Caleres, Inc. (CAL) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2015 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] Thank you. And Ms. Peggy Reilly Tharp, you may begin your conference.

Good afternoon and thank you for participating in Caleres’ second quarter 2015 earnings call, which is being made available to the public via webcast. I’m Peggy Reilly Tharp, Vice President of Investor Relations for Caleres. Earlier today, we distributed a press release with detailed financial tables which is available on our website at caleres.com. In addition, slides are available on our website for you to reference during this call. Please be aware, today’s discussion contains forward-looking statements, which are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors, including but not limited to the factors disclosed in the company’s Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today’s press release and our SEC filings, for more information on risk factors and other factors which could impact forward-looking statements. Copies of these reports are available online. Company undertakes no obligation to update any information discussed in this call at any time. Joining us on the call today are Diane Sullivan, CEO, President and Chairman; Ken Hannah, Chief Financial Officer; and Rick Ausick, President, Famous Footwear. Today, we’ll begin with strategy review from Diane followed by a financial summary from Ken before turning the call back over for Q&A. And I would like now turn the call over to Diane Sullivan.

Thanks, Peggy. And good afternoon, everyone, and thanks always for joining us today. We did report a solid quarter as expected with improved sales margins and adjusted earnings. Total sales for Caleres were up 2% year-over-year excluding Shoes.com, while gross and operating margin both expanded in the quarter. We also improved bottom-line performance by 22%, thanks to continued progress toward our long-term strategic initiatives. This solid performance is despite a never-changing retail environment. Tours and border markets have been hard hit by the strengthening U.S. dollar and back-to-school shopping has shifted closer to knees in many areas. For Famous Footwear, sales of $395.9 million were up 0.6% excluding Shoes.com. Despite a softer topline, we saw solid margin improvement in the second quarter. Thanks to the continued terrific management of this business. Gross margin increased 50 basis points to 45.3% and operating margin was up 70 basis points to 7%. From our merchandise perspective, we ended the quarter with a clean inventory position, down 0.7% on a per store basis. We also saw good strength in the quarter from the brand and the categories that we expect to do well during back-to-school and our key brands continue to deliver. Canvas was up double digits in the second quarter and as total athletic sales were up 1.9% as consumers continue to switch from performance to lifestyle product. While also our sandal sales were down in the quarter, we saw growth in key areas like women’s casual and junior sandals. And we made it through the quarter without seeing excessive promotional activity. We also saw increases in conversion rates and averaging at retail in the second quarter while pairs per transaction were essentially flat. While traffic was down in store, we continue to see steady improvement in ecommerce traffic. This is the company by a strong improvement in ecommerce sales, up several digits in the quarter across mobile, tablet and desktop. We’re also seeing improved conversions against all three of these ecommerce channels. And this improvement in ecommerce sales is due to the investments that we have made and we will continue to make in technology and infrastructure and talent. And as we’ve worked our way through the first half of the year, we’ve adapted our digital media strategy and we’re pleased with the result so far. We’re doing much more specific targeting in terms of native advertising, we’re leveraging our email list, which increased their email sales by mid-double digits in the second quarter. And during the quarter, we also expanded our ship from store test to $150. Through this test, online consumers can ask the products which maybe out of stock in our distribution center but is available in our test stores. This program has clearly provided us with the opportunity for incremental sales and it also allows for better management at each product and store. Now, turning to our brand portfolio for a minute, where we also had a solid quarter with sales at 4.4%. We saw particularly strong sales growth of 14.1% in contemporary fashion with double-digit growth coming from our Sam Edelman and Franco Sarto brand. For Sam, we’re still opening new retail stores, including our latest location at Garden State Plaza which debut during the second quarter. We had two more stores planned for this year and it has at this moment, we expect to potentially add another nine stores next year as we continue to maximize the potential of this brand. At Vince, we saw growth across all channels of distribution with both men’s and women’s outperforming our expectation. This remains an exciting brand and we are one to be pleased to be part of. Franco Sarto had a strong second quarter versus its plan decline that we had experienced in the first quarter and as expected, this brand is now at low single digits through the first half of the year. Also during the second quarter, we presented the Diane von Furstenberg live at the June FFaNY and the collection was well received. We’re excited to be partnering with this brand and we will be delivering products to our retail partners very late this year. We are also very enthusiastic about the launch of our men’s business. This brand as I think I have mentioned has being led by Gordon Thompson. The team is in place. The plan is coming together really nicely as we begin to significantly ramp up investments in the third quarter on this business. Now, turning to healthy living, we had total sales of $140.7 million, were down 1.5%. For Naturalizer, all-in sales were down 1.1% despite solid double-digit growth in our wholesale sales. The positive results we’re seeing at wholesales clearly show the consumer demand for the Naturalizer product and we’re working to translate that demand to our retail business where we operated nine fewer stores year-over-year. As they mentioned last quarter, we’ve added some new talent to the Naturalizer retail team and we’ve created a dedicated direct-to-consumer team. These groups are working hard to strengthen our retail business and we’re already beginning to see positive results. Although their success is being somewhat overshadowed by some weakness in our international market and some fluctuations in currency as well. For our other healthy living brand, LifeStride sales were up double digits in the second quarter and after a strong first quarter, Dr. Scholl's sales declined in the second. But for the first half, there will be -- they are up mid-single digits and we expect similar growth from this brand for the full year. Now, before I turn thing over to Ken, I’d like to call out our solid performance in the quarter and year-to-date. Following a sluggish July in Famous Footwear, it clearly would have been -- more pleased to see a little bit better topline growth. We are beginning to see improvements in same-store sales. At the start of the back-to-school season, we had been running somewhere around up 3% to 4% and now we’re seeing some acceleration in that rate as the later market begin to kick in for back-to-school. So we’re very confident that we have the right product and the right styles in stock as we’ve seen good consumer acceptance in the regions where school has really already begun. Our Brand Portfolio has also performed well and we are confident it’s going to continue to do so. We are really looking forward to this launch of the DVS line, the launch of our men’s business and the benefits of those long-term investments that we are making. This investment in our direct-to-consumer capabilities delivered good growth in our overall omni-channel with sales up in the second quarter of about 10%. And as the year progresses, we expect to continue to see the benefits of our digital investments, which remain a key part of our long-term strategies. We are looking forward very much to sharing more details about this and other components of our long-term strategic initiatives at our Investor Day that we had talked about often on here, which we have now set a date for. It’s going to be held on October 29, at our Sam Edelman offices here in New York and I really do hope to see many of you there. So with that, I will turn the things over to Ken.

Thank you, Diane and good afternoon everyone. As mentioned earlier, our net sales for the quarter were $637.8 million versus $635.9 million in 2014, up 2% excluding Shoes.com, which was sold in December of 2014. Adjusted for the current quarter’s debt extinguishment expenses, net earnings were $22.1 million in the second quarter or $0.50 per diluted share versus $18.1 million, or $0.41 per diluted share in 2014. This is a 22% increase in earnings per share year-over-year for the quarter and 24% increase for the first half of the year. If you take a look at our financial metrics, you could see our consolidated gross margin for the quarter was up 40 basis points to 41.2% of sales. Improvement at both our Famous Footwear segment and our Brand Portfolio segment help contribute to the overall gross margin expansion in the quarter. Our SG&A expense was 35.6% of sales in the second quarter, a 30 basis point improvement year-over-year. In addition to good expense management, some of this improvement was related to a shift in Famous Footwear marketing expense into the third quarter as second quarter spend was reduced to a later start to the back-to-school shopping season. From a productivity standpoint, revenue per square foot at Famous Footwear was $216, up another 2% on a trailing 12-month basis. During the quarter, we opened 10 new Famous Footwear stores and closed six. And in total, we operated nine more stores year-over-year. For 2015, we remain on track to open approximately 50 stores and expect to close approximately 50 stores as well. For the second quarter, net interest expense of $4.1 million was down 18.1% and once again, we ended the quarter with no borrowings against our revolving credit facility. Our corporate tax rate for the quarter was 26.5%. This amount reflects a $1.2 million discrete tax benefit associated with the utilization of existing tax loss carry forwards as we finalize the Shoes.com purchase price allocation methodology with the buyer. Our balance sheet remains in good shape and during the quarter, we received upgrades from both Moody’s and Standard & Poor’s. We ended the quarter with cash and equivalent of $129.3 million. Our overall inventory at quarter end was $641.1 million, down 2.5% from $657.7 million in 2014. On the Brand Portfolio side of our business, inventory was down 3.4% as we continue to effectively manage our supply chain. At Famous Footwear, inventory was roughly flat, excluding Shoes.com and down 0.7% on a per store basis. As you know during the quarter, we tendered for our 7⅛% Senior Notes and subsequently issued new long-term notes at a reduced rate of 6.25% and extended the term through 2023. While approximately 80% of our 7⅛% notes were tendered early in the second quarter, a portion remains outstanding and this resulted in a $39.2 million classified on our balance sheet at the end of the quarter under current portion of long-term debt. Yesterday, we redeemed the remaining outstanding 7⅛% notes and the extinguishment expenses associated with the final notes redemption will be reflected in our third quarter results. We are fortunate to complete the refinancing of the notes when we did, considering all the volatility in the buyer markets this summer. Our depreciation and amortization was $12.9 million for the quarter while capital expenditures were $13.7 million. Finally, as we discussed earlier with the later Labor Day, which shifted some back-to-school start dates deeper into the third quarter, we’ve adjusted our marketing spend to coincide with that shift. This shift along with a ramp-up in investment of our new Diane von Furstenberg business and our men's footwear business will likely result in an increase in third-quarter SG&A compared to prior years. Before we move to Q&A, I'd like to review and reconfirm our fiscal 2015 guidance. Earnings per diluted share adjusted for any debt related expenses remains between a $1.84 to a $1.94 per share. Our consolidated net sales of $2.61 billion to $2.63 billion. Same-store sales at Famous Footwear up low single digits, with reported sales roughly flat year-over-year due to the sale of Shoes.com in 2014. Net sales for the Brand Portfolio segment up mid-single-digits. Gross margin up approximately 15 basis points. SG&A at less than or equal to 35.4% of sales, continuing to leverage. Our net interest expense of approximately $18 million and effective tax rate of 30% to 33%. Depreciation and amortization of approximately $53 million and capital expenditures of approximately $75 million, with roughly $22 million allocated for expansion and modernization of our distribution centers. With that, I’d like to turn the call back over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Eddie Plank with Jefferies.

Hey. Good afternoon, guys. Thanks for taking the question.

Good afternoon.

Just a couple. I guess maybe, Diane or Rick; can you give a little bit more color on the weakness in performance athletic and sandals? Do you think part of it was just the shift in the calendar or was there something more? I know there has been a general shift towards casual and lifestyle, but I guess anything that you're seeing there relative to how you plan the business?

The business actually is planned. It’s pretty close to our plan. We are actually seeing more softness on the women side on the performance athletic than we might have expected. The men’s side is actually performing close to plan and slightly less than last year. So, we would expect obviously the female side of the business to transition faster to a new trend. So, I think a lot of that is just about trend driven business and the customer looking for is new items on the canvas side and the athletic leisure side looking kind of style. Sandal business, again a little perplexing, we had a pretty good first quarter within sandals. And so we thought we are going to have, be it okay in the second quarter. I think some of that business is transitioning to the canvas business as well though. I think there is a little bit of that customer who buys things, buys out where it is a open battle but now they are opening a pair of shoes and they are going to the canvas style. So, I think there is a little bit of that transition to the trends well there. But again, the good news is their inventories in the sandals at this point in time, we are happy with where couples where they are at and we think we can sell those balance of it.

Okay. Great. That’s helpful, Rick. I guess, Diane, clearly some would still shop with Naturalizer retail. You mentioned the merchants. Can you quantity or discuss in more detail any impact that we’re having as the brand evolves, anything in the product mix shift that you’re seeing in the stores, and I guess what you’re learning there? Thanks.

Yes. Sure. No problem. I think as I mentioned that, we have a lot of confidence in brand and we’re setting and really in the product that we already have at market. Now this is the second or third quarter where we generally have double-digit increases in our wholesale business. I am really pleased with that kind of improvement in performance. And actually, Eddie, when I look all and internationalize the business for the first half, it’s up 2%. So I think we’re heading in the right direction for the quarter for retail with a little bit difficult, but we’re seeing some early signals here in August and that we’re starting to turn the corner fall. So I think we will have an improvement to report as we get towards the end of third quarter and as we see in October. So we’re actually quite confident that we’re heading in the right direction there.

Okay. Great. Thanks for the color. Good luck going forward and nice job.

Thanks.

Your next question comes from Jeff Stein with Northcoast Research.

Good afternoon, guys. And the nice quarter. So looking at the performance of Famous Footwear in the quarter, comps up one-tenth to 1%. Can you talk a little bit about the impact? You referenced Diane the impact of border stores and tourist stores if you can isolate that impact. And also any thoughts in terms of the impact on the tax-free holiday shifts and how that may affect it comps in July and in the quarter?

Yes. Jeff, it’s Rick. We would look at that tourist/border business probably impacting our comp sales by about a 1%. And this step well I guess is probably going to continue for most of the back half of the year as we see that not abating at this point in time. We will anniversary the biggest hit we took so far. It’s been in first and second quarter. So as we get into first quarter, we will start having a little more comparable comparison to go against the next back half. I would think that’s probably going to be pretty consistent with what we will see. The tax-free, it’s not truly significant. And in Diane’s commentary about the 3% to 4%, it’s all that factored into that with the -- what wasn’t in July and what we got in August is all factored in that 3%, 4%.

So the 3% to 4% Rick, can you kind of frame that in terms of what we’re looking at in terms of the timeframe, is that mid July?

Mid July through yesterday -- as yesterday.

Okay. And what was -- what percent of the, I guess, schools are already back in your markets, any thoughts on that?

Yes. We would believe that we have got about 65% of our business are source -- are back to school at this point and 35% are going back either at -- right before Labor Day or just after Labor Day.

Okay. And did you see any impact, I mean there was lot of weather in your markets, particularly south central, northeast? As you look at Famous Footwear’s comps for the quarter, any divergence in regional performance?

I think the only divergence is, and again it’s kind of similar and consistent with could be other reasons for this. First of all, where the tourist centers are, the borders stores have an impact on our regionality sales. So we’ve clearly been better across the western part of the United States than we have other parts. So, that’s one thing. But weather, from the weather point of view, Jeff, we really had nothing that showed any, that was really significant on a weather if I’ve got a day or something like that, but nothing that was pronounced.

Got it. And one quick question for Ken. Ken, you alluded to the fact that you’re going to see some investments setting in DVF and the men’s line in Q3 and also shift in marketing. Can you talk a little bit about how you see SG&A, perhaps SG&A growth in dollars in Q3?

Yes. I mean, I think, if you look into Q3 on a raw dollar, obviously it’s our biggest quarter. So they are up naturally if there is a lot of our wholesale distribution expense. And there what we’re trying to allude to without getting into guiding specific numbers for the quarter was that we did see a little bit of a shift out of Q2 into Q3 as there is a later back to school time period. And Rick’s team has done a good job of aligning the marketing, specifically the digital marketing programs with that. And then we just want to remind people that we’re launching these businesses in a big way. And so we just want to be mindful here that there is some expense that’s coming with that.

Okay. But nothing specific in terms of, can you talk about the investments dollars that are going to be going into DVF and men’s?

We would rather not get into the specific investments in each of those businesses.

All right. Thank you.

Your next question comes from Scott Krasik with Buckingham Research.

Hi, everyone. Thanks for taking my questions.

Hi, Scott.

So, Ken, again, what was the -- how much was the shift in marketing from 2Q to 3Q?

Yes. We had moved out, it was around $3 million or $4 million I think of marketing expense just with the alignment in the shift. And I think you can go back and look historically at kind of what that spend and what Rick had just alluded to in terms of kind of what he saw is a shift in topline associated with that.

Yes. It seems, I mean, I just go back to last year’s 2Q, the SG&A was down on the dollar basis as well. So, is this just a natural progression that this is going to happen every year or little bit more maybe out of 2Q into 3Q?

I think so. And I think especially as you see the consumer shifting closer to the actual lead time, so we are also -- the mix of spend of marketing from media to digital also allows us to better align the expense with when we actually see the revenue.

Okay. Yes. Now that makes sense. And then Diane, can you tell us now what percentage of Sam is Circus?

Yes. It’s probably 10%, something like that.

Okay. And it seemed like there was a lot of momentum there, maybe talk about the incremental door opportunity, obviously that was a Macy’s primary initiative that you could obviously take that into other sort of more mid-tier places. So how much new distribution opportunities there and then what’s the right growth rate for Sam in wholesale, especially since you pulled back from that big department store?

Well, I would say, in general, it’s Sam, we -- it’s almost tough Scott to even put a cap or any kind of capital what we see the upside on that business, because there are so many levers that we have to -- we have opportunities pool not only in the wholesale sales here in the U.S. but now with our store growth, the digital piece of this growing really rapidly too in our e-commerce piece, in our licensing business, and you name it, continuing to take us. So we remain really encouraged by it, but we’ve been pretty consistently burning low-double digit rate and we don’t see there is any reason at this point in time that that’s not going to continue.

And even with tightening the distribution at Sam you can still grow that brand?

Right now we say we feel very good about the opportunity there.

And then could you just sort of put the numbers around that’s were in the public forum and how it’s setting there for BZees?

Yes. I can tell you it’s north of $25 million.

Okay. That’s great. And what’s the -- I thought it seems like there is why you’re targeting the outdoor, there is a lot of new distribution potential?

Yeah. We’re fortunate that’s hitting the sweet spot of where the consumer is right now. They’re loving that kind of product. And so we think there is opportunity really everywhere Scott, with that we really only scratching the surface of it.

And well, congratulations. Good luck.

Thanks.

Your next question comes from Steve Marotta with CLK & Associates.

Good evening, everybody. Two questions, the first is given that consolidated gross margin has increased about 30 and 40 basis points in Q1 and Q2 respectively. And your guidance implies flattish gross margins to the back of the year, can you talk a little bit about that dynamic and why it wouldn’t continue to recur gross margin expansion that is?

Yes. Steve, I’ll jump in and answer that and then Rick can talk to it as well. But I think right now as we look, we’re very pleased with the gross margin performance in the first half of the year. And I think if we were further along into the third quarter and seeing what we’re seeing today, we would likely be in a position to address that overall margin in the back half. I think right now just given the size of the third quarter and kind of what’s left to go and what. We’re seeing a lot of people with inventory increases and so we’re trying to be prudent here not get too far ahead of ourselves. But I do think that the team has done a great job of getting the margin expansion. And the environment stays the way it is today, I think will be able to continue to see that into the back half.

Okay.

Yeah. Steve, from Diane’s point of view to Ken’s point, I’ll be a lot smarter in two or three weeks about what that might look like for the quarter. And I think that’s when we can talk about that. We’re happy what we’re at. And we think we’ve made some great strive and we don’t expect it to not be able to add some growth on our margin but we think we want to make sure we’re able to have -- continue to show value to the customer. And if so, we may have to be more, a little more competitive, but we are ready -- we are ready to do that but right now its pretty good.

I got to imagine, you’ll be very smarten by the Investor Day, I can’t wait to see then.

Rick is smartened everyday.

And I have one clarification just to understand, you’re saying the Famous Footwear comps from mid July to current are running up 3% to 4% on a year-over-year basis?

Yes. Yes, that we’ve been running up since the middle of July been running up 3% to 4% and that actually we have seen some acceleration of that in more recently. As some of our leather market, which as Rick talked about, we have a good portion of our businesses in leather market have now kicked in as back-to-school is very close.

Tremendous. Best of luck. Thank you.

Thank you.

Your next question is from Jay Sole with Morgan Stanley.

Hey, good afternoon.

Good afternoon.

So I got a question about Famous Footwear. I think it’s interesting that when you saw maybe traffic not building the way normally doesn’t back-to-school and moving later in the year, the decision was to move the margin out and to put into August. Can you talk about the choice between maybe trying to increase the promotional cadence and maybe trying to drive the business that way versus the choice of maintaining the days on promotion, the logo days and maybe just kind of waiting when the traffic probably shows up in August?

Yeah. My belief is that unless there is a real reason to have customer come in to our stores on a more natural basis for us trying to drive in by price, usually nothing more than lower margins because the customer, they’re not ready to shop for that moment in time. We’ll get the same amount of traffic coming in and buying their products at lower prices. So we kind of built that into our program and into our thought process. And so we’re very cautious about using promotional activity as a way to help fully drive traffic into our stores on outside of normal traffic driving opportunities. So I hope that answers the question basically. But what we’re really focused at, when we think about back-to-school, we have every store, we have planned on where there is a peak week and there are secondary peak week. And what we try to do is make sure we’re fully ready to go in their peak weeks of business, which are typically the weeks either of a tax free or when the kids -- the week before the kids go back-to-school. So we spend lot of time making sure those things are right and then we led our promotional activity be driven around those things, Jay. And we found that to be the best way for us to manage the volume and margin business as we get there, as we get to better operating profit.

Got it. And then can you tell us a little bit about the traffic trends in the quarter and conversion in some of those metrics?

Yeah. It’s pretty much the same story. You talking about second quarter?

Yeah.

Okay. Second quarter, it’s pretty much a consistent story we’ve had. Traffic is down mid-single digits and conversion and averaging of retails are basically covering that, so they’re up comparably enough to cover the traffic down. And that gets us to a basically a flatter, up small 1% something like that on a store per store basis. So it’s the same story we’ve had. We’ve seen for, I think we are probably into our second year now with those kind of the trend.

And then maybe just one other one for me. Just looking ahead to the Investor Day, obviously, I’m sure you don’t want to kind of expand the story out of the bag. But just any high level thoughts about as the plan has been, you’ve been working on the plan through the last few months, since Ken has joined and obviously before that. But just since Ken has joined, any kind of thoughts about where some of the opportunities are from a big picture standpoint and maybe we’ll hear more about on the Analyst Day?

I think what I would say to that Jay, is that it was about four years ago when we began to phase one of the transformation in the future looks of what the new Caleres company was going to look like. And we came -- had that Investor Day and we talked about the restructuring involving the portfolio. I think we’re thinking about this next phase of transformation of the company in the very same way. It’s not going to be an incremental change we would like to -- with the ways to make it that change. And what we intend to do is get more specificity around how we are going to get to the longer term operating margin that we’ve been talking about 8%. So, I think it’s really -- it’s a continuation of the work that we started a while ago. And then with everybody tells and the progress we’ve made on Famous and Sam and the new brands in the portfolio and other opportunities, how we improved our balance sheet and how that now gives us an opportunity to think about a lot of other things. And I think it really is now, it’s our future to be able to create, which is an exciting place to be.

Great. Thanks, Diane.

Yeah.

And your next question comes from Laurent Vasilescu with Macquarie.

Good afternoon. Thank you for taking my questions. How should we think about the monthly comp cadence for this year, for the third quarter same store? I think last year, August and September were positive and similar, and then October was particularly challenged? Are we lapping easier comparisons for October this year?

Yeah. The October one would have been driven by a couple of things. Obviously, I think it was some weather issues in there, number one. And secondly, we had a promotional activities that happened in the fall over Halloween weekend, which was really bad idea when that happens. And then we also move the day that was one of those days where they have been in the comparable ’13 and then move to November in ’14. So between all of those things that impacted October pretty negatively, that won’t happen this year. So, we’re moving off to the promotional off of Halloween. We’re going to do it ahead of time. All the days will fall in October, so October should have -- again without any other foreseen weather issues, should be a more positive trend for us.

Okay. Great. Thank you. And then it’s great to hear that Franco Sarto was up this quarter. I think it was guided at -- it was up low single digits for the first half which I guess, implies a mid-to-high single digit rate for the second quarter. How should we think about the cadence for the rest of the year?

Yeah, Dan, we feel -- we do feel great about it. And I would tell you it’s going to be in the mid single digits profit for the year.

Okay. Great. And then the boot business, as we think about the second half of the year, I think last quarter was guided to be up low-to-mid single digits. Is that still the case? Any color on that business will be great?

Yeah, basically it’s still the case. The biggest issue there is the change of mix. We were probably 60% tall shaft and 40% booties a year ago. It’s culture 50-50. The tall-shaft boots, I think were planned flat-to-down slightly and we’ll have double digit increases in booties and that seems to be what’s happening today currently. Some of that business is starting primarily at the back-to-school. So we feel pretty comfortable with that.

Okay. Great. And then commodity prices continued decline, I think, let us down significantly over the last six months. Oil-based inputs as well. Are you seeing any potential benefits for the brand portfolios, brands in terms of the next six months?

Yeah. The team has done a great job working with our partners to go out and rebase on our soles as we see the impact of petroleum there and also working with our partners to continue to reduce the cost. So I think we are getting expansion on the gross margin on both Famous Footwear side of the business and on the branded. And what you see on the branded is often direct result of the work they are doing around the cost.

Okay. Great. Well, congratulations again. And I’m looking forward to the Investor Day.

Thanks.

Thanks.

.:

Good afternoon. During the portfolio, book to inventory was down 3.4%. I know you’re looking for kind of mid single digits sales outlook. Could you just talk about that variance?

Yeah. I think when we continue to manage that in the supply chain and so as we go through and look at the businesses that are growing, I think we feel like we have the inventory that we need to continue to grow those businesses. And in some areas, we’re -- we've carried some excess as a result of what happened in the first quarter with the port. We’ve not replenished to those four levels. And so I think you’re seeing the benefits of those inventory levels getting low as a result of some of the port issues earlier in the year. And we’ve not seen the need to take levels back to where they have been.

Okay. And then just comments you have in the press release regarding the progress you’ve made year-to-date that’s enabled you to accelerate investments. Could you just talk does that imply kind of first half outperformed your internal expectations. So therefore you’re putting that outperformance in two investments to keep the year flat with previous guidance or just more clear you’re on that statement?

Yeah. And I think that was the intention to say look we are certainly investing in our future. And I think bringing the day forward around this Investor Day, we’re excited to share more specifics around what that means. And we just with the level of performance, we did want to make sure that people kept it in context. We do have some new businesses that we’re launching and we will be investing in them. And those things were contemplated in the total year guidance. And so we just want to make sure we don’t get too far out ahead of ourselves here and try to be prudent in our communication.

All right. And then just a math question within the new debt offering. It looks as though it should be accretive to earnings about $0.02 to $0.03 on the lower interest expense, if you could just confirm that?

Yeah. If we go through and just look at the dropping form 7 and 8 to 6.25, we get so nice accretion. And so we got a couple of quarters here where we’ve got a bunch of extraordinary type expenses associated with cleaning all of that up but then once you get out into next year. You’ll see a reduction in that interest expense. This should drop couple of pennies incremental to the bottomline.

All right. Appreciate it. Thank you.

Thanks Jill.

Your next question is from Chris Svezia with Susquehanna Financial.

Good evening everyone. Thanks for taking my question. I guess, Rick, for you to start. I guess, third quarter last year, you really saw great success in canvas, casual, pseudo athletic business. I guess, as you see through day, you visiting that, you continue to see that momentum in particular as you go through August. Is that generally speaking a fair statement? So this means, you are comping on top on that comp growth still?

Yes we are.

Okay. Okay. And then…

Very nicely by the way.

Okay. So I guess, the question is what happens once you get through August until September. I mean is it -- I mean, you still feel like that. You’re still addressing that consumer, there is still demand for that product and what it proves to take some of that?

Yeah. I mean, obviously the calendar shift and weather shift moves people to different perspective what they are looking for. We’ve been doing this for a long time, Chris. And we know that there -- and I know there are several piece to the business, actually back-to-school is the biggest. The business again relative volume wise dropped some end of September and through early November. But we managed that. I mean, as part of our inventory management. We are going to stay in business but we don’t overbuy but then rebuild again for Christmas because it does happen to be a holiday item for gifts giving or people buying for themselves and there is a spring. There is a spring lift as we get to that March time period when people are thinking about spring break or when they are thinking about having shoes for spring. So, we’ve managed that business like that for years. Those still prove to be the -- all that’s happened is that the base levels increased and so we just keep managing that way so.

And on the first half, the goods, I’m just kind of curios. It seems to me a lot of, sort of buzz out there to a degree that it might not performed that well. I know you are planning it out from a comp perspective but what are you assuming from either just margin exposure and that type of thing if it doesn’t perform well, what’s sort of the recourse there?

The recourse is to try to sell it through the highest price we can and if we have availability to have canceled backups that are out in the delivery cycle before we get there, we can try to see if we cancel those goods. Right now, we have a few. We have a handful, five or six of them in stores now. They are selling well. They are not great but they are not nearly, out blown the doors but they are selling acceptably for this time period. And I think we believe that our customer will be just fine with buying that tall-shaft boot in the proportion that we have to offer to them. So again that will be something that we will have a better handle on as we get to the Investor Day. At the end of October, we will start to see, have a little bit of our picture on what’s going to happen there.

And do you think even with the extra marketing, do you think Famous can get operating margin leverage at a low single-digit comp for the third quarter or does it make a little bit tougher to get there?

I think we can -- that makes it a little tougher because we have more expense. But I think our expectation is that there should be a little bit of leverage if we can get to that low single digits.

Okay. Just a question for you, Diane, on the wholesale side. If you would strip out, I know you are not doing this anymore but if you take out the retail component to nationalize the retail out of that branded portfolio piece, can you just maybe talk about the underlying either gross margin or just EBIT margin performance in the overall wholesale platform? Is it improving just sort of what’s going on because the retail business seems to be improving nicely?

Improving nicely.

Okay.

Yeah. It’s doing very well.

And the expectation is that that continues. Correct?

That will continue.

And do you believe that some of the things that you are doing from the new teams. Not as far as retail, do you think it will have any positive impact in the back half of the year or is it just really a first half ’16 where they really start to have an impact to the both?

I think there is some modest impact that they will have on the back half of the year. There is some sense that we can do quickly. We are obviously not waiting. We have our hit list of steps that we have to do right now. We have some longer term strategic questions we have to answer. So, I think there is the mix as you can well imagine of a number of things that we are doing. So, I would say yes. We should see some improvement in the back half but it’s really into ’16 and ’14 that it would be more material.

Okay. Last question. Just Ken for you. 15 basis points on gross margins, I think maybe the wholesale team and Rick is probably good for another 5 basis points, maybe to get you to 20 maybe, it’s a joke. Never mind. The 5 basis points is just such a funny number, another 5 gets you to 20. Never mind. I will talk to you guys soon. Take care.

Thanks, Chris.

Thanks, Chris.

And your next question comes from Sam Poser with Sterne Agee.

Thank you for taking my question. I got a couple of questions. Diane and Rick, you guys mentioned that I think we are buying closer to lead but we’ve got a later Labor Day. So everything is shifting back anyway, so a week later. So that does move a good number of sales out of July and August. Am I thinking of that right?

Yes. For sure.

Yes.

Okay. So, then can you give us the cadence of the comps by month and where you are quarter-to-date?

Starting with which month?

I guess May, June, July and then into August.

Give me a second. Low singles, basically flat down low singles. That’s May, June, July.

Okay. And then quarter-to-date?

Quarter-to-date, 3% to 4%.

No, you said quarter-to-date was -- you didn’t say 3%, 4%. You said that from the last two weeks of July through now, you are up 3% to 4%. So what is it quarter-to-date?

It’s single.

So you are doing that. It’s accelerating. And given the later, I would assume that given the later Labor Day, you would expect business to basically ramp up and end basically a week later than you said a year ago based on the timing of when you should go back-to-school?

Yes.

Okay.

As we said earlier, Sam, six months 65% of the markets that went back-to-school and so with Labor Day where it is, it is deeper into the quarter.

But I mean a lot of the markets that haven’t go back-to-school is some of your largest markets.

Yes. About 25% of our business, right. Exactly.

And then also, you’ve had traffic down to last five quarters at Sam, I mean what is being worked on to help improve the store traffic, I know your conversions were good?

Well, first of all, I think I am getting as a mind it’s less about the number and more about the quality of the customer. So I think we are spending a lot of time working on making sure that we are talking to the right customers, who will have better lifetime value, higher sales and margin for us and getting them into our stores, because the idea that somehow we are going to magically figure out how to drive more people into our stores, I don’t see that happening. Now again on a total basis, which we saw on our omni-channel traffic in there, we have an increase in people shopping with us right, because our omni-channel is driving more traffic. When you put altogether, we actually have more people interacting with Famous Footwear into various ways than we’ve had in the past. So I think, again, it’s more around quality of customer and how we interact with them, how we gauge than it is about sheer numbers because I don’t have a magic potion to get people to drive to come to stores.

I have done you well because you actually did, but anyway.

Well, come in October, we will show how we’re going to do about it.

Okay. Very good. Diane, the Naturalizer stores have been a drag, you’re making some changes that you just talked about Chris’ question. But, I mean, at what point, did you say, I mean is there a line in the sand where you say we are going to either achieve whatever by a certain time or we are going to make some hard decisions on these stores, because it’s obvious systems seeing the products and so in the Naturalizer starting to improve, but it’s just not correlating, just not translating over to the retail stores and it appears to be a drag. So I know you’re working hard to do it, but, I mean, are you drawing the line -- internally drawing the line to Sam saying we don’t have this done by end of fiscal 2016, I am just picking a date, we’re going to have rethink how these stores -- if these stores are going to sell or so on?

I would say today our mindset, while I said in the past that we will always do whatever we have to do to enhance shareholder value for the long term that our focus right now is on making sure that we continue to improve the overall profitability and productivity of that brand period over and out. I am not giving anybody any else on anything in terms of making it better. So historic sand is got to have that kind of hedge that improve because it doesn’t make any sense that our wholesale business is terrific and our retail business is a little soft. So we are -- until I see that we have a thought probably effort and energy against that, I would draw the line in the sand yes. But as I said and I said publicly, there are no cyclical.

Okay. And then thank you. And then lastly, Rick could you talk a little bit of -- there has been a lot of shifting around from -- as you mentioned from performance to fashion athletic. I assume some of that is outside of Kansas. Could you talk about how you’re seeing that whole fashion athletic business sort of how you see it ramping to fall or how do you see it playing out through fall and maybe you could talk a little bit about it’s performed by gender?

Yes. Again, as you see if we talk specifically athletic more than fashion side of it, we have a couple of business. We would consider fashion if you think about some of the skate things we have and some of the -- what something like called back to ball, what we call it more fashion driven because it’s really not a performing shoe. Those businesses are good, and I think they’re taking again some business away from the true performance look. It’s more predominant on the women’s side where there is appears to be a bigger shift. But what we’ve done in our business is, it’s impacted more our secondary vendors, secondary partners as far as assortment and depth of what we bought there and our primary partner is still doing well even in the running business regardless. So I think we try to be as more selective even more. And as we do with most things when we get down this path, we look ourselves as an editor, right. We want to put our created assortment out there so we created our assortment, took some things out of it that we thought were secondary for the trend, didn’t impact our biggest piece of the business because we wanted to make sure we stay solid there and then shifted those dollars into other categories, whether that be the sketcher side of the athletic business or whether it would be the canvas side of the athlete business.

Okay. Thank you very much and good luck.

Thanks.

Thanks.

And our final question comes from Scott Krasik with Buckingham Research.

Yes. Hey, guys. Thanks. Just a couple of quick follow-ups. One, Rick, generally, what percentage of your boot sales, would you define as cold weather? And as the percentage of that, is that percentage changing this year?

Yes. It’s probably and I am sure I am off, but not more than 10% Scott. I think it’s probably in that range. We’ve been much more selective on where we put those boots in the last couple of years. And in fact what we’ve done is impacted some water resistant kind of product in stores that used to be -- where we used to put cold weather because the weather wasn’t cold enough there, the sale through the cold weather boots, but they didn’t want something that had some water resistant. We have done a little bit of that and it’s about -- I think we plan to up a little bit this year but not dramatically, so it’s probably low-single digits or something like that.

Okay. And thank you, Rick. And then just, Ken any conclusions to draw, you just spent $8 million plus to refi a debt. Can we assume that there’s probably not a large acquisition or you would need to issue bonds and that’s why you chose to do it now?

Well, I think we chose to do it now because the market was open for us to do it in a time where it was going to be accretive to the bottomline, I mean almost immediately. So I think that’s from a balance sheet management standpoint, the market was open and we went ahead and refinance at a lower rate. I think what we do going forward from an acquisition standpoint, I think is a separate discussion and a separate set of decision. I think we have capacity to do things. And I wouldn’t read into the refinancing of that as moving that forward or changing the way that we’re thinking.

Okay. All right. Thanks very much.

And we have no further questions. Thank you at this time. And I would like to turn the call back over to our presenters for any closing remarks.

Thank you very much for joining us this afternoon. And we look forward to seeing you again and sharing our plans for the future on October 29. Thanks again.

Thank you for your participation. This does conclude today’s conference call and you may now disconnect.