Q2 2019 Earnings Call
All lines have placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question Press Star One as a reminder, this conference is being recorded.
At this time I'll 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 second quarter 2019 earnings call and webcast.
A press release with detailed financial tables, as well as slides are available like Caleres Dot com.
Please be aware todays 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 FCC 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, and thank you for joining our second quarter call and for your continued support of Clarisoy.
During the quarter, we continued to successfully execute on our strategies to strengthen the emotional connections we have with our consumers.
Our deep insights combined with our industry, leading footwear capabilities allowed us to deliver relevant product supporting continued growth in the brand portfolio positive same store sales growth at famous footwear and record second quarter total sales.
Our focus on expense discipline also allowed the topline performance to translate into improved profitability for the quarter, resulting in a solid increase in earnings per share.
Turning to the details of the second quarter.
We are pleased to have delivered products that resonated across multiple consumer segments. This quarter.
The weather certainly resulted in the later spring that impacted our sandal business and there was a noticeable increase in demand for novelty and newness.
We also experienced retailers managing their inventories, which led to a moderation in replenishment orders. Fortunately the investments we have made in product design development and speed to market allowed us to manage and respond to these trends in a timely efficient and profitable way across our brand portfolio.
We also made excellent progress injecting more freshness into the assortment at famous footwear contributing to 1.5% increase in same store sales and successfully worked our way through certain underperforming athletic styles from a key vendor in the quarter.
We are pleased to have returned to positive growth with this brand heading into back to school.
We expect our underlying momentum at famous to continue into the third quarter as we have experienced a solid start to back to school and are confident that we are on track to deliver our eighth consecutive year of positive back to school same store sales growth.
In addition to delivering compelling products, we also increase consumer engagement through our loyalty and marketing efforts, we've seen encouraging results from our revamped loyalty program famously your rewards by driving increased engagement among existing members and continued growth and engagement of our new and reactivated membership base.
Existing rewards members are shopping more frequently and they're spending more per shopping occasion, we look forward to hearing and learning more from our consumers throughout this important back to school season.
We also experienced a solid response to our new marketing approach with a return to TV advertising at famous footwear contributing to the sequential improvement in performance during the quarter.
We have also you got to test them investments in the in store environment in order to ensure that we deliver an exceptional and consistent experience across our stores and are pleased with the name. The initial response from our customers.
These types of initiatives are not limited to our famous footwear operation we have seen a positive reaction to recent collaborations with local makers that we have launched and our newest naturalizer stores on Chicago State Street and in Herald Square in New York.
These pop up shop experience offer a revolving assortment of carticel products that sit alongside the core naturalizer merchandise, introducing our products to new consumers, while ensuring that our stores day exciting for our loyal naturalizer customers.
Also during the quarter, we continue to evolve our portfolio enhancing the relevance and diversity of our offering establishing a new partnership with Veronica beard and re launching zodiac.
We see great potential and our exclusive partnership with Veronica beer at the most exciting and fastest growing new brand in the fashion contemporary fashion space and I have to tell you. It is run by a dynamic and powerful team of women.
With the relaunch of Zodiac will also be able to effectively target a more casual segment through their offerings in that but more of a bohemian in western design trends.
Both of these brand launches well really capitalize on today's consumers love of newness and new brands.
Looking forward to the second half of the year, we are well positioned with relevant products from across our diverse portfolio. This diversification is the foundation of our business and ensures that we can consistently deliver sales and earnings growth in both expanding and contracting markets.
We have also built flexibility into our model, which is allowing us to meet.
Increasing consumer demand from new <unk> for newness in an environment, where retailers have become even more focused on inventory discipline.
We are well positioned to deliver on these changes in consumer and retail preferences, giving me and given the investments we have made and the speed to market and in our improved direct to consumer fulfillment capabilities.
We have reflected this and our expectations for continued growth in the brand portfolio in the second half.
We also recognize the need to continuously identify opportunities to improve efficiency across the organization, creating the fuel we need to fund the long term growth opportunities that we see ahead of us.
With everything going on right now we must focus on what we can control.
This has included moving quickly to adapt our supply chain to mitigate the impact of increasing tariffs for footwear produced in China.
We have actively diversified production away from China, and now sourced approximately 40% of our products outside of China up from less than 15% five years ago.
We continue to leverage our sourcing expertise.
Shifting additional production out of China, working with our partners to reduce cost while also selectively exploring price increases where they will be least disruptive to our consumers.
Well the situation remains fluid we are working this real time and are confident that we will find the right solutions to minimize the risk associated with Paris throughout the balance of the year and into 2020.
And with that I'd like to turn the call over to Ken for a financial review.
Thank you Diane and good afternoon, everyone.
For the second quarter, we reported earnings per share of 61 cents.
Our adjusted earnings per share was ahead of last year and expectations at 62 cents, excluding one sent a bionic integration related expense.
Our consolidated sales for the quarter up $752.5 million were up 6.5% over the prior year, including the addition of biotic and two additional months of Blowfish sales as well as the planned reduction and Allen Edmonds sales.
Our brand portfolio total sales were up 17.9% year over year in the quarter.
Or 0.4%, excluding the impact of acquisitions and the planned reduction at Allen Edmonds.
Famous footwear delivered a strong second quarter, reflecting significant progress on our product assortment and marketing initiatives same store sales were up 1.5% for the quarter, reflecting sequential improvement throughout the quarter and are up 0.4% for the first half total sales at famous footwear were $419.8 million down 2.2% as we operated 35 fewer doors versus the prior year and ended the second quarter with 973 total doors.
Let's turn to consolidated gross profit and margin.
For the second quarter consolidated gross profit of $305.9 million was up 4.4% and our reported gross margin came in at 40.7% down approximately 80 basis points from the prior year, reflecting continued growth in the brand portfolio.
Our brand portfolio reported gross margin of 34.7% in the second quarter down approximately 80 basis points from the prior year, primarily driven by markdowns on spring inventory.
The less replenishment and retailer concessions as Diane mentioned, the later spring impacted our sandal businesses.
Retailers were managing inventories and there was a noticeable increase in demand for novelty and newness all impacting margin in the second quarter.
For famous footwear second quarter gross margin of 43.4% was down approximately 15 basis points year over year. This was considerably better than we had expected as the team effectively cleared inventory in advance of back to school.
Our consolidated SGN a expense for the second quarter was up 3.4%, including the addition of both biotic and blowfish.
She M&A represented 35.6% of sales a reduction of more than 100 basis points from the prior year.
Our teams have done a great job managing what they can control.
Our depreciation and amortization for the second quarter of $16.3 million was up 10.9% versus the prior year, primarily due to the additional trademark trademark amortization related to our bionic acquisition.
Our second quarter operating earnings were $37.8 million or 5% of sales our adjusted operating earnings of $38.4 million were up 10.4% year over year and represented 5.1% of sales.
For the brand portfolio second quarter, adjusted operating earnings were $13.9 million or 3.9% of sales.
Adjusted operating earnings for the first half of $34.6 million up more than 10%, including the addition of our acquisitions.
Adjusted operating margin was down 211 basis points versus the same quarter, a year ago, reflecting the decline in gross margin mentioned earlier and a tougher selling sandal selling season, particularly in biotic adjusted operating margin for the first half was 4.9% down 40 basis points from last year.
At famous footwear second quarter operating earnings of $31.5 million represented 7.5% of sales and reflected the planned clearance of certain products ahead of back to school.
Our net interest expense for the second quarter of $7.4 million is up $3.8 million from a year ago.
As we use our revolving credit facility to finance the October 2018 acquisition of biotic.
Our second quarter tax rate was 23.7%.
And our adjusted EBITDA for the first half of 2019 was $101.5 million with an adjusted EBITDA margin of 7.1% essentially flat when compared to the same period a year ago.
Our capital expenditures were $8.8 million for the second quarter and down approximately $3.3 million year over year. We've completed the implementation of our new automation capabilities in both of our facilities and our capacity is ramping in line with our expectations.
Turning to our balance sheet, we ended the quarter with $42.6 million of cash and equivalents.
Our outstanding borrowings under our revolving credit facility were $300 million at quarter end down from $335 million at year end.
But up on a year over year basis due to the October 2018 acquisition of biotic.
We bought back $30 million of common stock in the second quarter and returned close to $36 million to shareholders in the first half of 2019.
Our consolidated inventory position at the end of the second quarter was $792.1 million.
For our brand portfolio, our inventories were up year over year, primarily related to our biotic acquisition in transit inventory for new and fresh product as well as a moderate increase in carry over of course bring goods, we fully expect to be able to sell through this course bring inventory in the coming months and that our brand portfolio inventory will be down on a year over basis by year end.
At famous footwear, we ended the quarter with inventory down 0.5% year over year.
Our operating cash flow for the company was a $116.6 million for the first half up 28% over last year.
Famous footwear, once again delivered solid and consistent cash flow in the quarter.
We are really reiterating our guidance for the year, which I will remind everyone is total revenue of approximately $3 billion.
Brand portfolio sales, including acquisitions to be up low to mid double digits famous footwear same store sales of flat to low single digits and adjusted earnings per share of between $2.35 and $2.45 per share.
Up approximately 9% year over year at the midpoint.
This obviously takes into account what we knew about the tariff situation at the end of last week as that is changing daily.
Now before we begin today I'd like to turn the call back over to Diane to provide some closing remarks, thanks, Ken and just to wrap up before questions were pleased with our ability to react quickly to the changes that we've seen in the environment, which we see as an important validation of the capabilities of our people and our model.
As a company we remain focused on operating with excellence and creating consistent profitable and sustainable growth over the long term, we look forward to sharing more with you about our plans and long term vision for Caleres at our upcoming Investor Day on October 2nd.
And with that I'd like to turn the call over to the operator for today.
Thank you at this time I would like to remind everyone that in order to ask a question. Please press star one well pause for just a moment to couple acuity roster.
First question comes from Laura the silicone with Macquarie. Your line is open.
Hi, Good afternoon. Thanks for taking my question and congrats on the progress for the second quarter.
I wanted to first focus on on famous footwear I think in your prepared remarks as well as the Powerpoint presentation, you talk about the progress by month, maybe could you guys, maybe parse that a little bit more how the month progressed and maybe the the quarter to date comp trend.
Yes, Hi, Laura and thank you for the question and answer that the comments you know it it really was it famous we're very pleased with the great execution that the that the team did in the second quarter. It was a combination of three factors was the great execution from an assortment and merchandising standpoint, making sure we were giving our customers access to very high demand styles and brands across categories. I think they really were super sharp in terms of their Assortments. We also saw improvement in our athletic assortment with re a return to growth at Nike.
That helped us a bit and also I you know, it's the enhance handsets in our marketing and our loyalty programs include including that return to TV advertising, which generated a response that we were really expecting too. So it really wasn't any one thing. It was really a combination of all of those things that allowed us to continuously improve our performance sequentially in the quarter and as I said.
We are you know really feeling very confident that we're going to show a Ah you know the eighth consecutive positive comp for our back to school season at the end of that at the end of the third quarter. When we when we report so I really feel like everybody has done a terrific job staying hyper focused and executing well at famous.
That's great to hear and then maybe Karen as implied six of the Powerpoint presentation that parses out about 16 cents and expenses related to brand acquisitions and exits could you, possibly parse it up by brand and maybe by quarter for us.
Kevin most of that is all associated with the acquisition of biotic. So the.
We had called out we've taken all of the markdown expense that was associated with the announced exits.
And that was of the Carlos Santana brand and that MDB. So all of that is behind us and for the most part.
All of the biotic integration expense that we had called out for this year, which.
I'll remind everyone was the.
The amortization of the purchase price back through the inventory.
The purchase accounting and.
That pretty much turn through the first half of this year.
Okay. That's very helpful. And then can you.
Personnel.
In terms of the guidance, it's encouraging to hear that you're reiterating that.
In the face of no.
The other day tariffs the does the does the guidance include the incremental tariffs of 10 or 15%, we'll see from list, scoring for B and then and then secondly, where should the revolver stand by the end of the fiscal year.
Yes, so the revolver were 300 million and we expected we would be down below 250 at the end of at the end of the year.
And then respect have respected tariffs Laurent you know our guidance, obviously up through Friday, that's what it includes and it's it's certainly the terrorists and everything is the.
Subject of the moment and I think it's important to keep in mind that we do have this diverse portfolio and we expect you know less than 40% of our business is going to be impacted by the proposed tariff and as we mentioned in our last call. We have taken the steps to diversify the production we want to make sure. We continue to deliver quality the customer where 40% of our products are outside China, we leverage our sourcing expertise, we're continuing to because of the sourcing powerhouse that we have you know where were able to move on at an appropriate pace of what we think is right and.
You know we're selectively.
Taking a look at TEP price increases, where they're really going to be leased impactful to our consumers. So if the situation continues to be really fluid and we were like everybody I think eyes went up on Friday with the latest weight and now you know you never know here on Monday, what that what is going to be but we're working in real time and are confident that we're going to find the right solutions to minimize the risk associated with the terrorists through the balance of the year. So.
Whereas we're working it every day in a and doing everything we need to do.
Okay very helpful and we look forward to see you guys at the Investor Day.
Thanks Lauren.
Your next question comes from lower shipping with loop capital. Your line is open.
Thanks for taking my question is really a follow on so what is the assumption for the impact of tariff. So your guidance is unchanged. It seems like you're executing well what are you putting in for downside from tariffs I presumed gross margin if not gross margin and sales in the back half.
Yes, Laura I think what we tried to do was take into consideration what had been communicated as of Friday and so there's there's the list that goes into effect September Onest and then a lot of the athletic.
Products that that ER was push really out to December 15th and so there was lots of.
Tweets in rhetoric on Friday about potential for it to go higher.
This morning, there were talks of it being cancelled altogether, but we feel like we have contemplated in our outlook, what we knew as of Friday and what is currently on the list that were what's going to be effective on September onest and what was on the list to be effective December 15th.
Got it.
And then on the brand portfolio that the comp is down but that doesnt seem to be hurting growth is there that cannibalization, what what am I seeing that comp.
Most of that comp is really the planned reduction in Allen Edmonds.
Got it. Thank you yeah, that's really their direct business that that we took down is showing up in that negative comp.
Understood great. Thanks.
Your next question comes from Rick Patel with Needham Your line is open.
Hi, Good afternoon, guys I'll add my congrats on the strong execution as well.
Just to follow up on the.
Pair of questions any context about how much of the assortment is affected by the September 1st tranche versus December 15th one.
Yes on on the on the September 1st one its about 70% of our.
Products that are made in China for us.
Thank you Dan.
And then just hoping you guys can talk about the outlook for the brand portfolio. So obviously the department store spaces Challenge right now and you touched on.
How theyre managing inventories in a tighter way how do you see this affecting the brand portfolio and could you put your growth expectations in the contact for us for Threeq and Fourq you.
Yeah, I think I would I would start by saying.
The.
Yes that segment was really what had a negative impact on the margin for brand portfolio in the second quarter as we tried to make sure. We had accounted for the appropriate level of markdowns and also discounts and allowances that were required. So we believe that we have taken that into consideration and.
We outlook and have closed out the second quarter.
Reflecting a lot of that in our second quarter results, Yeah, I would maybe add to that can too that we entered the year knowing that the environment was going to be volatile Leslie Didnt just happened in the last 90 days, you know and really our our view about how we're managing it hasn't changed and it's really comes back that we've got to keep our eye on the consumers' needs because they're changing more than ever and there's no doubt about it that you know as retailers continue to manage their inventories more carefully we have to make sure. We redouble our efforts on this front of making sure we create new product and a sense of urgency and newness all the time, because we could see already.
This spring that the consumer she wasn't interested in core product. She wasn't interested in anything that she had seen before it was really all about newness. So we've really redoubled our efforts on that front in the second quarter really looking at our business in the quarter thinking about where we had booked for the the third and fourth quarter.
And then making sure that you know we were responding to that and I think youve heard US say this we've really been trying to diversify our business model. So we can adapt quickly in these kind of environments and we think ultimately that is what allows us to.
Drive this consistent profitable and sustainable growth know, Matt no growth no matter, what the environment is so.
It really is making sure we stay incredibly agile and flexible and that our teams really paying attention day today on on what the consumer wants.
Great and lastly can you just provide some color on the outlook for operating margins as we think about famous versus the brand portfolio for Threeq versus Fourq you I know there were some lumpiness in expenses last year and you'll lap. The Brown acquisition later in the year, so it'd be great to have some complex my modeling.
Yeah I think.
As we look at kind of the year, obviously, there's been a little bit of a shift.
There's about 60% of the earnings Thats actually coming in the back half of the year this year and.
And.
Obviously, it's a big piece of that is third quarter and back to school. So the margin profile of we had.
Had initially thought that Q2 could be for famous down as much as 100 basis points ended up down 15, I think the teams did a nice job managing through that and.
We're able to come through a little bit little bit favorable the the brand portfolio with.
The question you started with and what we've seen in the department store space.
And our sandal business, which is a big big piece of the of our first half results that looks very different as you get into Q3, and Q4 and we start to see less of a margin impact from those areas of the business.
So I don't know Diane if theres anything you would add yeah, well you know I think we feel pretty good about you know the how how were lined up in terms of the categories in the assortments really across the company.
Both the brand portfolio in a theme is going into the third and fourth quarters.
And.
<unk> again back to the sandal penetration, we don't really have that headwind because we do have had a pretty high sandal penetration here weve.
Really taking all of the you know the medicine that we need to take on that and still delivered a decent quarter. So we're feeling I think and to your point feeling you know is optimistic as you can be about where how we positioned ourselves and it's a you know on us to continue to execute well against that.
Thanks, very much good luck in the back half.
Thank you. Thank you.
Your next question comes from Chris Svezia with.
Bush your line is open.
Hey, good afternoon, everyone and congrats on a on the positive performance there.
Thanks, Chris.
So I got a couple of things here I guess first.
Go back and last question, just what I don't think you answered it down but what was the cadence of the famous footwear comp throughout the you know the May June July period, what was the trend by month.
I didn't I didn't give that trend by month, and I'm really not going to give the trends by month, Chris I think you know what we basically said was their sequential improvement that we saw throughout the quarter. I think you can see that you know the the power of the portfolio and we have I believe that as that we will finish [laughter] the back to school season show in a.
Positive comp for the eighth consecutive years. So I didn't go through it month by month, but really nice sequential improvement and really pleased with the the consumer response to everything really that the famous team has put into place and so we're feeling very good about the foundation going forward.
Okay.
So let me ask it this way as I kind of look forward.
Everything that you've done at famous the team Thats done there sort of a product Nike getting incrementally better you brought in kids refresh with some brands as well nothing else marketing. So I guess the question is I know the guidance is flat to up low singles for the year you are kind of flattish for the first half of the year seems like momentum is building any reason why comps would in incrementally accelerate from here or at least hold these levels just.
Sure I know, it's a positive for back to school, but I'm trying to pin you down more about sustainability, given everything that you've put forth.
Yeah, I think we feel very good about that that business, but we you know.
It's not only just famous we also have the brand portfolio are running the entire company and we look at the.
Opportunities and risks across the entire brand.
So we think we've calibrated kind of our guidance and given you insight into that you know taking into account all brands with our portfolio. So while we feel really terrific about the what we've seen so far on famous you know could be better but until until we see it we feel like our current guidance is appropriate.
Okay and just on the.
Just curious what your thoughts plan about about that business into the back half of the year and just sort of how you're thinking about it either for famous or for your branded portfolio relative to the three months ago, where I am.
Yeah, I actually would say Chris on that point, we feel a bit more optimistic about it you know I think everybody in their early days there of the second quarter were really kind of wondering kind of what was going to happen, but what we're seeing early right now you know.
Doc Martin at famous is terrific short booties are great sneaker booties have been early read on that has been very good as well.
So you know.
Actually a you know any of the preview sales that we've seen you know some of our retailers.
Due in the in the summer here is really shown that boots look good. So I would say, where we were maybe a little conservative about where boots were going to be we actually saw them as a plus in the quarter in the second quarter and kind of think that momentum you know will continue so keep your fingers crossed on that because if that works that way you know that will be great for the industry as a whole. Okay. Thank you and then last thing here just.
Ken just maybe kind of.
Thought process for the third quarter I know you don't guide quarterly, but it's always helpful that people have a sense of how you're thinking I think last call you indicated third quarter could be up from an earnings perspective kind of low to high single digits. You know obviously you have to back into what the fourth quarter looks like but any refresh thoughts about third quarter. Given Q2 came in a little bit better margins, a little bit healthier comparable that stronger just any color about Q3 EPS would be helpful.
Yeah, No I mean, I think conservatively when we were talking before we really thought that would be flat to up slightly.
When we look out into the into the back half I think you know as Diane mentioned, we see good momentum and sequentially it at famous and.
We see lots of uncertainties across you know the some of the other pieces of the business that literally is changing daily so.
When I look at that the one thing that.
But I think that we want to make sure people understand is that you know the timing of the earnings.
It was a little bit more.
Weighted towards the back half and with that the.
Corporate expenses that we've continued to manage down I think.
Three years ago was $45 million in expense coming through that other segment down to 43 to 42, I think it's $40 million, it's kind of what we're expecting this year and so there is a little bit of timing shift between Q2 and Q3, just based on the shift of the earnings so when I look at.
As she in a in a week.
We were down about 100 basis points and.
In Q2 year over year, and we think that that will.
Continue and that will will probably be somewhere around.
The 35% rate range in terms as a percent of sales in Q3 and so that.
Should give you a pretty good idea in terms of how to how to model.
Okay. All right. Thank you all about Tom Ferguson. Thanks. Thank you.
Your next question, Steve Marotta with CL, King and Associates. Your line is open.
Hello Diet, and let me offer my congrats on the quarter as well.
Dan would you say that there was an acceleration from the second quarter in the current quarter to date period from a comp standpoint at famous.
It's been sequential improvement throughout the quarter, yes, there has been.
I understand could you also provide a little bit of historical framework around the percent of.
Sales by month.
In August September and October .
Trying to determine how much of the quarter as Pat.
Oh I would say can I don't have that in front of me, we can look that up for you Steve but.
When you talk about the headline yeah.
Be happy too.
Sure. Okay was there any material shift in SGN a in the second quarter.
Through the third quarter or vice versa.
No not a.
Not particularly I mean, the across the businesses. Obviously people. We're we're cognizant of trying to make sure that that anything discretionary that they were they were being prudent.
But really what we have talked about in the expense in the other segment would be the only when we ship we had.
A year ago in the second quarter, we had some increases in expense associated with some of our.
Our medical and casualty, where we're self insured and so.
Those numbers were little bit higher in the second quarter last year.
And so.
Those were favorable in the second quarter and so sequentially. There is a little bit more expense that would come through in.
Q3, there, but that's really tied to the level of earnings and the and the and the sales so.
It's a it's pretty straightforward there wasn't a lot of timing pushes out of Q2 into Q3.
Okay. That's helpful.
Last question can you just remind how much duplicative costs there were in the second half of last year associated with the DC.
So the.
The duplicative was really across the first half and then in the second half when we finally settled on the exit that all came out as a nonrecurring expense so in our in our non gap.
Numbers there was there was very little duplicative.
Coming through there.
Got you perfect. Thank you took the rest of the questions offline. Thank you again all right. Thanks.
Again, if you like to ask a question. Please press Star One. Your next question comes from Sam Poser with Susquehanna. Your line is open.
Good afternoon. Thank you for taking my question question first of all what was the total brand for the brand portfolio revenue I'm on the exam.
Up or down on the existing business, including being you know when you if you just put.
If you put.
On Evans into that number.
Yes, so we had because we had planned Allen Edmonds down we've taken it out and it was and it was up and Allen Edmonds as you saw on the on the other.
Com show the retail copper Remploy was down 9.3%.
Nobody in the brand portfolio wholesale number there what was the.
<unk> 0.4.
Right. It was up nine point upward he's he's wanting to include.
[noise] include Allen Edmonds, a plan for that line.
Right and then the other and so you did about $306 million in brand portfolio of clubs.
By on it.
Yes, that's right.
Secondly, when will this plan down of the Quint when will you be complete and Oh, that's been sort of turns around and sort of gets back to where you want it to be.
Well I think we're making good progress Sam on that you know as you know it those kinds of things don't happen overnight and we you know made that move a late last year to reposition the business and make sure that we reduced the amount of promotional activity. What we are saying is improve relevance of our product assortment, we have reduced the level of promotional activity. That's been good overtime. We definitely think we have the right plan in place, but we certainly see and I think it you know you you. There's no very obvious out there that the move of men to sneakers and moving out a dress shoes has been faster than ever. So you know, we really need to continue to get our assortments back in the right balance we've introduced sneakers. It's now a growing part of the assortment. There. We think we've even got to accelerate that some more so it doesn't happen overnight, but we.
No that and believe that we have the right plan in place to improve our profitability of that business and you know connect with the consumers even better so where where we feel like we're making the progress that we had hoped never fast enough of course, but we feel like we're making the right kind of progress.
So so when you think about the China I'm going to go to China, again, I'm, sorry, but what do you think of the China exposure I mean, a big chunk of the children's business I mean, that's a business, it's hard to get out of China.
And when you think about.
We're hearing some rumblings that prices might start to go up in kids, because it's not a movable.
Business when you think about the margins going forward with the tariff.
Even if the kids business, maybe push to the end of the year I mean, how do you look at how how long or how are those all this pricing central pricing change is going to work are you doing it item for item are you trying to average it across things on the brand.
Yeah.
At famous how are they approaching good how are they thinking about it I mean, I know, it's very fluid as you put it but yeah solar on on where well or yeah.
Couple of things on the kids side of it I you know it's at we don't see that that is a big risk for us with that we'd really be affected obviously at famous the bulk of our assortments there at famous.
Our really an athletic and sport and you know where the pressure really might be as other areas. So I think you know right now we would like and kind of what we see in the kids business and you know the teams will take a look at if if increases are coming through well, we'll have to assess that at that time, but right now we don't see that as being a significant factor for famous and I think again, because you know the big athletic brands and most of their key vendors of diversify their sourcing base and have done that you know for a while so I think were in reasonably good shape. There always you know paying attention, though and I think then the other thing on that brand portfolio.
You said it exactly right there is not a one size fits all and the good news is when the you know as the consumer wants newness you know theres not there were really trying to keep evolving you know the styles because we're looking at we do live in a brand by brand style by style and where we think the perceived value within each of the products and where we where we can you know either add value or do whatever we have to do so there's no one size fits all I think where our teams are doing a great job day to day trying to figure out what what a what the best approaches.
Some are really easy some are not so easy and it really depends.
Thank you and then lastly on Bionic now Bionic you know when you bought it. It's a very you know it's a it's a premium comfort brand I would assume that so you are.
Or how you like to think about it shortly.
That's a fair statement why is it in famous footwear, I mean, I would put it I mean for the same reason like Sam Edelman shoes are not in famous so they have some circus something famous.
But not Sam why is biotic in family well I think the team wanted to see whether or not some of the entry price product and bionic would resonate with our and famous would resonate with the consumer and so I think as being you know taking a look at whether or not that would make any sense. That's what the teams did it with.
Very small portion of the of the total by it was really a test and I think you know we continue to test lots of things and famous footwear and and they have a number of different test store groupings against you know I would say high household income stores, you know think I stores, an entire penetration of kids. So there's always testing going on of some something so I wouldn't I wouldn't read too much into that one Sam I think the teams, though you know do the right thing because its really all in how the consumer if it weren't <unk> I understand but I mean, you could probably sell some Sam Edelman shoes at famous too. If you tested that puts you haven't tested Sam Edelman stores. So.
Well, we have a great business with circuits that we're continuing to circus by Sam Edelman, but that's a sub brand and I mean, why not just create a sub brand of biotic for that that way from a like the brand itself. The states Youre well. It's interesting you mentioned that because one of the things actually that bionic has been working on is something called Bionic Beach and that is a an idea exactly about what where you're talking about that that is actually it's it's.
Primarily sorta sneakers, and sandals and flip flops, and we're kinda positioning it as.
You know in against early we haven't done a lot of.
In fact, I think it just came in for our Las Vegas, selling but we're looking at that as being an opportunity to reach a different consumer in different channels of distribution to your point and are hopeful that that you know if we once we get that right that that would be the avenue for for for a channel stores like famous and really others as well. So we're still in the you know the getting and getting everybody aligned around where the opportunities for growth are as saying Onyx. So I'm confident that we'll we'll be doing the right things on that Sam.
Hi, Thank you very much continued success.
Thank you thanks Sam.
Your next question comes from Chris Svezia with Wedbush. Your line is open.
Hi, Thank you for taking my follow up question I appreciate that two of them actually just how does the renminbi and the movement, we've seen relative to the dollar 4% moved since August 8% since mid May.
How does that affect you are purchasing I'm just curious how you think about that and the second question just with 10. When you mentioned leverage 100 basis points and that would continue I think the Q3 as the rate of 35 I think last year. You did 34.2, so I'm trying to make sure I got that or maybe I'm missing something.
Yes, so on the on the RMB.
The.
You know as we go in place.
Orders with the factories. We are we are taking into consideration what the RMB is at that time that is.
What the costs for that factory is so any any changes would come come through with new orders placed specifically tied to the RFP.
And obviously no obviously, we're working with those those partners to try to mitigate any impacts of these tariffs and so.
Where where they're getting savings were working with them to you know to share that with us.
To help offset the pure tariff.
And but there's.
And Ken just quick on how quickly the thought how quickly does not happen, but what the turnaround on it on it on any any orders placed today get the benefit of what you know the.
What the costs are so with our speed model, obviously, we roll that through.
Quicker than you know what a traditional order.
Okay, all right and are you asking a question.
Yes in a well what we said is that where we were we leveraged 100 basis points in the quarter and that.
The split on the other that was between the first half in the second half would be more closely tied to the earnings contribution in the second half, which we said was up in the 59, 60% range. When you take the midpoint of our guidance and you back out our actuals through the first half.
Okay I'll go back and look at that and also called documentary offline.
Yeah, I'll get back you on that thanks.
Thanks.
There are no further questions at this time I turn the call back to the presenters.
Hi, Thank you very much for joining us on our second quarter earnings call and we look forward to seeing you on October 2nd at Investor Day, Thanks very much.
This concludes today's conference call you may now disconnect.