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Brown Shoe Company, Inc. (NYSE:BWS)

Q3 2012 Earnings Call

November 20, 2012 9:30 a.m. ET

Executives

Diane Sullivan - President and Chief Executive Officer

Richard Ausick - Division President, Famous Footwear

Russ Hammer - Senior Vice President and Chief Financial Officer

Peggy Reilly Tharp - Vice President, Investor Relations

Analysts

Scott Krasik - BB&T Capital Markets

Jeffrey Stein - Northcoast Research

Steven Marotta - CL King & Associates

Jill Caruthers - Johnson Rice & Company

Christopher Svezia - Susquehanna Financial Group

Carla Casella - JPMorgan

Operator

Good morning. My name is Jodie and I will be your conference operator today. At this time I would like to welcome everyone to the Brown Shoe Company’s Third Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Peggy Reilly Tharp. Please go ahead, ma’am.

Peggy Reilly Tharp

Good morning and thank you for participating in the Brown Shoe Company’s third quarter 2012 earnings call, which is being made available to the public via webcast. I am Peggy Reilly Tharp, Vice President of Investor Relations for Brown Shoe Company. Earlier today, we distributed a press release with detailed financial tables which is available on our website at brownshoe.com. In addition, slides are available on our website for you to reference during today’s call.

Please be aware that today's discussion contains forward-looking statements which are not historical facts and are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors including but not limited to, the factors disclosed in the company's Form 10-K and other filings with the 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 that 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.

Joining us on the call today are Diane Sullivan, President and Chief Executive Officer; Russ Hammer, Chief Financial Officer; and Rick Ausick, President, Famous Footwear. Today we will begin with a strategy review from Diane, followed by a financial summary from Russ before turning the call back over for Q&A.

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

Diane Sullivan

Thanks, Peggy. Good morning and thanks for joining us. I am very pleased to report sales of $732.2 million and adjusted earnings per share of $0.60. As our company grew the top line, managed expenses and improved the balance sheet and continued to see positive results from our portfolio realignment effort. Year-to-date adjusted EPS is now at $1 a share.

As I have said over the past couple of quarters, Famous Footwear would be the leading indicator of our turnaround. And this business delivered another outstanding quarter with record third quarter sales of $436.8 million and a back-to-school same store sales comp of 5.5%. But the good news didn’t end with the start of the school year. We continued to see good sales growth in October resulting in a total third quarter same store sales improvement of 6.8%.

But the story is built on more than just improved sales. Our Famous Footwear real estate strategy continues to deliver as well. Stores we opened in the first nine months of the year are averaging sales of more than $205 square foot, better than our expectations. We also saw a terrific return on our marketing investments in the third quarter with our shift to digital offers from paper tabs driving record sales performance. We also saw improvements in same store traffic, up 2%, conversions, up 3.4%, while footwear AUR were up 1.3%.

We had positive same store comps across channels and geographies from coast to coast and border to border, regardless of climate. This allowed us to deliver close to a 25% increase in operating profit in the quarter versus last year. In terms of products, we saw good strength in a variety of styles. Running continued its strong trend, up 13.4% over the prior year. Boat shoes were also strong, up 118%. And we had increases across men’s, women’s and kids in that category. Sandal sales were good in each of the quarter for a total increase of slightly over 8%.

Women’s boots were up 13.4% in the quarter and we feel good about casual boot sales for the fourth quarter. Unfortunately we, like others, closed out a great quarter and started the next with the advent of Hurricane Sandy. While most important is that none of our associates were injured, however, many of them are still working to sort through the damage to their homes and their personal property. Sandy shuttered as many as 230 of our stores following landfall. Although, we had all but four stores up and running within nine days, we still expect to see a fourth quarter sales impact of a little more than $2.5 million.

Now in our wholesale operations third quarter net sales were up 3.3%, excluding brands we have exited over the past 12 months. Our contemporary fashion brands performed well in the quarter, up 5.2%, with very strong contribution from our Sam Edelman, Franco Sarto and Fergie brands. And I just have to give a special call out to Sam Edelman and his team and congratulate them on being named brand of the year by Footwear News. Sam just has this incredible understanding of the consumer, all you have to do is walk through the footwear floors and you will see what I mean. He knows what's relevant to her, he knows how she thinks and feels about fashion, and we are really happy for them that they won brand of the year. So congratulations to the entire team.

And now for a little color on Healthy Living. Wholesales sales were up 2.1% in the quarter. Dr. Scholl’s maintained this momentum as we added doors and expanded our assortment. LifeStride continued to outperform and we are thrilled to have this consistently strong brand as part of our healthy living portfolio. Ryka also had profitable growth in the quarter as it benefited from expanded distribution of key new styles. Naturalizer all-in sales which include both wholesale and retail results were up approximately 1%. Same store sales at our Naturalizer retail stores were up 8.4% with traffic and conversions both up year-over-year.

So all in it was another solid quarter for the company that we delivered improved financial results. And while I am pleased we are moving in the right direction, there is still more work to be done to reach our long-term operating margin and ROIC targets. I would ask Russ to continue to focus on continuous improvement of our cost and expenses and you should expect to see steady progress in these areas. We are also continuing to evaluate our ongoing businesses against the financial target we have set just over a year ago.

You know it’s hard to believe it’s only been a year since we first talked about our portfolio realignment strategy but I think you will agree that we have seen good success with our efforts to date. I am looking forward to closing out a successful 2012 and the turning to new opportunities in 2013. You know for sure there is a lot going on out there in the macroeconomic environment. But we are staying focused on playing our game. We are differentiating our brands. We are making sure we are building great product and merchandising it well. Operating as efficiently as we possibly can, and maintaining a strong hand on our financial management overall.

With that I would now like to turn the call over to Russ for a more detailed review of our financial performance.

Russ Hammer

Thank you, Diane, and thank you everyone for joining us on both the call and the webcast. We certainly appreciate it. Although Diane briefly reviewed our consolidated sales, I would like to add a little more color. For the third quarter we reported net sales of $732.2 million versus $713.8 million in the prior year. It is important to note, the results for both the third quarter 2012 and 2011 included sales of $15.6 million and $25.8 million respectively from brands and businesses we have exited. If we exclude these sales from both periods, net sales for ongoing businesses were up 4.2% for the third quarter.

For the third quarter we reported GAAP net earnings of $24.3 million or $0.56 per diluted share versus $33.7 million in the prior year. Third quarter 2012 results included portfolio realignment charges of $2.6 million, while the third quarter 2011 included a $21.6 million gain on the sale of AND 1 which was partially offset by portfolio realignment and integration related costs of $5.6 million.

However, on an adjusted basis net earnings improved 18.3% to $25.9 million or $0.60 per diluted share compared to earnings of $21.9 million or $0.51 per diluted share in the third quarter of 2011. I would now like to turn to our individual businesses beginning with Famous Footwear, which is part of our targeted family platform.

As Diane discussed, we reported record setting third quarter sales with strong same store sales for both the quarter and the back-to-school selling season. We also saw improved operating profit up approximately 30%. In the quarter we continued to drive top line sales growth while maintaining margin and reducing expenses as we have closed or relocated underperforming stores. These strong results were with 60 fewer stores year-over-year. In total we closed or relocated 11 stores and opened 18 in the quarter, keeping us on track for our planned 90 store closures or relocations and 55 store openings in 2012.

In addition, our real estate team continues to negotiate with our landlord partners to keep rents proportionally in line with our sales performance at each site, which is contributing to improved profitability. Now turning to our wholesale operations for our contemporary fashion portfolio. Third quarter sales were up 5.2% year-over-year with especially good sales growth from our Sam Edelman, Franco Sarto and Fergie brands. We also saw a year-over-year improvement in Carlos, capturing the number one selling boot position in the Famous Footwear this fall with the casual knee-high boot.

For Healthy Living brands, wholesales sales were up 2.1% in the quarter with double-digit performance from LifeStride and Ryka and continued improvement from Dr. Scholl’s Shoes. As Diane mentioned all-in Naturalizer sales were up approximately 1% year-over-year. Naturalizer had good sell-through with its fall casual product in the specialty and independent channels and once again we saw a good strength with our wholesale ecommerce partners, up nearly 30%.

Online sales remain the sales driver at both wholesale and retail in the third quarter. External ecommerce site sales were up 50% while our famous.com site was up 25%. We are also seeing more and more online offers being converted in person at local Famous Footwear stores, which helps validate the continued importance of multichannel opportunities for our consumers.

Now let's turn to a review of our financial metrics. Overall, gross margin in the third quarter was 39%, which was up approximately 30 basis points. While SG&A as a share of revenue was 33.1%, down 40 basis points year-over-year. Adjusted net earnings of $25.9 million were up 18.3% versus the prior year, while adjusted operating margin of 6% was up 65 basis points. Net interest expense of $5.4 million was down 17.5% as we continue to reduce our borrowings. For the quarter, our corporate tax rate was 31.9%.

Operating cash flow for the first nine months came in at $143.5 million, up $130.9 million versus a year ago. Cash and cash equivalents at the end of third quarter were $40.9 million. Cash used for financing activities was higher by a $132.9 million, particularly due to repayments net of borrowings under our revolving credit agreement in the first nine months of both 2012 and 2011, reflecting our strong operating cash flows during 2012.

Inventory at quarter end was $539.4 million, down 7% when compared to $580.2 million in the third quarter of 2011. At Famous Footwear, inventory was flat, while it was down 23% in the wholesale as we work to better manage this portion of our business. Today we are operating from a much cleaner inventory position versus a year ago. And as we have maintained strong fiscal discipline in our balance sheet management, our borrowing position has improved significantly year-over-year.

We ended the quarter with $308.8 million of borrowings, a reduction from $420.6 million at the end of last year’s third quarter. Our revolving credit agreement has approximately $381 million of additional availability providing ample liquidity. Depreciation and amortization was $40.5 million for the first nine months of the year while capital expenditures were $44.5 million. Our debt-to-capital ratio declined to 41.7% from 50.1% in the third quarter of 2011, while working capital as a percent of sales was 42.3% versus 38.3% in the prior year.

Before we began Q&A, I would like to review our fiscal 2012 guidance. Clearly, we are encouraged by our performance year-to-date as we continue to earn our way quarter by quarter by delivering results. As a result of our performance, we are increasing our adjusted EPS guidance to a range of $1.06 to $1.10. While we are confident in our ability to meet the lower end of this range, we remain cautious about any potential unforeseen impact from political and macroeconomic conditions beyond our control.

In terms of guidance, we also expect earnings per diluted share of $0.55 to $0.59. Consolidated net sales of $2.57 billion to $2.59 billion. Same store sales at Famous Footwear up low single digits. Net sales at wholesale operations down low to mid-single digits reflecting business exits. And gross profit margin up 20 to 40 basis points. SG&A up $917 million to $920 million and non-recurring costs of approximately $34 million. Our net interest expense of $23 million to $24 million and the effective tax rate of 32% to 35%, down from previous guidance due to better visibility into full year results and a mix shift in foreign and domestic earnings. Depreciation and amortization of $55 million to $56 million, and last, capital expenditures of $63 million to $65 million.

And with that operator we would be happy to now answer all questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Krasik from BB&T Capital Markets.

Scott Krasik - BB&T Capital Markets

So a few questions. First, what do you attribute the acceleration in the Famous Footwear comps after back-to-school to?

Richard Ausick

Superior merchandising skills. Scott, I think we had -- obviously, the athletic business continues to be strong. I think we took really strong positions with key products and key brands. The non-athletic side of it, we had some benefit on the boot business. We thought we had an opportunity to do some of that business a little earlier than we had a year ago. We have transitioned a lot of our inventory to more casual boots which it’s not really about boots in that context, it’s really about a fashion sense, it’s about customer using that as casual footwear.

So we thought that there was an opportunity over the last couple of years where we moved inventory and moved back over [the buy] into those categories and I think we got a benefit from it. That would be the two biggest reasons.

Diane Sullivan

And the marketing effort too I think probably had (inaudible).

Richard Ausick

Correct. And we did increase our rewards customer base and we think those people, obviously we try to turn them into more loyal customers. They do come back. So all those factors led to a better end of September and October.

Scott Krasik - BB&T Capital Markets

And to the extent that you do have a range to get to that low single-digit same store sales guidance for Famous for the year, are you expecting comps to be positive in the fourth quarter and will that come later in the quarter or is it balanced relative to the comparisons from a year ago?

Russ Hammer

Well, we expect it to be positive for the quarter. We are positive today. We expect to continue and I think we can hit that low single digit number for the quarter.

Diane Sullivan

I think that’s an important point. We are positive in the quarter so far even with Hurricane Sandy.

Scott Krasik - BB&T Capital Markets

Yeah. That’s great, I think. And then, Diane, the growth in wholesale, it’s just starting to come around. But you gave very conservative wholesale sales growth guidance in June at your Investor Day. Given the strength or the momentum that Sam has, it seems like Dr. Scholl's is, it’s not just a blip but it seems like it’s real. Can you really, is the growth in wholesale really a 1% type business or can you grow it faster? What’s the outlook?

Diane Sullivan

Yeah, you know I think we can certainly grow it faster than 1%. Our thought process really that we would like to consistently see that in the mid-single digit kind of growth range. I think we are being very thoughtful as I have said all along about this year. You know our fourth quarter performance in the last couple of years has not been the way that we would like to see it. And so we are being very thoughtful about this fourth quarter, making sure can we earn the business and we get the gross margin rates where we need them to be. And with this promotional environment out there, we are a little bit cautious.

So longer term, sure, we definitely believe so. I think for this quarter until we are through all the craziness out there, we can get a better handle of how the consumer is going to react. We are maintaining our cautious outlook.

Operator

Your next question comes from the line of Jeff Stein from Northcoast Research.

Jeffrey Stein - Northcoast Research

Hey, Diane. Question for you on weather boots. One of your competitors yesterday called out weakness in weather boots for the first couple of weeks here of November. And I am wondering if you are seeing a similar trend? And maybe you can talk a little bit about geographic trends that you have seen in your business early on in the fourth quarter.

Diane Sullivan

Yes, sure. Hi, Jeff. No problem. With respect to boots, it’s very much the way that people have been predicting it. It is that it’s really the full range of casual boots that have the momentum with the consumer right now. Anything that’s in a tall shaft, more dress boots, much slower selling, slower retail. And in terms of the cold weather boots, it’s a bit early. We haven’t had the weather to support it. But I think the way that the teams have merchandised it in and it really impacts Famous it doesn’t impact the rest of our business as much. That we feel very confident about our current position of inventory against our cold weather products today. So I think we are in the right spot with respect to boots as same as it relates to cold weather.

Jeffrey Stein - Northcoast Research

Did you buy down in units in cold weather boots this year versus last?

Diane Sullivan

Yes, we did.

Jeffrey Stein - Northcoast Research

Okay. And question on your ecommerce business. I think that Russ referenced the fact that you have seen a significant growth in your external online sales. And I am wondering if you could talk a little bit strategically about how you are positioning your wholesale business to capitalize on the growth of the ecommerce footwear business with perhaps traditional partners like Zappos, for example. Do you do business with them and basically hold the inventory for them and fulfill orders directly for them? Is that part of what we are seeing now in terms of what’s contributing to the growth of your external online business?

Diane Sullivan

Well, I think there is a couple of things. There is a lot going on in that whole area that you are referencing. The shift in terms of the way the consumer is shopping to more online and the whole omni channel aspect of what our business are going to look like going forward, it’s shifting as we speak. And I have to tell you, we spend a lot of time, Jeff, today talking about what's it going to take. How are we going to get our company and our brands ready to really make sure we can service the customer the way that they are really going to need to be serviced.

So there is a tremendous amount of time and energy that we are thinking about that because it’s not going away, it’s accelerating. I think that our current performance is really reflective of the fact that we have found ways on the wholesale side, we have the capability to really not only to drop ship but single pair delivery. And I think the teams have over the last year really focused very hard on making sure that there is a way to service the customer. And really, I could say, we are the best in class relative to our competitive set. So I think we are getting a lift primarily because of the way consumer is shopping that way, and then it’s also helping that I think we have been a little bit of ahead of the pack in some cases of figuring how to service those customers in the right way. So it’s a little bit of both. But big subject, more to follow and lot’s more thinking is got to be done to continue to maintain our lead in that area.

Jeffrey Stein - Northcoast Research

Okay. Very good. And in the fourth quarter are you expecting, this is for Russ, are you expecting any portfolio realignment charges to hit in the fourth quarter? And if so, any thoughts in terms of the magnitude?

Russ Hammer

So in the fourth quarter we do have from our previously announced restructuring, some impact on warehouse closures especially in the center that we had previously announced. And so we do have a few million dollars of charges in the fourth quarter that will be impacted.

Operator

Your next question comes from the line of Steve Marotta from CL King & Associates.

Steven Marotta - CL King & Associates

Good morning, everybody, and let me offer my congratulations on the quarter. Can you disassemble the gross margin increase of 30 basis points from mix and leverage? Maybe clearance versus full price? Could you talk a little bit about the components there?

Russ Hammer

Sure. So, any maybe Rick can add a little bit from the retail standpoint. You know when you -- comparing to last year we do have our exited businesses which also have taken into account and we have seen improvement across the board on our wholesale business as well as mix on our retail business. Rick, do you have any comments on that, what would drive the retail?

Richard Ausick

Yeah. Again, most of it is going to be mix, Steve. A lot of it’s about our [freshness] of inventory. Our inventory is really where the bulk of that or lack of aged inventory versus a year ago has helped or gross profit a lot.

Steven Marotta - CL King & Associates

Okay. Great. And also what was the specific amount of marketing in the third quarter of this year versus last year, and your expectations for that specific expense in the fourth quarter, please?

Russ Hammer

Third quarter of marketing. Marketing in third quarter versus last year, Steve, that’s what....?

Steven Marotta - CL King & Associates

Yeah, the marketing expense in third quarter versus last year and also fourth quarter year-over-year?

Richard Ausick

So the third quarter was up about 20% the last year. Now remember there was some shifting from second into the third so in total we are at or below last year’s number after nine months, just to be clear.

Steven Marotta - CL King & Associates

Okay.

Richard Ausick

There was some shift from second quarter into third, and for fourth quarter our plan will be to be equal to last year on the spend basis, dollar to dollar with a growth of sales. So it’s a lesser percent of our total sales in fourth quarter.

Operator

Your next question comes from the line of Jill Caruthers from Johnson Rice.

Jill Caruthers - Johnson Rice & Company

I guess just to follow up on the last question. I had assumed that SG&A would be higher and it looks as though your annual guidance for SG&A dollars is below what you had previously expected. If you could kind of give us metrics of that, I guess, lowering.

Russ Hammer

Sure. So we continue to see leverage on our SG&A as we move forward in the third quarter as I said on the call, and as we go into fourth quarter. We do have, as Rick mentioned, the marketing shift from second quarter to third quarter but we continue to see efficiencies in our marketing spend on the digital tabs especially as we have commented on. And that, as Diane said, has driven our revenue as well and has been much more efficient on spend. I think in the past we have mentioned that we get four to five times of productivity on our digital tabs versus the print tabs that we are no longer doing.

And then also our continuous reduction in cost of our previously announced restructuring programs are driving down our cost on our warehouses -- warehousing and other facility costs. We also see the impact of our strategy on driving facilities by closing lower performing higher costing leases and opening more productive storage as we went through. So all those are impacting to drive the leverage of our SG&A down.

Jill Caruthers - Johnson Rice & Company

And could you update us where the bonus increase, is that year-to-date? I know you were expecting to recoup a lot of bonus that you didn't take last year.

Russ Hammer

All right. So the way to think about our bonus is, our bonus is earned based on earnings. And so our earnings, 70% of it is in the back half of the year in the third and fourth quarters. So from an accrual basis, we accrue our earnings 70% in the back half of the year. And as you said, the previous year we had no bonus because we did not meet our targets.

Jill Caruthers - Johnson Rice & Company

Okay. And then any update on your strategy of Black Friday? How it compares to last year? You know hours operated, promotional strategy and what not?

Richard Ausick

From hours operated we have always had a few stores that were open on Thanksgiving just based on the mall or outlet situation. Last year that number increased to about 250 stores. Primarily those are driven by lease agreements where it’s a mall and the anchors are open, we have to open our stores. Thinks like that, Jill. And so we have 250 stores open last year. But at the time this year, those stores will be open again because that didn’t change. And then there is an addition of about 115 stores or so where because of strip center partners opening, whether it be Target or whoever, we went store by store and decided if it made sense for us to open at 8 o’clock or 9 o’clock whatever they are opening in those centers. And we found 115 stores that were going to try that. We look at our sales by hour and the productivity and everything else when it is all said and done and we manage that for the following year.

So we will have about 350 or 360 stores that will open. Some portions or most of the day on Thanksgiving or late in the day on Thanksgiving through 9 o’clock on Friday night.

Jill Caruthers - Johnson Rice & Company

And any insight on -- do you expect to be more promotional than you were last year? What do you see now in the environment right now?

Richard Ausick

You know I think there is obviously -- I can't speak for everything but you have seen the Black Friday ads just like I saw them over the last couple of days. I think the advent of the $19.99 boot promotions seems to be now worldwide. So that’s seems to be the one thing that people have gravitated to. We don’t have that in our mix. We just don’t think it’s something that is our strategy or that we feel like it’s worth the time and execution to do for a low margin business. We think we can get our customer just as we did last year when that came out last year, we did not anniversary it or use it. We think we did okay for the week. So we will see. We don’t -- our promotional plan is not be more aggressive, it’s to be at about the same as we were. And then we have some items we think are great items that we will have values on in our stores that are already part of our digital effort. We are doing a digital tab this versus a paper tab which is the first time we have done that on a event like this. So we will see how that goes. But we believe it will be fine.

Operator

Your next question comes from the line of Chris Svezia from Susquehanna Financial.

Christopher Svezia - Susquehanna Financial Group

So a quick question for you guys. Just when you guys went through the different categories, running, boot shoes, boots, etcetera and the increases, were those just in dollar terms or comp basis? So when you said boots were up 13.4%, was that revenue or comps?

Russ Hammer

That’s not comps, that’s total. So it would actually be bigger than that on a comp basis. And that was within boots. Yeah.

Christopher Svezia - Susquehanna Financial Group

Okay. I am sorry, I missed what you said, that was on a comp basis?

Russ Hammer

No, that was on a total basis, so on a comb basis the number would be bigger. We had (inaudible) source.

Christopher Svezia - Susquehanna Financial Group

Right. Okay, I got you. And then when you went into the -- you guys sound pretty good on the boot trends. I mean, all things considered, definitely some nuances here. But as you guys stepped into the fourth quarter you commented you were comping slightly positive for the total Famous Footwear chain. I mean is it fair to say that the boot business you continue to see comp growth for that category as you slipped into the fourth quarter?

Richard Ausick

Yes.

Christopher Svezia - Susquehanna Financial Group

Okay. And then just some balance sheet items real quick here. Where do you, Russ, think you will be in terms from an inventory perspective at the end of the year, just give us any idea. And also just where you are you going to be sitting on your revolver at the end of the year?

Russ Hammer

So the revolver, let me start with that one, we expect it will go up a little bit between now and year-end. But again that is down over the previous year. And then on an inventory basis we expect to see a slight increase in our inventory in the fourth quarter from the third quarter and it will be slightly up from last year.

Christopher Svezia - Susquehanna Financial Group

Okay. And the reason for that increase? I mean is that just due to the, I guess maybe what you are seeing from a wholesale perspective? Is it, I mean just maybe talk about why you would expect that to be up a little bit in dollars, on the inventory?

Russ Hammer

Well, there will be two pieces; most of it’s in our wholesale business though. And then we are opening new stores in the fourth quarter as we mentioned.

Christopher Svezia - Susquehanna Financial Group

Okay. And then on the Naturalizer business, you said it was up 1%. If you include retail, I think retail you said comps were up 8%. I guess it would imply the wholesale piece is down. I mean why -- kind of walk us through why it’s down? What retailers are telling you? Maybe nuances between maybe what’s going on in Canada versus the U.S. Just maybe flush that out a little bit.

Diane Sullivan

Sure. Yes. I did say that. So it’s 1% overall and it was a little over 8% comp in the stores. It’s really a carryover, Chris, from last year and a lot our implementation issues that we have with AFS. And as we have gone through this quarter and moving into next quarter, we are really seeing a bit of rebound in our overall business. So it was one of those things I think I said, when we were trying to (inaudible) that it was the Naturalizer business that was hit the, really hit the hardest. And we are now just starting to come out of the doldrums with all of that earning our way back. So we are seeing good early reads on our new fall casual items. We would like to look of our fourth quarter trends with Naturalizer so I think it’s really we are just coming out of that difficulty that we had coming out of ASF.

Richard Ausick

We are seeing good sell through as we go into the fourth quarter, so.

Diane Sullivan

Right, yeah.

Christopher Svezia - Susquehanna Financial Group

Okay. Does that mean, I mean it’s fair to say Naturalizer would potentially return to growth for spring 2013?

Diane Sullivan

Yeah, I would hope so. But we will see when all the plans are finalized. But, yeah, simply our hope would be that.

Christopher Svezia - Susquehanna Financial Group

And you didn't mention AND 1, so I am just sort of curious. Any color you can add about that business?

Diane Sullivan

Well, we sold it last year. So I think you are talking about....?

Christopher Svezia - Susquehanna Financial Group

Oh, not AND 1...

Diane Sullivan

Avia, you are probably thinking about Avia.

Christopher Svezia - Susquehanna Financial Group

Yeah, Avia. I am sorry.

Diane Sullivan

Well, he mentioned Ryka because the performance of that brand has been great. It showed some nice improvement in the third quarter. You know, Avia, we have been really in the process of getting that business turned around, developing terrific product. And we said that really spring ’13 was going to be our real first test that our strategy is working. So more to follow on that.

Christopher Svezia - Susquehanna Financial Group

Okay. Russ, real quick, tax rate for the fourth quarter?

Russ Hammer

So we are giving the annual tax rate. You have the year-to-date so you can back into the fourth quarter there. Because when the number is [kind of] low, Chris, the rates are probably not the right way to do it. So take the annual tax rate, you have got September year-to-date and that will give you your fourth quarter.

Christopher Svezia - Susquehanna Financial Group

Okay. All right, I can back into it. All right, thank you very much.

Operator

Your next question comes from the line of Carla Casella from JPMorgan.

Carla Casella - JPMorgan

I was just wondering if the strength you are seeing, do you think you are actually picking up share or have better traffic than some of your competition? Or do you think it’s strength of the overall (inaudible) and that’s really driving the, I guess, post-Sandy growth you have seen?

Richard Ausick

Well, I believe -- are you talking about specifically the last couple of weeks or you are about talking about third quarter because it’s just not about Sandy, I believe?

Carla Casella - JPMorgan

Yeah. Actually both would be helpful. I know the strength was really the third quarter but I think you also commented that your sales are up post-Sandy.

Richard Ausick

Yes. And again, obviously, the Sandy situation is more regional driven. If we look -- if we take out the northeast, New Jersey, New York area, our traffic is up in other part of the country. So I would think that that means, that would hopefully answer that question. And our conversion rates have been up. So between conversation average retail and traffic have all been up in other part of the country besides the New Jersey, New York metro area. And that would be typical of what the third quarter was as well. It’s hard that we know there is not much to help us understand market share other than some NPD data and we use FDRA which is a shoe organization that does encapsulate some businesses of 20 or so retailers and you can measure yourself against them. In that particular case for the last 22 weeks, something like 17 out of the last 22 weeks, we have out-trended the market when you look at those numbers, sometimes very significantly. So that would be an indication that we are winning not only the battle with the customers that come in to our store but also in market place against other competition. So it’s the only thing we have to give us that kind of indication. So I would say we are winning on both fronts right now.

Operator

Thank you. There are no further questions. I would now like to turn the conference back over to the presenters for any closing remarks.

Diane Sullivan

Thank you very much for joining us this morning and we just want to wish everybody a terrific Thanksgiving holiday with your family. We look forward to seeing you and speaking with you again at the end of the fiscal year. Take care.

Operator

Thank you. That concludes today's conference call. You may now disconnect.

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