Caleres Inc (CAL) 2008 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Brown Shoe Company Incorporated first quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the conference over to Mr.

Ken Golden, Director of Investor Relations.

Mr.

Golden, you may begin your conference.

Thank you, Regina.

Good morning, everyone, and welcome to the Brown Shoe first quarter 2008 financial results conference call.

This call is being made accessible to the public by a webcast in accordance with the SEC regulations 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 8K 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 a situation may change.

On the call this morning will be Ronald Fromm, Chairman and CEO, Diane Sullivan, President and Chief Operating Officer, Mark Hood, Chief Financial Officer, and Joe Wood, President of Brown Shoe Retail.

And now I would like to turn the call over to Mark Hood.

Thank you, Ken.

Good morning, everyone.

There is no doubt that the consumer environment in the quarter was difficult however we feel we managed our business well while making some key decisions and investments to better position us to win when the consumer returns.

We will touch more on this later in the call.

Now I would like to begin with the review of the income statement.

Consolidated net sales for the first quarter totaled $554 million down 2.1% compared to $566 million in the first quarter last year.

The sales decline is attributed to the impact of the 7.3% decline in same-store sales performance at Famous Footwear offset in part by a 9% increase in store count, a 1% decline in wholesale performance as retailers continue to manage inventories tightly and a 5.8% decline in same-store sales at specialty retail.

All segments were impacted by the challenging consumer environment with traffic and conversion levels down at Famous and fewer reorders with our retailer partners on the wholesale side of the business.

On a bright note we did have a strong quarter from our Brown New York brands which generated a 21% increase in sales versus first quarter last year.

Gross profit margins decreased 160 basis points to 39% from 40.6% in the first quarter last year.

This decrease was a result of higher promotional activity at Famous Footwear as we moved to aggressively manage inventory and maintain market share during the quarter, as well as higher allowances in the department store segment of our wholesale business.

SG&A declined as a percent of net sales to 36.6% or $203 million compared to 37.5% or $212 million in the first quarter last year.

The decline in the quarter resulted from the settlement of remaining insurance claims related to the recovery of environmental remediation costs at our [Redfield] facility in Denver, Colorado, and lower costs from the earnings enhancement plan.

While there was a lack of sales leverage related to the decline in same-store sales, and the impact of operating 102 additional stores, we did control our expenses well in the quarter.

As a result, consolidated operating income decreased $13.4 million -- decreased to $13.4 million or 2.4% of net sales from $17.5 million or 3.1% of net sales in the first quarter last year.

Net interest expense totaled $3.6 million in the first quarter, roughly flat with the prior year.

The company's tax rate in the quarter was 30.4% versus 32.3% in the first quarter last year.

Net earnings in the first quarter were $7.2 million or $0.17 per diluted share versus $9.6 million or $0.22 per diluted share in the first quarter of the prior year.

The results for the first quarter include $0.03 per diluted share in costs related to transition of our Madison office to St.

Louis and $0.15 per diluted share in insurance recoveries related to our Redfield facility.

Moving to our financial condition our balance sheet remains strong.

Cash and cash equivalents were up 4.1% to $63.2 million versus $60.7 million in the first quarter last year.

Total inventory at quarter end was $403.6 million up 1.5% from $397.7 million at the prior year quarter end.

Inventory at Famous Footwear was up 3.9% to $297.3 million on 91 net new stores.

On a per store basis inventory was down 4.7%.

And inventory at wholesale was down 13.8% from a year ago, driven by inventory management disciplines as well as the shift of Dr.

Scholl's from a landed to first class model with this largest retail partner, Wal-Mart.

Total debt outstanding at quarter end was $150 million compared to $159.5 million at quarter end a year ago, reflecting lower borrowings on our revolving credit facility.

Total debt to capitalization at the end of the first quarter was 21.1% compared to 22.7% at the end of the first quarter last year.

Capital expenditures in the quarter totaled $13.2 million which primarily reflects spending for new stores and remodels.

Operating cash flow for the first quarter totaled $36 million.

Regarding guidance for the second quarter and full year 2008 we remain cautious on our outlook for the balance of 2008, although the year-over-year comparisons get easier as 2008 progresses, considerable uncertainty on consumer spending remains.

The impact of higher costs not only at footwear but also at the pump and grocery store remains an unknown.

This widens the range of likely outcomes accordingly.

We expect full year earnings per diluted share on a GAAP basis in the range of $1.29 to $1.53 per share.

This includes costs of $0.11 per diluted share related to the transition of our Madison office to St.

Louis, net of an expected nonrecurring gain for the sale of a portion of our [plate] in real estate.

Full year guidance also includes a net gain of $0.15 per diluted share related to insurance recoveries in the first quarter.

Earnings per share for the second quarter are estimated in range of $0.05 to $0.10 per diluted share which includes costs of $0.14 per diluted share related to the relocation of our Madison office.

Net sales are estimated in the range of $2.43 billion to $2.48 billion for the year, growth of 3% to 5% year over year, and we are targeting $585 million to $600 million for the second quarter representing growth of 1.5% to 4% versus second quarter last year.

These estimates are based on the following: same-store sales at Famous Footwear ranging from minus 1% to minus 3% for the full year and the same range for the second 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 plan to be in the range of 25 to 30 which includes 15 to 20 stores in China.

Additionally our partners in the V&H footwear joint venture are also expected to open an additional 40 to 45 franchise stores in China during the year.

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

In the second quarter we expect wholesale sales in the range of down 2% to up 2%.

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

Average shares are expected to be 42 million.

Capital expenditures for the year are estimated to be $75 million to $85 million reflecting new and remodeled stores, infrastructure costs including material and handling equipment for a new west coast distribution center and nonERP system upgrades.

There is uncertainty out there in terms of when the consumer will return.

We have established a resilient business model that mitigates risk through our diversed portfolio brands which operate across all channels as well as through our inherent disciplines in asset management.

This makes us confident that we can achieve our guidance target.

I would now like to turn the call over to Diane.

Thanks, Mark.

And good morning, everyone.

The first quarter did indeed to be challenging for Brown Shoe, yet the benefits of our operating platform and our financial discipline along with the strength of our brand portfolio enabled us to optimize operating earnings in a difficult environment for consumer spending.

The earlier Easter and uncooperating weather exacerbated an already challenging environment for consumer spending, one that has been clearly felt across the entire retail and consumer sector.

This led to lower than anticipated sales and increased promotional activity in our Famous Footwear stores.

And our wholesale segment was also impacted as our retail partners managed through the same environment and sought to manage inventory more tightly.

That does not mean, however, that there haven't been a few bright spots.

As you would expect from us, during the first quarter we maintained our operating discipline and managed inventory and expenses well.

Regarding expenses, we continued to invest in marketing, talent and our infrastructure to support our growth.

At the same time, we drove improved efficiencies.

In addition our initiatives to improve the freshness and velocity of inventory continue to pay off.

Inventory at quarter end was down 4.7% on an average store basis at Famous Footwear, down 13.8% at wholesale, and we are pleased with the composition of our inventory across the enterprise as we begin the second quarter.

Secondly we continued our focus on maximizing growth opportunities within our wholesale portfolio.

Our Brown New York brands particularly Franco Sarto, Etienne Aigner and with our partner Sam Edelman, enjoyed strong sales results as evidenced by our 21% increase in first quarter shipments as they capitalized on strong momentum from the fall season, as well as the repositioning efforts that we have been working on for the last 12 months.

Backlog also looks good here.

We also furthered our channel reach by continuing our Kohl's introduction of natural soul and sport as well as Reba now being in Dillards.

And we are excited about the newest introduction into our portfolio, Fergie.

I think you may have seen the press release on that.

The Grammy award winning singer, song writer and actress, and we expect the initial shipments to be planned for the fourth quarter of this year and will be showcasing our plans in June at the New York shoe show.

We also achieved strong results in our Dr.

Scholl's original, Dr.

Scholl's kids and Carlos businesses, which benefited from very strong sell throughs.

And specific to original Dr.

Scholl's and Carlos, a differentiated point of view that we have been working on to present to the consumer.

Many of you may have seen Carlos featured in some of the Macy's TV ad campaigns this spring from which we really experienced a nice lift in sales.

That said our moderate brands did have a difficult quarter.

As we mentioned on the last call, we are working to rebalance our Naturalizer assortment and capitalize on the opportunity in the casual segment with expectations of improved performance for the back half of the year.

On the international front we are making progress and learning a great deal.

During the quarter we opened six Naturalizer stores in China and seven Naturalizer stores were opened by our partner, [Hongol] International.

By the end of 2008, as Mark had said, our expectation is to have 60 to 65 Naturalizer stores in China.

While early, we are pleased by the way the brand is being presented and we are working to optimize our sales productivity and build some scale.

So in total our wholesale segment reported net sales of $177.7 million, down 1.7% from $180.7 million in the first quarter of fiscal 2007.

Increased allowances and higher cost of goods contributed to our operating earnings decline from $13 million last year to $8.7 million this year.

As stated on the last call for the year, we currently expect our wholesale division to report mid single digit top line growth.

We are also working diligently on the sourcing front to help mitigate the cost inflation coming from China, and while we continue to maintain product integrity we are shifting our sourcing portfolio and adding additional features to our shoes, such as new comfort technologies to create added value for our customers.

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

Net sales for this segment totaled $58 million in the quarter down 3.8% from the first quarter of last year.

Same-store sales decreased 5.8%, and as you might expect our nonstore businesses were not immune to this environment.

Shoes.com recorded a 6.8% decline in sales.

I think you will recall that we have transitioned the business from LA to St.

Louis and in March we began migrating the business to a new Microsoft platform.

As the new team and the platform take hold, our expectations are for mid single digit growth by the end of the year.

The segment incurred an operating loss of $4.7 million, which compares to an operating loss of $3 million last year.

And finally, Famous Footwear, as Joe will outline shortly, was effected by lower traffic and conversions as well as increased promotional activity versus last year, leading to a 7.3% same-store sales decline in the quarter.

It is important to note that comparable store sales on a two-year basis declined 4.8%, in line with industry trend.

We will continue to plan our Famous business cautiously in the second quarter, with our energy focused on maximizing our very important back to school season with product differentiation, compelling brands and high impact marketing.

So in summary, we reported operating profitability modestly below our expectations despite the top line difficulties.

We also continued our strategies in support of our long-term growth.

We successfully added new brands to our portfolio, we have continued to increase our international presence, and we announced Famous is moving to St.

Louis, thereby creating a truly connected wholesale and retail organization.

We are confident that Brown Shoe today is a stronger company, better able to handle challenges.

As we look to the second quarter we do expect the difficult consumer spending environment to continue.

We will apply our same operating disciplines that you have come to expect from us to drive profitability and deliver a positive customer experience.

With that, I would now like to turn the call over to Joe to review Famous' results in more detail.

Thank you, Diane, and good morning, everyone.

The first quarter was challenging for Famous Footwear driven by current macroeconomic issues, a slump in consumer spending, cold weather, spring weather in the early Easter, which historically has never been good even in strong retail cycles.

This obviously affected our footwear sales prompting higher promotional activity at Famous and across the industry.

However, we have seen in the back end of the quarter and so far in May improved performance with comp sales running slightly positive, and while that is encouraging, the environment remains highly promotional.

In total first quarter net sales were $318.8 million, down 2% from last year.

As we mentioned same-store sales decreased 7.3%, which compared to 2.5% same-store sales increase in the comparable period a year ago.

We had a more difficult comparison than most of our peer set, and looking at a two-year comparative basis, we have performed at the upper end of this group.

Total net sales benefited from operating 91 more stores versus the first quarter of last year.

At Famous we continue to maintain our operating disciplines, controlling expenses and our inventory.

We ended the quarter with inventory down on a per store basis and aged inventory at 2.4%, right in line with last year.

We do feel comfortable about the freshness of our inventory position at the start of this second quarter.

In terms of margins, lower sales along with a 140 basis point decline in gross margin rate as a result of our aggressive approach to stay competitive and maintain inventory pressure along with the lack of leverage on expenses, led to a 64% decline in operating earnings to $7.6 million or 2.4% of sales compared to $21 million or 6.4% of sales last year.

In reviewing the selling metrics, it really was a traffic and conversion issue during the quarter.

Traffic was down 5.8% over last year and conversion was down 3.9%.

On the positive side, our average retail were roughly flat down to 0.3%, while peers per transaction were up 3.2%.

All of our channels were affected during this first quarter, mall, strips and outlets.

[inaudible] category had an increase during the quarter on a same store basis.

Womens were down 12.9%, men 7.9%, kids 11.6% and accessories minus 2.3%.

Athletics were down minus 2.7% in the quarter, however, the category has gained momentum especially in April and May led by NIKE and Converse, Asics, New Balance and our Skate category.

I think it is no secret that there has been a fashion law in the recent months in nonathletic product as you try to refresh your closet, we are seeing a shift from womens junior purchases to athletic.

While perhaps too early to call a new athletic cycle, we are encouraged as our inventory and assortments -- our position take advantage of this trend currently.

And obviously as well as during the going back to school season where we seasonally skew more towards this category.

Obviously we have tailored our marketing communication plans for back to school towards the athletic brands.

Regarding our stores, we opened 37 and closed 11 in the quarter ending with 1,100 locations versus about 1,009 in the first quarter last year.

We did not remodel any of the Famous Footwear stores in the quarter, however we did remodel 20 of the factory brand stores and remain pleased with our remodel program overall.

At the end of the quarter, we have 749 of the 900 Famous Footwear stores operating under the new format.

Inventory finished up 3.9% in total.

However on a per store basis as we mentioned before it declined 4.7%.

I also mentioned we did take aggressive action towards staying competitive in the marketplace and to keep our assortments fresh.

I was very pleased that our merchants did an excellent job at managing this inventory, especially during a difficult quarter.

As we have looked into the second quarter, we expect the environment to remain challenging.

Our primary focus will continue to be on controlling inventory and expenses, also especially the flow of new inventory in the stores.

Recent sales trends as I mentioned have improved in April and May reflecting cumulative positive comp store sales, however, we don't see much on the near horizon to improve visibility dramatically, so we continue to plan cautiously.

We will maintain our marketing presence and spend towards our consumer, executing our planned advertising expenses up moderately from last year.

Now in summary, it has been challenging in retail so far.

We are confident that we have a continuing and correct long-term strategy in place as proven by the success we have experienced over the last five or six years with strong sales and earnings growth.

We plan to continue to improve in our branded assortments while keeping product fresh and managing inventory.

We will grow our stores responsibly focusing on backfilling markets to leverage costs and maximize share in consumers minds.

I do feel that we have some opportunity to capitalize on the fall and holiday season in '08, obviously given the greater access to brands, improved product assortments and easier back half comparisons.

Now I would like to turn the call over to Ron.

Thank you, Joe.

Good morning, everyone.

As we have said, it is just obvious that we are disappointed that we were not able to better perform in a very turbulent environment.

Most of our businesses were challenged, but not all.

Importantly we continue to emphasize strategies that we believe will add to our resiliency while we position Brown Shoe for sustained long-term growth in sales and profitability.

In the near term, of course, that means focusing on execution at all levels of the business.

As I think about wholesale, I think the important element is we will continue to emphasize having wonderful properties in our pipeline for the future.

We continue to add vibrant brands to our portfolio and intensify our efforts to continuously flow footwear with high consumer appeal.

As Joe commented on, Famous Footwear has in the recent weeks some encouraging improvement, but the landscape continues and the outlook continues to be very challenging.

While we are encouraged by our product and marketing initiatives, we understand that the next real viable time for us will come at back to school, and I can assure you that our energy around the execution for back to school will be not any short of where we have been in the past.

Long term we believe we are well positioned and that our highly recognized world class brands in retail and wholesale are indeed exactly what the customer wants as she looks for trust in the product and integrity of the brands, as she buys in this environment, as she works through the cyclical economic and fashion [famine].

Importantly, we believe this is an opportune time to act more boldly on our transformation initiatives.

As most of you know last month we announced the inner connecting of our company by joining Famous Footwear with our St.

Louis operations.

This has been a long planned move.

This move is expected to allow us to react quicker and will foster greater collaboration throughout the enterprise.

Early on, the transition is on track, and we actually expect to be fully operational in St.

Louis by the end of July.

We are equally pleased, if not slightly overwhelmed, by the tremendous response of the positions we need to fill.

It is indeed gratifying to know that Brown Shoe is indeed an employer of choice.

In other news, just a reminder, we did move forward and sign the lease on our new west coast retail distribution center, which will support the growth at Famous Footwear and importantly create transportation cost efficiencies.

As we previously mentioned the facility will be operational to support our back to school season next year.

We also continued explore enterprise-wide information systems to maximize the effectiveness of our platform now that we are interconnected and coming together.

We will keep you informed as we continue to develop this area.

And importantly as Joe and Diane mentioned, we continue to invest in the consumer, in marketing, research, to further differentiate our brands and our penetration with our consumers, building the strength, equity and value of our brands, engaging consumers through those brands, and continuing to put millions of pairs of shoes on the feet of women, men and kids around the world each year through our stores and our retail partners.

As always, essential to achieving our vision is a continuous investment and a maximizing of that investment in the tremendous talent throughout our organization.

While the environment may be tough, simply said it is our job to overcome that toughness.

And I believe that the initiatives we have put in place will position us to succeed and get market share gains in this difficult time.

Interestingly, it is a very exciting time to be Brown Shoe right now.

I looked forward to updating you as to our progress on the second call in August if not sooner.

And with that, we will open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Chris Svezia of Susquehanna Financial Group.

Good morning, everyone.

Good morning.

A couple questions.

I guess first for you, Diane, I was wondering if you could add some color regarding -- you seem pretty optimistic regarding the wholesale business.

And I was just wondering if you could walk through your thought process as you go into the second half what will be driving that business for you to hit the mid single digit growth.

Obviously the environment is challenging and you are seeing promotional activity for some of the products out there.

I was just wondering, what are the key drivers to really improve that business in the face of the difficult environment you're seeing right now?

Yes.

A couple of things, Chris, it is a great question we spent a lot of time trying to make sure we've got our ducks lined up and in a row to deliver that mid single digit we have been talking about for a while.

I'd say, first of all there is momentum in our New York brands.

If you think about where we were last year and the comparisons in the back half of the year are much weaker than the performance that we experienced in the first half of this year.

It has been a 12 to 18 month process to get the businesses to where we would like to see them.

I think that's number one.

I think the other piece of it is the Carlos and the original and Dr.

Scholl's businesses.

Again, we have seen vitality and vibrancy of those two brands at retail, and our Dr.

Scholl's businesses at Wal-Mart as that business has improved our opportunities there continue to be available to us if we manage that well.

And I guess lastly is the -- probably I talk a little bit about the Naturalizer piece being the one question we have in the back half.

We have repositioned our assortments pretty well and we are really now going up against -- we will be rolling out Natural Sport for the first time to more doors and Natural to Kohl's and finally the launch of Fergie in the first quarter.

It is a tough one, Chris, because you don't know you who the reorders will play out and how tight everyone will keep inventory.

But I think the teams have done great work to get us positioned.

As I look at the backlog right now, the backlog is at about 8% and we all know backlog you have to be very cautious about how we view that.

But it looks like at least for the near term we have the backlog to support our thinking today.

Is that -- I guess that backlog reflects the assumption of higher price points going to the back half of the year because of the cost pressures and can you mention anything about LifeStride?

You didn't mention that.

What's going on there?

Yes.

I would say, again, I would point to our moderate conversation both Naturalizer and LifeStride being in the more moderate and traditionally zone had challenges this spring.

So I don't expect major turn around there, but I think it will hold its position.

And the teams are again -- in fact I was in China just a couple of weeks ago, they are working really fast and really smartly around the migration of our factory base to really make sure that we are able to deliver great product with a lot of integrity at prices that that are in line with our expectation.

So I don't have the crystal ball, whether -- how it will all exactly play out but I think all the cards we look at today, she hasn't voted yet, but we feel confident that we have keyed ourselves up.

It is Mark.

The other thing you have to remember is that our wholesale business in 2007 continued to decline at greater rates as we progressed through the year, so the comparisons in the back half of the year actually a little easier than the comparisons in the first quarter.

Okay.

That's helpful.

Thanks.

And then, I guess, Joe, for you on Famous I want to be clear, it seems like the promotional environment still continues to be out there.

Any thoughts of when potentially that could subside, or is that really going to be product driven as we find some newness in the marketplace and basically the industry trying to get their hands around the inventory levels that are out there at retail?

Yes.

Chris, I think we will obviously see it -- the beginning of the first quarter we are going to see it through second quarter and I think August as we get into the back to school.

I don't think anyone's -- I think the good news is no one's inventory that that I'm aware of -- they are fairly well under control.

It is just trying to keep market share now and spending economy.

I don't think we will see much change at least through second quarter and we will have to see what third and fourth will bring us as we have some soft comparatives this year versus last year.

And it seems like you are gaining greater access whether it was from (inaudible) or the Skate brands, DC shoe, Nike, etc., in your stores, is there any other categories that you are interested in, encouraged about as you go into the back half?

Obviously you talked about athletic.

And it seems to be showing some signs of life.

Anything else as you go back to school?

Not -- the current time frame, it is being -- our men's business has struggled some.

It is okay.

But as far as any excitement right now it is definitely in athletic, Skate, more of a casual type business.

Our junior business continues to be a little tough which we ran some exceptional years for two to three years in a row.

So currently as we sit here right now it is all in the athletic and athletic casual type business.

Okay.

And the last question I have for Mark, when you look at the guidance you have given for the balance of the year, I what kind -- what are you assuming in terms of the economic back drop to attain that?

Do you anticipate it to some degree the possibility of it getting worse, or improving, or staying the same at this point?

Again, I think that's a great question.

I think the guidance really assumes that slowly that the environment gets a little bit better.

I think the comparisons as we have said obviously get easier as you get through the year.

It doesn't assume an overnight improvement.

Again, if you go back to the beginning of the year, we set guidance in a back drop of a deteriorating economic environment and that has materialized and we are managing the business cautiously as we move forward.

Okay.

Thank you.

Best of luck, guys.

Your next question will be from the line of Heather Boksen of Sidoti & Company.

Good morning, guys.

A couple of quick -- a China question first with everything going on over there right now has the earthquakes or anything impacted your sourcing or retail operations there?

At this point in time Heather, it has not.

But obviously from a humanitarian perspective where our hearts go out to everybody there, and our -- actually our teams in China have been putting a fund together that the company is matching and we are trying to be as thoughtful as we can to everybody over there.

Right now it doesn't look like anything I have seen so far that it will impact the flow of goods or our retail operation.

All right.

And I guess in my other question with regards to the Famous Footwear relocation, it sounds like -- I know when you announced it, you said all the senior management was on board.

Is that still the case?

And I guess a tier below that of talent, now that they have had some time to digest it, can you kind of quantify how many of them are making the move?

I think we will try to stay a little bit away from numbers.

I'm not sure that is of great value.

If you think about the hierarchy of management here, we are well in the transition, almost the four -- first three to four top layers of management are all moving and shifting over with the -- as you would imagine a couple of exceptions where folks have family situations which were not -- so we are very pleased at that level.

And probably just as important is we have already -- again, I will try to stay away from the numbers, but it is thousands of resumes and the process that we have built, a very professional one, of which we are already have had the ability to make offers and have offers accepted at the next level of need as we go through there.

So still early.

I think July will come quick, be the end of July, and we will have operations up and running there, and you are always going to have challenges.

This is a very, very bold move and one that has a lot of work behind it.

The timing of this was very, very well selected in terms of when we made the announcement, as we worked through the season and the cycle and we will maintain presence in Madison for any key positions to make sure we have linkage going on the way back too.

I think we are in pretty good shape for where we are, but, Joe, you can certainly add perspective.

No, it's -- we are pleased.

I have 70% of the buying staff that is coming down and a few still trying to make family decisions and trying to make that transition.

Our chief merchant is coming.

All of our DMs are coming.

So the leadership group of Famous is relocating here to St.

Louis.

So I'm very pleased with that.

So it is the leaders that we want to move here and they are coming.

That's good to hear.

Also with respect to the new headquarters building, can you give us any additional color on what is going on there?

It sounds like from the release it will be on the existing property.

Is that correct?

Yes, Heather, it is Mark.

Obviously we are early in the planning, but we control pretty good tract of ground here in Clayton.

We are working with a couple of private partners in the public domain in terms of a redevelopment of that property, and the new headquarters would be comprised of a portion of that property and an operating lease at some time in the future.

Okay.

So I guess that's not -- I guess there's no expenses for that in ' 08.

How should we be looking at CapEx for '09 and beyond with respect to those initiatives?

Again it is expected to be an operating lease so the building itself would not run through as a capital expenditure for Brown.

Some of the leasehold improvements and equipment will come on board as a capital expenditure at some point in the future.

Got it.

One last question, with respect to the new Fergie brand, any idea yet what the price points will be on that and what kind of distribution you are trying to target?

Hi, Heather, yes.

We are actually working through all that right now.

I would tell you that the current plan is that it will be both a department store and a national chain opportunity, and we have been designing and developing product that we think is appropriate for the consumer that is shopping in each of those channels and those customers that are really -- have of late have aspired to be like Fergie.

Particularly in the national chain side our expectations could be more casual on entered a little bit younger, and in the department store a little more sophisticated a little more in line with -- I think you may or may not have read with the fact that she is doing the music for the new "Sex and the City" movie, so that sophisticated side of her is right for the department store sector.

Gary Rich and the team are putting all the pieces together and doing a great job, and by June, I think we will be able to give everybody a sense of what the price points, channel and customer target will be.

Okay.

Thanks.

I'll let someone else jump in.

Your next question will be from the line of Scott Krasik with CL King.

Thanks, guys.

I guess, Mark, the guidance that you gave at the end of the fourth quarter $1.50 to $1.60 did that include the insurance recovery, the $0.15?

It did not.

Okay.

Okay.

So that's -- Okay.

Good.

Then Joe maybe talk about athletic.

We had heard a lot of good positive feedback on athletics as well.

Maybe talk about where that is coming, where you see performance athletic playing a part.

And do you have a sense if we move back into an athletic cycle, your position in athletic is significantly better than it was the last time around versus the pure athletic retailers.

Yes.

I don't know how much more flavor to give it.

All genders in athletic -- I thought what was interesting as April's business turned positive led by athletic and it came across the categories, it came across kids, came across womens, came across mens.

It was being driven again by the vend doors I mentioned especially by NIKE on the performance end.

Our performance business is very good.

Not only Nike and DC -- or Nike and New Balance and Asics, but it is an interesting mix between performance from those types of companies and then when you take a look at Converse and DC Skate especially more of the lifestyle.

That's in athletic.

That's where we put that.

But you have both right now performance going very well and what I would consider the street athletic casual going very well.

Encouraged that we see that type of trend in April and we have seen that the first 20 days in May so far too.

That's great.

Are you -- where are you with the low profile business at this point?

It is flattish.

Athletic -- surprisingly athletic has been at that now for two years.

They were behind a curve.

We are getting some positive sales out of that also in athletic but low profile is flattish and right now in the down slump.

It is starting to struggle a little bit but we have been filling that pipeline for over two years.

Yes, absolutely.

Are then just we still on an upswing in skate?

Do you think Skate is starting to get peakish?

What's your thoughts on Skate?

No, not whatsoever.

We are adding Skate vendors.

Again DC will lead that.

When you take a look at Skate and you almost have to take a look at Converse in the same time frame.

That is the lifestyle they are wearing right now and those two businesses are very healthy and I don't think we have come close to maximizing that business yet.

That's great.

Thanks very much.

Your next question will be from the line of Sam Poser with Sterne, Agee.

Just real quick to follow up on Scott's question.

On the -- I know you move a few brands like Sketchers in between juniors and athletic.

Could you talk about how that's breaking out?

Sketchers is really more so in the junior business than in athletics.

Sam, I'm not sure I understand your question in total.

Well, it seems like the energies is athletics and the low profile that are more junior.

Is that not correct?

Again, that's in the junior business it is not housed in the athletic.

It is all -- all right.

Are you seeing movement therefrom the low profile to the --

No, I mean, Sam, we haven't seen a big swing right now.

Low profile continues to be a lifestyle.

It has been led by some of our bigger vendors especially Sketchers.

As you know it has been challenged especially during the first quarter.

So there is a softness there and it has swung over to athletic and athletic street.

Okay.

Very good.

And then, Mark, I want to follow-up on the guidance and how we should look at gross margins for the back half of the year and how you are looking at that.

Again, we don't do the line item guidance.

Again, I will just say that we had a tough gross margin in the first quarter as we tried to keep our inventories in line with the deteriorating sales environment.

And I think as we said, we're -- our content of our inventory is where we want it and our level of inventory is where we want it in terms of how we are guiding sales.

So we would expect to deliver acceptable gross margins.

Okay.

And should we be looking at -- I mean, your guidance with this wide range is -- you are doing this completely GAAP.

Is that correct?

Because you do have some legitimate one time charges in here.

Yes.

That is completely GAAP guidance.

That's correct.

And there is only a -- the net from the $0.37 to $0.44 on the [relow] is now $0.11?

Yes, again, I think the $0.11 is what we would expect would be the impact of those nonoperating items in 2008.

The $0.37 to $0.44 is not necessarily all include the expenses that would be incurred in 2008.

But that $0.37 to $0.44 does not include the benefit of the sale --

Yes.

The $0.11 nets the gain against that.

All I'm saying -- to say is that the $0.37 to $0.44 expense part of that net number has a longer tail than the fourth quarter because of the lease.

So when -- if we are looking at Q3 and Q4, when should we think that you are going to get the benefit of the sale?

And what are you giving your -- how many cents per share are you deeming that -- expecting that sale to be?

What are you netting?

Again, we guided to a net $0.11 and it is not going to be in the second quarter.

We will give you guidance on the third and fourth quarter on the next call.

But what I'm saying though is should we be taking the midpoint of $0.40 and saying it is a $0.39 charge or a benefit, less the $0.03 -- I mean is that the right way to look at it?

Well, again -- we are expecting the $0.11 for the year.

We had $0.03 of costs in the first quarter.

We have $0.14 of cost in the second quarter, and we will break out the balance of that when we give guidance on that for the third and fourth quarter.

But you're not going to give us the flip side of the expected benefit?

You're just going --

No.

Okay.

And one last question for Diane.

Good morning.

Hi, Sam.

You have talked -- you have done a great job apparently on the product side and on the acceptance side on Brown New York category.

Yes.

Just one quick one on that does that include Sam Edelman and where is that -- what is the plan there?

And then also -- when we look at what you are doing differently, or is it the nature of the external market, what you are doing differently on the more moderate brands Naturalizer and so on, are you going to employ strategies from New York into the more moderate brands?

Well, a couple things, first of all on Sam Edelman's side to fill you in on that, Sam and his team have enjoyed a great spring selling season so far to date.

They have been on target with a lot of the key items and key silhouettes.

We are feeling pretty good about the direction of that business.

And of course you know we have a minority ownership in that piece of it.

On the Brown New York side of the businesses, as I think you recall, this has been in process for a number of quarters.

And Rick [Oswick] and Dan Friedman and the team involved in those businesses that really doubled down and really looked at how do we make sure that we bring terrific designs and styles at the right value to the customer.

And I think frankly she is just voting that she likes what we are doing there.

And so I think that it is the same application on Naturalizer and LifeStride.

LifeStride is a little bit of a trickier issue, but Naturalizer I have tremendous confidence in that team too.

But as we turn to the back half of the year that we will have the right kind of assortment, so a little more dress casual, a little more casual with some new comfort technology built into the product as well.

And generally speaking I think we are planning the same kind of philosophy and thought process against really all of our brands.

Okay.

And then one last on the Fergie how should we categorize Fergie?

Is it going to be junior or impulse in the line of Carlos and so on?

Yes.

Good question and I know you have been a big proponent of us adding -- finding a vehicle to have a junior business within our portfolio.

I think if we do it right, I believe that we will have a junior and younger opportunity within the national chain and then also more of an impulse and contemporary kind of opportunity in department stores.

But a little early to tell until we work through all of our plans on that, but that would be our intent.

Okay.

Thanks so much.

Yes.

Your last question will be a follow-up question from the line of Scott Krasik with CL King.

Okay.

Thanks.

Diane, just following up on that, you thought Carlos would be up in the second half.

Is that just because Impulse is a category with a disaster in the second half of last year?

Yes, it was.

Impulse was a real challenge, and actually it has been a mixed bag a bit this spring, but we have been really the best of the lot in that category so we are really outperforming the competitive set there and the Macy's piece, you can't -- we were fortunate too having Carlos on that Macy's TV campaign you can certainly see the sales lift that we experienced in their stores.

So kind of a confluence of a lot of good things including all of the stuff I think that we did to create good product as well as the marketing piece of it with Macy's.

And so I think it is a combination, Scott, of all of those things.

Good opportunity then.

And then, Mark, just looking at the full year guidance to get to the low end of the guidance, is that really going to be driven by just a high promotional activity at Famous through back to school and holiday, or how do you expect to get to the low end year of that guidance?

Well, again, the guidance is a range because there are a lot of ways and outcomes to get there.

And I think the low end of guidance would say that it continues to be as difficult as it has been and the high end of the guidance would say that it gets somewhat better.

Well, I think you would have some control over the G&A more, right?

And you didn't guide the sales down all that much though it seems like it would be more in gross margin?

Yes, and then I think again expense control.

Yes.

Okay.

And then just lastly, looking at these charges, how should we tax affect these charges as we go throughout the year.

I assume these -- you are giving these on an after tax basis.

To the extent that we have done it on a per share basis they are definitely after tax numbers, and they would be taxed at -- I will call it a domestic tax rate, which would be at about 40%.

Okay.

Really helpful.

Thanks so much, guys.

This concludes the question and answer portion of today's conference.

Please proceed with your presentation or any closing remarks.

Thank you, everyone, we really appreciate your support and look forward to better consumer times out there.

So, talk to you next quarter.

This concludes today's conference.

Thank you for participating.

You may now disconnect.