Good afternoon and welcome to the Caleres third quarter earnings conference call. My name is Kathryn and I will be your conference coordinator. At this time, all lines are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded.

At this time, I would like to turn the call over to Ken Hannah, Senior Vice President and Chief Financial Officer. Please go ahead..

Good afternoon. I would like to thank you for joining our third quarter 2019 earnings call and webcast. A press release with detailed financial tables as well as slides are available at caleres.com. 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. The company undertakes no obligation to update any information discussed in this call at any time.

Joining me on the call today is Diane Sullivan, CEO, President and Chairman. I would now like to turn the call over to Diane..

Thanks Ken and good afternoon everyone. It was good to see many of you at our Investor Day in October. Thank you for joining our third quarter call and for your continued support of Caleres.

During the third quarter, we continued to successfully execute on our strategies as we broadened the reach and power of our brands and products, strengthened connections with consumers, and accelerated the innovation of capabilities and operations.

Our drive to leverage our investments and insights, combined with our industry-leading footwear capabilities, allowed us to deliver continued positive same-store sales growth at Famous Footwear and increased market share within the brand portfolio.

As it relates to strengthening our connections with consumers, we are excited to have opened the new Famous Footwear store in New York City, ahead of the busiest shopping period of the year.

This store in Herald Square, which is just down the street from our original 34th Street location will enable us to broaden the reach of the brand featuring world-class and demand brands at a great value.

This high-impact brand enhancing location is going to feature dedicated trend shops that will deepen our emotional connection with the customer and truly make them feel a little famous when they shop with us.

As it relates to broadening the reach and power of our brands and products, we also launched 27 Edit, our Halo brand for our Naturalizer brand family and over 50 brick-and-mortar doors, following a successful online performance in spring.

This collection of premium footwear combines all the fit and comfort components that Naturalizer is known for while elevating the design and materials with a more contemporary aesthetic.

Most importantly, this collection was based on feedback from our consumer insights division, which identified a demand from our target customer not met from our current brand offerings. We are also proud to report that the Dr.

Scholl's Herzog sneaker, a versatile and eco-conscious sports shoe, took home the first prize ever and a footwear honor at the Accessories Council Design Excellence Award.

This shoe brings to life the brand's mission to make shoes in a new and more eco-conscious way featuring things like repurposed scrap leather, plant-based foam insoles, linings, and top-cloths made from recycled bottles and natural soles made from a blend of rice husks and rubber. And by this time next year, Dr.

Scholl's will feature eco-conscious materials in all of its shoes. And as it relates to accelerating the innovation of capabilities and operations, we also further expanded our consumer fulfillment capabilities by completing the final automation of our in-house distribution facility in the third quarter.

I am very pleased to report that the facility has performed as planned since the cutover. Now turning to the details of the third quarter. At Famous Footwear, we had an excellent back-to-school allowing us to generate our eighth consecutive year of positive back-to-school same-store sales growth.

This was the biggest 10 selling weeks in the history of Famous and contributed to a 2.5% increase in same-store sales for the quarter. We experienced strength in our athletic, boots, and sandal categories and saw increases in all channels across all of our back-to-school timing zones.

Our kids business was particularly strong in the quarter and our decision to elevate our assortment of trend-right premium in-demand brands and styles with key programs delivered what our consumer was looking for. We also benefited in the quarter from continued improvements from our key athletic vendor.

We are seeing our customers respond to our enhanced offering as they recognize that Famous offers the best brands and styles at a great value. In addition to delivering compelling products, we are pleased with the results that we have been seeing in our revamped loyalty program, Famously YOU Rewards.

And that's driving increased engagement among existing members and continued growth in our new and reactivated membership base. Existing rewards members are shopping more frequently across all channels and spending more per shopping occasion.

And of course, we are going to continue to learn and evolve as we move to the next phase of this program and make sure that we are continuing to connect with consumers. Looking forward for Famous, we are well positioned for holiday from both a product mix and a total inventory standpoint and are very confident about our assortment.

We have a promotional plan and a marketing strategy in place, including a return to TV that we feel will deliver our sales and margin plan. Now turning to the brand portfolio where our sales were short of our internal plans as we experienced a later start to fall along with a moderation of our core products and associated replenishment programs.

In total, we were again able to take share in the quarter at the brand portfolio experiencing sequential improvement over the course of the quarter. Our fall styles are resonating with the consumer and our boot selling is very strong.

The relative sellthrough of our brands at our retail partners continues to outpace the market, while we adjust to an industry shift to more dynamic and on-demand ordering as evidenced by the increases that we are seeing in our e-commerce related sales.

Importantly, we have carefully managed our inventory with nearly an 8% reduction year-over-year exiting the quarter, and we are happy with the quality and the freshness of the inventory in the marketplace.

It's critically important that we have built the flexibility into our model because this is allowing us to meet increasing consumer demand for newness in an environment where retailers have become even more focused on inventory discipline.

On balance, we are well-positioned to deliver on these changes in consumer and retailer preferences giving the investments that we have made in our capabilities enabling speed, agility, and efficiencies. So, now let me give you a brief update as well on two of our most recent acquisitions, Blowfish Malibu and Vionic.

Blowfish Malibu product has performed very well in the marketplace and the brand is really naturally positioned to capture what the consumer is looking for right now. That sport and casual lifestyle, the fresh and very young spirit, a constant newness in their assortment, and you just top it all off with a can't beat price/value equation.

This combination is delivering results, and Don and the team have done a terrific job by capitalizing on these trends and we are really looking forward to seeing what's next from that team. And at Vionic, we are working rapidly to ensure that the brand can react with more speed and agility to meet the needs of the consumer.

We have worked with the team to ensure that the brand has the capabilities to deliver trend-right product and newness more frequently and they have already moved to a four season calendar. We also think that we needed to make sure they have the capability to test and validate new constructions ahead of mass-market launches.

They are now using our data and predictive analytics for the consumer that we found successful in our brand portfolio. And then when you add that all up in the end, this is going to result in leaner inventories and fresh products, as we will no longer be frontloading with slowing and chasing items.

As Dan Friedman and Chris Gallagher have worked together, they have already streamlined Vionic's process taking weeks out of their commercialization and development calendar. These actions provide even more fuel and support to this brand that has such a unique value proposition.

And finally, before I turn the call over to Ken, I wanted to briefly address tariffs and their impact on our business. This quarter, the increase in tariffs that were put into place in early September with almost immediate effect created some headwinds in the quarter.

As a result, our third quarter earnings results include $0.07 gross impact associated with the tariffs increase. We were able to offset $0.04 of the tariff headwind by taking discipline action and maintaining strong price controls but our earnings were still impacted by $0.03 this quarter.

We expect another $0.02 net impact in Q4 for a total of $0.05 for the year. As a result, we are narrowing the top end of our full-year adjusted EPS guidance range by $0.05 to $2.35 to $2.40. I am confident that the teams are focusing on what we can control and operating with the necessary discipline to deliver our guidance.

And with that, I would like to turn the call over to Ken for a financial review..

Thank you Diane and good afternoon everyone. For the third quarter, we reported earnings per share of $0.69. This included 40.02 of Vionic integration related expense and $0.07 related to the fair value adjustment associated with the mandatory purchase obligation for Blowfish Malibu, reflecting the strength in their business Diane mentioned earlier.

Our adjusted earnings per share excluding these items was $0.78 and includes a $0.07 gross impact and a 40.03 net impact in the quarter related to the tariffs that went into effect September 1. Consolidated sales for the quarter of $792.4 million were up 2.1% year-over-year.

Famous Footwear delivered a strong third quarter reflecting significant progress on our product assortment and marketing initiatives. Our same-store sales were up 2.5% for the quarter reflecting another strong back-to-school season and are up 1.1% for the first nine months of the year.

Total sales at Famous Footwear were $446.6 million, down 0.5% as we operated 47 fewer doors versus the prior year and ended the third quarter with 960 total doors. Our brand portfolio total sales were up 4.9% year-over-year in the quarter, including two additional months of Vionic sales in 2019 as well as the planned reduction in Allen Edmonds sales.

As Diane mentioned, our brand gained market share and performed exceptionally well at our retail partners with sequential improvements throughout the quarter. Let's turn to consolidated gross profit and margin.

For the third quarter, consolidated gross profit of $319.8 million was up 2.9% and our reported gross margin came in at 40.4%, up approximately 40 basis points from the prior year with contribution from both Famous Footwear and brand portfolio. For Famous Footwear, third quarter gross margin of 41% was up approximately 30 basis points year-over-year.

The margin improvement we experienced in Q2 continued as the team effectively managed their inventory allowing them to resist the temptation to increase the level of promotion in the marketplace.

Brand portfolio reported gross margin of 37.2% in the third quarter, up approximately 30 basis points from the prior year, including the benefit associated with purchase accounting year-over-year. Our consolidated SG&A expense for the third quarter was up 3.7%, including the additional two months of Vionic.

SG&A represented approximately 34.7% of sales, an increase of approximately 50 basis points from the prior year. Famous footwear expense was down $2.5 million year-over-year, reflecting lower fixed expenses as they operated 47 fewer doors.

At brand portfolio, expense was up reflecting the incremental two months of Vionic and the variable cost of distribution driven by higher mix of loose pairs shipped this year versus last.

Our depreciation and amortization for the third quarter of $16.2 million was up 2.6% versus the prior year primarily due to the additional trademark amortization related to our Vionic acquisition. Our third quarter operating earnings were $43.5 million or 5.5% of sales.

Our adjusted operating earnings of $44.4 million were down 5.3% year-over-year and represented 5.6% of sales. At Famous Footwear, third quarter operating earnings of $27.7 million represented 6.2% of sales and reflected higher gross margins and lower expenses as mentioned earlier. Our Famous Footwear operating earnings were up 13.4% year-over-year.

Fro the brand portfolio, third quarter operating earnings were $19.4 million or 5.4% of sales. Our adjusted operating margin was down approximately 200 basis points versus the same quarter a year ago reflecting the Vionic amortization and an increase in variable cost of distribution related to the higher mix of dropship business year-over-year.

Our net interest expense for the third quarter of $10.6 million was up $6.3 million from a year ago reflecting the fair value adjustment associated with the Blowfish mandatory purchase obligation and the use of our revolving credit facility to finance the October 2018 acquisition of Vionic. Our third quarter tax rate was 21.9%.

Our adjusted EBITDA for the quarter was $63.5 million or 8% of sales. Our adjusted EBITDA for the first nine months of 2019 was $165 million, with adjusted EBITDA margin of 7.4% of sales. Our capital expenditures were $11.4 million for the third quarter and down approximately $5.8 million year-over-year. Now turning to our balance sheet.

We ended the quarter with $52.5 million of cash and equivalents. Our outstanding borrowings under our revolving credit facility were $295 million at quarter-end, down from $335 million at year-end and $350 million a year ago following our 2018 acquisition of Vionic.

We bought back an additional $1.2 million of common stock in the third quarter and returned nearly $40 million to shareholders in the first nine months of 2019. Our consolidated inventory position at the end of the third quarter was $644.6 million, down $53.6 million year-over-year or almost 8%.

At Famous Footwear, we ended the quarter with inventory down 3.4% year-over-year. And for our brand portfolio, our inventories were down 12.6% year-over-year as the teams effectively balanced inventory in-house and at our partners ensuring quality and freshness of inventory in the channel.

We are particularly pleased with these result in light of our retail partners increasingly ordering closer to need. This is requiring us to carefully balance our ability to take advantage of opportunities with our commitment to managing our inventory risk. Our year-to-date operating cash flow was $145.7 million, up 54% over the same period last year.

As Diane mentioned, we are narrowing the top-end of our EPS guidance range by $0.05 to $2.35 per share to $2.40 per share to reflect the net impact from tariffs in the third and fourth quarter. We believe we are well-positioned to win in the long-term with our growth strategies and our business model.

In doing so, we will continue to broaden the reach and power of our branded products, strength our connections with consumers and accelerate innovation of our capabilities and operations. Now, I would like to turn the call over to the operator for Q&A..

[Operator Instructions]. Your first question comes from the line of Rick Patel with Needham & Company..

Hi. Good afternoon guys and congrats on the positive comp momentum for back-to-school..

Thanks Rick..

So my question is on the brand portfolios. With 3Q sales coming up a little bit softer, guidance for this year of low teens implies that the fourth quarter is going to be up in the low-double-digit ballpark.

Given that you have now lapped the Vionic acquisition and inventories were also down double digits at the brand portfolio, can you help give us comfort around this acceleration like other timing shifts coming into play here, new wholesale relationships, and context there would be great..

Sure. Rick, it's Diane. And here it is kind of how we think about the brand portfolio in the fourth quarter. I think in the third quarter, we really saw an acceleration as we moved through the third quarter.

So August, September was better than August, October was better than September, and actually our sell through rates even as we are into November would suggest that that kind of growth rate that we are forecasting for the fourth quarter is certainly possible. Our inventory and our boot acceleration has been terrific.

Our positioning, in terms of our ability to satisfy our direct to consumer and our loose pair business is right on track with respect to that on our dropships. And I really believe that with the current trend that we are seeing going into the fourth quarter, we feel pretty good about that business.

On the other side, on the Famous side, again the same kind of thing. We have seen the trends continue to improve. We are very pleased about and excited about our holiday plans. We are adding TV back to the media mix in for three weeks in the fourth quarter here at Famous, and those trends continue to look good.

Now, it doesn't mean we don't always have our work cut out for us. We have got to make sure that we continue to drive our business, but as we look at all the trends in our business right now, we feel like we are in great shape.

And last year, we were actually a little light on our inventory and our ability to satisfy boot demand, and this year we are in much better position. So, I think that that would be a piece of it. Ken, I don't know if you would like to add a couple points to….

Yes. I guess as we go in, I think when we look at that low double digit, if you go in and you look at Q1 where we were up all in a little over 20%, brand portfolio in Q2 was up around 18% and then Q3, call it roughly 5%. You can actually be flat in Q4 and still be up 10% for the year.

So just, I know you had mentioned double digit for the quarter, but we are running well ahead of that as we had three quarters where we had the benefit year-over-year of the Vionic sales..

Got it. And then a question on your initial thoughts for 2020. So, when you look at the range for earnings estimates out there, it's very wide. I was hoping if you can give us some preliminary thoughts on how we should be thinking about the model? Your long-term algorithm is for low-single-digit topline growth and double digit EPS growth.

Do you see this happening in 2020 or is it too early to make that call, especially given the curveball of tariffs? Any color there would be great..

Well, I think obviously it's tough to give any kind of 2020 guidance at this point in time. But what we laid out at our Investor Day in terms of what our intentions were and our aspirations in our growth rate, we would grow at or better than market.

It would be low-single-digit topline growth, and that we were really looking at continuing to drive double digit operating margin. Those long-term guidelines that we put out there has not really changed. Can't really say yet what 2020 is going to look like. We will certainly do that you know in March.

And right now, our position hasn't changed and we are just finishing off this year and paying attention to controlling what we can and driving our business..

Thanks very much. Good luck for this holiday..

Thank you..

Thanks Rick..

Your next question comes from the line of Laura Champine with Loop Capital..

Thanks for taking my question.

When we look at the tariff impact moving from $0.03 this quarter, $0.02 next quarter, is that just because next quarter is seasonally lighter in terms of sales or are there things you are doing to mitigate the tariffs? And if you can give us any kind of comment on what the run rate you think we will see in 2020 assuming status quo?.

Yes. Laura, the Q3 when we looked at the gross impact of $0.07, we were not able to have much of an impact on price. I mean by the time those tariffs went into effect, most of those orders were booked for the quarter. So, when we look, there is a little bit of price that is going to be able to help us in Q4.

And then as we move into 2020, we would expect the ability to offset most of the rest of that from a price standpoint. So it's really consistent with what we had said before over the long term.

We don't expect this to have a negative impact but in the short term, where it went into effect immediately and we had lots of orders that were already booked, we were only able to pull a couple of the levers.

As we look forward, we will continue to evaluate just different countries where we are producing goods and making sure we can maintain quality and speed, and then we would hope that we could execute a few more of our actions to mitigate more of it..

Understood. Thank you..

Thanks Laura.

Your next question comes from the line of Chris Svezia with Wedbush..

Good afternoon everyone and thanks for taking my questions. I guess first I just want to go to Famous Footwear for a moment.

Can you, Diane, any color about how comps progress throughout the quarter at all? Was it pretty consistent at that 2.5%?.

No. It was actually very strong in August. A little weaker in September and then came back again in October. So it kind of ran at the gamut, Chris, in the quarter..

Okay. And you made a reference to boots being a driver.

Was that consistent throughout the quarter? Or did that pickup in October where boots inflected?.

It was really pretty consistent throughout the quarter. But obviously really, October, it did start to kick in. But it was really the weather pattern, as you know, in the quarter was a little bit unusual and that August was so warm. So we had an opportunity on early boot selling to good and sandals were still good and the athletic was positive.

And as we flip to October, as the weather changed, boots kicked in again. So it worked out very nicely. The team did a great job of making sure we had the inventory position where we needed it to. And we have always done so well in our sport lifestyle categories and that was no different this quarter.

So it was really a nice balanced assortment, right brands, right styles really across the board. And a nice kid's business too..

Right. And Ken for you, just I guess the tariff piece is really just that incremental 5%.

Is that really what's new here in the guidance, just to be clear?.

Well, there is the incremental 5% and then there was just the impact in Q3 of not being able to offset all of the incremental 15%..

Okay. All right. And then so your fourth quarter implies $0.60 to $0.65 in earnings if I got my math right.

Just maybe walk through, north of $10 million in EBIT growth, so I am curious, just walk through if you can for the puts and takes of what to look for to drive that level of increase, if you could?.

Yes. I think when we look at the momentum we have got going in, obviously, we talked about on the brand portfolio, the boot selling, the inventory. We are not carrying excess inventory that we feel like we are going to have to push through at lower margins. So we are expecting to see some nice margin expansion in Q4 across the brand portfolio.

The e-commerce momentum, we sequentially saw that grow as we moved throughout the quarter. And so we are expecting that to continue into Q4. And then I think from a Famous Footwear standpoint, we had a great back-to-school season.

We finished the quarter really strong, really happy with all three both athletic boots and sandals, all were contributing to the growth. So we feel really good about that. And you we had the margin actually expand at Famous Footwear by 30-some odd basis points. And so all of that leads to some incremental earnings power in Q4 over last year..

Just to remind me, I there were some Vionic cost fourth quarter last year. [Indiscernible]..

Yes. A year ago, we had $0.10 of dilution from Vionic a year ago, $0.08 of that in Q4. So that was in our Q4 numbers a year ago..

Okay. Well, last one for me, just to go back to he branded portfolio and the outlook. I don't know, can you walk through, if you did flat, you are still about 10% growth on the year. I am just trying to understand, in one regards it seems like you are saying there was some acceleration potentially from this 5% in Q3.

Is that fair to think that maybe Q4 could be stronger from a growth rate perspective or no? I am just trying to gauge [indiscernible]..

Well, so I guess and part of I think what Rick was pointing out, so in Q3 this year, we had three months of Vionic versus one month of Vionic a year ago. And so when we go back to Q2, we had three months of Vionic this year versus no months of Vionic a year ago. Q4 will have three months against three months.

So a lot of what we had seen early on in terms of the outsized growth was coming from the Vionic addition. So that equates to an apples-to-apples in Q4..

Okay. So not to beat this to death, so you are expecting more organic growth. So Vionic, you are lapping pretty much everything at this point. I think Allen Edmonds is still supposed to be down potentially.

Does that just mean the core business is actually accelerating to some degree?.

Well, Allen Edmonds actually in Q4, if you remember, we made the decision to pull back on the level of promotion a year ago. And so we began lapping that decision in Q4..

Okay. All right. That's all I have for now. Thank you. And all the best to you..

Thanks Chris..

Thanks Chris..

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

Good evening, Diane and Ken.

What are the specific expectations for Famous Footwear comp in the fourth quarter as well as trend quarter-to-date?.

The trend quarter-to-date. I will start with year-to-date. So we were 1.1% year-to-date. Yes, we are not going to provide quarter-to-date or Q4 expectations. What we tried to say was, we had 2.5%. And in Q3, we saw good momentum as we were coming through the quarter, had a very strong October and all the seasonal fall category seemed to be selling well..

That's helpful. And you mentioned also that the new DC is fully automated.

When do you feel a little run at peak efficiency?.

Well, we are ramping and so we start to see here in Q4 some of the labor come out and we would expect to be coming down that learning curve going into 2020. So we will provide an update on what we think that's going to look like when we do our year-end report and give our guidance..

And we would certainly expect that to continue for a period of time, right..

Right.

We expect some benefits and some productivity gains next year. But we certainly won't be done at that point in time. There is a lot more to, as we even increased the demand of our e-comm business and all of that, that's going to help the productivity there as well..

Sure. One more question.

As it pertains to Famous Footwear's promotional cadence through the holiday season, does it differ materially at all from last year?.

Yes. Great question, Steve. We actually, even in the third quarter, our promotional cadence shifted a little bit during the quarter, but if you looked at the total amount of days where we were promoting, it was pretty consistent. And that's very much of what we are planning to do in December as well. A little bit of a shift of some of our activities.

We are not going to have one of the friends and family events. We are putting our investment back into the TV and the media. We think that was the right way to go. The consumer really responded well. And so balancing out a little bit of what we are doing in the fourth quarter, but not materially more promotional at all.

We will see how it all goes but right now the plan is to continue kind of our pattern that we developed early in the third quarter..

Well, very helpful. Thank you..

Thanks Steve..

Thanks Steve..

[Operator Instructions]. Your next question comes from the line of Tim [ph] Poser with Susquehanna..

Hi. It's Sam Poser. Thank you. I am changing my name. A few questions. How many stores -- Jim Poser, I guess I got it.

How many stores, Famous stores, did you open and close in the quarter? And then what's your plan for store openings and closings for the full year?.

Sam, we are looking that up..

Let me get you the specifics. I think we said we are 47 fewer..

Yes. So it looks like we opened in 1912. We closed 55 for net loss 43. So 949 is our ending plan..

Okay.

But where are we now?.

960.

960..

I got that but how many did you open in the quarter and how many did you close in the quarter?.

We opened four and closed 17..

We opened four and closed 17..

And then how many more are you planning on opening again? For the full year, you are planning on opening how many?.

Just one more in the fourth quarter..

And that one opened already, I assume. That's New York, right..

Yes..

Yes..

And then you are going to close like another 12 or 13?.

Correct..

Thank you.

And then what was the comp for the brand portfolio stores?.

It was negative 5%..

Yes, exactly..

And that was a planned reduction in Allen Edmonds. I think the Naturalizer piece was roughly flat..

Okay. And then what about those 4B tariffs? I don't know if you have that baked into your numbers or how you are thinking about that because some of your brands, specifically Blowfish Malibu would be impacted by that fairly significantly, probably also some of the Dr. Scholl's products and LifeStride.

So how are you thinking about List 4B if that comes?.

Yes. I mean, we have taken that into consideration based on what the current List 4B and the 15%. So about 30% of our production in China, so 70% was on List 4A and there is about 30% of what we have coming out of China that was on 4B..

But List 4B is almost entirely, I would assume, those three brands that I mentioned and I guess Rykä..

Rykä and then any of the kids-related product is also on there..

Can you give us an idea what the Vionic sales were in the quarter? If they were up, down? Were there up or down?.

Well, they certainly were up to us because we had an incremental two months. So in our results they were --.

Can you give us the number?.

They were up..

They were certainly impacted in the third quarter. Ken's looking at that. As I was saying, the work that we need to do with them on their core and replenishment categories, we needed to actually accelerate the kind of newness and freshness that they were bringing to the market, Sam.

And so we spent a lot of time working with them on that, moving to four seasons a year, making sure that they were using all the capabilities that our sourcing team could bring to bear to continue to drive some speed there. They need a little more freshness and newness added to their assortments.

So we are really pleased about the pace at which they are doing that. We really think that's going to be beneficial to them and to us as we get into 2020. But they were certainly a little light in that core and replenishment category during the third quarter..

So how do we think about, to get to a low double, I mean to get to low teens for the year for brand portfolio, you need a low double digit increase in the fourth quarter for brand portfolio? What are by brand or what are the key drivers that, you haven't mentioned Sam Edelman at all today, can you just give us some idea of what those key drivers are to get to that? And how much of that is initial orders? And how much of that is fill-in orders that you are counting on? I guess some of the initials will be January ship for spring..

Yes. Sam, so to get to a double digit increase all-in at brand portfolio for the year, I mean, I think....

But you said low teens. You didn't say double. You said low teens for the year. Or did I misunderstand? I thought you said low teens for the year.

And I think that's in your -- you are saying that you are expecting brand portfolio sales for the year to be up low teens that's on your --?.

Right. What we said was, just to back in to get to double digit, it could be flat..

Okay. But my question is what's driving, to get to low teens we need an 11% increase in the fourth quarter to get the 13%.

So what is going to make that up? How much of it is fill-ins? What are the brands that you see really doing the heavy lifting there?.

Yes. Most of that is, we have seen throughout the year initial orders continue to be down year-over-year. I think in Q3, initial orders continued to be down double digit as was replenishment. So, the e-commerce related sales, the dropship related sales, that's where the growth is coming.

And I think we are starting to lap year-over-year some of the significant shifts in the initial order reductions. So that's a bit of where you are seeing the growth. But it's all in newness fresh product. I think as Diane mentioned on just what we are doing. Sam and Vionic, both of those brands have big core replenishment businesses.

There is a shift there in both of those to more fashion-oriented product that's really where the consumer is going and that's what driving the growth really across the entire brand portfolio..

Okay. And then could you just tell me how much of your brand portfolio business is your own e-commerce business? Because that sounds like it's your in-house e-commerce and the dropship model that you are doing with your wholesale partners that's driving a lot of those business.

So can you give us an idea of what percent either each one of those are or the combination of?.

Yes. Let me give you a sort of a flavor for what third quarter was, Sam. About 38% of all of our business was in some e-commerce related sale, whether it was dropship, e-com to other retailers, our own e-com. And that grew substantially in the quarter.

And we expect to see that same kind of pattern, that same kind of growth on the base that we had last year in the fourth quarter as well..

Right. But I mean you are also talking about sell-ins to Zappos, for argument sake. I am asking you about your own e-commerce, which is a sell-through number and your dropship which is automatically an order from a consumer.

So what is that number? That actual out-the-door sale number as a percent, not what you are selling as a wholesale order to like to famousfootwear.com. I mean, that you are selling, they do carry their own inventory and then you also do dropships.

So what's that dropship flash?.

Yes. So year-to-date, that is roughly 32% of our total direct-to-consumer..

So that doesn't --.

Yes. Our own dotcom..

Your own dotcom is 32% of the brand portfolio business right now?.

Of the direct-to-consumer business for dotcom..

All right. You are right. I am sorry to drive you crazy.

You did $360 million in brand portfolio this quarter, of which what percent was the combination of dropship and your own e-commerce business which is telling you that like all that would all be direct-to-consumer?.

Yes. That's what Diane was mentioning. It was like 38% of --.

But does that include wholesale orders to Zappos? Or is that just what you are shipping to Zappos?.

No. The single pair orders directly to the consumer..

Okay. So it's 38%. So about 6% of your business is dropship and then the other 32% is your own business.

And how fast do you foresee that direct e-commerce business growing for the balance of the year and sort of down the road?.

Well, the direct-to-consumer business has been growing at close to 30%..

I am talking about the e-commerce part of that?.

And our e-commerce business has been growing at a similar rate..

And do you expect that, I mean looking ahead, I know you have not guiding the next year but I mean, when you look ahead over the next few years, do you expect that growth to accelerate as you put more effort against it or not?.

We expect it to continue. And yes, it would accelerate..

I mean that was a significant part of the investment we made on the capabilities of being able to not just do obviously case that packs, but single pairs is directly to consumer.

And all the automation in our distribution facilities, that's been the goal is to be able to make sure that we can address that specific consumer need and demand going forward for growth..

And Diane, I would assume that in the fourth quarter that that number goes up, as there is more demand. I mean, that's just the nature of direct business that's there..

Yes..

And is that a higher margin business? Is having that instead of wholesale at higher margin?.

Yes. It is..

Yes..

On the EBIT? On the bottomline?.

Yes..

Yes..

All right. Thanks very much and good luck. Thanks..

Thank you Sam..

Thanks Sam..

And your last question comes from the line of Wayne Archambo with Monarch Partners..

Hi. Good afternoon..

Hi Wayne..

Hi.

How are you?.

Good.

How are you?.

So good.

So with the sales up 2%, overall and inventories down in the quarter and I know, Sam kind of get into a lot of details within these different pockets of your business, but is there an active strategy to manage working capital accounts more closely? Are you actively bringing those inventories down? Or is part of that the net closures of 43 stores? Or is there an active strategy in place to manage inventory turns more efficiently?.

Yes. I mean we have been working at this now for a while. And clearly, we have been trying to follow much more of the speed model and bring product in much closer to need.

And making sure that we are not filling the pipeline up too early and responding more in season and all of those things, Wayne, are been a key part of what we think is going to be critical in terms of how we deliver, we grow and we deliver the kind of earnings we want to over the next couple of years..

Yes. If you look at, Wayne, our total inventory was down about 8%. So Famous, with the fewer doors, was down, I think 3.4%..

Right..

The brand portfolio, which is where we were up at the end of last quarter and what we had said was that we were working to shorten some product lifecycles and we are hoping to be down by the end of the year. So we were able to work that through in Q3 and we ended up down year-over-year about 12.6% in inventories in the brand portfolio.

So that aligns us with where the consumer is going which is more freshness, newness. And that's aligned now really across the chain with kind of how the consumer is behaving..

And would we expect the net number, next calendar year to decline similar to the net negative 43 on the number of stores at Famous? Would you see a continuation of that next year?.

Yes. I mean we haven't finalized the net reduction in the store base. But in terms of when we think about that as those stores are coming out, so is that associated inventory. So it's been pretty consistent..

Okay. Great. Thanks guys. Happy holidays..

Yes. Thanks Wayne..

Thank you too..

And there are no further questions at this time..

Okay. Thank you very much. Just to wrap up, we are really pleased with our ability to react quickly to the changes that we have seen in the environment and see this is an important validation of our capabilities in our people and our model.

We are always going to stay focused on operating with excellence and creating consistent profitable, sustainable growth over the longer term. And with that, I just like to wish everybody a Happy Thanksgiving and we look forward to seeing many of you next week in Market Week. Thanks..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..