Caleres Inc (CAL) 2008 Q4 法說會逐字稿

Welcome to the fourth quarter, year end, Brown Shoe Company, Incorporated, earnings conference call.

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

Thanks, Rachel.

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

This call is also available to the public via webcast in accordance with the SEC Regulation FD.

Before I turn the call over to Ron Fromm I'd like to remind you of the Company's Safe Harbor language.

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

Discussion of the Company's future plans and other statements in this call that are not current or historical facts are forward-looking statements.

These involve known and unknown risks and uncertainties that could cause the actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statements.

Factors that could cause actual results to differ materially include those listed in our press release issue 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 reports are available online, and from the Company's Investor Relations department.

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

And now I'd like to turn the call over to Ron Fromm, Chairman and CEO.

Thanks, Ken.

Good morning everyone.

Thank you for joining us today.

With me today are Mark Hood, our Chief Financial Officer, Joe Wood, President of Brown Shoe Retail and joining us from our office in Italy is Diane Sullivan our President and COO.

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

The fourth quarter marked one of our most challenging periods in our Company's 130-year history.

The continuation of the economic uncertainties and credit crisis drove a dramatic increase in the promotional activity of retailers throughout the quarter which had a detrimental effect on our sales and profitability.

While we are not satisfied, we did deliver results within the adjusted guidance we laid out on our last call.

However, our GAAP results were also negatively impacted by a number of non-recurring special costs including those related to initiatives that were previously announced as well as the goodwill and intangible asset impairment of $119.2 million after tax.

That were not forecasted in our guidance.

The total of these charges was $141.5 million after tax or $3.40 per diluted share.

Without the impact of these items our adjusted loss in the quarter was $11.5 million or $0.28 per share, at the midpoint of our $0.33 to $0.23 per diluted shares range which which we provided on the third quarter results call.

Mark will walk through these items with you in a few moments.

Over the last few months we have taken actions to position our Company for operating profitably and positive cash flow in what we expect to be a continuing challenging 2009.

To this end we have improved our inventory positioning with aging well below the prior year.

We've increased our financial flexibility with the expansion of our borrowing capacity under the credit facility and lengthened the term to five years.

We have implemented actions that we expect will generate cost savings of 28 to $31 million in 2009.

We continue to focus on managing our real estate portfolio and we are working with our landlords to align rents to the traffic being generated in their centers.

And we reduced our capital expenditure plans by lowering store openings, putting our headquarters project indefinitely on hold and increasing financial expectations on investing capital.

Capital expenditure in 2009 which includes a full year of expenditures related to our IT initiatives are planned in the range of 60 to $65 million, down from $77 million in 2008.

The investment in our west coast distribution centers will provide transportation savings beginning 2009 and our IT initiatives will begin delivering cost savings in 2010.

Additionally we expect these projects to increase our speed to market; improve inventory turns and improve our business intelligence capabilities, enhancing sales growth and profitability.

Additionally we completed the move of Famous Footwear from Madison to St.

Louis and are now benefiting from being a truly integrated wholesale retail operation.

During the year we also made investments to broader our consumer reach with international expansion, the growth and consolidation of Sam Edelman and enhancing our D to C capabilities with shoes.

com as well as the introduction of new footwear brands, Fergie, Fergalicious, Vera Wang Lavender Label and Libby Edelman.

While small today these brands offer us two vertical opportunities, and are expected to be drivers of our future growth.

Operationally the year included solid progress toward achieving some of our long-term goals.

We did increase our diversification, aligning our portfolio of wholesale brands to the channels where our customers shop.

We expect this effort to enable to us expand our growth opportunities and increase our resiliency going forward.

To this ends our overall wholesale branded mix-- sales mix in the national chain and shoe chain channels has increased, while continuing to lower our penetration of less profitable private label business at the mass.

Additionally we added highly desirable brands to our portfolio.

As I mentioned Libby Edelman, Vera Wang Lavender, Fergie and Fergalicious were all introduced this year and Sam Edelman has continued his solid growth.

While these businesses do not offset the 10% decline in year-over-year sales volume at wholesale, they are in line with our strategy to increase our branded business.

These efforts offer vertical opportunities with our own retail distribution and channel opportunities through which we expect to build back our wholesale volume.

Just as importantly, Famous Footwear maintained market share in a year that was very challenging in a challenging environment, demonstrating that providing brands at great value continues to resonate with American families.

As we begin 2009 our priorities are focused on improving profitability, maintaining liquidity, and enhancing cash flow.

We believe our brands and businesses are positioned well for this environment given the affordable price points within our wholesale brands as well as at Famous Footwear.

And, we are intensifying out efforts to offer even greater value with initiatives targeted at stabilizing our merchandise margins.

Diane will go over these opportunities in more detail in just a bit.

Importantly Brown Shoe remains a strong Company.

We have great brands, a strong balance sheet and tremendous partnerships with both retailers and suppliers, and we expect this to translate into market share opportunities this year.

Now I would like to turn the call over to Mark to review the fourth quarter financials and the outlook in more detail.

Thanks, Ron.

Good morning.

Our fourth quarter results included a number of charges as Ron mentioned.

Before I review the income statement let me walk through the detail of what was incurred during the period.

The comments that follow will relate to quarterly performance as well as our position at year end.

In total our net loss for the quarter was $153 million or $3.68 per diluted share.

This included total after tax charges of $141.5 million or $3.40 per diluted share.

As we mention in our press release this morning, the largest portion is the non-cash charge related to the impairment of goodwill and certain intangibles totaling $119.2 million, or $2.87 per diluted share.

This impairment resulted from the deterioration of general economic conditions and the resulting decline in our share price and capitalization.

The remaining piece of non-recurring charges totaled $22.3 million or $0.53 per diluted share and can be further broken down as follows.

$19.1 million or $0.46 per diluted share and costs related to our expense and capital containment initiatives including our workforce reduction program.

$1.7 million or $0.04 per diluted share and costs for the headquarters consolidation.

There will be no material carry over costs for either of these initiatives in 2009.

$1.5 million or $0.03 per diluted share for start up costs related to our IT initiatives.

Adjusting to exclude these impairment restructuring and other special charges, our net loss in the quarter was $11.5 million or $0.28 per diluted share.

I would refer you to Schedule IV of our press release this morning for a full reconciliation of our net earnings to adjusted net earnings for the fourth quarter and full year.

Turning to a full review of the income statement.

Consolidated net sales for the quarter totaled $521 million, down 8.8% compared to $571.4 million in the fourth quarter last year.

Sales at Famous Footwear were up $1.6 million as the impact of operating 64 additional stores offset a decline in same store sales of 3.6%.

Our wholesale revenues declined 25.1% as retailers significantly managed down their open-to-buy levels due to the erosion of consumers spending.

Additionally approximately $6 million of wholesale shipments were shipped in the first quarter of 2009 due to the closing of our sites and distribution center for four days during the last week of January following an ice storm and subsequent power outage.

Our specialty retail business was down 5.9% as a result of change in the Canadian exchange rate, a three tenths decline in same store sales and a 5.1% decrease at shoes.com.

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

Their comments will exclude the impact of non-recurring items and focus operationally on business unit performance.

Gross profit margins decreased 180 basis points to 37.2% from 39% in the fourth quarter last year.

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

At wholesale margins were down 290 basis points year-over-year as a result of both higher markdowns and allowances due to the environment and shifts in brand and channel mix.

Within retail our margins were down 230 basis points at Famous Footwear as a result of our efforts to maintain appropriate inventory levels both in quantity and freshness through an increase in promotional cadence.

Higher shipping costs on our home delivery business also impacted margins at famous and shoes.com, and increased markdowns affected our specialty retail business with overall margins in this segment down 330 basis points.

Partially offsetting these declines was a positive mix impacts to gross margin from a shift of our consolidated sales mix from wholesale sales to our higher margin-- gross margin rate retail businesses.

SG&A increased as a percent of net sales to 41% or $213.7 million compared to 35.2% or $200.9 million in the fourth quarter of last year.

The increase in the quarter resulted from operating 72 more North American stores across the portfolio, resulting in higher facilities expense and the expense deleverage from negative comps at Famous Footwear and specialty retail as well as the aforementioned mix change of lower SG&A rate wholesale sales to higher SG&A rate retail businesses.

As a result of these factors and the non-recurring charges and costs previously discussed, the consolidated operating loss was $205.1 million in the fourth quarter versus operating earnings of $17.8 million in the fourth quarter last year.

Net interest expense totaled $4.5 million in the fourth quarter compared with last year's $3.1 million due primarily to higher average borrowings on our asset-backed credit facility.

We recognized a $55.6 million tax benefit in the quarter primarily due to the impairment of goodwill and intangible assets and other special charges previously mentioned.

Our net loss in the fourth quarter was $153 million or $3.68 per diluted share versus net earnings of $14 million or $0.33 per diluted share in the fourth quarter of the prior year.

Excluding charges, our adjusted loss in the quarter totaled $11.5 million or $0.28 per diluted share versus income of $16.5 million or $0.39 per diluted share last year.

Moving to our balance sheet, cash and equivalents were $86.9 million at the end of the quarter versus $59.8 million last year.

Total inventory at quarter end was $466 million, up 7% from $435.7 million at fiscal year end last year.

Inventory at Famous Footwear was down 2.6% on a per store basis, but up 3.2% to $316.4 million on 64 net new stores.

Inventory of wholesale was up $22.1 million from a year ago driven by three factors.

First the consolidation of Edelman Shoe, second, inventories for our new brand launches and an increase in landed product for Dr.

Scholl's as it increases penetration into the mid tier channel and third the closing of our sites in DC in January which I mentioned a few moments ago.

Finally specialty retail inventory was down 11% on an average store basis, constant dollars for our North American stores.

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

We did have $112.5 million of borrowings on our credit facility at the end of the quarter which reflects higher borrowings primarily related to lower earnings performance and higher capital expenditure in 2008.

Capital expenditures in the fourth quarter totaled $15.6 million which primarily reflects spending for our IT initiatives and our west coast distribution center.

Moving to our outlook.

Due to the uncertain economic environment, lack of visibility, we have chosen not to provide quarterly or annual earnings per share guidance.

However, we will continue to provide perspectives on metrics and indicators around a number of income statement and balance sheet items to assist you in assessing our outlook and for modeling purposes.

For fiscal 2009 based on current economic conditions we expect net sales in the range of $2.2 billion to $2.3 billion.

Famous Footwear plans to open 55 new stores in 2009 while closing 35.

This is expected to partially offset our expectations of a mid single-digit same store sales decline for the year.

At wholesale we expect a high single-digit decline in our existing brands and continued decline of private label business will be partially offset by growth in our new brands such as Sam Edelman, Libby Edelman, Fergie and Fergalicious and Vera Wang Lavender label accompanying by an increased penetration by Dr.

Scholl's in the mid tier.

Selling and administrative expenses are expected in the range of 39 to 40% of sales for the full year.

This includes costs of $7 million to $9 million related to our IT technology initiatives.

Expenses increased on a year over year basis due to carrying the full year of facilities expense for the 72 net new North American stores opened in 2008., the partial year facility expense of the 20 net new American stores in 2009, the full year of expenses from Edelman Shoe Inc.consolidation and benefit related cost increases.

This increase in expenses will be partially offset by the 28 to $31 million in savings from our expenses and capital and containment initiatives.

We expect a tax benefit in 2009 although at lower levels than 2008 due to the mix of our foreign and domestic earnings.

Depreciation and amortization is expected to total 55 to $58 million for the full year.

Interest expense should approximate 22 to $24 million driven by increased borrowings and higher unused fees on our revolving credit facility.

Purchases of property, equipment and capitalized software are targeted in a range of 60 to $65 million, primarily related to our IT initiatives, logistics network, new stores remodels and general infrastructure.

And, finally while we expect a loss in the first quarter, we expect the full year to generate positive operating earnings and cash flow as defined as cash flow from operations less purchase of property, equipment and capitalized software.

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

Thanks, Mark, and good morning.

As both Ron and Mark have indicated the fourth quarter did prove to be challenging.

As I stated on our third quarter conference call, our goals going into the fourth quarter were to focus on three areas.

First of all to drive our core business of Famous, Naturalizer and Dr.

Scholl's, and then to ensure that we allocated the talent and resources to get our new business opportunities launched.

Second to manage operating expenses very tightly and, third, manage our inventories throughout the supply chain with even more stringent guidelines.

We accomplished most of these goals.

In particular we were successful in clearing inventory as we capitalized on the natural traffic of the holiday season and took timely markdowns across our retail and wholesale businesses.

As a result we are beginning 2009 in a solid inventory position with less overall inventory per door and better aging across our portfolio.

Looking at our wholesale business, in total wholesale sales declined 25.1% in the quarter to $142.7 million, bringing the full year to down roughly 10%.

Without the distribution in shipping, which Mark described, sales would have been in line with our previous guidance.

The lower sales in the quarter,as well as increased markdowns in allowances, resulted in an operating loss of $3.4 million before impairment, restructuring and other special charges compared to operating earnings of $18.5 million last year.

We experienced sales declines across most of our brands as shipments were affected by weak consumer demand that drove the increased promotional activity and tightened up open-to-buy at all of our major customers.

Gross margin in the quarter reflected these challenges with the majority of the margin erosion coming from higher markdowns and allowances and the balance a result of mix change.

While small in their overall impact the quarter did have some bright spots with Carlos Santana, Sam Edelman and the early reads of Fergie and Fergalicious last year's looking positive.

Importantly we do believe our portfolio of brands is positioned for market share gains and improved margins as we begin 2009 and what we know is going to remain a difficult environment.

Specifically our brands are affordable and offer great value to consumers.

The majority of our brands represent the opening price point within their respective category in which they compete, and we are better balanced cross channels, for example with Fergalicious now being offered in national chains and national shoe chains.

Secondly to respond to today's consumer demands for value, we've merchandised our our brands based on good, better, best pricing strategy with a greater emphasis on intensifying our penetration of key value price points.

This is where the consumers' mindset is today and we accomplished this for fall '09 across our portfolio and the reaction from retailers at recent shows has been positive to this action.

Regarding sourcing we have negotiated reduced costs by moving to lower cost regions and consolidating our factory base.

We expect this to translate into improved gross margin rates and more balanced pricing for consumers in the second half of the year.

We also believe our footwear styling continues to improve for several of our brands most notably Naturalizer and Via Spiga which, as we know, had a challenging first half last year.

Naturalizer is benefiting from our innovation and comfort technology with N5 and is gaining some traction at retail.

This comfort system that we've added to the product differentiates Naturalizer from its peers and is resonating well with consumers.

With Via Spiga, under new leadership and with a new creative director, Paolo Venturi, early spring reads are a bit better and we expect more doors in the back half of the year.

In addition we are pleased with our new flagship Via Spiga store located in Soho at Broadway and Broom.

The store enables to us sell from the web site and more importantly broaden our reach for this brand.

Additionally with Sam Edelman performing well and the launching of Fergie, Fergalicious and Libby Edelman and, while early, we are expecting our new businesses to have a great year.

Finally, as you expect, we are continuing to manage inventory very tightly which, in combination with the intensification of opening price points, should enable us to reduce promotional activity and improve margins this year.

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 $66 million in the quarter, down 5.9% from the fourth quarter last year.

Same store sales were essentially flat down 0.3% and included a positive performance in our 118 Canadian Naturalizer stores, As expected we increased promotional activity which affected margins in the quarter but allowed us to end 2008 with inventory on an average store basis down 11.2% versus the prior year for our North American stores on a constant dollar basis.

For 2009 we will emphasize more buy now wear now product and, of course, are introducing our N5 technology.

Sales at shoes.com for the fourth quarter decreased 5.1%.

Conversion rates were generally good in the quarter but traffic in January declined.

Seems to be pretty consistent with most e-commerce trends, but we are continuously working on testing new vehicles to enhance traffic and are implementing additional IT projects to drive organic search results this year.

We will also enable international shipping late in the first quarter within Europe and Canada.

In total the specialty retail segment incurred an operating loss of $2.5 million before charges, compared with-- to an operating loss of $1.5 million last year.

Turning to Famous Footwear, Joe and his team managed the business well in a challenging environment.

Clearly the environment was promotional and we took advantage of that holiday traffic to reduce inventory and end the year in a good position.

Famous was able to hold its market share in 2008 even in a very difficult environment which we do attribute to the everyday value and great brands that Famous Footwear offers.

As Joe will outline momentarily, we have initiatives in place to strengthen profitability at Famous in 2009.

These efforts center on showcasing great value and brands in our messaging while reducing the number of weeks we are on promotion.

We will also redirect some of our marketing to more measurable efforts such as to our rewards program which includes six million members.

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

Thank you, Diane, and good morning.

Famous Footwear reported a disappointing fourth quarter driven by the heightened promotional activity during the holiday which affected our profitability.

Our objectives heading into the quarter were to remain competitive, keep market share and end the year with a clean inventory.

We did accomplish these goals.

To this point our promotional vehicles were successful with our same store sales decline of 3.6%, a top three performance according to the FDRA.

Inventory at year end was down on an average store basis from the prior year and our aged inventory at year end was once again at a historical low.

As a result our inventories are in good shape as we begin 2009.

In total, fourth quarter net sales were $312.3 million, increasing $1.6 million or 0.5% from last year.

This increase was driven by the addition of 64 net new doors.

(inaudible) as I mentioned was offset by a 3.6% decline in comparable store sales.

Within our comparable store sales areas affected most by the sub-prime mortgage crisis, especially Arizona, California, Nevada and Florida, where we do have a high concentration of stores, experienced particularly weak performances which lowered our overall rate of comp growth by 110 basis points.

Gross margin declined by 280 basis points and combined with increased costs related to operating 64 additional stores led to an operating loss of $4.6 million excluding impairment, restructuring and other special charges in the quarter which compares to an operating profit of $13.4 million last year.

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

Traffic was down 2.8% from last year and conversion was down 1.8%.

Pairs per transaction were basically flat while average unit retail rose 2.3% even with the additional promotional activity.

Our same store sales basis our athletic business comp down 2%, our women's was down 2.3%.

The men's and kids business was more challenged, down 11 and 9% respectively for the quarter.

Only our accessory business achieved a comp increase of a little more than 11%.

In regards to store expansion, during the quarter we opened four new stores and closed four and we remodeled five existing locations.

For the year we opened 89 new stores and closed 25, ending the year with 1,138 Famous Footwear and Factory Brand stores.

For 2009 we have become very selective with new store openings, planning for a net opening of approximately 20 new stores for the year.

Currently our plans are to open 39 stores prior to Easter, obviously to take advantage of the increased traffic during this holiday.

We also expect to open additional 16 stores prior to August, the start of back to school season.

As it relates to real estate, we close between 25 and 30 stores annually.

Famous does have advantageous lease agreements that does provide us with great flexibility.

We do evaluate our portfolio monthly and will take advantage of this flexibility to increase the cadence of store closures should their performance deteriorate.

We have been successful in renegotiating leases in this environment and expect to lower average store rent costs.

As we begin fiscal 2009 we believe we are well-positioned to manage through the challenging environment.

We are focused on several fronts.

First our inventory is clean so we have moved up the flow of new merchandise into our stores.

Currently our average out the door retail is 4% higher than last year.

So we believe there is opportunity in regards to this metric as the quarters progress.

Given our healthy inventory position we have made a conscious decision to significantly reduce our promotional BOGO activity in our stores in 2009.

And finally we expect to maintain our marketing expenditures as we move to more measurable and effective advertising.

We will continue to focus on our best and most profitable customers by investing dollars in our rewards program through e-mail and digital efforts.

We currently have six million active customers in our loyalty program and another six million members that have not been active in the past 12 months.

We are working to re-engage these customers that did not shop and purchase from us in the last year.

In total we do believe our initiatives will enable to us grow market share, improve profitability despite the challenging environment.

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

Thanks, Joe.

Let me close by stating the obvious.

It is a challenging environment and it was a disappointing year.

At the same time I hope that you can hear throughout our conversations here this morning about our optimism, about our verticalization efforts, particularly the work we are doing with our new branded launches, and we expect those to make contribution throughout 2009 and going on in the years to come.

With that I will open it up to questions.

(Operator Instructions) [Mr.

Krisig with CL King], please go ahead with your question.

Thank you.

Diane, what's the dollar contribution or what's the range that you can sort of layout for us contribution in terms of wholesale from the new brands, Fergie, Fergalicious, Adelman, et cetera?

Sure, hi, Scott, how are you.

In terms of for 2009 we expect those brands as well as a number of other initiatives across the enterprise to probably, I'd say somewhere in the range of 50 to $60 million, I think is kind of what we are thinking about with those new launches.

Okay.

That's good.

Just in terms of distribution for Fergie and then Fergalicious excluding Famous.

Yes, actually you know the (inaudible) that I talked about on our last call continues to hold and actually has grown.

So net of Famous stores we are still in the range of well over 1,000 for Fergalicious and Fergie, last obviously because of the price points that's a brand that's targeted for department stores.

And so that's a little over 200 doors that Fergie will be in.

We are really trying to be very thought full and manage the launch and the opportunity for both of these brands at very distinct consumer segments and making sure we are in the right channels as well.

Okay.

Great.

Then just, Joe, maybe I can ask you in terms of this idea of managing the level of promotions versus the comps, I guess January is a good example when you pulled back on the promotion the comp declined double digits.

What gives you confidence that even though your inventories are down a couple of percent that once you pull back on the promotion that comps don't continue to decline in that high single double digit range.

Well, as I mentioned, we are really cutting back on BOGO.

BOGO is a very good vehicle for us during high traffic time frames.

However, at other parts of the year it really just reduces inventory.

We will replace the BOGO weeks that we are cutting back on on other promotional initiatives that we have really aimed more at single pair promotions during the year.

So we really are cutting back dramatic on the number of BOGO weeks, it's just becoming over used and isn't a vehicle we like to use other than the main drive times of the year.

So, okay, but are you sort of planning that once on the weeks where you are not BOGO'd year-over-year that you are planning for lower comps than sort of what we've seen.

No, we are not, we really are replacing those BOGO weeks what we consider our better value and promotional vehicles to the consumer.

Okay.

All right.

Thanks .

[Mr.

Speecey with Susquehanna Financial Group] please go ahead with your question.

This is [Christina Chen] for Chris..

Hi Ron, hi Diane.

My question is with regards to inventories down 2.6 per store at Famous but given that you are looking at a mid single-digit decline in comp can you help us understand how-- where this inventory is concentrated, because for us it looks like it maybe a little bit higher and then with us hearing that you would be holding fewer promotions when could this inventory be concentrated in?

Well, the inventory really-- the shift right now-- the inventory is really concentrated in several areas, obviously our athletic business has and continues to be extremely strong not only in athletic but in our skate business.

So we have switched our investment from a women's business that continues to struggle in the industry.

So we have shifted that over into athletic and skate at the current time frame.

I'm not sure if that totally answers your question.

So would you-- could you give us a percentage of how much of your revenues is now coming from athletic versus the nonathletic side, is that possible?

Well, yes, historically and even now athletic runs between 43 and 45% of our business.

But even in good times that business, that really doesn't fluctuate more than 5%.

So it can run anywhere from a low of 43 to a high of 50.

Right now it's running ahead of for the 43 pace we anticipate it continuing to grow as we go into future quarters.

Right.

Okay.

And as far as the wholesale business could you, Diane, perhaps help us understand how the new businesses would flow through and would it be fair for us to assume that maybe both the revenues are going to be declining quite steeply during the first half and see some kind of moderate recovery during the second half?

I would say-- I wouldn't say the first half is steep and I will sort of give you a little bit of color and ask Mark to step in here as well.

In our first half because we are launching Fergalicious and Fergie some of that will be-- certainly we will see in the first half of the year, and Libby but we are making sure again that we flow the goods right, get a good read on what the consumer reacts to-- is going to react to, and then as we move into the back half of the year get-- and know a little bit more and be a little bit more aggressive about where we want to place our bets.

So I would say generally first half is going to continue to be challenging.

We look at the second quarter as being probably the bigger question and the back half improving somewhat.

Mark, I don't know if you would want to comment, make any additional comments on that question?

No, again, I think you said it nicely, Diane, and again I think-- to reiterate what we talked about in our guidance section about full year guidance being high single-digit declines in some of our existing brands and the decline of our private label business and, as you mentioned earlier, significant growth opportunities from our new brands launches.

Okay.

Thank you.

I'll rejoin the queue.

Ms.

Boksen with Sidoti & Company, please go ahead with your question.

Good morning, everyone.

I guess the main question I have is, Diane, you talked a little bit about planning some gross margin improvement especially in the back half of '09 in the wholesale group.

Is that really just sourcing gains or is there some merchandise margin improvement you think you can get there as well.

Sure, I think it's a mix of all of those things.

First of all product costs, costs that we are really looking right now at paying and going into the back half of the year have come down after the highs that we experienced in 2008.

So we are certainly seeing the real costs come down.

The second thing is that as we again with good inventory position and as we manage the flow good we are also expecting that there should be reduced markdowns and allowances in the mix as well.

So we think that's the second piece of it.

And then the third piece is the way we've been really thinking about this good, better, best pricing strategy and making sure that we have, across all of our brands, a very sharp entry price point because we really do see the consumer searching for value.

So it's kind of the combination of those three kinds of things that we expect, why we expect to see better gross margin rates.

All right, thank you, guys.

Mr.

Poser with Sterne Agee., please go ahead with your question.

Good morning.

I have a question regarding your commentary that you made both on the call and in your release about being able to be operating earnings positive in '09.

How much of a-- based on what you said about the SG&A increase, and I guess first of all should we exclude that-- should we exclude that IT number and make that non GAAP, non-recurring based on what the guidance you gave?

And number two (inaudible) it looks to me like a significant increase in gross margin at least towards the back half of the year.

Please help me.

Sam, it's Mark.

I think first question relative to SG&A, I think we have not yet determined wether in '09 we are going to report the IT as a separate line item or not.

The guidance range that we gave you of 39 to 40% was inclusive of the IT spending.

IT spend was seven to $9 million.

Right, it's in there.

And it's in those numbers.

In terms of gross margin, I think Diane commented on that as well as Joe's commentary relative to the margin impact of different promotional vehicles.

Could you reiterate that, please?

Again, I think Diane said that we would expect margin-- gross margin opportunities in the wholesale business as a result of the pricing elements we are seeing from the factory shifts, the change of mix within brands on the good, better, best strategy, I would add to that the mix of branded business versus nonbranded business.

On the retail side Joe talked about fewer weeks of BOGO, BOGO impacts gross margin negatively so we would expect to have an overall better margin at Famous Footwear.

Just one last question, I mean, Diane I guess this is for you.

You mentioned that you had to pay some mark down money to the, I assume to the department stores this year.

How do you reduce-- how do you make sure that that does not happen to the degree it happened this year again within 2009?

Well, you know how tough that can be, Sam, but again the attack plan is a couple of things.

Really continuing to watch even more carefully how we are flowing goods and the timelier rate of markdowns as we can, and allowances we can.

The second thing is to make sure that pricing strategy takes hold because if we can have a couple of key big driver items that really good value price points for each one of our brands, we think that is the right way to go.

And I guess the other thing-- the comparison for fall '08 is so tough when you really think about the perfect storm that it was, with price increases going up, retails going up, consumer demand falling, traffic falling, so it was kind of a confluence of a lot of different events that put enormous pressure I think on everybody in the industry.

So any way, so it is those things that I think are going to be the keys.

Products that sell through.

I think, Sam, the other big macro effect here is if you look at the industry, and I think Brown resembles the industry, all of our major accounts have planned down their purchasing and will reduce their flow of purchasing, certainly into the first half.

But we would expect that in the second half as well.

I think that there will be exceptions to that brand by brand as we have seen with the significant and broad spread support for our launches and the initiatives as we have gone through the shows here, as we look at the initiatives for the second half.

But I assume that that means we are going to be taking market share.

I don't expect to have more inventory out there which really led to the dramatic promotional activity.

It all starts with too much inventory on the shelves and not enough customers coming into the doors.

I think that we are all going to prepare ourselves for a very difficult environment which means we, in essence, expect traffic to continue to be challenging and inventories will be planned accordingly.

That brings up one last question, I apologize.

Diane, again, on the 50 to $60 million that you expect on the new brand contribution the flow of that I would guess would be like two-thirds first half, one-third second.

Am I thinking about that right because of the launch or even two-thirds first quarter?

I'd want to double-check that for you, Sam , to make sure I give you the facts but I would probably lean the other way a little bit.

But we will follow up with you and make sure you get what you

Thank you.

Ms.

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

I know you recently launched Libby Adelman in the Famous Footwear channel.

Could you talk about just moving more of your actual house brands into the Famous Footwear channel.

What's promoting that move, is it just given a lack of wholesale customers, and just if you could quantify the percentage of mix of those brands in the Famous Footwear channel.

This is Joe.

In a (inaudible) , there has been (inaudible) a cautious effort to verticalize a lot of our business.

With the success that we've had on (inaudible) Naturalizer had a great year, but with the launch of two new breeds especially Libby and now we are launching this week Fergalicious in all of our stores.

It has been very successful.

We continue to grow that business with the focus of growing our internal brands.

Currently our brands here at Brown Shoe represent about 15% of our total business.

It doesn't sound like it's that much but if you also take a look at the fact if you back out athletic, our internal brands become more like 26, 27% of our nonathletic business.

So it's become a very important and profitable part of our business and we will continue to grow it as the quarters and years go by

How does that compare to year ago numbers?

Just to see how much it's grown over the past year?

Let me give you a more of a five-year history.

It's growing at about ten, 15% rate per year.

So without getting into pure numbers it has been at around a 15% growth internally on a yearly basis.

I think the other thing that we really believe is important too, is the brand like Fergalicious comes in now into the Famous Footwear portfolio and it's not speaking to a different customer as well.

So a junior oriented customer where we had the rest of our brands in our portfolio have been speaking more to the traditional and updated classic side as well.

I think the other important think Jill, to remember is that as a matter of policy we do not allocate product between brands, that is Famous' decision as to what brands they carry and what price points they do.

What we have done as an organization under Diane's leadership is really heighten our design capability and our consumer insight capability to make sure that we now have brands that we can target specifically for the famous customer and we think that has paid off dividends already in the brands like Dr.

Scholl's that we've had in the stores probably going on two years now.

And we continue to believe that it's really design centered and consumer focused on the segmentation that we believe is the reason we can drive more success in the famous chain.

I guess this last question on that, some of these new brands, is it exclusive to Famous Footwear or are you selling these products to some of your other mid tier off price channels that work through the wholesale chain?

There isn't anything that's exclusive to Famous Footwear.

Even Libby Adelman that brand while it's a good portion of its focus is targeted to Famous she was also on Home Shopping Network.

So, other than that one, the rest of them are broadly based brands.

Thank you.

Mr.

Fromm, there are no further questions at this time.

Please continue with any closing remarks you may have.

Thank you again for joining us.

We appreciate your support and look forward to speaking with you when we report first quarter results in May.

This concludes today's fourth quarter year end Brown Shoe Incorporated earnings call.

You may now disconnect.