Caleres Inc (CAL) 2016 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 2016 earnings conference call.

(Operator Instructions)

Thank you, and I would like to turn the conference over to Peggy Reilly Tharp.

Thank you, Jennifer.

Good afternoon.

I'm Peggy Reilly Tharp, Vice President Investor Relations for Caleres, and I'd like to thank you for joining our second-quarter 2016 earnings call and webcast.

A press release with detailed financial tables and slides are both available at Caleres.com.

Please be aware today's discussion contains forward-looking statements, which are subject to a number of risks and uncertainties.

Actual results may differ materially due to various risk factors, including by 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.

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

Good afternoon, everyone, and thanks so much for joining us for a review of our second quarter.

We successfully managed our business, despite continuing industrywide shifts and delivered.

Our results show the benefit of good execution during a challenging environment, as we improve gross margins, maintained SG&A spend, and continued to invest for long-term growth.

We kept inventories in line with our expectations, as we prepared for the key back-to-school selling season, and also maintained our focus on inventory management and our brand portfolio.

We reported solid improvement in cash from operations and we increased our return to our shareholders through our dividend and share repurchase program.

And importantly, as in the first quarter, we continued to strategically invest on both an operational and a capital basis for the long-term success and growth of our Company.

So while the overall industry is still soft, we are actively managing the areas within our control and maintaining very disciplined focus.

Thanks to our investments and the team's agility, we have been able to read and react to the atypical seasonal shopping patterns we have been seeing and to more rapidly respond to the consumers' desire that we're seeing for newness.

We continue to see consumers seeking distinctive products from trusted brands, which for sure benefits both our brand portfolio and our Famous Footwear segments.

We're also seeing continued growth in our e-commerce sales for both segments, with total e-commerce accounting for approximately 10% of our consolidated sales in the second quarter.

Now let's turn to Famous Footwear, where same-store sales were down 1.1% during a very mixed period from May to July.

With May comp sales down, while June was up and for July, comp sales were down again.

We continued to see a shift to buying closer to needs for the back-to-school selling season.

While we've certainly seen evidence of this trend for several years, it's much more pronounced this year with consumers buying at need or even later in the season in some instances.

With roughly two-thirds of our consumers doors already back in the classroom, we are deep into the heart of back to school, and yet, we're seeing some consumers are starting their shopping after school has started even more than we've seen before.

So even with the changes in consumer shopping cadence, our same-store sales for the back-to-school season are currently up about 1%, with each week showing improved performance and August comps sales up 2.5%.

As I just mentioned, we're also seeing an increase in sales at Famous.com, up 65% to date for back to school, with the majority of these orders being fulfilled from store inventory.

In terms of product trends at Famous, we saw continued growth in lifestyle athletic and sport influence product in the second quarter.

We planned these styles up for back to school and they are taking share from overall athletic and reaching into the fashion segment.

And as you would imagine, these are the areas we have planned up for the back half and into 2017.

Now turning to our brand portfolio segment where we saw mixed performance between our Healthy Living and contemporary fashion brands, with total sales down 3.8%.

Despite a tough environment, the teams did a good job and managed inventory, while actively adjusting to the changing retail marketplace.

Thanks to their efforts, brand portfolio gross margin was up 85 basis points with consecutive quarterly improvements, and additionally, operating margins improved and was up nearly 90 basis points in the quarter.

For the Healthy Living brand, second-quarter sales of $127.4 million were down 9.4%.

As expected, Dr. Scholl's sales were lower, as we continued to exit some categories in the mass channel.

While these exits are going to continue to weigh on Scholl's performance this year, the brand's optimistic about early opportunities and new higher margin categories.

Naturalizer also declined in the second quarter, operating fewer doors year over year and experiencing some difficult traffic trends.

Despite the top-line challenges, operating margin improved in the quarter as the brand focused on inventory management and expense reduction.

Shifting to contemporary fashion, where second-quarter sales of $105.1 million were up 3.8%, with all key brands delivering nice improvement, including Sam Edelman and Franco Sarto.

Consumers are responding to newness, and our contemporary fashion brands are providing all of the right designs, from black heels to flats to sport-influenced styles and to what we're seeing now is a lot of seasonal sways and transitional product.

In addition, our focus on supply chain enhancements is beginning to help us maximize our most successful styles.

As our retail partners have continued to tighten their inventory, they have reduced their initial orders and maintained their focus on chasing product in season.

Thanks to the work we've done over the past 12 months, we're gradually reducing cycle times and improving our ability to deliver more product in season.

As you know, the entire retail landscape is changing quickly and consumers have continued to shift their buying pattern.

Despite these challenges, I'm really excited to be part of the industry at this time, because the issues that we're facing today are really going to help us shape our future.

And the investments that we've made here at Caleres and the work we've done over the past few years will help us as we navigate this exciting new terrain.

So despite the current environment, we're confident in our ability to deliver consistent, profitable, and sustainable long-term growth through the continued execution of our strategy.

Investments such as our supply chain and our consumer fulfillment initiatives have made it easier for us to adapt to the constant changes in the industry and at retail.

As a result, we are maintaining our fiscal earnings-per-share guidance, and Ken's going to provide you with a complete guidance update prior to Q&A.

And with that, I'm going to turn things over to Ken.

Thank you, Diane, and good afternoon, everyone.

Today, we reported second-quarter net sales of $622.9 million, down 2.3%, reflecting a soft overall retail environment.

Our consolidated gross margin for the second quarter was 41.7% of sales, up 47 basis points year over year, with improvements at both our Famous Footwear and brand portfolio segments, up 14 and 85 basis points respectively.

In the second quarter just as in the first, we continue to benefit from improved product mix and focused inventory management, with a reduction in overall markdowns.

Year-to-date gross margin improvement is nearly 80 basis points to 42% of sales.

Total SG&A in the second quarter was 36.5% of revenue, or $227.3 million.

Despite a lackluster retail environment and slower sales, we have continued to invest for long-term growth and maintained our overall SG&A spend year over year.

Depreciation and amortization was $13.4 million for the second quarter, up 4% on an increased store base and reflecting investment in the modernization and expansion of our distribution centers.

Net interest expense for the second quarter was $3.2 million, down more than 20% year over year, as we benefited from the refinancing of our senior notes in the second quarter of 2015.

For the second quarter, our corporate tax rate was 32.3%, a significant increase over last year's rate of 26.5%, which included a $1.2 million discrete tax benefit associated with the utilization of existing tax-loss carry-forwards.

The difference in rate year over year would equate to a $0.04 of earnings-per-share difference in the quarter.

As a reminder, in the third quarter of 2015, we also recognized a $0.03 tax benefit.

Net earnings in the second quarter of this year, including investments in the business and additional retail doors, were $19.8 million, or $0.46 per share.

For the second quarter of 2015, adjusted net earnings were $22.1 million, or $0.50 per share, excluding the debt extinguishment expenses we incurred.

Capital expenditures were $13 million for the second quarter and $31.2 million for the first half, reflecting investments in new retail doors and the expansion and modernization of our distribution centers.

Now turning to the balance sheet, we ended the quarter with cash and equivalents of $165.7 million, up $47.6 million from the end of 2015, and had no borrowings against our revolving credit facility.

As Diane mentioned, we also returned cash to our shareholders via both our share repurchase and dividend programs.

We've purchased an additional 450,000 shares of common stock in the second quarter on top of the 450,000 shares we repurchased in the first quarter.

We also declared a dividend of $0.07 per share, our 374th consecutive quarterly dividend.

Our consolidated inventory position at quarter end was $648.9 million, up approximately 1% year over year.

At Famous Footwear, we ended the quarter with inventory up 3.4% per store on a dollar basis and up 0.6% per store on a pair basis.

For our brand portfolio, inventory at quarter end was down approximately 4% as we continue to focus on inventory management.

During the quarter, our brands once again encountered low initial orders and more mid-season replenishment resulting in overall higher margins.

Before we begin Q&A, I'd like to share our current view of FY16 guidance.

We are maintaining earnings-per-share guidance of $2 to $2.10, as we expect to manage our inventory and our expenses to drive bottom-line earnings growth year over year.

We now expect consolidated sales of between $2.57 billion to $2.6 billion, with same-store sales at Famous Footwear now expected to be flat to up low single digits.

We're also raising our gross margin expectations to reflect the good margin expansion year to date, and we now expect our rate to increase 25 to 35 basis points over 2015.

We are maintaining our other guidance metrics at this point in time, including our tax rate of between 30% and 32%.

However, I would like to remind everyone that in 2015, our corporate tax rate was 24.8%, reflecting a number of discrete tax items.

And with that, I'd like to turn the call back over to the operator for questions.

(Operator Instructions)

Scott Krasik, Buckingham Research.

Yes, hi everyone.

Thanks.

So just want to dig into what's happening at Famous.

A little bit soft relative to our expectations but a decent rebound in August.

So can you just talk a little about the health of your customer?

Are they coming out to shop less?

I think last year back to school got off to a slow start because of Labor Day, so maybe it's just an easy comparison.

So maybe just a little bit more detail there please, thanks.

Yes, Scott, I think last year the other thing that happened there was, I think some shift of tax-free from July to August, so that made July a little softer too.

I don't know that the health of the customer is much different.

I think it's just their shopping pattern that makes it more difficult for us to predict and to see.

Again, we -- a lot of what the second quarter softness was, was the last three weeks of July being less than last year and less than we had expected.

And again, as Diane said, we're up 1% for that back-to-school period, so the three weeks of July and the four weeks of August would now be up one.

So they came, they just came at a different point in time.

Strange things like tax-free weekends were okay; some places they weren't very good, and after tax-free, the business was better in those market.

So it makes no sense that people weren't driven to shop on tax-free weekends, but eventually came back 5 to 10 days later and purchased again.

So I think it's that kind of thing we're seeing.

I don't know that's necessarily the health or the ability of the consumers who want to buy, our customers want to buy.

It's just about this whole -- this timing thing seems to be the thing we can't quite understand yet.

And relative to either the percentage of your markets that are back to school or the shift from people waiting till they get back to school to purchase, any thoughts around that?

Yes, we have about 60% of the schools are back in our store base.

So we still have 35% or so that are going back and those -- all that now happens after Labor Day.

So I think the question for us is how we start this weekend going to this weekend and obviously the week or 10 days past that, the week or two weeks past that, that we've seen -- where we had more activity other parts of the country.

Will we get that in the Northeast?

Will we get that in the Chicago and Minneapolis market, Seattle markets, all those big market that go back after Labor Day.

Scott, it's Diane.

Those early weeks are just much lighter than they have ever been, those late July weeks.

It's almost like a two- to three-week shift it feels like in terms of how the consumer traffic is peaking for back to school for us.

So we've really got to see all the way into the middle of September and through September truly to really get a better sense of what that's all going to look like.

And then just, sorry two more, Rick.

Thanks, Diane.

Number one, how are your top brands -- you always talk about your top five brands as a percentage of total.

How are they performing for back to school and your near to medium-term outlook for them?

And then has anything changed in terms of what you're doing from a promotional standpoint.

I know mix and bo-go take your margins down.

Are you doing anything to be able to offset that this year in 3Q?

Thanks.

Our margins -- our promotional activity is relatively the same.

The margin will end up being -- it will depend on how the customer purchases, to a degree, at this point time.

So I don't see -- I don't think we've had a major shift in our promotional activity or our promotional beat.

As far as our top brands, by and large, the top brands are all performing at or better than our current trend.

So if we're up one for back to school, our top brands are performing at that level or better, and several of them significantly better.

Okay, good luck.

Thanks very much for all the color.

Laurent Vasilescu, Macquarie.

Thank you very much for taking my question.

Can you remind us how the Famous store comp did last year during its reported by month?

If I remember correctly, I think comps get a little bit easier into October.

Yes, I'm looking, hang on, Laurent.

August is 39; September was 57; and October was 35.

Okay.

Very helpful and then on Scott's question, with regards to athletic, I think last quarter it was noted that lifestyle athletic receipts for back to school were up 25% to 30%.

Can you tell us if that category is meeting your expectations versus what you are already initially ordered?

It's close -- it's gaining momentum, just like everything else early in the period it did not.

But as we've gotten into the last, I'll call it three to four weeks, it's probably been at that level if not higher.

So we're gaining on it.

I would think we're probably, in total, a little bit light to that projection.

But we still have three weeks to go.

So it would feel like we'd be able to be close to the number when it's all said and done.

Okay, great, and then turning to gross margins can you provide any color on how should we think about the overall Company gross margin between 3Q and 4Q?

I think as we go across and look, Famous obviously, we're -- we were down a little bit in the first quarter.

We were up, I think 14 basis points in the second quarter, and so we're not expecting a lot of continued expansion there.

I think on the branded side, the teams have done a nice job managing inventory.

And I think as we've shifted to some lower initials, there's been a lot less give back, and so on a net margin basis, we've made a tremendous amount of progress.

We're just going into the fall season, so we hope to continue to get some expansion in the brand portfolio, as well.

Okay, very helpful.

And then I wonder if the long-term guidance you provided last year during the investor day, has anything -- since we're almost a year out now, lapping that event, has anything changed in terms of the long-term vision, in terms of the P&L, or just the branded side versus Famous Footwear side?

And then anything -- are you seeing anything in terms of potential acquisitions out there.

So, I don't think anything has changed since what we had communicated back in October about the long-term outlook and the priorities of the business.

I think that's what's guiding our decision on a day-to-day basis and we recognize that what's going on in the overall environment right now is a moment in time.

We continue to invest in the initiatives that we had laid out and have no reason not to continue to do so at this point.

Okay, very helpful.

And then anything on the acquisitions at this point in time?

No.

Okay.

And then maybe lastly, in terms of the supply chain initiatives called out, can you potentially quantify the positive impact on the gross margin, or anything else on the P&L, for that matter?

Yes, I think we're early into that.

Most of what we're seeing is in the area of speed to market and cycle time, so I think our timing was good and there's a desire of a lot of our customers to pull back on some initial orders and be able to chase goods.

I think the work that the team has done in the supply chain and particularly around cycle time has benefited our ability to respond to our customer.

I think most of the dollar savings that we expect to get those initiatives will really start to show up in a more meaningful way in 2017.

Laurent, it's Diane.

It's really going to be in 2017.

It's fairly small, most of the impact to 2016, and it really is, back to that comment around initial orders being less on the wholesale side, it's really going to allow us to drive in season replenishment and respond to the chase that every retailer wants to do today.

So it's really, I think 2017 and beyond when you're really going to start to see that affect our top line, is really what I'm hoping.

Okay, thank you very much and best of luck.

Thank you.

Steve Marotta, CL King & Associates.

Good evening, everybody.

Good evening.

That August was up 2.5%, and I believe you mentioned that each week in the back-to-school season has been better than the previous.

Is that still correct?

So we can assume that each week in August has also gotten consecutively better.

Yes.

Okay, now let me just beat a dead horse.

Last week in August must be running nicely above 2.5% in order to have gotten to that average for the month.

Yes, that's true, and I think the reason we want to make sure we look at a longer window on all this, Steve, is the volatility that we had seen throughout even the second quarter, making sure that we don't try to read too much into every single month.

But what we are seeing is that customer buying, really it feels a couple of weeks away from where they historically have been.

So we expect with another 35% of people to go back to school yet, that we should continue to see some decent trends for the next couple of weeks.

Yes, just a heck of a head start to the quarter; it's really good.

Can you talk a little bit about, and maybe this is directly related to your previous answer, can you talk a little bit about your comfort with the Famous Footwear inventory being up 3.4% in light of down 1.1% comp?

Yes I think we're -- Rick I think would echo this: we're very comfortable with our inventory levels and if you really look at on a per-pair basis, it's up slightly.

And we believe that we've got the inventory in the right categories of merchandise.

There isn't really anything that looks out of line to us.

And these teams do a fantastic job of managing that always throughout the given season.

So Rick, I don't see any issues.

Yes, frankly Steve, the lack of sales the last part of July impacted that.

We had goods in store to sell in the end of July for back to school that didn't materialize.

So if I factor out a 0.5% or so of inventory that should have been sold, now we're down to three year less than 3% on a dollar basis, and we're probably actually at or below on the pair side.

So we're fine with that; we think that was basically where we wanted to be for this period of time.

Okay, last question, there is a competitor that's adding -- loudly adding children's footwear in the back half of this year.

Do you plan on reacting to that?

Have you felt any initial impact from that?

Can you talk a little bit about the competitive environment within that particular product category?

Yes, Steve, our kids business in the quarter end and the half has been performing really nicely, so we haven't seen any impact yet.

I know it's pretty early in terms of their adds to the stores.

We feel that we're going to be able to compete there just like we compete against every other category that we have in the past, whether it's people that are adding more athletic and more sport and you name it.

And we're confident that we'll manage through that and find the right answer to it.

Great, thank you very much.

Jill Nelson, Johnson Rice.

Good afternoon.

If you could just talk about the department store channel.

Have you seen any differences heading into the fall season?

And then any insight into potential impact from the 100 Macy's store closings that they recently announced?

Yes, let me answer, Jill, it's Diane.

Let me answer the last question first.

Those 100 Macy's stores really not going to be a significant impact to us.

It's, I don't know, somewhere around 13%, 15% of their total business are in those stores.

And typically they'd be the most unprofitable doors, so therefore, a tiny little bit of sales impact.

But overall profitability-wise we think would be a -- it's going to be a win anyway.

So we don't see anything there.

With respect to the overall business in department stores, I'd say that generally, as inventory levels come back in line a little bit.

And that's really what the challenge has been.

We're starting to see some of the new things that are hitting the floors respond pretty nicely.

So the customer seems to be responding to newness, or loving anything that relates to any of the sports styles that you've heard a lot about.

And black heels and sandals has been really important.

And a lot more in terms of booties, a little bit early on booties, but some of the transitional businesses that have open-toe booties on black heels have been pretty good too.

So I'd say early reads are a little bit better, but too early to call it, and we're seeing little bit stronger sell-throughs on some of those new goods.

Anything that's been around for a while that is -- she's seen before she's not responding to.

Things that are absolutely new and are a great value, she seems to like.

So, again, I think this will take the full year for it to all normalize, but I think as inventory levels get back in line and people feel a lot better, we'll -- it -- we should get back to a slightly better cadence.

Alright, appreciate it.

Thank you.

Yes.

Jeff Stein, Northcoast Research.

Good afternoon.

First a question for Rick, wondering if you can give us some detail on how the comp broke down at Famous Footwear in terms of AUR units per transaction, transactions, and conversion?

Traffic transactions were down slightly in the quarter, about mid-single digits, call it, or low single digits I should say, low single digits on the transactions.

AURs and pairs, so the basket itself was up low single digits; that's where we get to the 1% now.

And --

Conversion?

Conversion was up, conversion was up in total.

Okay, I think Diane answered this question, but maybe I'll just ask it in another way.

When back to school is over the business changes, and I'm wondering how the product that drives the back half of the quarter is responding to early sell-throughs of that type of product.

And then secondarily, any concerns around the election cycle and how that is going to affect your media plans for the fall?

Well, I think Diane talked a little bit about some of the product things that are working early.

I think booties are okay; they're not fantastic.

So I think that's something that we're hopeful that will get better as we get close -- as we get further into the season.

We don't have a lot of tall-shaft boots on our floors.

The handful that we have are doing okay.

More of those arrive in our inventories over the next two to three weeks, so that will be something we would look to drive the back half.

So I think as far as new receipts that would drive that, pretty much would be it on new things.

And again, a little early to tell what that's going to actually do for our business.

As far as the election, yes, I think all that stuff has impact of the customer, particularly when we're talking about it being as intense and negatively toned as it has been and it's probably only going to get worse, I would imagine.

I think there's many people concerned about what's going on.

Yes, and in terms of our media spend, it was really all digital this year, so it wasn't we had chosen just to avoid the higher cost around the Olympics and election costs and all that and took as an opportunity to really push ourselves more digitally.

Okay, and Diane, and maybe you could just bring us up to date on DVF and George Brown in terms of where those new brands stand.

Yes, really early, just shipping shoes now.

Website for George Brown, sorry just shipping shoes, are selling them, but small, can't get a good read on it yet.

The website for George Brown goes up mid-September, so that will be great.

But I would think that Octoberish, Jeff, I will have a better sense of things.

And on DVF, sell-throughs have been very good on the shoes that we have out there.

Again, not material to our total yet, but nothing that would indicate today that it shouldn't be strong going forward.

Okay.

Thank you very much.

Yes.

Jay Sole, Morgan Stanley.

Great, thank you.

My question is about Naturalizer.

In the press release it said the brand portfolio was down 8%.

I assume a big piece of that is Naturalizer.

Can you just talk about the Canadian stores versus the US stores, any impact that FX had?

And then maybe how the wholesale business is doing for Naturalizer and some of the new products like Bzees and things like that.

Thank you.

Yes, sure.

Hi Jay, it's Diane.

I'd be happy to.

I think we've been really working on, I would say stabilizing and trying to grow Naturalizer now, really in earnest for the last 6 to 12 months, steady progress.

Not ever as fast as you would really like it to be.

We've been focusing on things that are really under -- that we can control, so trying to improve operating productivity has been the most immediate thing that we wanted to focus on.

I think what I like about the performance on Naturalizer is our gross margin on wholesale is up 70 basis points and that retail about 40.

I think that indicates it was really helpful in terms of how the teams managed the inventory at Naturalizer, because that really could have been a significant problem for us.

And they -- it was significantly down in our inventory is really clean right now.

Operating margin on an all-in basis was up 80 basis points and operating earnings were up about 10%.

Bzees demand, actually, we cannot keep pace with at this particular time, and we're really trying to get more capacity in the fourth quarter of this year.

So, that has been exceeding our expectations.

And then in terms of things -- things that have been going on, some indicators about what the future would hold, I would say we have done a lot of work around new product that we presented, a new Naturalizer premium line in June and August.

And that has been received extraordinarily well.

We are pulling forward, trying to pull forward a lot of those goods into I would say the October/November time period into our stores, so we can get a much better read on that.

We've been putting in more sport and athletic in the store, as well, and that's been certainly helping with our -- the performance there.

So not making as much progress on the top line right now as I would have liked, given the environment that we're in.

But I think that we're really putting ourselves in a position to win and really making sure we've got the -- really improving the -- our operating productivity.

So progress, little more work to do I would say fourth quarter is the time where I'll be able to talk a little bit more about top-line performance and what we expect for 2017 for Naturalizer.

Got it, so it's interesting because you mentioned Bzees is doing very well.

With the wholesale business doing well, is there an opportunity perhaps to work on the operating -- the expense structure with the lease portfolio?

Are you actually up in the next couple of years, any thoughts around maybe some ways to migrate some of those sales from your stores to the wholesale partners?

Yes, we do, we look at that all the time, and, in fact, we're rationalizing that portfolio where we need to.

We did have, I think it was maybe a half-dozen fewer stores this year, four fewer doors this year and we had some currency impact, as well.

So yes, we are -- everything on that stuff, Jay, really is always on the table for us to make sure that were looking at on the all-in profitability, how do we make sure that we continue to make progress on this business.

And one of the interesting points about Naturalizer is about 20% of their total business now is done on e-commerce, which again, that's a big part of what we're trying to turn the drive and to shift.

We think that's the way to go over the long term.

Interesting, okay.

Then maybe Diane, one last one for me.

You talked about how a lot of the -- for the wholesale portfolio, a lot of retailers want to do more chasing in season.

Is there any way you can maybe just explain or somehow quantify for us like what -- traditionally, what percentage of the business has been preorder and what has been [chase] and where you see it migrating?

Where's it now and where's it going to migrate to?

Yes, great question, and I'll speak to the total, although it varies a lot, honestly by brand and depending on brand strength and market position and actually, the value proposition of the brand too in the marketplace.

But generally speaking, we're seeing initial orders down anywhere from 5% to 15% it could be on some brands, which means those upfront orders that you would normally get, you're not getting.

So they're buying much less.

And what you have to do is you either work with the retailer and decide what kind of inventory you want as backup for some of the big selling items; you do that with a few retailers that you've got the right plans with.

But typically, that's not going to account for any more than about 10% of the business.

So we try to be very thoughtful on that, because you know how you can get killed on the inventory and it can -- there's just no way today to clear goods as we're seeing now.

Clearance, even just trying to get clearance to sell in store today is much more challenging than it has been.

And we are finding that even in all of our brands, that the regular price selling is actually stronger than any of the clearance selling.

So I don't know if that answers your question, but so it's just -- and then it in season what we'll do, we are -- we can rapid replenish on an existing item, somewhere between 40 and 50 or 60 days, depending on what category it is.

We're looking at design modification now.

So for example, not exactly the same shoe, but maybe a slight design tweak.

We're looking at being able to do that within a 50- to 60-day time period, and then also still working on the overall supply chain time period and trying to shrink that by another 30 days, too.

So when we turn a corner in the next year, our goal would be to certainly have at least 10% of our business in a given season done through some form of this replenishment reorder business in order to continue to grow.

But that all starts with making sure you have got the right product to begin with, right?

Because you're not going to change things that aren't selling really well.

So it really goes hand-in-hand, incredible product that's really relevant and new and fresh to the customer, and then this ability to replenish quickly and shorten the cycle time and season.

Got it.

Thanks Diane.

Yes.

Scott Krasick, Buckingham.

Hey thanks just a couple of follow-ups.

First, Ken it seems like you have been able to tweak the SG&A a bit, given maybe some of the software sales and the outlook in the back half of the year.

Just wondering how much of that is sustainable and should we expect to see leverage on that next year?

Are you going to have to reinvest to grow sales next year?

No, I think we're trying to be rational real-time.

In the SG&A, we are continuing to invest in new brands and resources to do that, so I think we're trying to do things that are sustainable.

We'll -- certainly as we get into the fourth quarter and start to give guidance for 2017, we'll be much more specific around that, but we're trying not to do anything that is going to have to unwind and come back later, so.

I think for the most part, we're continuing to invest in the initiatives that we had laid out in October and just trying to get more efficient in everything we do.

That's helpful, thanks.

And then Diane, I think you're up to about 10 stores in Sam Edelman.

You opened a new one --

Yes, yes, World Trade Center.

Down at the new -- at the World Trade Center.

Have you seen it?

Just pictures, just pictures, I got to get down there.

So just how are you thinking about the stores.

Are they accomplishing from the brand perspective?

Do you have a model that works?

How are you thinking about that?

Well, we think that it's absolutely essential to have a retail presence for Sam Edelman.

Do we have model that works yet to our ambitions?

Absolutely not, and I think that's what we wanted to get was 10 to 12 to 13 stores out there that we could really begin to understand how to drive that business and really make that an economic contributor to the overall Sam Edelman brand.

So still a work in progress, Scott.

Feel very comfortable with the progress that we've made to date, and we can see week to week, again, nice improvement in those stores that had just been opened really in the last six months.

So early to tell, but right now tracking very close to where we had hoped they would be.

Are you selling more handbags, jewelry?

Did that translate to online?

Are able to create some of the --

Yes, on -- it's still I think it's probably still only about 12%, 10% to 12% of the total mix; it varies by store.

But eventually, we think that is going to grow and obviously, when we built these stores too, we had planned to have things other than just shoes and handbags and jewelry in it.

We had planned to have some outerwear, as well as some apparel in there, and we'll have more news on that to come in the future.

But in the meantime, I think Sam and the team is doing a good job in terms of really trying to learn how to have these stores not only inform what they do on the brand and the line going forward and test product as you would expect them to do, but really to begin to learn a little bit more about the customer too.

So early, but yes, we like it, but want to take a pause.

I think that's what I said last quarter, and just digest these stores and make sure we do, to your point, really have a model that works.

Yes.

Okay.

Thanks very much.

Yes.

Sam Poser, Susquehanna.

Good afternoon.

Thank you for taking my question.

I just want to clarify how we should think about the SG&A in the back half of the year, just to follow up on what Scott asked?

Because based on the guidance, it needs to be down fairly significantly.

So what -- how are you planning on trimming the spending, to what degree?

Well as you'll remember, last year we had pushed some SG&A out of the second into the third, and so I think we're back to a little bit more normalized rate there.

And then I think in Q4 I think is where we're seeing the biggest gains.

So okay.

Okay, and then the conversation keeps talking about the environment, and the environment out there is what it is.

One of the other conversations that's going on is that people are looking for experience, for brands and for so on.

So given that it's an equal opportunity annoyance with the environment, what are you doing to really work on in improving the customer's experience in the stores to get them to come?

Because yes, product is king, but there's a lot of product and to the point of it's harder to move clearance, that means that the consumer is so well-informed right now, you need to do something to entice them, which may be beyond product.

It may be further experience and so on.

So do you have things going on in that regard with Famous, specifically, and the other brands, as well?

Sam, it's Rick.

There's all these things where if you've been tested, we have found anything yet that we think would be something we would roll to all 1,000 stores, and I think it's -- we're trying to understand what that is.

We're a value family-channel footwear, which has been part of it.

Our business has been built on convenience and speed of service to the customer when they're in the store.

So when you talk about experience, we try to make that experience as good as we can make it, bringing -- we have iPads in stores now for associates in about 500 stores so that we can have more access to show the customer more opportunities to purchase other colors and styles and varieties that we have.

And so we're working on things like that.

But again, as far as re-creating the inside of the store, so that it has a better experience, we're a ways --

No, that's not what I meant.

I mean, do you have good conversion rate?

Your conversion rates are good, Rick.

So these people coming in: they're finding it, but you're not getting enough people coming in.

So maybe it's what's the experience that you can offer the consumer to entice them to come in beyond finding a great value on a pair of shoes, because that may -- what got you to the party may not be what gets you from here on--

Our stores are relatively small, so if you're asking are there other things we should be doing inside the store, we have to give up product availability in order to do that.

So I think we have -- not that we haven't thought of that, but I'm just saying, there's some trade-offs and the fact that our stores don't have a lot of extra space in them.

So if we decided to -- and I'm not suggesting we would do this, want to put a coffee bar in a store, doesn't -- as an opportunity to get an experience, well, we'd have to take something out.

Because there's not really extra space to do that.

So I think we're -- we've looked at some of these things, Sam.

We haven't been able to come up with what that is yet.

Doesn't mean it's not out there; just means we haven't been able to come up with it.

And in some ways, Sam, you're asking the million-dollar question, right, that everybody is searching for and how are you going to drive traffic to brick-and-mortar and drive traffic in total to all ways that the customer is shopping.

And I think today, it's still a really good one, good question.

And what we're really trying to do is make sure that we have the right product and assortment in the stores for the customer, that we're really upping our game in making the investments around how she's shopping, whether it's mobile and online and making sure that's easy for her to do.

We run programs with our associates in store about how to connect with the customer and do that thing.

So I think it's -- your point's a good one; it's an evolving marketplace and we're going to have to constantly challenge ourselves.

You flip it to the other side to Sam Edelman, and it's a great example, I think, of a place that, actually, we have a tremendous amount of opportunity to not only present Sam as a brand and what he's all about and the full assortment.

But I would tell you that we -- there are a number of things in the next 6 to 12 months that you'll see us do in some these stores that I think will be quite a bit different than what you're seeing in there today, and it's not coffee bars or anything like that.

But in terms of new ways that we think we can actually engage the Sam girl to this brand so that she wants to shop even more.

So it's a good question not an easy one to answer.

Could I have one last follow-up on that?

Could it, Rick, could it just be that the she that you're going after is a much narrower -- you may be casting too wide a net, that you just need to target the net more specifically to go after her, which it might have been 20 kinds of women five years ago and now it's five kinds of women that are shopping there.

And --

That's a lot of what the work that Rick's been doing around this high-value customer.

Yes, I think that's -- I think you're exactly right.

We believe there's a customer that has higher value to us than other customers.

So when you start making those decisions, you are going after a smaller pool of people that will shop with you more often, spend more when they shop, and be a longer lifetime value.

All those things are the things that we have found in these customers we have in our current database and why we're so interested and so invested in making sure we get more of them to come and shop with us.

So if they like experience, I'm sure they would like a different experience if we could make it better, so I don't think it's something we have to -- we're not going to stay the same and think they're going to like it.

We're going to keep evolving with them.

But you're absolutely right; it's more about finding those customers that have a stronger desire to buy footwear and then have a stronger desire to buy footwear from you, which Famous, and therefore, make sure you're talking them directly and getting as many of them as you can to shop.

That's a narrower field than we typically had talked to over the last 50 years of our existence.

I think I've killed the horse, so thank you very much.

Good luck.

You're welcome.

Thanks, Sam.

William Reuter, Bank of America Merrill Lynch.

Good afternoon.

My first question, when you talk about the choppy performance at Famous Footwear by month, I'm wondering if you are seeing similar or consistent performance across the store base or if you're seeing greater divergence in this environment between the good stores and the bad stores.

I don't think so.

I think there's pockets of -- like everything, there's always pockets of the country that seem to perform better or worse depending on the moment, but nothing that would make us think that there's some divergence of business by type of store or by area.

So --

No, I think it's more driven by the time of need, and the need changes throughout the season based on all kind of external events.

So I think the days of being able to measure a weekly comp and assume that it's relevant year over year when you're no longer setting for the entire spring and February people are buying for spring throughout February, March, and April.

I think we have to look at it beyond just a week to week comp basis, because we don't see a divergence in stores.

I think when the weather is good and people want to buy sandals, we see really good performance across every demographic that's having the nicer weather.

I think it does tie back to the time of need is really what's driving the difference.

And when I look at our quarterly performance, there is no trend when you look at up a month, down a month, up a month, down the month.

That's why we try to go back and really talk about the back-to-school season, because I think back-to-school season we think is going to be about where we thought the back-to-school season for the back two weeks of July.

Obviously, we're lower than they were the year before.

The last week compared to the same week a year ago, up quite a bit more than they were in that same period a year ago.

So I think it's more just the time of need than it is some divergence across stores.

I was thinking about this in the context of there's a lot of retailers that are changing the size of their store base, whether it's through store closures or alternatively through growth.

And I'm trying to think about over the next couple of years what that could mean in terms of you and the Famous Footwear segment in terms of where you think that the right store base to maximize profitability is.

Yes, I think our current thinking and it has been that way for several years is, the size of the store base will be relevant on where our opportunities are on the real estate side.

And again, we've had a strategy against a customer target that we've been able to identify opportunities in trade areas where we don't have stores where there's enough of these customers that they should be able to support a store and we've started to go down a real estate path of placing stores in those markets.

A few are open; more will come online.

The ones we've opened are doing nicely, so we think there's a strategy around putting the store near the customers who you want to the attract are -- is a strategy.

But as far as does that mean we're going to go out and need to open 300 or 400 more stores or we're going to close 200 or 300 stores, the answer to that is that's not how we think about it.

We think about it on a more -- a basis of making sure we're -- the stores we're opening are right for our customers, right size and right location.

And those stores that are starting to not become right for our customer, we look at it making sure we go about closing them so that our store base should just speak -- if we do this correctly, our store base should do nothing but get more profitable for us, and it should help increase our business, whether that means we're going to have 5% more stores or 5% less stores is not really the issue anymore; it's about having the right ones.

Okay, and then an earlier question about M&A, it wasn't entirely clear to me whether you were saying that you guys were not active in terms of the market or you were saying that you just didn't want to make any comment about where you are in that process at this point.

Is there anything you can provide there?

No, I think even if we were in the middle of something, we wouldn't be able to talk about it on this call.

So obviously, we understand the importance of putting capital to work.

And we're a portfolio of retail and wholesale and of brands.

And certainly in a number of different conversations.

But nothing to report at this time.

We have no further questions in queue at this time.

I would like to turn the conference back over to our presenters.

Thank you very much for joining us for our second-quarter call.

I'll look forward to seeing you all along the way, and if not, before the third-quarter call.

Take care.

Thank you for your participation.

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