Caleres Inc (CAL) 2011 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Brown Shoe announcement 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.

Ms.

Peggy Reilly Tharp, you may begin your conference.

Good morning and thank you for participating in the Brown Shoe second quarter 2011 earnings call which is being made available to the public via webcast.

I'm Peggy Reilly Tharp, Vice President of Investor Relations for Brown Shoe.

Earlier this morning, we distributed a press release with detailed financial tables which is available on our website at BrownShoe.com.

Please be aware that today's discussion contains forward-looking statements which are not historical facts and are subject to a number of risks and uncertainties.

Actual results may differ materially due to various factors including but not limited to -- the factors disclosed in the Company's Form 10-K and other filings with the US Securities and Exchange Commission.

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

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

The Company undertakes no obligation to update any information discussed in this call.

Joining us on the call today are Diane Sullivan, President and Chief Executive Officer; Mark Hood, Chief Financial Officer; and Rick Ausick, President of Famous Footwear.

Today we will begin with a corporate strategy review from Diane, followed by a financial summary from Mark, before turning the call back over to the moderator for Q&A.

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

Good morning, everyone and thank you for joining us.

I'd like to jump right in with a quick review of our second-quarter results before update I update you on back-to-school and the results of our strategic efforts.

While our consolidated net sales for the quarter were up 7.2% at $628.1 million, the entirety of this gain was due to the acquisition of ASG in February of this year.

Our adjusted loss per diluted share for the quarter was $0.06, which reflects [$0.07] share impact related to our SAP implementation and a $0.06 write-down of our toning inventory.

For Famous Footwear, sales were down slightly with toning playing the largest role in this decline.

Excluding toning, in both the second quarter of 2011 and 2010, that would've resulted in a 3.2% improvement in sales this year and on a same-store basis, year over year sales, excluding toning, were up 3.9%.

During the quarter, we strong saw strength in running and sandals at Famous with running sales up nearly 30%.

Lightweight styles and bold colors, as you know, continue to attract consumers in this category, and sandal sales in the quarter were up 5.5% which help us make up for weather-related softness in first-quarter sandals sales and reports flat sandal sales for the first half.

And we continue to see very good strength in sandals into the third quarter.

Boot sales also helped to fill the toning gap during the second quarter with sales up approximately 10%.

The unabated strength in this category furthers our belief that boots will [continue] to transcend historical seasonal trends.

And at our Wholesale Operations, year over year net sales were up nearly 25% in the second quarter due to ASG.

However, our smaller but important and growing contemporary fashion brands like Vera Wang, Via Spiga, Sam Edelman, and Franco Sarto also contributed.

While these brands make up a smaller portion of our revenue, they are expected to be a key contributor to our long-term growth.

Now, while Mark is going to talk in greater detail about our guidance later in the call, I'd like to make a few comments about that right now.

Internally, we been up against 2 challenges this year -- lapping toning sales and the implementation of the AFS portion of SAP, with both of these influencing our performance and our guidance.

During the second quarter, as the industry continued to shift, we also had to do so and review our investment in the toning category, so we made the decision to reduce the carrying value of our entire toning inventory.

With these adjustments, we believe we have mitigated the risks associated with this inventory and adequately gauged the consumer interest going forward.

As for our SAP stabilization, while we are making progress, it's cost us more in terms of dollars and efforts than we had anticipated.

And for the year, stabilization costs are expected to impact adjusted EPS by more than $0.20 per diluted share due to increases in allowances and chargebacks, margin related to lost sales, and incremental stabilization costs.

With any Company -- and that is implementing SAP, and we certainly know is that it's just a tremendous undertaking.

However, we have made meaningful headway with our stabilization program which began at the end of the first quarter.

With the help of SAP, Deloitte, and other experts, we reviewed the implementation from a technical and practical perspective.

We have made changes and we have seen results.

Some of those results include things like -- our ability to close the books on time, which we're also seeing improved timeliness of invoicing and collections.

We've got a little work to do to get our Accounts Receivable [aging] back in line but nice progress.

We're also seeing greater precision around profitability and as for shipping, we're more efficiently processing orders and shipping shoes.

With that said, we realize there is still much work to be done.

So while we believe the work of a negative impact from toning and SAP is behind us, I wanted to be as clear and as transparent as possible regarding these issues and how we've worked to resolve them to take quick action and to adequately meet expectations.

I'd also like to stress that we have our eyes wide open regarding the macro challenges we face in the back half of the year as well.

However at this point, I'm almost more concerned about the unknown such as the global unrest and the unstable US fiscal policy versus the known, which we've been battling for a while now -- the increases in labor costs, freight, and leather and petroleum costs.

And as -- we're fortunate here at Brown because we can actually see how the consumer is shopping across multiple channels of distribution, and we can certainly see at the designer and luxury end, that consumer continues to be robust at the middle part of the market.

A little softer, and clearly those consumers that are really faced with unemployment and are shopping in the mass channels are clearly struggling.

So with this in mind, we are already really working to provide an offset against these areas.

We're carefully managing cash on our balance sheet.

We're working to maintain adequate inventory to meet our consumers' needs in a very realistic manner.

As I discussed in the first-quarter call, we're also in the midst of completing a review of our portfolio to identify and take action around businesses that either don't fit our target customer platforms of family healthy living and contemporary fashion, or that are leaking value.

We made the first shift in our portfolio today when we announced the planned sale of AND 1 to Galaxy International for $55 million in cash.

The deal is expected to close within 45 days and we plan to use the proceeds to pay down debt.

AND 1 is a global men's performance, basketball and lifestyle brand that caters to basketball players and enthusiasts and it was part of the ASG acquisition that we completed in February for $145 million in cash plus some debt.

While the ASG acquisition helped broaden our reach in healthy living as a more specialized athletic product, AND 1 didn't clearly align with our target strategy.

As a brand with potential, we believe it's a better fit for a Company that can dedicate their resources it needs to move it to the next level.

I believe the sale of AND 1 shows we are moving in the right direction with our strategic review and are committed to delivering value to our shareholders by potentially monetizing some of our less strategic brands.

We will continue to review our brands and businesses over the next 6 months and we're also taking a hard-nosed look at our costs as we begin our planning processes for 2012.

While we're making progress against our goals, we recognize that we still need to move faster to unlock and capture the value at Brown Shoe.

Going forward, we will continue with our review of each branded businesses using return on operating capital as a key metric and of course, we'll continue to update you when we have news to share as we did today.

Before turning things over to Mark, I'd like to give you a quick update on back-to-school at Famous Footwear.

As expected, consumers continue to shift their back-to-school shopping to later in the season as part of an overall long-term trend.

We coordinated our marketing spend around this shift to be sure that we are aligned with the consumer when they're ready to buy; and as planned, we have resumed our Buy-One, Get-One event for the back-to-school season.

So month-to-date for August, we have seen sales up 1.2% year over year with both average unit retail and pairs per transaction up.

And while traffic counts are down slightly, conversions have been up.

And of particular note, last week we recorded back-to-school sales of $49.4 million, up nearly 5% over the same week last year, making it our largest single week in history.

We still have about 3 weeks left of traditional back-to-school selling and based on last week's record-selling sales, we look forward to heading to a solid finish.

And with that, I'd like to now turn the call over to Mark for a review of our financials.

Thank you, Diane and good morning, everyone.

I'd like to quickly review our quarterly results beginning with consolidated net sales which were $628.1 million, up 7.2% over the second quarter of last year.

As Diane mentioned, the primary contributor to this growth was ASG.

At Famous Footwear, which is part of our targeted family platform, net sales of $344.9 million were down slightly year over year at negative 0.7% as we operated 12 fewer stores while same-store sales were up slightly 0.2%.

As Diana discussed already, the decline in toning was the most apparent at Famous Footwear.

However, we did see strong growth in running, sandals, and even boot sales in the quarter.

Excluding toning, second-quarter sales at Famous Footwear were up 3.2%, and on a same-store basis, year over year sales were up 3.9%.

During the quarter, we opened 12 new stores and closed 8 underperforming stores.

Our trailing 12 month revenue per square foot for Famous Footwear stores is $186.

However, stores we have opened this year are averaging $211 per square foot and are performing at or better than expected against our higher standards.

We're also becoming more aggressive with our review of marginal stores.

Like many retailers, we overbuilt in some places during the boom years of 2007 and 2008.

However, we are working to exit these leases where possible and will continue with these efforts aggressively going forward.

For the remainder of this year and into 2012, we plan to remain focused and actively manage our portfolio.

We will also continue to take advantage of the current real estate market conditions to gain access to better locations whenever it is possible and profitable to do so.

For 2011, we are planning to open 50 new stores and close 40 stores to 45 stores.

Turning to our wholesale operations, which include our healthy living and contemporary fashion brands, we saw strong net sales growth of 24.6% in the second quarter.

For our healthy living brands, [all-in] Naturalizer sales which include wholesale and retail results were $75.9 million.

This year over year improvement of 3.8% was due to strength in our international Naturalizer business.

Dr.

Scholl's sales were $43.4 million, down 18.2% in the second quarter due to the year over year decline in toning.

However, we continue to work on the turnaround of this brand and are starting to see positive signs.

If you read the New York Times article about Dr.

Scholl's shoes earlier this month, you learned that we have added 150 new accounts over the past 6 months and are featured at Lord & Taylor, Macys.com, Piperlime, and Urban Outfitters.

For our ASG brands, Avia sales were also impacted by toning, as expected.

However, our new leadership team at ASG is working to build growth plans for not only Avia but also ryka and Nevados, which have both seen sales improvement year to date.

In our contemporary fashion brands which include Vera Wang Lavender, Via Spiga, Franco Sarto, and Sam Edelman, net sales were up 6% year over year.

Let's move on specialty retail which includes our Naturalizer stores, Shoes.com and our overall direct-to-consumer business.

In the second quarter, sales at our Naturalizer retail stores were up 3.4% year over year.

Second-quarter same-store sales for our Naturalizer retail stores in North America were up 5.5%.

Our Canadian stores showed good performance while our US stores were up about 1%.

In Canada, we have strong retail presence in catalog business and we've opened 5 new stores there year to date.

At our direct-to-consumer business, we saw sales improvement of nearly 10% in the quarter with Famous Footwear and Naturalizer both showing significant improvement year over year.

I'd like to review our financial metrics in a little more detail, beginning with GAAP earnings per diluted share.

For the second quarter, we recorded a loss per share of $0.11, which included $0.05 of costs for the ASG integration and related inventory purchase accounting adjustments and the early retirement of our 2012 senior notes.

Excluding these items, the adjusted loss was $0.06 per diluted share and as Diane mentioned, this amount included the $0.07 impact related to SAP stabilization and a $0.06 write-down of toning inventory.

Overall gross margin in the quarter was 37.7%, which was down approximately 300 basis points when compared to the second quarter of 2010.

The reduction in gross margin was primarily due to the lower value of toning product at Famous Footwear.

However, it was also negatively impacted by a shift in mix from retail to wholesale.

At our wholesale operations, gross margin was 28.5%, down approximately 180 basis points when compared to the second quarter of 2010.

This decline reflects the impact of toning at Dr.

Scholl's.

Additionally, SAP-related chargebacks and allowances lowered margin by 150 basis points.

These declines were offset in part by brand mix including the ASG.

SG&A dollar spend of $235.6 million was up 5% with the entire increase due to the addition of ASG expenses.

As a percent of revenue, SG&A was down 70 basis points year over year.

Net interest expense, excluding the impact of early extinguishment, increased $1.7 million over the second quarter of 2010, due to higher borrowing levels associated with the acquisition of ASG.

The Company's tax rate of 34.7% was down 30 basis points year over year, largely in line with last year's rate.

Depreciation and amortization for the second quarter was $15.1 million, while capital expenditures were $12.1 million.

We ended the quarter with $250 million of borrowings under our revolving credit agreement which has approximately $270 million of additional availability.

During the quarter, we repurchased 2.2 million shares or $22.4 million or $10.20 per share and we completed our prior repurchase program early in the third quarter.

Additionally, the Board of Directors authorized a new stock repurchase program of up to 2.5 million shares and declared quarterly dividend of $0.07 per share.

This dividend will be the 355th consecutive quarterly dividend paid by the Company.

Cash and cash equivalents at the end of the quarter were $62.6 million.

Inventory at the end of the quarter was $627.9 million, up 8.6% year over year.

The increase in inventory was primarily due to the February acquisition of ASG.

At Famous Footwear, inventory was down 3.2% at the end of the second quarter.

Wholesale Operations inventory was up 56.6%, with ASG accounting for nearly 80% of the increase.

As Diane discussed, while our aged inventory has been impacted by toning, we believe the current inventory levels at all of our businesses are in line with our expected sales.

Before wrapping up the call, I'd like to review our amended guidance for the full year.

While full-year results are expected to be down significantly from our prior guidance, the second half demonstrates our earnings power and growth, with adjusted EPS of $0.76 to $0.88, an increase of 36% to 57% compared to the $0.56 for the back half of 2010.

Our updated full-year guidance metrics are as follows -- consolidated net sales of $2.68 billion to $2.71 billion.

Flat same-store sales for Famous Footwear.

Excluding ASG, flat net sales at our Wholesale Operations.

Gross profit margin down the 60 basis points to 90 basis points on a consolidated basis.

Net interest expense of $25 million to $26 million, and effective tax rate of 32.5% to 33%.

Earnings per diluted share of $1.01 to $1.13, with adjusted earnings per diluted share at $0.85 to $0.97.

Depreciation and amortization of $59 million to $61 million, and capital expenditures of $52 million to $54 million.

As Diane already discussed and as we said in today's earnings release, we took a hard look at our potential earnings for both back half and full year of 2011 before we lowered our guidance.

These numbers reflect our continuing concern about potential impact from the overall global economic uncertainty, consumer acceptance of pending price increases and expected cost pressures.

Going forward, we will continue to update you each quarter, as always, on any revised expectations for the full year and the potential impact from any external events beyond our control as well as our ongoing portfolio review.

With that, I'd like to turn the call back over to the operator for Q&A.

(Operator Instructions)Scott Krasik with BB&T Capital Markets.

Just first a question on the guidance.

It looks like in the first half of the year, you had $0.13 of charges that you added back to GAAP to get to adjusted and for the back half of the year, you have $0.27 or so of -- it looks like benefits you're going to exclude from GAAP to get to adjusted.

Can you explain what that is?

Scott, the back half of adjusted items would include a continuation of the integration costs on the acquisition of ASG as well as the estimate of our gain on the sale of AND 1.

Okay, So primarily the biggest benefit will be the booking, the sale of AND 1?

Correct.

Okay.

And then did you say that Ryka was up year-to-date?

Is that correct?

Yes.

Okay.

So in terms of visibility, for the back half of the year, how would you qualify because I assume you weren't missing sales any more at this point in the wholesale business.

The comp trends at least are improving at Famous Footwear.

So what level of confidence do you have around the sales guidance now?

Hi, Scott.

It's Diane.

How are you?

(technical difficulty) into that question.

We, obviously, as we have stated in the call, we really have taken a hard look in the first half, taking into consideration last year, what we think the headwinds are from a macro perspective.

Where we're at in terms of our SAP implementation and all of the above and really, we're very thoughtful about where we set guidance.

So I would tell you that we are as confident as we can be sitting here today that the guidance that we laid out there is something that we feel very good about for the rest of the year.

Diane, just because you're -- just a couple quarters in or a quarter in as CEO, is your approach to guidance now -- continue not to give it one quarter by quarter and just to give directionally by half?

How are we going to expect that now?

Well, I think we would probably continue the way that we've been handling it up to this point in time.

I think we're focused right now on making sure that we drive to the numbers that we've laid out for 2011 and the guidance we have given and make sure that we do and execute all the things that I've talked about whether it's a strategic review of the portfolio, it's finishing the integration of ASG, it's stabilizing AFS, and that's what we're really focused on.

And as we get closer towards the end of the year, we finish our planning, we will take a look at 2012 and give guidance at that point in time at the end of '11.

Right.

Okay, but I know you're not giving quarterly guidance, but just help us out a little bit between Q3 and Q4, wholesale gross margins should continue to be down significantly in the third quarter?

And then all of the recovery in the fourth quarter or how do you view that?

Scott, it's Mark.

I'll answer that question.

I think we would expect again as we go back to last year, our legacy wholesale margins were down 540 basis points in the third quarter, and 800 basis points in the fourth, so we would actually expect improvement in both the third quarter and fourth quarter of our legacy margins.

And we would see some continued margin pressures in our Famous Footwear business, particularly in the third quarter as we still are up getting some stronger margins in sales in the toning category last year.

And would you expect better comps at Famous in Q4 than Q3?

Yes.

And that's a strictly toning driven or -- ?

It's in part that.

I would say again, the comparison year-over-year is much more difficult in the third quarter than the fourth quarter.

We were up a little over 10% in the third quarter last year and right at 5% in the fourth quarter last year, so a function of that comparisons.

Okay.

But toning (technical difficulty) in both.

Okay.

And then Diane, that you said this is just the first step in the strategic pruning that you're doing.

Do you expect to be able to announce anything else this year, or most likely not until next year?

We're continuing to do the work, Scott, and I think as I have said pretty often around this subject that we are, first of all, trying to do the right thing for shareholders but we also want to act with speed.

So I would tell you that I would expect that there will be some additional activity through the end of this year then with a full plan towards the end of 2011 for '12.

Steve Marotta with CL King.

A couple of quick questions.

When will SAP stop being a drag as you anticipate this year?

Yes, hi, Steve.

It's Diane.

How are you?

Yes.

At the end of this year.

That's what we would say.

So through -- so you expect an SAP drag through the third quarter and fourth quarter?

And that's -- yes, and that's reflected in our guidance that we've given.

Are there going to be a similar number of BOGO days in third quarter of this year versus last year and fourth quarter as well?

For third quarter, the answer would be yes.

For fourth quarter, I will hold my answer against for competitive purposes.

But right now, we're matching day per day in third quarter.

Okay.

That's great.

A little bit of granularity on AND 1.

Did you ever talk about the breakout of sales and EBITDA by division?

No.

By brand, would you like to take this opportunity now?

No.

Okay.

As it relates to in -- Mark, you already touched on this for gross margin in the back half, wholesale gross margin in the back half last year in total was down 650 basis points and that was largely due to supply chain issues and to a lesser extent, SAP.

Within the legacy business, you expect some to be recouped this year.

Can you quantify how much you expect to be recouped?

Yes.

I think in the back half, we'd expect, I think overall, our wholesale gross margins to be up in the neighborhood of 400 basis points with about 300 basis points of that driven by improvement in our legacy brands and the balance mix impact of the higher margins at ASG.

Okay.

You've answered my second question without me having to ask it, which was the ASG impact.

Lastly, with inventory down 3.2% at Famous, can you speak there to cleanliness and clearly, there is a still a toning headwind, so there must be more toning then you'd like in that down 3.2%.

Can you tease it out a little bit?

Well, I think we've talked about revaluing inventory to where we think it's appropriate, so that inventory number would include that.

Okay.

So you feel good about it?

There's no extra gross margin pressure expected in the third quarter above and beyond -- why did you say there would be third quarter pressure in the gross margins at Famous in the third quarter?

Because last year, we were still selling the shoes at pretty much full price and the volumes were going to be higher, so I think that's -- we didn't get into lower margins on toning product until the middle of November, when pricing started to erode, so that's why we said that.

Okay.

And then you also expect gross margins to be down at Famous in the fourth quarter?

Slightly, probably.

And do you want to -- what would be the reason there?

Well, we'll still have a little -- well, the hangover is that we still have some toning numbers in the fourth quarter, and those, Mark, again, was the beginning of the (inaudible)reduction, so those margins would still be higher than what we're getting today.

So I think we're trying to factor some of that in, and we also have some cost increases in our business that we're trying to make sure that we believe we've mitigated.

But we're also wanting to make sure that we account for that in a sense of what the customers will pay for the goods when we get them here.

Okay.

My last question actually, Diane, you spoke to aligning marketing with expectation that back-to-school occurred later in this current quarter.

Can you talk a little bit about when the ads will be dropped and where and what we can expect there?

Sure.

We -- last year, we had started actually in late July with some of our early markets at Famous Footwear and this year, we moved the marketing expense and advertising really starting in the first week of August or so, and running it through the second week of September.

So again, we're seeing the consumer shop later and later and later, so what we're really trying to make sure that we're as efficient as possible about the timing of when we put our advertising spend out there for the customer.

Rick, do you have [anything] else on that?

Yes.

We have stores all over the country and obviously, schools start at different times so we do a science project about what stores start when and then how do we market in those places?

To Diane's point, we review the list every year.

We have five timing groups that we call them and how we market against them and that all starts and all depends on school starts basically and their peak, what we projected either peak weeks of volume and we try to advertise right before their peak weeks, so --.

Got you.

Terrific.

Thank you very much.

Jill Caruthers with Johnson Rice.

Could you talk about the change and you have broken out pretty well in the segments of your gross margin assumptions for the back half but could you talk about where your biggest surprise is or disappointment?

Do you see it more on the wholesale versus retail?

And this is compared to your previous guidance of flat annual gross margin projections?

So again, Jill, it's Mark, so I think as Diane said in the remarks early on, I think the two headwinds that we've been battling all year have proven to be bigger hills to climb.

I think the toning decline and the pressure year-over-year from a margin point of view -- and we're still selling great numbers of units, obviously lower prices.

And therefore, lower margins, would be a reason that the Famous margins in the quarter both for the second quarter and our guidance for third quarter as Rick just talked about, would be taken down from our prior margin guidance.

And then I think the ongoing saga of margin items in -- related to SAP, while we talked about the $0.07 in the first quarter, I think we have a similar amount in the second quarter, we had a similar amount in the first quarter that we didn't spend quite as much time talking about because we quite honestly had studied it and evaluated how all of the puts and takes in the same way that we did as we headed into this call.

And as we studied the back half and tried to understand the rate of improvement, again, focused on making certain that as we took guidance down that we had properly factored all of the second, third derivative effects of the issues we've been battling in SAP.

Okay.

And then just a question on your existing management team, where the holes were, where you are looking to add, given the recent departure of your Wholesale Division President?

Jill, it's Diane.

Good morning.

How are you?

Actually, we are -- we have a terrific general manager out at ASG, a guy named Tim Joyce, who has 25 years of experience in the athletic and athletic specialty industry, so he is leading our efforts out there along with a number of additional folks, new folks, to complement the great team out there.

New sales head, Jim Hoff from Asics; a new person that's going to help us in product development design, his name is Brad Little, also a veteran of the industry; and another one, actually around, Alan Vickers, his name is, who's going to help us really drive that business internationally.

So I think we have a real solid team and Tim Joyce is reporting directly to me.

And then that leaves the other portion of it is our heritage businesses.

And actually on a temporary basis, we have assigned someone who has run Naturalizer in the past for us and to oversee that and then he has supported by probably the A team in our business, a guy named John Malpiedi, who runs Naturalizer all in; Keith Duplain, who runs Scholl's; and [Deb Privolo] who runs LifeStride, so we have a really experienced and terrific team of folks that are running each one of those businesses so we're in -- I think we're in good shape right now, Jill.

Okay.

And then just the last question that you touched on doing a deeper evaluation of your Famous Footwear stores, some maybe lower performing stores, could you talk about, are the Naturalizer stores also included in that review, given that segment that we can see has posted a loss for quite many years?

Yes, Jill, Mark.

Certainly they are included in that.

We've actually had a pretty active campaign of closing the Naturalizer stores over the last 24 months, but certainly the same scrutiny and criteria are applied to both our specialty stores as well as Famous Footwear and the specialty category in addition to the Naturalizer stores, we've had a couple other tests concept out there in terms of Brown Shoe Closet and others where we are aggressively working on the closure of those stores.

Jeff Stein with Ticonderoga.

Good morning, everyone.

I just wanted to understand where the change in the guidance has come from, and I'm wondering how much of the drop in your guidance, Diane, is the result of the increased SAP costs that you outlined as being $20 million bucks?

And then how much of it based upon what you're actually seeing now in your order backlog, perhaps in wholesale and what, perhaps, you anticipate you might see going forward?

Okay, Jeff.

Let me start with the easy one first at the end there.

Our order backlog right now is up 12%, and so that's -- I think we're in pretty good position relative to our expectations.

I mentioned it was $0.20, not $20 million, in terms of the SAP costs; and clearly, our adjustment and guidance, as Mark has mentioned as well, is really all about trying to factor in the toning headwinds, the AFS stabilization headwinds, and then being really thoughtful about the back half in terms of the macro environment as well.

So it's really a combination of those three that we really wanted to make sure that we set the right expectations for the rest of the year.

And Mark, I don't know if you have anything to add to that --

I think just adding color to the SAP part of it, I think again, there's a chunk of that, as we said on the release, that it relates to lost sales that, again, we feel it [has not] impacted our ability to generate sales to some extent.

And I think the terms of where we are and we say we're about two-thirds of the way through as we sit here at the end of the second quarter in terms of those SAP cost with about a -- what we've guided in the back half assumes about a combined third quarter and fourth quarter impact, roughly equal to the second quarter impact.

Okay.

So what was the -- in your most recent guidance, prior to what you updated today, what were you assuming on SAP, cents per share?

Again, I think we really felt like the -- we would -- our guidance that reflected no -- it had only really factored in, I think, Jeff, the incremental spend piece that we were spending with the outside consultants in that guidance.

And as you know, we talked about that about 75% of those costs are capitalized versus expensed.

So it sounds to me like maybe three-quarters of the $0.20 or more is new relative to what you thought in your prior guidance.

Would that be fair?

I'd say probably more like two-thirds, but I won't split hairs over it.

Okay.

Let's see.

Can you talk a little bit, Diane, about pricing elasticity for fall and maybe by brand?

Where were you most successful in pushing price increases through to your retail customers?

And based upon the early reads you're getting on retail takeaway, are you getting any pushback on the price increases?

Yes.

It's a great -- good question, Jeff.

As we take a look at our portfolio, I would tell you if it's brands like Via Spiga or Vera Wang or Sam Edelman or even Frank Sarto, we have been able to, so far, and it's playing out early yet in terms of fall selling but we have been able to pass along the price increases that we needed to in those brands.

Obviously, they just [sat] into the market at the designer level and above.

It's just a little bit more elasticity right in that prices on right now.

As we look at brands like Naturalizer in the portfolio, it's been interesting.

Early read there too is, and we were very careful about that one because it sits in the middle part of the market, so we really tried to be thoughtful about the good, better, best pricing model.

And I would tell you so far, again early, because we're not even into September yet, but the early read is pretty good on that, and it really comes down to more in the private brand, Dr.

Scholl's, Wal-Mart, Target, that level where it's really tough to pass price increases on right now with the consumer that's so stressed there.

So that's pretty much, I would say, how the pattern -- how it falls.

And obviously, at the end of the day, if you have great product, consumer loves it.

And loves it, they buy it.

So right now, early read, okay.

Okay.

And one final question, Diane.

Do you guys have any visibility into spring with regard to product costs, both material, labor, and shipping?

Yes.

Little early.

We're actually -- Chinese New Year's a bit early this year so we're really working hard to make sure that we get orders in and placed so that we'll not impact the consumer and get the goods out in January.

So early read right now is still facing some inflation there, pretty much consistent with what we've been saying, anywhere from the 5% to 10% increase depending on the brand that you're talking about.

So that's what we've been seeing and the type of product that we have, too.

It depends.

Chris Svezia with Susquehanna Financial.

All right.

So, Mark, help me here.

Could you give me an idea specifically, what's in the adjusted number versus the earnings per diluted share number?

What is SAP in one number and not in the other?

Obviously, American Sporting Goods, the inventory piece is in there, the debt piece is in there, early retirement, what's in there and what's not?

That's what I'm trying to figure out.

Okay.

There are no SAP costs in the -- adjusted earnings per share all include the cost of our SAP stabilization.

The adjustments for GAAP from adjusted all relate to American Sporting Goods, AND 1, and the extinguishment of debt.

Okay.

So basically, the $0.85 to $0.97 doesn't -- SAP is in that number?

Correct.

Okay.

So you didn't necessarily -- okay.

And then --

Again, we didn't take it up because we're operating the system and everything and getting [across] the pressure and the results.

When we had excluded that cost, pre-go live which was we'll call it the expense portion of the capital project.

We had put it down below but once we went live, we put all of those SAP costs into our operating results.

Okay.

What about the inventory adjustment?

Is that --

It's in operating results.

Okay.

So that's not -- so the only difference between the two numbers really has to do with American Sporting Goods, early extinguishment in debt?

Fair?

Correct.

Okay.

Why is it now $0.16 as opposed to $0.12 to $0.13 or something along those lines?

So again, I think as we said earlier, in response to Scott's question, I think it was that you've got an element of gain in there, relative to the AND 1 transaction.

Okay.

All right.

And then on the wholesale business, legacy, why not [additional] backlog to 12%?

I know there's always backlog is not a clear indicator of revenue, but why not more growth in the back half of the year as opposed to flat?

I think trying to be thoughtful about the continuation of the implementation of [ASF] and SAP, and any potential challenges that we'll face going forward and through all that, just like we faced up to this point in time.

So we wanted to be very thoughtful about that, Chris.

Again, I think, Chris you've got to unpack that by brand as well.

Again, I think our contemporary fashions and the items selling into that part of the marketplace continued to perform very well.

The product we sell into the mass channel has continued to do (inaudible) under pressure as that consumer is more distressed and they manage their inventories tighter, and all that stuff that comes with the bottom end of the economy.

Okay.

And then Rick, were you just -- you opened up a little bit about gross margin trajectory for Famous, down a bit here in Q3, and possibly for Q4.

Any thoughts about operating margin direction?

Can you leverage Famous Footwear SG&A at, call it a low single digit comps as what you talked about the back half?

How do we think about operating margins for Famous back half?

Again, I think we've already said that we leveraged Famous with comps in the 1% to 1.5% range, so we should leverage the expenses in the back half.

Okay.

So you could show some modest improvement in operating profits in the back half of Famous?

Fair?

Fair.

And again, I think, in the back half, by its nature, includes the back-to-school period where, which is very productive versus fixed costs.

It's kind of a freebie.

Okay.

On the wholesale side, I know you talked a little bit about second half in the gross margin, making up some of the loss from last year but not all of it.

How do we think about on the SG&A side, is that -- because I know what the puts and takes for American Sporting Goods are going to be, but is there an opportunity to make up some of the ground as well on that?

I know operating margin-wise, you're probably not going to make it all up but does that help you narrow the gap from a leverage perspective?

Well, we're certainly taking a hard look at our costs across the enterprise whether it's in Famous and Wholesale or on our corporate support functions, and certainly, trying to -- I think in the front half of the year, we actually spent less on expense on a dollar basis at ASG last year than we did a year ago and we would expect that trend to continue in the back half.

What does -- longer term, what does SAP do to the Wholesale Operating margins?

What's -- I remember back, a long time ago there was some talk, several hundred basis points.

Is that any -- is that something you want to talk about now or is that something that's you wait until next year to have that conversation?

I think that we would be better off waiting until next year on that conversation.

We are right now in that phase, Chris, of really making sure we get this stabilized and I think it would be premature for me to make a guess on what that all would look like.

Again, I'm really staying focused on making sure that we finished the stabilization work in the next couple of months.

But --

So, we'd definitely be happy to do that later in the year?

Okay.

But is it fair to say that next year, it's not a drag?

Or you start to yield benefits from it next year?

Nothing specific --

I would say it's fair to say that it wouldn't be a drag next year.

Okay.

And then products, lastly, I'm just curious outside and obviously you feel pretty good about boots at Famous.

The running business.

Any thoughts about casual, the boat shoe business, basketball, kids in general, any other areas which of interest there?

Sure.

I'm sure Rick would like to comment on a couple of those.

Obviously, the Boat shoe business is a very strong in the marketplace and for us, so whether it's Sperry or whether it's some of our Junior casuals that are boat shoe inspired they're all performing very well for us now.

And we expect that to continue to a degree into not only back half of this year but also into next year to some degree.

The kids' business is leading our business right now, both athletic and non-athletic.

We're pretty happy with the way our kids' business is performing at back-to-school for sure, and we keep adding additional product categories and product lines there that we think will keep having that be a nice plus for us for the back half of the year so the kids' business is actually pretty good right now.

You asked about basketball.

Our basketball business is up but in our channel, in our piece of the business, it's a relatively small business.

That's really a mall-based business and that's where the bulk of that business is done, Chris.

But for what we sell, it's up nicely.

It just is a small number in the grand total of things.

Okay.

Any thoughts about how the molded footwear business did in the quarter?

I'm sorry, the what business?

The molded footwear?

Or if you want me to just say Crocs, how did it perform, to be more specific?

(multiple speakers) Not something else, okay.

And we had a nice spring with them.

They've done a nice job with that brand, and we've sold that well in our stores.

We continue to look at our assortment and depth of inventory and we expect to have another nice year with them as we get into spring of next year.

Thank you very much, guys.

And best of luck to you.

Scott Krasik with BB&T Capital Markets.

Mark or Diane, I knew you didn't want to go through operating metrics of the individual ASG brands, but just for modeling purposes, what were the sales at -- of AND 1 on an annualized basis?

I think when we bought the Company, we said that Avia was about 60% of the business and that Ryka and AND 1 each represented about 15% and the smaller brands made up the balance.

Okay.

And was there some seasonality, [H2 versus H1] for AND 1, just because it's a bigger basketball?

I really just don't know the answer to that.

Okay.

Again, I think we would expect that it would lower -- call it, our prior guidance I think the sales will -- we would expect would be lost in the current year, relative to the closing date would be about $9 million.

That's it.

Okay.

That's helpful.

And then, Rick, you're on a roll there so let's just talk about the comps a little.

Just to clarify, because there were a lot of numbers out there.

Is it right, back-to-school or quarter-to-date, you're running at about a 1% comp and last week was a 5% comp?

That's correct.

Okay.

And none of those numbers exclude toning, correct?

That's correct.

Okay.

So I know some people went back to school this week.

Is that what you're attributing the later back-to-school to, is it -- do you think your customer was influenced by all the negative headlines around the budget fight and resulting stock market weakness?

Well, I think our customers are influenced by a lot of things.

I think, again, we're in that middle market and I think it's a little bit more of a budgeting thing for them.

They have to figure out how they afford all these things at this time of year when the news isn't so good and maybe their individual situation might have deteriorated from a year ago.

So I think it's all part of that, Scott.

So yes, again, we found again, over time, and when I say later it's not like we're talking weeks later, but this -- things can shift for four days to five days at a time around and it's been happening.

So as we get closer to Labor Day we still find more and more people shopping at those times of the year for back-to-school items, whether it's budget, whether it's the kids want to see what's going on, all those things factor into it and nothing on the macro level has done anything to help that.

So --

So is it -- so the negative, I'm assuming the comps were pretty negative in the first couple of weeks of the month --

The first week of the month, we still had a hangover from the toning sale of a year ago.

That was going to be my question.

So that's included in those comp numbers in those last, I think it was five days or six days worth of that business was relatively substantial.

Okay.

So as we get into September, you didn't give specific comp guidance, but low single digit, other than that one week is really on trend with what we've seen?

Yes, I would say so.

Okay.

And then, Diane, just help us out.

The 12% Wholesale backlog, what would that have been?

Just ex-ASG, or ex-ASG less the $9 million?

It would've been down in the mid-to high singles.

Sam Poser with Sterne Agee.

Just real quick.

I'm on a -- just real quick, Diane, would you think about acquiring better brands such as along the Avia lines to help offset the more moderate or traditional product?

As you said, they're responding to style, and there's more style at the designer type products than there is some of the more basic moderate?

Is that something that thing you're looking at?

Well, I would say, Sam, what we're, again, really staying focused on what we think is our high-priority projects here, which is really digesting the ASG acquisitions, getting (technical difficulty)[AFS] that stabilized.

As we look at the portfolio brands we have and look at how we address -- how we move our overall operating margins up, who knows where we'll go after we do that strategic review?

But I think right now, again, we're focused on making sure we are executing really well on what's in front of us and completing that strategic review.

All right.

Thank you very much.

Good luck.

Carla Casella with JPMorgan.

Hi.

We've been seeing some press lately about shipping rates not going up seasonally as much as they have in the past.

Can you say if you have got any benefits in the quarter or do you expect any benefits in the back half?

And we're thinking shipping rates from the Far East to the West Coast ports.

It's Mark.

I think we've seen, Carla, certainly not the pressures on freight cost that we saw a year ago, while there's certainly been plenty of availability and we think -- so that we are benefiting from that as we said.

And again, I think we continue to balance, I'll call it, now the -- where we are in recovery of the air freight we incurred a year ago, we continue to incur some of that this year as a result of issues with SAP as opposed to as a result of, I'll call it, factory delay issues.

At this time, there are no further questions.

Presenters, do you have any closing remarks?

No, I really don't.

We just want to thank everybody for joining us for this conference call, and we look forward to speaking with you during the third quarter and at the end of the call for the third quarter earnings.

Appreciate it.

Thanks.

This concludes today's conference call.

You may now disconnect.