Caleres Inc (CAL) 2012 Q2 法說會逐字稿

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

At this time I would like to welcome everyone to the second quarter earnings conference call.

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

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

(Operator Instructions)

Thank you.

It is now my pleasure to hand the program over to Ms. Peggy Reilly Tharp.

Please go ahead.

Good morning.

And thank you for participating in the Brown Shoe Company's second quarter 2012 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 today we distributed a press release with detailed financial tables, which is available on our website at brownshoe.com.

In addition, slides are also available on our website for you to reference today during the call.

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 risk 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 press release 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.

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

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

Today we'll begin with a strategy review from Diane followed by a financial summary from Russ, before turning the call back over for Q&A.

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

Good morning.

And thanks very much for joining us today.

I'm pleased to report sales of $599 million, and adjusted earnings per share of $0.16, as we continue to deliver against our strategic portfolio realignment efforts in the second quarter.

This performance was driven by our continued focus on our strategic framework and the game plans that we've been executing against for the past nine months.

For the quarter, I just have to specifically highlight the outstanding performance at Famous Footwear, which delivered record sales of $350 million, and an operating margin of 5.9%.

As I discussed with many of you at our Investor Day in late June, Famous Footwear is the leading indicator that our strategy is working and we see this quarter's results as another positive proof point that we are delivering against our commitment to drive shareholder value.

Our real estate strategy at Famous continues to deliver, with stores opened in the first half of the year averaging sales of more than $200 a square foot, better than our expectations.

During the quarter we closed or relocated 26 stores and added 14 new stores, resulting in a 6.7% improvement in average revenue per square foot.

However, the over-arching strategy at Famous goes beyond brick and mortar with famous.com up 16.5% in the quarter.

We expect the omni-channel to be a significant contributor over the near and long term as we continue to aggressively test new ways to grow this portion of our business in concert with our stores.

For example, we targeted new rewards members through an enhanced offer, which helped add 1.2 million new members in the quarter, an increase of 12% over the prior year.

This effort also helped to grow our e-mail database and more importantly, to add long-term repeat purchasers to our rewards membership roster.

And from a consumer perspective, we're always looking to enhance the consumer experience.

We continue to connect in terms of merchandising.

As we mentioned in our earnings release, we saw growth in running, up 13%, and sandals, up 4%.

We also saw strength in boat shoes and wedges with bright colors obviously continuing to drive sales across multiple merchandise categories.

This includes hosiery which helped drive our accessories business at Famous up 10% over the prior year.

In our wholesale operations, net sales were down 9.4% in the second quarter.

As we've discussed in the past, part of our portfolio realignment efforts resulted in the exit of several brands over the last nine months.

So excluding revenue associated with these brands, sales were down 3.1% year over year.

Our contemporary fashion brands continue to perform well, up 11.7% on top of a 26.8% growth in the first quarter.

We saw continued strong growth from the Sam Edelman brand and overall continued good performance from our Franco Sarto, Vera Wang and Fergie brands in the quarter.

In the contemporary space, color played a factor across all of our brands, while key sellers varied by brand.

At Vera Wang and Via Spiga we saw strength in wedges continue.

Sam had great success with his flat sandal Gigi, as well as other flat sandals and other novelty embellishments and materials, while Franco hit on a bit of both trends with great selling wedges and flat sandals.

Overall consumers in all three of our platforms are gravitating towards -- much more towards buy now, wear now when it comes to footwear.

For our Healthy Living portfolio, sales were down 10% in the quarter where we saw an expected decline in Dr. Scholl's Shoes.

As I mentioned on our last call, we are very encouraged by the brand's performance as it's completing its turnaround efforts.

All in Naturalizer sales were just short of plan in the first half.

However, the brand is outperforming our expectations so far very early this fall with early reads at our Naturalizer retail stores and new receipts looking very good.

And LifeStride continued its strong trend again this quarter.

From a product perspective in these brands, interest in lightweight and barefoot is helping Dr. Scholl's, while the consumer's desire for better comfort and cushioning in lightweight product is driving growth for our LifeStride bland.

All in, consumers are looking for footwear that is a lot more casual and sporty, but still trend-right in this platform of business for us.

Now, looking to the future, we continue to drive investment returns by putting our efforts behind the brands that are performing best.

Conversely, we are reducing or eliminating efforts around brands that are underperforming.

During the second quarter, we elected to terminate our license agreement with Etienne Aigner due to a dispute with a licensor.

We will now include this brand's exit in our portfolio realignment efforts.

While we will deliver third quarter orders, we will not be producing marketing or selling footwear under this brand going forward.

In total, this exit accounted for a non-recurring charge of approximately $7 million in the quarter.

Although we had not planned for this amount in our quarterly results, we believe exiting this brand is in the best interest of our shareholders at this time.

Difficult decisions like exiting this brand are all part of what it's going to take to deliver on our commitment to build shareholder value.

Our quarterly results demonstrate we are executing against our portfolio efforts and managing our business in order to achieve our long-term growth targets and deliver the results.

As I've said previously, we intend to prove ourself to investors and the Street by earning it quarter to quarter.

With that, I'd now like to turn the call over to Russ for a more detailed review of our financials.

Thanks, Diane.

Thanks everyone for joining us on both the call and the webcast.

We appreciate it.

Diane briefly reviewed our consolidated sales.

I will add a little more color.

For the second quarter, we reported net sales of $599.3 million, versus $620.6 million in the prior year.

Results for both the second quarter of 2012 and '11 included sales of $8.5 million, and $25.8 million respectively from brands and businesses we have exited over the past nine months.

If we exclude these sales from both periods, net sales of our ongoing businesses in the second quarter of this year were down less than 1%.

For the second quarter, we reported a net loss of $2.5 million, or $0.06 per diluted share, which improved nicely when compared to a net loss of $4.6 million, or $0.11 per diluted share in 2011.

The second quarter 2012 loss included portfolio realignment charges of $12.4 million, and $2.3 million of organizational changes.

On an adjusted basis, net earnings of $6.8 million, or $0.16 per diluted share, improved significantly when compared to a loss of $2.7 million, or $0.06 per diluted share in the prior year.

I'd now like to turn to our individual businesses, beginning with Famous Footwear, which is part of our targeted family platform.

As Diane discussed, we reported record setting sales in the second quarter with a record $20.5 million of operating profit.

This was achieved while operating 62 fewer stores year over year, demonstrating another proof point that our strategy is delivering the intended results.

For the quarter we closed or relocated 26 stores, and are on track for our planned 90 closings or relocations this year.

We also opened 14 new stores in the second quarter for a total of 25 new stores in the first half.

We expect nine more stores will open in August for a total of 34 new stores, putting us on track for our planned 55 store openings in 2012.

For the quarter, approximately 65% of our sales were at our strip center locations, with 20% at outlets and approximately 15% at malls.

Also for the quarter, average unit retail was up 3.4%, while traffic conversions and pairs per transaction were all relatively flat.

Turning to our wholesale operations.

For our Contemporary Fashion portfolio, second quarter sales were up 11.7% year over year, as we continued to drive styles that put consumers first.

Looking at the first half of 2012 versus last year, we saw good growth across this platform, with our Sam Edelman brand up more than 20%.

Franco Sarto also continued its double-digit sales growth in the first six months of the year, while our Fergie brand was up more than 100% year-to-date.

Both the Franco and Fergie lines are excellent examples of the benefit of focused attention at the platform level.

As Diane mentioned earlier, by concentrating our efforts around our best performing brands we are able to drive better results and deliver value for our shareholders.

For our Healthy Living brands, all in Naturalizer sales for the second quarter, which include wholesale and retail results, were down 5% year over year.

As we have continued to focus on the omni-channel growth in Naturalizer, we have seen a related increase in wholesale shipments to external e-commerce partners totaling 14% of sales in the second quarter.

Our Dr. Scholl's Shoes brand continues to reap the benefits of its turnaround efforts.

All told, Dr. Scholl's Shoes exceeded our internal plan by 10%.

The brand also delivered improved gross margin and operating margin, both over plan and versus second quarter of last year.

In addition, the team reduced inventory through better management and increased product demand.

While second quarter sales were down year over year, as expected, this was due in part to our efforts to strategically diversify our mix of business.

During the quarter, volume at better and mid-tier channels grew 10% and consumers can now find Dr. Scholl's Shoes at over 7,600 doors in the US.

Dr. Scholl's Shoes also saw a significant increase in online sales in the first half, up 57% over the prior year.

Overall, the online consumer's appetite for our Healthy Living and Contemporary Fashion brands continue to grow in the first half with external e-commerce site sales up over 50% year over year.

At our Brown Shoe Company direct to consumer sites these sales were up 11% in the first half.

To add more clarity to the benefits, our strategic execution is delivering, I'd like to review our financial metrics in a little more detail.

Overall, gross margin in the second quarter was 39%, which is up approximately 140 basis points.

The improvement in gross margin when compared to the second quarter of 2011 was primarily due to margin improvement at Famous Footwear, and a reduction in sales in the lower margin wholesale brands we have exited.

During the quarter, we continued to execute against our targeted cost reductions in SG&A, resulting in a decline of $14.6 million compared to the second quarter 2011, or more than 6% to $219.3 million.

SG&A as a shared revenue was 36.5%, down 120 basis points year over year.

For the first half of 2012, SG&A was down $29.9 million compared to last year, and we continue to guide for a full year decrease in SG&A of $12 million to $17 million.

There are three primary drivers causing this difference between the first half reduction in SG&A and the annual decrease.

First, our annual incentives are heavily weighted to the second half of the year when the predominant amount of our earnings are expected.

Compared to last year, there is approximately $10 million of planned annual incentives compared to negligible amounts in the second half of last year.

Second, we've continued to leverage our marketing dollars with our largest opportunities as we have shifted these expenses from our first to second half.

Our second half marketing costs are planned to be up $6 million in the back half compared to last year, largely driven by a shift in timing of our marketing spend between first and second half this year.

And third driver is the 53rd week will result in incremental SG&A of approximately $9 million in the second half versus last year.

Adjusted operating earnings of $15.9 million were up significantly versus the prior year, while adjusted operating margin of 2.7% was up 250 basis points.

Net interest expense of $5.7 million was down 24% as we continued to reduce our borrowings.

For the quarter our corporate tax rate was 38.3%.

Operating cash flow for the quarter came in at $119 million, up $76 million year over year.

Cash and cash equivalents at the end of the second quarter were $47.4 million.

Inventory at the quarter end was $621.1 million, down 1.1% when compared to $627.9 million in the second quarter of 2011.

At Famous Footwear inventory was flat, even as we pulled key receipts forward into the second quarter with strong inventory assortment management and higher revenue per square foot.

All in all, we are well positioned from an inventory perspective to maximize back-to-school sales at Famous Footwear.

We ended the quarter with $116 million of borrowings, a reduction from $250 million at the end of last year's second quarter under our revolving credit agreement, which has approximately $405 million of additional availability providing ample liquidity.

Depreciation and amortization were $26.7 million for the first half, while capital expenditures were $27.1 million.

Our debt to capital ratio declined to 43.6% from 53.4% in the second quarter of 2011.

Before we begin Q&A, I'd like to review our fiscal 2012 guidance.

Clearly, we're encouraged by the execution of our strategy and the resulting performance in both the first half and the second quarter, and we are especially pleased with the results of our ongoing portfolio realignment efforts.

However, as we enter the third quarter and the height of the critical back-to-school selling season, we remain cautious about the overall macroeconomic environment, like many others in the industry.

As a result, we are increasing the bottom end of our full year adjusted EPS guidance range.

We now expect between $0.85 to $0.95 for 2012, which is a 53 week year.

We also expect earnings per diluted share of $0.34 to $0.44, and consolidated net sales of $2.57 billion to $2.59 billion.

Same store sales at Famous Footwear up low single digits.

Net sales at wholesale operations down low to mid single digits, reflecting our business exits.

Gross profit margin up 20 to 40 basis points.

SG&A of $920 million to $925 million.

Non-recurring costs of approximately $34 million, with the increase primarily related to $8.1 million of Aigner cost and $2.3 million of organizational change cost.

Net interest expense of $23 million to $25 million and effective tax rate of between 38% and 40%.

We expect depreciation and amortization of $56 million to $57 million, and we expect our capital expenditures to range between $58 million and $63 million.

With that, operator, we'd be happy to answer all questions.

(Operator Instructions).

Scott Krasik, BB&T Capital Markets.

On a good quarter, Diane.

Thank you, Scott.

We just heard the last part, a good quarter, Diane.

Thank you, Scott, appreciate it.

Good morning and congrats.

So couple questions.

August in general seems to be a better retail month, given the back-to-school is happening later, so are you seeing an acceleration in your Famous Footwear comps in August relative to the trend we had last quarter?

I would tell you that we are universally happy with our overall business.

Customer counts and conversion rates are up across all of our timing groups and we've still got a number of weeks to go but I would tell you, Scott, we're really happy.

Relative to the second quarter, can you say what the headwind from toning in terms of the comps are or will be in Q3?

This is Rick.

Q3 will be less than 2%.

I think it's like 1.5% to 1.8%, something like that.

Okay.

So we should be done at that point.

We certainly hope so.

And then there's obviously some moving parts, Rick, in terms of the profitability in Famous in the back half of the year.

So maybe talk about your expectations relative to what we've seen so far in gross margin at Famous in the back half, fourth quarter looks easy because of the mark down in boots you had to take third quarter.

I think athletic probably carries slightly lower gross margin, but you probably get better leverage.

How should we think about gross margins relative to what we've seen so far?

The gross margin is -- relative to what you've seen so far, will probably be a little less.

Again, I think you said the same -- you hit on a couple of things.

First of all, athletic which is driving some of our business right now has a less margin than some of our other categories versus last year we think we should be able to maintain or do a little better than last year.

So that's the issue with the fourth quarter from some of the boot issues that we had a year ago.

So I think that puts the frame on it a little bit.

It might be a little less than it's within because athletic driving right now.

It should get better than last year, basically because of boots getting better.

Okay.

And then, Russ, just a couple questions.

In terms of the 53rd week -- thank you for the SG&A clarification -- how does it work on overall profitability, what's your expectation?

So what we see on the 53rd week is approximately $29 million of sales, and we generate margin of about $10 million on those sales.

Okay.

That's helpful.

And then again, thanks for the bridge on the SG&A.

But by my calculations, to get to the midpoint of the SG&A guidance, even with these additional costs, you're looking for about $10 million in savings from some of your initiatives.

It certainly seems like some of the stuff kicks in, in the second half of the year and you should get the benefit from almost everything in the second half you've gotten in the first half.

So is this just conservatism or is there something else there?

I think as we bridged on the shift of marketing costs, I mentioned the $6 million shift of marketing costs in the back half, $4 million of that is in the third quarter, shift from second to third.

And then we have those other incremental expenses and then with the new store openings that we mentioned, we feel that the guidance range that we gave on the SG&A is appropriate.

Okay.

Thanks and good luck.

Thank you.

Thanks, Scott.

Steve Marotta, CL King and Associates.

Good morning, everybody.

Let me offer my congratulations on the quarter and the half as well.

Appreciate it.

As it relates to the EPS progression for the year, there's an assumption that's built in that there will be negative EPS comparisons in either the third quarter or the fourth quarter.

I haven't plugged in the specifics of the SG&A guidance that's been offered on the call, but maybe Russ you could talk a little bit about how you see those EPS progressions.

And I know you don't guide on a quarterly basis, but clearly one or both are going to be negative on a year-over-year basis.

As I said, we're highly encouraged by the results we've seen.

As Diane mentioned, we do want to just do this quarter by quarter.

There's a lot of uncertainty in the economy, a lot of macro issues facing us, the election, the issues all coming up.

So we're cautious about how we're guiding here from a both SG&A and earnings perspective to make sure that, as Rick was mentioning, our Famous stores we're guiding up low single digits.

So we'll see how that pans out.

Okay.

Even low single digits it would seem to me to at least generate positive EPS on a year-over-year basis, but you don't want to go into any more detail and I completely understand.

As it relates to -- I'm sorry?

The only thing I was going to add to that is we do have the impact of reflecting our business exits on the wholesale side.

So you have to keep that in mind.

Okay.

You guys spoke about being extremely happy as it relates to the third quarter.

Can you speak a little more specifically on the early back-to-school markets, maybe.

And I know there are a few of those but at least -- I'm sure you're probably seeing a difference geographically on how your comps are performing in those early back-to-school markets.

Can you add a little bit of color -- again, I don't mean specific markets, you don't have to call out a market in Texas, but generally on early back-to-school, how those are trending in comparison to the balance of the portfolio.

Yes, Steve.

We break our stores into five different timing groups.

So we have -- based on the school starts.

So we have -- we track them daily on how that works.

I'll tell you, the one universal thing that we're seeing and I think it's been written up several times in the last week or so is this whole shift to the customer spending later.

So the peak weeks, when that -- which we would call the week before back-to-school, still is the peak week in almost any market that we look at.

The thing that's happening is the post peak weeks are much higher than they have been historically.

So there is this shift to where whether it's the customer's waiting, whether it's the kids wanting to see what people are wearing, whether it's mom and dad budgeting differently so that they have the ability to afford the spend, it's been moving this direction for several years, probably five years or more we've been seeing this trend.

It's much -- it seems more pronounced this year than we've ever seen it, which is one of the reasons why we're hesitant to talk about what the results are, because we still have a lot of our -- most of our -- I would believe at least about a third to 40% of our stores are still experiencing either peak or will have post-peak business to do.

So we've got to see how all that rolls out, but that's what we've seen so far from our early markets.

Is it safe to say that those early markets, and even sort of post back-to-school, but in general the early markets are comping better than the later markets quarter-to-date?

I would not say that.

You would not say that?

Again, early markets make up -- the markets themselves and we talk about the time, could be from coast to coast, north to south.

It has nothing to do with geography, has more to do with the school systems.

There's a lot of differences in those things.

So California goes to school a certain time and it has its own issues.

Florida, the business in Florida's been pretty good for several years.

It's hard to look at it when you combine some of those things as to why that timing group is better.

I wouldn't necessarily characterize it that way.

I understand.

Thank you very much.

You're welcome.

Thanks, Steve.

Jeff Stein, Northcoast Researchers.

Couple questions.

First of all, Russ, not to nitpick but you called out just over $10 million of incremental non-recurring charges that had not been called out previously.

So that would get you to about 30, and you're now projecting 34 for the year.

So wondering where's the other $4 million coming from?

Sure.

As I mentioned a moment ago, we had organizational changes that were previously announced.

CFO change.

Okay.

That's primarily the difference.

Okay.

And --

We also had a little bit of ASG integration cost, that was part of that as well.

Okay.

Okay.

The brand that you're exiting, that you exited in second quarter, I can't pronounce it.

Aigner.

Aigner.

What were the annualized sales and earnings from that business and how much are you giving up in the back half of the year?

So it was approximately $30 million on an annual basis.

Okay.

And profitability?

We don't disclose the profitability on those brands for competitive reasons.

Okay.

So I'm wondering, in the change in guidance that you have given to us this morning by raising the lower end, how much are you assuming -- because you're going to obviously lose something from that in the back half of the year.

Can you give us any assistance on that?

It's not a material amount.

I think I'll just leave you with that.

We gave you the revenue amount.

Okay.

How about if we could just talk about sales for a moment, how much -- what kind of sales impact by giving that up will you affect the wholesale business in the back half of the year?

I think when you look at the guidance that we gave, we said that our net sales, our wholesale operation will now be down low to mid single digits reflecting the business exits.

The only adjustment we made in that was the exit of the Aigner.

$30 million annualized impact that we mentioned.

Fair enough.

Fair enough.

Diane, could you talk a little bit about Naturalizer?

What's going on there?

The first quarter wasn't that great.

It sounds to me like the second quarter also a little bit weak.

What were the reasons for that?

And why are you so optimistic about the back half of the year?

Yes, it's a good question.

We have been a little disappointed with our Naturalizer results in the first half.

I think we got a little more aggressive on the product side in terms of trying to really address what we saw as an emerging consumer and I think it didn't quite resonate enough with our core customer.

So as we move back into fall we really get focused back on that core customer, added more comfort features again, enhanced the product lines and got it to be a little more casual in its touch.

So generally speaking, we think that the back half and into next year is going to show nice improvement.

So it honestly was a little bit of us getting too aggressive in terms of trying to address that emerging customer.

Got it.

And just one quick question for Rick.

Rick, can you talk a little about the boot business and how you have bought boots this year relative to last?

Yes, it's a little early for us, Jeff, to really have a great handle on the boots.

We bring about -- I'm going to say less than 30 styles in for back-to-school.

They're primarily casual driven.

What we have brought in for the back-to-school time period has done very well.

Small numbers, small unit sales, but on a sell-through basis we're pretty happy with it.

We think that the casual boot business, again which was strong last year if everybody remembers, will again continue to be good.

Trends are right, a little Western touches, low booties, a lot of different things that the customers are wearing today in back-to-school or the summertime with shorts and short skirts, and obviously with jeans.

So we think that trend is still going to continue and be strong.

The real question is what happens -- we bought that up low single digits.

What really matters now is what happens to the weather business and we think we're better positioned from the cold weather business to not have the hangover in January and February that we had this past year.

So if we get weather, we'll be -- we'll sell them at higher prices and if we don't get weather, we'll sell them a little lower prices.

We don't expect to have the inventory hangover we had at the end of 2011.

So it sounds like you bought boots, weather boots down to last year.

Would that be correct?

I think we're expecting to do the business about equal to up a little bit, but the actual units we'll have on hand is less than last year as we can hopefully sell them at higher prices.

Got it.

Okay.

Thank you very much.

You're welcome.

Thanks, Jeff.

Jill Caruthers, Johnson Rice.

Good morning.

A question, you mentioned earlier on the call that the first half openings at the Famous Footwear side were very strong.

Could you talk about that, as well as if you're seeing some nice incremental sales shift as you perhaps close a store in a market where you've got an existing store?

I think we said that our stores opened in 2012 are doing about 4% or 5% better than our pro formas, and 10% to 12% better than the chain average.

Caution there always, Jill, is it's a short period and we try to factor in grand openings and things like that so we don't over project there.

So we think that, that's a fair estimate of how those stores are going to perform.

As far as what happens to existing stores, it depends.

Sometimes these stores aren't in -- there isn't an existing store to impact, number one.

But if there is, we have a whole marketing campaign to inform our customers, particularly the rewards customers we have in that marketplace about where the new store is, where it's going to be, invite them to the grand opening, do different promotional offers to make sure they come and find us.

We haven't seen, typically, issues with transferring a customer from an existing center that was where we're closing to a new center, primarily because we're moving to better locations and they like that.

So it helps us in many different ways.

And could you point to some of the key drivers that is driving that improved performance in the new stores?

We look -- again, adjacencies, who's in the center with us.

It's not just about us, it's who's there.

That's one reason.

Availability to traffic patterns.

Is it in a place where it's easier for the customers to get to and is it in a more of a central location.

Over time, shopping patterns change and as centers develop, some of these stores we opened 10 and 15 years ago that we're closing, that was where we should have built it 10 or 15 years ago.

Today that has changed.

Some of those moves are to places where it is more current and a better mix of tenants for us.

The other thing that happens is we're also rationalizing the size.

We're making sure that the size of the store, A, provides the experience we want to provide and gives the customer the inventory and the merchandise presentation we think that they want, but we're not over building them.

I think that's the other side of it too.

Appreciate it.

Just last question.

I believe you commented that conversion was flat in the quarter and on your Investor Day a few months back you noted that, that was -- conversion was one of your key focuses going forward.

If you could talk about some of the progress you've made there.

Thank you.

Conversion's also a function of your promotional activity to a degree.

We did take a couple of promotions out of second quarter that would have been higher conversion types of events.

If I put those back in and say we either comped them or take them out our conversion was probably up slightly in the second quarter, and our conversion for third quarter so far is ahead of last year.

So we think some of that -- some of the work we've been doing -- it's one of those -- the payback isn't on necessarily the minute you do it.

The payback is on a longer term basis.

I think our store teams are working very hard.

It's on everybody's performance appraisals and those kind of things, so we know we put the right incentives and we're starting to see some benefit from and we hope that continues.

Thank you.

Thanks, Jill.

Chris Svezia, Susquehanna Financial.

Good morning, everyone.

Nice job.

Thanks, Chris.

Thanks, Chris.

Contemporary, I'm just curious, just might be nitpicking here, sequential slowdown versus Q1, was that just timing of product?

Seasonality?

Anything you can call out about that?

Or any other color you can add going from over 25% growth to 11% growth.

I can't think of anything off the top of my head, Chris, that stands out in my mind between the two quarters.

I really -- it's tough, always, I think on wholesale when you look at shipments that way, to think about the quarter-to-quarter, you got to almost look at the season to season.

So I think probably the best comparison will be spring to fall and that kind of sequential growth.

But generally speaking, I feel terrific about the progress that we continue to make in Contemporary Fashion.

Let me ask it this way.

From a backlog perspective, has it accelerated as you went into fall in terms of percentage increases or maybe that could be a better indicator, any color about that?

I think we're right in line with what our forecast and our guidance is showing.

So I think we feel very good about the current backlog that we have.

The thing that you do see with a lot of retailers today is they're really looking at making sure that they keep their inventories tight and try to increase turns and chase product as it's working.

So I think there's probably a little bit of that, that is factored into this as well.

Chris, it's Russ.

I just want to mention a couple other things.

We are seeing better sell-through on our brands year-over-year.

We did exit some brands as you're aware, and our Sam Edelman brand had an outstanding quarter.

So we're pretty encouraged as we go forward.

But it's all built into our guidance.

Okay.

On the Naturalizer business, is it fair to say the specialty retail comp decline is a function of things you were talking about earlier?

Yes.

The product might not be aligned, et cetera, is that fair to say?

Exactly.

As we looked at their business since the flip in fall to more fall product, we've seen a really, really nice turnaround there, which is the reason for my comments that we have a couple of proof points out there on Naturalizer retail.

And some of our -- also our department store customers are showing really nice sell-throughs on the new fall deliveries that they've receipted.

Okay.

And then on -- with regard to -- you didn't talk about Avia and Ryka necessarily.

I know they're, particularly Avia, a dark horse here.

Any update in terms of product?

Any updates as we think about either one of those brands?

Is this more of a 2013 story?

It is a little more of a 2013 story but I'd have to say, I think we're pleased with the progress we are making.

We like the new product that's been developed and it's in the pipeline.

They've done a good job of managing the inventory.

We've reorganized the business and like some of the talent and the organizational changes we've made.

But the real issue -- and the customers are starting to like the story, but the real issue is that the proof will be in the pudding in 2013.

Because that's when the real test of the new product gets out into the marketplace and whether or not we're on the right track.

So I would say I'm pleased with it, but I've got to see the consumer response, because that's the ultimate litmus test for any brand in business.

I'd just add, Chris, that I think that, as Diane said, '13 is the proof point with the new product coming out in the spring, but we feel like we're in an improved inventory position.

We've got it positioned well as we go into that.

Okay.

And then, Russ, for you, the SG&A piece just for a second here.

You had a lot of benefit in the first half, thanks for the additional color.

I'm curious about the incentive cost piece.

The $10 million, could you maybe talk about between Q3 and Q4?

I think you mentioned from a marketing perspective the $6 million shift.

I think there's $4 million more in Q3.

Any color about the $10 million incentive cost?

Is it evenly split?

How should we think about that?

Our incentives will be split along with our earnings, which are heavily weighted with our back-to-school, as you know from a seasonality standpoint.

So would not be evenly split.

It's fair to say Q3 has a higher cadence to that incentive spend?

That's fair to say.

And then one just big picture question.

You guys have always had non-recurring costs, which have become recurring costs.

So I'm curious as you think about the business, Russ, going forward now that you've kind of made some realignments, et cetera, just how do you think about the costs, one time, if you want to call them that, as we move forward beyond this year once you get through this?

Do we start to look at more of a cleaner P&L?

Just your thoughts once we get beyond 2012.

Sure.

It's funny, Diane was laughing there because I asked the exact same question, when does the Company stop having one-time non-recurring.

I do think, though, Chris, when someone says are you ever done exiting businesses and acquiring business, the answer is no.

We have a hurdle rate, as we discussed in the Investor Day, and we're going to be continually be assessing businesses.

But I do like to see a cleaner look at the business going forward, starting in '13, unless there's major strategic shifts that we see or major strategic infrastructure shifts that we -- or opportunities that we see, we do expect to see a cleaner business going forward.

Okay.

Fair enough.

All right, all the best.

Thank you very much.

Thanks, Chris.

Thanks, Chris.

Ben Shamsian, Sterne Agee.

Good morning, it's Sam Poser.

Thanks for taking my call.

Good morning, Sam.

Good morning, Sam.

Good morning.

A couple questions.

What percentage of the Famous business right now is private label, house brands versus non-house brands?

We don't do private label.

We do national brands.

It has to be based on -- Naturalizer's a national brand, not a private brand.

If we look at it that way, Sam, it's about 15%.

How much of the Fergie business -- where is most of that Fergie business being done to drive that large increase?

It's really across all channels of distribution.

The Fergie business is at Nordstrom.

We also have a growing and developing business with Fergie at Macy's, DSW, Famous has a Fergalicious business and general online business.

Sam, it actually is in lots of different customer bases.

How big is Famous of that total, if you could say?

We don't know how big it actually is, so --

Not disproportionate, let me put it that way, to the total.

Okay.

Thank you.

And then can you talk a little bit about Sam Edelman's Circus business?

And also now that Libby's back with you guys, with Sam, can you just talk about some of the strategies there down the road?

First of all, we are thrilled to have Libby back.

We think -- we knew that her sabbatical would end at some point in time.

So we're thrilled to have her back and she's going to focus on the marketing and the licensing opportunities within the family of Sam Edelman brands, so we're thrilled with that.

The Circus line, we really saw an opportunity in the junior, I'll use junior and impulse segment of the marketplace that we really sought Sam's sensibility and capabilities warranted some investment there and so, so far, so good.

It's very early, haven't really shipped any shoes yet.

Starting to do that towards the end of this year.

But feeling very good about the reaction so far.

But as I say all the time, you've heard me many times, Sam, we've got to see what the sell-through looks like.

So it's too early to call any kind of success, but we're encouraged.

Thank you very much and good luck.

Thanks, Sam.

(Operator Instructions)

Scott Krasik, BB&T Capital Markets.

Hi.

Thanks.

Rick, there's been a lot of rain in Florida the last few days, looks like the Gulf Coast is going to have a rough week.

Is that -- are those markets big enough to move the needle for you?

Florida would be, but we had a few closings on the weekend because of power outages basically and some flooding.

I think we had about 30 stores or so affected over the weekend in some, way, shape or form.

Basically now where the path of the storm is on what they say the bulk of the issue is going to be, we have 17 stores in harms way.

It really will have very little impact, if at all.

Is there insurance on those 30, with the flooding and the power?

We have normal business interruption insurance.

Okay.

And then maybe just help me understand the cadence of the wholesale gross margin improvement.

You saw good improvement this quarter, but you still have some real laggers from Naturalizer and Scholl's.

As we go into the back half of the year, should the improvements year-over-year in wholesale gross margin actually accelerate?

I think that we will see basically about the same improvement to a slight acceleration.

Remember, we do have the impact of the exited businesses.

The exited business helping gross margin, right?

It will help in the back half; that's correct.

Right.

Okay.

So that would be the difference versus the first half of the year.

Exactly.

And then in terms of the expectations after SAP is fully anniversaried, do we look at 2009 as the target for gross margin or that was a pretty good wholesale gross margin, almost 33%.

Where does this business sort of end up?

I think ultimately we sure would like to see the gross margins get to that 33% level.

It's funny, Scott, you know this is quick as you can lose it, it takes a little while to get it back, particularly in this market of inflation that we're in right now.

So that is certainly our target.

How fast we can get it, we're extremely aggressively focusing on that in wholesale and think that's a key part of delivering the earnings potential for both our Healthy Living and Contemporary Fashion businesses.

But the pace, again, got to see it.

So we're focused on it.

Are Avia and Ryka still running above that?

Let me -- close to that.

Okay.

Because historically they were above that, right?

Yes, they were.

Okay.

Ryka is and Avia's a little below right now.

Okay.

Thanks.

Yes.

Ben Shamsian, Sterne Agee.

It's Sam again.

Just real quick.

Your speed to market, given that you're moving a lot of focus and a lot of the growth going into the contemporary brands and then with Fergie, and Fergalicious, and now Circus, can you talk about how that's changed or where you intend it to get to?

I would say, Sam, that the Company, as you know, has been in the mode of kind of transforming itself on the wholesale side from what would had been really a moderate and comfort driven business to adding this Contemporary Fashion piece to it.

I think the real key comes from having teams that are dedicated to each one of these brands across, not only product development design but also sourcing.

So it's that sense of teamwork that we have and also design and sample rooms in the Far East that are allowing us to make sure that we're able to respond the way that the general managers see fit.

So I couldn't quote you an overall improvement in terms of what our speed to market is.

We've really been focusing on alignment of the talent and the drive for how we're going to satisfy that consumer across each one of our brands.

If I could just quick follow-up.

That consumer's more, I don't know, more testy than they've ever been and so if you're six months out on a projection, even if you think you've got it right, sometimes you don't.

Yes.

Are you aiming at four months to be able to offer another delivery like for instance FFANY in December, are you going to be showing different -- quicker deliveries, not just early February stuff and trying to clear through what February would be for the other FFANY show or platform and so on?

I think there's going to be three levels of kind of how we think about that speed to market question.

It's sort of what's the core and what's the normal.

The second one is to -- if there's something that's really hot and we want reorders, we can get it pretty quickly.

It can be sometimes 70 days out or so.

So it depends.

And then it's the one you're speaking to, how do we do the test and react even a little more quickly.

I think there's going to be ultimately three kind of components to how we think about that.

Thank you for taking my question.

Okay.

Thanks, Sam.

Thanks, Sam.

Jeff Stein, Northcoast Research.

Yes, couple follow-ups real quick.

First of all, Diane, how should we be thinking about the Dr. Scholl's business?

It sounds like it's really been kind of lumpy.

Your first quarter I think was up low-double digit and your second quarter down.

Maybe you could talk a little about what's going on with your customer base that's causing that kind of volatility and how we should be thinking about that on a go forward basis.

They're looking to see how the quarters look.

Here's what I'd say, I think I mentioned on the last call that we did expect that this year to be choppy, there would be bits of up and down on the Dr. Scholl's business.

But again, as we have really looked at our performance against our internal plans and the stabilizing this business, we can see, and I think I mentioned this to you last time, that we can see the strategy really starting to work.

They were up against toning and fast flats and a number of other businesses last year, but we have been successful in expanding our mid-tier distribution really nicely, lots of new categories of business that's working.

And I think Russ even mentioned at some point in time along the way here that our response on a lot of our e-commerce businesses that carry Dr. Scholl's is really good.

You're right, it is a little choppy.

It's a little hard to read through all the noise but I'm very confident, as we turn to '13, we won't see this kind of choppiness going forward.

Quick one for Rick.

Rick, how many BOGO weeks will you have in third quarter this year compared to last?

Same as last.

It will be nothing different.

Okay.

Thank you.

That does conclude our question-and-answer session for today.

I hand the program back over to Management for further comments or closing remarks.

Thank you very much for joining us today.

We look forward to speaking with you again during the quarter and certainly at the end of the third quarter, and thanks again.

This does conclude today's conference call.

You may now disconnect.