Caleres Inc (CAL) 2015 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the second-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you.

And Ms. Peggy Reilly Tharp, you may begin your conference.

Good afternoon and thank you for participating in the Caleres second-quarter 2015 earnings call, which is being made available to the public via webcast.

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

Earlier today we distributed a press release with detailed financial tables which is available on our website at Caleres.com.

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

Please beware today's discussion includes forward-looking statements which 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 which could impact forward-looking statements.

Copies of these reports are available online.

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

Joining us on the call today are Diane Sullivan, CEO, President and Chairman; Ken Hannah, Chief Financial Officer; and Rick Ausick, President of Famous Footwear.

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

And now I'd like to turn the call over to Diane Sullivan.

Thanks, Peggy.

And good afternoon, everyone, and thanks a lot for joining us today.

We did report a solid quarter, as expected, with improved sales margins and adjusted earnings.

Total sales for Caleres were up 2% year over year excluding shoes.com, while growth and operating margin both expanded in the quarter.

We also improved bottom-line performance by 22% thanks to continued progress towards our long-term strategic initiatives.

This solid performance was despite an ever-changing retail environment.

Tourist and border markets have been hard hit by the strengthening US dollar.

And back-to-school shopping has shifted closer to need in many areas.

For Famous Footwear, sales of $395.9 million were up 0.6% excluding shoes.com.

Despite a softer top line we saw solid margin improvement in the second quarter thanks to the continued terrific management of this business.

Gross margin increased 50 basis points to 45.3% and operating margin was up 70 basis points to 7%.

From a merchandise perspective we ended the quarter with a clean inventory position, down 0.7% on a per store basis.

We also saw good strength in the quarter from the brands and the categories that we expect to do well during back-to-school, and our key brands continued to deliver.

Canvas was up double digits in the second quarter and total athletic sales were up 1.9% as consumers continue to switch from performance to lifestyle product.

While overall sandal sales were down in the quarter, we saw growth in key areas like women's casual and juniors sandals.

And we made it through the quarter without seeing excessive promotional activity.

We also saw increases in conversion rates and average unit retail in the second quarter while pairs per transaction were essentially flat.

While traffic was down in store we continued to see steady improvement in eCommerce traffic.

This was accompanied by a strong improvement in eCommerce sales, up double digits in the quarter across mobile, tablet, and desktop.

We are also seeing improved conversions against all three of these eCommerce channels.

This improvement in eCommerce sales is due to the investments that we have made and will continue to make in technology and infrastructure and talent.

And as we've worked our way through the first half of year we've adapted our digital media strategy and we are pleased with the results so far.

We are doing much more specific targeting in terms of native advertising, and we're leveraging our email list, which increased our email sales by mid double digits in the second quarter.

And during the quarter we also expanded our ship-from-store test to 150 doors.

Through this test, online consumers can now see products which may be out of stock in our distribution centers but is available in our test stores.

This program has clearly provided us with the opportunity for incremental sales, and it also allows for better management of each product in-store.

Now, turning to our brand portfolio for a minute, where we also had a solid quarter with sales up 4.4%, we saw particularly strong sales growth of 14.1% in contemporary fashion, with double-digit growth coming from our Sam Edelman, Vince, and Franco Sarto brands.

For Sam, we are still opening new retail doors, including our latest location at Garden State Plaza which debuted during the second quarter.

We have two more stores planned for this year.

And as of this moment, we expect to potentially add another nine doors next year as we continue to maximize the potential of this brand.

At Vince, we saw growth across all channels of distribution, with both men's and women's outperforming our expectations.

This remains an exciting brand and one we are pleased to be part of.

Franco Sarto had a strong second quarter versus its planned decline that we had experienced in the first quarter.

And, as expected, this brand is now up low single digits through the first half of the year.

Also during the second quarter we presented the Diane von Furstenberg line at the June FFANY and the collection was well received.

We are excited to be partnering with this brand and we'll be delivering product to our retail partners very late this year.

We also very enthusiastic about the launch of our men's business.

This brand, as I think I've mentioned, is being led by Gordon Thompson.

The team's in place, the plans are coming together really nicely, as we begin to significantly ramp up investment in the third quarter on this business.

Now turning to healthy living where total sales of $140.7 million were down 1.5%.

For Naturalizer all-in sales were down 1.1% despite solid double-digit growth in our wholesale sales.

The positive results we are seeing at wholesale clearly show the consumer demand for the Naturalizer product, and we are working to translate that demand to our retail business where we operated nine fewer doors year over year.

As I mentioned last quarter, we've added some new talent to the Naturalizer retail team and we've created a dedicated direct-to-consumer team.

These groups are working hard to strengthen our retail business and we are already beginning to see positive results, although their success is being somewhat overshadowed by some weakness in our international markets and some fluctuations in currency, as well.

For our other healthy living brands, LifeStride sales were up double digits in the second quarter.

And after a strong first quarter, Dr. Scholl's sales declined in the second.

But for the first half they're up mid single digits and we expect similar growth from this brand for the full year.

Before I turn things over to Ken, I'd like to call out our solid performance in the quarter and year to date.

Following a sluggish July in Famous Footwear, because clearly we would have been more pleased to see a little bit better top-line growth, we are beginning to see improvements in same-store sales.

At the start of the back-to-school season, we had been running somewhere around up 3% to 4%, and now we are seeing some acceleration in that rate as the later markets begin to kick in for back-to-school.

So, we're very confident that we have the right product and the right styles in stock as we have seen good consumer acceptance in the regions where school has really already begun.

Our brand portfolio has also performed well and we are confident it is going to continue to do so.

We are really looking forward to the launch of the DVF line, the launch of our men's business, and the benefits of those long-term investments that we are making.

This investment in our direct-to-consumer capabilities delivered good growth in our overall omnichannel, with sales up in the second quarter about 10%.

And as the year progresses we expect to continue to see the benefit of our digital investments which remain a key part of our long-term strategy.

We are looking forward very much to sharing more details about this and other components of our long-term strategic initiatives at our Investor Day that we have talked about off and on here, which we have now set a date for.

It is going to be held on October 29 at our Sam Edelman offices here in New York, and I really do hope to see many of you there.

So, with that, I will turn this thing over to Ken.

Thank you, Diane.

And good afternoon, everyone.

As mentioned earlier, our net sales for the quarter were $637.8 million versus $635.9 million in 2014, up 2% excluding shoes.com which was sold in December of 2014.

Adjusted for the current quarter's debt extinguishment expenses, net earnings were $22.1 million in the second quarter or $0.50 per diluted share, versus $18.1 million or $0.41 per diluted share in 2014.

This is a 22% increase in earnings per share year over year for the quarter and 24% increase for the first half of the year.

If you take a look at our financial metrics you can see our consolidated gross margin for the quarter was up 40 basis points to 41.2% of sales.

Improvement at both our Famous Footwear segment and our brand portfolio segment helped contribute to the overall gross margin expansion in the quarter.

Our SG&A expense was 35.6% of sales in the second quarter, a 30 basis point improvement year over year.

In addition to good expense management, some of this improvement was related to a shift in Famous Footwear marketing expense into the third quarter as second-quarter spend was reduced to a later start to the back-to-school shopping season.

From a productivity standpoint, revenue per square foot at Famous Footwear was $216, up another 2% on a trailing 12-month basis.

During the quarter we opened 10 new Famous Footwear stores and closed 6. In total, we operated nine more stores year over year.

For 2015 we remain on track to open approximately 50 stores and expect to close approximately 50 stores, as well.

For the second quarter, net interest expense of $4.1 million was down 18.1%.

And, once again, we ended the quarter with no borrowings against our revolving credit facility.

Our corporate tax rate for the quarter was 26.5%.

This amount reflects a $1.2 million discrete tax benefit associated with the utilization of existing tax loss carryforwards as we finalize the shoes.com purchase price allocation methodology with the buyer.

Our balance sheet remains in good shape and during the quarter we received upgrades from both Moody's, and Standard and Poor's.

We ended the quarter with cash and equivalents of $129.3 million.

Our overall inventory at quarter end was $641.1 million, down 2.5% from $657.7 million in 2014.

On the brand portfolio side of our business inventory was down 3.4% as we continue to effectively manage our supply chain.

At Famous Footwear, inventory was roughly flat excluding shoes.com and down 0.7% on a per store basis.

As you know, during the quarter we tendered for our 7 1/8% senior notes and subsequently issued new long-term notes at a reduced rate of 6 1/4% and extended the term through 2023.

While approximately 80% of our 7 1/8% notes were tendered early in the second quarter, a portion remained outstanding and this resulted in $39.2 million classified on our balance sheet at the end of the quarter under current portion of long-term debt.

Yesterday we redeemed the remaining outstanding 7 1/8% notes, and the extinguishment expenses associated with the final notes redemption will be reflected in our third-quarter results.

We were fortunate to complete the refinancing of the notes when we did considering all the volatility in the bond markets the summer.

Our depreciation and amortization was $12.9 million for the quarter, while capital expenditures were $13.7 million.

Finally, as we discussed earlier, with a later Labor Day, which shifted some back-to-school start dates deeper into the third quarter, we have adjusted our marketing spend to coincide with that shift.

This shift, along with the ramp-up in investment of our new Diane von Furstenberg business and our men's footwear business, will likely result in an increase in third-quarter SG&A compared to prior years.

Before we move to Q&A I would like to review and reconfirm our FY15 guidance.

Earnings per diluted share, adjusted for any debt related expenses, remains between $1.84 to $1.94 per share.

Our consolidated net sales of $2.61 billion to $2.63 billion.

Same-store sales at Famous Footwear up low single digits with reported sales roughly flat year over year due to the sale of shoes.com in 2014.

Net sales for the brand portfolio segment up mid-single digits.

Gross margin up approximately 15 basis points.

SG&A at less than or equal to 35.4% of sales continuing to leverage, our net interest expense of approximately $18 million, and effective tax rate of 30% to 33%, depreciation and amortization of approximately $53 million, and capital expenditures of approximately $75 million, with roughly $22 million allocated for expansion and modernization of our distribution centers.

With that, I would like to turn the call back over to the operator for questions.

(Operator Instructions)

Eddie Plank, Jefferies.

Good afternoon, guys, thanks for taking the question.

Just a couple.

Maybe Diane or Rick, can you give a little bit more color on the weakness in performance athletic and sandals?

Do you think part of it was just the shift in the calendar or was there something more?

I know there's been a general shift towards casual and lifestyle but anything that you are seeing there relative to how you plan the business.

The business is actually pretty close to our plan.

We are actually seeing more softness on the women's side on the performance athletic that we might have expected.

The men's side is actually performing close to plan and slightly less than last year.

But we would expect, obviously, the female side of the business to transition faster to a new trend.

So, I think a lot of that is just about trend-driven business and the customer looking for the new items on the canvas side and the athletic leisure side looking style.

The sandal business -- again, a little perplexing.

We had a pretty good first quarter in sandals, so we thought we were going to be okay in the second quarter.

I think some of that business is transitioning to the canvas business, as well, though.

I think there's a little bit of that customer who buys things, bought it to wear the open sandal but now they are buying a pair of shoes and they are going to the canvas style.

So, I think there's a little bit of that transition to the trend, as well, there.

But, again, the good news is our inventory in the sandals at this point in time, we are happy with, we are comfortable with where they're at and we think we can sell through the balance of it.

Okay, great.

That's helpful, Rick.

Diane, clearly some wood still to chop with Naturalizer retail.

You mentioned the merchants.

Can you quantify or discuss in more detail any impact that they're having as the brand evolves?

Anything in the product mix shift that you are seeing in the stores and what you are learning there?

Thanks.

Yes, sure, no problem.

I think, as I mentioned, we have a lot of confidence in the brand and where it is heading, and really in the product that we already have at market.

This is the second or third quarter where we've (inaudible) double-digit increases in our wholesale business, and really pleased with that kind of improvement in performance.

And actually, Eddie, when I look all-in at the Naturalizer business for the first half it is up 2%.

So, I think we are heading in the right direction.

The quarter for retail was a little bit difficult but we are seeing some early signals here in August and as we are starting to turn the corner to fall.

So I think we will have an improvement to report as we get towards the end of the third quarter and as we see in October.

So, actually quite confident that we are heading in the right direction there.

Okay, great, thanks for the color.

Good luck going forward and nice job.

Jeff Stein, Northcoast Research.

Good afternoon, guys.

Nice quarter.

Looking at the performance of Famous Footwear in the quarter, comps up 0.1%.

Can you talk a little bit about the impact you referenced, Diane, the impact of border stores and tourist stores, if you can isolate that impact?

And also any thoughts in terms of the impact on the tax-free holiday shifts and how that may have affected comps in July and in the quarter?

Yes, Jeff, it is Rick.

We would look at that tourist/border business probably impacting our comp sales by about 1%.

And just FYI, that's probably going to continue for most of the back half of the year as we see that not abating at this point in time.

We will anniversary -- the biggest hit we took so far has been the first and second quarter.

So, as we get into first quarter we will start having a little more comparable comparisons to go against.

But the next back half, I would think that's probably going to be pretty consistent with what we will see.

The tax-free, it is not truly significant.

And in Diane's commentary about the 3% to 4%, all of that factored into that with, what wasn't in July and what we got in August, is all factored in that 3% to 4%.

So, the 3% to 4%, Rick, can you frame that in terms of what we are looking at in terms of the timeframe?

Is that mid July?

Mid July through yesterday.

Okay.

What percent of these schools are already back in your markets?

Any thoughts on that?

Yes, we would believe that we are -- we've got about 65% of our business or our stores are back-to-school at this point, and 35% are going back either right before Labor Day or just after Labor Day.

Okay.

Did you see any impact -- there was a lot of weather in your markets, particularly South-Central, Northeast -- as you look at Famous Footwear's comps for the quarter, any divergence in regional performance?

I think the only divergence -- and, again, it has been a little inconsistent, there could be other reasons for it.

First of all, where these tourist centers are, and these border stores are, has an impact on our regionality sales.

But we've clearly been better across the Western part of the United States than we have other parts.

So, that's one thing.

But from the weather point of view, Jeff, we really had nothing that was really significant on a weather problem.

There might've been a day or something like that but nothing that was pronounced.

Got it.

And one quick question for Ken.

Ken, you alluded to the fact that you are going to see some investment spending in DVF and the men's line in Q3 and also a shift in marketing.

Can you talk a little bit about how you see SG&A growth in dollars in Q3?

Yes.

I think if you look into Q3 on a raw dollar, obviously it is our biggest quarter.

So, they are up naturally.

There's a lot of our wholesale and distribution expense in there.

What we were trying to allude to, without getting into guiding specific numbers for the quarter, was that we did see a little bit of a shift out of Q2 into Q3 as there's a later back-to-school time period.

And Rick's team has done a good job of aligning the marketing, specifically the digital marketing programs with that.

And then we just want to remind people that we are launching these businesses in a big way, so just want to be mindful here that there is some expense that's coming with that.

Okay, but nothing specific in terms of -- can you talk about the investment dollars that are going to be going into DVF and men's?

We would rather not get into the specific investments in each of those businesses.

Thank you.

Scott Krasik, Buckingham Research.

Hey, everyone, thanks for taking my question.

Ken, again, how much was the shift in marketing from 2Q to 3Q?

We had moved out, it was around $3 million or $4 million, I think, of marketing expense just with the alignment in the shift.

And I think you can go back and look historically at what that has been, and look at what Rick had just alluded to in terms of what he saw as a shift in top line associated with that.

It seems, I just go back to last year, 2Q the SG&A was down on a dollar basis, as well.

So, is this just a natural progression that this is going to happen every year, a little bit more maybe out of 2Q into 3Q?

I think so.

And I think, especially as you see the consumer shifting closer to the actual need time.

The mix of spend of marketing from media to digital also allows us to better align the expense with when we actually see the revenue.

Okay.

That makes sense.

Then, Diane, can you tell us now what percentage of Sam is Circus?

Yes, it is probably 10%, something like that, right now.

Okay.

And it seemed like there was a lot of momentum there.

Maybe talk about the incremental door opportunity.

Obviously, that was a Macy's primary initiative but you could obviously, take that into other more mid-tier places.

How much new distribution opportunity is there?

And then what's the right growth rate for Sam in wholesale, especially since you've pulled back from that big department store?

I would say, in general at Sam, it is almost tough, Scott, to even put any kind of cap on what we see the upside on that business because there's so many levers that we have opportunity to pull; not only in the wholesale sales here in the US but now with our store growth, the digital piece of it growing really rapidly, our eCommerce piece, our licensing business, you name it, continuing to take off.

So, we remain really encouraged by it.

But we have been pretty consistently running low double-digit rates and we don't see there's any reason at this point in time that, that is not going to continue.

And even with tightening the distribution at Sam you can still grow that brand?

I think right now we'd say we feel very good about the opportunity there.

Then could you just put some numbers around, since we are in a public forum, and how exciting we are for BZees?

Yes.

I can tell you it is north of $25 million.

Okay.

That's great.

It seems like there's a lot you are targeting -- the outdoor, there's a lot of new distribution potential.

Yes, we are fortunate that it's hitting the sweet spot of where the consumer is right now.

They're loving that kind of product.

We think there's opportunity really everywhere, Scott, with that.

We are really only scratching the surface of it.

All right, congratulations, good luck.

Steve Marotta, CL King & Associates.

Good evening, everybody.

Two questions.

The first is, given that consolidated growth margin has increased about 30 and 40 basis points in Q1 and Q2, respectively, and your guidance implies flattish gross margins through the back of the year, can you talk a little bit about that dynamic and why it would not continue to occur -- the gross margin expansion, that is?

Yes, Steve, I will jump in and answer that and then Rick can talk to it, as well.

I think right now as we look, we're very pleased with the gross margin performance in the first half of the year.

And I think if we were further along into the third quarter and seeing what we are seeing today, we would likely be in a position to address that overall margin in the back half.

I think right now, just given the size of the third quarter and what's left to go, we are seeing a lot of people with inventory increases.

So, we are trying to be prudent here and not get too far ahead of ourselves.

I do think that the team has done a great job of getting the margin expansion.

If the environment stays the way it is today, I think we will be able to continue to see that into the back half.

Steve, just from a Famous point of view, just to Ken's point, I will be a lot smarter in two or three weeks about what that might look like for the quarter.

I think that's when we can talk about that.

We are happy where we are at.

We think we've made some great strides.

We don't expect to not be able to have some growth on our margin but we think we want to make sure we are able to continue to show value to the customer.

So, we may have to be a little more competitive and we want to be ready to do that.

But right now it looks pretty good.

I've got to imagine you will be very smart, then, by the Investor Day.

I can't wait to see you then.

(laughter).

Rick gets smarter every day.

And I just have one clarification, just to understand.

You are saying that Famous Footwear comps from mid July to current are running up 3% to 4% on a year-over-year basis?

Yes, we have been running up, the [ledger eye] have been running 3% to 4%, and that actually we had seen some acceleration of that even more recently as some of our later markets, which as Rick talked about, we have a good portion of our business is in later markets, have now kicked in as back-to-school is very close.

Tremendous.

Best of luck.

Thank you.

Jay Sole, Morgan Stanley.

Good afternoon.

I've got a question about Famous Footwear.

I think it is interesting that when you saw maybe traffic not building the way it normally does in back-to-school, and moving later in the year, the decision was to move the marketing out and to put it into August.

Can you talk about the choice between maybe trying to increase the promotional cadence and maybe trying to drive the business that way versus the choice of you maintain the days on promotion, the BOGO days, and maybe just waiting when the traffic probably shows up in August?

My belief is that unless there's a real reason to have customer come into our stores on a more natural basis, us trying to drive them in by price usually leads to nothing more that lower margins.

Because the customer, if they are not ready to shop for that moment in time, we will get the same amount of traffic coming in and buying our products at lower prices.

We've built that into our program and into our thought process.

So, we are very cautious about using promotional activity as a way to help fully drive traffic into our stores outside of normal traffic driving opportunity.

I hope that answers the question basically.

What we really focus at, when we think about back-to-school; we have every store we have, we have planned on when is there peak week and their secondary peak week.

And what we try to do is make sure we're fully ready to go in their peak weeks of business, which are typically the weeks either of a tax-free or the week before the kids go back to school.

So, we spend a lot of time making sure those things are right and then we let our promotional activity be driven around those things, Jay.

And we've found that to be the best way for us to manage the volume and margin business as we get there so we can get to a better operating profit.

Got it.

And then can you tell us a little bit about the traffic trends in the quarter and conversion and some of those metrics?

Yes.

It is pretty much the same story.

You're talking about second quarter?

Yes.

Second quarter, it is pretty much a consistent story we've had.

Traffic is down mid-single digits.

And conversion and average unit retails are basically covering that, so they are up comparably enough to cover the traffic down.

And that gets us to a basically flat or up small 1%, something like that, on a store-per-store basis.

So, it's the same story we've seen for -- I think we're probably into our second year now, of those kind of trends.

Then maybe just one other one for me -- looking ahead to the Investor Day, obviously, I'm sure you don't want to let the story out of the bag, but just any high-level thoughts about -- you've been working on the plan for the last few months since Ken has joined, and obviously before that; but since Ken has joined -- any thoughts about where some of the opportunities are from a big picture standpoint that maybe we will hear more about on the Analyst Day?

I think what I would say to that, Jay, is that it was about four years ago when we began phase one of the transformation and the future look of what the new Caleres Company was going to look like.

We had that Investor Day and we talked about the restructuring involving the portfolio.

I think we are thinking about this next phase of transformation of the Company in the very same way.

It is not going to be an incremental change.

We would like to look for ways to make it a step change.

What we intend to do is to put more specificity around how we are going to get to the longer-term operating margin that we have been talking about of 8%.

I think it is really a continuation of the work that we started a while ago.

And then with everybody's help and the progress we have made on Famous and Sam and the new brands in the portfolio and other opportunities, how we improved our balance sheet, and how that now gives us an opportunity to think about a lot of other things; I think it really is, now, our future to be able to create, which is an exciting place to be.

Great.

Thanks, Diane.

Laurent Vasilescu, Macquarie.

Good afternoon.

Thank you for taking my questions.

How should we think about the monthly comp cadence for this year for the third quarter at Famous Footwear?

I think last year August and September were positive and similar, and then October was particularly challenged.

Are we lapping easier comparisons for October this year?

Yes, the October one would have been driven by a couple of things.

Obviously, I think there were some weather issues in there, number one.

And, secondly, we had a promotional activity that happened to fall over Halloween weekend, which was a really bad idea when that happened.

And then we also moved the date.

One of those days would have been incomparable 2013 and it moved to November in 2014.

So, between all of those things that impacted October pretty negatively.

That won't happen this year.

We are moving the promotion off of Halloween.

We're going to do it ahead of time.

All the days will fall in October, so October should have a -- again, without any other unforeseen weather issues should be a more positive trend for us.

Great, thank you.

And then it is great to hear that Franco Sarto is up this quarter.

I think it was guided that it was up low single digits for the first half, which I guess implies a mid to high single-digit rate for the second quarter.

How should we think about the cadence for the rest of the year?

Again, we do feel great about it, Laurent.

And I would tell you it is going to be in the mid single digits probably for the year.

Okay, great.

And then the boot business, as we think about the second half of the year, I think last quarter it was guided to be up low to mid single digits.

Is that still the case?

Any color on that business would be great.

Yes, it's basically still the case.

The biggest issue there is the change of mix.

We were probably 60% tall shaft and 40% booties a year ago.

It is closer to 50/50.

The tall shaft boots, I think, were planned flat to down slightly and we'll have double-digit increases in booties.

And that seems to be what's happening today currently, that some of that business is starting to come early in the back-to-school.

So, we feel pretty comfortable with that.

Okay, great.

Then commodity prices continued to decline.

I think leather is down significantly over the last six months.

Oil-based inputs, as well.

Are you seeing any potential benefits for the brand portfolios' brands in terms of the next six months?

Yes, the team has done a great job working with our partners to go out and work rebates on our soles, as we see the impact of petroleum there, and also working with our partners to continue to reduce the cost.

I think we are getting the expansion on the gross margin on both the Famous Footwear side of the business and on the branded.

And what you see on the branded is often a direct result of the work they are doing around the cost.

Okay, great.

Congratulations again and looking forward to the Investor Day.

Jill Nelson, Johnson Rice.

Good afternoon.

Branded portfolio -- it looks like inventory was down 3.4%.

I know you are looking for a mid single-digits sales outlook.

Could you just talk about that variance?

Yes, I think we continue to manage that in the supply chain.

As we go through and look at the businesses that are growing I think we feel like we have the inventory that we need to continue to grow those businesses.

In some areas where we've carried some excess, as a result of what happened in the first quarter with the port, we have not replenished to those full levels.

I think you are seeing the benefits of those inventory levels getting low as result of some of the port issues earlier in the year.

We have not seen the need to take the levels back to where they had been.

Okay.

And then just a comment you have in the press release regarding the progress you've made year to date that's enabled you to accelerate investments.

Could you just talk -- does that imply first half out-performed your internal expectations so, therefore, you are putting that out-performance into investments to keep the year flat with previous guidance?

Or just more clarity around that statement.

Yes, and I think that was the intention, to say, look, we are certainly investing in our future.

And I think bringing the date forward around this Investor Day, we are excited to share more specifics around what that means.

And with the level of performance we did want to make sure that people kept it in context.

We do have some new businesses that we are launching and we will be investing in them.

Those things were contemplated in the total year guidance.

We just want to make sure we don't get too far out ahead of ourselves here, and tried to be prudent in our communication.

All right.

Then just a math question with the new debt offering.

It looks as though it should be accretive to earnings about $0.02 to $0.03 on the lower interest expense.

If you could just confirm that.

Yes, if you go through and just look at dropping from 7 1/8% to 6 1/4%, we get some nice accretion.

We got a couple quarters here where we've got a bunch of extraordinary type expenses associated with cleaning all of that up.

But then once you get out into next year you will see a reduction in that interest expense that should drop a couple pennies incremental to the bottom line.

All right, I appreciate it, thank you.

Chris Svezia with Susquehanna Financial.

Good evening, everyone.

Thanks for taking my questions.

Rick, for you to start, third quarter last year you really saw great success in canvas, casual, pseudo-athletic business.

As you sit here today revisiting that, you continue to see that momentum, particularly as you go through August.

Is that, generally speaking, a fair statement?

You're comping on top of that comp growth still?

Yes, we are.

Okay.

Very nicely, by the way.

Okay.

So, the question is, what happens once you get through August and into September?

Do you still feel like you are still addressing that consumer, there's still demand for that product, or does boots take some of that?

Obviously, the calendar shift and the weather shift moves people to a different perspective on what they are looking for.

We've been doing this for a long time, Chris, and we know that, in our head, there are several peaks to the business.

Actually back-to-school is the biggest.

The business, again, relative volume-wise drops some end of September and through early November, but we manage that.

That's part of our inventory management.

We'll stay in business but we don't over-buy.

But then we build again for Christmas because it does happen to be a holiday item, whether it's gift-giving or people buying for themselves.

And then there is a spring lift as we get to that March time period when people are thinking about spring break or when they are thinking about having shoes for spring.

We have managed that business like that for years.

Those still prove to be -- all that's happened is that the base level has increased.

So, we just keep managing it that way.

And on the tall shafted boots, I'm just curious, there seems to be a lot of buzz out there, to a degree, that it might not perform that well.

I know you're planning it down from a comp perspective.

But what are you assuming from either just margin exposure and that type of thing?

If it doesn't perform well, what is the recourse there?

The recourse is to try to sell them for the highest price we can.

And if we have the ability to have cancellable backups that are out in the delivery cycle before we get there, we can try to see if we can cancel some goods.

Right now we have a few, we have a handful, five or six of them in-store now.

They are selling well.

They're not great, they're not blowing the doors off, but they are selling acceptably for this time period.

I think we believe that our customer will be just fine with buying that tall shaft boot in the proportion that we have it offered to them.

Again, that will be something that we will have a better handle on as we get to the Investor Day.

At the end of October we will start seeing, have a little better picture on what is going to happen there.

And do you think, even with the extra marketing, Famous can get operating margin leverage at a low single-digit comp for the third quarter or does it make it a little bit tougher to get there?

It makes it a little tougher because you have more expense but I think our expectation is there should be a little bit of leverage if we can get to that low single digits.

Okay.

Just a question for you, Diane, on the wholesale side.

If you were to strip out, I know you are not doing this anymore, but if you were to take out the retail component, so Naturalizer retail, that branded portfolio piece, can you just maybe talk about the underlying either gross margin or just EBIT margin performance in the overall wholesale platform?

Is it improving?

Just what is going on?

Because the retail business seems to be diluting it somewhat.

Improving nicely.

It is doing very well.

And the expectation is that that continues, correct?

That will continue.

And do you believe that some of the things you are doing from the new team at Naturalizer retail, do you think that they will have any positive impact in the back half of the year?

Or is this really a first-half 2016 where they really start to have an impact to the business?

I think there is some modest impact that they will have on the back half of year.

There are some things that we can do quickly.

We are obviously, not waiting.

We have our hit list of stuff that we have to do right now.

We have some longer-term strategic questions we have to answer.

So, I think there's a mix, as you can well imagine, of a number of things we are doing.

So, I would say, yes, we should see some improvement in the back half but it is really into 2016 and 2017 that it would be more material.

Okay.

Last question, Ken, for you.

15 basis points on gross margin.

I think maybe the wholesale team and Rick is probably good for another 5 basis points maybe to get you to 20, maybe?

It is a joke.

Never mind.

It is just such a funny number, another 5 to get you to 20.

Never mind.

Nice job.

I will talk to you guys soon.

Take care.

Sam Poser, Sterne, Agee.

Thank you for taking my question.

I've got a couple questions.

Diane and Rick, you guys mentioned that people are buying clothes for the need but we've got a later Labor Day so, everything is shifting back anyway.

We are week later so that does move a good number of sales out of July and into August.

Am I thinking about that right?

Yes, for sure.

Okay.

So, then can you give us the cadence of the comps by month and where you are quarter to date?

Starting with which month?

May, June, July and then into August.

Low singles, basically flat, down low singles.

That's May, June, July.

Okay.

And then quarter to date?

Quarter to date 3% to 4%.

No, but you said quarter to date was -- you didn't say 3% to 4%.

You said that from the last two weeks of July through now you're up 3% to 4%.

So, what is it quarter to date?

Mid single.

So, it is accelerating.

And I would assume that, given the later Labor Day, you would expect business to basically ramp up basically a week later than it did a year ago, based on the timing of when people go back to school/

Yes.

Okay.

I think we said earlier, Sam, about 65% of the markets that went back to school.

With Labor Day where it is, it is for end of the quarter.

But a lot of the markets that haven't gone back to school are some of your largest markets.

Yes, about 35% of our business, right, exactly.

And then also, you've had traffic down the last five quarters at Sam.

What is being worked on to help improve the store traffic?

I know your conversions were good.

First of all, I am getting of the mind it's less about the number and it is more about the quality of the customer.

I think we're spending a lot of time working on making sure that we are talking to the right customers who will have better lifetime value, higher sales and margin for us, and getting them into our stores.

Because the idea that somehow we are going to magically figure out how to drive more people into our stores, I don't see that happening.

Now, again, on a total basis, if we throw our omnichannel traffic in there, we have an increase in people shopping with us, because our omnichannel is driving more traffic.

And when you put it all together we actually have more people interacting with Famous Footwear in the various ways that we've had in the past.

I think, again, it is more around quality of customer and how we interact with them and how we engage than it is about sheer numbers because I don't have a magic potion to get people to come to the stores.

I've known you a while, Rick, I thought you actually did.

But anyway.

Come in October and I will show you what we are going to do about it.

Okay, very good.

Diane, the Naturalizer stores have been a drag.

You are making some changes that you just talked about with Chris's question.

At what point do you say -- is there a line in the sand were you say we are going to either achieve whatever by a certain time or we are going to make some hard decisions on these stores?

Because it is obvious, just from seeing the products, that Naturalizer is starting to improve, but it's just not translating over to the retail stores and it appears to be a drag.

I know you are working hard to do it, but are you internally drawing a line in the sand saying if we don't have this done by end of 2016 -- I'm just picking a date -- we're going to have to rethink if these stores are going to stay, and so on?

I would say today our mindset, while I've said in the past that we will always do whatever we have to do to enhance shareholder value for the long term, that our focus right now is on making sure that we continue to improve the overall profitability and productivity of that brand; period, over and out.

I'm not giving anybody any outs on anything in terms of making it better.

So, it's, Sam, you've got to have that kind of head set.

Improve it, Improve it, because it doesn't make any sense that our wholesale business is terrific and our retail business is a little soft.

So, until I feel that we have exhausted all the effort and energy against that, I would not draw the line in the sand yet.

But, as I've said to you and I've said publicly, there are no sacred cows.

Okay, thank you.

Then, lastly, Rick, can you talk a little bit, there's been a lot of shifting around, as you mentioned, from performance to fashion athletic.

I assume some of that is outside of canvas.

Can you talk about how you are seeing that whole fashion athletic business, how you see it ramping through fall, how you see it playing out through fall?

And maybe you could talk a little bit about how it performed by gender.

Yes.

Again, if we're talking specifically athletic and more the fashion side of it, we have a couple of businesses we would consider fashion, if you think about some of the skate things we have and of what some people might call basketball.

We call it more fashion-driven because it is really not a performance shoe.

Those businesses are good and I think they are taking, again, some business away from the true performance look.

It is more predominant on the women's side where there appears to be a bigger shift.

But what we have found in our business is it has impacted more our secondary vendors, secondary partners, as far as assortment and depth of what we bought there.

And our primary partner is still doing well even in the running business, regardless.

I think we've tried to be more selective.

As we do with most things when we get down these paths, Sam, we look at ourselves as an editor.

We want to put a curated assortment out there.

So, we've curated our assortment, took some things out of it that we thought were secondary to the trend.

It didn't impact our biggest piece of the business because we wanted to make sure we stayed solid there.

And then shifted those dollars into other categories, whether that be the Skechers side of the athletic business or whether it be the canvas side of the athlete.

Okay.

Thank you very much and good luck.

Scott Krasik, Buckingham Research.

Hey, guys, thanks.

Just a couple quick follow-ups.

One, Rick, generally what percentage of your boot sales would you defined as cold weather?

And is that percentage changing this year?

Yes,, it is probably, and I am sure I'm off, but it is not more than 10%, Scott.

I think it is probably in that range.

We have been much more selective on where we put those boots in the last couple of years.

In fact, what we have done is impacted some water-resistant kind of product in stores where we used to put cold weather because the weather wasn't cold enough there to sell through the cold weather boots.

But they did want something that had some water resistance.

So, we have done a little bit of that.

And it is about, I think we planned it up a little bit this year but not dramatically, so it's probably low single digits or something like that.

Okay.

Thank you, Rick.

Ken, any conclusions to draw -- you just spent $8 million-plus to re-fi the debt?

Can we assume that there's probably not a large acquisition where you would need to issue bonds and that's why you chose to do it now?

I think we chose to do it now because the market was open for us to do it in a time where it was going to be accretive to the bottom line almost immediately.

I think from a balance sheet management standpoint, the market was open and we went ahead and refinanced at a lower rate.

I think what we do going forward from an acquisition standpoint, I think, is a separate discussion and a separate set of decisions.

I think we have capacity to do things.

I wouldn't read into the refinancing of that as moving that forward or changing the way that we are thinking.

Okay.

All right, thanks very much.

We have no further questions in queue at this time.

I would like to turn the call back over to our presenters for any closing remarks.

Thank you very much for joining us this afternoon.

And we look forward to seeing you again and sharing our plans for the future on October 29.

Thanks again.

Thank you for your participation.

This does conclude today's conference call and you may now disconnect.