Caleres Inc (CAL) 2009 Q4 法說會逐字稿

Welcome to the Brown Shoe Company Inc.

fourth quarter and full year 2009 earnings conference call.

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

Thank you, Regina.

Good morning, everyone.

Welcome to the Brown Shoe fourth quarter and year end 2009 financial results conference call.

This call is also available to the public via webcast in accordance with the SEC's 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 conference call the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

Discussions 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.

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

Good morning.

Thanks for joining us to review our fourth quarter and our full year results.

With me today are Diane Sullivan, our President and Chief Operating Officer, and Mark Hood, our Chief Financial Officer.

Following my opening remarks, Mark will review our financial results and outlook in more detail, then Diane will provide additional insight into our operating performance and priorities in 2010.

Afterwards we will open up the call for your questions.

Pleased, but not satisfied, is how I characterize 2009 performance.

Our product and brand marketing strategies drove a solid performance in the fourth quarter and continued our positive momentum from back-to-school season.

As we planned the year surrounded by the unpredictability of the recession, we developed multiple scenarios to manage through this economic environment and position ourselves for an uptick in consumer spending.

During the first half of the year we took aggressive action to lower our expense base, reduce our capital spending, intensify our inventory and capital management disciplines, and improve our liquidity position.

These actions gave us strength and flexibility to capitalize on market share opportunities during the second half of the year, driving revenue and profitability beyond our original expectations.

To this end, we've invested in exciting must-have product categories at Famous Footwear, flowing the product to match changing traffic programs and deepening our engagement with our consumers through compelling marking programs.

This led to a record fourth quarter sales at Famous Footwear, driven by a 9% same store sales increase, and included a 39.6% gain at famousfootwear.com.

We saw similar success with our Naturalizer and Dr.

Scholl's brands, elevating product innovation and styling, resulting in continued traction with consumers, increasing velocity at retail and improved merchandising margins.

In total, we delivered an 8.6% net sales increase versus the fourth quarter last year.

On an adjusted basis, Q4 net earnings per diluted share were $0.19 versus an adjusted net loss per diluted share of $0.28 last year.

As a result, for the full year our adjusted net earnings per diluted share were $0.40, significantly above our expectations at the beginning of the year, and compares to the $0.47 per diluted share of earnings we posted last year.

As we look forward to 2010, while the environment feels much better than it did a year ago, there still remains an element of uncertainty as to the pace and sustainability of the recovery.

Regardless, we believe our business will continue to build on the favorable momentum from the back half of 2009.

Famous Footwear and Naturalizer stores have continued their strong pace through February, and our Wholesale on-order position is in strong shape for the first half of the year.

Our key priority for 2010 is to increase profitability and sales productivity.

When we spoke at the ICR Conference in January, we told you that our expectation was to achieve an EPS run rate of greater than $1 a share in the next 15 to 18 months.

We expect to achieve this target while continuing to invest in our long-term growth, and increasing the rate of return on these initiatives.

We believe these goals are well within our reach, and we have strategies in place to support those plans.

But as we did in 2009, we also have developed multiple scenario planning so we can act, react quickly to changes in consumer demand.

Our key areas of focus for 2010 are increasing sales productivity at Famous Footwear, improving conversions and continuing to enhance average transaction value, i.e.

toning product, to drive stronger sales per square foot metrics and store level economics.

We continue to make progress on improving the store productivity and profitability of our real estate portfolio by closing under-performing stores while increasing investment hurdles for new stores, i.e.

in driving stronger sales per square foot measures and store level economics.

And we continue to complement in-store productivity with marketing strategies such as enhancing our multichannel platform, stepping up our branding investment and increasing resource allocation to famousfootwear.com to reach consumers across shopping locations.

On the Wholesale side, we are focused on driving brand productivity across the portfolio, improving velocity at retail and merchandise margins, by first capitalizing on the major toning trends with our Heritage, Naturalizer and Dr.

Scholl's brands.

And secondly, capitalizing on the style quotient with the gaining momentum in our contemporary portfolio, leveraging these insights across our integrated multichannel platform to build strong merchandising and marketing plans with our retail partners.

As well, we will continue to attract more consumers and enter new markets internationally with our core brands.

On an enterprise-wide basis, we are committed to moving onward with our march to $1 per share improvement.

Essential to these efforts, is continuing to build the relevancy and penetration of our brands by increasing our investment in marketing to strengthen the engagement with our consumers.

We plan to increase our marketing investment from 15 -- by 15% to 20% in 2010, or an increase of 50 basis points, primarily in support of our core brands as we create a tool box of marketing programs to be in front of the customer more often and in more meaningful ways.

And, lastly, we are continuing to work to optimize our platform, with recent infrastructure investments beginning to yield significant efficiencies.

Our commitment to our profitability goal is unwaivering and our confidence is strong, as the actions we've taken in 2009 have provided further evidence and a strong foundation for this growth.

All in all, we will continue to plan thoughtfully, invest wisely and grow our earnings power and our brand preference during 2010 and beyond.

Now I will, turn the call over to Mark for details.

Thank you, Ron, and good morning, everyone.

My comments this morning will focus mainly on the results from the fourth quarter and our outlook for 2010.

Our full year results are also available in the press release that went out earlier today.

I'll start with a quick review of the income statement.

Net sales were $566 million, an increase of 8.6%, compared to $521 million in the fourth quarter of 2008.

The key drivers of our sales performance were a 9% same-store sales increase at Famous Footwear, a 7.6% same-store sales increase at Specialty Retail, driven by a strong performance from our Naturalizer stores, and a 5.8% sales increase for our Wholesale division.

Our gross profit rate in the fourth quarter improved 390 basis points to 41.1% of net sales from 37.2% in the fourth quarter of last year, which is one of the most promotional quarters in history as retailers reacted to the economic downturn by clearing inventory to align with the reduced consumer spending environment.

In the fourth quarter, Famous Footwear improved its gross profit rate by 290 basis points, driven primarily by strong sales in the higher margin categories of toning, boots and accessories.

Specialty Retail improved its gross profit rate 130 basis points as a result of on-trend product, increased full price selling and fewer closeouts in the quarter.

Our Wholesale division improved its gross profit rate by 710 basis points, primarily resulting from improved sell-through and velocity of product at retail, which lowered our markdown and allowance exposures.

Selling and administrative expenses increased by $4.3 million to $218 million or 38.5% of net sales, versus $213.7 million or 41% of net sales last year.

The increase in expense dollars was primarily related to an increase in incentive compensation as a result of our improved financial performance and shifts in the timing of marketing to align with high traffic periods.

This was partially offset by operating 28 pure North American stores across the portfolio as well as savings from the actions taken early in 2009 to contain costs.

Net restructuring and other special charges were $5.1 million in the fourth quarter of 2009 and consisted of $4.6 million related to the organizational changes we announced in November 2009, and $2.3 million in implementation costs for our new IT platform.

This was partially offset by a $1.9 million reduction in our reserves for future lease costs from our vacated Madison, Wisconsin headquarters.

Last year's fourth quarter included charges of $36 million, related to our expense and capital containment initiatives, headquarters consolidation and IT platform initiatives as well as $149.2 million in non-cash impairment charges.

The above factors resulted in operating earnings in the quarter of $9.3 million, or 1.6% of net sales, versus an operating loss of $205.1 million in the same period last year.

On an adjusted basis, excluding charges, operating earnings were $14.4 million in the fourth quarter of 2009 versus an operating loss of $20 million last year.

Net interest expense in the quarter was $5 million, an increase of $0.5 million versus last year.

We recognized a small tax benefit in the quarter, ending the year with approximately an 11% tax rate.

This compares to a tax benefit of $55.6 million in the fourth quarter last year primarily related to the impairment and the restructuring charges we reported.

As a result, net earnings for the fourth quarter were $5 million, or $0.12 per diluted share, versus a net loss of $153 million or $3.68 per diluted share in the year-ago period.

Adjusting for the charges and recoveries previously discussed, net earnings in the fourth quarter were $8.1 million or $0.19 per diluted share, versus a net loss of $11.5 million or $0.28 per diluted share in the fourth quarter last year.

Cash and cash equivalents increased 44.8% to $125.8 million at the end of the quarter, compared to $86.9 million at the end of the fourth quarter last year.

Total inventory at quarter end decreased 2% to approximately $456 million from $466 million at the end of the fourth quarter last year.

The decrease was driven by approximately a 22% decline in wholesale inventory, reflecting improved flow of goods to retailers.

You might also recall that ice storms in January 2009 prevented us from shipping in the final week of the quarter.

Somewhat offsetting this was an 8% increase in average per store inventory at Famous Footwear.

These levels are in line with the improved trend of sales and our first quarter outlook at Famous Footwear, as well as reflecting our increased investment in toning product to meet the strong consumer demand.

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

Borrowings under our revolving credit facility were $94.5 million at quarter end, a reduction of $18 million from last year.

Capital expenditures, or purchases of property, equipment and capitalized software in the fourth quarter, totaled $9.8 million, bringing full year capital expenditures to $50 million.

Capital expenditures in the quarter primarily reflect spending for our IT initiative.

Moving to the outlook, consolidated net sales for 2010 are expected to grow in the mid single-digit range, with first quarter net sales increasing by low single digits.

Same-store sales at Famous Footwear are expected to grow in the low to mid single-digit range for the full year.

First quarter comps however, are expected to be in the high single-digit range.

We plan approximately 25 store openings in 2010, accompanied by a plan to close approximately 50 stores.

At Wholesale, we expect sales to increase in the high single to low double-digit range for the full year, with flat to low single-digit growth in the first quarter.

Selling and administrative expenses as a percent of net sales are expected to be in the range of 37.5% to 38% for the full year.

This excludes costs of $7 million to $7.5 million related to our IT initiative.

Depreciation and amortization of capitalized software and intangible assets are expected to total $51 million to $53 million for the full year.

Net interest should approximate $21 million to $22 million.

We expect a tax rate in the range of 33% to 34% during 2010.

And lastly, capital expenditures are expected to be $60 million to $65 million for the full year, primarily related to our IT initiatives, new stores and remodels and general infrastructure.

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

Thanks, Mark, and good morning.

We do feel good about the progress made during the quarter and our better-than-expected results.

But I think one of the most critical points is the success that we achieved in the quarter was broad-based and is really the result of decisive actions we took as well as the power of our multichannel platform.

We delivered high single-digit sales gains in our Retail concept, substantial growth in our e-commerce channels and mid single-digit growth in our Wholesale business.

This success was built across product categories, channels and regions.

And importantly, the strategies and the disciplines that we implemented in the first half of the year yielded solid margin results, particularly as we look at our core businesses.

Let's turn to a review of our divisional performance beginning with an overview of Famous Footwear's fourth quarter results.

While we did anticipate an improvement in business during the quarter, the results exceeded our expectations.

Our strong product assortment and consumer engagement initiatives built upon the solid results we established during our back-to-school season, and we really worked to drive this success through the holiday season and now into early 2010.

And as a result, Famous' net sales increased in the quarter to $342.7 million, a record fourth quarter result, and up 9.7% from the fourth quarter of last year.

The performance was primarily driven by a 9% same-store sales increase, our largest quarterly gain in more than a decade.

And I think this accomplishment is noteworthy for two reasons.

First, it does follow a decline of 3.6% in the fourth quarter last year resulting in a two-year comp gain of 5.4%.

And for the first time in a decade, December sales were bigger than August sales.

These results were driven by all components of Famous' multichannel platform, including a 39.6% gain at FF.com, and all regions posted a same-store sales increase during the quarter.

The sales improvement came primarily from increases in average selling prices and conversions, and that was resulting from sales of higher priced point product both in toning and in boots, as well an increased full price selling as we anniversaried the dramatic liquidations from the end of last year.

This offset a slightly negative impact from traffic counts and average pairs per transaction metrics.

All metrics improved progressively throughout the quarter as we shifted marketing from November and into December.

Now turning to our category performance, our Women's business showed impressive growth with an 18% same-store sales gain.

This was driven by a strong increase in women's athletics, particularly toning products.

We built on the robust consumer demand for this category with targeted marketing programs as well as TV and digital ads from our partners.

And we are certainly continuing these efforts into 2010, and in fact I'm sure that many of you saw the Shape-ups ad during the Super Bowl that tagged Famous Footwear.

But toning was really only part of the picture.

Our boot assortments performed well, both in the Fashion category as well in seasonal boots, which benefited from the colder winter weather across much of the country.

And the health of our Women's casual business is much improved from last year as we enhanced the freshness and quality of our assortment in fall and holiday, which will continue to benefit us into spring of 2010.

While our Men's business declined 2.6% on a same-store basis in the quarter, we did reduce inventory in order to reallocate funds to other growing categories.

Men's athletics posted a solid 2.9% gain in the quarter, led by running, skate and cross-training styles.

And although a small business today, we have seen an increasing momentum in the Men's toning product and we believe this opportunity will continue to grow.

Looking at Kids, the category was down 2.6% on a same-store basis, with boots being the key positive driver.

And though Accessories is our smallest category, it continues to gain momentum with a same-store sales increase of 40%.

Gross profit rate in the quarter increased by 290 basis points to 44.1%, with an equal number of BOGO weeks in the quarter versus last year.

So less aggressive promotion and the success of our key product categories were primary drivers behind the year-over-year improvement.

Selling and administrative expenses were up $3.9 million in the quarter but were 260 basis points lower on a rate basis due to sales leverage.

The increase in dollars is related to higher incentive compensation and the timing of our marketing program with national television ads and an incremental Christmas tab being non-comparable to last year.

These were partially offset by lower payroll and facilities costs from operating nine fewer stores.

This led to an operating profit rate of 4% in the quarter compared to an operating loss in the fourth quarter last year.

We closed the quarter with inventory up 8% on an average per store basis, consistent with our high single-digit plan for the first quarter as well as the investment in higher priced goods, particularly new toning styles.

Our aged inventory position continues to be in fantastic shape.

Moving to our store count, during the quarter we opened one new store and closed 20 existing locations.

At quarter end, Famous operated a total of 1,129 stores versus 1,138 last year.

Looking ahead to 2010.

We have already seen that Famous' momentum is carrying into the early weeks of the first quarter with double-digit gains in February.

While these are the smallest weeks of the quarter, we are pleased with how we kicked off the year.

And we've identified key initiatives that will build on these results to drive market share gains in 2010.

First, as you would expect, we are going to continue to build on the consumer excitement around the toning category across our national footprint.

Secondly, we will increase our investment in the Famous Footwear brand with compelling -- with a compelling marketing plan for 2010 and a 15% increase in media spend.

With Make Today Famous as a catalyst, we are going to be expanding our presence across a broad media spectrum to make sure we reach consumers from a variety of touch points including national television, radio, print, social media, digital and mobile devices.

And, third, we will intensify our investment to support the continued development of famousfootwear.com to reach a broader range of customers and enhance consumer engagement.

Now, turning to our other core brands, Naturalizer and Dr.

Scholl's.

Total Naturalizer sales increased 12.4% with solid performances across its multichannel platform driven by a nearly 20% gain in third party wholesale sales, a 7.4% same-store sales comp at Naturalizer North American stores, which included a 51.7% increase at Naturalizer.com.

It should be noted that we finished the year with 15 fewer North American stores than in 2008, and expect a similar decrease in 2010 as we continue to improve the productivity of our store portfolio.

Boots, as you would imagine, were the key product driver for the quarter with strong sales of casual and wide shaft styles.

Also, following several down seasons, the Career Dress category showed a nice rebound.

So in Naturalizer we attribute these results to two key areas of emphasis.

First, the M Five comfort system continues to gain recognition and traction with our consumers as women begin to understand it and embrace it.

Secondly, the momentum of the natural sole brand in the mid-tier channel.

And finally, the continuing emphasis on our well developed multichannel platform with retail, catalog and e-commerce, allowing her to shop when, where and how she wants.

We managed the business well in the quarter and as a result of solid sell-throughs and expense management, our all-in operating margins increased to 5.1% of net sales in the fourth quarter, and for the full year, operating margins were 6.5%.

We've seen nice improvement this year and believe our double-digit operating margin target is well in sight.

Now moving to Dr.

Scholl's, sales increased nearly 35%.

However, as we discussed at this time last year, some shipments from the fourth quarter of '08 were pushed into the first quarter of 2009.

While it was an easier comparison, we did see a strong result even when accounting for this shift.

We've mentioned on the last few calls that much of the disruption with Dr.

Scholl's in 2009 was the result of the resetting of our floor at Wal-Mart.

This shift is now complete.

We feel pretty good about the outlook and we've launched focused shop and brand presentations in roughly 3,000 Wal-Mart stores around the country.

Additionally, we do believe that this healthy living and wellness and comfort and toning trend dovetails nicely with the Dr.

Scholl's brand promise of comfort and well-being.

The Dr.

Scholl's exercise sandal was the original wellness shoe and we really think there's some white space in the marketplace for toning and other types of products between $30 and $70.

And Dr.

Scholl's is aiming to meet this consumer need.

Our first products went to market this fall and the early sell-throughs were encouraging.

Solid sales growth, increased merchandise margin rates and expense leverage drove a 440 basis point improvement in Dr.

Scholl's operating margins, to 13.7% of sales in the quarter.

And it should be noted that we are seeing continued momentum from our Contemporary Fashion brand, the Aspiga, Sam Edelman and Vera Wang, which performed very well at retail during the quarter and are growing within those retail fashion authorities.

So in total, our Wholesale brands provided consumers a reason to buy as they created excitement with freshness and innovative products while offering the right value.

As a result, adjusted operating margins in the quarter were 7.2% versus an operating loss in the fourth quarter of 2008.

And importantly, our outlook is positive at the start of 2010, driven by a solid on-order position and continued growth of our core brand.

So all in all, as Ron said, we feel good about it.

We had a solid finish in the fourth quarter against what was a very challenging year.

I think it's certainly attributed to a lot of hard work done by our associates.

But most importantly, we are really looking forward to 2010 as we build on the momentum that is existing in our business today.

So with that, I think I'm going to turn the call over to the operator and I think we are going to take questions at this point in time.

(Operator Instructions).

Our first question comes from the line of Jeff Stein with Soleil Securities.

Good morning everyone.

A question on the inventory and the toning category.

First of all, you mentioned that inventory at Famous Footwear was up about 8% at the end of the quarter.

How much was it up in units as opposed to the dollar increase?

And then wondering if you could just kind of comment in terms of how much of your inventory you have invested in the toning category.

Okay.

Hi, Jeff, it's Diane.

How are you.

Good, Diane.

They are going to get me some numbers as relates to the pairs but let me talk a little bit about total dollar inventory.

As we looked at the toning business in the fourth quarter of this year, it was somewhere around 5% of our total business and it is continuing to gain momentum all the way throughout the quarter.

So if we kind of look to first quarter and the balance of the year, our expectation is that our total penetration of toning to our total is going to be somewhere in the high single digits.

It's kind of tough [obviously] to see how the consumer is going to respond, because at this point in time we are just getting out -- just now really have Sketchers in all [stores].

Reebok is not completely out there yet and won't be until probably May or June.

So it's still early.

We are still trying to measure consumer response.

But all indicators today look very positive.

And I think what I have here in front of me is that -- 3.5% up in pairs?

About 3.5% up in pairs, Jeff.

Okay.

And it seems like everyone in the world has a toning shoe now.

So the question is, is this a fad in your view and how long does it play out?

And what kind of risk, what kind of investment are you going to make given the potential risks that perhaps this could blow out real quickly?

And I don't know how you feel about that as you take a look at the back half of the year.

Well, I would tell you, at the end of the day the consumer is going to vote.

They are going to let us know.

But as we sit here today we do not believe that it's a fad.

We believe that it actually is a consumer trend that fits into a much bigger idea beyond just a product classification.

And it really is all about the attitude about being the best that you can be.

Depending upon who you talk to, people are predicting that this category could be anywhere between $1 billion and $2 billion, and who knows where it goes after that, not unlike what we saw in the walking category a number of years ago.

So we really believe that this toning business fits beautifully in our portfolio, particularly at Famous Footwear where that consumer is really all about this kind of product and the Family Footwear channel.

And we also believe there's relevance as it relates to both Dr.

Scholl's and Naturalizer, too.

So while it's going to get to be a crowded marketplace, we think innovators and people that are looking to keep thinking about how to touch the consumer, reach the consumer in new ways, will be the winners in this category.

So we believe it's important for us.

And Diane, can you talk about cannibalization?

Have you noticed all fall off in your traditional women's athletic business during the period of time where toning has been ramping up?

That's a great question, Jeff, and it's one we constantly are looking at.

And to date, we have not seen any dilution of any of our other businesses.

Now, how long that continues, what should we expect?

The teams are watching that very, very carefully and staying close to it.

But right now we have not seen any cannibalization.

Okay.

And just two more questions real quickly.

First of all, in the fourth quarter were you at all disappointed with your Wholesale sales growth?

Because I was kind of under the impression that you were kind of hoping for a double-digit increase in Q4 and it looks like you did fall short of that.

Yes, we were kind of hoping for, I think it was the high single-digit increase, something like that.

So we came in at 6%.

So, sure, would I have liked to have done that?

Absolutely.

But I think as we look forward into 2010, again it was really about how do we manage the profitability of our businesses.

And as we look at our on-order for Q1 and Q2, Jeff, we are feeling very good about the prognosis of high single and low double-digit increases for 2010.

So we think we are in the right place.

Got it.

And final question, Diane.

As you look at Famous Footwear, what kind of comp increase is required to leverage SG&A in the new fiscal year?

I'm looking over here at Mark.

What -- ?

Again, I think we saw tremendous leverage at the comps we ran.

I think low single digits would continue that leverage, and we are obviously planning it a little bit higher than that.

Got it.

Okay.

Thank you very much.

Our next question comes from the line of Heather Boksen with Sidoti.

Good morning.

Diane, maybe you could give a little color with regards to the Wholesale sales guidance for 2010.

It looks like it implies pretty strong growth in the second through the fourth quarters of the year and just what you're seeing there.

Yes.

Hi, Heather, good to talk to you.

The -- again, I think we always have to keep putting these things in context of the comparisons.

So in truth, we are up against slightly bigger comparisons last year.

But as we look at our business, our Heritage brands of Naturalizer and Dr.

Scholl's, we definitely see momentum building in those families of brands for lots of different reasons -- brand extensions, new products that we've added to those categories, some channel diversification and our contemporary fashion brands as well, with Sam and Via and Vera are not only gaining momentum in the current doors that they are in, but they are also expanding their door base.

So it really gives us additional opportunity to feel much more confident and comfortable about the forecast of the back half performance that we are looking for.

So those are the biggest drivers of the growth next year.

Any feedback you guys are getting from some of your larger accounts on open [to] buy dollars and how they are planning inventories for fall of 2010?

I would say generally everybody wants to try to keep inventories as tight as possible and chase inventories.

I don't think that mindset has changed.

I think to much of a degree, the burden of trying to drive that upside is going to come to the wholesale brands and how do we make sure we've got the right inventory to support what we believe is going to be the positive drivers in the back half.

So still pretty tight, Heather.

All right.

Thanks, guys.

Our next question comes from Jill Caruthers with Johnson Rice.

Good morning.

Can you talk about the Famous gross margin improvement in the fourth quarter?

I think it was up almost 300 basis points, and you point to toning as being a core part of that improvement.

If you could somehow strip that out and maybe just talk about outside of toning, kind of what that core business -- how the margins looked.

Let's see.

Jill, it's Diane.

Again, when we look at margins in the fourth quarter of this year, clearly we were, again, up against easier comparisons because of the tremendous liquidation.

But I would tell you that about -- probably about half -- and Mark is kind of looking it up for me here -- about half of that gross margin improvement came from toning.

And I think the rest was on the other base part of our business.

Again, I think we had significant margin improvement in the boot category.

And if you strip out the -- all categories essentially showed improved gross margins on a year-over-year basis.

That helps, thank you.

And then looking at improving the Famous sales productivity at Famous Footwear, do you feel as though it's more of an effort to remodel stores, maybe tweak the size of the store?

Or is it more on kind of a merchandise allocation issue?

Where do you feel -- what area do you feel helped improved that metric the most?

I don't think -- and I'm sure Mark will chime in here -- I don't think there's a silver bullet on any of those things.

I think it's a question that it's a number of things.

Over the last couple of years, clearly we have been really looking at the size of the footprint on a per door basis as well as looking at what kind of market penetration we needed across the country.

So I think we've been really trying to look at productivity from a real estate and from a size of the footprint perspective.

I think the other thing, again, the way we are really going to win is to continue to drive the sales per square foot and really, frankly just satisfy consumers better.

If we are able to do that, drive a higher average unit sales and continue with this momentum that we currently have where the AURs are higher, our customer counts are getting a little bit better.

And we really believe this momentum of all of these toning and everything else is just going to drive a lot of new customers across the threshold.

This is Ron.

I guess what I would add is that I think that we believe that we need to continue just a significant emphasis on working on engagement with our consumers.

And we need to do that in-store and we need to do it with our marketing programs and we need to do it with our online programs.

So Diane talked about multichannel touching here, and we really believe our emphasis needs to be on that engagement process.

And, yes, we'll remodel some stores and, yes, we will [work through -- ].

But we really believe we have got great brand stories to tell and we really haven't got those stories across in the engagement level that we really believe could drive productivity at store level.

I think on that point, Ron, just to keep in everyone's mind, we talked about a 15% increase in marketing spend this year.

That's up against a 12% or so increase last year.

And the way we were -- [cost of media] and the way we were able to buy, the number of consumer impressions that we're now putting up there against Famous Footwear and the great brands that we carry in our store has substantially improved.

And we expect that that's going to continue to build momentum for our business.

That's a good point, Ron, I forgot to mention that.

And then just last question, kind of overall, the targets behind doubling earnings over the next 12, 15 months.

Clearly, it looks as though [sales momentum] is in your favor and that should help leverage your expenses.

What's your outlook on gross margin or other [key] operating margin improvement?

I think we believe that gross margin improvement continues to be possible, but we believe that it comes from telling these right stories so that in essence, you get more of those, if you will, full-priced sales in the categories with the stories that are greatest in demand.

Clearly when you have a just terrific driving force, as toning is right now, we get the extra wind at our back.

But hopefully you have picked up that the improvement in our business is very broad-based.

It obviously is being enhanced by the toning but working through there.

Having said that, I think in the near term at retail I think margin opportunity will be good.

I'm sure that you are hearing, and we are also seeing and experiencing, trying to go through the field on the forward side of order placement as factory space continues to tighten.

And we would continue to see, I think, a tightening and challenging environment on placing orders and pricing into the fall season and beyond.

Although I would tell you that I believe that being a value player, we will ride that tide with everyone else and be in a good competitive position.

But I think in the longer term view here we see the tightening.

I appreciate the comments.

Thank you.

Our next question comes from Elizabeth Montgomery with Longbow Research.

Hi guys, congratulations and thanks for taking my question.

My question is on the Famous Footwear store base.

I guess I was hoping you could maybe give some color on just how many of the stores you feel might be oversized or might, at this point, still be lagging in terms of the four wall contribution.

It's Mark, Beth.

Again, [it's] wise to continue to study the bottom 10% of our portfolio, I think that those are where we kind of focus our actions in terms of landlord renegotiations and relocations and betterment of locations.

Is there anything consistent about that bottom 10%.

Is it the regional thing or a specific type of location or store format?

No, I mean, again, it's the bottom of the barrel and it's -- we've made mistakes in all categories.

I think the portfolio of opportunity is broad there.

One additional comment.

I just would refresh your memory that we are very aggressive in our lease operating plan so we typically have the bulk of our leases with three-year kick outs on five or ten-year terms.

And so we are pretty confident that when -- as we talk about what that bottom tier is, it's right in front of us.

It's not a building long-term problem or whatever.

We take care of it as it occurs.

And given the last three years of the recession, those stores that struggled most in there are being addressed.

Okay.

And then, Ron, I know you had mentioned, I guess at [Fanny], that you guys were working on some new, I guess ways of collaborating on -- with retailers on the Wholesale side.

I was wondering if you can give us any update on that.

Yes, I think, Beth, we talked a little bit about -- we really believe that the profit opportunity on the department store side of the business has been certainly challenging and that we've worked to create a different type of partnership or relationship with the retailer which focuses on having a real good understanding of the story we want to tell with each retailer and what that expectation for merchandise assortment and sell-through is.

And I would tell you that I think the major retailers, and a couple in particular who we've had a little bit longer engagement period of time, have really been responding to how could we manage this whole process together and get a better outcome and perhaps a more controlled outcome where you have a better likelihood of getting tthe profitability that you had expected.

I don't think this comes as a surprise to anyone as the department store channel has been declining for a great number of years.

And so you have got to be looking at that model mix as we go forward.

Early reads, which we've been working on, [if that] was sustainable, I think we would be very, very excited.

I Okay.

And then I guess one quick one.

Given how well the toning product is working in your stores right now, you think it's accurate to say that the shape-up product is not over-distributed yet at this point.

No, we definitely don't think so.

As we mentioned a little earlier, again, we continue to see it building momentum, not leveling off at all yet.

It appears to be incremental right now to our total business.

And it's funny, as you just even walk the malls or walk the street, really think about how many people you see in that type of product yet.

So we think there's -- it's not that many.

So we think there's still a lot of opportunity for growth there.

Okay, great.

Thanks, and I don't have a pair yet either, so --

We think there is sort of a unique opportunity here that's associated with Famous Footwear as a family store and this channel that we operate in.

We really are the best place to buy branded product for this [gal].

This really fits very, very well in our stores.

It is not a perfect fit in an athletic environment, and it's not the perfect fit in the fashion environment.

So we think this is a very unique time for us to really be the captain of this category.

Makes sense.

Thanks, guys, and good luck.

Thanks.

Our next question comes from Christopher Svezia with Susquehanna.

Hi.

This is Christina Cheng for Christopher.

How are you, everyone?

Good, Christina, how are you?

Good.

My question is could you give us some color on maybe how some of your spring categories are doing, maybe for sandals, some of the other categories you didn't mention?

And maybe an update on how the Fergie line is doing as well, and maybe your thoughts on Crocs.

Sure, it's a little early, but what I can tell you -- Obviously toning, toning, toning, big across really every place that we look.

Secondly, would be -- early reads on sandals are good, I wouldn't say great yet.

Weather certainly has impacted a bit of that prognosis right now.

Flat and embellished product continues to be important.

So that extreme from flat to very high heels has been critical across our total enterprise.

And in general, I would tell you boots continued a little longer than we thought and who knows if that's going to be a more of a year-round kind of look., Because you see women wearing boots a lot.

I would tell you continuing of toning, continuing of boots, flats still working well.

Early read on sandals okay.

No, we don't see any issues.

And embellishment and [glam] still kind of at the other end of the extreme, seems to be what we are seeing right now.

Okay.

How about outside toning in the athletic category.

Do you see any of the new launches for running or basketball being [competitive] --?

I think the only other category we'd say is showing any life would be running.

So it's really running and toning are the two big ones.

I see.

And then my question for gross margins, it looks like first half definitely you probably have a lot of room to see good margins there.

But any chance, given the margin increases in the second half of last year, if there's any more -- if we are likely to see, say 100 basis points on top of the gains you had in the third quarter and fourth quarter?

Because you anniversary toning probably towards like of second half of third quarter, right.

Yes.

Again -- Christine, it's Mark.

I think we certainly see, as Ron talked about, gross margin opportunity particularly early in the year.

And then I think it does get a little more difficult as you get into the back half and the comparisons get tougher.

But again, I think we don't really quantify that for you in terms of our guidances other than we would expect them to be up.

Right.

Would you expect sourcing costs to be -- to become a headwind at some point during the back half of the year.?

Well, we are hearing a little bit about that.

Not a lot so much about the sourcing costs but the access to getting product made because of some labor issues and that sort of thing.

So I think our forecasting needs to be really well done.

And the good news is again, we have a powerful sourcing arm.

So we believe that we will be able to make sure we get the goods kind of at the time that we need it.

But it's something that you do hear a little more today, Christina, than you had heard six months ago.

I see, okay.

Thank you.

That's all I had.

Our final question comes from the line of Ken [Stumhauser] far with Sterne Agee.

Thank you for taking my questions.

First, I was just wondering if you could talk about whether you are currently carrying Crocs in your stores.

And if not, whether that is something you are currently exploring.

Yes.

No, we do currently carry them.

Okay.

Is it just a couple of SKUs or is it something that is broader and, if not, are you looking at expanding it?

It's not a significant amount.

It's about $1 million of inventory or so.

And again not a big part of the overall formula for Famous Footwear.

Okay.

And then secondly, you guys probably have good visibility on what your order is going to be like in Famous Footwear for the second half, specifically for back- to-school.

Fashion boots has been a pretty big driver for the past two years.

I was wondering if you could just comment on whether you plan that business overall to be up again in 2010 or if it's something that you are maybe a little bit more cautious on?

I would say we haven't finished our plans yet for fall 2010.

But the early indicators that we are hearing from our folks who are at [Meet Cam] and looking at what the consumer is thinking about, is that boots certainly seem to be a very important staple and a critical part of her wardrobe.So I would not say that I think we are going to be planning them less than where they have been this year.

How much more, it's yet to be determined.

And it really depends by brand too.

Some brands just resonate better with the consumer in that category versus others.

So I wouldn't say less, hard to say how much more, I guess would be the short answer.

Just a couple more questions.

As far as the store base is concerned, you reduced it in 2009.

You're guiding to seeing that reduction again in 2010.

How has your perspective changed on what the saturation level is for Famous Footwear?

And net/net, how big of a change do you think it could be long-term domestically?

Ken, it's Mark.

I think we would -- we think there's still plenty of room to grow the chain but I think we are cautious at this time in terms of completing the portfolio change-outs in terms of some of our poorer performing stores.

And we are actively engaged in looking for new locations in the new locations that is we have secured since we tightened our standards [involved] in performing at nice levels for us.

So I think we are encouraged to continue to grow the chain.

So I think it's still a net growth opportunity long term?

Absolutely.

Okay.

And then one final question for you, Mark, actually.

The IT initiatives that you are identifying separately, the -- recently.

What precisely is that?

Can you just elaborate on what exactly that is, the expenses?

Sure.

We are midstream in our implementation of the SAP platform which is a multi-year spending of approximately $65 million.

And approximately 25% of the activities associated with the platform under the accounting rules are required to be expensed as incurred.

Is that like consulting fees or -- ?

Yes.

And when will that conclude?

We expect to wrap up the current phase of that project in the latter stages of the third quarter of 2010.

Okay.

Thank you, and best of luck.

Thank you.

I will now turn the conference back over to Management for any closing remarks.

Thank you everyone.

We look forward to the coming quarters.

There is certainly some wind in the sails of the footwear business, and that certainly encourages us.

I think at the same time, we certainly hope that we've conveyed that I know some of you ask when are we going to return to normalization.

And you have heard me say I don't believe that we are going back to a normal, that we are going forward to a very, very different time of engaging the consumer in a different way in which she is going to shop.

And we really believe that we've been forward thinking on this, and we are confident that we are starting off 2010 in a robust way.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect.