Caleres Inc (CAL) 2019 Q2 法說會逐字稿

Good afternoon and welcome to the Caleres Second Quarter Earnings Conference Call.

My name is Jesse, and I'll be your conference coordinator.

(Operator Instructions) As a reminder, this conference is being recorded.

At this time, I will turn the call over to Ken Hannah, Senior Vice President and Chief Financial Officer.

Please go ahead.

Good afternoon.

I would like to thank you for joining our second quarter 2019 earnings call and webcast.

A press release with detailed financial tables as well as slides are 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, but not limited to, the factors disclosed in the company's Form 10-K and other filings with the U.S. 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 me on the call today is Diane Sullivan, CEO, President and Chairman.

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

Thanks, Ken.

And good afternoon, and thank you for joining our second quarter call and for your continued support of Caleres.

During the quarter, we continue to successfully execute on our strategies to strengthen the emotional connections we have with our consumers.

Our deep insights combined with our industry-leading footwear capabilities allowed us to deliver relevant product supporting continued growth in the Brand Portfolio, positive same-store sales growth at Famous Footwear and record second quarter total sales.

Our focus on expense discipline also allowed the top line performance to translate into improved profitability for the quarter, resulting in a solid increase in earnings per share.

Turning to the details of the second quarter.

We are pleased to have delivered product that resonated across multiple consumer segments this quarter.

The weather certainly resulted in a later spring that impacted our sandal business and there was a noticeable increase in demand for novelty and newness.

We also experienced retailers managing their inventories, which led to a moderation in replenishment orders.

Fortunately, the investments we have made in product design, development and speed to market allowed us to manage and respond to these trends in a timely, efficient and profitable way across our Brand Portfolio.

We also made excellent progress injecting more freshness into the assortment at Famous Footwear, contributing to a 1.5% increase in same-store sales and successfully worked our way through certain underperforming athletic styles from a key vendor in the quarter.

We are pleased to have returned to positive growth with this brand heading into back-to-school.

We expect our underlying momentum at Famous to continue into the third quarter as we have experienced a solid start to back-to-school and are confident that we're on track to deliver our eighth consecutive year of positive back-to-school same-store sales growth.

In addition to delivering compelling products, we also increased consumer engagement through our loyalty and marketing efforts.

We have seen encouraging results from our revamped loyalty program FAMOUSLY YOU REWARDS by driving increased engagement among existing members and continued growth and engagement of our new and reactivated membership base.

Existing rewards members are shopping more frequently and they are spending more per shopping occasion.

We look forward to hearing and learning more from our consumers throughout this important back-to-school season.

We also experienced a solid response to our new marketing approach with a return to TV advertising at Famous Footwear contributing to the sequential improvement in performance during the quarter.

We've also begun to test some investments in the in-store environment in order to ensure that we deliver an exceptional and consistent experience across our stores and are pleased with the initial response from our customers.

These types of initiatives are not limited to our Famous Footwear operations.

We have seen a positive reaction to recent collaborations with local makers that we have launched in our newest Naturalizer stores on Chicago State Street and in Herald Square, New York.

These pop-up shop experience offer a revolving assortment of artisanal products that sit alongside the core Naturalizer merchandise introducing our products to new consumers, while ensuring that our stores stay exciting for our loyal Naturalizer customers.

Also during the quarter, we continue to evolve our portfolio, enhancing the relevance and diversity of our offering, establishing a new partnership with Veronica Beard and relaunching Zodiac.

We see great potential in our exclusive partnership with Veronica Beard, the most exciting and fastest growing new brand in the contemporary fashion space, and I have to tell you it is run by a dynamic and powerful team of women.

With the relaunch of Zodiac, we'll also be able to effectively target a more casual segment through their offerings in more of a Bohemian and western design trends.

Both of these brand launches will really capitalize on today's consumer's love of newness and new brands.

Looking forward to the second half of the year, we are well positioned with relevant product from across our diverse portfolio.

This diversification is the foundation of our business that ensures that we can consistently deliver sales and earnings growth in both expanding and contracting markets.

We have also built flexibility into our model, which is allowing us to meet increasing consumer demand from -- for newness in an environment where retailers have become even more focused on inventory discipline.

We are well positioned to deliver on these changes in consumer and retail preferences, given the investments we have made in the speed-to-market and in our improved direct-to-consumer fulfillment capabilities.

We have reflected this in our expectations for continued growth in the Brand Portfolio in the second half.

We also recognize the need to continuously identify opportunities to improve efficiency across the organization creating the fuel we need to fund the long-term growth opportunities that we see ahead of us.

With everything going on right now we must focus on what we can control.

This has included moving quickly to adapt our supply chain to mitigate the impact of increasing tariffs for footwear produced in China.

We have actively diversified production away from China and now source approximately 40% of our products outside of China, up from less than 15% 5 years ago.

We continue to leverage our sourcing expertise, shifting additional production out of China, working with our partners to reduce cost, while also selectively exploring price increases where they will be least disruptive to our consumers.

While the situation remains fluid, we are working this real-time and are confident that we will find the right solutions to minimize the risk associated with tariffs throughout the balance of the year and into 2020.

And with that, I'd like to turn the call over to Ken for a financial review.

Thank you, Diane, and good afternoon, everyone.

For the second quarter, we reported earnings per share of $0.61.

Our adjusted earnings per share was ahead of last year and expectations at $0.62, excluding $0.01 of Vionic integration-related expense.

Our consolidated sales for the quarter of $752.5 million were up 6.5% over the prior year, including the addition of Vionic and 2 additional months of Blowfish sales as well as the planned reduction in Allen Edmonds sales.

Our Brand Portfolio total sales were up 17.9% year-over-year in the quarter or 0.4%, excluding the impact of acquisitions and the planned reduction at Allen Edmonds.

Famous Footwear delivered a strong second quarter reflecting significant progress on our product assortment and marketing initiatives.

Same-store sales were up 1.5% for the quarter, reflecting sequential improvement throughout the quarter and are up 0.4% for the first half.

Total sales at Famous Footwear were $419.8 million, down 2.2% as we operated 35 fewer doors versus the prior year and ended the second quarter with 973 total doors.

Let's turn to consolidated gross profit and margin.

For the second quarter, consolidated gross profit of $305.9 million was up 4.4% and our reported gross margin came in at 40.7%, down approximately 80 basis points from the prior year, reflecting continued growth in the Brand Portfolio.

Our Brand Portfolio reported gross margin of 34.7% in the second quarter, down approximately 80 basis points from the prior year, primarily driven by markdowns on spring inventory, less replenishment and retailer concessions.

As Diane mentioned, the later spring impacted our sandal businesses, retailers were managing inventories and there was a noticeable increase in demand for novelty and newness all impacting margin in the second quarter.

For Famous Footwear, second quarter gross margin of 43.4% was down approximately 15 basis points year-over-year.

This was considerably better than we had expected as the team effectively cleared inventory in advance of back-to-school.

Our consolidated SG&A expense for the second quarter was up 3.4%, including the addition of both Vionic and Blowfish.

SG&A represented 35.6% of sales, a reduction of more than 100 basis points from the prior year.

Our teams have done a great job managing what they can control.

Our depreciation and amortization for the second quarter of $16.3 million was up 10.9% versus the prior year, primarily due to the additional trademark amortization related to our Vionic acquisition.

Our second quarter operating earnings were $37.8 million or 5% of sales.

Our adjusted operating earnings of $38.4 million were up 10.4% year-over-year and represented 5.1% of sales.

For the Brand Portfolio, second quarter adjusted operating earnings were $13.9 million or 3.9% of sales with adjusted operating earnings for the first half of $34.6 million, up more than 10%, including the addition of our acquisitions.

Adjusted operating margin was down 211 basis points versus the same quarter a year ago, reflecting the declines in gross margin mentioned earlier, and a tougher selling -- sandal selling season particularly at Vionic.

Adjusted operating margin for the first half was 4.9%, down 40 basis points from last year.

At Famous Footwear, second quarter operating earnings of $31.5 million represented 7.5% of sales and reflected the planned clearance of certain products ahead of back-to-school.

Our net interest expense for the second quarter of $7.4 million was up $3.8 million from a year ago, as we used our revolving credit facility to finance the October 2018 acquisition of Vionic.

Our second quarter tax rate was 23.7% and our adjusted EBITDA for the first half of 2019 was $101.5 million with an adjusted EBITDA margin of 7.1%, essentially flat when compared to the same period a year ago.

Our capital expenditures were $8.8 million for the second quarter and down approximately $3.3 million year-over-year.

We've completed the implementation of our new automation capabilities in both of our facilities and our capacity is ramping in line with our expectations.

Turning to our balance sheet.

We ended the quarter with $42.6 million of cash and equivalents.

Our outstanding borrowings under our revolving credit facility were $300 million at quarter end, down from $335 million at year-end, but up on a year-on-year basis due to the October 2018 acquisition of Vionic.

We bought back $30 million of common stock in the second quarter and returned close to $36 million to shareholders in the first half of 2019.

Our consolidated inventory position at the end of the second quarter was $792.1 million.

For our Brand Portfolio, our inventories were up year-over-year primarily related to our Vionic acquisition, in-transit inventory for new and fresh product as well as a moderate increase in carryover of core spring goods.

We fully expect to be able to sell through this core spring inventory in the coming months and that our Brand Portfolio inventory will be down on a year-over basis by year-end.

At Famous Footwear, we ended the quarter with inventory down 0.5% year-over-year.

Our operating cash flow for the company was $116.6 million for the first half, up 28% over last year.

Famous Footwear, once again, delivered solid and consistent cash flow in the quarter.

We are reiterating our guidance for the year, which I will remind everyone is total revenue of approximately $3 billion, Brand Portfolio sales, including acquisitions, to be up low to mid-double digits; Famous Footwear same-store sales of flat to low single digits; and adjusted earnings per share of between $2.35 and $2.45 per share, up approximately 9% year-over-year at the midpoint.

This obviously takes into account what we knew about the tariff situation at the end of last week as that is changing daily.

And before we begin Q&A, I'd like to turn the call back over to Diane to provide some closing remarks.

Thanks, Ken.

And just to wrap up before questions, we're pleased with our ability to react quickly to the changes that we've seen in the environment, which we see as an important validation of the capabilities of our people and our model.

As a company, we remain focused on operating with excellence and creating consistent profitable and sustainable growth over the long term.

We look forward to sharing more with you about our plans and long-term vision for Caleres at our upcoming Investor Day on October 2. And with that, I'd like to turn the call over to the operator for Q&A.

(Operator Instructions) Your first question comes from Laurent Vasilescu with Macquarie.

Congrats on the progress for the second quarter.

I wanted to first focus on Famous Footwear.

I think in your prepared remarks as well as the PowerPoint presentation, you talk about the progress by months.

Maybe could you guys maybe parse that a little bit more how the months progressed and maybe the quarter-to-date comp trend?

Yes.

Laurent, thank you for the question and for the comment.

It really was at Famous, we're very pleased with the great execution that the team did in the second quarter and it was a combination of 3 factors, with the great execution from an assortment and merchandising standpoint making sure we were giving our customers access to very high demand styles and brands across categories.

I think they really were super sharp in terms of their assortments.

We also saw improvement in our athletic assortment with a return to growth at Nike, that helped us a bit and also the enhancements in our marketing and our loyalty programs, including that return to TV advertising, which generated a response that we were really expecting to.

So it really wasn't any one thing.

It was really a combination of all of those things that allowed us to continuously improve our performance sequentially in the quarter.

And as I said, we are really feeling very confident that we're going to show the eighth consecutive positive comp for back-to-school season at the end of third quarter when we report.

So really feel like everybody has done a terrific job, staying hyperfocused and executing well at Famous.

That's great to hear.

And then maybe, Ken, I think, Slide 6 of the PowerPoint presentation it parses out about $0.16 in expenses related to brand acquisitions and exits.

Could you possibly parse that out by brand and maybe by quarter for us?

Yes.

I mean, most of that is all associated with the acquisition of Vionic.

So the -- we had called out -- we've taken all of the markdown expense that was associated with the announced exits and that was of the Carlos Santana brand and DVF.

So all of that is behind us and for the most part all of the Vionic integration expense that we had called out for this year, which I'll remind everyone was the amortization of the purchase price back through the inventory, the purchase accounting and that pretty much turned through the first half of this year.

Okay.

That's very helpful.

And then can you parse out -- in terms of the guidance, it's encouraging to hear that you're reiterating it in the face of day-to-day tariffs.

Does the guidance include the incremental tariffs at 10% or 15% we'll see from Lists 4A and 4B?

And then secondly, where should the revolver stand by the end of the fiscal year?

Yes.

So the revolver worth $300 million, and we had expected we will be down below $250 million at the end of the year.

And then with respect to tariffs, Laurent, our guidance obviously up through Friday, that's what it includes and it's certainly the tariffs and everything is the subject at the moment.

And I think it's important to keep in mind that we do have this diverse portfolio, and we expect less than 40% of our business is going to be impacted by those proposed tariffs.

As we mentioned in our last call, we have taken the steps to diversify the production.

We want to make sure we continue to deliver quality to the customer, where 40% of our products are outside China.

We leverage our sourcing expertise.

We're continuing to -- because of the sourcing powerhouse that we have, we are able to move at an appropriate pace of what we think is right, and we're selectively taking a look at price increases where they are really going to be least impactful to our consumers.

So the situation continues to be really fluid.

We were -- everybody, I think, eyes went up on Friday with the latest tweet.

And now you never know, here on Monday, what it's going to be.

But we're working in real time and are confident that we're going to find the right solutions to minimize the risk associated with the tariffs for the balance of the year.

So we're working it every day and doing everything we need to do.

Your next question comes from Laura Champine with Loop Capital.

Really a follow-on.

So what is the assumption for the impact of tariffs?

So your guidance is unchanged.

It seems like you're executing well.

What are you putting in for downside from tariffs?

I've presumed the gross margin, if not, gross margin and sales in the back half.

Yes, Laura, I think what we tried to do is take into consideration what had been communicated as of Friday.

And so there is the list that goes into effect September 1, and then a lot of the athletic products that was pushed really out to December 15.

And so there was lots of tweets and rhetoric on Friday about potential for it to go higher.

This morning, there were talks of it being canceled altogether.

But we feel like we have contemplated in our outlook what we knew as of Friday and what is currently on the list that were -- was going to be effective on September 1 and what was on the list to be effective December 15.

Got it.

And then on the Brand Portfolio, the comp is down, but that doesn't seem to be hurting growth.

Is that cannibalization?

What am I seeing in that comp?

No, most of that comp is really the planned reduction in Allen Edmonds.

Got it.

Yes.

That's really their direct business that we took down is showing up in that negative comp.

Your next question comes from Rick Patel with Needham.

I'll add my congrats on the strong execution as well.

Just a follow-up on the tariff questions.

Any context about how much of the assortment is affected by the September 1 tranche versus December 15 one?

Yes.

So on the September 1 one, it's about 70% of our -- of products that are made in China for us.

And then just hoping you guys can talk about the outlook for the Brand Portfolio.

So obviously the department store space is challenged right now and you touched on how they're managing inventories in a tighter way.

How do you see this affecting the Brand Portfolio?

And could you put your growth expectations into context for us for 3Q and 4Q?

Yes.

I think I would start by saying that segment was really what had a negative impact on the margin for Brand Portfolio in the second quarter as we tried to make sure we had accounted for the appropriate level of markdowns and also discounts and allowances that were required.

So we believe that we have taken that into consideration and the outlook and have closed out in the second quarter reflecting a lot of that in our second quarter results.

Yes.

I would maybe add to that, Ken, too that we entered the year knowing that the environment was going to be volatile, that's what just happened in the last 90 days.

And really our view about how we're managing it hasn't changed, and it really comes back that we've got to keep our eye on the consumer's needs because they're changing more than ever and there is no doubt about it that as retailers continue to manage their inventories more carefully we have to make sure we redouble our efforts on this front of making sure we create new product and a sense of urgency and newness all the time because we could see already this spring that the consumer, she wasn't interested in core products, she wasn't interested in anything that she had seen before.

It was really all about newness.

So we've really redoubled our efforts on that front in the second quarter, really looking at our business in the quarter, thinking about what we had booked for the third and fourth quarter and then making sure that we were responding to that and I think, again, you've heard us say this we've really been trying to diversify our business model so we can adapt quickly in these kind of environments.

And we think ultimately that is what allows us to drive this consistent profitable and sustainable growth no matter what the environment is.

So it really is making sure we stay incredible agile and flexible and that our teams are really paying attention day-to-day on what the consumer wants.

Great.

And lastly, can you just provide some color on the outlook for operating margins as we think about Famous versus the Brand Portfolio for 3Q versus 4Q?

I know there was some lumpiness in expenses last year and you'll lap the Vionic acquisition later in the year, so it'd be great to have some context on modeling.

Yes.

I think as we look at kind of the year, obviously, there's been a little bit of a shift.

There's about 60% of the earnings that's actually coming in the back half of the year this year.

And obviously a big piece of that is third quarter and back-to-school.

So the margin profile, we had initially thought that Q2 could be for Famous down as much as 100 basis points, ended up down 15.

I think the teams did a nice job managing through that, and we're able to come through a little bit favorable.

The Brand Portfolio with the question you started with and what we've seen in the department store space in our sandal business, which is a big piece of our first half results, that looks very different as you get into Q3 and Q4, and we start to see less of a margin impact from those areas of the business.

So I don't know, Diane, if there is anything you would add to that?

Yes.

Well, I think we feel pretty good about how we're lined up in terms of the categories and the assortments really across the company, both the Brand Portfolio and the Famous going into the third and fourth quarters.

And again, back to the sandal penetration, we don't really have that headwind because we do had a pretty high sandal penetration here.

We've really taken all of the medicine that we need to take on that and still have delivered a decent quarter.

So we're feeling, I think, Ken, to your point, we're feeling as optimistic as you can be about where -- how we've positioned ourselves.

And it's on us to continue to execute well against that.

Your next question comes from Chris Svezia with Wedbush.

Congrats on the positive performance there.

So I got a couple things here.

I guess, first, to go back to Laurent's question, just what -- I don't think you answered it, Diane, but what was the cadence of the Famous Footwear comp throughout the May, June, July periods?

What was the trend by month?

I didn't give the trend by month, and I'm really not going to give the trend by month, Chris.

I think what we basically said was there's sequential improvement that we saw throughout the quarter.

I think you can see that the power of the portfolio and we have believed that as -- that we will finish the back-to-school season showing a positive comp for the eighth consecutive year.

So I didn't go through it month by month, but really nice sequential improvement and really pleased with the consumer response to everything really that the Famous team has put into place.

We're feeling very good about the foundation going forward.

Okay.

So let me ask it this way.

As I kind of look forward, everything that you've done at Famous, the team that's done there, in terms of products, Nike getting incrementally better.

You brought in a kids refresh with some brands as well.

You've got the loyalty program, marketing.

So I guess the question is, I know the guidance is flat to up low singles for the year.

You're kind of flattish for the first half of the year.

Seems like momentum is building.

Any reason why comps wouldn't incrementally accelerate from here or at least hold these levels?

Just -- I know it's a positive for back-to-school, but I'm trying to (inaudible) a little bit more about sustainability given everything that you've put forth.

Yes.

I think we feel very good about the business, but we -- it's not only just Famous, we also have the Brand Portfolio.

We're running the entire company, and we look at the opportunities and risks across the entire brand.

So we think we've calibrated kind of our guidance and given you insight into that, taking into account all brands within our portfolio.

So while we feel really terrific about the -- what we've seen so far on Famous, could be better, but until we see it we feel like our current guidance is appropriate.

Okay.

And just on the -- just curious what's your thoughts, Diane, about the boot business into the back half of the year, just sort of how you're thinking about it, either for Famous or for your Brand Portfolio relative to maybe 3 months ago or where it stands today?

Yes.

I actually would say, Chris, on that point, we feel a bit more optimistic about it.

I think everybody in their early days there of the second quarter were really kind of wondering kind of what was going to happen, but kind of what we're seeing early right now, Dr. Martens at Famous is terrific.

Short booties are great.

Sneaker booties have been -- early read on that has been very good as well.

So actually any of the preview sales that we've seen some of our retailers do in the summer here has really shown that boots look good.

So I would say where we were maybe a little conservative about where boots were going to be, we actually saw them as a plus in the quarter, in the second quarter and kind of think that momentum will continue.

So keep your fingers crossed on that because if that works that way that will be great for the industry as a whole.

Okay.

And then just last thing here, just -- Ken, just maybe kind of thought process for the third quarter.

I know you don't guide quarterly, but it's always helpful that people have a sense of how you're thinking.

I think last call, you indicated third quarter could be up from an earnings perspective kind of low to high single digits.

Obviously, you have to back into what the fourth quarter looks like, but any refreshed thoughts about third quarter given Q2 came in a little bit better, margins a little bit healthier, comp a little bit stronger.

Just any color about Q3 from an EPS would be helpful.

Yes.

No, I mean, I think, conservatively, when we were talking before, we said we really thought that would be flat to up slightly.

When we look out into the back half, I think, as Diane mentioned, we see good momentum and sequentially at Famous, and we see lots of uncertainties across some of the other pieces of the business that literally is changing daily.

So when I look at that, the one thing that I think we want to make sure people understand is that the timing of the earnings is a little bit more weighted towards the back half.

And with that, the corporate expenses that we've continued to manage down, I think 3 years ago was $45 million in expense coming through that other segment down to $43 million to $42 million.

I think it's $40 million is kind of what we're expecting this year.

And so there is a little bit of timing shift between Q2 and Q3 just based on the shift of the earnings.

So when I look at SG&A, we were down about 100 basis points in Q2 year-over-year.

And we think that, that will continue and it will -- we'll probably be somewhere around 35% range in terms as a percent of sales in Q3.

And so that should give you a pretty good idea in terms of how to model.

Your next question comes from Steve Marotta with CL King & Associates.

Let me offer my congrats on the quarter as well.

Diane, would you say that there was an acceleration from the second quarter in the current quarter-to-date period from a comp standpoint at Famous?

There's been sequential improvement throughout the quarter.

Yes, there has been.

I understand.

Could you also provide a little bit of historical framework around the percent of sales by month in August, September and October, trying to determine how much of the quarter has passed?

Oh, I would say -- can I -- I don't have that in front of me.

We can look that up for you, Steve, but...

We can talk about that offline.

Yes, be happy to.

Sure.

Ken, was there any material shift in SG&A in the second quarter to the third quarter or vice versa?

No.

Not particularly.

I mean across the businesses, obviously, people were cognizant of trying to make sure that anything discretionary that they were being prudent.

But really what we had talked about in the expense in the other segment would be the only shift.

We had -- a year ago in the second quarter, we had some increases in expense associated with some of our medical and casualty where we're self-insured.

And so those numbers were little bit higher in the second quarter last year.

And so those were favorable in the second quarter.

And so sequentially, there's a little bit more expense that would come through in Q3 there, but that's really tied to the level of earnings and the sales.

So it's pretty straightforward.

There wasn't a lot of timing pushes out of Q2 into Q3.

Okay.

That's helpful.

Last question, can you just remind how much duplicative costs there were in the second half of last year associated with the DC?

So the duplicative was really across the first half.

And then in the second half when we finally settled on the exit, that all came out as a nonrecurring expense.

So in our non-GAAP numbers, there was very little duplicative coming through there.

(Operator Instructions) Your next question comes from Sam Poser with Susquehanna.

First of all, what was the total Brand -- the Brand Portfolio revenue on the -- up or down on the existing business, including if you just put Allen Edmonds into that number?

Yes.

So we had -- because we had planned Allen Edmonds down, we had taken it out and it was up.

And Allen Edmonds, as you saw on the comp showed the retail comp for Brand Portfolio was down 9.3%.

No.

But in the Brand Portfolio wholesale number there, what was the...

Up 0.4.

Right.

Up 0.4.

Up 0.4.

He is wanting to include Allen Edmonds, the plan...

Right.

And then the other -- and so you did about $306 million in Brand Portfolio plus Vionic to get to the total number.

That's right.

Okay.

Secondly, when will this planned down of the -- when will you be complete and Allen Edmonds sort of turns around and sort of gets back to where you want it to be?

Well, I think we're making good progress, Sam, on that.

As you know, those kinds of things don't happen overnight, and we made that move late last year to reposition the business and make sure that we reduced the amount of promotional activities.

What we are seeing is improved relevance of our product assortment.

We have reduced the level of promotional activity, that's been good.

Over time, we definitely think we have the right plan in place, but we certainly see, and I think there is no -- very obvious out there that the move of men to sneakers and moving out of dress shoes has been faster than ever.

So we really need to continue to get our assortments back in the right balance.

We've introduced sneakers.

It's now a growing part of the assortment there.

We think we've even got to accelerate that some more.

So it doesn't happen overnight, but we know that and believe that we have the right plan in place to improve our profitability of that business and connect with the consumers even better.

So we feel like we're making the progress that we had hoped.

Never fast enough, of course, but we feel like we're making the right kind of progress.

So when you think about the China -- I'm going to go to China again, I'm sorry.

But when you think of the China exposure.

I mean, a big chunk of the children's business -- I mean, that's a business that's hard to get out of China and when you think about -- we're hearing some rumblings that prices might start to go up in kids because it's not a movable business.

When you think about the margins going forward with the tariffs, even if the kids business may be pushed to the end of the year.

I mean, how do you look at -- how are all these pricing -- potential pricing changes going to work?

Are you doing it item per item?

Are you trying to average it across things or the brand that you're working with at Famous?

How are they approaching it?

How are they thinking about it?

I mean, I know it's very fluid as you put it, but can you give us some color on where things are on all of that?

Yes.

A couple of things.

On the kids side of it, I -- it's -- we don't see that as a big risk for us.

With that we'd really be affected, obviously, at Famous.

The bulk of our assortments there at Famous are really in athletic and sport and where the pressure really might be is other areas.

So I think right now we're liking kind of what we see in the kids business and the teams will take a look if increases are coming through, we'll have to assess that at that time, but right now we don't see that as being a significant factor for Famous.

And I think again because the big athletic brands and most of their key vendors have diversified their sourcing base and have done that for a while.

So I think we're in reasonably good shape there, always paying attention though.

And I think then the other thing on the Brand Portfolio, you said it exactly right.

There is not a one-size-fits-all and the good news is when the consumer wants newness, there is not -- we're really trying to keep evolving the styles because we're looking at -- we do look at a brand by brand, style by style and where we think the perceived value is in each of the products and where we can either add value or do whatever we have to do.

So there is no one-size-fits-all.

I think our teams are doing a great job day-to-day trying to figure out what the best approach is.

Some are really easy, some are not so easy and it really depends.

And then lastly, on Vionic.

Now Vionic, when you bought it, it's a very -- it's a premium comfort brand.

I would assume that's how you are positioning it or how you like to think about it.

Is it a fair statement?

Sure.

That's a fair statement.

Why is it in Famous Footwear?

I mean, I would put in -- I mean, if for the same reason, like Sam Edelman shoes are not in Famous.

So they have some Circus stuff in Famous, but not Sam.

Why is Vionic in Famous?

Well, I think, the team wanted to see whether or not some of the entry-priced product in Vionic would resonate with our -- and Famous would resonate with the consumer.

And so I think it's been taking a look at whether or not that would make any sense.

So that's what the teams did.

It was a very small portion of the total buy.

It was really a test, and I think we continue to test lots of things in Famous Footwear and they have a number of different test store groupings against I would say high household income stores, stores that have higher penetration of kids.

So there's always testing going on of some things.

So I wouldn't read too much into that one, Sam.

I think the teams will do the right thing because it's really all in how the consumer -- if it works, so to say.

Well, I understand.

But I mean, you could probably sell some Sam Edelman shoes at Famous too if you tested that, but you haven't tested Sam Edelman in the store, so...

Well, we have a great business with Circus that we're continuing to -- Circus by Sam Edelman.

But that's a sub-brand, and I mean, why not just create a sub-brand of Vionic for that, that way from -- like the brand itself just stays pure.

But ...

Well, it's interesting you mentioned that because one of the things actually that Vionic has been working on is something called Vionic Beach and that is an idea exactly about what you're talking about that is actually it's primarily sort of sneakers and sandals and flip flops, and we're kind of positioning it as -- it against early.

We haven't done a lot of -- in fact, I think it just came in for our Las Vegas selling, but we're looking at that as being an opportunity to reach a different consumer and different channels of distribution to your point and are hopeful that, that -- if we -- once we get that right that, that would the avenue for channel -- stores like Famous and really others as well.

So we're still in the getting everybody aligned around where the opportunities for growth are at Vionic.

So I'm confident that we'll be doing the right things on that, Sam.

Your next question comes from Chris Svezia with Wedbush.

Two of them, actually.

Just how does the renminbi and the movement we've seen relative to the dollar, what, 4% move since August, 8% since mid-May, how does that affect your purchasing?

Just curious how you think about that.

And the second question, just with Ken, when you mentioned leverage 100 basis points, so that would continue, and I think you said Q3 SG&A rate of 35%, I think last year you did 34.2%.

So I just want to make sure I got that or maybe I'm missing something.

Yes.

So on the RMB, the -- as we go and place orders with the factories, we are taking into consideration what the RMB is at that time, that is what the cost for that factory is.

So any changes would come through with new orders placed specifically tied to RMB.

And obviously, we're working with those partners to try to mitigate any impacts of these tariffs and so where they're getting savings, we're working with them to share that with us to help offset the pure tariff.

But there's...

And Ken, just quickly.

How quickly does that happen?

What's the turnaround on that?

On any orders placed today get the benefit of what the costs are.

So with our speed model, obviously, we roll that through quicker than a traditional order.

Okay.

All right.

And the SG&A question?

The SG&A, what we said is that we leveraged 100 basis points in the quarter and that the split on the other that was between the first half and the second half would be more closely tied to the earnings contribution in the second half, which we said was up in the 59%, 60% range when you take the midpoint of our guidance and you back out our actuals through the first half.

There are no further questions at this time.

I turn the call back to the presenters.

Thank you very much for joining us on our second quarter earnings call, and we look forward to seeing you on October 2 at Investor Day.

Thanks very much.

This concludes today's conference call.

You may now disconnect.