Caleres Inc (CAL) 2008 Q3 法說會逐字稿

Welcome to the third quarter 2008 Brown Shoe Company Inc.

earnings conference call.

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

Ken Golden, Director of investor relations.

Thanks, Tina.

Good morning, everyone, and welcome to the Brown Shoe third-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 forward-looking statements.

Factors that could cause actual results to differ materially including those listed in our press release issued this morning and available on our 8-K filed prior to this call, and other risk factors listed from time to time in the Company's SEC reports.

Copies of the Company's reports are available online and from the company's investor relations department.

The company does not undertake any obligation or plan to update these forward-looking statements even though the situation may change.

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

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

Good morning, everyone.

As you know, it was a challenging quarter and we experienced the slowdown in consumer traffic and spending that has impacted retailers and wholesalers of footwear and apparel.

Macroeconomic forces significantly altered consumer shopping patterns mid-quarter and we began to take decisive action and proactive steps to manage inventory and expenses.

We have a great team here, and they managed the business with great rigor and adjusted midstream to respond to these unprecedented challenges.

We are now into the heart of our planning and budgeting process and following the FFANY New York show next week we will complete the working of the details of our 2009 budget.

As we approach our business for 2009 we are developing multiple scenarios that will give us the flexibility to position us to achieve the best possible outcome.

As we set our plans and operate in this downturn environment.

We do not see an immediate change in the economic environment.

However, we are developing initiatives to enable us to compete more effectively and garner market share in a more efficient, resilient manner.

So what does this mean for Brown Shoe?

Well, we are working harder to differentiate our offerings and drive newness in the market through our core brands, as well as the newly developed brands.

As you are aware, we have developed a strong pipeline of new businesses to more effectively compete and win market share.

These new businesses were developed not only to increase our penetration in new accounts and channels, but also because many of them provide terrific vertical opportunities at Famous Footwear.

Our portfolio is shifting toward higher-margin brands and away from low-margin private-label.

We see this as positive movement that will be accelerating in the years ahead.

As you would expect, we are also intensely focused on efficiency and are applying strict disciplines to our management of expenses and capital in order to lower our costs and maximize cash flow and profitability.

We are reviewing every dollar of capital and expense to ensure that we receive an appropriate return.

In doing so we will change the pace of expenditures for new stores and major capital projects.

We have dramatically cut our store expansion plans for the 2009, 2011 timeframe and now expect to open a net of just 25 Famous Footwear stores next year.

We will also reduce our modeling and remodeling activity.

And we are also indefinitely delaying our plans for headquarters redevelopment.

In doing so we will forego a potential gain in the fourth quarter to which we had previously guided, related to the sale of the real estate we own here in Clayton.

But we believe this is an appropriate decision given the climate.

Our logistics and IT initiatives are on plan and on budget and are strategically significantly important and designed to increase operating efficiencies.

However, we will monitor the pace of the investments in these projects closely.

At this time we will maintain our investment in the brands and businesses that are generating strong returns and driving our growth.

During November we increased our equity stake in the Sam Edelman brand to 50%, furthering the partnership we began some 15 months ago.

Importantly, Brown Shoe continues to deliver on its core values applying conservative philosophies to our business such as our stringent inventory management disciplines.

We believe firmly that Brown Shoe is prepared to weather the economic downturn.

We have a heritage in footwear spanning 130 years and have successfully operated in both growing and declining economies.

We operate a diversified portfolio of brands, having long established and valued partnerships throughout retail, and our vast sourcing design and distribution expertise will also be a key advantage for us we navigate through these unprecedented times.

As we look ahead, while we are not as reliant on the holiday season as many other retail companies, we do expect promotional activity to accelerate for the holiday season and have reduced our expectations for sales and profitability.

We have updated our guidance to reflect this more difficult environment.

And now I would like to turn the call over to Mark to review our third-quarter financials and guidance in more detail.

Thank you, Ron.

Good morning, everyone.

Let me begin with a review of the income statement for the third quarter.

Consolidated net sales for the quarter totaled $631.7 million, down 2.2% compared to $645.5 million in the third quarter last year.

Sales at Famous Footwear were up $1.7 million as the impact of operating 78 additional stores offset a decline in same-store sales of 5%.

Our wholesale revenues declined 4.8% as retailers sought to aggressively manage inventories as a result of the declines in traffic at retail.

Our specialty retail business was also down 7.3%, driven primarily by lower same-store sales in the US.

Diane and Joe will provide more color on our results by business unit shortly.

Gross profit margins decreased 100 basis points to 39.3% from 40.3% in the third quarter last year.

The decline was driven by lower margins at both our wholesale and retail businesses.

At wholesale margins were down 40 basis points year-over-year as a result of both higher markdowns and allowances and shifts in brand and channel mix.

At retail our margins were down 70 basis points at Famous Footwear as a result of our efforts to maintain appropriate inventory levels both in quantity and freshness.

Higher shipping costs on our home delivery business also impacted margins at famousandshoes.com and greater markdowns affected our specialty retail business with overall margins in this segment down 470 basis points.

SG&A increased as a percent of net sales to 37.3% or $235.8 million compared to 33.7% or $217 million in the third quarter last year.

The increase in the quarter resulted from two main factors.

First, 190 basis points of this change was a result of the impact of the $16.5 million in nonrecurring costs relating to our headquarters consolidation and IT initiatives in the current year, versus $4.5 million in nonrecurring earnings enhancement plan costs in the third quarter of 2007.

The remaining 170 basis points creates as a result of operating 78 more Famous Footwear stores resulting in higher facilities expense.

And expense deleverage from negative comps at Famous Footwear and specialty retail as well as lower wholesale sales.

As a result of these factors consolidated operating income decreased to $12.9 million or 2% of net sales from $42.8 million or 6.6% of net sales in the third quarter last year.

Net interest expense totaled $3.4 million in the third quarter compared with last year's $2.8 million.

Our tax rate in the quarter was a negative 9%.

The negative tax rate for the quarter reflects the cumulative adjustment of our year-to-date tax expense to our expected full-year rate.

The full year rate reflects a higher relative mix of poor earnings which are subject to lower statutory tax rates and state tax incentives for job creation and training coming from the transition of our Madison headquarters to St.

Louis.

We recognize these tax incentives as a discrete item as they are earned.

Net earnings in the third quarter were $10.4 million or $0.25 per diluted share versus $27 million or $0.61 per diluted share in the third quarter of the prior year.

Third-quarter results include $0.24 per diluted share and costs related to our headquarters consolidation and IT initiatives.

Third-quarter 2007 earnings included costs of $2.9 million or $0.06 per diluted share related to our earnings enhancement plan.

Therefore adjusted earnings in the quarter totaled $20.5 million or $0.49 per diluted share, a decrease of 26.9% on a per-share basis versus $29.9 million or $0.67 per diluted share last year.

Moving to our balance sheet, cash and cash equivalents were $36 million in the quarter versus $79.9 million last year.

The year-over-year decline is largely a result of the Q4 2007 share repurchase and an increasing year-to-date CapEx of $22 million.

Total inventory at quarter end was $469.3 million, up 6.5% from $440.9 million at third-quarter end last year.

Inventory at Famous Footwear was up 9% to $352.4 million on 78 net new stores but was flat on a per-store basis.

Inventory at wholesale was up 3.6% from a year ago.

Specialty retail inventory was down 4.7%.

As Diane will speak to shortly, we are pleased with the aging of our inventory of both retail and wholesale and are taking measures in the quarter to align our inventory with lower sales expectations.

Long-term debt outstanding at quarter end was $150 million, same as quarter end last year.

We did have $24 million of borrowings from our credit facility at the end of the quarter which reflects lower earnings performance and higher CapEx.

Total debt to capital [lease] and at the end of the third quarter was 23.7%.

Capital expenditures in the third quarter totaled $23.3 million which primarily reflects spending for new stores, remodels, the West Coast distribution center and purchase of software and systems upgrades and capitalized software related to our information technology initiatives.

Moving to our guidance for the fourth quarter and full year 2008, we expect full year earnings per diluted share on a GAAP basis in the range of $0.09 to $0.18.

This includes aggregate nonrecurring items of $0.33 per diluted share, $0.43 related to our Madison transition, $0.05 for our ERP project offset by $0.15 in insurance recoveries back in the first quarter.

As a result of positing our HQ redevelopment we no longer expect a real estate gain in 2008.

Excluding these net charges, adjusted EPS for the full year are now expected to be in the range of $0.42 to $0.51 per diluted share.

In the fourth quarter we expect a loss per diluted share in the range of $0.29 to $0.39 on a GAAP basis.

This includes costs of $0.06 per diluted share related to our Madison transition and IT initiatives.

Excluding these nonrecurring items, adjusted EPS in the quarter is expected to be a loss in the range of $0.23 to $0.33 per share.

Net sales are estimated to be in the range of $2.27 billion to $2.29 billion for the full year, and we are targeting fourth-quarter revenues of $515 million to $538 million.

These estimates are based on the following assumptions.

Same-store sales at Famous Footwear of -5.1% to -5.5% for the full year and -5% to -7% for the fourth quarter.

We estimate full-year wholesale net sales to be down 7% to down 9% versus 2007 levels.

In the fourth quarter we expect wholesale net sales in the range of down 14% to down 21%.

Average diluted shares are expected to be 42 million.

Capital expenditures for the full year are now estimated to be $85 million, reflecting new and remodeled stores, infrastructure costs including material handling equipment for the new West Coast DC, capitalized software and systems upgrades for our ERP implementation.

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

Thanks, Mark and good morning.

Both Ron and Mark have outlined pretty well some of our challenges, results and the actions that we are taking to prepare our brands and our business for the economic reality that exists today.

Our teams are battling daily to drive to the best possible outcome for the near term while we make sure we retain opportunities for 2009 and beyond.

As you have seen and read, consumer demand and the water level in the industry has dropped off dramatically over the last number of weeks and it is really impacted all of our partners in one way or the other at every level of distribution.

It seems that the consumer has moved away from that conspicuous consumption to more conscious kind of consumption.

And to combat this pressure we remain focused on four key areas.

First of all, driving our core businesses of Famous, Naturalizer and Dr.

Scholl's as we believe these are the brands that are aligned with the mindset of the consumer today and are positioned to perform well and weather the current environment.

Secondly, we are appropriately allocating talent resources and marketing support across our portfolio to drive these core businesses, as well as new ones that have the potential to support our growth in the future.

Third, as we always do we are focusing on managing our inventory all the way through the supply chain, whether it is at (inaudible)sales ratios at retail or per store inventory with even more stringent guidelines in this next quarter and this next year.

And finally toward the obvious area of expenses which we plan to manage very tightly.

Beginning with a review of our wholesale business, in total wholesale sales declined 4.8% in the quarter with lower sales and increased markdowns on allowances resulting in a decline of operating earnings to $18.5 million from $23.1 million last year.

Within wholesale our branded businesses performed relatively well.

In fact, Naturalizer reported a solid increase in third-quarter sales which was a strong turnaround from the spring season.

This was driven largely by an improved assortment but importantly by the new n5 comfort technology, which really enhanced the intrinsic value of our product.

Our Brown New York brands were up nicely in the quarter, as well, with Aigner leading the way with more than a 40% increase.

And our Dr.

Scholl's brand family continues to hold its own as well as all channels of distribution.

On the other hand, our LifeStride business was challenged.

As was our private label and private brand volume in the quarter, a business that now represents less than 15% of total wholesale sales.

As you know retailers continue to increase the amount of private label and private brand resource in house and as a result we are moving even faster to direct our resources to our branded assortment.

Dan Edelman has delivered a strong quarter and while small today it is expected to become a more important component in the future.

We look forward to continuing to work with him and his team to help drive the business and in fact we will be launching a new line, Libby Edelman, next spring and of course our Fergie and Fergilicious brand launches are eagerly awaited at retail and are currently planned to be in roughly 1300 to 1500 stores nationally.

These are two of our more important new businesses launching for spring 2009.

Turning to our specialty retail division which primarily includes Naturalizer retail stores and our shoes.com e-commerce business, net sales for this segment totaled $65.6 million in the quarter but same-store sales decreasing 6.7% driven by reduced traffic in our US stores.

Total net sales were also affected by a decline in the Canadian dollar exchange rate.

Additionally, shoes.com reported a 7% decline in net sales as we thoughtfully cut back on customer acquisition expenses and initiatives, so that we could focus on conversions and stabilizing our new platform.

By quarter end the site achieved stability, and we feel confident about the speed and accessibility of the site going forward.

In total this segment incurred an operating loss of $3 million which compared to an operating loss of $1.9 million last year.

Now turning to Famous Footwear, we managed the business well especially considering the significant move we made from Madison to St.

Louis, moving more than 60 and hiring another almost close to another 170 new associates, all while managing this considerable shift in consumer traffic during the quarter.

As Ron mentioned earlier, things looked pretty good during the back-to-school time period where we actually made more money during that period than we did last year.

However, the sharp slowdown in consumer spending across channels reduced traffic, plus higher markdowns and allowances and consequently is reducing our expectations for the fourth quarter.

We are taking the necessary steps to adjust to this new economic climate and believe that we will continue to be positioned with our brands and our portfolio in these difficult times.

With that I would now like to turn the call over to Joe to give you a review of Famous' results in a bit more detail.

Thank you, Diane, and good morning, everyone.

Famous Footwear reported a disappointing third quarter.

While we began the period with a solid back-to-school season, driven largely by athletics and sandals and transitioned into our fall assortments well, sales trends slowed dramatically mid-September driven by lower traffic in a broad-based decline in consumer spending.

Launching a need to shop Famous Footwear remains our customers' destination of choice for her and her family.

However, she continues to shop much later in the season awaiting better bargains during clearance and in between these key times, the business has become much more challenging.

In total third-quarter net sales were $362.7 million, increasing $1.7 million or 0.5% from last year.

This increase was driven by the addition of 78 net new doors.

However, it was offset by a 5% decline in comparable store sales.

Within our comparable store sales base areas affected most by the subprime mortgage crisis especially in Arizona, California, Nevada and Florida where we do have a high concentration of stores, experienced particularly weak performances which impacted our overall rate of growth of comp growth by roughly 200 basis points.

Operating earnings were $20 million, declining $10.8 million from last year's third-quarter operating earnings of $30.8 million.

This was driven by a 70 basis point decline in gross margin profit as we increased promotional activity to maintain market share and manage our inventories.

In addition, SG&A as a percent of sales increased by 230 basis points, mainly due to fixed cost deleverage from operating the 78 additional stores since the same time last year.

Regarding our sales metrics, customer traffic and converging continued to be challenging during the third quarter.

Traffic was down 6.9% from last year and conversion was down 2%.

On a positive note, our pairs per transaction were up 2.3%; average unit retails rose 2.4% even with the additional promotional activity.

On a same-store sales basis our athletic business did post a relatively flat performance with sales comping down just at 0.3%.

However, our women's business was down 10.2%, men's 9.8% and our kids business was down 12.3% during the quarter.

Our accessory business did achieve a 4.1% increase in comp sales.

We do continue to emphasize our stringent inventory management discipline and while this did result in some increased promotional activity in the quarter, we were successful in clearing inventories and are positioned well for the holiday selling season.

Inventory quarter end on an average store basis was flat yet up as Mark mentioned 9% in total due to the 78 net new stores open since the third quarter of last year.

In regards to our store expansion, during the quarter we did open 18 new stores while closing seven and we did remodel five additional stores.

For the year we expect to open 89 new stores and close approximately 25 locations ending the year with 1138 Famous Footwear and factory brand stores.

As Ron mentioned, we continue to believe it is prudent to scale back new store expansion as we wait for improved sales environment and in doing so we have applied stricter criteria for new store ROI.

As mentioned in 2009 our current plan is to open between 40 and 50 new stores while closing approximately 25 to 30 locations.

As we begin the fourth quarter we believe we have identified compelling assortments and brands and intend to gain market share during the holiday season.

Our priorities are remain competitive in the marketplace and focus on assorting our stores with brands and styles that are current and relevant with our core consumers.

We are, nonetheless, prepared for a tough holiday.

With that in mind, we decided not to reduce our marketing spend as we believe this effort will enable us to gain market share.

To this end we believe we have a key advantage.

Given the more than 6 million loyalty members in our rewards program, we actively communicate with this group by e-mail, direct mail and through CRM.

We will also maintain our marketing in other channels such as print and media to ensure that Famous Footwear remains a key destination for holiday.

This holiday season we will continue to maintain our strict inventory discipline, making sure that we position Famous for first quarter receipts of next year.

And now I would like to turn the call over to Ron for his closing remarks.

Thanks, Joe.

As you can tell it was a difficult quarter.

Last week we certainly spent a lot of time in planning meetings as we intensely review the scenarios in which we are looking at the business as we go forward.

But at the same time I had the opportunity to go on a number of market visits and an opportunity to go to Colorado Springs where I met with a number of other CEOs and had an opportunity to look at some of the effects of the housing crisis and the number of homes that are left with foreclosure and mortgage, etc.

and you can certainly see and feel that consumer sensibility as you walk through the stores and you walk through our departments.

Albeit I felt we were tremendously well positioned in the marketplace.

On Tuesday night I had the opportunity to fly to New York to begin work on the FFANY show next week and it so happened to align with the opportunity to firsthand experience the opening of our Via Spiga store in Soho in which I got to see the general and the enthusiastic sponsor to the product by both the editors and the fashion people in the store.

Later in the week I had an opportunity to take my 1.5-year-old grandson on his first footwear experience and to go out and buy a pair of new snow boots and a pair of new [lighted] product and once again you were really pleased with the assortment and the service levels that Brown Shoe Company is capable of delivering.

It would have been a complete week except I also had an opportunity to address the diversity initiative going on in St.

Louis this week, and as I was leaving a young lady, young professional who works for the association stopped me, took off her shoe and raised it to me and said and n5 by Naturalizer inside and she said thank you.

So while the economic reality is very, very difficult and it is a struggling time out there, what I believe my market visits show me is that we are doing the right things to develop product the customer wants and deliver service the customer expects.

That is what is going to pull us through during this economic downturn and now I will open it up for questions.

(Operator Instructions) Mr.

Svezia, Susquehanna Financial Group.

Good morning, everyone.

A couple questions here.

I guess first, Diane, for you, I guess can you just maybe quantify your backlog position at the end of the quarter?

And then secondly, maybe could you just talk about obviously the department store channels we know obviously what is going on out there.

Everyone is talking about reductions and open to buy, etc.

Maybe if we just talk about the backlog in the context by brand in terms of what is going on, Brown New York, what is going on with Naturalizer, LifeStride, etc.

as you look to spring.

And then I have a follow-up question, please.

Let me address it in total first.

Clearly the department store sector really again as I said, every level of distribution across the marketplace is under some kind of stress.

And as we look specifically at our backlog on order as we (inaudible) are going into the fourth quarter it was down about 10% and as we look toward the first quarter, I think we are looking at about the same rate and actually Ron just pulled this out for me and about 9% down going into -- right now actually going into this particular quarter.

And as we look across the total branded business I would say there are not significant swings between each one of the brands that generally speaking depending on the channel.

They are pretty much plus or minus around that one with the exception of the private brands and private label business, which as I mentioned in the call just a minute ago, that now represents a little bit less than 15% of our total wholesale business.

So we do see a little more erosion there but other than that it is kind of plus or minus right around that 9% or 10%.

Okay, and on the inventory position which it seems relative to your outlook for the fourth quarter and what looks like for the backlog position as you head into Spring, a bit high.

So I guess I just want to get some clarification, both on the Famous Footwear piece, I know you guys are running BOGOs for the balance of this year and maybe on the wholesale piece, just where that higher inventory seems to be and what do you anticipate as you get through the fourth quarter; where you think the inventory levels should be.

On balance on our wholesale brands and inventory there, again we are in pretty good shape on that.

And I am pulling up some data on this.

Again, in total we are just slightly up.

It is very minimal and a couple million dollars, that's it, in total inventory.

Which really again if I look at and pan it down, it's really been in the authority brands there which really supports our higher sales ratio there.

So I think we are in good shape there.

As we look to specialty retail, specialty and shoes.com our store inventory looks very good and is down as I mentioned 5% to 7%, I think as we said.

And our shoes.com inventory is a little high that we are working down over the course of the fourth quarter to get in line with where it was last year.

So in general I think we have the actions in place to manage inventory the way that we need to and I think I would ask Joe to maybe comment on Famous Footwear and his thoughts around inventory there.

As I mentioned, the inventory was flat at the end of the quarter.

I am not disappointed with that at all especially when we take a look at the initiatives we took for third and fourth quarter 2007 to reduce our inventory on a per store basis.

So I think we were on that issue much earlier than other retailers.

And also have taken consideration, that our units are down 4%.

So our age inventory even at this time this year versus 2007 was even cleaner than this time last year, so I am not at all concerned with our inventory levels in the current time frame.

One last follow-up if I could just put this in here, as you look to, talk about your capital expenditures and allocations; any thoughts?

I know you haven't done too much in 2009 yet, but you talked about in terms of the store openings on the Famous side, could you maybe add some color about what you are looking for for CapEx for fiscal year 2009?

In terms of we -- as Ron mentioned we are still finalizing our 2009 planning, so I don't want to give a specific 2009 number because we are continuing to look at where that is.

I think we indicated in the release that over the three-year period of 2009 to 2011 we have cut our prior plans by $72 million.

You will recall that we are in the middle of a couple of large infrastructure projects with our West Coast distribution center where we will have some carryover capital spend in 2009.

And our IT initiative which is really ramps up in Cap spending in 2009.

We would expect 2009 capital expenditures to be down significantly from 2008.

But there is some limit to that reduction because of those infrastructure projects; as we said we have cut significantly the new store and remodel capital expenditures in '09.

Okay.

Thanks.

Heather Boksen, Sidoti & Co.

I realize you are still in the budgeting process for 2009 but if you look back at the last couple years, you had a lot of spending for Famous Footwear, 2007 had the spending for the earnings enhancement plan.

What is with both of those things out of the picture for the most part in 2009, what is a good run rate for SG&A going forward?

We haven't completed our 2009 processing or planning.

We are looking to hold the increase in capital -- excuse me -- in SG&A expense to the extent the lowest extent possible factoring in the annualization of new leases that are not yet anniversaried.

We haven't finalized that target, so I can't really tell you the number.

But you would expect your SG&A -- when you say go up in line with the store growth, I guess that is excluding all the charges you took this year.

Correct.

Okay.

I guess my second question is borrowings at year end, where do you expect to be on the revolver?

We would expect to be borrowed in the neighborhood of $80 million to $90 million at the end of the year with a commensurate amount of overseas cash.

Okay, and one last quick question for Diane.

I know in previous quarters they've called out Naturalizer as one of the brands that tends to be underperforming within the wholesale division.

This quarter you call it out as one of the better ones and I realize this is a tough environment but is there anything changed there for the better?

Yes.

I think so.

As I mentioned I think on the last call we did have a difficult spring season on Naturalizer.

And we had really rebalanced our assortments I think better across where the consumer was shopping against more casual items, but the real key thing has been this new n5 technology that we've put into the footwear.

That we see much, I guess better sell-through right now particularly in department stores with this new n5 technology.

So I think that has been a really significant point of the shift I think in the performance of our overall business this quarter.

So that is pretty much why.

And the n5 is in the spring product, too?

Yes, it will be in every single Naturalizer shoe that we supply and actually with even more enhanced communication on that going into really the end of this year and next spring.

All right.

That's helpful.

Thank you.

Mr.

Stein, Soleil Securities.

A question on the credit line.

My understanding is it expires in July of 2009; and wondering at this point if you've had discussions with your bank group and if we should expect to see some action on the credit line before it does expire.

Absolutely we have been in conversations with BofA who is our lead bank on the facility.

We are currently in process of going through the mechanics of an extension and amendment and would expect to complete that process late fourth quarter or early first quarter.

Great, and question with regard to covenants on the line; can you talk a little bit about what they are?

It is a little bit vague in the 10-K.

Sure.

The facility is an asset-based lending facility so it really has very little in the way of covenants.

It is all based on our receivable and inventory borrowing base.

So no fixed charge covenant or leverage covenant?

No.

Okay and Mark, the tax rate for the year, could you give us an estimate?

Good question.

When we closed the third quarterly we estimated the annual effective rate at 15% because of the wide array of outcomes and the guidance range, we didn't give a guidance range for the fourth quarter.

But depending upon the degree of domestic earnings versus foreign earnings I would expect again a somewhat aberrant tax rate in the fourth quarter as we will also continue to earn incentives under the various programs which would generally be lowering that rate anyway.

But the non discrete item rate is quite volatile depending upon the mix of domestic and foreign earnings.

Over time, Jeff, we would see that our -- the foreign earnings tends to have a larger component of private label business.

So as that continues to go down and we move more and more branded we probably see that tax rate going up a little bit.

But having said that, all of the major customers we have, the very large customers we have, those programs flex almost indiscriminately season to season as they think about what programs they are doing and what programs they would like us to do, which portion we would want, they would like us to land ourselves and do more warehousing for and which portion given there.

So it is a very variable situation.

And one real quick one.

Wondering if you can talk about potential deflation in your cost structure next year?

And I would be referring specifically to a potential drop in cost of goods with a stronger dollar and perhaps excess manufacturing capacity overseas.

And also if you could talk about how many leases, come up for renewal at Famous Footwear next year and if you've been in discussions with respect to rent reduction.

I will start with the last, Jeff.

It is Mark.

In terms of lease action dates in 2009 we probably have about 200, between 225 and 250 lease action dates scheduled for 2009.

We have been very active in terms of addressing leases and lease costs over the last number of months.

We have completed the lease actions on probably a similar number of leases in 2008 as we just spoke about for 2009 and to date we've got between $5.5 million and $6 million of annual rent concessions from those lease actions we've taken in recent months.

Great and cost of goods?

In terms of cost of goods, as you know we saw significant increases this last year, anywhere from 5% to 12% or 15%, depending on the brand channel, etc.

There is a lot of shifting going on right now with supply and demand over in the Far East with factory closings and you name it.

So I think we are going to have a better sense of what that is going to look like after Chinese New Year.

To see whether or not some of the decreases that we are seeing in (inaudible) goods it is going to affect our cost of goods or not.

Or if the factory closures and the ability to get shoes made going to impact prices.

So it is a little bit in flux right now, so I would say we have a better chance of really getting a handle on that after Chinese New Year.

Got it.

Thank you.

Mr.

Krasik, C.

L.

King.

Good morning.

A couple questions first on wholesale, Diane, Fergie, the 1300 or 5000 doors, how many of those are Famous?

About 800 of them are -- Fergilicious, I am sorry, Fergilicious about 800 for Famous, and Fergie Joe, how many.

Fergie we are going to do about 75 stores and Fergilicious about 800.

Okay, good.

And then Naturalizer if you X out Natural Soul which was new this year, was that still a better performer or was that --

If I took Natural Soul out of the Naturalizer numbers?

Yes.

All in it's up.

Soul is at Kohl's and it is performing reasonably well.

So I would say all in, I guess I am looking at the numbers here it is about flat for the quarter.

Both Naturalizer and Soul together.

Okay, and then Joe, in Famous the inventory being flat it is tough to see it because women's, men's and kids are all down; so where is that inventory that might be a little extra?

Well, where we really put the emphasis on especially third quarter and so for fourth has really been in the women's casual, and that is a very broad category.

But that is where the business has struggled the most is the women's casual business.

So the inventory there is down, and our men's business is down also.

Where we really see a flat inventory is more so in athletic where that is the only bright spot.

So the inventory is proportionate right now to the sales rate we have but it is down especially in women's casual and in men's.

Okay, and the reason for higher ASP's is because the excess inventory and athletic?

No, not really.

We've received the higher average sales as we went through the balance of this year, so was a higher cost that received especially affecting the third and fourth quarter receipts, so that was across the board.

Not but actually so much by athletics as the nonathletic business.

Okay, and then if you gave it I'm sorry.

Did you say what the comps were ex-California, Nevada, Arizona, Florida?

No, I didn't say what the comps were.

I said basically our business was affected in those markets 200 basis points worse than the balance of our stores in the foreclosure markets.

Drew down the aggregate performance by 200 basis points; those markets were obviously down low double digits.

Okay, and then this is just sort of a philosophical question, but Mark and Ron, did you consider as the development deal for your headquarters was going away -- since that was a part of your guidance and the stock had come down from the low teens into the mid-single digits -- had you considered updating investors on that to take that out of the guidance?

Well, the reality is that this has been very fluid conversation.

And so to actually met with the developers literally in the last seven to 10 days about what is the right thing to do given where we are, where we are going to do.

Again the site is terrific development site; activity from the developer probably will continue about planning what the right opportunities and what the different opportunities are for the site.

But at this time we are just not believing it would be a thoughtful thing to do to move forward with the headquarter site itself.

So that is why it was just a recent development.

Fair enough.

Thanks, guys.

Mr.

Poser, Sterne, Agee.

Just a question on the margins and SG&A, looking at, how are you looking at margins and SG&A into Q4 with the new guidance?

We would expect that we would have decline in gross margin and an increase in SG&A, but the ranges on those vary somewhat given the breadth of the quarter guidance.

Again we don't want to give you line item guidance but directionally we would expect to continue to have some gross margin pressure and incremental SG&A.

Again I think we talked about the fact that we have not taken marketing expenses out of our spending in the fourth quarter.

In fact, we intend to spend more marketing than we did a year ago.

Just the one thing that we can't see and you talked about it already but could you give us the range of tax rate that is within the guidance, to get to the number just for the tax rate number?

We would expect to have kind of a similar level of discrete item in terms of the incentives earned as we experienced in the quarter.

And I would expect -- it is so hard to answer the question, Sam, because of the volatility of the mix of earnings.

But I would expect it would be a significant benefit number as opposed to a provision number.

And that is built into the negative guidance which would then just put more pressure on the margins and SG&A?

Right.

Okay.

Diane, on the wholesale inventories and on this dramatic change from being down for to now being down potentially in the teens in the fourth quarter, is this -- how are you planning to move through all that inventory on the wholesale side?

Well, a couple things.

I think first of all we are trying to be very thoughtful and considerate in our look into the fourth quarter because as I said a little earlier, when we look at our unshipped order position going into it, it doesn't quite look as dramatic as the forecast that we have.

As you think about, Sam, and you know very well the store forecast that we are hearing from a lot of our retail partners is really caused us to be very conservative again in our thought process about how we think about the fourth quarter.

And the teams, we are taking action on slow-moving goods already at retail.

We are managing to ship goods to other channels of distribution and customers as we need to, and we are canceling goods along the supply chain as well.

So it is a combination of lots of different actions that we need to take in order to make sure that our inventory stays in line.

I would assume this happened quite quickly where the I mean, where it happened quite quickly where the air brakes got put on and a lot of that inventory was already in transit to you which you would have liked to have canceled three months ago if you could have.

Yes, not so much.

Again, I think our teams do a pretty good job of reading the tea leaves every month along the way to make adjustments to inventory.

So I think that we do a pretty good job of that.

I am not going to say that we are not going to continue to be challenged for a while on it, but I'm pretty confident that we will work through it in the right way.

One last question on Famous Footwear.

What changes in the promotional activities going to happen?

They've been running a lot of BOGOs lately, and I don't know how successful that is being.

Are you going to go to more targeted price point sales or what kind of adjustments are you making to the promotional strategy there?

Yes, we will remain in BOGO for holiday, but it is really directed more to the consumer, to her through direct mail, through e-mail, through the rewards program.

We do have some additional radio which is massed in January but the huge effort is a direct message to her connecting with the individual customer.

Thank you very much.

Jill Caruthers, Johnson Rice.

Good morning.

If you could talk about your specialty retail segment, it is definitely a drag on your operating profit line; comps have been lackluster for some time, just can you talk about that positioning, the importance of that division?

And given the weakening overall results have you evaluated that business, possibly closing stores or just talk a little bit more about that.

I'll take a stab at this and then I will ask Mark to step in, as well.

First of all, specialty retail consists of really two primary components, Naturalizer retail stores and our shoes.com business.

With respect to our Naturalizer stores, when we again it is hard to separate the wholesale and the retail businesses and not think about them together.

And I think as I've mentioned on a number of times over this last couple of years we have been able to get the operating margin up to high single and low double digits.

And we believe even at the end of this year when we put those two businesses together that the operating margins are -- while not going to be where they were last year, are going to be respectable.

And we think this is a key channel to really continue to stick to our customer.

So it is one of -- that piece of it.

The second piece of it is our shoes.com business.

And as I said, our sales were basically down in the quarter.

As we managed traffic a bit so that we could focus on not spending money because the high variable costs on the e-commerce site marketing it, so what we were able to do was not to take advantage of organic traffic and focus on conversion rates which we have actually seen in the last 30 days continued to improve, and make sure that we have the site as stable as we possibly could.

So we are feeling pretty good on that side of it but as we go forward while there is lots of moving parts on the shoes.com site to get the business model in line, we feel that is an important strategic opportunity for the company going forward.

Because we do look out next year we are going to open a handful of Naturalizer outlet stores.

There is a number of centers that we haven't been in that are highly rated and given some shifts in real estate became available, and we think those are going to be highly productive stores or we wouldn't open them.

We also have a small pilot going on and we will continue to have a pilot going on with a new concept called The Closet, which early indications we are excited about.

I think that innovation and freshness in the retail platform is an important element to keep piloting and testing on.

So we will continue to do a little bit of that.

And then while I'm not actually sure if it shows up in Specialty or if it shows up in International on the segment reporting, we will continue to open I think 25 more stores.

15 joint-venture stores.

15 joint-venture stores in the Far East next year, and then again our joint venture partner will open a number of franchise type stores as well.

So again, we look at it, Jill, all the time because we understand that the reporting is not very transparent.

And we consistently come back to make sure that we are looking at the EVA process in terms of the value added of these stores.

Clearly in the downturn, the economic situation it is, they are clearly less profitable than we would like or they have been.

But we believe net-net they still are a positive attribute to the brand.

I appreciate the comments.

And just a quick follow-up on a previous debt question, what was your current availability on your credit facility at the end of the quarter?

We had $311 million available at the end of the quarter.

We had $24 million drawn, and then we had also some outstanding letters of credit, which are relatively constant.

Mr.

Svezia, Susquehanna Financial Group.

Just a question for Joe real quick, just on Famous.

At this point what level of comp you need to begin to leverage the business, I guess, in this type of environment?

If you take a look in the current environment, we are going to need someplace in the neighborhood of at least a 2% comp to take a look where we get back to the type of metrics and profitability that I deem acceptable.

So we are looking at least a 2%.

Joe, how are you looking at your open to buys?

You look to spring personally in terms of, obviously, it seems like your inventory being flat on a per store basis.

But does that come down as you go into spring, or how are you looking at your open to buy, obviously, for spring at this point?

We are still looking at the open to buy to be down slightly for spring.

Again, as you take a look until you see a business trend change, which I don't think we are going to obviously take a look at February 1 and all of a sudden it's going to get a lot better.

So it will be -- our purchases for spring are down slightly for first quarter until we see a change in business.

So, obviously, our inventory per store will be again down for first quarter.

Then the last question I have is philosophically over the years, Brown Shoe Company, you guys have gone through transitions, Project IMPACT, Project EXCEL, closed stores, made transitions, consolidations.

I guess as you reflect upon your business at this point, and I know you are not talking about next year, but do you see as you look at your business a possibility for additional store closures, whether it is on the Naturalizer business, additional consolidations?

Maybe you could just kind of maybe just give us an idea of where you are actually seeing after all these years the benefits on the margin from all that consolidation that you have done.

Where is it showing up on the margin at this point?

Chris, it is a terrific question.

And I would tell you that I know this, we are glad that we took all those actions.

I think that the survival and success, whatever success we have had, could be attributed to all those actions if you start with the project back when we started Project IMPACT and the significant focus on changing the way we fundamentally managed our inventories and how we have carried that discipline through for a decade now to terrific results.

When I think about when we had the projects to change and realign our management and our store basis, particularly with the specialty retail group.

But also you will recall that there were three years, I believe, where we had a negative store growth at Famous Footwear as we cleaned up and made sure that we had the right retail locations.

And again, we didn't just do it as a project, but we instilled a disciplined approach to managing those leases on a go-forward basis.

So we think that we are cleaner as well.

There is no doubt that in this planning cycle and the unprecedented nature of the slowness of the economy and the softness of the consumer has led us to challenge ourselves, as I spoke to, to develop a multiple scenario planning model by which we will take deep dives around each of those areas.

Specifically you mentioned whether it is the store base, whether it is the specialty stores, whether it is brands, individual brands or geography and fixed expenses.

So it is, I believe it is always the silver lining in a downturn environment that forces management to step back and in essence since you have to take a different cut because you are charged with making sure you deliver the best outcome you can.

And so if the sales continue to be challenging and as we said at the opening remarks of the call, we believe that the current future environment is not going to change.

This is the environment we are in right now, and we have to manage to that environment.

We just finished -- virtually haven't finished but we are pretty complete on the finish of the move of Madison to St.

Louis.

We couldn't have done it at any better time.

It has worked famously well, if you will.

We certainly benefited from the closure of May here in town to really up our talent base.

And so when we walk the halls today and joke and speak to it, too, we are just so enthusiastic about the rising talent base.

At the same time the real benefits and synergies don't come in the merely moving of the physical environment.

It moves from the opportunity to synergize and talk to one another and build that straight across.

I believe that the benefits will show up in the launch of probably most visibly in the launch of Fergilicious and Fergie and Libby because our teams have been working side by side, hour by hour to develop those opportunities as we go forward.

So I think we are pretty excited about that.

I think on a call not too long ago, Chris, we said we are nearing the end of the transformation and it has been a long time.

Literally years or some of us probably think of it in terms of decades, that has brought us to a place and a platform that we feel very comfortable, that given normal economic times we could make significant inroads in growing our business and our market share.

We think it is prudent to be realistic and pause as we do and take this opportunity to go back and I think Mark would say double down on our efforts to make sure that we are as efficient and effective as we think we are.

And of course when we do that work we find what everybody else would think you find, there are opportunities to be more effective and more efficient.

And I think we will be expressing those in the way we plan next year.

And hopefully give us an opportunity to have a better outcome.

Thank you for the response, Ron, and best of luck around the holidays.

Mr.

Stein, Soleil Securities.

Just a couple ones.

Try and understand a little bit better what is going on on the wholesale side in the fourth quarter; kind of indicating 9% drop in backlog going in but indicating high teens, potential high teens drop in sales.

Where do you see most of that sales drop coming from?

Is it coming in private label?

And I presume that also includes some upfront shipments from Fergie.

And I am wondering if you could talk a little bit about -- I was a little confused about how many big box stores Fergie is actually going into.

If you could separate that from Famous Footwear.

Be happy to.

With respect to the way that we are thinking about the fourth quarter, as I said our external unshipped order position right now is down about 9%.

Again, as we move through the fourth quarter we think that it is going to continue to be a challenging environment.

So we want to be cautious about how we forecast that.

When we look at where the declines are going to be coming from, we do believe that it is primarily a -- it is quite a bit in the private brand and private label part of our business.

In addition to that, there is a little bit of a belief also that there will be certainly a lack of reorders during the season, as well.

So it is kind of a combination of all of those components that are causing our thought processes around the fourth quarter.

As we look towards Fergie and Fergilicious and Fergie is really going to be in somewhere around 100 to 115 doors, and that is some Famous Footwear but also Nordstrom's and other accounts.

And then Fergilicious is last count I heard was approximately 1300 to 1400 doors, and that is a mix of our own fantastic Famous Footwear chain along with JCPenney and a number of others.

So it is really a pretty good broad base of business.

I'm not sure whether you probably wouldn't recall, but we are really positioning the Fergilicious business to really be in the national chain part of the marketplace.

We think that as the $39-$59 price point is really where we need to be with Fergie at higher price points, at $79 and up in department stores.

Okay, and with respect to planning at Famous Footwear, why only plan down slightly from an inventory standpoint, when it seems to me that the business is trending worse than that?

It would seem you are setting yourself up potentially for higher markdowns in the first half of next year.

Two things.

I guess two comments is we were extremely aggressive -- this business just did not turn South in 2008; it really started in especially in the quarter three and four 2007.

So we have been extremely proactive with our inventory since the third and fourth quarter of 2007 and through the balance of 2008.

I think we also have to be very thoughtful in taking a look at our inventory as we go through the first quarter and second quarter of '09.

You can force your inventory dollars and units down so low that you don't become important to your consumer anymore.

So that is a balance that we take a look at on almost on a weekly basis.

So our inventory is down.

Our purchases will be down consummate with the business but a concern that you drive it down too far and that is what we discuss on a weekly basis right now.

At some point you don't become relevant to your customers.

One way I think about it is that we made a decision probably going back maybe 12 months ago, but real estate has a lead time so you never quite get it right in terms of where your mindset is at.

But we now really focus on opening a Famous Footwear box in about 6500 square feet, say 8500.

6,000.

6500 moving to 6000 from sort of 8000.

So one thing that you when you think about is that we have a lot of stores; the vast majority of the chain is north of that number and so that is one of the reasons why as we've opened up new stores we believe we can generate the same sales and productivity out of a more efficient and effective box.

So in some of those old stores you've got to maintain inventory position, but then you have to maintain inventory flow, too, so you got to keep it moving and keep it clean.

The number that is always good to look at is the actually the aging bucket.

We are actually cleaner at this stage this year than we were last year.

And so we are willing to continue to work on that.

Thanks.

Thank you.

We truly appreciate your continued interest.

I think Brown Shoe remains a strong company and is readying itself for the economic conditions of today.

We have strong brands and high customer loyalty and we are committed to increasing our efficiency and lowering costs.

And believe that our company will emerge from the economic downturn stronger and better able to capitalize on the many opportunities which we see for our business and our brands.

Thank you and look forward to seeing you next time.

Ladies and gentlemen, this concludes today's third quarter Brown Shoe Company Inc.

earnings conference call.

You may now disconnect.