Steven Madden Ltd (SHOO) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Steven Madden, Ltd. conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

Any reproduction of this call in whole or in part is not permitted without prior express written authorization of the Company.

And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference Miss Cara O'Brien of Financial Dynamics.

Please go ahead.

Thank you, operator.

Good morning, everyone, and thank you for joining this discussion of Steven Madden Limited fourth quarter and year-end results.

Before we begin I would like to remind you that statements in this conference call that are not statements of historical or current fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risk, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

The statements contained herein are also subject, generally, to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the SEC. Also, please refer to the earnings release for more information on risk factors that could cause actual results to differ.

Finally, please note that any forward-looking statements used in this call should not be relied upon as current after today's date.

With that out of the way, I would like to turn the call over to Jamie Karson, Chairman and Chief Executive Officer of Steven Madden, Ltd..

Jamie, go ahead, please.

Thanks, Cara.

Good morning, and thank you for joining us as we review Steven Madden, Ltd.'s results for the fourth quarter and full year ended December 31st, 2006. With me to discuss the business today is Ed Rosenfeld, our Senior Vice President of Strategic Planning and Finance.

2006 was an exciting, dynamic and record setting year for our Company. We were very pleased with other overall operating performance and the financial results we generated for the year. In short, we were able to grow our top line, substantially increase our gross margin, leverage our expense structure and return value to shareholders.

We grew our top line 25% for the fourth quarter and 26% for the year. Net income increased 35% for the fourth quarter and more than doubled for the year. Most importantly, we have solidified our position as the fashion leader in our space. And as we begin 2007, we feel very strongly about the continued success of our business.

We is also believe that by further progressing in our strategic initiatives we will continue to make significant strides toward evolving Steve Madden into a globe lifestyle branded Company.

To be a bit more specific, I would like to mention several highlights from 2006. First, we strengthened our core footwear business. We were extremely successful in elevating our existing brand's image and appeal and expanding the demographics of our customer base.

We have moved beyond our heritage as a casual footwear provider and are now recognized for more sophisticated styles as evidenced by the growth core Steven Madden wholesale and retail businesses, as well as our Steven by Steve Madden business.

We will continue to build upon this momentum while at the same time maintaining the strength in our heritage business. The strength of our core business is also reflected in the 480 basis point improvement in our gross margin for the year.

This improvement is a testament to our outstanding design team led by Steve and their continuous ability to deliver the fashion-forward trend-right product desired by our consumers which help drive more full-price selling of our product throughout the year.

Second, we were successful in our efforts to diversify our business model. In February, 2006 we announced the strategic acquisition of Daniel M. Friedman & Associates, which enabled us to expand our reach beyond footwear into handbags and belts. We also signed a number of new licenses for the Steve Madden and Steven brands, most notably for dresses, and we continue to evaluate additional licensing opportunities in order to evolve our brand into a global lifestyle brand.

Third, we extended our reach to a broader audience by developing and growing new wholesale brands, as well as by further developing the channels in which we distribute our existing collections. Most importantly, we introduced SM New York, which is being rebranded as Madden Girl to provide an opening price point offering that allows a new base of customers a way to experience the fashion of the Steven Madden brand.

Steven Madden Girl has been growing steadily since its launch a year ago, and we see significant opportunity to further its distribution and sales contribution in the future.

It is important to note that we achieved our record financial results and made progress on our strategic initiatives throughout the year while maintaining a very solid balance sheet with no debt. We also returned a total of $29.4 million to our shareholders during the year through a special one-time dividend in our stock repurchase program.

Looking ahead to 2007, we will continue to focus on building upon the growth and success we achieved in the past year. Our top priority remains delivering fashion-forward trend-right footwear to our ever broadening customer base. As such, we remain committed to supporting our outstanding design team led by Steve and ensuring that they have all of the resources that they need to continue to deliver superior product.

By providing product that excites our customers, we are able to not only drive strong full-price selling but also to build our brand equity. We will continue to leverage the strong brand equity that we have developed in our core offering into newer brands like Madden Girl as well as new merchandise categories.

We are very optimistic that we are on the right path to continue to grow and diversify our business and maintain our momentum in developing Steve Madden into a global lifestyle branded Company.

With that now, I would like to turn the called over Ed, who will discuss the financial results for the quarter and the year in more detail.

Thanks, Jamie.

Consolidated net sales increased 25% in the quarter to 114.1 million, driven by strong growth in Steve Madden Women's wholesale, Steven by Steve Madden Women's wholesale and our retail business, as well as the contributions from SM New York, launched in Q4 of last year and Daniel M. Friedman & Associates, acquired in Q1 of this year.

Gross margin for the quarter declined from 42.6% last year to 40.8% this year, due primarily to a disappointing gross margin at our Daniel M. Friedman accessories division.

Operating expenses as a percentage of sales declined 120 basis points in the quarter as we continued to control costs and leverage expenses against increase in sales. Net income for the quarter was 10.1 million, up 35% from a year ago. Diluted EPS for the quarter was $0.45 per share on 22.3 million diluted weighted average shares outstanding, compared to $0.34 per share on 21.7 million diluted weighted average shares outstanding in the prior year.

Now we will talk a little bit about the performance of each of our divisions. Net sales for the wholesale division increased 32% to 76.6 million from 58.1 million in the comparable period. This division was comprised of 11 segments in the quarter Steve Madden Women, Steve Madden Men, Steven by Steve Madden, SM New York, Stevies, Candie's, Rule, Natural Comfort, Steven Men's, Jump and Daniel M. Friedman.

Net sales for the Steve Madden Women's wholesale segment increased 14% to 31.8 million versus 27.9 million last year. Flats really drove the business in our flagship division, particularly ballerina. From a material standpoint animal print, suede and mixed materials all performed well. Boots and booties were disappointing.

Net sales in Steve Madden Men were 12.6 million in the quarter versus 13.1 million a year ago. Dress shoes and driving mocks continued to perform well, while sport fusion looks were disappointing. We have recently introduced some fresh sport products which our wholesale customers have responded very well to and we expect that category to pick back up starting in Q2.

Net sales in Steven by Steve Madden were 6 million in Q4, up 63% from 3.7 million in the comparable period a year ago. Sales gain was driven in part by a substantial increase with Nordstrom. From a product standpoint, flats and low wedges were stand outs. Leopard and patent leather continued to be strong materials.

SM New York contributed 5.5 million in the quarter, up from the 1.6 million it contributed in its first quarter of shipment in Q4 of 2005. For 2006, SM New York significantly exceeded our expectations by recording 24.5 million in net sales in its first full fiscal year. And we expect to continue the momentum we have in this business in 2007.

As some of you know, and as Jamie mentioned earlier, we have elected to rebrand SM New York as Madden Girl going forward, which, of course, has the closer association with the flagship brand and we believe that it is a more compelling name overall.

Net sales in Stevies were 2 million in the quarter, a 71% increase from 1.1 million in the third quarter last year. We recorded significant increases in our kid's division with some major accounts including Limited Too and JC Penney.

Candie's net sales were 4.3 million versus 6 million a year ago. While gross sales were only off by approximately 145,000, net sales declined sharply, due to increased mark down allowances related to promotional activities on boots and clogs.

Rule recorded 500,000 net sales in its final quarter. As previously announced we have elected to discontinue this brand.

We had also had small sales contributions from three brands we were testing in the quarter, Natural Comfort, Jump and Steven Men's. Wholesale sales under these new brands totaled 900,000 in Q4.

Our last wholesale division, the Daniel M. Friedman Accessories business acquired earlier this year, had net sales of 13 million in the quarter. While sales in this segment exceeded plans, the gross margin was weak, due primarily to poor performance of the Betsey Johnson handbags, which resulted in excessive closeouts and mark down allowances.

Taking all of this together, we delivered a 32% increase in overall wholesale sales. Overall wholesale gross margin decreased from 36% last year to 31.5% this year, due primarily to the disappointing margin performance of the Daniel M. Friedman business.

Excluding the Daniel M. Friedman, the wholesale footwear gross margin was 34.8%, down 120 basis points from last year as the improved margins in the Steve Madden Women's and Steven segments was offset by declines in Steve Madden Men's and Candie's.

Moving on to our retail division, fourth quarter sales were 37.5 million, up 12% from last year's 33.4 million. Comp-store sales increased 11.8% in the quarter. Gross margin in the retail division improved 590 basis points from 54% last year to 59.9% this year, primarily due to fewer closeouts, fewer store-to-store transfers and freight savings.

As of year end we had 96 stores in operation, including our Internet store. During the quarter we opened one new store in Atlantic City. For 2006 stores opened for the full 12 months generated $748 in sales per square foot.

Moving to other income. The Company's commission and licensing fee income net of expenses increased 103% in the quarter, from 1.9 million last year to 3.8 million this year.

Our Adesso-Madden first cost division continued its outstanding performance with commission income net of expenses increasing 135% to 3.1 million in the quarter, compared to 1.3 million in the fourth quarter last year. Licensing income was also up from $542,000 last year to 665,000 this year, a 23% increase.

Now, I would like to briefly touch on our full-year results. Net sales for the full year increased 26% to 475.2 million. Wholesale sales increased 37% to 340 -- 347.5 million. And sales for the retail division increased 5% to 127.7 million.

Comp-store sales increased 4.9%. Commission and licensing income doubled from 7.1 million last year to 14.2 million this year, driven by 134% increase in commission income at our Adesso-Madden division and a 28% increase in licensing royalty income.

Gross margin for the year expanded 480 basis point to 41.8% from 37% last year. Operating expenses as a percentage of sales declined by 210 basis point. Annual net income increased 141% to 46.3 million over last year's 19.2 million. Diluted EPS was $2.09, compared to $0.92 in 2005, a 128% increase.

Now with respect to the balance sheet, we continued to maintain a debt free balance sheet and ended the year with 108.9 million in cash, cash equivalents, and marketable securities. Total inventory at the end of the year was 33.7 million and our inventory turn for the year was 7.4 times.

Accounts receivable and due from factor were 47.5 million, reflecting average collection in 59 days. Capital expenditures were 2.4 million for the quarter and 9.5 million for the full-year 2006. We paid $1 a share or 21.1 million special dividend in the quarter and stockholders equity as of December 31st was 211.9 million.

Now, on to the outlook for the first quarter and full-year 2007, which we have revised based on first quarter trends to date and current visibility.

As we outlined in our release, we expect sales and margin pressure in the first quarter due to the weaker than anticipated performance we experience in boots in both wholesale and retail, sport fusion product in Steve Madden Men's, and Betsey Johnson handbags in Daniel M. Friedman. As a result, we expect first quarter net sales will be approximately flat with last year's first quarter. And earnings per diluted share will be between $0.40 to $0.43.

With regard to our full-year outlook, we plan to focus this year on building on the substantial growth we achieved in 2006. As Jamie noted at the start of today's call, we accomplished a number of important strategic initiatives in the past year, which have provided with a much broader platform for the the expansion of our business over the long term.

Looking forward, we plan to continue to leverage the ongoing strength of our core footwear business. The brands we have introduced in last year and our entry into new merchandise categories through the Daniel M. Friedman division.

We also intent to continue to expand our retail footprint with the opening of approximately 8 to 10 retail locations this year. We plan to focus again this year highly trafficked urban locations in our proven major markets in that will significantly enhance the brand as well as provide an attractive return on investment.

We anticipate net sales for the full year will increase in the range of 3% to 5% over 2006. And we now expect earnings per diluted share for the year will be between 2 -- $2 and $2.10. Management also remains committed to returning capital to shareholders, and we will continue our stock repurchase program in 2007.

As we noted in our release, our Board of Directors recently authorized an increase of $30 million in our stock repurchase program, bringing our total authorization up to $59 million.

In closing, while we have taken a more conservative outlook for the year, we remain confident in our business moving forward. We believe we are more strongly positioned than ever before based on several key factors.

First, the Steve Madden brand is stronger than ever and we continue to make strides in becoming a global lifestyle brand. Second, we have diversified our business model in the last year through the acquisition of Daniel M. Friedman and the launch of new brands both of which provide us with additional avenues of growth.

Third, our design team which we believe is the best in the industry, is delivering sophisticated trend-right designs for our core footwear business. Finally, we have a strong financial foundation that will support our future growth.

We remain very excited about leveraging the successes last year to take advantage of future growth opportunities through our diversified model and our expanded customer base. We believe we have a strong foundation as well the plans and programs in place to continue our progress in 2007. We look forward to reporting back to you throughout the remainder of the year.

Now, I would be happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS]

Our first question comes from Scott Krasik with C.L King.

Hi, guys.

Good morning, Scott.

Can you go into the handbag business a little bit. I know in the third quarter 10Q you indicated it didn't make any money. I am assuming fourth quarter will be similar.

What do you expect in the back half and ultimately based on a split between branded when it is your own or a license or the private label bags you do. What sort of margins should this business carry?

Well, I will answer the second part first. You correctly pointed out, the margin in our Daniel Friedman business should be lower on an ongoing basis than our footwear business because they do their private label work on a landed basis, meaning they ship the goods --they take the goods into the warehouse and ship them out and they recognize the sales in gross profit. Whereas we do that first cost so it comes in as other income and does not dilute or gross margin.

It should be lower than the margin in our wholesale footwear business. We still would like to be in the 30s in the Daniel Friedman business over the long-term, but right now we are not achieving that and it's really due to this weakness that we are seeing in the Betsey Johnson handbags.

In terms of operating margin it will have a lower cost structure in the footwear?

Yes. Our goal of the long-term is to get into the double digits. That is not our forecast this year.

Okay.

You talked about a test for Natural Comfort, Jump, Steven Madden. I know it is a small business are you continuing with those in 2007 and beyond?

Jump we are not continuing with. That was something. Again, that was a test. It performed okay, but the conclusion there is that we like the sneaker business but over the long term we want to be in the sneaker business under the Steve Madden brand. We think that is the way to get the most value out of our brand equity and create the most value for our Company.

We are currently exploring ways to get into that business under Steve Madden. Steven Men's has performed below expectation so far. We believe we went out with price points that were too high there. We were looking at average retails of $195 to $300.

The goods did not perform as well as we hoped. Some of our wholesale customers have been encouraging us to do a line with average retails closer to $150. We are currently evaluating that.

There has been talk in -- getting back to your men's athletics -- there's been some talk in the trades about a test with Footlocker.

Can you talk about where that stands and what you view as your opportunities in the athletic specialties phase?

Sure.

That is something that we are looking at in men's. We are doing about 150 door test with the Footlocker group, with Footlocker, Footaction and Champs. And it's something we are excited about that.

One of the good things that has happened in our men's business is you saw in fourth and we mentioned in the press release that in first that we had had a little slowdown in the sport fusion category. I think that we probably held on to some styles too long. The competition had sort of caught up to us and undercut us on price.

That caused us a weakness for a couple quarters there. But the good news is that the men's team did a great job in responding to that. We brought in a new designer who helped us build some more athletic looks, develop some shoes using softer less shiny materials. rounded, more athletic bottoms. We have had a tremendous response to those that we introduced that new group at the Shoe Show in Las Vegas in February.

We fell we are totally back on track in the sport category. We will see a pickup starting in Q2 there.

Good. Okay.

Okay. And just lastly, Madden Girls great first year. What are the opportunities? Can it be as big as when l.e.i a resource for department stores and the mid-tier? Can it be as big as l.e.i was in its prime?

Yes. Certainly that would be the long-term goal, not this year. We do expect substantial growth this year.

I believe I have mentioned that I would hope we could grow that business 25% or 30% this year. Over the long-term, sure I would like to see it get close to a $50 or $60 million business.

You are keeping that all cut to order to reduce the --

Absolutely.

Thanks, guys.

Thank you. Our next question comes from Jeff Van Sinderen with B. Riley.

Good morning.

I wonder if you could delve a little bit more into the specific weakness in the Daniel Friedman handbag business and then what your thoughts are in terms of how that business is going to be remedied going forward will, and then also when you have think you potential can start the turnaround?

Sure.

Well, it is again -- it was -- the driver there is the Betsey Johnson handbags. It is pretty simple. We have --the product was not as crisp there. It was really a product issue.

They were very successful with the Betsey Johnson handbags for quite some time with these heavily detailed bags. The fashion moved away from us a little bit to cleaner more classic looks. I don't think we evolved the styles quickly enough, so that did hurt us in fourth. You are going to see that hurt us in, again, in first. We have put some strategies in place to recommend that will remedy that.

We put some new design talent into the division, and we are looking to make the bags a little more consistent with current trends while maintaining the Betsey Johnson look and feel. The other thing is we think we may have gotten a little over distributed there. We were on a great run that we may have gone out to too many doors and gotten a little too aggressive there.

These are $325 bags so they don't work everywhere. So what we've done is pulled back the distribution of Betsey Johnson and increased the number of doors of distribution for Betseyville, which is the lower priced Betsey line, which is trending much better now.

In terms of the lead time and so forth, considering all of that, do you think that this business could improve in Q2, Q3 or what?

We are looking to make a big impact in fall. We playing it pretty conservatively for the first half of the year.

Okay.

Then on Candie's I just wonder if you can give us anymore color on that business and whether there are specific issues or clothes issues and how do you fix that and when do you think that is going to improve?

Sure.

Well, again here I think in fourth the product was not as crisp as it has been to date. We had specific problems with some boots and with some clogs that resulted in heavy markdowns. What happened there was we transitioned the team.

We had the head designer for Steven was also doing Candie's throughout much of last year. As the Steven brand really took off it became important for her to focus exclusively on Steven. So, we transitioned the teams and I think there was disruption during that transition period. The good news is that the new team is in place.

Kohls is on board and excited about the new team. What they are even more excited is that Steve has gotten himself much more involved in the product, particularly for fall. And Kohl's is very excited about that.

That is great to hear. As far as your retail store business, it seems like you are making some significant progress there on an operational basis.

Can you talk a little bit more about what has been happening there and how you see that playing out the rest of this year?

Sure.

We did a nice job in the fourth in addition to the comp you saw that the gross margin as up pretty substantially and that was based on fewer closeouts, we had some freight savings and also, fewer store-to-store transfers and those are changes that we think we can continue going into 2007.

We do have a little bit of pressure in first because of the poor performance of our boots this year. But starting in Q2 because of the strength of the remaining product categories and we are seeing for spring, we feel pretty good about retail.

Okay. Good.

And then just to follow up on the boot business, just wondering what your thoughts are in terms of how much of that weakness you think was weather related versus product execution or competitive pressure, that kind of thing.

Wasn't that business kind of a difficult anniversary to begin with?

Yes, it was. We had very successful boots a year ago. Particularly in first quarter we had some stretch boots that sold very well in the first. Of course, we had some western in fourth.

But, I'm sorry, what was the first part of the question?

I was asking in terms of how much you thought weather was related.

I think it was both. I think there wasn't any overriding fashion trend the year. Also the weather was very tough on us. It was very mild winter until really the last month or so.

By that time the boots were already so -- marked down so substantially. It helped us move them but it was at a lower margin.

Thanks, very much. Well, that's helpful. Good luck this quarter.

Thank you.

Our next question comes from Heather Boksen with Sidoti & Company.

Good morning.

First a little piece of housekeeping. Can we get the gross margins by brand for the fourth quarter and the year?

Fourth quarter and the year? Sure.

Fourth quarter Madden Women's 29.5 versus 25.7 a year ago. 36.7 for the years versus 28.1.

Madden Men's 41.3 versus 48.3 Q4. 42.5 versus 40.3 2005 for the full year.

Steven 40.8 in the quarter versus 35.9. 44 in the year versus 25.2.

Stevies 41.3 in the quarter versus 42.2. 41.1 in the year versus 31.1.

Candie's 28.7 in the quarter versus 51.1. 38.8 for the year versus 32.6.

Madden Girl 45.8 versus 48.8. And Madden Girl was 43.1 for the year.

Those are essentially the main ones. And Daniel Friedman 15.2% in the fourth quarter. And retail, I believe you have, 59.9 in the quarter versus 54 in the fourth quarter of last year. 54 for the full year versus 49.5.

Okay. Thanks.

Now, you are two-thirds of the way through Q1. Now as far as visibility goes, the markdowns in place right now, you are comfortable that will clear the boot product remaining in inventory right now. Is that fair?

Yes.

Maybe just some more color with respect to the handbags. What percent of that business is Betsey Johnson these days?

It is over a third.

And lastly, with respect to the share repurchases going forward, can you give -- have you already started repurchasing here in Q1? Your thoughts as to how you plan on going about this?

Yes. Well, we have not started we have been in a blackout period since December 20th because of the end of the quarter and before announcement of earnings.

We do plan on repurchasing shares once the window opens which is three business days from today. We have been very committed to returning capital share. We have done over $50 million in the last two years in share purchase and dividends. Given the where the stock right now and our optimism about the long-term prospects of the business, I think our preference is share repurchases right now.

We do plan on being in the market next week.

Okay.

Just lastly, you had mentioned your continuing to evaluate additional licensing opportunities. Is there anything specifically out there that you are looking at right now?

We are always looking at opportunities. Right now, I think our focus is on making the licenses that we have as successful as possible.

In particular the dresses, which we have gotten just a phenomenal initial reaction to from the wholesale customers. Those are starting to ship, essentially, this week. Our real focus is on making those as successful as possible.

Okay.

Just to follow-up to that. Can you give us a sample of who the bigger accounts are going to be on the dress license?

Sure.

All of the big guys. Federated, Dillard's. Nordstrom, Carsons, everybody.

So we are really excited about it.

Okay. Thanks, guys.

Thank you. Our next question comes from Jeff Mintz with Wedbush Morgan.

Thanks, good morning.

Another question actually on the handbag business. I know you had had some styles of the Steve Madden and Steven bags that you weren't real happy with kind of in the middle of this year. Can you just tell us where you are on the new styles on that and how -- what you are seeing from the retail channel on those brands.

Yes, I am glad you asked about that, because I neglected to mention that earlier.

That is the good news at Daniel Friedman is that we have made tremendous progress there. As you recall we have the Steve Madden Club Bags. Those are performing much better. Those are doing well. We think we can do even better with them, but they are doing well.

But what's really exciting is the Steven bags, those are, of course, the higher priced bags and they are just performing great. They are selling very well at retail. We have one bag in particular with a gold lock that is just blowing out. We are very pleased with that.

Great. Thanks.

And then looking at just to kind of the core Steve Madden Women's business do you expect that to grow in revenues in 2007. If so, where is that growth coming from? Is it new doors? Is it expanded floor space at existing doors?

Yes. Well, as we indicated in the press release, I think there will -- that sales will be down modestly in first, due to the boot issue.

Because we did, as I said earlier, have some stretch boots and other boots that, frankly, that were selling very well into first quarter last year that are tough to anniversary for us. We expect to recover for the balance of the year. I would expect the business to be roughly flat for the full year.

Okay.

The second question then is, are you seeing additional doors or is it basically kind of flat across-the-board, same number of doors roughly, same floor space, etc.?

Yes, it is the same number of doors. Just having good product that turns quickly. That is how we are going to grow in Steve Madden Women's. Because it is not a channel with a lot of door growth.

Okay. Great.

And then just a housekeeping question. Do you see closing any retail stores this year?

Right now we are looking at two to three closures. We haven't finalized that yet.

Great. Thanks, very much. Good luck.

Thanks.

Thank you. Our next question comes from Angelique Dab with Nollenberger.

Good morning. Most of my questions have been answered.

But I have just a general trend question. You talked about the women's environment and growth in current doors. What types of products do you see helping you achieve that?

Well there an are a number of things. We believe flats are going to continue to be strong. They did slow down a little bit when the weather got cold, but we were pretty confident that was a weather issue and not a trend issue, because they continued to perform in our warm weather doors. We are starting to see those pick up again.

The peek-a-boo toes are looking good for us again. Dress shoes are strong. We have actually seen a pickup in the single-sole dress shoes, recently. Canvas. What else? Polka dots, floral and other exaggerated prints.

The color white. Fabrics. There are a lot of things that are exciting for spring.

And then could you also talk a little bit about the sports fusion and the trend that you are seeing there going forward?

Yes. Well, as I said we developed these more athletic looks with our new design team in Steve Madden Men's. We have gotten a great response to those. The shoes are little younger looking and more athletic.

We feel very good about that. We expect that to pick back up in Q2.

Thank you.

And then a couple -- you had mentioned a couple of quarters back that there were some -- there were new competitors coming online that you saw as challenging.

Could you talk to what you are seeing on the competitive landscape leaning from BCBG and Jessica Simpson and those types of brands?

Sure. Those are tough competitors. We always -- we always have tough competitors. I don't think there is anything new in that department.

Thank you.

Thank you. Our next question comes from Susan Sansbury with Miller Tabak.

Hi. Yes. Thanks, very much.

First, I apologize, but could you repeat the inventory number at the end of the year?

At the end of the year it was 33.7 million.

Against?

Against 28.4 million the year before. 5.7million of that was Danny Friedman. So if you split -- strip that out, excuse me, it was 28 -- down from 28.4 million the year before.

Okay. Great. That is what I was looking for.

My question basically what I am trying to parse if can get you to do it on this call is the underlying pulse rate of the business. Your core Madden businesses both wholesale and retail.

This 3 to 6% revenue increase, how much reflects, for example discontinued businesses? How much of it does it reflect your planning boots down if that is actually going to be the case? How big was the boot business last year versus the year before? And how much was it down?

Can you -- in terms of the gross versus net sales number, can we talk about the level of markdowns '06 to '05 and then on 'o7 to '06? In other words, how much leakage is there here with the committed markdown as opposed to -- is the underlying business stronger than this 3% to 6% revenue increase?

Well, the first thing I will say is that the 3% to 5% growth does, of course, include the loss of Rule which was a $10.6 million business.

Okay.

Also a little bit in l.e.i., another 2 million. You are looking at 13 million of two businesses that went away.

There were a lot of questions there. Refresh me. What was the second one?

What was your boot -- was your boot business in '06 up or down net?

In '06 it was probably flat the last year, roughly.

So it accounted for what percent of sales?

I don't have that over the full year. When we are talking about the first quarter of '07 it is a substantial piece.

I was looking this morning at our comp performance by category for the date. A year ago boots and booties made up 35% of sales in our retail stores in the first two months. Fourth quarter it is more like 30%.

Okay.

So you are saying that is above normal or --

I am saying this year in the first quarter it is going to be lower than it was a year ago.

Roughly by how much? Can you disclose that?

10%.

When you look at wholesale, particularly your department store and mid-tier customer base, can you talk about open to buy or backlog or sell throughs? Anything that would indicate the health of the business, whether it is slowing up, going down?

We don't like to talk too much about backlog, because we don't think it's the most reliable indicator. It is up in our core businesses for Q2 and for Q3.

Of course, the caveat is that it is all about the product. If the product isn't right then the backlog is, essentially meaningless. But, yes, right now it is up.

The wholesale sell throughs are strong on the new goods that we have in the stores.

Can you define that up single digits, up double digits?

No.

You are wonderful. Thanks, very much.

Thank you. Our next question comes from John Curti with Principal Global Investors.

Good morning.

What is the anticipated capital spending for 2007?

We are looking at $12.5 to $13 million in CapEx.

The majority of that is for the retail stores?

A little over $7 million is for retail in both new stores and remodels. We are going to spend about $1.2 million on a new telephone system.

Another $3 million in other systems. We are looking at a new planning and forecasting model for wholesale. A new merchandising and allocation system for retail and new EDI replenishment system. Then there is another 1 million to 1.5 million on top of that.

How many retail stores will you be remodeling?

Probably 10 to 12 right now.

Will some of those be expanded in terms of square footage.

No, generally not.

All right. Thank you, very much.

We have a follow up question from Scott Krasik with C.L.King.

I might have missed it. Did you talk about the watch license and the launch of the J.C Penny children's clothing?

Yes. The watch license we will be launching product in fall for holiday. We are still working on the final designs there. Stevies Kid apparel at J.C.penny has been okay. Not great. No terrible.

Is your increase at Stevies footwear with Penneys does that have to do with the mass hit with kids clothing or was that in the course of normal business.

I think it helped, but our kids business is up everywhere. The shoes are much better and we are just doing a much better job in kids.

Okay. Good. Thank you.

Thank you. We have a follow up question from Angelique Dab with Nollenberger.

Question on the guidance that you are giving. Does that include repurchase?

No. Any accretion from the repurchase would be incremental.

Thank you.

[OPERATOR INSTRUCTIONS]

Next question comes from Susan Sansbury with Miller Tabak.

Back on the sports fusion because I'm not a shoe dog. Do you think the weakness in the sports fusion category is strictly related to your own product issues or do you feel that this market is cooling off or that there are too many competitors in there? What is your attitude about this?

What we found was that our product was no longer differentiated from the competitors. They caught up to us and they were under cutting us selling a lot of sport fusion products at $34.99 and $39.99. That's not the business we're in. We are $70 shoes.

We can compete effectively with those competitors when we have differentiated product which is what we have now with the new looks. We can compete very effectively with those lower-priced competitors when we have differentiated product which is what we have now with the new looks that I talked about. They have gotten a little stale. The competitors had caught up to us. And so when it defaulted to price we were losing.

Now that we have the new differentiated product we will see that business improve again.

Okay.

It is not an overall category issue. There have been trends that we have now -- that we are now on trend.

You are wonderful. Thanks.

Thank you. Our next question comes from Lauren Solar with First Albany Capital.

Hi, guys.

I have a quick question about sports fusion. Where was that distributed to? Who were the largest customers? Is that available in like Nordstrom?

Yes. It is in all of the normal accounts that we sell our Madden Men's product in. Nordstrom, Dillard's, Federated, etc.

Okay. Great. Thank you.

Thank you.

There are no further questions. Please continue with any closing remarks.

Thank you for participating in the call. I just want to leave you with a thought that as we move into 2007 we remain very optimistic optimistic about our business and we look forward to speaking with you on the next call. Thank you.

Ladies and gentlemen, that does conclude our conference for today.

You may all disconnect, and thank you for participating.