Caleres Inc (CAL) 2010 Q3 法說會逐字稿

Good morning, my name is Celeste and I will be your conference operator today.

At this time, I would like to welcome everyone to the Brown Shoe Company third-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)

I would now like to turn today's call over to Mr.

Ken Golden, Director of Investor Relations.

Please go ahead, sir.

Thank you, Celeste.

Good morning, everyone.

Thank you for joining us today for Brown Shoe's third 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 risk 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 Company's investor relations department.

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

Thanks and good morning, everyone.

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

As usual, following our prepared remarks, we will open up the call to answer your questions.

We are pleased to report better-than-expected sales and earnings for the third quarter as well as an improved outlook for the full year of 2010 and expectations for improved performance through 2011 as evidenced by our $1.31 to $1.43 EPS guidance.

Our third-quarter performance was driven by strength across the brand portfolio and included a double-digit increase in same-store sales at Famous Footwear, a 34% increase in our wholesale operation sales, and EPS growth to $0.42 from $0.38 last year or $0.45 versus $0.42 on an adjusted basis.

Importantly, the third quarter represents our fifth straight quarter of improved performance, including a record sales result for the total Company and a record sales result for Famous Footwear.

We attribute our performance to the focused execution of our core strategies, driving profitable market share at Famous Footwear and capitalizing on the favorable footwear trends at wholesale, especially as it relates to our healthy living and contemporary fashion swim lanes.

At Famous Footwear, our success is best demonstrated by our 10.6% same-store sales performance, coupled with gross margin expansion during the quarter.

We placed a lot of energy and effort into maximizing the back-to-school season which you have heard me say before is Famous's Christmas and we are pleased with our record performance during this all important season.

Our importance importantly was broad-based with same-store sales gains across all major categories and our comp sales, excluding toning, increased 6%.

As we spoke on the call last quarter, we also knew that it was the right time to invest in elevating the Famous brand with consumers.

We increased our marketing investment, emphasized great service, and delivered a terrific store experience for our customers, showcasing our powerful national brands.

As a result, Famous saw increases in traffic, conversion and average ticket growth even as we reduced our (inaudible) during the third quarter compared to last year.

We also are capitalizing on the key footwear trends within our wholesale business and healthy living and contemporary fashion lead the way during the quarter.

Both Naturalizer and Dr.

Scholl's had solid double-digit sales growth during the quarter.

On the fashion front, boots and dress shoes continued to be in high demand with consumers.

This led to strong increases for our contemporary brands led by gains in Via Spiga and Vera Wang which both saw sales grow over 50%.

And Sam Edelman delivered another strong double-digit performance.

We continue to see lots of excitement on the contemporary floor.

In total, our Wholesale brands are delivering the right combination of fashion and value and as a result have been allocated more space at retail.

Our backlog at quarter-end is up 25% and is a good indication that this strength will continue in the upcoming quarters.

Our inventory at quarter-end grows by just under 20% over the third quarter last year.

It is up with intent as we shifted deliveries forward to mitigate cost, sourcing constraints, and as we planned to go live with SAP in our Wholesale operations.

Importantly, our inventory position has never been cleaner and more current as we expect our year-end balance sheet to show sequential improvement in inventory growth and be more aligned with sales expectation as we move forward.

In summary, we are pleased with the results in the quarter.

We capitalized on the increased enthusiasm for footwear, we delivered strong sales growth and increased our net earnings even while absorbing $16.8 million or $0.25 per share after tax in incremental cost related to the incentive compensation and marketing.

As we begin the fourth quarter, we are confident that the strength of our business model and our strategies will allow us to continue our positive performance.

Our brands continue to be in high demand and we have strategies in place to continue this favorable momentum.

We have outlined expectations that include the resumption of EPS guidance based on our improved visibility and our confidence in our team's ability to drive further increases in our top and bottom lines.

We have provided specific EPS guidance for our fiscal 2010 and 2011 years.

We now expect to deliver $1.00 to $1.05 in adjusted EPS in 2010 with continued growth expectations for 2011 based on low to mid-single-digit sales increases and earnings per share of $1.31 to $1.43.

Now I'll turn the call over to Mark to review our financials.

Thanks, Ron.

Let me add my good morning to everyone as well.

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

Net sales were $716.1 million, an increase of 14.5% compared to $625.6 million in the third quarter of 2009.

They key drivers of our sales performance where a 10.6% same-store sales increase at Famous Footwear, a 33.7% increase from our Wholesale divisions, and our retail numbers were supported by a 14.1% increase across our e-commerce platform.

During the quarter we opened four new Famous Footwear stores and closed 14 existing locations for a total of 1118 stores versus 1148 stores last year.

Gross profit increased by $23.3 million or 9% versus the third quarter last year.

On a rate basis, our gross profit was 39.4% compared to 41.4% in the third quarter of last year.

In the quarter, Famous Footwear further improved its gross profit rate by 30 basis points as a result of improved sellthroughs and operating with 19% 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, partially offset by increases in rewards marketing and less boot penetration than in the prior year.

The consolidated gross margin performance in the quarter was below our expectation of a 40% to 40.5% rate and was negatively impacted by both the strong sales increase at Wholesale leading to a greater mix within the portfolio as well as a 540 basis point decline in gross profit rate in the Wholesale division.

The margin decrease at Wholesale was attributable to some anomalies this year and last, including an abnormally high rate last year when gross margins expanded 390 basis points from the prior year.

280 basis points of the decline resulted from changes in brand and channel mix.

100 basis points related to increased markdowns in the quarter.

90 basis points related to other lower initial margins and the balance was related to air freight and other factors.

Selling and administrative expenses increased by $24.6 million to $247 million, improving by 100 basis points to 34.5% of net sales as a result of leverage on fixed retail facilities despite the increased investment in marketing and incentive costs.

Marketing expenses increased $8.7 million and we had $8.1 million in incremental incentive compensation expense.

Year to date the aggregate increase in marketing and incentive costs totaled $31.1 million.

It's important to note that the incentive compensation expense is up significantly due to our better-than-expected performance as compared to the targets set at the beginning of the year.

We will reset the bar on incentive compensation in 2011 and plan to hold our marketing expense to a flat rate of sales compared to 2010.

Net restructuring and other special charges were $1.9 million in the third quarter compared to $2.2 million last year, both related to our IT initiatives.

Net interest expense in the quarter was $4.9 million, roughly flat to last year.

Our tax rate in the quarter was 34.9%.

As a result, net earnings in the third quarter were $18.6 million or $0.42 per diluted share versus $16.3 million or $0.38 per diluted share in the year ago period.

Adjusted net earnings in the quarter were $19.8 million or $0.45 per diluted share versus $17.7 million or $0.42 per diluted share in the third quarter last year.

Shifting to the balance sheet.

We were net borrowed under our revolver by $83.3 million at quarter-end versus a net borrowed position of $15.9 million at quarter-end last year and we had $256 million in availability on our revolving credit facility.

Our borrowings in the quarter relate to working capital investments and the completion of the Edelman shoe acquisition in the second quarter.

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

Total inventory at quarter-end increased 19.9% to $539.9 million.

The increase was driven by a 15.4% increase in inventory levels at Famous Footwear, up 12.4% on a unit basis per store.

These levels reflect our investment in higher average priced product such as toning and boots and a shift of receipts into the third quarter compared to last year so we could have the floor better set for fourth quarter.

Inventory in our Wholesale division was up $42 million year over year to support new businesses such as Niya and the explosive growth of Vera Wang.

And our backlog which is up 25% at quarter-end.

In addition, we flowed in inventory early in anticipation of the go-live portion of our SAP implementation in the fourth quarter and strategically moved inventory into Q3 from Q4 to mitigate sourcing and capacity constraints.

As Ron mentioned, we expect to show sequential improvement in the percentage increase in year-end inventory with an expectation for consolidated inventory levels to be up in the low double digits.

We plan to drive down our inventory levels over the next quarter by normalizing receipt flows to match demand and move through our SAP implementation.

Capital expenditures for purchases of property and equipment and capitalized software in the third quarter totaled [$15.2 million] with spending primarily on new stores, remodels, and our IT initiatives.

Year-to-date capital expenditures totaled $40.9 million.

Moving to our outlook, we currently expect diluted earnings-per-share in the range of $0.90 to $0.95 for the full year 2010 which includes $0.10 per share in charges related to our IT initiatives.

This compares to net earnings of $0.22 per diluted share in 2009 which included $0.18 per share in net charges.

Consolidated net sales for the fourth quarter are expected to increase in the high-single to low-double-digit range which includes an increase in same-store sales expectation at Famous Footwear in the high single digits and an increase in wholesale net sales in the high teens to low 20s range.

Selling and administrative expenses as a percent of net sales are expected to be in the range of 36.8% to 37.2% for the full year of 2010 which includes net restructuring and other special charges of $6.5 million to $7 million for our IT initiatives.

Also included in our full-year expectation is a year-over-year increase in marketing expense of approximately $18 million and approximately $21 million in anomalous costs of incentive compensation, air freight, and other items.

We are planning an effective tax rate of 34.8% to 35.2% and net interest expense in the range of $20 million to $20.5 million.

Depreciation and amortization of capitalized software and intangible assets are expected to total $50 million to $50.5 million for the full year.

And as a reminder, we will begin amortizing SAP in our Wholesale systems change in the fourth quarter.

Purchases of property and equipment and capitalized software are now targeted in the range of $58 million to $60 million for the full year.

We are also introducing 2011 guidance.

For fiscal 2011 we currently expect earnings per share in the range of $1.31 to $1.43 range as we leverage the expense base on improved sales and will not incur the anomalous costs of $21 million in the 2010 P&L during 2011.

Next year we expect consolidated net sales to grow in the low to mid-single-digit range driven by same-store sales growth at Famous in the low to mid-single digit range and Wholesale net sales growth in the mid-single digit range.

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

Thanks, Mark, and good morning, everyone.

Just a couple of comments before I get into more details of our business results.

There is no doubt that we are pleased with the progress on improving our enterprise-wide performance with very healthy topline momentum across our brands and distribution channels.

Our strategic path is clear and our brands are nicely aligned with the macro trends of healthy living, contemporary fashion and delivering value to families.

As you know, we made several decisions over the last few quarters with intent to support these strategies and drive market share and consumer preference in these areas.

While this has clearly resulted in terrific topline traction with consumers at both retail and wholesale, it has also resulted in a few puts and takes on short-term margin.

But we're really encourage by the advances we've made and expect continued progress as we move into next year.

So let me give you a little more color on how our businesses performed during the quarter and address some of the questions you may have.

Let me begin with a review of Famous.

Famous's progress was excellent this quarter against both short-term and long-term goals.

We achieved record sales in the quarter and the back-to-school season which included record results in each month of the quarter.

The sales performance was driven by low-single-digit gains in traffic in AUR as well as double-digit improvement in conversion rates.

The sales performance during the quarter was broad-based, with increases across all of our major categories, all channels, and all regions.

We were led in the quarter by a strong women's business, generating a high single-digit same-store sales gain with running, toning, casual shoes and sandals being important contributors.

Men's grew in the mid-single digits driven by athletics and sandals and casual and both our kids and our accessory businesses performed well, increasing in the low double digits for the quarter.

We also made advancements on our productivity goal as the result of both the strong sales momentum and through the progress being made in our real estate portfolio initiative.

Sales per square foot for the trailing 12 month period was $184 a square foot compared to $164 in the prior 12 months, a 12.4% increase, and we're closer to reaching our near-term goal of $200 per square foot.

We believe there's opportunity to move to $225 over the next few years and it's important to note that stores opened since we changed our criteria for new opening performance are now operating at $200 per square foot while closings have been operating at $130 a square foot.

We were able to accomplish these results while operating with 19% fewer store BOGO days during the quarter than last year.

We've allocated a lot of energy and resources to enhance our brand, store experience and assortment to drive preference with our customers and reduce our reliance on price-driven promotions.

We've made great strides in this area as evidenced by our year-to-date 12.4% same-store sales increase coupled with 48% fewer store BOGO days over that time period, proof that our customer is really responding well to our strategies and the actions that we've taken.

The reduced BOGO cadence, stronger sellthroughs and success of strong margin categories led to a 30 basis point improvement in gross margins during the quarter and we've seen 180 basis point increase in gross margins year to date.

As we've been discussing throughout the year, we've made investments in payroll, inventory, and marketing and traffic and conversion rates that we're seeing are really a result of that investment.

As we've reduced our reliance on BOGO, we have reinvested that back into the consumer, building a stronger connection with our customers and driving brand equity and differentiation.

And according to Brand Index which is a company that measures daily the public perception of about 850 brands across 34 different sectors in the marketplace, it shows that Famous Footwear has the largest improvement in overall brand health and quality perception by consumers during that July to September time period, rising nearly 14%.

Operating margin in the quarter was 7.6% compared to 7.3% in the third quarter last year.

So it was a terrific quarter from both a financial and a strategic perspective.

Now let's turn to inventory.

Our inventory position at quarter-end reflects our investments to capitalize on key product trends such as boots and toning and our decision to narrow and deepen our assortment with additional sizes and widths.

The latter has certainly led to increased conversion rates.

We thought we may have missed some opportunities last fall based on the flow of receipts, so we shifted more receipts into the third quarter this year and will have fewer in the fourth quarter.

Our inventories are clean and current and the inventory levels will be more in line with sales trends by year-end.

Excluding our investment in toning products, average store inventory at quarter-end increased 5.6% and this compares to a same-store sales increase of 6% in the quarter of non-toning products.

Now on the topic of toning, we have seen some moderations in the high-growth trend of this category versus its acceleration at the beginning of the year.

The demand for toning product in our stores remains healthy and we continue to expect margins in this business to approximate our store average.

Toning has been a positive catalyst for Famous Footwear's business beyond the category itself.

It has led to new customer visits, expanded our opportunity in the athletic category, and has proven we can sell a higher price point versus our historical average.

We have seen that over 30% of the customers purchasing toning product in our stores are new to Famous and one-third of these customers have returned and made at least an additional purchase.

Based on current sales trends, the category is expected to represent roughly 6% to 7% of our volume in the fourth quarter.

It will positively contributes to our cost expectation in the quarter and by year-end will have generated over $100 million in sales for Famous Footwear.

We would anticipate of course that this is going to moderate somewhat in 2011, particularly as lightweight and technical running styles gain momentum.

These are two trends that we expect will generate a lot of excitement over the next couple of seasons and of course, we are going to fully support these categories.

We have always looked at this trend from a perspective of healthy living and fitness, not just as a category of toning.

And one of the great benefits of our concept is that we're able to shift our assortment to meet consumer needs.

She tells us what she wants and right now, she wants to be more fit and live a healthier lifestyle.

We intend to provide her with the best footwear solutions for her and her family to do so.

Now if we look forward, we expect Famous to deliver another terrific quarter.

November has started out strong.

Same-store sales are up high single digits month to date and this is despite operating without BOGO in the month until just until this last week weekend versus being in BOGO during the same period last year.

And as we look to holiday, our marketing is locked and loaded and we expect to continue our pace as evidenced by our high-single digit outlook for the quarter on top of last year's 9% increase.

Now let's turn for a minute to Wholesale.

As we discussed for the last two years, we've been transitioning our Wholesale portfolio toward a more branded mix.

The sequential improvement in Wholesale sales during the quarter, a 33.7% increase following a mid-20% in the second quarter, is a good indication that consumers are reacting positively to our brands.

The better-than-expected sales result was built on our focus of driving market share through innovative product and ensuring that we make sure we deliver a strong branded value to the marketplace.

Our results were broad based with each of our channels of distribution growing and similar to last quarter, we saw continued strength from our core brands along with the ongoing acceleration of our contemporary fashion business.

This was led by another strong quarter from Naturalizer.

The Naturalizer family of brands was ranked third across all [MPD] channels and the brand continued to show strength across its multichannel platform.

Our contemporary business continues to perform very well and is now approximately $215 million in sales on a trailing 12-month basis.

It's becoming an integral piece of our portfolio and we're pleased with the progress that's been made by this group and expect continued growth from these brands.

And Dr.

Scholl's sales increased over 50% in the quarter.

This was partly the result of that of an improvement in sales outside the mass channel but also based, quite frankly, on an easier comparison last year when sales were down due to a floor shift at a large retail partner.

As we continue to transition our branded portfolio, we will see shift in brand contribution on a quarterly basis.

As Mark walked through earlier, this was one of the dynamics in our gross margin performance in the third and fourth quarter.

And given the macro dynamics that we are comparing against from last year, you'll see more sequential volatility in quarterly margins.

That said, we're not pleased with the gross margin results in the quarter and we are working like everyone to ensure improvement in this area.

We expect that brands and channel mix will normalize next year and will have much less impact from unusual items such as air freight that was highlighted a little bit earlier.

Now the other question that everyone is really wrestling with and dealing with affecting margins is the challenges [in manning] the flow of inventory to balance spikes in consumer demand with the capacity and cost constraints that we see oversees.

From our perspective going forward, we see the cost of goods increasing by 6% to 8% on a fall versus fall basis driven by currency, labor, and materials inflation.

Each channel is going to face different pressures with lower price points being impacted the greatest.

And we believe our portfolio diversity and greater weight towards branded goods will be an advantage in this environment.

This issue has also forced us to really tighten our planning process.

Our investment in SAP is expected to help us improve our management of flow, gain supply chain efficiencies as well as information to assist us in risk mitigation.

We are pleased with the acceleration of our topline performance at Wholesale over the past few quarters, but I can assure you we remain focused on improving our flowthrough.

While we are taking a realistic view of Wholesale gross margins for next year by planning them flat to down slightly, we believe that through continued sales momentum and greater expense efficiency including savings associated with our systems initiatives, we will achieve a material improvement in divisional operating earnings in 2011.

So in closing, fundamentally the actions and investments we made in 2010 have put us in a better position for the future and on a path to achieve our long-term profitability goals.

We continue to attract new customers and we're converting more of them with improved product, store experiences, and marketing.

We are going to have a very good 2010 result, significantly better than was planned a year ago and we expect to have a terrific 2011 as well.

And now I guess I will turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions) Scott Krasik, BB&T.

(inaudible) everybody and thanks for the additional disclosure and the EPS guidance.

It is appreciated.

No problem.

Mark or Diane, maybe dig into the Wholesale gross margin decline a little bit more.

I know you called out mix and higher markdowns and lower IMUs.

But maybe talk specifically about the brands in the mix, where you're seeing higher markdowns.

Are you doing more sales to off price?

Some of the specifics there.

Mark, why don't you just do the total and then I'll come in and do the brand by brand commentary?

So again, just refreshing in total, we saw 280 basis points of the decline was the result of channel mix and to some extent, the brand mix, the bigger piece of that being channel.

As I think we said a year ago, we had some anomalous channel mix, particularly in the mass channel where we had less sales of Dr.

Scholl's.

So it was favorable this year and obviously because we had such a huge increase in Scholl's with the 50% increase this year, it was a margin drain on a mix basis.

And I think the markdowns again, you see that primarily show up in the department and better specialty store margins with the contemporary brands.

So just a little bit more color on that, Scott.

It really is, to Mark's point, it was really the Dr.

Scholl's mix because of the huge shift this year and growth in the sales of that brand and then additionally in some of our contemporary fashion brands where we took some additional markdowns that we needed to take to continue to move the goods.

And then shifting over to Famous, can you just give us what on a same-store basis your total inventory was up at the end of the quarter?

I know you gave it in pairs, but --

So again, it was up about 18.5% on an average store basis in total dollars.

And do you have that ex-toning by chance?

That was up 5%, 6% ex-toning.

So you gave that number already.

And then you just commented about the margin in toning going forward.

You said they should be at the average store, average athletic margins?

Could you just clarify that?

Yes, we believe that it will be very similar to our average store margin rate, all in.

So just given the tough compares in the first half of next year, you gave us some Wholesale gross margin guidance for next year.

Can you give us some gross margin guidance for Famous incorporated into that FY 2011?

We're still finalizing our planning, but as we currently said, we would look for it to be flat to up slightly.

And you're going to offset the toning and boots I assume by what?

Well, we see -- toning is still going to represent a significant portion of our business going into next year.

So our plans would still have it in the 5% to 6% range of our total business.

And as we begin to transition into new categories of business such as the lightweight running that we talked about and technical running and again, shift our investments to that area, we really see toning flattening out in terms of its overall importance and some of these new categories coming in to help continue to keep our margins at an acceptable and solid level.

And then just lastly, it's certainly encouraging to hear these new stores are running at such a high productivity rate.

Maybe talk about what you're doing differently, where you're targeting it differently and how many opportunities there are to open stores at this level of productivity going forward.

So again, we went back -- and going back to 2008 when we started slowing down growth, we went back and redefined criteria.

So we set criteria for opening at a higher bar.

And then we've maintained the discipline to actually open under those criteria.

We think there's ample room for 1500 plus Famous stores as we look at the marketplace today.

What's the difference in the markets or in the (multiple speakers)

Scott, so a couple of things.

We continue to use two tools and a lot of good real estate common sense.

So we've refreshed using an instrument called Map Info and we've refreshed our database with a company called APT.

And in so doing, in essence we go and we take a look at clusters of customers that are very specific.

There's I believe over 60 or 70 of those clusters out there.

And we match the right customers in those clusters with the best real estate space available in the marketplace.

And when we do that, we basically raise the criteria for overlap, if you will.

And so we now have opening of stores that have a greater likelihood of adding our best customer or more of our best customer in those locations.

That's the simple part.

Finding those locations, getting deals done, that's the hard work.

But you do think that there are hundred of stores in terms of getting to that --

In using the mixture of these tools, let's just say because quite frankly the number is too big, so quite frankly, I would just say there's easily more than hundreds and hundreds of them out there.

Just finding them is the challenge.

Getting them all (multiple speakers)

Chris Svezia, Susquehanna Financial.

(inaudible) on the backlog being up 25%, I think as you went through the year, it was stronger than that.

I'm just assuming, Diane, that's in part due to as retailers sort of reset the bar in terms of how they are pre-booking product or could you maybe just talk about I guess why that's come down?

Is it just the anniversarying the numbers or just any color about that number?

It's a couple of things, I think.

First of all, the backlog for everybody was a little bit higher because of the way the people were flowing goods and placing orders.

So the whole supply chain was changing.

I think that's number one.

The second thing is, again, we brought in goods in the third quarter, as you heard, in order to make sure we were ready to ship prior to SAP and all of that, so we were making sure we were getting goods out earlier.

And I think the rest of it frankly is now everybody is kind of taking a wait-and-see to see how the fourth quarter shakes out and how inventory levels look.

But generally speaking, I think we don't see any significant or material shift in the demand for our brand at this particular time.

And then as you guys think about Famous Footwear and where you stand right now and you talk about these productivity numbers, I know you went through a [positioning] of consolidating the store base.

Is that still realistic thought process for 2011 in terms of traction in the Famous Footwear store base still?

Chris, it's Mark.

I think right now we'd be planning for net positive store growth in 2011.

I'll probably call it 5 to 10 order of magnitude of positive.

We still have -- which would mean that we'll have a few more openings than we had this year and a few less closings.

But we will continue to attack the bottom performing part of the portfolio pretty aggressively.

So wait -- so, Mark, you are saying in 2011 it would be -- you start to see net growth in the store base?

Yes, we said -- I think we have talked about it being up plus 5% to 10%.

And I am curious about your thought for next year.

You threw out some observations and obviously you threw out an EPS number.

But you were talking about the topline growth and then you threw out some pieces on the margin, particularly on the Wholesale side, gross margin might be down a bit but better operating margin performance in Famous.

Hopefully you hold the line on gross margin, maybe see some slight improvement.

And I would assume if you get some comp growth, at least what you're guiding to, you should be able to leverage that business.

Is that fair to say?

Famous, you should see operating margin improvement in that business next year (multiple speakers) guidance?

Yes.

And then I'm curious, on that $21 million, I guess what are you thinking for incentive comp next year?

Is it down year over year?

What else is in that number?

The biggest part of that would be incentive compensation.

Again, as we've said, we're on track to hit the upper limits of our incentive plan with the beat to the expectations from the beginning of the year.

So we will reset the bar for earning that and set it at our target rate.

Our max as you know is about 200% of target.

So next year -- can you tell me what your incentive comp dollar number is for this year -- of that $21 million, what is incentive comp?

$12 million of that $21 million is (inaudible) incentives over 100%.

And last question I just have, just on these Mind Body Sole stores, you had a team member go out and go take a look at the store in Boston.

I was just wondering if you had some color about what your thoughts are behind the store.

Are these just tests?

Still have a lot of toning emphasis in those stores, it seems like.

How do you flex that store in and around I guess cold weather products?

Just what are your thoughts about why now, what the thoughts are behind it, etc.?

Sure.

Yes, we've opened four stores so far and they really are just tests.

And the whole intent here, Chris, is aligned with our strategy around this idea of healthy living and the way that the consumer wants to be fit.

And we believe that there is significant opportunity in the marketplace to deliver a different kind of store experience for them.

So we thought four stores, five stores was a good way to test.

We went out to premium malls, so Burlington Mall in Burlington, Massachusetts; Cherry Creak in Denver, Colorado; Florida Mall in Orlando; we're at Woodland Hills in Tulsa and then we're going to be opening in early December at the Wellington Center in Palm Beach.

And the idea is no, it's not just toning.

Again, it's all about a fitness and healthy living lifestyle.

So it includes all sorts of products from running, from toning, to outdoor, to having an experience in the store where they can try on these shoes, they can chat about their lifestyle, they can talk to some of the sales associates in the stores about how to improve their overall health and well-being.

Very different kind of proposition than what we've done.

And we really believe that as much as anything, we're going to learn a lot about the way the consumer of this part of the marketplace thinks so that we can continue to refine our thinking, our assortments and our strategies for the future.

So really, really preliminary test.

It's four or five stores out of 1100 that we have.

And it's the kind of thing that frankly, we think we ought to be continually choosing the right kinds of things to be gaining more insight about the potential for the brand.

Thanks.

And just lastly, Mark, on the $21 million, I guess the balance is related to SAP?

No, it's anomalous costs and investments we've made in the current year, things like the air freight which we don't see recurring at the same rate next year, some other investments we've made in quite honestly in tests [and strategy looks] that add some expense to it this year.

So that $21 million doesn't include the SAP piece?

No.

Does that get reinvested, those funds back into the business and some other initiatives?

Well again, I think we've said that we would expect to have an improved expense rate next year.

Jeff Stein, Soleil Securities.

Diane, I am wondering if you can just give us a little bit of insight into what's happening in toning with respect to average unit retail, how much your retails are off and how that might affect -- how that is affecting your comp at the present time.

In other words, if you're still seeing high single-digit growth in comps, are you seeing it coming in other areas such as boots?

Are you seeing it from traffic?

What are some of the offsets to, I would presume, lower AUR in toning?

Let me try to give you a little bit of flavor on that, Jeff.

First of all, I would say right now, our price points on toning are down about 12% to the high of the peak in the first half of the year.

So if we were looking at close to $100 at that point in time, it probably averaged around $93 year to date where right now, we're running in November about $82.

And we've repriced all of our goods in line with where the rest of the marketplace is.

So it's about a 12% difference.

It's interesting that as we look and go forward, we still see it representing a significant part of our business.

As I mentioned, we still expect that 6% to 7% of our total sales in the fourth quarter are going to continue to come from this category.

So it will be an important part of our comp store increase in the fourth quarter.

But what we are really pleased with along with the rest of the marketplace, the boot business has just been terrific.

And I can tell you, we're running close to 40% increases through the month of November on boots.

So that's really going to help our comps.

And then you layer in this new category and this new trend of running and technical lightweight running, all of that coming together, we think that you put all those pieces, it really bodes well not only for the fourth quarter, but as we move into next year.

So on toning specifically, it's really again coming back to just right-sizing the inventory and continuing to fuel these other new categories of business for growth.

Do you feel your toning inventories are in line at the present time?

No, I think our toning inventories are higher than what we would certainly like to have.

But our ability to manage the receipt flow and with the current pace of consumer pull by the end of the first quarter-ish, we should have rights-sized our inventory in that piece of it.

So we're comfortable with where we're at.

We understand what we have to do and we're taking the actions necessary to make sure we get everything in line.

Overall for the fourth quarter, can you talk about the level of promotional activity at Famous Footwear?

I know you mentioned earlier that you weren't on BOGO but in store visits, you were 50% off in boots and it looked like the rest of the store was somewhat promotional.

So I'm just kind of curious how you see kind of gross margin picking up.

You know, it's interesting.

Our strategy for the fourth quarter is going to be very similar to what we've been doing all year.

We see boots and toning and running as being the categories that are going to drive our business.

The promotional case around boots -- so what you saw there, we've not changed the strategy on our boot promos at all.

It's the same as we were last year.

We are going to continue to invest in marketing in the fourth quarter.

We are going to be on national cable and prime time, so we are going to be driving that.

And BOGO days right now, we're planned I think it's to be down --?

About 35%.

35%.

So same strategy of trying to shift our allocation of investment to the right spot to reduce our reliance on the promotions.

So I think that maybe -- does that answer your question, Jeff?

It does.

One more question, Diane.

Can you talk about the weakness that you're seeing in contemporary brands?

Which brands specifically and are these fashion issues?

Are there other execution issues involved?

Maybe you could just talk about that.

Well, the sales trends have been phenomenal.

So what you did -- probably what you picked up on the call was that we did take some markdowns within that segment of our business.

And some of it really had to do with some quality issues that we had.

But other than that, the momentum at retail is terrific on our Via and Vera and Sam business.

So I think you heard probably the 100 basis point markdown in the third quarter.

But again, that was just one piece of a whole lot of things, but the momentum on the business is very good.

So you would consider that to be kind of a blip, just kind of nonrecurring?

Yes.

Jill Caruthers, Johnson Rice and company.

If you could talk about kind of your marketing spend outlook for 2011, I know you made some incremental investments this year and kind of shifting around by reducing BOGO and putting that in other venues.

Can you talk about how you're looking at marketing for next year?

Well, this year, Jill, you're right.

Typically we have spent somewhere just a little bit north of 3% of sales on marketing.

This year at Famous, we're somewhere around 3.7%.

And basically our plan is to hold that rate going into 2011.

And then could you just dig a little bit more into the improvement you've seen on the Famous sales per square foot productivity?

What do you feel really is the key drivers to increasing that number up to the $200 level?

And then you did throw out the target of longer term to get to the $225.

I think it's really we are creating more of a demand and creating Famous as a destination, as a terrific place for families to come to buy casual products.

I think fundamentally that's what the difference has been.

And as we look at our store per store and we look at our conversion rates, and you look at AUR, you put all those pieces together along with information from Brand Index, it's telling you that on a -- in a very objective perspective that you're making progress against the health of your brand.

And so I think it's a combination of all of those things that are really helping our overall business.

One of the ways I think about it is that when we're trying to attract or lure in existing customers in existing markets, we have to in essence always overcome that they already think they know Famous and what it looks like and what it is.

When we open a brand-new store and we in essence lay down this new, exciting experience and we back it with all of these fabulous new marketing tools that allow us to reach out with everything from our rewards base to cable to in-store events, and to use that in such a way, I think it's one of the first places you really start to see the power of Famous Footwear marketing coming through.

Because we in essence give them these 360-degree touch points for the first time and pretty much all of these customers [are experienced].

And so, again, I think we're doing the same things that we're doing in a lot of the other stores but here it's new, fresh and exciting.

And then I'll repeat what we said earlier.

In our criteria, we know that in that new store base, we have a higher percentage of, if you will, our best customers who live around those stores.

It seems like conversion is probably benefiting from your increase of I guess size and width inventory you mentioned.

Yes, exactly.

And some terrific work that our store operations people have been doing in-store too.

Could just quantify that increase that's kind of devoted toward the size allocation versus I guess product expansion?

We all looked around and said no, Jill.

No problem, thank you.

We'll come back to you.

And we have no further questions.

I'll now turn the call back over to management for closing remarks.

Great to have you all here.

We look forward to the next quarter.

We certainly were pleased with the results of the third quarter.

And on sort of a personal note, I think you can see that we're at a time in the industry that there is some wind in our sails and we believe we're taking great advantage of it.

And at the other side, you can also see that there are a lot of moving parts and a lot of challenges.

And I think I'm most proud of the team in constantly taking on these challenging times and winning.

So we'll look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's call.

You may now disconnect.