athletics both in women's and in men's.

So we're taking a look at colors.

We're taking a look at wedges.

Our dress business has started to reverse an 18-month trend.

Obviously, continuing into the skate business and the boat business and driving mocs.

That's at least initially in February and again it's hard to read because it's probably the worst winter we've had in the last 50 years.

At least those trends should continue as we start to transition into the warmer months hopefully of March, April and May.

It's what we see early.

Okay.

Just on the athletics, is there any particular change there?

No.

There really isn't.

It's still being driven.

Obviously, the performance of Nike being a pleasant surprise with New Balance coming back in a positive range.

It is being driven by Nike and New Balance for us right now and also realize that our skate business, which has continued to be outstanding is in our athletic business.

So Nike, New Balance and our skate vendors especially being led by DC.

Thank you.

Last question I have just on the wholesale side of business, Diane.

Given the 11% increase in the backlog for the business and some of that obviously being reflective of sort of some of the product flowing through in the first quarter.

Could you maybe add some color about the drivers on the wholesale end of the business?

Brown New York continues to do well.

Seems like there's incremental opportunities for Naturalizer.

Could you just talk about the drivers to the business and as you look at the possibility of potentially further reductions in terms of reorder activity at wholesale, is that likely to possibly occur and any update on the private label end of the business as well?

Is that stabilized at this point?

Okay.

I think I have those three questions.

Let me start off with the first one that you asked about our backlog against our wholesale brands.

The good news about that is that it's pretty evenly spread across our portfolio with a little bit higher penetration against the brands that we would want, where we like it to be.

So for example, again, we could see a good backlog against Franco Sarto, a decent backlog on Via Spiga, also on Aigner and Naturalizer a good backlog, as well.

Then to a smaller degree, the scale of it isn't really as important to the total with the original Dr.

Scholl's is another one that has a good backlog against it.

Again, pretty evenly distributed across all of the brands in the portfolio and, frankly, where we really like to see the backlog, too.

That would be the first question, the answer to your first question.

The second one, I think it was actually the third, but I think it was private label and private brand where we see that flowing.

And I guess what I would tell you in the fourth quarter, we saw private label and private brand down about 22% to last year.

And it represented maybe about 20% of our total sales.

We expect that percent as a percent of the total to decline further in 2008 due to some additional erosion in increase in our branded business as a percent of the total.

So pretty much we're managing it.

We feel pretty good about it.

I think we've got that piece covered well as well.

Then I think with your question on the reorder component, that is really anybody's guess.

First quarter, as we look at the backlog, we feel good about that.

Really depends about consumer reaction to product in the marketplace in the second quarter.

We would like to believe that our products are going to resonate with customers and the sell through rates are going to be good.

So far there isn't anything that tells me that's not going to happen today.

But how it all ends up during the second quarter we will have to kind of wait and see.

Thank you for answering all my questions.

I appreciate it.

If I could just jump in on the private label private brands, those percentages Diane talked about are full-year 2007 versus 2006 and not fourth quarter driven.

Right.

Okay.

Thanks, Mark.

Appreciate it.

Miss Boksen from Sidoti and Company, please go ahead with your question.

Good morning, guys.

I guess this question is for Diane and Joe as well.

Can you speak a little bit towards the trends you're seeing for fall '08?

I know we've heard from several of your peers that in addition to the macro factors that have been impacting them over the last couple quarters, the dearth of fashion trends has been impacting them as well.

How much does this affect you and are you seeing anything in terms of what's going on for fall '08?

Can you just comment on that?

Are you seeing anything encouraging there?

Sure.

Let me start it and Joe can fill in as well.

I think what we would say in general that, I guess two points.

First one is that it really appears that classic lines, clean lines and, in terms of style is going to be critically important, but also enhanced really with new materials and new colors and new kinds of detailing is really what the major trend people are talking about.

It also, the other piece of it is that there's not any specific shift that I would say in the categories.

We really still see the sweet spot for next fall being the tailored dress with a little more casual is the other piece of it.

As we look at our brands across our portfolio, we feel like we're positioned really well to capture that shift.

Not so much from, I guess, the, people talk a lot about the consumer want side, the high-trend stuff.

We think there's going to be a little bit of that out there, but it's going to be much more around consumer needs and really filling voids in their wardrobe that are very versatile.

So as we look at the portfolio of brands that we have, we think we're positioned pretty well to really capture that shift that we see the consumer going in.

In particular, I use Franco Sarto as a great example, and Naturalizer, too.

Because we think it's those brands and that attitude kind of sits in the sweet spot of where we see the market going.

Joe from the athletic perspective?

Yes, Diane, I think you covered basically our business other than the athletic.

The only thing we've seen, even though our fourth quarter was not robust as we took a look at athletic in the fourth quarter and as we've entered early spring what we're starting to see, a little more of a turn in the percentage of our business results in athletic.

Again, I mentioned, driven by Nike, New Balance, Converse and our skate business.

We are seeing a better performance out of our athletic business.

We'll see what that leads us to as we get into spring and then obviously back to school.

We have had a nice increase there going forward.

Okay.

I had a couple of housekeeping kind of questions here.

Can you quantify the cost for this new West Coast distribution center in the first quarter?

Incrementally, how much is that?

In the first quarter, we'll have no cost impacting on the capital.

The capital uptick from to $75 million to $85 million, more than half of that increase year-over-year is a result of capital for the material and handling equipment.

But the new D.C.

itself is not expected to come online until late first quarter of 2009, so it won't have any impact on first quarter results.

Okay.

With respect, also, can you -- do you have -- I know we'll get it in the K but what was Famous Footwear's gross margin in the fourth quarter?

If you mentioned it, I missed it.

Just one second.

Again, it was -- in the fourth quarter, it was 43.5, down about 110 basis points of Famous for the quarter.

Okay.

I guess, at least for the first half of 2008, it's fair to -- should we expect given the inventory positions at the end of the year, we wouldn't see it be that severe going forward or is that a good run rate in this environment?

You know, really take a look at -- this is Joe.

Take a look at our run rate for our first quarter.

Won't be affected right now as we said going forward.

We took our margin down obviously in fourth quarter to clear our inventory.

We're back to margin neutral compared to first quarter of last year.

All right.

That's helpful.

Thank you, guys.

Miss Caruthers from Johnson Rice, please go ahead with your question.

Good morning.

If you could talk about the Famous Footwear store growth you have planned for '08, the 100 to 110 stores?

How many are you committed to and what, if the market continues to deteriorate, what's your ability to exit some of those leases possibly in the back half?

Actually, the leases currently out of the 100 to 110 that we're anticipating just I believe around 82 of those have been signed.

So I'm not concerned about getting out of the 82.

We continue to take a look at the back half.

Do we actually execute 100 or 110?

So I'm still very comfortable with 100 to 110 stores.

And those will come more so in the first three quarters.

What we have more so reduced is the back quarter or the back half of the year, but I want to be clear that's also driven not only by us being prudent about the current business atmosphere, but also by the investment community that has backed off some of their commitments in the fourth quarter of this year and have slid those projects into the first quarter of '09.

So it's a combination of both investments that won't come out of the ground in fourth quarter and us being a little more prudent and the current atmosphere of how many stores we ought to drive.

I'm not really looking to get out of anything.

I feel very comfortable with 100 to 110 stores that we will commit to during the current year.

One other element I'd add is that in terms of protection, I think the most important protection is anchor protection in these centers and in the centers that we have concerns about, I think the team -- as a matter of fact, I think they've had a couple of pretty rigorous sessions over here the last couple weeks to really take a look at those centers and the anchor protection and other tenant elements there and making sure that we maintain our ability and flexibility if we don't get those anchors opening.

Okay.

Then just one follow-up on an earlier question on the wholesale reorders.

Could you possibly talk about how significant reorders is to your overall wholesale business, possibly what percentage of that is your total revenues?

How much was reorders down in the fourth quarter?

Jill, it's Mark.

I think if we don't get the miss in our guidance for the fourth quarter, about half of that miss would have been reorder driven.

So it would have represented $6 million, $7 million of miss in the fourth quarter out of $190 million of business.

How significant, if you look at it over, across a year, how significant is reorders to your total wholesale business?

Again, I think it depends on the shoes, right?

If it's hot shoes, it's more, but I think we run our business more not reorder driven, but more on collections and assortments and making sure we've got the trend right product.

I guess the way I would also address that, Jill, is that there's a couple pieces that really depends on the brand.

Some of the brands in the portfolio where you're at even less of an issue.

Really in our flagship brands that's where reorders become more of a question, but it also is the continuous flow of goods that we feed into the marketplace.

So it isn't just, you ship a shoe in and you're looking for reorders against that.

It's also just about the flow every single month, and how everybody is managing the inventory at retail and accepting or not accepting new receipts during that particular month.

So it's a combination of both of those things that really impact our I guess the reorder bucket as we think about it.

Thank you.

Mr.

Krasik from CL King, please go ahead with your question.

Hi.

Thanks, guys.

Hi, Scott.

Joe, I guess, the flat comp at women's that was actually pretty good in light of everything.

What was driving that?

You know it was still being driven by our -- if you take a look at where we were in Q4, we actually had a very good boot season.

We need to eliminate dress, but dress at least at Famous is a small percentage of our business.

So the fourth quarter is driven by a great boot, driven by more so in the shearling area.

And our athletic business, especially in running, and our skate business was extremely good in Q4 for women's.

Okay.

Are you, in terms of some of the new product you're going to bring in at the end of the quarter, are you aware if any of your other competitors either in the family channel or the mid-tier will have access to the product you're getting as well?

To my knowledge, at the current time frame, current time frame, that's first quarter maybe part of the second.

Currently, the answer would be no.

I don't think it would be available to other retailers in the mid-tier initially.

Good.

And can you say whether it's in the athletic side or the Brown Shoe side?

It's on the non-athletic side of our business.

Okay.

Good.

Okay.

Great.

And then Diane, maybe talk about you said a lot over the last year about helping the department stores manage the inventory, planning, planning timing of shipments, but it seems like when times are tough, you still get hit and you still got to write a big check at the end of the day.

Maybe talk about what you learned this year and how it will help you next year and what should flow through because of that?

Well, I don't know how much more we learned this year.

To tell you the truth, I think the Company has done historically just done a terrific job, again, of partnering with retailers, making sure we're flowing goods in the right timing and the right way.

The challenge always is even though your brand may be performing within the context of that retail floor, if this tough time and consumer traffic is down, you can't always get the reorders or the increased shipments that you need in order to continue to, I guess, feed and fuel that pipeline.

So in terms of, I guess, the learnings, I think this year as we go into this next year is to continue to have our teams stay connected at the hip with the department stores, with the buyers to continue to do the work that we do in planning out the receipt flow, planning the goods as well as we can, and making sure, frankly, that we are really selling the assortments that we feel very compelled about that we believe that the consumer's going to have the right kind of reaction to them.

Because at the end of the day, as you just pointed out, we really own the inventory and own everything all the way through that, the pipeline in terms of the way that we need to manage the business.

You know, Scott, there's two things I'd say.

One is, we enjoy and we like being in this footwear business.

And it is driven by style and trend, and it's also driven by need as Diane said.

We think we'll see a little bigger shift to the need side than the want side in this given year.

Let's take a look, though, at the fourth quarter.

We did not plan negative comps.

We did not -- we don't believe our customers plan negative comps in the fourth quarter of '07.

And I don't think we're going to plan negative comps in the fourth quarter or holiday of next year, as well, because I think we're in the business of serving customers who want that fashion and that trend.

I think that when you take a look at the fourth quarter, it was driven by the fact -- the results were driven by the fact there were fewer customers interested in footwear purchasing.

I think that's a trend that the whole industry has to face and has to look forward to beating.

You beat it by having fresh product.

I think the thing that Brown Shoe Company can do and the thing that Brown Shoe can help the industry do is continue to buy more shoes -- I mean, buy less shoes more often and continue to keep flow as premier in the process.

I think we have some accounts that truly are buying into that and going to make that work.

I think that the industry will shift, they always do.

So we'll see as little bit of shift, and I think that that should open up opportunities in the second half quite frankly.

Would you agree that the markdowns and issues really stem from Naturalizer, though?

And that that's --

No, not at all.

Not at all.

Across the board.

I think that it's across the board.

Even as you think, you always got to be careful of the small ones but that markdown costs for fashionable merchandise is just always statistically higher, and so I think that that's, those costs are built in as well.

It wasn't Naturalizer at all.

Not at all.

Okay.

Just a general question.

I've heard that some retailers are actually trying to demand a private label guys to actually take the, control the inventory themselves.

Have you seen that at all or has it been business as usual on private label?

I'm not hearing that, so don't know how to respond.

That's a response.

All right.

Thanks, guys.

Mr.

Poser with Sterne, Agee.

Please go ahead with your question.

Good morning, everybody.

I've got a few questions.

Number one, what are the comp -- how would you lever SG&A at Famous?

What kind of comps are we needing to see there to see some leverage on the SG&A, most likely towards the back half?

Sam, it's Mark.

Again, we need positive same-store sales probably, 1 to 2 points to lever.

Again, you've got to remember that new-store productivity is actually a drain because it takes up to three years for new stores to reach normal profit contribution levels.

So you've got the leveraged, the fixed costs of the transportation and stuff like that, but they bring along some incremental fixed real estate costs.

Okay.

And then in your guidance, and this is just a clarification, you are guiding -- you are giving a GAAP guidance ex the Earning Enhancement, correct?

We gave only one guidance number.

And that's without the Earnings Enhancement?

Correct.

It's all inclusive.

It's all in, it's inclusive of costs.

Inclusive of those costs is the way the guidance is?

It's a GAAP guidance?

Right.

Okay.

Joe, what percentage of your business in Q4 was the Brown wholesale brands and how are you looking at that going forward?

Sam, overall, two parts of this, it was approximately 14%, 15% of our overall business.

Now, that's all in.

It's obviously much higher than that if you exclude athletic because Brown doesn't play in the athletic arena but overall, it's about 13%, 14% of our business.

And you're looking at it the same way into 2008?

Sam, we're looking for a little more growth in '08.

We've had a lot of success as we take a look at our kids' business, our Scholl's, our Naturalizer business and as we add, as Diane mentioned, new brands to our portfolio.

So we look for some nice growth with our parent Company at wholesale.

Okay.

And then, just a couple more, Diane, as you mentioned about the price increases towards the back half of the year.

Yes.

What kind of, I mean, in conjunction with those price increases what are you having to do to enhance the value rather than just raising prices, but maintaining the price value relationship for that consumer?

How is that working?

Can you walk through that a little bit?

Sure.

I'll give you a couple of examples.

Let's take Naturalizer.

As we've been getting price increases coming through and it really depends, anywhere from 5% to 12%, pretty much across the board on most of our brands.

What we've been doing is really trying to go in and taking a look at first of all how do we make sure we add additional value?

That's going to come through new comfort features in the shoes, or it's going to come through better materials and higher quality materials and/or the other piece of it is that we've really looked to merchandise our price points across the board.

So for example, in Naturalizer, we're going to be just a very little bit of our line at $59 but primarily $69 and $79 at retail.

The same thing with Franco Sarto.

We're looking at new, innovative stretch materials.

Again, different components in the shoes that we think are going to add additional value.

Then we've been looking at, again, taking the price points up pretty much about $10 at each level.

So $79, $89 and $99 probably at Franco Sarto, but merchandising that well so that we don't vacate any price point and make sure that we're capturing the full initial margin that we need to capture on, particularly on the branded inside.

It really kind of, Sam, depends on the brand and we've also looked at where we think there may be some market share opportunities at times, too, as we built up the product lines.

Thank you.

And then one last thing for Joe.

You talked about some of the athletic brand drivers.

Can you talk about some of the non-athletic brand drivers that you have in 2008?

You saw in 2007, you're seeing 2008 and then with the strength of Nike and New Balance and the skate brands, with the business basically being flat, who's that business coming from?

Who's that coming out of?

Sam, let's take athletic first.

If we see growth in, because it is basically somewhat of a small industry when you start taking a look at the names.

I have growth in Nike, New Balance and the skate brands.

You can fill in the blanks on where those dollars might be coming from from the balance of the vendor community.

As we take a look at non-athletic, we're really taking a look early at our Skechers business continues to have a small, but nice increase, and that's on a big volume base.

Madden, our own portfolio through Brown Roxy.

I mentioned before.

Those are vendors, at the same time frame when we take a look at the very early performance of our wedge business in women's.

Again, it's been surprising so far in February.

But Sam, you take a look at athletics.

You've got athletics in two places.

You've got Skate and running.

You also have athletic fashion in Chuck's and Marc Ecko, and D.C.

Boat shoes, early readings, driving marks, early readings are good.

Sandals off to a great start in men's but not so many women's.

It's too early for open footwear.

I don't know if that answered your question.

I believe it did.

Just one last thing, how is the classic business in general?

It still remains tough, Sam.

Thank you very much.

Good luck, everybody.

Thanks.

Thanks, Sam

Mr.

Fromm, there are no further questions at this time.

Please continue with any closing remarks you may have.

Thank you all for your attention.

Look forward to talking to you next quarter.

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

You may now disconnect.