Caleres Inc (CAL) 2010 Q1 法說會逐字稿

Welcome to the Brown Shoe Company Incorporated first quarter 2010 earnings conference call.

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

Mr.

Golden, you may begin.

Thank you Carrie.

Good morning everyone.

Thank you for joining us today for Brown Shoe's first quarter 2010 financial results conference call.

This call is also being made available to the public via webcast.

Our remarks contain forward-looking statements which are not historical facts and are subject to a number of risks and uncertainties.

Actual results may differ materially.

Please refer to today's financial press release and our SEC filings for more information on risk factors and other factors that could impact forward-looking statements.

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

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

Good morning.

Thanks for joining us to review our first quarter 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 and then Diane will give us some additional insight into our operating performance.

Afterwards, we will open up the call to answer all your questions.

While I am pleased to report another quarter of improved sales growth in earnings, as well as solid progress toward our goals, I am most encouraged by the continuing momentum so far into the second quarter.

Consolidated net sales last quarter were 10.9%, or first quarter record of $597.7 million.

The performance was strong and broad based across the portfolio.

Our retail channels led our performance during the quarter, with mid -teen same-store sales increases at both Famous Footwear and specialty retail.

And our wholesale performance was also solid as we delivered a nice increase in shipments in our sell through rate at retails are very encouraging.

Our overall double digit sales growth, coupled with a significant increase in gross margin rate, more than allowed us to fund the investments we are making in our brands and fueled an increase in the first quarter net earnings per diluted share of $0.26 on an adjusted basis compared to a net loss per diluted share of $0.14 last year.

We attribute this success to the initiatives and investments we have made over the last few years.

It was our intent that the onset of the recession to continue our infrastructure and brand investments to better position ourselves when the environment improved.

While there were challenges during that period, we feel confident today that those were the right decisions to have made in order to evolve Brown Shoe in to a leading marketer of global footwear brands.

We are now beginning to realize the value of our infrastructure investments from our retail distribution center to our IT platform initiatives, as well as a very solid transition of Famous Footwear to St.

Louis.

The intensified concentration on our core brands has resulted in strong performances from Famous Footwear, Naturalizer, and Dr.

Scholl's over the last three quarters, but also has provided us with greater strategic clarity to drive continued performance into the future.

Our marketing initiatives are driving traffic into our stores and creating brand communities for our customers.

Make Today Famous continues to gain traction with our consumers and has reached its next evolutionary phase with the launch of our Mind Body Sole initiative to deepen our connection with our consumers in the fitness arena, and strengthen our leadership as the destination in this category.

And our productivity initiatives at both retail and wholesale have been key components to greatly improved operating metrics during the quarter.

The economic environment continues to show some uncertainty and our consumers are facing the same economic realities as everyone else.

They are focusing on value, and making every dollar go further.

The benefit of Brown Shoes is that we offer trusted nationally recognized brands that are affordable.

And the great healthy living and fashion offerings across our multichannel portfolio offer greater value beyond utility and price as they make her feel better physically, as well as emotionally.

When we last spoke, we told you that we expected to achieve $1 per share in earnings in the next 15 months to 18 months.

Clearly we have a more accelerated path and now expect to earn those kinds of results in this fiscal year.

Therefore, we have turned our focus to driving $2 per share as the next milestone on our way to achieving our principle goal of generating operating returns in the high single digits and a return on invested capital in the mid- to high-teens.

We will do this while we continue to make investments into furthering the growth of our brands, and strengthening our market position.

With that, I'm going turn the call over to Mark.

Thanks Ron.

And good morning everyone.

I'm going to begin with a quick review of the income statement.

Net sales were $597.7 million, an increase of 10.9%, compared to $538.7 million, in the first quarter of 2009.

The key drivers of our sales performance were 15.5% same-store sales increase at Famous Footwear, a 16.2% same-store sales increase at our specialty retail driven by a strong performance from our Naturalizer stores.

Both retail numbers supported by double digit growth in our Famous Footwear.com and Naturalizer.com businesses, and our Shoes.com business was up 13.1%.

Net sales of our Wholesale business increased 3.5%, in line with our expectations of flat to low-singles growth for the quarter.

Our gross profit rate in the first quarter improved 280 basis points to 41.4% of net sales, from 38.6% in the first quarter of last year.

In the quarter, Famous Footwear improved its gross profit rate by 230 basis points.

Driven by strong sales in the higher margin categories of fitness, accessories, and boots.

The strength of our business also allowed us to reduce our promotions and drop two weeks of planned Buy One, Get One during the month of April.

As a result we had 22% less promotion, than in first quarter 2009.

Our Wholesale division improved its gross profit rate by 310 basis points, primarily resulting from improved sell throughs at retail, which lowered our markdown and allowance exposures, as well as growth from our higher margin brands.

Specialty retail improved its gross profit rate by 150 basis points as a result of on-trend product and more full-priced selling in the quarter.

Selling and administrative expenses increased by $11.8 million, to $224.5 million, or 37.5% of net sales, versus $212.7 million or 39.4% last year.

The increase in dollars was largely driven by an increase of incentive compensation and increased payroll cost as a result of pay increases given to our associates as well as increased selling salaries as a result of the increased sales levels.

This was partially offset by operating 62 fewer stores across the portfolio, than in last year's first quarter.

Net restructuring and other special charges were $1.7 million in first quarter, compared to $2.6 million last year, both related to our IT initiative.

The above factors resulted in operating earnings in the quarter of $21.3 million, or 3.6% of net sales, versus an operating loss of $7.2 million, in the same period last year.

Excluding the aforementioned charges, adjusted operating earnings were $23 million or 3.9% of net sales in the first quarter of 2010, versus operating loss of $4.6 million last year.

Net interest expense in the quarter was $4.5 million, $0.6 million less than last year due to lower average borrowings under our revolver.

Our tax rate in the quarter was 37.4%.

Our domestic retail operations carry a 39% tax rate, and their outperformance in the quarter drove the increase in this rate.

As a result, net earnings in the first quarter were $10 million or $0.23 per diluted share, versus a net loss of $7.6 million, or $0.18 per diluted share in the year ago period.

Adjusted net earnings in the quarter were $11.2 million, or $0.26 per diluted share, versus a net loss of $5.9 million or $0.14 per diluted share in the first quarter last year.

Looking at our balance sheet, cash and cash equivalents increased 28.9%, to $59.5 million, at the end of the quarter compared to $46.1 million at the end of the first quarter last year.

Total inventory at quarter-end increased 5.6%, to $431.5 million, from $408.5 million at the end of the first quarter last year.

This increase was driven by a 15.9% increase in average per-store inventory levels at Famous Footwear, of which about half was related to the investment in higher priced fitness product.

These levels are in line with recent sales results, and our second quarter performance, which we expect to increase in the low- to mid-teens on a same-store base.

To put this in further perspective, this increase follows four years of declines and our current inventory levels are below 2006 on an average store basis, while our same-store sales or sales per-store are higher than during 2006.

Average per-store inventory specialty retail decreased 2.9% on a constant dollar basis.

Wholesale inventory declined 3%, reflecting improved sell throughs and flow goods to retailers.

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

We had no borrowings under our revolving credit facility at quarter-end versus $39 million of borrowings at quarter-end last year.

Capital expenditures or purchases of property and equipment and capitalized software in the first quarter totaled $11.3 million, with spending split evenly on new stores and remodels and our IT initiative.

Moving to our outlook, consolidated net sales for 2010 are expected to grow in the high single- to low double-digit range with second quarter net sales increasing in the low- to mid-teens range.

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

Second quarter comps are expected the grow in the low- to mid-teens.

We plan approximately 25 store openings, and 50 closings during 2010.

At Wholesale, we expect sales to increase in the low- to mid-teens range for the full year, with mid- to high-teens growth in the second quarter.

Consolidated gross margin rate in the second quarter is expected to increase versus second quarter of 2009, but decline sequentially from the first quarter driven by gross margin growth at Famous Footwear partially offset by a decline in Wholesale gross margins, both sequentially and versus second quarter 2009, driven by sales mix.

In the second half, gross margin is expected to be down modestly, resulting in full year 2010 gross margins, ending modestly ahead of last year.

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, which includes costs of $7 million to $7.5 million relating to our IT initiative.

We expect SG&A dollars to increase sequentially in the second quarter versus the first.

Driven once again by higher payroll and incentive costs, and an increase in marketing spend in the second quarter of more than 60%, year-over-year.

For the full year, marketing expense is planned to be up more than 30%.

Depreciation and amortization of capitalized software and intangible assets are expected to total $49 million to $51 million for the full year.

Net interest should approximate $19.5 million to $20.5 million for the full year.

We expect the tax rate for the full year in the range of 37% to 37.5%.

Lastly, capital expenditures are expected to be $62 million to $65 million for the full year, primarily related to our IT initiatives and new and remodeled stores.

And now I would like to pass the call over to Diane.

Thanks, Mark and good morning.

Let's get right to our review of our divisional performance beginning with an overview of Famous Footwear's first quarter results.

While we anticipated strong growth from Famous Footwear in the quarter, the results exceeded our expectations.

Famous experienced across the board strength in the quarter.

All channels, geographies, categories and genders were up and contributed to the growth.

Importantly, our results were driven by multiple levers targeted and engaging marketing to drive awareness and visits, high demand product offerings and strong in-store presentation to drive conversion, and consistency across all of our multichannel touch points.

And as you've heard, we have seen this momentum continue at a very similar rate as we -- since we've ended the first quarter.

So in total, Famous' net sales increased 14%, to a first quarter record of $362.2 million, driven by 15.5% increase in same-store sales, our largest quarterly gain in more than a decade.

Same-store sales continued momentum started with our 4.7%, and 9% comps in the third quarter and fourth quarter respectively.

And on a two-year basis, our first quarter same-store sales were up 10.6%.

We achieved strong transaction metrics during the quarter, reflecting our initiatives to drive greater productivity.

In fact, conversion was up in the high single digits, AUR increased mid-single digits and traffic was up low-single digits.

Pairs per transaction were down slightly, largely attributable to fewer promotional weeks in the quarter versus last year.

And by category, the women's business led Famous' performance with an impressive mid-teen same-store sales gain, driven by sandals, athletic, and toning styles.

Men's business delivered a low-single digit increase in same-store sales for the quarter and was led by athletics.

And we've seen men's toning product continue to gain some momentum.

Kids achieved a mid-teens increase in same-store sales, led by casual styles, and our accessories business, while small,continues to gain momentum with same-store sales increase of almost 50%.

Gross profit rate in the quarter increased by 230 basis points to 45.3%.

The gross margin expansion was driven by less aggressive promotion in the quarter compared to last year and the success of our key product categories.

Selling and administrative expenses were up $2.5 million in the quarter, but were 450 basis points lower on a rate basis due to leverage.

Higher variable expenses from the increased sales performance, increases in-store payroll and incremental expense related to our distribution center opened in Q2 of last year, were the key drivers of the increase.

This led to an operating profit rate of 7.8% in the quarter, compared to 1% in the first quarter last year.

As Mark mentioned, we closed the quarter with inventory up 15.9% on an average per-store basis, consistent with our sales expectations as well as the investment in higher priced goods.

Our aged inventory position continues to be in great shape.

Moving to our store count, during the quarter we opened 11 new stores and closed six existing locations.

At quarter-end, Famous operated a total of 1,134 stores, versus 1,166 last year.

As we look ahead, we remain focused on our key initiatives and product store productivity and marketing that will build on this strong start to the year.

We plan to capitalize on the consumer excitement around the fitness and toning categories across our national footprint, adding next generation styles and new brands.

And additionally, we have increased our investment in the Famous Footwear brand as we execute on our marketing plans for 2010.

Make Today Famous has really taken hold with our customers and we are continuing the evolution of the message and expanding our media presence.

We also recently introduced our Mind Body and Sole Tour to strengthen Famous' position as the leader in the fitness movement.

As part of this initiative, we have partnered with Ali Vincent, who was the first woman to win NBC's €œThe Biggest Loser." And Ali will make 20 in-store appearances in key markets from now through July.

This endorsement is supported by great in-store presentations and targeted marketing to create an even stronger emotional connection with our customers.

Now turning to Wholesale, performance was in line with our expectations of a low-single digit net sales gain in the quarter and overall we did manage the business well.

Net sales were up 3.5%, $174.7 million, led by Naturalizer and our contemporary fashion brands.

Gross margins were much improved across our wholesale brand, with a 310 basis point improvement for the division, a reflection of much improved sell throughs at retail.

Expenses were up 10% in dollars, primarily due to incentive composition and increased marketing.

And overall, Wholesale operating margin was 5% in the quarter, versus 3.5% last year.

Now, turning to our core brands Naturalizer and Dr.

Scholl's, total Naturalizer sales increased 17.2% with solid performances across its multichannel platform.

The performance was driven by a mid-teen increase in third party Wholesale sales, making it a Top 4 performer across POS channels according to NPD for the quarter.

Same-store sales at Naturalizer North America grew 17%, driven by mid-single digit increases in traffic, conversion, and AURs.

Naturalizer stores generated positive operating earnings in the quarter, and we believe it will do so through the year as well.

And Naturalizer.com generated a sales increase in the mid-20%.

It should be noted that we finished the quarter with 17 fewer North American stores, than in the same period last year.

Sandals, both casual and career were the key product drivers and business, as you've heard from many folks, did open up early due to the warmer weather that we experienced in March.

We managed the business well and as a result of the solid sell throughs and expense management, our all in operating margins for Naturalizer increased to 7.5% of net sales in the first quarter compared to 2.1% in the first quarter of last year.

Moving to Dr.

Scholl's, sales decreased in the mid-teens as we continued to anniversary some quarter-to-quarter unevenness in shipments from last year.

But the business performed better than we had planned in the quarter.

For the full year, we expect a mid-teen increase in sales with significant increases in both second and third quarter and flat to low-single digit increase in the fourth quarter.

As a result of the decrease in sales, our first quarter operating margins were 10.8% of sales compared to 12.5% last year.

And as we move through the year, we are going to be continuing to build on this ubiquitous nature of the Dr.

Scholl's brand, broadening our distribution and developing new innovative products and technology to drive the growth of this great brand.

And just to comment quickly on our contemporary fashion brand, Via Spiga, Sam Edelman, and Vera Wang have continued their exceptional momentum this spring and delivered significantly better than expected sales in margin growth.

These brands have really connected well with consumers who seek designer quality and style with a strong value proposition.

As a group, these three brands grew at about a 75% clip in the quarter and more importantly, generated positive operating earnings.

While small in comparison to our three core brands, we see this momentum continuing and their position in our portfolio becoming more meaningful.

Looking forward, our order backlog for wholesale is in great shape and supports our strong growth expectations.

Not unlike what you have heard from others who have already reported, given shifts in capacity in the Far East, and retail order flow, backlog numbers have generally outpaced near-term shipment expectations.

In our case, full year sales are expected to grow in the low- to mid-teens, and our backlog stands above 50% at quarter-end.

On average, we have seen retail orders come in roughly five weeks six weeks earlier than historic timing.

And several years ago, in anticipation of these shifts in sourcing we began moving our Far East operation both north and towards the interior of China.

And at this point we are now sourcing roughly half of our product from the Guangdong region.

With these actions and given the strength of our sourcing operation, we believe we are well positioned to meet our expectations going forward.

So, in closing we had a great quarter.

We are certainly excited about our opportunities to continue the pace for the remainder of the year.

And with that, I would like the now turn the call back over to the operator for the question-and-answer portion of the call.

(Operator Instructions) We will pause for a brief moment to compile the Q&A roster.

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

Good morning everyone and nice job on the quarter.

I guess my first question is I just want to talk about the toning business for a moment.

And I guess more specifically, Diane, if you want to talk to that, just what your expectations are this year in terms of percentage of the business?

What it was in Q1 either if you can talk about relative to Famous, relative to the Naturalizer brand or Dr.

Scholl's?

And any update in terms of what you are doing in terms of your rollout in-store?

I think you are doing 200 or 250 or so Famous Footwear stores with fitness walls in the back?

Any update there?

Sure.

Well, certainly everybody is excited about the toning category.

And it is clearly still early.

It's hard to even begin to imagine what the outlook of this is going to be like as we look to the next year.

But our experience, to this point, has been that when we take a look at the percent of our total business, toning has represented somewhere around 8% to 9% of our total business during the first quarter of this year.

And we certainly expect that it's going to continue at that pace and we are really going to allow the consumer to vote.

We want to make sure that we support whatever business is out there.

We believe that Famous is so well positioned with our current platform and our retail stores to take advantage of it.

And, so what you heard about our Mind Body Sole presentations in-store.

We have now close to, I believe, 50 of them that are up and doing -- seems to be, again, early but doing really nicely.

And our expectation is through the rest of the year that we really that think this is a great way to not only present toning but more importantly really take advantage of this whole idea of fitness footwear, what we believe is this healthy living momentum that's in the category.

So we are excited about it.

We are going to fuel it.

We believe we ought to drive it.

We are going to let the consumer vote and we're -- but we're paying attention to making sure we are calibrating the opportunity and managing our inventory in the right way.

I mean, based on 8% to 9% of the business seems like it would be higher at Famous Footwear for the obvious reasons, I guess.

Yes, that was first quarter, Chris.

As we moved through second quarter, we will certainly -- our expectation would be that it would be stronger than that and our expectation would be in the third quarter, it could potentially be stronger than that.

So we will see as the consumer comes in and votes but we are going to have the product there for her when she chooses to do so.

In terms of -- last follow-up on this -- just in terms of, I guess what you're seeing with existing brands, Skechers, Reebok is upping up in terms of product distribution and some of your own brands and then some others that have gotten into it.

Just the lay of the land to how that might unfold you continue to work with existing brands and layer in newer ones, just your thoughts there as well?

Well, we are continuing to work with the core brands that you mentioned.

We think they've done a terrific job of providing great product and even continuing to innovate into new concepts and new styles in that category.

So our team at Foot Famous are making sure we are on the cutting edge with all of those resources to make sure we are getting the best of all the new thinking going forward.

So again, we remain encouraged.

We think it's going to eventually evolve in to even beyond toning and fitness but become more of a casual component of the business.

So, similarly but very excited about it.

Okay.

And then, just -- I want to ask, and I have a question here, it's on the inventory for Famous.

And Mark, you seem to be prepared for this.

So I guess this is my question, inventory on a per-store basis is up 16%, I think I remember in Q4 you had inventory up pretty high on a per-store basis.

And I guess my question is you saw good gross margin improvement for Famous but on two-year basis, I think it was only up 150 bits for the first quarter.

So my question is this, you are looking at a lot of your competitors, which are I guess, doing more with less from an inventory perspective.

So I'm just curious why it's up that high?

If you can add a little bit of color to that and are you just bringing in so much inventory?

It just doesn't -- it seems odd that you would maybe do more with less, just comparatively speaking.

So, if you could maybe talk to that a little bit?

Good question, Chris.

I tried to cover it a little bit in my prepared remarks.

Again, if you look at the way we've managed inventory consistently, if you go back to 2006, which was our last normalized year, we have taken down our inventory in the first quarter in each of the last four years.

And our current average store inventory is about 2% less on a per-store basis that we carried in 2006 and our average per-store sales is up between 4% and 5%.

So, we actually think we are managing the inventory quite well.

Okay.

I'm just saying, okay, it just seems high relative to maybe what it could be.

I guess that's my question.

I mean, could you do more with less, I guess, is the question?

Really, Chris, this is Ron, you can always do more with less.

You can always try to make sure you draw the line.

We are trying not to tiptoe on a fine line here.

We truly believe that we've just started to see the increase and opportunity in our fitness and healthy living product.

We plan on funding this to ensure that we continue to play a leadership role in this element.

And we are going to make sure we have the product.

We are going to make sure that we have access to the product that we are ordering and flowing the supply of product to make sure we are not going to miss a beat here.

We are not afraid of this category.

We have plenty of opportunity to make sure that we manage inventory as we go.

We are still so early, I still think we are not even taking full advantage of the inventory that we have.

So, we are still early.

Okay.

All right.

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

Thanks.

Your next question comes from the line of Jeff Stein of Soleil Securities.

Question for Mark.

Looking at the SG&A number, when you released your fourth quarter, you were providing SG&A guidance of 37.5% to 38% of total sales.

And it looks like you are raising sales expectations but also keeping SG&A guidance as a percent of sales flat.

So the question is why is that and where do you see incremental SG&A coming from?

Sure, Jeff.

Good question.

Again, a couple of answers, and again, I think we tried to cover some of it in the prepared remarks.

But I think the biggest increases that have caused the rate to remain the same would be funding of incentive compensation cost, funding of increased marketing spend and the variable store payroll cost associated with the higher sales expectations and other variable store costs.

Got it.

Okay.

Can you tell us what your marketing spend is expected to be this year and also on the SG&A, how much of your SG&A increase in basis points or dollars in the first quarter was due to incentive comp?

In dollars, it was about $5 million.

What was the first part of the question?

Marketing spend this year -- anticipated marketing spend?

Yes, again, I think we said marketing spend would be up about 30% year-over-year and be in neighborhood of $95 million.

Got it.

Got it.

Okay.

And can you talk to cost of goods and given the fact that you've got higher labor costs in China, tighter capacity, higher raw material costs.

What -- When do you see raw material costs beginning, or costs of goods beginning to tick-up year-on-year and by roughly what magnitude?

Hi Jeff, it's Diane.

We are expecting that factory prices coming out of China are going to increase in the 5% to 7% range.

And you are right, it really is a combination of the labor, the capacity, the raw materials and the RNB.

Our sense above that is, as we move in to the fourth quarter of this year that is when we will start to see some of those inflationary pressures start to hit our cost of goods.

And I think as I mentioned, as we've moved our sourcing north and further inland into China, we are trying to make sure that we develop a -- the right relationship and get to the right parts of China to make sure we mitigate as much of those cost increases as we possibly can.

So --

Got it.

And I'll take one more question and pass it on.

Can you talk about cannibalization from the toning category, what if, any, have you noticed in your traditional athletic categories relative to toning?

That's a good question.

It's hard to judge but here's what I'll tell you.

When we looked at our athletic performance all in without toning in it we were down 1 to 2%.

So you might say there was some cannibalization within that business, but again it's too early.

It's hard to judge whether that was -- we were trading one-for-one but we are keeping obviously a very close eye on that.

So right now, not significant.

Still all in, very strong performance.

Thank you very much.

(Operator Instructions) Your next question is from Heather Boksen of Sidoti & Company.

Hi, good morning everyone.

One more quick toning question, and I'm not sure if you guys even have the data for it.

What was the Famous Footwear comp in Q1 if you can ex out the toning?

Yes, it would have been up in the mid-single digits.

So 8% to 9% of it was probably toning driven.

All right.

That's helpful.

And are we still expecting a slight decrease in the store count in 2011 for Famous?

Slight.

All right.

And my last question, obviously product -- the factory costs coming up.

How is occupancy costs been trending for you guys and how are you planning that for this year?

Are we still seen some benefits there or is that starting to slow?

Again, we continue to have touch points with our landlords as a result of the structure of our leases.

We continue to work on negotiating the appropriate rents for stores that have been more challenged in the recession.

For first quarter, we actually leveraged our retail facilities costs in the neighborhood of 280 basis points versus the prior year.

We would look for full year, the retail facilities cost to be down slightly year-over-year.

That's helpful, thanks.

Next question is from Jill Caruthers of Johnson Rice.

Good morning.

If you could talk about it looks like with your updated year sales guidance on the Wholesale you have become more optimistic, I guess, on the back half.

I wanted to get your take on that?

Jill, it's Diane.

When we take a look at our backlog, that's really where our optimism is coming from.

It's based in the facts of what we have in terms of backlog for second quarter, how our third quarter backlog is coming in, and then in addition to that, as Ron mentioned we have been really focused on developing the right product.

And the momentum that we are feeling in not only our core brands but our contemporary fashion brands, we can see that growth and that momentum happening.

So, it really is based on very, very strong order backlog right now today.

Okay.

Is channel streets I guess pretty broad based as well the backlog?

Yes.

It is.

It's actually been following very much similar pattern all the way across department stores, national chains, mid-tier and mass.

So we feel pretty good about that and it looks like the mass business as number of years of having challenges in that segment of our portfolio, it looks like that has stabilized.

So that helps a lot, we're not -- there is not the leaking hole in the bucket as much anymore.

So that really helps tremendously.

Okay.

And then just curious how the consumer continues to focus on value?

Was wondering what happened to traffic when you did take out the two BOGO weeks of (inaudible)?

Yes, traffic was still up in the quarter.

So we felt that that was the right thing to do.

We've always have been looking to find a way to make sure we look for ways to reduce the promotional cadence in the business and try to have as much of full price selling as we possibly could.

The fact that we delivered that and delivered an increase in traffic, it really helped obviously the gross margin dollars and we think that was the right thing to do during the quarter.

And just a little bit more clarity.

Did you see significant drop down in business when you took out the BOGO weeks or --

No.

Just to --it exactly as we would have expected it to.

But again as you can see by the same-store sales of 15.5% for the quarter, we really feel like we did the right thing there.

All right.

Thank you.

Your next question come from the line of Ken Stumphauzer of Sterne Agee.

Good morning everyone.

Thank you for taking my questions.

A couple of quick ones.

As far as the Mind Body and Sole campaign goes, there is certainly a fixturing element to it from what I have seen.

Can you describe whether that's capitalized or expensed and secondly whether you are receiving vendor support for that?

Ken, it's Mark.

It does have a capital cost to it from a visual standpoint and I think we are getting some modest vendor support on it.

But primarily it's our investment.

Okay.

And then secondly, if you could maybe speak a little bit, I'm sorry if I missed this, if you could speak a little bit about what is driving the pretty dramatic increase in marketing expense?

What specifically is underlying that increase?

I think you said it was 30% for the full year.

Yes.

Actually, Ken, it's Diane.

What -- there is a number of components to it but the biggest one is really our additional investments this year in national cable, even in the second quarter, our plan is to probably add four weeks there versus where we were last year.

And we think that, again, a smart thing to do to drive our overall business.

And beyond that it's a lot of other little things that are engaged with and have to do with our Mind Body Sole events and other promotional opportunities including Digital [Tap] and a number of things.

So it's all really centered around driving that category of business and driving the Famous Footwear brand in the second quarter.

Then on the Wholesale side, it really is focused on our Dr.

Scholl's brands and a lot of good work.

The teams are doing with in-store presentations to support the Dr.

Scholl's brand.

So it's those two pieces primarily.

Okay.

Thank you.

That was helpful.

And then, finally, I know I asked this last quarter but I will ask again.

Just looking on the website, it seems like you have a lot more assortment of Crocs product.

I was wondering if it was perhaps getting incremental placement within the actual stores at this point?

Actually, yes, more so spring next year.

Okay.

Thank you.

Best of luck.

Thank you, Ken.

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

I guess one question here just on the reference about the dollar in earnings -- the potential for dollar in earnings this year.

Is that on a, just to clarify, is that on a GAAP basis or non-GAAP basis?

In terms of how you are looking at it?

Again, we have been looking at it, again the cost of the IT initiative for the year is about $0.10, and I think that we generally speak to the dollar in terms of adjusted earnings but I think we're not trying to give specific EPS guidance on the call.

We were pretty specific on the rest of the metrics.

Okay.

So, basically it -- for the most part, it excludes that, it's more on a operating basis, correct?

Again, we generally talk in terms of the operating basis in terms of things but we tried to give you specific metrics again, I think --

Okay.

We wouldn't limit the comment to say that it's $1 on a adjusted basis.

Okay.

The other question I have here is on the Wholesale business and as you look at the operating margin structure and we talk about sourcing costs and you look at what you did in the first quarter in terms of seeing 150 bit improvement.

But I guess, if you look historically in terms of the trend line where the business has since been better than that, so I just want to get your thoughts in terms of putting all that together looking at you did last year.

It seems like you should show improvement for the year, but is there anything we should be aware of from either quarterly -- how we should be thinking about this first half, second half in terms of the trend line on the operating margin for that business?

I think as the sales grow and the back three quarters you should expect, I would say, incremental leverage in the Wholesale side of our business.

Okay.

And then, even with just, I guess, my next question is on product cost side.

In terms of the timing, we're talking about 5% to 7%, I guess more specifically the timing of when that would hit the P&L and I know you have some opportunity to mitigate that cost but, if not, is it the view of potentially looking at pricing?

I mean, the tide is going to raise all boats.

So, I'm just curious -- your thoughts on timing and how we should look at that?

Yes.

I would say, maybe Mark can chip in, but I would say, again, it looks to us like it's going to be more starting in the fourth quarter of this year.

That's when we are going to see most of the impact.

And again, we are thinking about how we manage our costs accordingly.

Yes, and again, I just go back again to my comments on gross margin.

We would expect Wholesale gross margins to be down year-over-year in the back part of the year.

Okay.

All right.

And then you offset that with SG&A with some opportunity to leverage on the SG&A side, correct?

Correct.

Okay.

And last thing I have here, just on new brands.

Is there anything else you can talk about new brands, new products, talked a lot about toning?

Any thoughts about the boots categories, as we go in to the fall?

And I know Ken asked about the Crocs business, but I know you have it in your stores and it continues to look like it's expanding.

That's one callout I think we can think about.

Is there anything else we should be aware of?

I think the only thing I would add is we do believe that the boots business this year is going to be as good as, if not better, than even it was last year.

And we made sure we diversified the assortments in boots.

We really think it continues to be an important fashion trend in the way women are wearing boots now.

It's really a casual alternative and it replaces a lot of our casual business.

So, I guess that would be, Chris, probably the other big thing we would want to point out in addition to things we've already discussed.

Okay, the very last thing I have and I'll leave you guys alone.

Just when you think about hitting $2 a share in earnings, I guess my question is do you ever think of a time if and when toning is not -- just becomes another category like cross-training or something like that.

Where you are not reliant, it becomes competitive.

It becomes competitive on pricing.

I'm just curious.

I mean, it's driving a lot of growth in your business both in Wholesale and retail.

I'm just curious how you think about $2 a share and how that business would relate to that as you move forward?

I think, Chris,the way we think about it and I think if you take the whole context of this call and we talk about the inventory funding, we talk about the marketing funding.

I think that the way we are thinking about it is, we are funding access to a more motivated customer base that we believe we have a unique opportunity to deepen the connection with that customer when she is coming into the store and that over time, we expect to get a greater percentage of her purchases, we expect to get certainly a greater percentage of toning and fitness product right now, because, clearly that's where the opportunity is.

But we also expect to get more of her purchases as she comes in the store as we use the continuing growing capability of our CRM and our social networking competencies to continue to talk to her and build this two-way relationship.

We believe that's how you are going to win in the marketplace today and ultimately we think we have a shot here because this is such a great new category that we are getting a lot of new customers, first time customers, and we don't expect to waste that visit.

And we are going to keep talking to her and coming back.

So we see this not as just improving our business.

We truly see this as a paradigm shift of our opportunity to grow where and how important Famous Footwear is in their lives.

And so we're not -- the categories will come and go, they will grow and they will work down but we truly believe that the Mind Body and Sole taking is taking over the consumer mindset, not just in footwear but every part of her life is what we believe we can deepen that relationship on.

And really talk to her as we see her coming in and every ounce of research we are doing, whether it's in the toning category or whether it's in family category or whether it's in the contemporary segment is continuing to resonate that same message.

And so that's where we are building on.

We don't think it's a small thing.

We think this is a significant, unique opportunity right in the [real] house of Brown Shoe company and fortunately, we are past building the infrastructure investments, we have still -- have more to go but we're able -- we've got our teams focusing on the consumer right now and what she wants.

And so we are going to continue to fund that.

We think about it as the next milestone that we would expect of our sales -- we believe our shareholders would expect of our sales is to drive that business to $2 a share while we are doing that.

And that's what we are going to work hard at getting done.

Okay.

Thanks very much, Ron.

I appreciate it.

Your next question comes from the line of Jeff Stein of Soleil Securities.

Hi guys.

You talked about inventories on the Wholesale side of your business being down about 3% at the end of the first quarter yet you are looking for a double digit increase up in Wholesale volumes.

So I'm wondering, can you talk a little bit about supply chain and how that's changing and what, if any, risk you might see in not being able to deliver the product to the customer to get that double digit increase in the second quarter?

Jeff, it's Diane.

We are -- it's a high grade problem to have.

We -- our backlog and our order base has grown significantly.

We are on this every single day.

We have a strong sourcing operation, as I said, we've adjusted sourcing strategies over the last couple of years to give us as much flexibility as possible.

And we are right now in a place where we believe that we are going to meet that demand that we currently have and don't really see issues in the -- over the long-term.

And if we need to, there is always the opportunity to air freight shoes here to make sure that we satisfy that demand and we've certainly had to do a little bit of that and would plan that we'd need to do that probably a little bit in the future as well.

Does that -- Diane does that look like a high probability event for second quarter, doing more air freighting and --

Yes.

Even if it's available, are the plants cranking out enough products so that you can fill the plane and get to it the customer?

Yes, right now it looks like we certainly can, Jeff.

It's hand-to-hand combat everyday though by the teams to make sure we are managing that well.

Final question, Diane, can you talk about, just capacity in general in China?

And how long it's going to take to build it back to levels to satisfy current demand trends for the industry?

Well, that's a great question and it is really hard to say.

I don't think we are going to see capacity growing significantly and certainly not in the next four months to six months.

And when you think about there is certain pressures around different categories of business with this demand in athletic and toning and fitness footwear.

That's where you are seeing a lot of the pressure right now to make sure that you're able to satisfy all the demand.

So I would tell you we expect that it's capacity issue is going to continue for sometime period and again I think it's our long-term partnerships and relationships with our factories that are really allowing us make sure that we are staying ahead of the demand and the opportunity that we have.

Got it.

Thank you.

There are no further questions at this time.

Do you have any closing remarks?

Thank you.

I know that many of you have joined us on these calls for several years.

A few years ago, when business was terrific you might recall me saying that it was a great time to be in the shoe business.

So I think perhaps I would simply end by saying that it's still true today, and when we focus on inspiring people to feel good and live better, feet first.

We will continue to win in the marketplace.

Look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect