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Executives

Ken Golden – Director of Investor Relations

Ronald A. Fromm – Chairman of the Board & ChiefExecutive Officer

Diane M. Sullivan – President & Chief Operating Officer

Mark E. Hood – Chief Financial Officer & Senior VicePresident

Joseph W. Wood – President of Retail

Analysts

John Shanley – Susquehanna Financial Group

Heather Boksen – Sidoti & Company

R.J. Hottovy – Next Generation Equity Research

Jill Caruthers – Johnson & Rice Company LLC

[Mr. Soul] – Morgan Stanley

Elizabeth Montgomery – Cowen & Company LLC

Sam Poser – Stearn Agee & Leech

Brown Shoe Co., Inc. (BWS) Q3 2007 Earnings Call November 28, 2007 9:00 AM ET

Operator

Welcome to the Third Quarter 2007 of Brown Shoe CompanyIncorporated Earnings Call. I would nowlike to turn the call over to Ken Golden, Director of Investor Relations.

Ken Golden

Thank you Dennis, and good morning. Welcome to the Brown Shoe Third Quarter 2007Financial Results Conference Call. Thiscall is being made accessible to the company via webcast in accordance with theSEC Regulation FD. Before we begin I’d liketo remind you of the company’s safe harbor language. During this conference call the company willmake certain forward looking statements to help you better understand itsfinancial results and competitive outlook. Discussion of the company’s future plans and other statements in thiscall that are not current or historical facts are forward lookingstatements. These involve known andunknown risks and uncertainties that could cause the actual results tomaterially differ from historical results or from any future results expressedor implied by these forward looking statements. Factors that could cause actually results to differ materially includethose within our press release issued this morning and available on our 8Kfiled prior to this call and other risk factors listed from time to time in thecompany’s SEC reports. Copies of thecompany’s reports are available online and from the company’s investorrelations department. The company doesnot undertake any obligation or plan to update these forward looking statementseven thought the situation may change. Now,I’d like to turn the call over to Ron Fromm, Chairman & CEO of Brown Shoe.

Ronald A. Fromm

Good morning. Thankyou all for joining us this morning. With me today is Diane Sullivan our President and Chief OperatingOfficer; Mark Hood our Chief Financial Officer and Joe Wood, President of BrownShoe Retail. Clearly, we are notsatisfied with our third quarter results which were slightly below theexpectations we set when we began the quarter. Much like the entire industry we are operating in a challenging environmentfor consumer spending. Confidence wasobviously down, weather was unseasonably warm and dry and there was quitepossibly a style lull. On that lastpoint, I think it’s been yet to be determined whether there’s a definitivepause in the fashion cycle or if it is really driven by the abnormal weatherbecause, without the weather catalyst there has been on compelling need for herto update her wardrobe particularly, in footwear. And while Brown Shoes stoodup to these challenges by relying on our key brand strength of solid executiontread right product, this was not enough to offset the lower levels of trafficat retailers across the country.

I think this morning we’ll change it up a little bit and onthat note, I think it will be fitting to start off with Mark Hood who will walkus through the financials and then update guidance. Then, Diane will provide an overview of ourperformance by operating division and Joe will provide further detail to FamousFootwear’s quarter. Go ahead Mark.

Mark E. Hood

Thank you Ron. Goodmorning everyone. I will focus myremarks on consolidated results and as Ron said, Diane and Joe will providecolor on retail and also segments. Beginning with the review of the income statement consolidated net salesfor the third quarter totaled $645.5 million compared to $676.8 million in thethird quarter of last year. Much of thesales decline was due to the exit of the bath flights and some plannedreductions in private labels. However,results were also impacted by unseasonable weather where the current year’swarm temperatures follows last years which were the coldest in decades andconsumer reaction to macro economic forces.

Gross profit margins increased 40 basis points to 40.3% from39.9% in the third quarter last year. This reflects a greater mix of retail business versus wholesale businesses,67% in 2007 versus 64% in 2006 and improved gross margins in our wholesaledivision offset in part by lower absolute margins at Famous Footwear andspecialty retail. SG&A decreased by4.8% to $217 million or 33.6% of net sales, a 10 basis point improvementcompared to $227.9 million or 33.7% of net sales in the third quarter lastyear. The decrease was driven by lowerincentive and stock based compensation costs and savings from the earningsenhancement plan. This was offset inpart by the shift of mix of wholesale versus retail and $4.5 million inearnings enhancement planned cost primarily related to relocation of our www.Shoes.com business from Las Angeles to Saint Louis as well as reduced [inaudible].

Consolidated operating income for the third quarter 2007increased to $42.8 million or 6.6% of net sales from $42 million or 6.2% of netsales in the third quarter last year. Net interest expense totaled $2.8 million compared to $3.7 million inthe prior year period. The decrease inthat interest expense was due to higher cash balances over the year agoperiod. We had no outstanding borrowingsunder our revolving credit facility at the end of the third quarter. On an adjusted basis excluding the earningsenhancement plan charges in the third quarter and costs related to the exit ofthe bath business in 2006 which are summarized in Schedule 4 of our pressrelease, we achieved net earnings of $29.9 million or $0.67 per diluted sharecompared to $0.65 last year.

We ended the quarter with a strong balance sheet, cash andshort term investments were up 68% to nearly $80 million from $47.5 million atthe end of last year’s third quarter. Total inventory at quarter end was $440 million up from $434 million inthe prior year period. Inventory atFamous Footwear was up $18 million or about 6% while our store count was up 8%,thus on a per store basis inventory was down 2% at Famous Footwear. Inventory wholesale was down 24% from a yearago versus an 11.8% sales decline. Totaldebt outstanding at the end of the quarter was $150 million compared to $170.5 millionin the prior year period. As a resulttotal debit to capitalization at the end of the third quarter was 20.2%compared to 25.4% at the end of the third quarter 2006. Capital expenditures on the quarter totaled$13.1 million which reflects spending for new stores and remodels as well asinfrastructure. For fiscal 2007 we are no forecasting capital expenditures tobe approximately $40-45 million down from our prior estimates.

Regarding guidance for fiscal year 2007, for the full yearwe now expect diluted earnings per share on a GAAP basis in the range of$1.40-$1.45 per share. This guidanceincludes estimated costs related to our earnings enhancement plan of $0.25 perdiluted share. On an adjusted basis excluding these costs we expect earningsper diluted share to be in the range of $1.65-$1.70 per share. This represents growth of 1-4% over adjustedearnings per diluted share of $1.63 in fiscal 2006. Net sales has been adjusted to be in therange of $2.3-$2.39 Billion which is predicated on the same short sales of flatto down 1% in addition of approximately 110 new store openings and 30-35closings at Famous Footwear. We nowestimate wholesale sales to be down approximately 14-15% versus 2006levels. However, as we detailed on thelast call, we expect full year 2008 wholesales sales to be up in mid singledigits over 2007. We now expect a 300basis point increase in our effective tax rate in 2007 due to a lower mix offoreign earnings.

For the fourth quarter 2007 we expected diluted earnings pershare on a GAAP basis to be in the range of $0.36-$0.41 per share as comparedto $0.31 in the fourth quarter of last year. This guidance range includes estimated charges related to the earningsenhancement plan of $0.03 per share. Please note that the earnings in thefourth quarter 2006 included charges of $0.16 per diluted share for costsrelated to the exit of the bath license, the earnings enhancement program andenvironmental remediation. On anadjusted basis excluding the earnings enhancement charges we expect fourthquarter 2007 earnings per diluted share in the range of $0.39-$0.44 per shareversus 2006 adjusted earnings per diluted share of $0.47.

It is important to note that Q4 2007 will be 13 weekswhereas the fourth quarter of 2006 was comprised of 14 weeks. Net sales are estimated to be in the range of$595-605 million which is predicated on the same store sales change of flat todown 2% at Famous Footwear. Wholesalesales in the quarter are expected to be down 16-17%. Now, I’d like to turn the call over to Diane.

Diane M. Sullivan

Thanks Mark and good morning everyone. We are pleased with how we managed thebusiness in the quarter and I will provide some details momentarily but, Iwould like to first address the weaker sales performance. Sales were roughly $30 million below lastyear and as we discussed previously this was driven in part by what we knewwhen we planned the quarter, namely the gap left by the bath business and lowerprivate label sales. However, whatwasn’t anticipated was the softness at retail which contributed to ourdisappointing result at Famous Footwear and fewer in season reorders from ourretail partners on the wholesale side of the business. Some of this was offset with the good quarterfrom Dr. Scholls, Etienne and Franco Sarto and pretty solid results fromNaturalizer and LifeStride as well.

On the other hand we’ve had a number of things to be pleasedabout in the quarter. Clearly, theresults speak to the fact that we managed the business extremely well. Inventory at Famous Footwear was down on aper store basis and down significantly at wholesale and we are well positionedfrom an inventory standpoint as we enter the fourth quarter. This all together resulted in strongermargins overall. In particular,wholesale registered its third straight quarter of at least 110 basis point improvementin gross margins attesting to the success of our repositioning of the wholesaleportfolio towards higher margin businesses.

Our International expansion got underway as well in thequarter as we opened our first stores in mainland Chinawith our joint venture partner D&H, Brown Shoe and Hongguo. And, as you know, we plan to open a total of500 points of distribution over the next five years and we look to continue toexplore to additional means to grow our brands globally. We also made progress this quarter on ourearnings enhancement plan initiative as we moved our www.Shoes.com operation from LA to Saint Louis with the intent of leveraging resources to growthis business more properly and we really are very thrilled with some of thenew talents that are joining the team there at www.Shoes.com. We are really very excited about that.

But now, let me provide a little color to the quarter on asegment basis. Beginning with ourflagship brand Famous Footwear which generated total sales of $361 million inthe quarter. This is down 1.4% over thequarter last year while same store sales were down 6.2% for the quarter or down2.6% on a comparable calendar basis. That was a tongue twister. Asmany of you know, third quarter last year was an all time high for the brand socomparisons were difficult. Joe willprovide more details shortly but it was really a tale of two halves in thequarter. Sales during the back to schoolseason in the first half of the quarter were markedly better than in the secondhalf which we attribute to both the economic factors and the unseasonablyweather discussed earlier in the call. But, the team managed margins and inventory well and we are positioned toexecute very well in the fourth quarter.

Moving on to our 278 store specialty retail division whichprimarily consists of our Naturalizer retail stores and www.Shoes.com businesses. We continue to be pleased with the progressthat this segment has made during the last several quarters. Sales were up 3.8% in the quarter to $70.8 millionas www.Shoes.com grew 29% in the quarterand we also benefited from the effects of the exchange rates in our Canadianstores. In our retail stores overallsame store sales were down 1.9%. Weexperienced a solid start to the quarter in August but, like others struggledin September and October. The team alsomanaged margins well in the quarter resulting in an operating loss of $1.9 millionwhich included costs of $2.8 million from the earnings enhancement plan. This was primarily related to the relocation of the www.Shoes.com offices from LA to Saint Louis. Werelocated 50 positions to our headquarters and we expect the repositioning ofthis business and the ongoing integration to the Brown platform to continuethrough the end of the year.

Our expectations continue to be high for our D to C businesswhich we believe will contribute significantly to the top line over the nextseveral years while generating mid single digit operating margins. And, I just have to say that the team did agreat job at moving the business and limiting the destruction during thequarter.

Turning to wholesales. Sales for the quarter totaled $213.7 million, a decline of 11.8% fromthe same period last year which was below our expectations driven, as Imentioned by lower in season reorders at retail and a planned reduction inprivate label as well as the exit of the bath business. The key story here is the excellent marginand inventory management this team produced during the quarter. Trends and risks were identified and actionswere taken quickly to deal with the soft retail environment and to mitigate asmuch risk as possible. As a result,gross margins increased 110 basis points in the quarter to 35%. Operating profit increased 15.65 to $23.1 millionon roughly $30 million less in sales. This resulted in an operating margin of 10.8% versus 8.3% of sales lastyear which also included costs related to the bath exit. Pulling out the earnings enhancement costs inthe third quarter this year and the bath exit costs in Q3 of 06, operatingmargins grew 11% versus 9.2%. Also,impressively, inventory was down 24% in the quarter overall which is atestament to our consumer driven models, the hard work of our team and the shipand buying patterns of our customers. Our inventory position as we look through the pipeline is clean andboosts have been managed well all season.

Just a quick update on Brown New York where we arecontinuing to see progress with these brands in particular, feedback on theproduct has been exceptional reflecting the changes we continue to make to ourmanagement and product and design teams at Brown New York and we expect to seedouble digit growth from this group in the fourth quarter. Additionally, the third quarter also saw thelaunch of Natural Sole in Kohls which as met our expectations.

In closing, we are focused on managing the year to the bestoutcome possible while setting ourselves up well for 2008. We continue to move our portfolio towards amore profitable mix of businesses while at the same time increasing investmentsinto our growth vehicle. And now, I’dlike to turn the call over to Joe who is going to review Famous Footwear’squarter in more detail.

Joseph W. Wood

Thank you Diane and good morning everyone. As my call list comment, Famous Footwearendured a tough quarter and back to school period. As we began the quarter we really facedheadwinds due to the retail countership and a tough comparison of lastyear. We expected to offset this withstrong assortments and a sharp marketing message. However, lower traffic counts especially inSeptember and October caused those sales and earnings to come in below theprior year and our expectations. Despitereduction in traffic, we maintained our operating philosophy for markdowncadence as we knew it would not be productive to increase promotions in a lowertraffic environment. We also kept to ourstrict inventory disciplines and only increased promotions the last weekend ofOctober as the merchants worked to maintain clean inventory levels.

In total Famous Footwear sales of $361 million were downfrom $366.3 million for the third quarter last year. Famous Footwear sales for the quarterdecreased 2% or 2.6% on a comparable calendar basis which compares to an 8.2%same quarter sales increase at a year ago period. Lower sales along with the slight decline ingross margin rate and a lack of leverage on expenses lead to a 22% decline inoperating earnings to $30.8 million or 8.5% of sales compared to $39.6 millionor 10.8% of sales last year. And, toreview the metrics, lack of traffic was the story. While the average retails were up about 1%,conversions were down 1.9%. A trafficdecline of 6% which was 3% on a comparable calendar basis. All channels were affected during the back toschool timeframe both mall, strips and outlets.

By category our kid’s business performed well with sales up3% store for store. Accessories alsocontinued its past strength and it was up 5% on store for store basis. Athletes during this time frame was basicallyflat however, these increases were more than offset by same store sales declineof 8% in our women’s business and 10% in men’s.

Regarding our stores; we continue to be pleased with our newstore remodel programs. Our remodelinitiative remains on track with over 80% of our [inaudible] now complete. During the quarter we opened 51 stores andclosed 15 ending the quarter with 1,060 locations. For the year, we remain on track to open atotal of 110 locations while closing 35.

As we go in to the holiday season we believe our inventory isin good shape and our store assortment reflects key trends. With that said, we expect this period to bepromotion and we believe we will prepare for such. To maximize our traffic and to sustain andgrow market share we started our November holiday promotion earlier this yearwith favorable results. As we look atJanuary promotions we are focused on two distinct different customerprofiles. The first is the clearancecustomer looking for a good deal; the second is targeted at a younger consumerwho comes in after the holiday with cash to shop for new. Additionally marketing efforts will be placedto maximize their spend while they are in our stores during thistimeframe.

We will continue to improve and control expenses and inhereto our [inaudible] philosophy aiming towards metrics as we always have. As we look to fiscal 2008, our key prioritiesare to maintain the flow of newness. Weremain excited by the number of new offerings that Nike is introducing to ourchannel next year along with our many other vendors. And, you know, we remain committed to ourstore expansion plans in 2008 and to date we’ve negotiated leases on 128 of thetargeted 130 sites that we will open.

In summary, I am confident that Famous Footwear possess thetalent and discipline to manage its business well during the fourth quarterconcentrating on maximizing our sales, product flow, ending inventory andexpenses. Now, I’d like to pass the callback to Ron for closing comments.

Joe

Thanks Joe. Just acouple of additional comments on Joe’s remarks here. Early November business driven by a strongpromotion we did produce the type of sales increases we had expected and we’repretty pleased with that. Coming oncyber Monday because we did just move all our operations to Saint Louis and we were extremely pleased with cyber Monday,we had a record day and I think Diane or Joe can comment it, it was 60 or 70 or80% up.

Diane M. Sullivan

89%

Joseph W. Wood

89% up but, there’s a little comparability of where we arethere in the cycle as well. But again,as we look forward we continue to be thoughtful and cautious about the amountof activity both promotionally and trying to drive customers and customertraffic in the store causes us to be thoughtful about the business as we guideand drive the business in the fourth quarter. While we are disappointed with the results, you know, it really was adifficult environment and I think the team does a great job and I think itcontinues to show. We manage thebusiness well. I also think it speaks tothe power of our multi channel platform. Leveraging the synergies between retail, wholesale and ecommerce acrossthe enterprise and that this model shows that it stands up well in difficulttimes. But, more importantly willprovide us with the opportunity to grow in better times. As such, we are focused on delivering theyear but, equally focused on continuing to build the infrastructure andexecuting against the initiatives designed to assist us in our goal of doublingsales and the rate of profitability over the next five years.

While, the wind may be in our faces now, after a number ofstrong quarters for the footwear industry we continue to be encouraged and Ican assure you that we still have the passion and energy as well as our teamsto drive the enterprise success. Now,why don’t we take the time to turn the call over to you, the operator, so wecan answer questions. Please ask onequestion and a follow up. If you have additional questions, please return tothe queue.

Question-and-Answer Session

Operator

(Operator Instructions)Mr. Shanley fromSusquehanna Financial Group. Please goahead with your questions.

John Shanley –Susquehanna Financial Group

Thank you and good morning. Joe, I wonder if you can give us some details in terms of the poortraffic levels that you mentioned. Didthe store traffic decline pretty much in sync with the sales declineparticularly in the backend of the quarter? And, have those traffic levels improved to any degree since we note thatsome of the recent business in your stores that you’re running BOGOs and itseems to be a lot more promotional here in November than it had been earlier inthe quarter. Is the traffic level comingback to any degree?

Joseph W. Wood

I think there were several questions in there John so let mesee if I can answer them. You know,during back to school traffic was okay really in August, I mean it was down alittle bit but, August was a fairly decent month. And, where traffic really declined, John inall three channels was obviously, in September and then October was verypoor. What we did see come back andtraffic continued to decline in September into October. Now, we have seen traffic come back slightly,its still in the negative, in November so, we’re still experiencing a customerdecline especially as we look at the first couple of weeks. Again, not as sever as November. Promotionally, John, the only think we did iswe usually start our promotions mid November. We moved them up by two weeks, it made sense to do so. We received favorable comments and salesresults from that but, we really haven’t gotten any more aggressive with ourpromotions other than as far as two weeks earlier in November.

John Shanley –Susquehanna Financial Group

You don’t remember Joe whether last year you did thepromotion across all product categories as it seems to be going now, was thatthe case last year as well?

Joseph W. Wood

Yes, it was John.

John Shanley –Susquehanna Financial Group

I have one quick question. The expectation that the private label business is going to return to asales increase next year, is that based on actual orders that you’ve booked andhave you been able to fill the gap based on the loss of some of that Paylessbusiness with other value channels?

Diane M. Sullivan

We believe that we have stabilized the private label business. We don’t necessarily think that it’s going togrow next year. We’re really shiftingthe mix in the entire portfolio towards much higher margin businesses so webelieve we have stabilized that piece of it which will allow us to grow nextyear.

Operator

Mrs. Boksen with Sidoti & Company, go ahead with yourquestion.

Heather Boksen –Sidoti & Company

Good morning. Johnalready kind of touched on it but with the comp decline accelerating in theback half of the quarter how much of that has sense been improving in Novemberwhen it got colder, how much of that would you say was weather related and howmuch would be the other factors?

Joseph W. Wood

Well, you know, I think whether it is us or anyone else,that becomes speculation. But,speculation only from the fact that if you take a look at our boot sales asweather got colder and you take a look at athletic, historically, as it getscolder our cold weather inventory sells well, athletics tend to take a backseat, that has happened, especially over the last two weeks as we have gottensome colder weather. So, the trend hasalways been the same. We have seen anincrease in our boot business, especially in the last two weeks.

Heather Boksen –Sidoti & Company

Okay. Then, I guess to follow up with that and I guess, thiscould be for Joe and Diane. Lookingahead to spring, what are you seeing in terms of trends and particularly forthe wholesale business. You know, obviouslydepartment stores have been struggling this half, what are you seeing from themin terms of, I guess, what’s their outlook going in to spring and what is thesense you’re getting from them?

Diane M. Sullivan

The sense that we’re getting from them is that they continueto be cautious, cautiously optimistic that as we move our way through thefourth quarter turning into 2008, things will stabilize a little bit. I think everybody is still trying to wait andsee what the consumer is going to do and how traffic is going to be affected. But, our, you know, I wouldn’t say are lookingat things in a dire way. I thinkeverybody’s trying to be a little smart about the way they are managing thebusiness and as Joe indicated the way he’s thinking about it continuing tomanage and bring in new goods and [inaudible] smartly and give the consumerschoices and maintain that freshness is going to be key in order to move out ofthe lull that we’re in. And then, as faras categories we’re seeing a little bit of a shift between more casual andcasual dress type product and less dress in the market place and continuinginterest in low profile and sport kind of products too. So, that’s kind of that sort of shift we’reseeing out there in terms of the way for the purchases are looking. Joe, I don’t know if you would add to that?

Joseph W. Wood

No, I would agree. Aswe take a look as we get to the first of the year we’re going to see first ofthe year retail lines, especially January and then the product flow changesmore towards athletic as we take a long at spring with large receipts both atthe end of January and beginning of February. So, on top of your comments by end, it’s also the athletic businessgroup really keeps us in the spring looking forward to the new deliveries bothfrom Nike and our skate vendors as we get to the first of the year.

Operator

Mr. Hottovy Next Generation Equity Research. Please go ahead with your question.

R.J. Hottovy – NextGeneration Equity Research

Good morning everyone. First question I have just had to do with the international operationsand obviously, it’s a bit early with having just opened up the China stores aswell as the Japan stores but, if you can give us a little bit more of an updateas to what you see in terms of next year. How many stores you may be looking at in Chinaand maybe possibly any other, just any other detail you can give us there.

Diane M. Sullivan

Sure. I’ll start andlet any of my colleagues chip in on that. We have about 15-20 points of distribution at this point and time andexpect to add another 10-15 through the end of this year and as we turn to nextyear I think our expectation is another 50 or so. It’s a little early to tell exactly how allthat’s going to play out and when that’s going to happen because we are reallyjust finishing up really the first 60 days of products in the stores. The reactions so far in terms of Natural as abrand in Chinahas been solid. There retail performancehas been good and, you know, as you can expect we’re learning a lot about howthe consumer is going to respond to the brand and the products and makingchanges along the way as we need too. And, we’re very excited by the team of people that we have there. Aterrific guy named Howard Herman is heading that operation up over there in China. He’s a guy that’s been around Brown Shoe companynow for a while and, you know, is just doing a terrific job there. I don’t know if Ron or Mark want to addanything on China?

Mark E. Hood

No, I think that sums it up pretty well Diane. I think we’re very optimistic that we’vegotten off to a good start and the works ahead and we’ll be opening as it makessense to do but, focusing more on the quality of locations and space thanabsolute numbers.

Ronald A. Fromm

I think probably a couple of important differences, a lotmore focus on the product development cycle in China. We have the ability in our offices inDongguan to do [inaudible] production and get in and test and learn product ona regular basis and so I think as these stores open that inventory turnetcetera is expected to improve dramatically and I think we are very excited. But, mostly we’re excited because we have avery seasoned team. As Diane said,Howard has actually worked for us now for I think, 15 or 16 years and speaksfluent Mandarin and has spent the last couple of years working in our Saint Louis office and now he’s over there. So, I think we’re in capable hands and we’vespent a lot of time with the Hongguo team this last month and again, I thinkHongguo is just absolutely a first rate retailer, is operating over, I believeover 700 doors of retail distribution right now and so, I think we’re in goodhands and it’s early and we’ll report back to you as we move on.

R.J. Hottovy – NextGeneration Equity Research

Okay. It sounds like it’soff to a great start. My follow upquestion just has to do with some of the brand expansion opportunities youmight see in the brand New York Group and just with valuations coming inparticularly in the footwear industry over the past couple of months, are youseeing any more opportunities arrive to kind of build out that portfolio? Any commentary you can give us there?

Ronald A. Fromm

Well, I think as we probably say quite often I think ourteam takes a very good look, we have a lot of open to look. There’s a lot of moving parts, you know,everything in the industry always seems to be available and I think we’vedesigned a nice tight line review as we can understand which things are sort ofbeing discussed and out there and continue to look. I think we’ve been very focused on gettingthe Brown New York team in place and making sure the products right first and,you know, we’ve certainly made great progress and I think we’re looking forwardto 08 to verify that. We don’t have, youknow, we don’t have anything that we would obviously be discussing with you ifwe had anything imminent. We continue tothink there are opportunities and we certainly expect to pursue them.

R.J. Hottovy – NextGeneration Equity Research

Okay. Thanks.

Operator

Mr. Caruthers from Johnson Rice, please go ahead with yourquestion.

Jill Caruthers –Johnson & Rice Company LLC

Good morning. I washoping you could talk a little bit more about on the wholesale side fewerreorders in season. If you could perhapsquantify that and maybe talk about maybe when do you get the bulk of springorders and how we can look for timing on that.

Diane M. Sullivan

Sure. Hi Jill, howare you? You know, the reorders – thirdquarter is when we look at the fall season is really the quarter when we getthe most immediate for reorders and because of the way, two reasons, because ofthe way we manage the inventory and obviously the retail environment, reorderswere down substantially. It depends onthe brand but, we managed that we think exactly right. I mean, anywhere between 10-20% we were downin terms of our reorders and again, I think that was the right play because wehave been able to again, really make sure we continue to expand margin and theoperating margins also obviously for the quarter were a lot better for thequarter had we not managed the flow of product to retail. Our order base, actually, I don’t know wherewe stand right now. We’re – obviously,we’ve got a lot of first quarter, really I’d say through February and Marchright now and in terms any other numbers you guys want to tack on?

Mark E. Hood

The backlog I have in front of me is as of the end ofOctober so, it is a little bit stale in terms of that but, I mean, by the endof the quarter our fourth quarter of the on order was in line with our expectedsales for the forth quarter and, you know, a very solid start to the 2008 firstquarter, you know, up decently over the prior year but it’s a little thin so Iwon’t give the exact number as a percentage increase there.

Diane M. Sullivan

Okay.

Jill Caruthers –Johnson & Rice Company LLC

Okay. Maybe a followup is on the earnings enhancement plan, I know you’ve quantified costs up foreach quarter and now it looks like you’re seeing more benefits materialize fromthese initiatives. Maybe you could justtalk a little bit more about that, some of the key areas where you’re seeingthese benefits materialize? Thank you.

Mark E. Hood

Yeah. I’ll take thatone I guess. Yeah, the benefits clearlycome over time and I think we’ve remained on track to deliver the results thatwe’ve promised through the end of 08 and I think certainly when you look at theperformance in the third quarter one of the reasons we were able to deliver ourprofits, or nearly delivery our profits while missing significantly on the topline is because we had had the program going on and its really broad based interms of where we’re getting the savings. Again, the reductions in head count associated with consolidationactivities and the warehouse combinations etcetera just continue to benefit usas we get deeper into the year.

Operator

[Mr. Soul] from Morgan Stanley please go ahead with yourquestions.

[Mr. Soul] – MorganStanley

Hi, thank you for taking my call. I just had a question on the, Mark youmentioned the debt capital is down this quarter by 20% and, you know, with thestock is probably right now trading around five times [inaudible] what are yourthoughts about the capital structure in regards to the debt? Maybe a buy back or a dividend? Can you talk about that a little bit for usplease?

Mark E. Hood

Yeah. I thinkobviously, we’ve continued to work on maintaining our balance sheet flexibilityfollowing the [inaudible] acquisition and have been in a strong cash generationover the last 12-18 months and I think as we’ve continued to talk about we havesome upcoming infrastructure capital expenditures that will make use of some ofthe cash. We’ll remain, as Ron indicatedearlier interested in adding wholesale brands and we continually review withour board opportunities relative to share repurchase. We have a 2.4 million share repurchaseprogram authorized but, we have not utilized that over the last couple ofyears.

[Mr. Soul] – MorganStanley

Okay. Well,great. With regard to cap backs youmentioned it would be down, I think in the guidance about, you know, maybe $15 millionroughly to $20 million lower than it was previously. Where’s the change there? Can you talk about maybe what’s [inaudible].

Mark E. Hood

Yes, it’s really a delay in execution on a couple of our opinitiatives relative to logistics and IT where the work of determining exactlywhat we’re going to do and in the time frame that we’re doing it that has takena little bit longer than we would have kind of planned when we set our cap expendituretarget.

Operator

Ms. Montgomery from Cowen please go ahead with your question.

Elizabeth Montgomery– Cowen & Company LLC

Hi guys. Most of myquestions have been answered but I wondered, Diane could you speak to thedifference in the relative strength of comp business during the quarter betweenNaturalizer and Famous Footwear and then Joe, is there anything that you guyscan do through the frequent shopper program that you have at Famous Footwear tomaybe help drive some traffic in Q4? And, if so, are you doing it? Thanks.

Diane M. Sullivan

Okay. Let me talk alittle bit about traffic and comps and Naturalizer retail stores you werechatting about versus Famous Footwear. Ithink in Naturalizer it was we were really fortunate. It was the flow and the way the month camethrough whether it was, you know, August came through pretty strong and then alittle bit week in September and October, it wasn’t quite impacted in the samewas as Famous was during that time period and I think additionally, thecustomer that we have for Naturalizer in the Naturalizer stores is a little bitdifferent. That customer is very, veryloyal to the brand and I think we benefited a little bit in terms of traffic tothe stores relative to Famous because of that loyalty. And, I think Joe maybe just in terms ofmaybe, I think just in terms of in Famous, I think the other point that myfriend here is reminding me is that it was a much easier comparison forNaturalizer versus Famous Footwear, without questions. As you recall, I think it was a little over8% last year, comps at Famous versus Naturalizer was probably, you know, two,one to two so that’s another major difference clearly between the performanceof the two businesses.

Joseph W. Wood

I think answering part of your question is focusing on ourrewards consumers and talking to her directly. That now represents, that customer now represents over 50% of oursales. We obviously are focusing onadditional focus on December and January talking directly to her to change thetraffic trend and sales trend that we saw during third quarter.

Elizabeth Montgomery– Cowen & Company LLC

And as a follow up could I just ask what percentage of boostthat are normally in Q4?

Diane M. Sullivan

Yeah. Probably, I’dtell you it’s probably somewhere between 30-35% in total normally and that wasin total from wholesale and for Famous I know it is quite a bit less than that.

Joseph W. Wood

It’s not a, it’s an important number but not a significantnumber to change our business one way or the other.

Operator

Mr. Poser from Stearn Agee please go ahead with yourquestion.

Sam Poser – StearnAgee & Leech

Good morning. I justhave a couple follow ups. Number one,you mentioned that your inventory per square foot at famous is down, can yougive us what the total square footage is right now, Joe?

Joseph W. Wood

One of our folks will look it up. We’ll either get it back to you while you’restill on the call, or we’ll get it to you there.

Mark E. Hood

Our square footage Sam was about 7.4 million square feet atthe end of the third quarter.

Sam Poser – StearnAgee & Leech

Okay. Thanks. Can you talk about Joe, what the gross marginSG&A was and can you give us the specifics for that for Q3 right now andalso what your assumptions are looking ahead into Q4?

Joseph W. Wood

Well Sam, I’m sorry repeat again. The gross margin for Q3 and Q4 SG&A?

Sam Poser – StearnAgee & Leech

Your gross margin, the actually gross margin for SG&Afor Q3 and then how you’re looking at that for Q4 as well.

Joseph W. Wood

The details of the gross margin will be out in the 10Q in aweek or so but, I think on a relative basis, you know, the gross margins aspayments in a quarter were down about 70 basis points year-over-year. We had a little less benefit from thefreshness of inventory in the current year as we were going up against thosestronger numbers from a year ago. And,the operating expenses were down from about 120 basis points, I think, orexcuse me, they were up, the leverage from the lack of sales drove the expenseration out there about 120 basis points.

Ronald A. Fromm

And Sam, I don’t expect erosion on the margin in the fourthquarter so right now, my inventory is clean. I don’t see a lot of pressure there going into fourth quarter.

Joseph W. Wood

And, we really don’t give line item guidance in the fourthquarter.

Operator

Mr. Shanley from Susquehanna Financial Group, please goahead with your question.

John Shanley –Susquehanna Financial Group

I just had one follow up question. Joe, are there any brands or styles thatyou’re anticipating bringing in for the spring 08 selling season that you thinkmay help to reinvigorate the men’s and women’s non athletic footwear segment ofyour merchandise mix?

Joseph W. Wood

You know, we are right now but, I really don’t want tocomment on that but, we do expect some additional brands into spring of 08 toenhance some of our businesses, especially as we take a look at the dress andcasual that we’ve been struggling with during the third quarter.

John Shanley –Susquehanna Financial Group

Maybe you can just give us an idea, what seems to be theproblem with those two product categories? Is it just the lack of interest on the part of the consumer? Or, is it related to a disinterest in some ofthe apparel products that would stimulate footwear sales that would go withthose apparel wardrobe items?

Joseph W. Wood

I don’t think the wardrobe right now is a major factor. I mean, it is more so, if we took a look bytotal categories, especially in women’s and men’s it was more or less the samestory this year as it was last year although those categories were expandedeven further in number of styles. So, Ithink it is more so that we’ve filled their closet and are looking for somethingnew so, it was last year in 06 was a great story with the same store figuringin 07 at some point you fill the closet and they’re looking for somethingnew. So, I thin it is the newness ofstyles coming in first quarter of next year that is going to turn that consumertrend around.

Operator

[Mr. Soul] from Morgan Stanley, please go ahead with yourquestion.

[Mr. Soul] – MorganStanley

Hi. I just had onefollow up question. Looking at a bigpicture perspective, the even margin on adjusted basis the way I’m calculatingit was about7.3% this quarter. That’sthe highest it’s been in quite a few quarters, at least 10 or so. Because it issuch a tough retail environment being able to have such a high margin, have yourethought any of your margin goals for where you see this business being ableto go down the road maybe two, three, four or five years?

Mark E. Hood

Okay. I think whilewe’ve been pretty consistent in saying that our objective would be to doubleour operating margins and I think obviously the results in the quarter speak toa progress towards that goal. But, wehaven’t changed the goal.

[Mr. Soul] – MorganStanley

Okay. Thanks.

Operator

Ms. Boksen from Sidoti & Company, please go ahead withyour question.

Heather Boksen – Sidoti& Company

Hi. I just want onequick follow up with regards to earning enhancement plan, maybe because it’sjust a change in the way you’re wording it but, you mentioned in the pressrelease that after tax benefits upon completion in late 08 continue to be$17-20 million. Are we going to see$17-20 million benefit in 08? Or, willthat be late 08 into 09?

Mark E. Hood

Again, I don’t think we consciously changed the wordingthere but the intent remains the same and that’s accumulative from the beginningof the program to have been completed by that point in time and I think wewould have some ongoing run rate benefits beyond that. But, that would be what would be realized.

Heather Boksen –Sidoti & Company

Alright. Thanks.

Operator

Mr. Fromm there are no further questions at this time. Please continue with any closing remarks youmay have.

Ronald A. Fromm

Thank you all for joining us, look forward to seeing younext quarter and hopefully we’ll have a better story and better results and I’msure we’ll see a lot of you next week at [inaudible] as well.

Operator

This includes today’s Third Quarter 2007 Brown Shoe CompanyIncorporated Earnings Call. You may nowdisconnect.

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