Caleres Inc (CAL) 2008 Q2 法說會逐字稿

Welcome to the second quarter 2008 Brown Shoe Company, Incorporated, earnings call.

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

Thanks, Dennis.

Good morning, everyone.

Thanks for joining us for the Brown Shoe second quarter 2008 financial results conference call.

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

Before we begin, I would like to remind you of the Company's Safe Harbor language.

During this conference call, the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

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 plans to update these forward-looking statements, even though its situation may change.

On the call this morning will be Ron Fromm, Chairman and CEO; Diane Sullivan, President and COO; 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, and thanks for joining us.

The consumer environment remains difficult.

We worked hard to deliver the quarter at the low end of our prior guidance, while at the same time making some key announcements and investments relative to the future of our business.

On to a review of the income statement.

Consolidated net sales for the second quarter totaled $569 million, down 1.3% compared to $577 million in the second quarter last year.

The sales decline is attributable to the impact of the 2.9% decline in same-store sales performance at Famous Footwear, offset in part by a 10% increase in store count, a 9.3% decline in wholesale performance.

Retailers were more promotional, leading to greater allowances, which not only impact margin, but also are recorded as a reduction in sales.

Inventory and open-to-buy continue to be tightly managed by retailers, leading to fewer immediate orders and more closeouts which are sold off at lower selling prices.

Specialty retail same-store sales declined 0.2%.

All segments were impacted by the challenging consumer environment, with traffic and conversion level at Famous down across all channels.

While the geographic markets which have been impacted the most by the decline in the housing markets performed as would be expected, the majority of other markets in which Famous operates proved to be quite healthy.

Lastly, our Brown New York brands continued strong momentum, generating a double digit net sales increase versus second quarter last year.

Gross profit margins decreased 80 basis points to 39.3% from 40.1% in the second quarter last year.

This decrease was the result of higher promotional activity at Famous Footwear, as we moved to aggressively manage inventory and maintain market share during the quarter, higher allowances in department stores and a greater mix of sales from Franco and Aigner, which are licensed businesses, and declines in Naturalizer and LifeStride, which are owned brands with higher margins, and a greater mix of mid-tier and off-price business.

SG&A increased as a percent of net sales to 38.4% or $218 million compared to 37% or $213 million in the second quarter last year.

The increase in the quarter resulted from cost related to the transition of our Famous Footwear offices to St.

Louis, increased utility costs due to commodity inflation and increased facilities cost due to a higher number of stores, as well as expense deleverage due to lower net sales.

This was partially offset by lower incentive plan costs in the current year and earning enhancement plan costs in the comparable prior year quarter.

As a result, consolidated operating earnings decreased to $4.9 million or 0.9% of net sales from $17.9 million or 3.1% of net sales in the second quarter last year.

Net interest expense totaled $3.3 million in the second quarter compared with last year's $2.8 million.

Our tax rate in the quarter was minus 21.9%, reflecting several factors: First, a higher mix of foreign earnings, which are subject to lower statutory tax rates; second, the continuing shift of our East operations to support our branded product business as a result of the greater cost deductibility in our higher tax jurisdictions; and lastly, we recognized $900,000 net of a $500,000 federal tax impact of income for state tax incentives related to our headquarters consolidation initiatives.

Net earnings in the second quarter were $2.2 million or $0.05 per diluted share versus $9.8 million or $0.22 per diluted share in the second quarter of the prior year.

The results for the second quarter include $0.15 per diluted share and costs related to the transition of Famous Footwear to St.

Louis, and start up costs related to our ERP project, which was $0.01 more in the quarter than our previous guidance.

Second quarter 2007 earnings included costs of $3.6 million or $0.08 per share related to our earnings enhancement plan.

Moving to our financial condition, our balance sheet remains strong.

Cash and cash equivalents were nearly flat with second quarter last year at $64.4 million.

Total inventory at quarter end was $502.9 million, up 6% from $474.5 million at the second quarter of last year.

Inventory at Famous Footwear was up 9.2% to $373.4 million on 103 net new stores.

On a per store basis, inventory was down approximately 1%; however, it would have been down 3% had we not accelerated planned August receipts to be better positioned for back-to-school.

And inventory wholesale was down 4.9% from a year ago.

Total debt outstanding at quarter end was $150 million, same as quarter end last year.

Total debt to capitalization at the end of the second quarter was 21.1%.

Capital expenditures in the second quarter totaled $23.2 million, which primarily reflects spending for new stores and remodels, the new West Coast distribution and purchase of software and systems related to our information technology transformation.

Operating cash flow for the second quarter totaled $27.6 million.

Regarding the guidance for the third quarter and full year 2008, we are less optimistic on our outlook for the balance of 2008.

While comparisons do get easier in the back half, uncertainty relative to consumer spending remains.

In addition to the ongoing macro concerns in the back half, we will also get our first read on how the consumer responds to price inflation in footwear.

We believe it is prudent, given the factors discussed, to reduce our guidance for the back half and full year.

We now expect full-year earnings per diluted share on a GAAP basis in the range of $1.12 to $1.29 per diluted share, which includes costs of $0.09 per diluted share related to transition of our Famous Footwear division to St.

Louis, net of an expected nonrecurring gain for the sale of a portion of our St.

Louis real estate, and $0.04 per diluted share related to our information technology transformation.

As a reminder, full year guidance also includes a net gain of $0.15 per diluted share related to insurance recoveries during the first quarter.

All in, we expect nonrecurring items to represent $0.02 per diluted share of income for the full year.

Earnings per share for the third quarter are estimated in the range of $0.31 to $0.41 per diluted share, which includes costs of $0.21 per diluted share related to the relocation of Famous Footwear and the ERP start up costs.

Net sales are estimated to be in the range of $2.38 billion to $2.40 billion for the year, and we are targeting 650 to $660 million for the third quarter.

These estimates are based on the following: Same-store sales at Famous of minus 2% to minus 4% for for the full year; and minus 1% to minus 3% for the third quarter.

We estimate full year wholesale net sales to be flat to down 2% versus 2007.

In the third quarter, we expect wholesale net sales in the range of flat to down 4% from the prior year quarter.

Given the current environment, we believe it is prudent to further tighten our standards for capital management.

As such, at Famous Footwear we are planning approximately 90 new store openings, with 30 store closings for the full year, down from our prior guidance of 100 to 110 and our original plan of 130 new stores.

And as it relates -- as it is planned right now, we would expect to open 70 to 80 new stores in 2009.

New stores, especially retailer, plan to be in the range of 25 to 30, which includes 15 to 20 in China.

We expect a total of 60 to 70 stores in China by the end of the year.

We expect our tax rate to be between 24 and 26%.

Average diluted shares are expected to be 42 million.

Capital expenditures are estimated to be 85 to $90 million, reflecting new and remodeled stores, infrastructure costs including material handling and equipment for the new West Coast distribution center, capitalized software and system upgrades fur our ERP implementation.

As discussed, uncertainty remains in terms of when the economic conditions will improve; but we have established a resilient business model that mitigates risk through our diverse portfolio brands, which operates across all channels at a range of price points, as well as through our inherent disciplines and asset management.

This allows us to continue to invest in building our future platform while we operate in a difficult environment.

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

Good morning, everyone.

And as anticipated, the second quarter was a challenging one for us.

While we've applied our successful disciplines of inventory and expense management that you have come to expect from us, we were not immune from the decline in store traffic and increased promotional activity across the industry.

This led to lower sales and earnings as compared to the year ago.

And as Mark mentioned, the increased allowance levels at department stores as they look to manage their inventory tightly in the quarter, led to gross margin pressure for our wholesale business.

Nonetheless, during the quarter, we managed the business well, focusing on profitability versus driving revenue, which we believe was necessary in this environment.

At the same time, we continued to invest in our brand, infrastructure and talent in support of our future growth.

Now looking at wholesale, clearly the entire segment is under pressure, not only from a top line perspective but also on the cost side.

One of the great strengths of Brown is our sourcing prowess; and our teams continue to do a nice job of managing these pressures.

We are 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.

We believe this is the way to win over the longer term.

Within our wholesale business, we believe the right strategy was to limit the supply of inventory at retail to maintain the integrity of our margins.

In fact, while our wholesale sales and earnings were down from a year ago, we maintained our wholesale operating margin to last year's level, and did see some encouraging signs for several of our brands.

Before I get into some of our highlights, let's discuss a few of the businesses that were challenged during the quarter.

Our two largest traditional brands, Naturalizer and LifeStride, were impacted in the quarter by the effect of the economy on their consumer and by challenges in the department store sector.

Naturalizer sales declined in the quarter, which we expected given our need to rebalance assortment towards uptrending categories.

The good news is that the early reads on our Naturalizer products for fall are positive, with our styles retailing at a better rate than we had experienced during the first half of the year.

We have delivered more tailored and casual styling, along with additional comfort features, for this consumer.

This has us encouraged that we have begun to reach more stability as we start the second half of the year.

LifeStride also had a challenging quarter.

We have had to shift our focus back to $39 and $49 price points from $49 and $59, narrow the assortment, and adjust sourcing models and support accordingly.

We believe these price points represent the sweet spot for LifeStride.

Improvement is expected in 2009 as we stabilize retail price points and margins going forward.

And in our nonbranded businesses, we continue to manage this segment to appropriate levels, as we continue to reallocate resources towards higher margin branded businesses.

Now, on to some of the highlights in the quarter.

Our Brown New York brands, including Via Spiga, Franco Sarto and Aigner, continued their positive momentum, recording a double digit increase in sales in the quarter as our work to upgrade product offerings and increase the velocity of newness at retail paid dividends.

Carlos Santana continues to improve its performance, and has now one of the better performance in the impulse spread.

We expect this positive momentum to continue based on our strong product offering, supported by marketing campaign with Macy's that includes national TV.

And original Dr.

Scholl's enjoyed a good quarter, with sales up significantly albeit off a small base.

We also continued to make progress on some of newer initiatives, which while small today, are expected to become more important growth drivers in the future.

To this end, our partnership with Sam Edelman continues to gain momentum.

Our strength, from a back office and sourcing perspective, has allowed Sam and his team to focus on maximizing the sales potential of this brand, which has become quite strong in a short period of time.

By all accounts, Sam's line was one of the exceptional highlight coming out of the WSA show.

In addition, we are looking for opportunities to shift channel mix, decrease our reliance on private label and deliver a better mix across channels and brands; and as part of this effort, I think you have heard that we launched Fergie and Fergalicious at WSA.

Fergie has great consumer appeal across a wide audience, and we expect this brand to be meaningful for us in 2009.

For those of you who didn't see us at the show, we are planning a dual launch -- Fergie for department and specialty stores targeting against the fashionista side of her personality and priced from $79 to $109; and Fergalicious, targeting the teen and tween market, with more casual and sport styles, will be sold through national chains, retailing between $39 and $59.

We have not seen this much excitement around a new launch in quite some time.

We will also be introducing Vera Wang Lavender Labeled footwear at (inaudible) and (inaudible) in September.

We are enthusiastic about this line and the opportunity to work with such a renowned designer such as Vera.

The line will be launched in spring '09 to better department and specialty stores.

Jay [Schmidt], who came on board a few months ago, will manage this business along with Via Spiga as we strengthen our offering at the higher end and bridge segments.

So in total, our wholesale segment reported net sales of $180.1 million, down 9.3% from $198.4 million in the second quarter of fiscal 2007.

Increased allowances, a shift in channel mix and a shift in the mix of sales of licensed versus owned brand contributed to our operating earnings decline from $12.9 million last year to $11.6 million this year.

Based on our revised outlook for the second half of the year, we currently expect our wholesale segment to report flat to a 2% decrease in sales this year.

Turning to our specialty retail division, which primarily includes our Naturalizer retail stores and our Shoes.com e-commerce business, net sales for this segment totaled $63 million in the quarter, up 1.5% from the second quarter last year.

Same-store sales decreased 0.2%.

Shoes.com recorded a 3.2% decline in net sales which represented an improvement from the first quarter.

I think you will recall that we began migrating the business to a new Microsoft platform this spring.

The system's integration has caused some business disruptions, and we are working very diligently to try to stabilize it.

This segment incurred an operating loss of $3.1 million, which compared to an operating loss of $1.8 million last year.

Now, turning to Famous Footwear, we once again managed the business well, emphasizing growth opportunities such as athletics, while maintaining tight control of inventory and expenses.

Sales at Famous reached the low end of our guidance.

However, increased promotional activity to drive sales and a net increase of 103 stores to our base caused operating earnings to come in well below a year ago.

And as we begin the second half of the year, we expect the challenging experience during the first half to continue; and as such, as you heard from Mark, have updated our sales and earnings guidance.

We will emphasize our expense and inventory management strategies with even greater focus; and at the same time, remain encouraged and will focus on the opportunities identified that we're implementing to drive our long term growth.

We have a highly talented team, great infrastructure and a diversified channel and brand strategy that certainly position us to optimize earnings in an ongoing difficult environment.

With that, I'd like to now turn the call over to Joe to give you a review of Famous Footwear's results in a lot of detail.

Thank you, Diane, and good morning, everyone.

You know, as we anticipated, the second quarter continued to be challenging for Famous Footwear.

The soft consumer spending environment led to declining store traffic patterns and increased promotional activity as compared to a year ago.

Results continue to be affected by fashion law in the women's casual and junior businesses.

That said, we did see some bright spots.

including encouraging signs in athletic footwear, remained diligent in the management of our inventory, which is now an average per store basis compared to last year.

In total, second quarter net sales were $326.6 million, 3.2% ahead of last year's second quarter.

This increase was driven by the addition of 103 net new doors since the second quarter last year, but was partially offset by 2.9% decline in same-store sales.

Our comp trend improved from the first quarter and follows a 0.3% comparable store sales decrease to last year.

Operating earnings were $9.6 million or 2.9% of sales compared to $18.9 million or 6% of sales last year.

This was driven by a combination of 120 basis points decline in gross margin rate, which resulted from increased promotional activity, and 190 basis points of expense leverage from an increase of the 103 stores, higher utility costs and an incremental $2 million spend in marketing.

Even though the environment was tough, we do believe that it is important to continue to build our Famous Footwear brand.

Regarding our sales metrics, customer traffic and conversion continued to be challenging in the second quarter.

Traffic was down 5.2% from last year, and this was experienced in all three channels -- malls, strip centers and outlets.

The conversion rate was down 5.9%.

On a positive side, our average unit retails were up 0.5% from last year, even with the additional promotional activity, while pairs per transaction was up 10.2%.

On a same store basis, the athletics category drove our performance, with sales comping up 1.3% year-over-year; however, Women's was down 6.9%, Men's at 1.5% and Kid's down 14.5%.

The athletics category did gain momentum throughout the quarter, driven by Puma, Nike, Converse, New Balance and our Skate business.

We are continuing to see the shift from women's junior and casual purchases to fashion athletic and continuing low profile styling.

We believe that we are well positioned, however, to capitalize on the momentum in athletics, having shifted additional inventory dollars into that category for back-to-school selling this season.

And obviously, we tailored our marketing communications back-to-school toward the athletic brands.

As I mentioned, we continue to maintain very good control of our inventory -- we did end the quarter with average inventory below last year, and as importantly, aged inventory in line with the prior year period.

Our total inventory at quarter end was up 9.2% from the year ago period, primarily due to the 103 new -- net new additional stores, as well as an increase in our average cost.

As we begin the third quarter, we do feel comfortable about the freshness of our assortments, especially given our aggressive efforts to move product during the quarter.

Regarding our stores, during the quarter we did open up 30 and closed three, and remodeled five locations, ending the quarter with 1,127 stores versus 1,024 in the second quarter last year.

We continue to be very pleased with our new store and remodel program; and at the end of July, 85% of our stores are operating under our new format.

We have also been extremely pleased with the transition of our Famous Footwear operations from Madison to St.

Louis, joining together here our wholesale and retail organizations under one roof.

In connection with this move, we hired and trained 200 new associates, having filled approximately 98% of our open positions during the quarter.

The transition was smoother than we had anticipated, and I think we fully expect the benefit from the ability to collaborate with our St.

Louis partners on a daily basis.

As we look to third quarter, we expect the macroeconomic environment to obviously remain challenging.

Currently, customer traffic trends continue to be below last year's level.

Thus, we are planning our Famous business cautiously.

While we do expect to catch some volume during the peak back-to-school weeks, our primary focus is continues to be on controlling inventory and our expenses, and especially the flow of new inventory into our stores.

We have maintained our marketing presence, as I mentioned, spending toward our consumers with plans in the second half, our investment to be plat to last year.

We believe in this environment it is prudent to preserve cash flow.

And as Mark mentioned, we have scaled back our new store opening plans to 90 this year versus the original plan of 130, and we will close between 25 and 30 stores.

Now in summary, we continue to believe we have the right strategies in place to maximize profitability during a difficult environment.

We do feel comfortable with the product assortments in our stores, our marketing initiatives, and we expect to capture our share of business during the quarter.

Now I'd like to pass the call over to Ron.

Thanks.

Good morning.

Joe, Mark and Diane did a terrific job of reiterating our prospects for the second quarter and you know, it is always difficult when the news is tough and somewhat disappointing.

But I can tell you that it is overshadowed by the enthusiasm that I have everyday now when I get to walk the halls of Brown Shoe Company and I get to see my good friends at Famous Footwear and the excitement that's being generated every day in the hallways.

It truly has been a remarkable -- and I think it also marks the start of the last phase of the transformation of Brown Shoe Company into a powerful marketing company.

What is important is that we recognized the opportunity as the decline in the market was taking place; and that because of our strong financial position, it provided us the ability to take advantage of this economic downturn, to invest in the future of our Company more rapidly, both in its infrastructure and in creating a pipeline of new brands to advance our strategic goals.

As always, our main areas of focus are talent, stores, systems, and product.

We are confident that the investments we are making today will pay off when the consumer returns.

You know, at the same time, you can count on us to continue to manage our business with discipline and increase our contact with our proposition our for consumer.

Our prudent management of our capital and assets will be retained.

It will be thoughtful allocation of talent and resources to drive greater profitability and maintain our discipline on expense management; and of course, product and brand innovation to generate excitement with our consumers rather than being price-driven.

I think it's an important time for Brown Shoe Company, and one that I'm very excited about.

At this time, we'll open it up for questions.

(OPERATOR INSTRUCTIONS).

We will pause for just a moment to compile the Q&A roster.

And our first question will come from the line of Chris Svezia with Susquehanna.

Good morning, everyone.

I guess, Diane, a question for you to start.

Just, when you came to the last conference call, you guys felt pretty optimistic about your thoughts regarding second quarter for flat revenues for the wholesale piece.

And I'm just kind of curious, at what point did it start to deteriorate?

And secondarily to that, you know, you have some new products, we saw -- you talk about some of the things going on at Naturalizer and what you are seeing there and obviously some of the newer brands; but given the status of the department store channel, which seems to be very cautious here in the second half, how much confidence do you have that you will be able to hit those targets that you have now laid out for the wholesale piece?

I guess -- you know, I guess, Chris, it is a great question and not an easy one to really answer, when you think about trying to forecast what the consumer is going to do in future given this kind of environment.

But you know, I guess, maybe I will reiterate a little bit about what we really thought about the second quarter and what we experienced.

I think, clearly, that the overall trend in traffic and the amount of promotional activity that happened across the entire landscape was much more than, I think, anybody had anticipated, which had pressure across our entire wholesale segment to begin with.

So that's number one.

The second piece of it would be that, as I mentioned in our traditional brands -- both Naturalizer and LifeStride -- not only did they have some of that pressure, but they did have some other issues that were inherent to the shift in moving our product in Naturalizer to more casual and tailored offerings, so we had called that out as something that we needed to do that we felt would be turned around more in the back half of the year, and I think we are on track to do that.

And I also think we learned a lot in the quarter on our LifeStride business, as we really began to see that the sweet spot for that brand was truly at the $39 to $49 price point, because that really -- there was a -- the consumer is looking for more and more value.

That seemed to be a really great place to be.

So those are a couple of the things, I guess, probably worth reiterating.

And then during that time period, too, second quarter we typically rely on a number of immediate -- so, you know, immediate reorders -- against a number of our businesses, and clearly that did not come in where we had intended it to, given the environment.

So all in all, it was really about how do you find the right balance, Chris, between making sure you are not overshipping and overselling, but making sure that you are delivering as much overall market share and profitability that we possibly could.

So I think it was -- it is a delicate balance; and as we look towards the third and fourth quarter, you know, it will have to -- we will have to see.

I think it is our best guess as of right now, and we continue to work really hard against the pipeline that we talked about, whether it's with Fergie and Fergalicious to get us into new channels and new customers, as well as with Vera Wang in the Lavender Label, and a number of other initiatives across the Company.

So it is really a mix of all of those pieces.

Okay.

That's helpful.

Just a follow up on that, Diane.

You haven't seen any push back relative to pricing increases?

In other words, kind of your new guidance and what you're (inaudible) at?

In your channels, there hasn't really been a push back from a pricing perspective -- those customers saying the price value equation is not there -- you know, go back, revisit, the brand or revisit models, et cetera.

Are you seeing any of that?

Well, I think two things to that.

We -- you know, we will really see the first pace to that in the fourth quarter of this year.

So that's really one of the major question marks that are out there right now, is to how is that -- how is the customer going to respond to these higher price points.

I can tell you right now on our -- again, on our largest brand, Naturalizer -- the early read on that is quite good and we feel very good about a lot of our products sitting out there right now at $79, and velocity on those are good.

On the other hand, with LifeStride, we actually really do think that in that particular case there was some resistance to higher price points and we really wanted to be -- make sure we didn't vacate that entry price point in department stores, and didn't vacate that segment of the marketplace and made sure we stayed looking like we had a very good proposition relative to private label there, too.

So that was a little bit of a tweak in our strategy.

But third and fourth quarter, we will learn a lot more; but I think we have done -- again, as best as we possibly can, Chris, I think we've tried to read the few leads right and position our portfolio in the right place.

Okay.

Thanks.

And Joe, just one quick question for you.

The promotional environment seems to intensify a little bit going through the latter portion of the second quarter -- you guys were running pretty consistent BOGO events in your stores.

Just kind of curious, what are you sort of inferring in terms of your outlook for sort of the third quarter and the remainder of back-to-school from a promotional perspective?

Chris, third, fourth quarter -- so I will address them both.

Promotional activity during this time of year is no different than previous back-to-school.

So let me answer this way: Our promotional cadence going into third quarter remains the same as last year; promotional cadence in fourth quarter remains the same as last year.

We were more aggressive during the second quarter, which was obvious; but promotional cadence now and going forward for the balance of the year is the same as 2007.

Thank you.

I will get back in the queue and let someone else get in.

Thanks.

Your next question will come from Heather Boksen with Sidoti & Company.

First a quick housekeeping one.

You mentioned store openings for '09 for Famous Footwear of 70 to 80.

Was that net of closings or is that before?

That's before closings, Heather.

Normal -- assume a normal closing pattern for next year?

Yes, in the range of 30 to 40 store closings.

Okay.

And you know, with respect to the wholesale division, you know, kind of touching on what Chris did, you know, would you -- Diane, would you say that your plan for the back half of the year assumes the department store, the sentiment there, you know, remains pretty cautious?

I would say so, yes.

I think we have not anticipated significant improvement in the velocity of our products at retail in the back half of the year.

I think we have kind of known that there's more of the same going on.

Okay.

And I know it is, you know, early to speak to '09; but you know, assuming you have gotten some feedback already to Fergie and some early thoughts of Vera, would you think that next year, given the new brands, you should post wholesale revenue growth?

You know, it is a little early for me to comment on that yet.

I know that in the next 30 to 60 days our visibility will be much better, as we see more of the orders coming in; but I would tell you that we certainly were encouraged by the reaction to the Fergie and Fergalicious lines at WSA; and as I said, with Sam Edelman.

So we do believe that we should be well represented in the marketplace in '09; but again, too early to really give you much more detail on that.

Okay.

And one more quick housekeeping one, if I can get it in.

Through Qs 2 and 3, you have had $0.36, or it will be about $0.36 in Famous Footwear charges, the full-year guidance is $0.09 in charges net of benefits.

Assume we will see $0.25 in benefits from Famous FootWear in Q4; is that correct?

Yes.

You are combining a couple of -- you have got the $0.21 -- there's a little bit of ERP cost and then the -- that, just again, full-year we said ERP was going to be $0.04.

So we had a penny in the second, a penny in the third and would have $0.02, therefore, in the fourth.

Okay.

And that's in the 21 for Q3?

Right.

And the 15 from Q2?

Correct.

Okay.

Thank you.

That's helpful.

I will get back in queue.

Your next question will come from the line of Jill Caruthers with Johnson Rice.

Good morning.

You mentioned quickly on the -- you talked about the Famous division inventory numbers, how you accelerated some August receipts, maybe if you could just put a little clarity behind that?

Yes, actually it is Joe.

We actually moved an additional $10 million of receipts back into the -- earlier in the quarter.

And a lot of that was earmarked into athletics, which was driving and continues to drive our business.

So it will wash out during the quarter; but we did -- we came in early in July and brought in an additional $10 million of August receipts to push our sales for back-to-school.

Okay.

And maybe you can talk about -- I know the phenomena of shopping later in the season closer to need continues to happen.

If you could talk about kind of where your peak season for back-to-school falls, maybe how many of your markets have gone back-to-school, just a little clarification on kind of that time frame?

Thank you.

Yes.

Our peak weeks, really last week and the current week that we are in, and then it starts falling off somewhat, other than the eastern schools, which go back after Labor Day.

But there's -- all of them, other than the fourth -- we have four segments, and the fourth segment is obviously those that start after Labor Day.

They are shopping right to need.

So they're buying today, wearing today.

It continues -- I think the fifth year in a row of business coming later each year.

It is happening this year once again, but we do have three segments that are already in back-to-school, and a fourth yet to come.

Thank you.

Your next question will come from the line of Scott Krasik with C.L.

King.

Yes, thank you.

Joe, the -- you know, the sales trends are down, but they're actually not that bad.

You know, is it more a sense that you are just promoting too heavily, you know, or much more heavily than what you expected?

Or is it that maybe some of your new stores -- because I know you have opened a lot of stores in the last few years -- are really underperforming the expectation?

Maybe talk about the moving parts there.

Okay, well, let me see -- whatever I miss, let me know.

We were more promotional in the second quarter, especially in May and early June.

Call it a competitive environment, or whatever you want to, we were much more competitive than we ever have been, number one.

Number two, it is interesting, as we take a look at our business, you know, there are some -- there are some bright spots.

We always look at the negative.

If you take a look at our business being down 2.9 for the quarter, just it is interesting how we follow business now.

If you look at the foreclosure states and follow those -- especially California, Arizona Nevada and Florida -- the business in those states affected my total so dramatically that our business would have almost been flat in looking at those states alone.

So there are parts of the country performing extremely well, but you can follow the foreclosure rates states, and your businesses follow that (inaudible).

That would be -- so would that follow through, then, most of the stores you have opened in the last few years, were focused in those states?

Yes, in a lot of cases.

I mean, as our real estate is target, and a lot of it is targeted toward the East, when you look in the New York, Philly area but it's also in the West, because what is hurting us somewhat now were the states that carried us for years, the businesses in California, Arizona and Nevada, especially for three or four years in a row, was just on fire, with Florida following.

And now, you know a few years later in the last year, year and a half, with the foreclosure rates, what brought us the best of those states now is hurting us with foreclosure, and retail is following it.

Okay.

I can't say I'm happy with my business being down 2.9, but without those four states I have a flat business.

Okay.

And then Mark, maybe you could address -- I mean, it looks like at the midpoint of the third quarter guidance, you are at about $0.57 or so throughout the year, to date.

To get even to the low end of your guidance, we are talking about sort of record fourth quarter EPS, even excluding the benefit of the land sale -- I mean, is that correct?

I think the land sale certainly has a significant impact on the fourth quarter guidance.

And I think the -- it is what it is, it is what our guidance is.

Right.

So I mean, even "X" the sale, we're still talking about EPS up from 2007, correct?

Yes, you'll recall, 2007 was an extremely promotional order.

So you are lapping up against, you know, better numbers.

I think we're not expecting a significant environmental improvement, but the comparisons from a margin standpoint are significantly easier in the fourth quarter.

Right.

But '07 was up from '06, so it is not like it was depressed year-over-year.

Okay, I mean, it just seems like -- it doesn't seem like you are taking that conservative of an approach, seeing as how you are assuming an up fourth quarter.

We're giving you our best thoughts on how we see the business coming down.

Yes, okay.

Thanks.

Your next question will come from Sam Poser with Sterne Agee.

Good morning.

Just a couple of questions.

First of all, the -- in the press release you mentioned that the $0.15 per diluted share was primarily related to the relocation of Famous Footwear to St.

Louis.

Other than -- when you say primarily, can you just give us some more color on what else might be in there?

Yes.

I mentioned earlier, Sam, we had $0.01 per share of cost relating to our ERP project.

Okay.

And then, Diane, how are the Reba shoes doing at Dillards and Natural Soles at Kohls these days?

Yes.

Natural Soles at Kohls is doing nicely, sort of in the middle of the pack in their business, and actually we are going to be expanding our Natural Sport business there in '09.

So okay -- right -- I'd say right in the middle of the pack.

Our Reba shoes at Dillards have actually been slow, Sam, honestly.

So, we are, you know, working through that and trying to figure out what that right mix in that assortment ought to look like.

Okay.

It is not a big number though.

It sounds to me when I'm listening to this, with Naturalizer and LifeStride being soft and the -- as well as some -- as well as the Reba shoes, and then you have the better businesses going on over at Brown New York, is this a fashion play where sort of more non descript product is just facing a tougher time because there isn't that must-have kind of feel to it, while the product in Franco and Via Spiga are sort of more special and have more of a "I need to have that" mentality to it?

I think there is --- certainly I think that's a good insight, and I think there is some truth to that; but it is also interesting as we look at more recently what's going on in the last, I'd say maybe four so six weeks, particularly on the Naturalizer side, that sort of very versatile product, that has perfect comfort feature is kind of the go-to shoe that you could wear it a lot of different ways is also seems to be a segment of the business that is starting to show some vitality.

So we are really trying to work our assortment to get there in those more traditional brands so that it works in that direction.

Okay.

And then just one last thing for Joe, could you walk through by group again how the -- what the performance was athletics, Kid's, Men's, Women's and so on?

Yes, Sam, athletics in total was up 1.3%.

Our Women's business -- our Kid's business -- I'm sorry, Sam -- was down 14 and 14.5.

Again, that is interesting because our athletics business and Kid's is in athletic.

So it is a little -- it is a little misleading.

In the athletic -- or I'm sorry, in the Women's business -- it was down 6.9, and the Men's was okay at down 1.5.

And how are you approaching the mix now with those numbers?

Help me with that question again, Sam?

I mean, how are you approaching mix changes?

Because it sounds like it's sort of low, and you've got strong athletics, you've got weak Women's, are there certain items there that you are just missing right now within these categories that you just need to have?

No, I don't think it is much of items we are missing.

Obviously, I have always said I love the box we have -- the consumers told us that their interest right now is more so in athletic -- what I would call athletic and fashion athletic.

So we are just changing the finance of our inventory mix to reflect such.

And is this something that happened more quickly than what you expected?

I think what happened a little more quickly was in the casual Women's business; I think the switch over to or the interest in what I consider the fashion athletic part of our business was a little faster than what we had anticipated.

So casual and junior casual business was softer than what we had anticipated more, and it came a little more quickly than we anticipated.

Okay.

I have one more question, but I will get back on.

Thank you.

Your next question will come from the line of Jeff [Stein] with [Soleil] Securities.

A couple of financial questions for Mark.

Wondering if you can talk a little bit about how your ERP investment is going to weigh in to earnings for next year; and then also, in the release you talked about roughly $37 million of incentives associated with the St.

Louis development, and wondering how and what line items would be affected again going forward, and how that would affect the P&L for 2009.

Good questions, Jeff.

In terms of 2009 guidance, I think we will hold off giving '09 guidance until we have the -- I will call them the nonspecial items to talk about.

We are in the process of kicking off our 2009 planning work, and when we have got that in a position to share, we will do that.

I think in terms of the ERP costs, there are certain significant amount of capital associated with the project; and you know, historically, if you take a look at the full costs of an ERP implementation project, about 25% of the total cost ends up running through expense during the period of implementation, and 75% stays capitalized as fixed asset as a historic rule of thumb.

We will obviously see how that plays out as we go through the exercise of doing it for Brown, but those would be kind of the industry norms that we have looked at as we did our planning for the ERP implementation.

In terms of the tax incentives, those will run through as credits in the tax provision as we perform the activities and realize those credits as they have been offered by the various state municipalities; but that 37 million is expected to take, you know, many years to harvest that under the way that the credits are provided under the various state programs.

And Mark, the ERP total investment, can you put some definition around that?

Again, I think we have not given out the total investment there, and we will give you the cost of that each year as we roll out; and our plan here again, is -- while we have a firmly approved budget for it, we don't think of it as separate from the rest of our capital allocation.

Okay.

And one question for Joe.

Joe -- and someone else asked the question before, but just seems like you had an usually large number of BOGO events; in fact, to me it looked like almost the last six to eight weeks every single day has been buy one, get one.

Is that going to -- in your view, don't you risk damaging the value of the Famous Footwear brand by running such extensive promotions consistently?

And just wondering if you could be a little bit more specific in terms of the number of BOGO days that you are planning for Q3 and 4 this year compared to last.

I think you indicated they're going to be about the same, but can you give us the number of days you are planning?

I would have to go back and take a -- we'd have to go back and take a look.

I will answer your -- yes I ran an extra six weeks of BOGO in second quarter that I did not experience in previous year.

I think that was reflective of what was going on in the industry.

I just couldn't stick my head in the sand.

So I didn't like running a business that way.

Third and fourth quarter, as I mentioned -- and I will have to get back to you with the exact number of weeks that we are running in the third and fourth quarter, but it is no more than we did the previous year.

So I will get back to you with that number; but it is -- there's no additional weeks to set third and fourth quarter than there was the last year; however, I am keeping my marking spend flat to last year and going back and -- and yes, I have to get the brand of Famous and not price first.

So did not like running my business the way I did the second quarter, will not run it that way third and fourth quarter.

Thank you.

Your next question is a follow up question from the line of Chris Svezia with Susquehanna.

Just one quick follow up here -- something that has been talked about recently -- but on your Naturalizer retail portfolio, you guys have roughly 270 or so stores, and in the past and prior years you guys have closed and pruned so many unproductive stores, whether it's in Canada or the U.S.

And you know, obviously, the Naturalizer brand having some difficulty here in the first half, but hopefully starting to see some signs of improvement.

What do you need to get that business to start showing some improvement relative to what we have seen over the years and obviously in the quarter?

It certainly looks like the gross margins need to improve, the product margins and obviously the comp; but is what you are seeing in the Naturalizer brand enough to start to move it in that direction, or is there something else going on?

You know, I think, Chris if you take a look, really at the last three years over on the Naturalizer brand, there has been significant improvement on the brand all in, from 2005, 2006, to you know, the time period today.

This last half -- these last two quarters -- have been a little more challenging for us.

And we do believe that the strategies that we are putting in place with respect to product assortments, design and development, the way that we are managing the brand all in, is the right direction to go in.

So I don't know that you are going to see a significant shift in what we are doing, but I think being really smarter and continuing to be smart about the right kind of execution along all of the aspects of our business.

So I don't think there will be a major swing.

Okay.

So -- because I know in the past you guys, have talked about all in, the Naturalizer business is extremely healthy and profitable, but I know that from a reporting basis you guys break out the retail piece and --

Right.

-- you talked about the wholesale piece as well, but just from running a retail business -- and you've started to make some improvements in terms of the product and how -- the appearance of some of the stores recently, I am just curious about what point maybe do you start to see less of a drag on that piece of the business if Naturalizer starts to show some signs of improvement as you move into next year?

Is that possible that starts to be less of a drag?

Mark, maybe you could help, but here's what I would say: I think, again, when we looked at it all in in the prior year, we were certainly looking at an operating ROS of 10% or there above.

And that was -- has been improving over the last couple of years.

Again, first half of this year a little more challenging, given the overall environment and with the brand in particular, but we don't see any reason why that can't continue to show improvement overall in the next 12 to 18 months.

Great, Diane.

I think again, we've had the double digit operating profit margins in '07, '06; and as you said, significant improvement from '05.

The first half was more difficult with some of the product and I think the, you know, negative store per stores, particularly in the first quarter.

The second quarter obviously improved versus first quarter from the store over store performance point of view.

But, we would expect, again, no major changes in store count and continuing to try to get the retail only piece of that to operate at a better break even level on the P&L.

Okay.

All right.

Thank you, guys.

Appreciate it.

And this morning's final question will come from the line of Scott Krasik with C.L.

King.

Thanks.

Diane, following up on Naturalizer, you mentioned LifeStride is going to shift back to the $39 price point, 29,39.

It wasn't that long ago that Naturalizer was the $49 to $59 price point range.

Is there any talk or discussion to maybe trade down there a little bit?

Well, on LifeStride it is actually 39 and 49, coming down really more from 49 and 59 that we had taken that up to.

With Naturalizer, we have got a pretty decent balance, Scott, against, you know, $69 and $79 price points.

And we think that in order to deliver the right kind of value proposition for that customer, we think that's where we need be.

But we are also being sensitive and looking deeper in terms of how we allocate assortments and price points by door with our department store partners.

So you know, with -- understanding that A and B stores can handle certain types of assortment, certain price points and our C, D and E stores really have to look a little bit differently, we are trying to take a much more -- much deeper dive in continuing to understand how this customer is responding at that kind of level as well to make sure we have got that sized right.

Okay.

Then and, Joe, just lastly, how are you looking at boots as a percent of the mix for the back half of the year, and how does that balance with your comp guidance assuming the higher price point of boots?

Yes, we are planning on, obviously -- not obviously, but I think we are following a trend -- our boot business early, especially juniors, has been very positive.

Anticipate that is always a hard business to calculate because it is driven also by weather; but anyway, to answer your question, planning our boot business up significantly, especially as we go into the back half of the third and fourth quarter.

It is factored into -- at least our numbers on margin and an increase in our sales.

So, it can affect your business rather dramatically, especially November/December timeframe; but we are looking for that business to be extremely healthy.

So then your guidance for sort of low, single digit negative, mean you are taking pricing on product in general, you are looking at boots as a bigger percentage of the mix.

Are you assuming the traffic actually gets worse?

No, I'm not looking for the traffic to get worse, but not looking for my Women's casual business and Women's casual and Junior's casual to get better.

Boots, I don't think, can offset totally that trend that we are currently experiencing.

Uh-huh.

I do not expect traffic to get worse, though.

And if you do get a bump in traffic, then there could be an upside.

Yes.

I don't even think you need to get a bump -- get a bump in traffic.

I think, as I mentioned, running down a little bit around 5% in traffic counts.

And when you take a look at being less promotional in the fall than we have been in the first two quarters, take a look at AURs, traffic needs to remain where it is, or just become negative two or three, and then your business starts to get a lot more healthy than what it currently is.

Sure.

Okay, well, good luck, everybody.

Thanks.

Hey Scott, it's Mark.

Back to your question I think you had on the fourth quarter, again I think in terms of comparison to last year, I think excluding the nonrecurring items, we are looking forward to being kind of flattish to down 20% or so.

Okay.

That's really helpful.

Thanks.

Thank you.

Please continue with any closing remarks you may have.

Thank you, everyone.

Again, this was a difficult quarter.

I believe our execution remains solid.

Having said that, I would tell you that I think our business could have been better and there are things we could have done better, and I know that the teams have gone through maybe perhaps even a painful process of reviewing everything that we are doing and making sure that we sharpen our positioning and sharpen our execution.

And we believe that that will help us yield the best results in a very difficult environment; and so I would expect as always, that we will -- we can't predict exactly what is going to happen with the consumer, but we can expect ourselves to beat the competition.

So with that, we'll look forward to next quarter.

This concludes today's second quarter 2008 Brown Shoe Company, Incorporated, earnings call.

You may now disconnect.