Caleres Inc (CAL) 2010 Q2 法說會逐字稿

Good morning.

My name is Regina and I will be your conference operator today.

At this time, I would like to welcome everyone to Brown Shoe's second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

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

Sir, you may begin.

Thank you, Regina.

Good morning, everyone.

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

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

Our remarks today 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 risk factors that could impact forward-looking statements.

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

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

Welcome, everyone, and thanks for joining us to review our second quarter results.

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

Following our remarks, we will open the call to your answers -- to answer your questions.

Clearly, I am pleased to report another quarter of solid sales and earnings improvement and I really applauded the efforts of the entire organization helping to achieve and drive these results.

This is our fourth consecutive quarter of improved performance which we believe speaks to the traction that we have gained with our customers through our enhanced marketing initiatives, our product offerings, as well as in our improving store experiences.

But it also reflects in part the wind in the sales of the footwear industry over the last couple of seasons.

And while the industry as a whole has benefited, Brown Shoe has done particularly well and is certainly taking market share as indicated by our results.

More importantly, we believe that we continue to be well positioned to increase our momentum as we progress through our most important time of the year.

While we are pleased with our improving results thus far, we remain focused on achieving even greater returns.

For the first quarter, net sales were $585.8 million, a 14.5% increase from the second quarter last year.

Impressively, the sales performance was broad based across retail, wholesale, and e-commerce.

Leading the way was a better than expected 26% gain in our Wholesale group as well as a 12% comp gain at Famous Footwear.

This is a reflection that our branded product and branded value is resonating well with each of our consumer groups, first and foremost, families at Famous Footwear, our contemporary fashion customer, with Sam Edelman, Via Spiga and Vera Wang, as well as our heritage consumer with Naturalizer and Dr.

Scholl's.

The strong sales trend led us to significantly decrease our promotional activity in the quarter at Famous Footwear which helped fuel the increase in gross margins versus the second quarter a year ago.

Our strong sales and gross margin performance afforded us the opportunity to continue our investments in our brands, marketing, and inventory.

The result was second quarter net earnings per diluted share of $0.12; on an adjusted basis, we earned $0.15 per share.

As you know, during the second quarter, we also completed our acquisition of the Edelman shoe business.

The Sam Edelman brand continues to be one of the fastest growing brands at retail and we are excited about the additional growth opportunities the business offers, as well as the addition of a group of very talented people and the creative force of Sam and Libby Edelman.

On a different note, we are also proud to have achieved our near-term milestone of generating adjusted earnings of $1 per diluted share on a trailing 12-month basis on a much faster track than we previously had anticipated.

As we discussed on the last call, the strategies and initiatives that we have in place have us focused in the past at $2 a share and beyond over the next couple of years.

Speaking of looking forward, in spite of economic and consumer nervousness, we expect to deliver solid results in the second half of the year.

Yes, the economy remains challenging but historically that is good for footwear and particularly good for Brown Shoe.

The core premise of our hybrid model is a superior commitment to fulfillment in sourcing, design and product that is equaled by our commitment to serving today's more value-conscious customers.

I suspect that our customers have been avoiding big ticket purchases for items like footwear, shoes that make them feel better about themselves as well as their families.

This is especially true given the robustness of footwear in general and the traction of the key consumer trends both in fitness as well as in fashion.

We know we have the right merchandising product and marketing plans to continue this momentum through the important back-to-school and holiday seasons.

We have had an encouraging start to back-to-school, with double-digit comps in the early markets, and our wholesale backlog remains strong.

Moreover, you know we remain committed to our investments in our brands, our technology, innovation and our people.

While these do impact short-term earnings we are steadfast in our belief that we are building towards a better long-term returns for Brown Shoe.

For the full year, we expect to deliver a record sales result and believe our earnings momentum will continue into next year.

And now I will turn it over to Mark.

Thank you, Ron, and let me add my good morning to everyone.

I will begin with a quick review of the income statement.

Net sales were $585.8 million, an increase of 14.5% compared to $511.6 million in the second quarter of 2009.

The key driver of our sales performance were a 25.8% increase from our Wholesale division and an 11.8% same-store sales increase at Famous Footwear, a 6.8% same-store sales increase at Specialty Retail, and our Retail numbers were supported by a 20% increase across our e-commerce platform.

Our gross profit rate in the second quarter improved 90 basis points to 40.7% of net sales from 39.8% in the second quarter of last year.

In the quarter, Famous Footwear improved its gross profit rate by 320 basis points, primarily as a result of operating with six fewer weeks of BOGO across the chain.

Said another way, we operated with 85% fewer store BOGO days than in the year ago period.

This was coupled with continued strong sales of higher priced footwear and higher margin accessories.

This was partially offset by a 230-basis-point decline in gross profit rate in our Wholesale division.

This was primarily attributable to an increased mix of sales to third parties, which we discussed on our last call, as well as additional mix shifts in channels of brands, and increased air freight costs.

This was offset partially by improved sell-throughs at Retail, which lowered our mark down and allowance exposure as well as growth from our higher margin brands.

On a dollar basis, Wholesale gross profit increased by 16.8% in the second quarter.

Lastly, the mix of Wholesale sales to the total had a 40-basis-point negative impact on consolidated gross margin.

Selling and administrative expenses increased by $17.9 million to $224.5 million.

On a rate basis, SG&A decreased to 38.3% of net sales from a rate of 40.4% in the second quarter last year.

The increase in expense dollars was largely driven by an increase in payroll expense, a large part of which is variable with sales volume, a 44% increase in marketing expense and higher incentive compensation costs due to improved performance.

These increases in SG&A were partially offset by operating 64 fewer stores across the portfolio than in last year's second quarter.

Net restructuring and other special charges were $1.9 million in the second quarter, compared to $2 million last year, both related to our IT initiatives.

The above factors resulted in operating earnings in the quarter of $12.1 million, or 2.1% of net sales, a 310-basis-point increase versus last year.

Net interest expense in the quarter was $4.8 million, roughly flat to last year.

Our tax rate in the quarter was 35%, impacted primarily by a change in the mix of domestic and foreign earnings.

As a result, net earnings in the second quarter were $5.3 million or $0.12 per diluted share versus a net loss of $4.2 million or $0.10 per diluted share in the year ago period.

Adjusted net earnings in the second quarter were $6.5 million, or $0.15 per diluted share, versus an adjusted net loss of $3 million or $0.07 per diluted share in the second quarter last year.

Moving to our balance sheet, we remain in strong financial condition.

Cash and equivalents were $30.7 million at quarter end.

We were net borrowed under our revolver by $4.8 million at quarter end versus a net borrowed position of $10.2 million at quarter end last year, and had $331.9 million in availability at the end of the second quarter on our revolving credit facility.

During the quarter, we invested $32.7 million in cash and $7.3 million in stock to complete the Edelman acquisition.

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

Total inventory at quarter end increased 9.7% to $578.1 million from $526.8 million at the end of the second quarter last year.

The increase was driven by a 13.7% increase in average per-store inventory levels at Famous Footwear, up 8.9% on a unit basis per store.

These levels are consistent with our sales expectations and reflect our investment in higher average price product including fitness product.

Inventory at Wholesale was up 28.3% at quarter end, reflecting our sales momentum and strong on-order position.

Average per-store inventory at Specialty Retail decreased approximately 3% on a constant dollar basis.

Capital expenditures for purchases of property and equipment and capitalized software in the second quarter totaled $13.4 million, with spending split evenly on new stores and remodels and our IT initiatives.

Moving to our outlook.

Consolidated net sales for 2010 are now expected to grow in the low-double-digit range with third quarter net sales increasing in the low-teens range.

Same-store sales at Famous Footwear are expected to grow in the high-single to low-double-digit range for both the full year and the third quarter.

We expect to open approximately 30 to 35 stores in 2010 accompanied by a plan to close approximately 50 stores.

At Wholesale, we expect sales to increase in the high-teens range for the full year, with growth in the third quarter in the low to mid-20s.

Consolidated gross profit rate in the back half of the year is expected to be in the range of 40% to 40.5% driven by margin growth at Famous Footwear, offset by a decline in Wholesale gross margins year-over-year driven by similar mix dynamics that we saw this past 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 which includes costs of $7 million to $7.5 million related to our IT initiatives.

For the third quarter, SG&A is expected to be in the range of 35.8% to 36.3% which includes costs of $2 million to $2.5 million for our IT initiatives.

This range also includes an increase in marketing and incentive compensation costs versus last year of approximately $20 million which equates to approximately $0.29 per share on an after-tax basis.

Depreciation and amortization of capitalized software and intangible assets are expected to total $50 million to $52 million for the full year.

Net interest expense should approximate $20 million to $21 million for the full year.

We expect a full year tax rate in the range of 36.5% to 37% during 2010.

And lastly, capital expenditures are expected to be $60 million to $63 million for the full year, primarily related to our IT initiatives and new and remodeled stores.

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

Thanks, Mark, and good morning.

We delivered solid results in the second quarter which is a reflection of how our brand strategies are continuing to resonate with our customers.

As you have heard, we continue to believe that we are well positioned to drive this favorable momentum into the back half of the year.

During the quarter, our focus was on two critical areas.

At Retail, it was all about driving increased productivity, while at the same time, maintaining customer momentum, as evidenced by our strong productivity metrics in the quarter as well as significantly reduced promotions.

And at Wholesale, to deliver against the strong demand for our brands, we worked hard to manage order and delivery flow in order to minimize the impact of capacity and shipping issues in the Far East.

As you can see, our results reflect good execution against both of these areas.

Now let's turn to a review of the divisional performance, starting with an overview of Famous Footwear's second quarter results.

Famous' net sales increased 10.6% to $347.3 million driven by an 11.8% increase in same-store sales.

The performance was broad based with growth across all categories, channels and markets.

We have seen a continued improvement in productivity with sales per square foot for the trailing 12-month period of $179 compared to $162 in the prior year.

We are moving closer to reaching our goal of $200-a-square-foot and now believe that it is within reach by the -- probably $190-a-square-foot by year-end.

So we are feeling like the productivity improvements there are good.

Traffic grew in the low-single-digits during the quarter.

AURs grew in the mid-single-digits and conversion grew in the mid-teens.

And as you'll recall, conversion was a key strategic focus for us over the last few quarters.

We attribute the improvement in conversion to a couple of key factors, first of all, having the right product offering as well as the right inventory levels in sizes.

In all of our consumer studies, we find that the number one reason customers leave our stores unsatisfied is that we don't have the right size available.

Secondly, we wanted to make sure we had high-demand brands and styles that were supported with effective in-store visuals such as our Mind, Body & Sole initiative.

We also wanted to make sure we presented our customers with a strong branded value message and importantly, to have energized and engaged sales associates.

We did some additional work this quarter on a number of customer engagement strategies.

As I mentioned, all categories saw increased sales, our women's business led Famous' performance again, generating a mid-teen comp store sales gain, reflecting strength in all areas of our business.

Our mens and kids businesses both delivered a mid-single-digit increase in comp store sales for the quarter and our accessories business, while small, continues to gain momentum with same-store sales increase of over 20%.

Gross profit rate in the quarter increased by 320 basis points driven by more full-priced selling from the significantly reduced BOGO cadence, an important strategic initiative for us.

Selling and administrative expenses were up $8.7 million in the quarter, but were 160 basis points lower on a rate basis due to better leverage.

Higher store payroll expense and a 60% increase in marketing spend were the key drivers of the increase.

This led to an operating profit rate of 4.5% in the quarter compared to a slight loss in the second quarter last year.

Our inventory position at quarter end is consistent with our sales expectations and reflects our strategic investments to capitalize on key product trends.

We are driving to that $200 a square foot and we believe our inventory is in the right position to support this goal, aligned with all of those investments in stores and product and marketing.

Importantly, our aged inventory position continues to be in great shape.

Moving to our store count, during the quarter we opened 7 new stores and closed 13 existing locations.

At quarter end, Famous operated a total of 1,128 stores versus 1,167 stores last year.

As we look ahead, the early reads on back-to-school are very good.

Our first three timing groups are running consistent with our expectation and we have seen our sales momentum continue with comps running in the low-double-digits quarter to date.

Other early reads are in addition to sales of the usually strong athletic and juniors we are finding that she is buying a lot of items that aren't true back-to-school items, such as dress products and boots that really support our optimism for the season.

And from a category and merchandise perspective, we expect running and trails to remain an important category for the season, with key styles from Nike, Puma and Asics.

We also expect that we'll maintain our position as the destination for skate products with key styles from Converse and Van.

And as I mentioned, we are seeing strong early reads on boots including junior boots.

Our marketing continues the evolution of "Make Today Famous" and it's timed to more closely align with peak weeks.

As you've undoubtedly heard, consumers are shopping later in the season and we believe our advertising is well-timed to capitalize on that trend.

Our campaign this year is more extensive than the original launch and it includes TV, radio, digital, advertorials, and in-store and print elements.

Compared to last year, we have invested more in national cable advertisements with more 30-second slots and more prime time positioning.

And our focus is a little sharper as we target both moms and teens, highlighting cool lifestyles and cool brands for both.

Turning to Wholesale, as we have been discussing for the last several quarters, our focus at Wholesale has been on satisfying the customer by first of all continuing to advance the innovation and design of our products, and, secondly, to ensure that we deliver a strong branded value to the marketplace.

We have made nice progress on these and this certainly has been central to our success in the quarter.

Net sales in the second quarter were $178.6 million, up 25.8% from the second quarter last year.

Similar to Famous Footwear, the performance was broad based with sales increases across all channels.

And we saw continued strength from our core brands along with the ongoing acceleration of our contemporary fashion business.

Operating income in the Wholesale division rose 14.5% to $9 million from $7.9 million last year.

Overall, a good performance in the quarter which included higher sell-through rates at retail and lower mark downs compared to last year.

Now, turning to our core brands, Naturalizer and Scholl's, total Naturalizer sales increased 9.2% which we attribute to the ability to provide our customers with value and product versatility across the brand's multichannel platform.

In fact, Naturalizer was a top four performer across POS channels according to NPD for the quarter, and same-store sales at Naturalizer's North American stores grew 7.4% in the quarter.

Year-to-date, Naturalizer stores are ranked number one according to FDRA and like Famous, conversion was the primary comp driver with slightly better AURs and roughly flat traffic.

And Naturalizer.com generated a sales increase in the mid-30s.

We finished the quarter with 21 fewer Naturalizer stores in the same period last year as we drive to higher productivity and profitability metrics.

Our all-in operating margin was 7.2% and we continue to focus on driving double-digit operating returns from this business.

Now moving to Dr.

Scholl's, the brand saw a sales increase of close to 67% in the quarter resulting from several recent strategic initiatives that we've put in place.

The first one is that we have really now seen a stabilization of our business at Wal-Mart, our largest customer.

Secondly, we have seen an expansion of distribution to the mid tier with new athletic and casual products which is generating a lot of interest and opening some new opportunities for the brand.

And thirdly, we started a new collaboration with our partners at Schering-Plough, with Dr.

Scholl's, which is set, really has seen some early success with something called Dr.

Scholl's Fast Flats, which are these terrific foldable ballet flats in a zipper bag that the customer can put easily in her purse or carryon.

We are really excited about this new collaboration and new innovation with Schering-Plough that we really think is going to have a positive impact for the brand over the long term.

So we do expect to see these new initiatives provide growth opportunities in both the near and longer term, and as you might expect, will drive some new business model dynamics.

Second quarter operating profit dollars were up about 2% to last year.

On a rate basis, operating margins were 7.5% of sales compared to 12.3% last year, impacted by the business shift as well as increases in freight and investments in marketing and other things.

Lastly, a quick update on our contemporary fashion brand.

We have seen gains at all of our contemporary brands, Via Spiga, Franco Sarto, Sam Edelman and Vera Wang during the second quarter as they have continued their nice momentum through the first half of 2010.

These brands continue to resonate with consumers who seek designer quality and style along with a strong value proposition.

As a group, these brands grew at greater than a 40% rate in the quarter and more importantly, generated strong interest for fall with their early collection.

We see this momentum continuing and their position in the portfolio becoming more meaningful.

Looking forward, our order backlog for the Wholesale division is in great shape, up almost 60%, and reflects our strong growth expectations as well as orders coming in approximately five to six weeks earlier than historical which we discussed last quarter.

So our focus in the back half will be to ensure that we deliver against this strong backlog.

This includes continuing to have to navigate the sourcing and shipping environment to the best outcome.

The entire industry is being impacted by these dynamics and we believe that well-managed companies are going to do better.

We will continue to manage capacity, order flow and timing, and collaborate and engage with our partners across the value chain.

The power of our sourcing platform and our long standing partnerships, with both great factories and retailers, gives us an advantage in this environment.

And lastly, while we're pleased with the acceleration of our top line performance at Wholesale, with the sourcing and other inflationary factors impacting costs we will be redoubling our efforts to drive operating margins to acceptable levels.

So in closing, we're really pleased to deliver another solid quarter.

We're excited about our opportunity to continue this pace into the second half of the year.

So now I think we're going to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions).

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

Our first question comes from the line of Scott Krasik with BB&T Capital.

Okay, thanks, guys.

Good morning.

Good morning.

So, a little more detail on athletic in the quarter, and specifically toning, can you talk to what the contribution was this quarter?

And what the outlook is as well in your guidance?

Sure.

Hi, Scott, it's Diane.

How are you this morning?

Good.

Let me give you a little perspective on toning.

First of all, I will sort of put it in context.

Toning is, we believe, one very important part of this ongoing macro trend for the consumer where it's really all about fitness.

So toning is really the first leg of the stool and we think that this is a trend that is going to continue for quite a long time.

As we start to, begin to think about our performance in the second quarter, we really take a look at the whole category, and when you take our toning business and split it between sort of our core rocker bottom, our sandals business and then a lot of the new technologies that are coming into the marketplace we actually see on a per pair basis the performance in the second quarter at about the same rate, or at the about the same amount of pairs through our chain as we saw in first quarter.

So we see the shift moving from what that traditional rocker bottom was into sandals and now into new technology.

At any point in time, I think in the first quarter all-in, our toning was maybe a little more than 9% of our total sales and in the second quarter a little north of 8% of our total sales.

So we're feeling generally that it's early.

We're comfortable with where we're positioned.

Our inventory reflects our expectations for the back half of the year.

And we are also trying to -- it is really, it's really early in this cycle.

We are really trying to watch how the consumer responds during these seasonal time periods.

It's the first time we have been through some of these warm weather months, and it is -- are they going to respond in the same way?

So overall, we remain very excited about a lot of new innovation that is coming in the pipeline, and making sure that we are balancing our inventory against the fresh and the new as well as our existing business.

So lots of learning going on, Scott, on this.

Okay.

That's really helpful.

I would say just one more follow-up on that category, just maybe talk about pricing, obviously, pricing was probably impacted by the Skechers promotion in July and August for second quarter, but talk about your pricing assumptions going forward, and maybe the mix of brands, is it increasing, is it decreasing?

How do you approach that?

I would tell you a lot of the -- the driver clearly in this category has been Skechers.

There's just no doubt about that and they are really performing the best at retail.

As we look into the back half of the year and we think about some of these new technologies that are coming in, the AURs and the price points on some of those are actually higher than even the core product that we have, had in the assortment early on.

So, again, lots of learning going on with respect to how the consumer is going to respond to the resistance runner and other things that are coming into the pipeline.

We have some new things coming in from Avia, New Balance and then actually in the fourth quarter, the new Nike program will be coming into the mix as well.

I would tell you we certainly don't expect to see erosion of those AURs in the back half of the year.

We would expect to maintain those kind of price points.

Great, thanks.

And then a couple more.

Mark, can you talk about maybe the different drivers of the gross margin decline in your second half guidance, what piece of that is maybe mix to a higher wholesale business, higher levels of promotions, can you maybe break that down?

Sure, Scott.

I think what we said in our guidance remarks was that we would expect retail margins to be flat to up slightly compared to last year and that the entire decline versus last year would be driven by the mix dynamics in our Wholesale business and the factors we faced in the second quarter.

Okay.

I'm sorry if I missed that.

Then the, then the last piece of it, in terms of the retailers, they're taking inventory earlier, they feel good about boots, are you seeing this carry forward into your spring order book as well?

You probably have some pretty good visibility into that, or are they taking a step back?

I would say there's a lot of shifting going on.

As we've really pushed to make sure that we get our orders in as early as possible because of the sourcing dynamics over in the Far East, retails have been willing to place those orders a little bit earlier which I think is certainly reflected in our backlog.

As we look into the spring season, it's still a little early, we won't have a terrific read on that until mid-September I would say.

But generally speaking, Scott, I don't expect the cadence of the timing or orders to change dramatically.

And, again, we are going through this interesting time period right now as get into the start of the fall season.

That is going to determine a lot of how they think about their business in the first quarter of next year as well.

The other thing we are watching is Chinese New Year and other things how that will impact the push and pull in the fourth quarter.

But generally I don't expect significant shifts and I'll certainly know better in the next 30 days or so.

All right, so -- sorry.

You know, Scott, I think there's some good news here, I have been in this business for a long time.

When you have the attention of the general merchandise managers and the presidents of the business are all well aware of the need to keep footwear rocking and rolling in their businesses.

So much more time and attention is going to be placed on planning and flow, all the way through and I see this going all the way through to the second quarter of next year.

The one thing I think that is going to mean is it's going to mean better business for all of us, a better planned business, and when we see our business planned better, I just think the yield on margin always goes up.

So I look at this as a very interesting opportunity that really uniquely positions Brown Shoe because of our tremendous history, and real well known for our success on the sourcing and fulfillment side of the business.

So it is an interesting thing but I think it is going to be a plus.

That's great.

I guess my last comment to that is that I assume [releasing] your planning, pricing will be up year-over-year in the first half?

Correct.

Okay.

All right.

Thanks, guys.

Good luck.

Thanks, Scott.

Our next question comes from Chris Svezia with Susquehanna Financial.

Good morning, everyone.

A question on the Wholesale business for a second, just on the margins, I don't know if there's any way -- I know, Diane, you and I chatted about this a little -- but is there any way you could talk about how much as you look to the back half of the year is either just shipment delays, how much is product mix, how much is first-cost business, pricing inflation, I'm just trying to understand the puts and takes of where the biggest impacts are on that margin?

Maybe just talk about that.

Here, and I'll let Mark chime in, I'll give you a couple of comments and he can add some color commentary to it.

Here is what I would say first of all, Chris, we have seen really nice expansion in our sales and sales growth.

Gross margin dollars on an absolute basis have grown really nicely.

We have seen the velocity of the business at retail improve significantly.

We have made lots of great improvements against our strategic initiatives and we have made investments in marketing and in sales.

Offsetting that to some degree has been the increased investment in marketing, so it is kind of a double-edged sword there.

Freight costs have shifted in the quarter to make sure that we continue to ship goods.

Incentive comp has also impacted everything.

And [just] as changing dynamics a little bit of the business model.

So there has been this interesting dynamic where theres lots of goods and pluses and then as we've sort of navigated the environment some other sort of take aways to our gross margin rate.

I guess if you looked at the mix of all of that, it would be pretty evenly split across most of those components.

Mark, maybe you can --

Again, specific to gross margin, Chris, I think the -- probably still the number one, I will call, impact on the margin rate in the back half as it was in the second quarter will be the growth of our third party business which dilutes the vertical profit impact from our inter-Company business on a rate basis.

Secondly, would be, again, continued air freights costs and then in the back half we begin to see, I will call it the initial margin impacted a bit by the sourcing cost increases.

Okay.

Then just in terms of -- you are not seeing any issues with getting product because you're air freighting more product in and given the strength in your contemporary businesses, you are not seeing any issues with getting availability to air freight that product in, you are just paying higher costs.

So you're not -- are you seeing any possibility of just delays in getting that product in, and what has been the response from retailers in terms of what they've had to say about that, if at all?

I think generally there has been a certain portion of everybody's business in the industry where it has been tough getting product out of the Far East.

But, again, to the power of Brown Shoe and the strength of our sourcing competency and our logistics chain, I think we have done better than most in terms of being able to get those goods out.

And as it relates to the retailer, we are working to make sure that we deliver on time.

And importantly, again, it is back to this idea that footwear is really in demand, our brands are in demand, and we have a significant swing in a positive way toward much higher sales to the back half this year versus last year.

So we are working very hard to make sure we fulfill it in the best way possible.

Okay.

Thanks on that.

I guess two other quick questions here, just on the guidance, I mean if I, I know you're not providing a specific EPS number but to kind of work through the numbers here a little bit, on a GAAP basis, it looks like the second half of this year potentially, if you kind of strike it in the middle here it could be relatively similar to the second half of last year on a GAAP basis.

I think you did roughly $0.51 last year on a GAAP basis.

Is that just because -- it seems like your revenues are a little bit stronger, your gross margin because of mix and the other issues we were just talking about, maybe a little softer, but you're spending a little bit more on marketing, you have incentive costs.

Is there anything else I am missing there?

I'm just curious why SG&A, even though your revenues are growing a little bit faster, SG&A as a percent isn't coming down?

So just maybe just walk through that process if I am missing anything?

Again, I think -- we specifically don't give EPS guidance.

So that part of your question I will pretty much ignore.

But in terms of the inputs, the SG&A is certainly impacted by the increased marketing we are spending in our brands and the higher incentive costs, compensation costs versus a year ago as we've set forth in our guidance.

Okay.

That's all I have for now.

Thanks, guys.

Appreciate it.

Thanks, Chris.

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

Good morning, everyone.

Just hoping maybe we could go into more detail on the higher spending.

The $20 million, how much of that is incentive comp and how much of that is incremental marketing spend?

Out of that $20 million it splits roughly $8 million of it incentives and $12 million to marketing.

And within the marketing half of that, are there any timing shifts going on, and are any pieces moving quarter-to-quarter, or is there anything we should be aware of there?

No.

Again, I think as we said back on last quarter's call, we were raising our marketing costs on a full year basis by approximately 30%.

We did have a little bit of leakage out of the second quarter into the third quarter on the marketing line.

But pretty much we are spending more and then applying that marketing during high traffic times.

And I know it is far too soon to talk about 2011, but as we think about marketing spend, is this going to be -- should we expect -- when should we expect marketing spend to kind of taper off and be more in, growth to be more in line with sales?

Heather, here is what I say, I would think that our marketing spend next year on an absolute basis would be about where it is this year.

We really think that we have been under investing in marketing for quite a while, particularly on the Famous Footwear side of it.

So in terms of absolute dollars, we think that's going to be pretty consistent next year, and we expect to generate continued increases in our comp store sales.

So it sounds like we should see some leverage again?

Yes.

With that said, I really would tell you that as long as we are seeing the type of traffic and response to the customer, I really look at our channel of business, both on our Wholesale and our Retail side.

Right now it is really speaking to the heart of the consumer out there.

I would tell you that as long as I believe we can grow market share and that we can continue to add loyalty to that customer base, we continue to see first time customers at an all time increase, this is clearly money well spent for the short and the long term.

I think we are in it for the long term, and we will balance it and we see shifts, but we certainly believe in what we are doing and we will continue to do those things.

I think when you add innovation work that we're doing to that, I think both of those things are just continued important investments.

Very good.

One just marketing question, how much of this, and just ball park, how much of this is the Famous marketing and how much is for the Wholesale brands?

(Inaudible) the mix of our business, with the increases on both sides of our business but proportionate to the size of business.

All right.

Thank you guys, that's helpful.

Thanks, Heather.

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

Good morning, everyone.

A couple of questions here.

First of all, wondering if you can talk a little bit about the percent of your product you are shipping from the Far East that is being air freighted in this year versus last?

And then as a follow-on to that, can you talk about the outlook for shipping container capacity as we move into next spring?

In other words, what I am trying to get at here, there seems to be, at least for the moment, a cyclical squeeze in capacity but does this extend beyond the current year?

Hi, Jeff, it is Diane.

A couple of things.

As you rightly said, this is a cyclical shift.

We have really seen capacity in the Far East, they had certainly reacted to the slowdown in business in 2008 and 2009.

So capacity certainly got a lot tighter as we went into 2010.

And, again, as I mentioned for our business as our brands started to accelerate, we really had to make sure we reached into the right factory partners and new places for us to continue to be able to satisfy our customer demand.

We do not see that there's going to be any kind of expansion in capacity necessarily in the Far East at all.

So it is something that we are continuing to work through and work with our partners to ensure our continuous flow of goods and supplies.

So I think the teams are working in the right way, again, all the way across the supply chain from our factory groups all the way here to the front end with our retail partners as well.

In terms of the total amount of our business where, the teams are looking that up for you, but it was relatively insignificant really in the total big, big picture of things, and maybe.

I think clearly it was a big increase over [LY], air freight but it is just a small portion of the total thing.

They're looking up some of the detail numbers there.

Here is a couple sort of anecdotal things.

I know that in talking to Mike Kauffman, our head of logistics, we have reached our peak container weeks and we are actually, week by week we'll sort of see a decrease now.

And ultimately we felt very good about being able to fulfill all of that need.

With a lot of work, a lot more moving pieces, using a lot more ports.

So, again, I think active management on this thing is very important.

I think that as we go through the holiday, I think again, having sort of seen it coming, I think people will be in a better position to respond.

Having said that, I think we are all still trying to work with our retail partners as well as our own thinking about how to make sure we are well prepared as we go into Chinese New Year next year.

I think it is sort of, the peak is headed, it's going to decline in the next few months.

Then we're going to have to make sure we are in position for the fall shipping, and I think we are still trying to work through with the partners how that is going to affect year end.

So, again, Jeff, in terms of percentage of shipments which is -- we don't normally look at it that way too much.

Probably a little less than 5% of the shipments are being air freighted.

The more important metric, I think, would be is the dollars we are spending is probably up 330% or so over last year.

The consolidated impact on wholesale margins is running about 0.6.

Wow.

Okay.

So a couple of other things.

So, with the kind of sales increases you guys are seeing, I guess a look at this and I say, my gosh, if you are ever going to bring it down to the bottom line now is the time.

But you are seeing cost pressures from shipping, and yet, I guess my question is this the right time to really be investing this much money into marketing, why not let a little bit more come down to the bottom line in this environment because should things slow next year, what levers do you have to drive higher profitability if we begin to see a slowdown, I guess?

That's a good thought process, Jeff.

Again, I will start with I think as long as we continue to see new customers in the door and our ability to get them back, I think that marketing money is going to be well spent.

I think as we go into next year, there's a number of costs that we are starting to think about seriously, the typical costs you would expect us to be thinking about.

We anticipate changes in health care costs, we anticipate changes in benefits cost.

We expect on the cost of goods side to be under some pressure, so we are taking all of that into consideration as we do our planning for next year.

I also would look at maturation of our teams and our IT initiatives as also impacting positively next year as we look toward there.

So we're committed to delivering an increased rate of return year-over-year.

I can assure you of that.

Can you talk a little bit about, and this question is for Diane, on the toning side of the business, is toning a back-to-school -- first of all, is toning in your view a back-to-school category?

And if not, when would you expect to see a reacceleration of momentum in that business?

And, secondly, were you at all disappointed that it's less than a year into the cycle it's already showing signs of becoming less as a percent to total sales than more?

In other words, has toning in your opinion peaked out or does it continue to grow here?

Good question, Jeff.

First of all, with respect to how we think about it relative to back-to-school, it really is not a core component of our back-to-school plans.

In fact, whatever additional business we get as she's walking through the door shopping for her children, we think that's just a plus.

But as we turn the corner into late September into October and the latter part of the third quarter, we have a number -- we have high expectations for October.

We have a lot of initiatives to support the continued growth in that category, and the support of a lot of new initiatives, or new products that are coming into Famous Footwear.

So that's how we think about it there.

And actually, again, it is one of those, your question about are we disappointed.

I would tell you really probably not.

Would we have liked to have seen the acceleration potentially, but coming out of nowhere, a business that is running at 8% or 9% of your total sales is pretty significant.

And $1.7 billion is going to be the size of the category this year.

So, again, as we just think about it, it's a first step in what we believe is going to be a lot of new innovative product in the industry to really regenerate consumer interest around the fitness category.

We actually are enthusiastic about it.

But it doesn't mean that we don't pay attention to making sure we are managing our inventory levels and balancing our investment there in the right way.

But feel very good about the progress there and think it is a long term, a long-term game changer for us.

Thank you.

Our next question comes from the line of Jill Caruthers with Johnson Rice.

Good morning.

Could you talk about your second half expectations on margins for the Retail division?

Is this including a reduction of BOGO days like you saw in the second quarter, or is it kind of an intraquarter decision that you can make if sales are stronger to pull off on BOGO days?

Again, Jill, it is Mark, and, again, I don't think we would expect to see the significant decline in the back half that we saw in the second quarter.

And I think we would enter the back half intending to be down slightly on a year-over-year basis.

Down slightly on BOGO days or margin?

On BOGO days.

We said we would probably be up a little bit on margin basis.

Okay.

Then just, Diane, your comment on early reads on back-to-school, I thought it was positive that you are seeing the customer shop more traditional, non-traditional back-to-school products, and kind of what's your take on that?

Do you think that's shifting some business from fourth quarter to third quarter or is the consumer basically buying a larger ticket (inaudible)?

Well, I think it is two things.

I don't think it is shifting anything from fourth quarter to now.

I basically think two things, that we have seen the consumer go from sandals into boots.

So there's a bit of that adjusting from one seasonal item to the next.

We think that is certainly is impacting a little bit.

She comes into the store and she sees things she likes.

So I think that's important.

And then there's a little bit of this void in her closet for dress products.

So we have also seen some, picking up some items there.

We don't see it as shifting our business from quarter to quarter.

We just think it is part of what she's missing in her closet right now.

Okay.

Thank you.

Yes.

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

Good morning, everybody.

I have a few questions about the, if, Diane, if you felt like you pulled forward any sales with the promo and have you seen any acceleration like from July, or let's say from late June, to now in the toning business overall?

Number one.

Not significantly.

During that promotional cycle, we did see a little bit of a lift, 1.5 or so times what we would have expected.

But not, not out of the ordinary.

Same as we've talked about, we really weren't, did have source-mover status on this category, one of the first folks out there.

So pretty pleased with our progress at this point in time.

And would expect that we would see the acceleration of these products as we get into September and October and she's more ready to look at this category of business again.

So right now, you're sort of -- you are on the same pace as you were, let's say, three weeks ago or has it picked up a little bit?

It is probably flat to where we were three weeks ago.

When you talk about the marketing campaigns, can you talk by some of the key partners, what kind of campaigns that you are running?

It is, again, a mix.

We are really focused on driving our Famous Footwear brand and our BOGO event during back-to-school and that sort of thing.

So it is a lot of work there.

We have also been working very closely with Converse for some in-store events.

We like that.

And then as we get into the latter part of the quarter, going into October, we are working on more toning and fitness kind of to support Skechers and other brands in that category.

So it's kind of a mix, it's trying to follow where what we believe the consumer wants to buy, what she's shopping for at that point in time and connecting all those dots together.

And then two more things, within the guidance that's given for back half of the year, I guess, with low-doubles, mid-teens for the third quarter, and then probably high-singles for the fourth quarter, how much of that would you say is predicated on -- how much of that are you assigning to the toning business being a lift there?

When you look at the whole back half of the year.

Just to correct the guidance for Famous in the back half is high-singles to low-doubles.

Okay.

But Q3 was bigger than the back half, I believe?

I think we said for both the third quarter and the back half that was our guidance.

Okay.

And so how much of that is being driven by the toning category?

No significant change versus what I've talked about in that 8% to 9% range.

And then lastly, with pricing and so on, you mentioned that prices are going up next year, how are you, what kind of price increases are you seeing, how are you working with the factories, and how are the brands working with you at Famous and so on?

And how are you making sure that that you can continue to deliver a value into 2011 on all aspects of the business really?

That's a big question, Sam.

As we've talked about, there really isn't a one size fits all for all of our brands.

What we definitely try to do, the one thing that we are consistent on is it's not about taking value out, it's putting value back into our products and our brands.

We continue to make sure that we are delivering great products for our customer.

A lot of what we are trying to do is take a look at the way the assortment and mix sort of shows up.

We know that we always have to have a good value proposition within the mix of most of the brands and at the same time continue to drive higher AURs.

The customer, as we've talked about many times, doesn't equate price to value.

We are really trying to make sure we continue to drive more value and great quality in our products and I think, again, as we have talked about whether it is boots that are really showing great momentum, or the toning category showing great momentum and those prices are certainly -- consumer really feels like they are getting a great value with that.

So we're constantly looking at all of those different components to make sure we satisfy the customer.

Thanks.

And I'm sorry, one more thing on toning/Skechers.

When you look at Skechers business and the toning part of it and the kids part of it and so on, how much momentum do you see there?

I mean, you said it was the leader of the pack as far as toning goes.

Do you expect that to continue through the balance of the year?

Well, as I think about the balance of the year and I think about the toning, certainly.

I do think that Skechers is the leader of the pack.

As it evolves and we move into other types of technology, who knows?

We will see how the consumer reacts to the next generation of products that they see, not only in the toning and fitness category but this whole barefoot technology area as well.

So it will be a really, an interesting and wonderful next six to 12 months because there really does seem to be so much consumer interest in this category today.

Thank you guys very much.

Good luck.

Thanks, Sam.

There are no further questions at this time.

I will turn the call back over to management for any closing remarks.

Thank you, everyone.

We look forward to the next quarter, as we continue to believe that footwear is going to be a category that is going to out perform.

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

Thank you all for participating.

You may now disconnect.