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Brown Shoe Co., Inc. (NYSE:BWS)

Q3 2007 Earnings Call

November 28, 2007 9:00 am ET

Executives

Ken Golden – Director of Investor Relations

Ronald A. Fromm – Chairman of the Board & Chief Executive Officer

Diane M. Sullivan – President & Chief Operating Officer

Mark E. Hood – Chief Financial Officer & Senior Vice President

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

Operator

Welcome to the Third Quarter 2007 of Brown Shoe Company Incorporated Earnings Call. I would now like 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 2007 Financial Results Conference Call. This call is being made accessible to the company via webcast in accordance with the SEC Regulation FD. Before we begin I’d like to remind you of the company’s safe harbor language. During this conference call the company will make certain forward looking statements to help you better understand its financial results and competitive outlook. Discussion of the company’s future plans and other statements in this call that are not current or historical facts are forward looking statements. These involve known and unknown risks and uncertainties that could cause the actual results to materially differ from historical results or from any future results expressed or implied by these forward looking statements. Factors that could cause actually results to differ materially include those within our press release issued this morning and available on our 8K filed prior to this call and other risk factors listed from time to time in the company’s SEC reports. Copies of the company’s reports are available online and from the company’s investor relations department. The company does not undertake any obligation or plan to update these forward looking statements even 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. Thank you all for joining us this morning. With me today is Diane Sullivan our President and Chief Operating Officer; Mark Hood our Chief Financial Officer and Joe Wood, President of Brown Shoe Retail. Clearly, we are not satisfied with our third quarter results which were slightly below the expectations we set when we began the quarter. Much like the entire industry we are operating in a challenging environment for consumer spending. Confidence was obviously down, weather was unseasonably warm and dry and there was quite possibly a style lull. On that last point, I think it’s been yet to be determined whether there’s a definitive pause in the fashion cycle or if it is really driven by the abnormal weather because, without the weather catalyst there has been on compelling need for her to update her wardrobe particularly, in footwear. And while Brown Shoes stood up to these challenges by relying on our key brand strength of solid execution tread right product, this was not enough to offset the lower levels of traffic at retailers across the country.

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

Mark E. Hood

Thank you Ron. Good morning everyone. I will focus my remarks on consolidated results and as Ron said, Diane and Joe will provide color on retail and also segments. Beginning with the review of the income statement consolidated net sales for the third quarter totaled $645.5 million compared to $676.8 million in the third quarter of last year. Much of the sales decline was due to the exit of the bath flights and some planned reductions in private labels. However, results were also impacted by unseasonable weather where the current year’s warm temperatures follows last years which were the coldest in decades and consumer reaction to macro economic forces.

Gross profit margins increased 40 basis points to 40.3% from 39.9% 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 wholesale division offset in part by lower absolute margins at Famous Footwear and specialty retail. SG&A decreased by 4.8% to $217 million or 33.6% of net sales, a 10 basis point improvement compared to $227.9 million or 33.7% of net sales in the third quarter last year. The decrease was driven by lower incentive and stock based compensation costs and savings from the earnings enhancement plan. This was offset in part by the shift of mix of wholesale versus retail and $4.5 million in earnings 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 2007 increased to $42.8 million or 6.6% of net sales from $42 million or 6.2% of net sales in the third quarter last year. Net interest expense totaled $2.8 million compared to $3.7 million in the prior year period. The decrease in that interest expense was due to higher cash balances over the year ago period. We had no outstanding borrowings under our revolving credit facility at the end of the third quarter. On an adjusted basis excluding the earnings enhancement plan charges in the third quarter and costs related to the exit of the bath business in 2006 which are summarized in Schedule 4 of our press release, we achieved net earnings of $29.9 million or $0.67 per diluted share compared to $0.65 last year.

We ended the quarter with a strong balance sheet, cash and short term investments were up 68% to nearly $80 million from $47.5 million at the end of last year’s third quarter. Total inventory at quarter end was $440 million up from $434 million in the prior year period. Inventory at Famous 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 year ago versus an 11.8% sales decline. Total debt outstanding at the end of the quarter was $150 million compared to $170.5 million in the prior year period. As a result total 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 as infrastructure. For fiscal 2007 we are no forecasting capital expenditures to be approximately $40-45 million down from our prior estimates.

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

For the fourth quarter 2007 we expected diluted earnings per share on a GAAP basis to be in the range of $0.36-$0.41 per share as compared to $0.31 in the fourth quarter of last year. This guidance range includes estimated charges related to the earnings enhancement plan of $0.03 per share. Please note that the earnings in the fourth quarter 2006 included charges of $0.16 per diluted share for costs related to the exit of the bath license, the earnings enhancement program and environmental remediation. On an adjusted basis excluding the earnings enhancement charges we expect fourth quarter 2007 earnings per diluted share in the range of $0.39-$0.44 per share versus 2006 adjusted earnings per diluted share of $0.47.

It is important to note that Q4 2007 will be 13 weeks whereas 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 to down 2% at Famous Footwear. Wholesale sales 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 the business in the quarter and I will provide some details momentarily but, I would like to first address the weaker sales performance. Sales were roughly $30 million below last year and as we discussed previously this was driven in part by what we knew when we planned the quarter, namely the gap left by the bath business and lower private label sales. However, what wasn’t anticipated was the softness at retail which contributed to our disappointing result at Famous Footwear and fewer in season reorders from our retail partners on the wholesale side of the business. Some of this was offset with the good quarter from Dr. Scholls, Etienne and Franco Sarto and pretty solid results from Naturalizer and LifeStride as well.

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

Our International expansion got underway as well in the quarter as we opened our first stores in mainland China with our joint venture partner D&H, Brown Shoe and Hongguo. And, as you know, we plan to open a total of 500 points of distribution over the next five years and we look to continue to explore to additional means to grow our brands globally. We also made progress this quarter on our earnings enhancement plan initiative as we moved our www.Shoes.com operation from LA to Saint Louis with the intent of leveraging resources to grow this business more properly and we really are very thrilled with some of the new 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 a segment basis. Beginning with our flagship brand Famous Footwear which generated total sales of $361 million in the quarter. This is down 1.4% over the quarter last year while same store sales were down 6.2% for the quarter or down 2.6% on a comparable calendar basis. That was a tongue twister. As many of you know, third quarter last year was an all time high for the brand so comparisons were difficult. Joe will provide more details shortly but it was really a tale of two halves in the quarter. Sales during the back to school season in the first half of the quarter were markedly better than in the second half which we attribute to both the economic factors and the unseasonably weather discussed earlier in the call. But, the team managed margins and inventory well and we are positioned to execute very well in the fourth quarter.

Moving on to our 278 store specialty retail division which primarily consists of our Naturalizer retail stores and www.Shoes.com businesses. We continue to be pleased with the progress that this segment has made during the last several quarters. Sales were up 3.8% in the quarter to $70.8 million as www.Shoes.com grew 29% in the quarter and we also benefited from the effects of the exchange rates in our Canadian stores. In our retail stores overall same store sales were down 1.9%. We experienced a solid start to the quarter in August but, like others struggled in September and October. The team also managed margins well in the quarter resulting in an operating loss of $1.9 million which 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. We relocated 50 positions to our headquarters and we expect the repositioning of this business and the ongoing integration to the Brown platform to continue through the end of the year.

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

Turning to wholesales. Sales for the quarter totaled $213.7 million, a decline of 11.8% from the same period last year which was below our expectations driven, as I mentioned by lower in season reorders at retail and a planned reduction in private label as well as the exit of the bath business. The key story here is the excellent margin and inventory management this team produced during the quarter. Trends and risks were identified and actions were taken quickly to deal with the soft retail environment and to mitigate as much 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 million on roughly $30 million less in sales. This resulted in an operating margin of 10.8% versus 8.3% of sales last year which also included costs related to the bath exit. Pulling out the earnings enhancement costs in the third quarter this year and the bath exit costs in Q3 of 06, operating margins grew 11% versus 9.2%. Also, impressively, inventory was down 24% in the quarter overall which is a testament to our consumer driven models, the hard work of our team and the ship and buying patterns of our customers. Our inventory position as we look through the pipeline is clean and boosts have been managed well all season.

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

In closing, we are focused on managing the year to the best outcome possible while setting ourselves up well for 2008. We continue to move our portfolio towards a more profitable mix of businesses while at the same time increasing investments into our growth vehicle. And now, I’d like to turn the call over to Joe who is going to review Famous Footwear’s quarter in more detail.

Joseph W. Wood

Thank you Diane and good morning everyone. As my call list comment, Famous Footwear endured a tough quarter and back to school period. As we began the quarter we really faced headwinds due to the retail countership and a tough comparison of last year. We expected to offset this with strong assortments and a sharp marketing message. However, lower traffic counts especially in September and October caused those sales and earnings to come in below the prior year and our expectations. Despite reduction in traffic, we maintained our operating philosophy for markdown cadence as we knew it would not be productive to increase promotions in a lower traffic environment. We also kept to our strict inventory disciplines and only increased promotions the last weekend of October as the merchants worked to maintain clean inventory levels.

In total Famous Footwear sales of $361 million were down from $366.3 million for the third quarter last year. Famous Footwear sales for the quarter decreased 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 in gross margin rate and a lack of leverage on expenses lead to a 22% decline in operating earnings to $30.8 million or 8.5% of sales compared to $39.6 million or 10.8% of sales last year. And, to review the metrics, lack of traffic was the story. While the average retails were up about 1%, conversions were down 1.9%. A traffic decline of 6% which was 3% on a comparable calendar basis. All channels were affected during the back to school timeframe both mall, strips and outlets.

By category our kid’s business performed well with sales up 3% store for store. Accessories also continued its past strength and it was up 5% on store for store basis. Athletes during this time frame was basically flat however, these increases were more than offset by same store sales decline of 8% in our women’s business and 10% in men’s.

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

As we go in to the holiday season we believe our inventory is in good shape and our store assortment reflects key trends. With that said, we expect this period to be promotion and we believe we will prepare for such. To maximize our traffic and to sustain and grow market share we started our November holiday promotion earlier this year with favorable results. As we look at January promotions we are focused on two distinct different customer profiles. The first is the clearance customer looking for a good deal; the second is targeted at a younger consumer who comes in after the holiday with cash to shop for new. Additionally marketing efforts will be placed to maximize their spend while they are in our stores during this timeframe.

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

In summary, I am confident that Famous Footwear possess the talent and discipline to manage its business well during the fourth quarter concentrating on maximizing our sales, product flow, ending inventory and expenses. Now, I’d like to pass the call back to Ron for closing comments.

Joe

Thanks Joe. Just a couple of additional comments on Joe’s remarks here. Early November business driven by a strong promotion we did produce the type of sales increases we had expected and we’re pretty pleased with that. Coming on cyber 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 or 80% up.

Diane M. Sullivan

89%

Joseph W. Wood

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

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

Question-and-Answer Session

Operator

(Operator Instructions)Mr. Shanley from Susquehanna Financial Group. Please go ahead 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 poor traffic levels that you mentioned. Did the store traffic decline pretty much in sync with the sales decline particularly in the backend of the quarter? And, have those traffic levels improved to any degree since we note that some of the recent business in your stores that you’re running BOGOs and it seems to be a lot more promotional here in November than it had been earlier in the quarter. Is the traffic level coming back to any degree?

Joseph W. Wood

I think there were several questions in there John so let me see if I can answer them. You know, during back to school traffic was okay really in August, I mean it was down a little bit but, August was a fairly decent month. And, where traffic really declined, John in all three channels was obviously, in September and then October was very poor. What we did see come back and traffic 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 customer decline especially as we look at the first couple of weeks. Again, not as sever as November. Promotionally, John, the only think we did is we usually start our promotions mid November. We moved them up by two weeks, it made sense to do so. We received favorable comments and sales results from that but, we really haven’t gotten any more aggressive with our promotions 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 the promotion across all product categories as it seems to be going now, was that the 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 a sales increase next year, is that based on actual orders that you’ve booked and have you been able to fill the gap based on the loss of some of that Payless business 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 to grow next year. We’re really shifting the mix in the entire portfolio towards much higher margin businesses so we believe we have stabilized that piece of it which will allow us to grow next year.

Operator

Mrs. Boksen with Sidoti & Company, go ahead with your question.

Heather Boksen – Sidoti & Company

Good morning. John already kind of touched on it but with the comp decline accelerating in the back half of the quarter how much of that has sense been improving in November when it got colder, how much of that would you say was weather related and how much 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 as weather got colder and you take a look at athletic, historically, as it gets colder our cold weather inventory sells well, athletics tend to take a back seat, that has happened, especially over the last two weeks as we have gotten some colder weather. So, the trend has always been the same. We have seen an increase 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, this could be for Joe and Diane. Looking ahead to spring, what are you seeing in terms of trends and particularly for the wholesale business. You know, obviously department stores have been struggling this half, what are you seeing from them in terms of, I guess, what’s their outlook going in to spring and what is the sense you’re getting from them?

Diane M. Sullivan

The sense that we’re getting from them is that they continue to be cautious, cautiously optimistic that as we move our way through the fourth quarter turning into 2008, things will stabilize a little bit. I think everybody is still trying to wait and see what the consumer is going to do and how traffic is going to be affected. But, our, you know, I wouldn’t say are looking at things in a dire way. I think everybody’s trying to be a little smart about the way they are managing the business and as Joe indicated the way he’s thinking about it continuing to manage and bring in new goods and [inaudible] smartly and give the consumers choices and maintain that freshness is going to be key in order to move out of the lull that we’re in. And then, as far as categories we’re seeing a little bit of a shift between more casual and casual dress type product and less dress in the market place and continuing interest in low profile and sport kind of products too. So, that’s kind of that sort of shift we’re seeing 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. As we take a look as we get to the first of the year we’re going to see first of the year retail lines, especially January and then the product flow changes more towards athletic as we take a long at spring with large receipts both at the end of January and beginning of February. So, on top of your comments by end, it’s also the athletic business group really keeps us in the spring looking forward to the new deliveries both from 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 – Next Generation Equity Research

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

Diane M. Sullivan

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

Mark E. Hood

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

Ronald A. Fromm

I think probably a couple of important differences, a lot more focus on the product development cycle in China. We have the ability in our offices in Dongguan to do [inaudible] production and get in and test and learn product on a regular basis and so I think as these stores open that inventory turn etcetera is expected to improve dramatically and I think we are very excited. But, mostly we’re excited because we have a very seasoned team. As Diane said, Howard has actually worked for us now for I think, 15 or 16 years and speaks fluent 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’ve spent a lot of time with the Hongguo team this last month and again, I think Hongguo is just absolutely a first rate retailer, is operating over, I believe over 700 doors of retail distribution right now and so, I think we’re in good hands and it’s early and we’ll report back to you as we move on.

R.J. Hottovy – Next Generation Equity Research

Okay. It sounds like it’s off to a great start. My follow up question just has to do with some of the brand expansion opportunities you might see in the brand New York Group and just with valuations coming in particularly in the footwear industry over the past couple of months, are you seeing 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 our team 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’ve designed a nice tight line review as we can understand which things are sort of being discussed and out there and continue to look. I think we’ve been very focused on getting the 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 forward to 08 to verify that. We don’t have, you know, we don’t have anything that we would obviously be discussing with you if we had anything imminent. We continue to think there are opportunities and we certainly expect to pursue them.

R.J. Hottovy – Next Generation Equity Research

Okay. Thanks.

Operator

Mr. Caruthers from Johnson Rice, please go ahead with your question.

Jill Caruthers – Johnson & Rice Company LLC

Good morning. I was hoping you could talk a little bit more about on the wholesale side fewer reorders in season. If you could perhaps quantify that and maybe talk about maybe when do you get the bulk of spring orders and how we can look for timing on that.

Diane M. Sullivan

Sure. Hi Jill, how are you? You know, the reorders – third quarter is when we look at the fall season is really the quarter when we get the most immediate for reorders and because of the way, two reasons, because of the way we manage the inventory and obviously the retail environment, reorders were down substantially. It depends on the brand but, we managed that we think exactly right. I mean, anywhere between 10-20% we were down in terms of our reorders and again, I think that was the right play because we have been able to again, really make sure we continue to expand margin and the operating margins also obviously for the quarter were a lot better for the quarter had we not managed the flow of product to retail. Our order base, actually, I don’t know where we stand right now. We’re – obviously, we’ve got a lot of first quarter, really I’d say through February and March right 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 of October so, it is a little bit stale in terms of that but, I mean, by the end of the quarter our fourth quarter of the on order was in line with our expected sales for the forth quarter and, you know, a very solid start to the 2008 first quarter, you know, up decently over the prior year but it’s a little thin so I won’t give the exact number as a percentage increase there.

Diane M. Sullivan

Okay.

Jill Caruthers – Johnson & Rice Company LLC

Okay. Maybe a follow up is on the earnings enhancement plan, I know you’ve quantified costs up for each quarter and now it looks like you’re seeing more benefits materialize from these initiatives. Maybe you could just talk a little bit more about that, some of the key areas where you’re seeing these benefits materialize? Thank you.

Mark E. Hood

Yeah. I’ll take that one I guess. Yeah, the benefits clearly come over time and I think we’ve remained on track to deliver the results that we’ve promised through the end of 08 and I think certainly when you look at the performance in the third quarter one of the reasons we were able to deliver our profits, or nearly delivery our profits while missing significantly on the top line is because we had had the program going on and its really broad based in terms of where we’re getting the savings. Again, the reductions in head count associated with consolidation activities and the warehouse combinations etcetera just continue to benefit us as we get deeper into the year.

Operator

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

[Mr. Soul] – Morgan Stanley

Hi, thank you for taking my call. I just had a question on the, Mark you mentioned the debt capital is down this quarter by 20% and, you know, with the stock is probably right now trading around five times [inaudible] what are your thoughts 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 us please?

Mark E. Hood

Yeah. I think obviously, we’ve continued to work on maintaining our balance sheet flexibility following the [inaudible] acquisition and have been in a strong cash generation over the last 12-18 months and I think as we’ve continued to talk about we have some upcoming infrastructure capital expenditures that will make use of some of the cash. We’ll remain, as Ron indicated earlier interested in adding wholesale brands and we continually review with our board opportunities relative to share repurchase. We have a 2.4 million share repurchase program authorized but, we have not utilized that over the last couple of years.

[Mr. Soul] – Morgan Stanley

Okay. Well, great. With regard to cap backs you mentioned it would be down, I think in the guidance about, you know, maybe $15 million roughly 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 op initiatives relative to logistics and IT where the work of determining exactly what we’re going to do and in the time frame that we’re doing it that has taken a little bit longer than we would have kind of planned when we set our cap expenditure target.

Operator

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

Elizabeth Montgomery – Cowen & Company LLC

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

Diane M. Sullivan

Okay. Let me talk a little bit about traffic and comps and Naturalizer retail stores you were chatting about versus Famous Footwear. I think in Naturalizer it was we were really fortunate. It was the flow and the way the month came through whether it was, you know, August came through pretty strong and then a little bit week in September and October, it wasn’t quite impacted in the same was as Famous was during that time period and I think additionally, the customer that we have for Naturalizer in the Naturalizer stores is a little bit different. That customer is very, very loyal to the brand and I think we benefited a little bit in terms of traffic to the stores relative to Famous because of that loyalty. And, I think Joe maybe just in terms of maybe, I think just in terms of in Famous, I think the other point that my friend here is reminding me is that it was a much easier comparison for Naturalizer versus Famous Footwear, without questions. As you recall, I think it was a little over 8% last year, comps at Famous versus Naturalizer was probably, you know, two, one to two so that’s another major difference clearly between the performance of the two businesses.

Joseph W. Wood

I think answering part of your question is focusing on our rewards consumers and talking to her directly. That now represents, that customer now represents over 50% of our sales. We obviously are focusing on additional focus on December and January talking directly to her to change the traffic 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 boost that are normally in Q4?

Diane M. Sullivan

Yeah. Probably, I’d tell you it’s probably somewhere between 30-35% in total normally and that was in 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 significant number to change our business one way or the other.

Operator

Mr. Poser from Stearn Agee please go ahead with your question.

Sam Poser – Stearn Agee & Leech

Good morning. I just have a couple follow ups. Number one, you mentioned that your inventory per square foot at famous is down, can you give 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’re still 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 at the end of the third quarter.

Sam Poser – Stearn Agee & Leech

Okay. Thanks. Can you talk about Joe, what the gross margin SG&A was and can you give us the specifics for that for Q3 right now and also 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 – Stearn Agee & Leech

Your gross margin, the actually gross margin for SG&A for 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 a week or so but, I think on a relative basis, you know, the gross margins as payments in a quarter were down about 70 basis points year-over-year. We had a little less benefit from the freshness of inventory in the current year as we were going up against those stronger numbers from a year ago. And, the operating expenses were down from about 120 basis points, I think, or excuse me, they were up, the leverage from the lack of sales drove the expense ration out there about 120 basis points.

Ronald A. Fromm

And Sam, I don’t expect erosion on the margin in the fourth quarter 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 fourth quarter.

Operator

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

John Shanley – Susquehanna Financial Group

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

Joseph W. Wood

You know, we are right now but, I really don’t want to comment on that but, we do expect some additional brands into spring of 08 to enhance some of our businesses, especially as we take a look at the dress and casual 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 the problem 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 of the apparel products that would stimulate footwear sales that would go with those 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 by total categories, especially in women’s and men’s it was more or less the same story this year as it was last year although those categories were expanded even further in number of styles. So, I think it is more so that we’ve filled their closet and are looking for something new so, it was last year in 06 was a great story with the same store figuring in 07 at some point you fill the closet and they’re looking for something new. So, I thin it is the newness of styles coming in first quarter of next year that is going to turn that consumer trend around.

Operator

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

[Mr. Soul] – Morgan Stanley

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

Mark E. Hood

Okay. I think while we’ve been pretty consistent in saying that our objective would be to double our operating margins and I think obviously the results in the quarter speak to a progress towards that goal. But, we haven’t changed the goal.

[Mr. Soul] – Morgan Stanley

Okay. Thanks.

Operator

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

Heather Boksen – Sidoti & Company

Hi. I just want one quick follow up with regards to earning enhancement plan, maybe because it’s just a change in the way you’re wording it but, you mentioned in the press release 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, will that be late 08 into 09?

Mark E. Hood

Again, I don’t think we consciously changed the wording there but the intent remains the same and that’s accumulative from the beginning of the program to have been completed by that point in time and I think we would 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 you may have.

Ronald A. Fromm

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

Operator

This includes today’s Third Quarter 2007 Brown Shoe Company Incorporated Earnings Call. You may now disconnect.

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