Caleres Inc (CAL) 2009 Q2 法說會逐字稿

Welcome to the second quarter 2009 Brown Shoe Company, Incorporated earnings conference call.

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

Thanks, Christy, good morning, everyone.

Thanks for joining us today for the Brown Shoe second quarter 2009 financial results conference call.

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

Before I pass the call over to Ron Fromm, I would like to remind you of the Company's Safe Harbor language.

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

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

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

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

Copies of the Company's reports are available online and from the Company's Investor Relations department.

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

Now I'd like to turn the call over to Ron Fromm, Chairman and CEO of Brown Shoe.

Good morning, everyone.

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

Following my opening remarks, Mark will discuss our financial performance in more detail and review our outlook.

Then Diane will provide additional insight into our operating performance.

Following this we will all be available for questions including Joe Wood to answer them.

Our earnings performance was in line with our expectations for both the second quarter and the first half of 2009.

Though it remains a challenging period for us in the industry, our results are getting progressively better and our outlook is getting progressively better as well.

During the quarter, we continued to run the business based on our core operating principals, managing the controllables and making key investments to give us an opportunity to win in the back half of the year while continuing to position us for success as this economic climate ends.

Before I touch on the results, I would just like to make a couple comments about how proud I am of the entire organization for how they've managed through this extremely challenging period and the effort that has been put forth to give us the best chance of success during back-to-school and the fall selling seasons.

In the last 12 months, in addition to coping with a tough economic climate, we successfully relocated our Famous Footwear business from Madison to St.

Louis, developed and launched a new distribution center on the West Coast, opened two new design studios in the Far East and began the implementation of a new information technology platform.

This has required a lot of sacrifice and heavy lifting and I thank them for their continued focus during this time.

Moving on to our results for the second quarter, net sales were $511.6 million, representing a decline of 10.1% from the second quarter last year.

With the help of expense savings and margin improvement, we delivered a net loss of $0.10 per diluted share or $0.07 per diluted share adjusted for $0.03 per diluted share in costs associated with our IT initiatives.

This compares to net earnings of $0.05 per diluted share last year, or $0.20 per diluted share adjusted for cost of $0.15 per diluted share in special charges last year.

Our sales decline in the quarter was primarily driven by lower traffic across the industry.

Our stores comparable sales performance generally tracked our decline in customer accounts with Famous Footwear generating a minus 6.7% same-store sales results.

And our wholesale brands continued to be impacted by lower demand and a reduced inventory levels across all retail channels as our partners aligned their inventory levels to customers reduced selling patterns as well as by the continuing trend of direct sourcing within certain retail channels.

Importantly, the bold and decisive action that we took on early allowed to us manage our expenses this year and remain diligent, allowing us to meet our earnings expectations even while we experienced a greater sales decline than we had planned.

Through the expense and capital containment initiatives that we announced earlier in the year, we now expect to realize over $40 million in annual savings.

Yet while we have stepped up our focus on expenses, we also have continued to make strategic investments to better position our business for success in the back-to-school and fall selling seasons.

These include investments in marketing, product and store environment to drive an improved customer experience at Famous Footwear.

Investments in our "Make Today Famous" campaign, which Diane will discuss in more detail later, and continued investments in design, product development and sourcing.

Coming off the WSA and Fanny show season we are encouraged by the buyers and managements earlier reaction and excitement about our product offerings and new programs with key retailers.

As we move into the second half, we are focused on two key areas in order to deliver the best outcome; driving the sales opportunities of our core brands of Famous Footwear, Naturalizer and Dr.

Scholl's as well as continuing to aggressively manage expenses and our balance sheet to preserve profitability for this year and beyond.

While consumers are still holding back on spending and high unemployment remains a concern, we are finding that when the fashion and the price are right, she will buy.

There is a mild sense of stabilization with the consumer and the anniversary of the back-half macroeconomic disruption from last year should provide some opportunity.

We are encouraged by the start of back-to-school selling season and the opportunities that "Make Today Famous" will bring.

Coming off extensive field trips in the field, our stores and product have never looked better.

And though the selling season will come later due to timing of Labor Day and the consumer's propensity to shop closer to need, our early back-to-school markets are trending positively.

Second half visibility is still difficult.

However, we do expect to generate profitability in both the third and fourth quarters resulting in positive net earnings for the full year on flat to down 2% consolidated sales in the back half versus last year.

Now I'd like to turn the call over to Mark to discuss our financial performance for the quarter.

Thanks, Ron, and good morning, everyone.

As you saw in our press release this morning, our net loss for the quarter was $4.2 million or $0.10 per diluted share, including after tax costs related to our information technology initiatives of $1.3 million or $0.03 per diluted share.

This compares to net earnings of $2.2 million or $0.05 per diluted share in the second quarter of last year.

Last year's net earnings included after-tax costs of $0.15 per diluted share, primarily related to our headquarters consolidation.

Turning to a full review of the income statement for the second quarter, net sales were $511.6 million, a decrease as Ron mentioned of 10.1% compared to $569.2 million in the second quarter of fiscal 2008.

Reduced traffic at our stores and the stores of our retail partners had an unfavorable impact on all of our businesses from a year-over-year perspective.

At Famous Footwear, a 6.6% decrease in traffic was the driver of a 6.7% decrease in same-store sales.

Wholesale sales were down 21.1% in the quarter with sales for most of our brands down in the period.

Our private brand and private label business accounted for more than half of the decline during the quarter.

And specialty retail sales declined 12% driven by lower sales at shoes.com, a 3.8% decrease in same-store sales and an unfavorable Canadian exchange rate.

Our gross margin rate in the quarter improved by 50 basis points to 39.8% of net sales from 39.3% of net sales in the second quarter of last year.

The main components for the year-over-year change were an improvement in gross margin rate of wholesale, resulting from an increase in the mix of higher margin branded sales, vertical profit resulting from an increase in penetration of our brands at Famous Footwear, and lower allowances to our wholesale customers.

Also contributing to the margin improvement was a greater mix of retail sales which carry a higher gross margin rate than wholesale.

These gains were partially offset by a decrease in gross margin rate at Famous Footwear which was driven by greater promotions in the quarter.

Selling, general and administrative expenses in the quarter decreased by $1.4 million to $206.6 million or 40.4% of sales versus $208 million or 36.5% of sales in the same period last year.

The decrease in expense dollars was primarily related to our expense and capital containment initiatives that we implemented at the beginning of the year along with a shift in marketing spend as the result of back-to-school being later this year.

The annual savings from the expense and capital containment program are now expected to exceed $40 million in 2009.

However, these improvements were partially offset by the increase in facilities costs due to operating 36 more North American stores and operating an additional distribution center as well as the increased expenses related to the consolidation of Edelman Shoe.

Net restructuring and other special charges were $2 million in the second quarter of 2009, and relate to the implementation of our new information technology platform.

Last year's second quarter included charges of $10.1 million, primarily related to our headquarters consolidation.

As a result of these items, we generated an operating loss in the quarter of $5 million versus operating earnings of $5.1 million in the same period last year.

Net interest expense in the quarter increased by $1.3 million due to increased borrowing levels year-over-year.

In the second quarter, we recognized a $5.5 million tax benefit due to our operating loss.

Moving to our balance sheet, cash and cash equivalents were $37.3 million at the end of the quarter compared to $64.4 million at the end of the second quarter last year.

Total inventory at quarter end increased 4.8% to $526.8 million from $502.9 million at the end of the second quarter last year.

The increase in inventory was driven by the addition of 40 stores at Famous Footwear since last year and as we told you during our May conference call a pull forward of athletic product to better position us for the back-to-school season at Famous Footwear.

As a result, average store inventory at Famous Footwear was up 3.2% at quarter end.

We expect average store inventory to be down 3% at Famous by the end of the third quarter.

Also contributing to the increase in inventory was the consolidation of Edelman Shoe.

And as a reminder about our business model, our private label business where the majority of sales decline occurred does not carry inventory as though sales were made on a first cost basis.

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

Borrowings under our revolving credit facility were $47.5 million we had availability in excess of $320 million.

Capital expenditures, or purchases of property and equipment and capitalized software in the second quarter totaled $15.5 million versus $23.2 million in the year earlier period.

Capital expenditures in the quarter primarily reflect spending for our IT initiatives, distribution center and new stores.

Moving to our outlook, we expect to generate positive net earnings in both the third and fourth quarters based on flat to down 2% sales in the second half when compared to the second half of 2008.

Due to the timing of the macroeconomic events of 2008, the year-over-year comparisons are somewhat imbalanced between the third and fourth quarters.

For fiscal 2009, we expect net sales for the full year in the range of $2.18 billion to $2.2 billion.

Same-store sales at Famous Footwear are expected to decline in the low to mid-single-digit range in the back half of the year.

We have substantially completed our store openings for the year in the second quarter with one store left to be opened in the third quarter for our full year total of 54 openings in 2009, accompanied by a plan to close 55 to 70 stores during the year.

At wholesale in the second half, we expect sales to be flat to down low-single-digits year-over-year.

This would assume a mid-to-high teens percent decline in the third quarter with a corresponding increase in the fourth quarter related to the anniversary of the shifts in retail that occurred last fall.

Selling and administrative expenses are expected to be in the range of 38.8% to 39.2% of sales for the full year.

This includes costs of $8.5 million to $9 million related to our IT initiatives.

On a dollar basis, adjusting for the previously mentioned special charges, we expect our expense base to be flat to down slightly year-over-year.

Depreciation and amortization of capitalized software and intangible assets are now expected to total $51 million to $52 million for the full year.

Net interest expense should approximate $20.5 million to $21.5 million driven by increased periodic year-over-year borrowings and higher unused fees on our revolving credit facility.

As a reminder, we expect to generate a tax benefit in fiscal 2009 despite having pre-tax income.

Our consolidated effective tax rate is significantly impacted by the mix of our foreign and domestic earnings.

Capital expenditures are expected to be $53 million to $55 million, primarily related to our IT initiatives, new stores and remodels, our logistics network and general infrastructure.

Lastly, we continue to be confident in our ability to generate positive operating earnings or EBIT, positive net earnings and positive cash flow for the full year.

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

Thanks, Mark, and good morning, everyone.

The second quarter marked a challenging period for our Company and the industry as customer traffic continued to be soft.

Our retail partners focused on maintaining lean inventories on their selling floors which lowered sales at wholesale while lower customer counts and increased promotional activity led to a decline in performance at Famous Footwear.

Our focus remained on positioning our brands, marketing and stores for improved performance as we moved through the year while managing our expenses very tightly.

While we recognize that the environment and visibility remain challenging, we believe our initiatives have positioned us solidly for Famous Footwear to improve its sales trend during the all important back-to-school season.

And on the wholesale side of our business, we are seeing some encouraging signs coming out of our recent shows leading us to believe our brands are positioned well for 2010.

Importantly, inventories at Famous are fresh and our wholesale inventory is in good shape and we also believe that there is opportunity to grow sales in the fourth quarter and expect solid profitability during the back half of the year.

Beginning with a review of Famous Footwear.

Total sales were $314.1 million, a decline of 3.7% from the second quarter of last year.

Total sales benefited from the additional stores since the second quarter of last year, but was offset by the 6.7% decline in comparable store sales.

Traffic continued to be the driver of our comp sales decline with consumers making fewer shopping trips given this tough environment.

As we mentioned on our first quarter call, we changed our promotional cadence early in the quarter in favor of single pair promotions.

Unfortunately, the industry and consumers remained focused on BOGO which disadvantaged our same-store sales performance early in the quarter.

We reintroduced BOGO to our stores in June and the comparable store sales trend improved in the back half of the quarter all of which led to lower gross margin.

The business was also negatively impacted by tax-free weeks, school openings and other promotions that shifted to the third quarter.

While SG&A was well controlled, lower sales and higher promotional activity led to a second quarter operating loss of $846,000 which compares to operating earnings of $11.3 million in the second quarter last year.

Finally, inventory was well controlled with aging and great shape even as we moved up some deliveries of key fall styles to position us for when opportunities during the back-to-school selling season.

Athletics across all genders while down continued to lead Famous' performance with comparable store sales of negative 3.7%.

Our athletics continued to be driven by key styles from Puma and Converse, as well as by strong skate styles from brands like DC.

Outside of athletics each of our footwear categories experienced low double-digit comp sales declines during the quarter.

However, our kids business in total combining the athletic and non-athletic pieces was down 4.2% and though accessories is our smallest category we continued to see strong positive comp momentum in this area.

Regarding our store count ,during the quarter we opened 13 stores and we closed 12, resulting in 1,167 total stores.

Additionally, we continue to work on our retail estate portfolio.

The impact of store closings will reduce SG&A by $2 million in 2009, $20 million in 2010 and $35 million in 2011.

These actions will improved profits by $12 million over the same time frame and also reduce working capital and lease liabilities.

The real estate team continues to work with our landlords to adjust rent to be reflective of market conditions and have fully executed more than 200 lease actions in the first half.

Annual savings from these actions are approximately 5% of sales for these stores.

During the quarter, we focused on the key elements of the all important back-to-school period for family footwear to make sure that we gave ourselves the best opportunity to gain share.

From a merchandising perspective, we edited our assortments concentrating on our best vendors and best styles, and we bought in greater depth and invested in the athletic category which is outperforming our other categories and typically a driver of back-to-school representing 60% of our volume during this time period.

And as a reminder our athletic mix is skewed toward the suburban lifestyle assortment of athletic footwear.

From a marketing perspective we unveiled a new national branding campaign, "Make Today Famous," which is the largest and most aggressive in Famous' history.

To this end, our third quarter advertising spend will increase 10% over the third quarter last year.

Utilizing national cable TV ads, radio, print, viral marketing and social networking sites we will achieve 100% sales coverage and roughly 2 billion impressions, two and a half times the number of growth impressions versus last year.

Importantly, marketing dollars will not be up for the year.

The increase for Q3 represents our strategic decision to shift our spend to match customer traffic patterns.

The campaign was unveiled in July and highlights our great brands and our store.

We have also added fixtures in-store and in our windows to highlight the campaign which is integrated as well as with our REWARDS program.

We are excited about this campaign, our associates are energized and we believe it will improve our positioning for back-to-school.

But more importantly, it really does begin to set the tone to drive long-term equity in the Famous brand.

While it's still too early to properly assess our back-to-school season, each of the early markets are tracking to our expectations and we are seeing improved customer counts which is encouraging.

Now turning to brand performance, as we did on the first quarter call I will focus on our core brands of Naturalizer and Dr.

Scholl's.

Beginning with Naturalizer, when we combine the sales and profitability of Naturalizer across the wholesale and specialty retail divisions, sales were down 11.1% in the quarter with a same-store sales decrease of 3.9% at our Naturalizer stores.

We were successful in holding operating earnings to last year's levels driven by increased gross margins due to the solid acceptance of the brand, lower allowances and stronger inventory control.

As a result, operating margins increased 80 basis points to 7.9% of total sales versus 7.1% last year.

Moving to Dr.

Scholl's, which is represented in all channels of distribution from the mass channel to department stores, we are working with a valued retail partner to align the flow of Dr.

Scholl's business with their strategic initiatives resulting in reduced volumes beginning in the second quarter.

As a result, Dr.

Scholl's sales declined 20.7% in the second quarter versus the same period last year.

We were able to hold operating earnings to last year's levels due to strong expense control.

Operating margins for Dr.

Scholl's was 12.4% of sales in the second quarter, an increase of 240 basis points as compared to 10% of sales in the second quarter of last year.

The third quarter will also be lower volume due to these strategic shifts, but it will result in an improved long-term business.

In the fourth quarter, we expect a meaningful improvement in shipments of Dr.

Scholl's with back-half sales for the brand expected to be down in the mid single-digit range.

In total, our initiatives within our wholesale business will continue to focus on driving our branded sales, continuing to drive improvement in our gross margin and delivering compelling style and innovation across our branded portfolio.

You know, this tough economy has accelerated two key trends impacting our business today.

On the one hand, it's resulted in more stress on our private label business as many retailers have increased the proportion of direct sourcing for their private brands.

Yet on the other hand, we see it as a positive for our branded portfolio as the challenging environment has led other retailers to put greater emphasis on their most successful brands and strongest partners which we expect to benefit us in both the near and the long term.

In summary, the second quarter was challenging for us, yet our focus remained on positioning Famous Footwear and our wholesale brands for the best outcome during the meaningful second half of the year.

And while we expect retailers to remain cautious with their inventory purchases during the third quarter, we expect to drive market share at Famous and, therefore, expect to report a sequential improvement in sales and profitability as compared to the second quarter.

Additionally, as we begin to anniversary the disruptive macroeconomic events of fall 2008, we do believe there are opportunities for some wins in the back half.

And while visibility is difficult and who knows what the new normal is, we do expect our total Company sales to be flat to down 2% year-over-year in the back half with our continued focus on expense controls and an improvement in our profitability.

With that, I would like to turn the call back over to Ron.

Thanks, Diane.

Why don't we just open it up for questions and we'll make comments afterwards.

(Operator Instructions).

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

Your first question comes from the line of Chris Svezia with Susquehanna Financial.

Good morning, everyone, Christopher Svezia at Susquehanna Financial.

A couple of questions here.

First, when you guys step back and just looking at your guidance for a second and you're looking at that fourth quarter and in particular on the wholesale side, I was wondering if you could add some color about why you feel as comfortable as you do about that business rebounding into maybe a mid-teens rate, and granted the comparison is pretty favorable.

Is that primarily the drivers or is there a readjustment?

Or do you see something in backlog trends or something along the line to give that you comfort level that that's going to show that level of rebound in the business on the wholesale side?

Chris, maybe I will start and Mark can add his comments.

Hi, how are you this morning?

Again, as I said, while the visibility is not perfect.

As we look at a number of the brands in our portfolio, we do see some momentum building.

So, for example, if we think about our businesses with Sam Edelman and Via Spiga and Vera Wang there's some new businesses there that are being launched that we didn't have really in the fourth quarter of last year as well as we see momentum building on those key brands.

In addition to that, our core businesses of Naturalizer and Dr.

Scholl's as we look to the fourth quarter and we see something is happening as we turn, shift into 2010, we see some opportunities for wins there as well.

And then, along with our celebrity brands between Carlos and Fergie which is a new launch and some momentum we think that there is opportunity.

We feel like we've kind of dealt ourselves to win, but clearly the consumer has to show up for us to really take advantage of all that.

The only thing I would add to that, Diane, is we had a very significant decline, 25% in Q4 last year, which was impacting negatively by the ice storm on our January shipments.

I think some of those factors of the new brands and the momentum brands that you talked about along with the comparison gives us kind of (inaudible) in the fourth quarter.

Okay.

Are your retail partners willing to take in kind of being accepting of more inventory now that they've lowered the decks and kind of gotten to a more sustainable level in terms of the inventory levels they want to have?

Are they being more receptive to taking in that product?

You know, Chris, I think that the answer to that is no.

I think selectivity is the issue here.

I think this is really the result of programs that we've developed over the last 12 months that we see coming to fruition in the fourth quarter is where we'll see the upturn.

If it hadn't been for the realignment of our Scholl's business in the second and third quarters that wouldn't have looked so severe of an upturn.

Okay.

Just while we are on the Dr.

Scholl's business for a second does that have anything to do with what Wal-Mart is doing with their footwear business strategically?

Yes, it does, Chris, and we actually believe that we are extremely well-positioned for fourth quarter and going into 2010 as we work very closely with them on our Dr.

Scholl's brand.

They really view it as a very, very strong component of their footwear floors, and in fact we have a number of tests going on as it relates to Dr.

Scholl's departments as well as testing different pricing levels in Wal-Mart also to see if we can improve the velocity of our business there.

So I think we've got a great strategic partner there and really it bodes well for us for the future.

Switching gears for one second, just at Famous, Joe, when I guess any color about what you've seen so far, you commented some of your early markets starting to trend positive, those that have gone back, add some color about what the consumer is looking for.

Are you still expecting it to be pretty promotional?

Are you still running BOGOs in those markets?

Any color about what they are buying, how they are buying it would be certainly helpful?

Well, Chris, I think you had five questions in there, but let me know when I'm done what I haven't answered.

A couple of things we've been extremely surprised, we have five timing groups.

We knew that back-to-school was going to be later by a week, have been extremely surprised it is running at least two weeks behind that.

We have seen the first two timing groups run two weeks late, but they are both now and continue to be in positive both in sales and in traffic counts.

So what does that bring for our next three groups?

I think it will be the end of September before we can look back and really assess the strength of back-to-school.

But encouraging as it is running so late.

So they are buying after the fact, not near need, they are buying after need.

It's still being driven by, a good portion by athletic.

So even as though the other retailers have struggled at least some of those that have reported our business remains fairly healthy in athletics.

So we feel very positive about the investment that we made there.

What were other ones that I missed, Chris?

I was just curious from maybe from a pricing perspective are you still running BOGOs in those markets that have converted to back-to-school?

Yes, we are still running BOGO.

It still is the most effective vehicle that consumer responds to.

But we have found one thing.

Is it promotional?

I don't think it's any more promotional than it was prior and what we are finding if you really dig under the motor and look at the SKU base, this isn't really about price.

So it isn't, as we get further into this, it's not about $19.99 and $29.99, it is about the brands.

It is about giving them a good value.

It's not about, at least our business is not being driven by price.

Okay.

And, Joe, with your inventories up and you said it's an athletic buy, I'm just kind of curious, are you buying -- how flexible are vendors, are you buying to certainly anticipate a kind of promotional environment out there?

Is that how your buys are being reflected given inventories are being up?

There are two parts to that inventory purchase, Chris, one was on a promotional end where we did, went to a vendor base and bought a couple of vendors so we could promote at a price if we wanted to.

Again, consumers telling us it's not about the price.

The other was a pull forward of inventory of orders out in August, bring them back into July to position us not to walk a sale.

So I'm not really concerned about the athletic inventory.

Again, it will be down, and our total inventory will be down 3% to the previous year at Q3 end.

So I feel very comfortable where our inventory is now and also considering if you look over the last couple of years our inventory is down 15% over the previous years, but it will still be down 3% on a quarter end basis Q2.

So I feel very good about my inventory.

Okay, and last question I have is just on the expense side, earlier in the year you talked about $29 million to $31 million in expense savings due to some of these initiatives.

It went up to almost $35 million.

Now you are talking $40 million.

So roughly a $10 million or so swing.

Could you talk about precisely where that's coming from, number one, and, number two, are you deferring any expenses, things that you might be doing that you're deferring maybe until next year?

Can you talk about where that's coming from?

Yes, Chris, it's Mark.

Again, I think it's, I think the entire organization is keenly aware of the environment we are operating in and is managing the controllable expenses even better than we had hoped they would when we planned them, the thing, and I think the bold actions that Ron talked about in terms of headcount reductions have yielded better results.

And in those instances where we have backfilled positions we've actually been successful in getting savings at the positions we've had to refill that we hadn't counted on.

We continue to get good work done in terms of adjusting rents to the current market conditions as I, as Diane talked about on the call and just things like travel have been extremely well managed and costs have come down and no real deferral of expenses, but clearly we are conscious about not spending if it doesn't need to be spent.

Okay.

Thank you very much.

Your next question comes from the line of Heather Boksen with Sidoti & Company.

I guess this question is more for Diane.

I was just curious with regards to the wholesale group, how much of this guidance for the back half of the year would you say is retailers just wanting the later deliveries?

And also with regard to that fourth quarter expectation, are you assuming any reorders in there to get those kind of numbers?

I think there's probably two components that are driving our outlook.

I think the first one is as we look at our third quarter, Heather, we clearly have the on order right now to deliver the third quarter that we have forecasts that we've outlined so I think that's number one.

And number two is the point that really Mark made that our fourth quarter last year was a really challenging one.

And as we look at the new launches of new businesses in the fourth quarter of this year along with some momentum building in some of our brands we think there's opportunity.

Then the last piece of it is when we look at our stock to sales ratios right now we are really under inventoried out there.

So if the consumer does decide to come back in any way, shape or form, we think our inventories at retail are really light.

So, again, who will really, you will never know until she comes in and votes, but I think we have put ourselves in a position as best as we can to take advantage of that environment.

All right.

And I guess looking ahead to spring 2010, I know you said the reaction so far to the product has been good.

Good enough to show some wholesale revenue growth next year or will the private label declines still offset that?

I think it feels like a little far out to make any kind of predictions, but I would tell you that in terms of our private label and private branded business, it is now, we sort of expect that by the end of the year to represent less than 3% of our sales on a consolidated basis.

So it is getting to a place where it's really not that meaningful.

So we would certainly like to believe that 2010 we would begin to show improvements in our sales growth and sales trends at wholesale.

Mark, I don't know, is that --?

Yes, I think it's early.

We certainly haven't completed a planning cycle for 2010.

I think we've done a lot of work towards improving over the three-year outlook, but, call it the timing of that on a quarterly basis, et cetera, it's very early in terms of the detail work.

And I think that as Diane mentioned the private label, private brand decline which we expect to continue in the back half will take that to a level where it doesn't represent the same risk in 2010.

But the momentum of some of our brands and sophomore season of the new brand launches should give us good confidence for wholesale growth next year.

Heather, I think we are headed into try to forecast end of the year inventory planning by our retail partners.

I think that a lot of water is going to go under the dam before we get to that point as to how much are they going to ship before Chinese New Year, how much are they going to ship after, the swings from month to month, and all of that has an effect on our quarter timing.

But it doesn't have effect on our continued growing confidence in the brand portfolio as we go forward.

Whatever hesitance we have is all about timing not about progress.

All right.

That's good to hear.

Just switching gears a little bit, it sounds like the BOGO promotions have had a good response, a better response than some of the promotional kind of activities you were doing earlier in the quarter.

Is that the way to go going forward?

Should we expect, and should we expect BOGOs to be a little more significant in the fourth quarter year-over-year, just how should we think of that?

This is Joe.

Unfortunately, right now BOGO is a way of life.

It's just as you shop it's not only in footwear, it's commonplace, it is what the consumer expects whether it's footwear or other categories.

I don't think you will see an increase in fourth quarter compared to last year, at least that's our plans.

We don't see an increase in that promotional vehicle.

We will probably mirror it from last year, but will not increase it.

All right.

Thanks.

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

Wholesale brands at Famous Footwear kind of you've broken out the percentage with and without athletics what that makes up at the Famous Footwear division as well as the gross margin help because you did point that out as one of the drivers this quarter of more improved margin.

Hi, Jill.

You broke up a little bit so we are going to try to piece together, but I believe that you were asking for a little bit of perspective on the vertical improvement that we are seeing with our wholesale brands at Famous?

That's right, just kind of the mix that you are seeing there, and you've broken out before with and without athletics as well.

Ye, we are, I think that we don't really sell what we call through athletic intercompany a little bit in the Scholl's line, but our, we are expecting and have experienced an increase from we had been running in the 14% to 15% range historically.

And with the launch of Libby and Fergalicious into Famous in the spring season here we are seeing a lift in that number and also an improvement in the gross margins driven by some of those intercompany businesses.

Is there any way you can quantify that margin benefit that you saw in the second quarter?

Yes, I know exactly what it is but we don't break that out in terms of our disclosure.

Okay.

Is there any way the wholesale revenue weakness, is there any way you can talk about kind of the different components of that?

I know had you mentioned earlier about half the decline was private label, if you could talk maybe about the other half?

Sure.

Orders, low reorders, are you losing any customers out there?

Just a little bit more into that.

Thanks.

No problem, Jill, be happy to do that.

As Mark had indicated more than half of the second quarter shortfall was in the private label, private brand side of it.

And then as we look at across the branded portfolio it was really all brands with the exception of Sam Edelman and Carlos Santana showed some decline to a larger or smaller degree of decline in the second quarter.

It is not that we are losing any retail customers.

It really is as we manage our stock to sales ratios at retail and make sure that we are not getting ourselves out of line.

Really that has been the intent.

So I can't think of really anything else to add with respect to that, that point.

I think it's, Sam and Carlos has been fantastic and the others it was a little bit here and there on the rest of the branded piece.

Appreciate it.

Thank you.

Again, Jill, back to the margin question, again, we had wholesale, on the wholesale side we had improvement in our third party margins as well as in our intercompany margins.

So that also benefits at Famous the strength of those brands.

(Operator Instructions).

You do have a follow-up from Chris Svezia.

Hey, a couple of just quick follow-ups here.

Just, Diane, from a sourcing cost perspective, obviously, coming out of China, costs are coming down, can you maybe quantify into what degree either these have to be reinvested back in other brands or just kind of used to continue to move product, just curious what you foresee is going to happen with lower sourcing costs from just moving product?

And for you guys what's going to happen from a P&L perspective?

Right, I will speak generally and then Mark can speak to some of the specifics.

Certainly in the third and fourth quarter, as I know you and I have chatted about, we do see our initial margin rate improving as costs are coming down and as we are being smarter about where we are sourcing and how we are sourcing.

So as we look at both third quarter and fourth quarter we see gross margin rates improving and it looks like, Mark, what would you say, a couple hundred basis points?

Yes.

It look like a couple hundred basis point improvement in the back half, something like that on our initial margin is kind of the way we are seeing it.

Okay.

But to, whatever, and that's just strictly (inaudible)

Sorry, Chris, you faded out there, too.

I couldn't hear you.

Chris, if you will press star one again?

Okay, Chris, your line is open.

Okay, can you guys here me now?

Yes, sorry, Chris.

Yes.

Okay.

I feel like a commercial.

So I guess that's strictly on the wholesale side of the business.

I guess my question is, can you, based on, you are not anticipating that you'll see the entire benefit of that?

I mean, some of that's to some degree might get reinvested, is that a fair assumption or depending on how the second half unfolds whether there's mark down allowances, or things of that nature have to unfold?

Is that a fair observation?

I think so, I think we've sort of demonstrated at least in this second quarter here that our allowance rates have gotten a little bit better and we've been a little sharper on some of those things, but clearly, again, it will unfold.

Our intent, obviously, though, would be to try to capture as much of that as we possibly can.

Okay.

And, Joe, just a question for you, just from, you talked about athletics, some broad strokes, but I'm curious more specifically color on running, you do a small basketball business, classics, just skate, I mean, just kind of, are those still growth categories, what's going on in that regard?

Yes, Chris, a couple of things.

Really it's not much about basketball.

Running business still remains very healthy.

I think it's following some of the peoples' industry trends.

But our running business remains healthy.

Obviously, it's the same components, their brands with softening, Nike, Asics has continued to be strong.

We do have a very large skate business being driven by DC and some of our other vendors.

It has flattened out some, but when you take the whole vulcanized between, because that is somewhat the same consumer between Converse, between our skate, consumer that business remains very healthy.

So we are still pleased in our running and our skate business continues to lead the athletic portion of our results.

Okay.

And on the classics side?

Anything there?

No, not really.

Classics are, remain classics.

We really don't, have not seen an uptick in the classics business.

It remains somewhat still an urban business.

It really hasn't given us any lift.

We haven't seen an increase in consumer demand there.

Okay.

And the non-athletic sort of hybrid, Rocket Dog, sort of Skechers kind of business, has that shown any improvement or is that trending in line with the overall Company average?

Okay, this is a little bit too early.

I would say, though, we keep looking for, Chris, and we are getting too early, initial signs though, and again it's only a couple weeks.

I guess the question we are asking ourselves is we are taking a look at performance of our women's casual business and women's junior business.

It's starting to show some life early.

So after a year and a half in this industry of a women's business being down and struggling as she now, tired of her old closet, couldn't take it any more, coming back out?

It's early.

That season comes late September, October, November, but the first time we've looked at the numbers and said, oh, have we bottomed out, if we have, then are we going to get back into the cycle maybe some little more aggressive buying, and then your margin, as you know, improves.

There's a 5-point swing there, so we'll see.

So it's not declining anymore.

That's the good news.

And the early read on boots for us, too.

Early read on boots.

Everybody is that it's very, very positive.

Outstanding.

If we get additional wind at our back on that that not only should help our comps but also our margins, too.

Absolutely.

Okay.

Good to hear.

Thank you very much.

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

Good morning, everybody.

A couple of questions, on, additional follow-up on Chris' questions, Skechers, where do you put the shape-up shoes?

What category do you have that in?

We just have it in our athletic business.

It is?

And, okay.

Now is your athletic business running up right now or do you see it running up for back-to-school?

A little too early.

Again, at the current time frame, yes, it is running up.

And the inventory levels at the end of the quarter you said I believe were up 3.7% per door.

A little over 3%.

I'm sorry?

About 3.1% at the end of Q2.

And I guess my question is, and it sounds like your planning business down in the third quarter and then are looking for more positive activity in the fourth quarter.

Is that a fair statement?

Sam, it's Mark.

Again, I think what we gave is back half guidance on comps at Famous.

We didn't split it by quarter.

Again, I think the 3% increase in average inventory as we talked about was pulling forward receipts.

We said we would expect inventory would be down 3% by the end of the third quarter.

On a per store basis.

On a per store basis, yes.

Okay.

And then how do you, when you are looking at the athletic business, Joe, into spring 2010, how are you looking as orders are now do for spring 2010?

How do you preliminarily look at your business?

Are you staying very conservative?

It sounds like you are beginning to be slightly more optimistic for the back half.

So how does that roll as orders are due right now?

I think we are looking right now at basically athletic as a flat to up business some, for first quarter of next year.

Again, that work is still isn't progress.

Actually our orders are due some by the end of August and other ones by mid-September.

So we are still looking our way through that in the first part of next year.

But athletics has always been extremely strong, especially as you go into first quarter, when you take a look at your late February, March business.

So right now when you say conservative, I would say right now we would say flat, but would you have to ask me 30 days from now when orders are placed.

How is it changed, just to follow up, one last question, how has that changed as you look at the mix?

Given the changes and you guys have done a good job over the years of really borrowing against actual sales performance.

You've stepped up with quite a few vendors, other vendors have been struggling for some time especially in the classics world.

How is it working on, are you really buying it by item now more so than by brand, I guess is the question?

It's still, the brand still is the number one thing that we take a look at.

Then, obviously the SKU basis within that brand.

It's brand first, then SKU within the brand and has that SKU base become tightened?

Yes, it has.

And then one last thing, Diane?

Yes?

I'm sorry, how are you looking on the department store orders preliminary spring following WSA and Fanny and so on?

How are those preliminary, how does that look out for you right now going forward?

Are they, their businesses have been hurt more than what anybody else's?

Right.

Again, it's a range depending upon the customer, Sam, because as you can see their store-for-store has been anything from down in the mid-teens to down in the low-single-digits depending on who you are talking about.

So what we are really seeing is those open to buys and those plans corresponding somewhat with those kind of trends right now.

We don't see huge increases at all, but, again, it's back to how each one of our brands are performing with each one of those partners.

Have you been able to shorten your windows to be able to react closer to need?

Yes , in a couple of places we certainly have this particular season and we've been able to get some goods in.

For example, as everybody is talking about boots right now, we were able to turn around some boot orders as soon as we got some early reads from a number of our retailers.

So, yes, we have been able to do that in some

Well, thank you.

And good luck.

Thanks, Sam.

Thank you.

We've reached the allotted time for questions.

I will now turn the call back over to Ron for closing remarks.

Thanks, everyone.

We appreciate your continued interest and look forward to the second half of the year and a solid back-to-school, hopefully.

This concludes today's conference call.

You may now disconnect.