Caleres, Inc. (NYSE:CAL) Q4 2023 Earnings Call Transcript

Caleres, Inc. (NYSE:CAL) Q4 2023 Earnings Call Transcript March 19, 2024

Caleres, Inc. reports earnings inline with expectations. Reported EPS is $0.86 EPS, expectations were $0.86. Caleres, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Caleres Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. My name is Sherry, and I will be your conference coordinator. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Liz Dunn, Senior Vice President of Corporate Development and Strategic Communications. Please go ahead.

Liz Dunn: Good morning. Thank you for joining our fourth quarter and full year 2023 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are available at caleres.com. Please be aware that 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. In discussing these — in discussing the results of our operations, we will be providing and referring to certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used in today’s earnings release, on our presentation on the Investors section of our website. The company undertakes no obligation to update any information discussed in this call at any time. Joining me today on the call are Jay Schmidt, President and CEO, and Jack Calandra, Chief Financial Officer. We will begin this morning’s call with our prepared remarks, and thereafter, we will be happy to take your questions. I would now like to turn the call over to Jay.

Jay?

Jay Schmidt: Thank you, and good morning, everyone. I’m pleased to report that Caleres delivered another strong performance during the fourth quarter 2023, capping off the third straight year of adjusted earnings per share above our $4 baseline. These results continue to underscore the power of our portfolio of brands, the focus of our talented team, and the magnitude of our structural financial transformation. Overall, 2023 marked another year of significant accomplishment and disciplined financial execution at Caleres. In total, we delivered annual sales of $2.8 billion, in line with our expectations. We achieved adjusted operating earnings of $201 million, and generated a strong consolidated adjusted operating margin of more than 7%.

Our adjusted earnings per share of $4.18 was in line with the outlook we reaffirmed in January. And we generated approximately $260 million in adjusted EBITDA. We are particularly proud of these results, which were achieved while navigating a dynamic demand environment and making prudent investments in support of our future growth. In addition to our financial accomplishments during 2023, we gained market share in both the Brand Portfolio in women’s fashion footwear and we gained market share in Shoe Chains for Famous Footwear as well as in Kids. We leaned into our Edit to Win initiative and leading SPEED capabilities, which facilitated a nearly 7% reduction in inventory. We generated $200 million of cash from operations, and strategically used that cash to invest in and accelerate value-driving capabilities essential for our future growth.

This included enhancements to our marketing ecosystem, the expansion of our international presence, particularly at Sam Edelman, the involvement in consumer experience at Famous Footwear, and the upcoming go-live of our financial and operating system into a new integrated SAP platform. We also deployed cash to further strengthen our balance sheet and enhance our financial flexibility by reducing borrowings by $126 million from 2022. Finally, we returned more than $27 million to our shareholders through share repurchases and dividends. Now, let’s move to some performance highlights from the fourth quarter. During the period, we delivered sales of $697 million, up slightly from the prior year. We generated strong margins, and we achieved fourth quarter adjusted earnings per share of $0.86, which represented a 32% increase over the fourth quarter of 2022.

Now, let’s turn to our operating segments. The Brand Portfolio delivered its best-ever annual adjusted operating earnings, which topped $148 million, eclipsing its previous record of $112 million, and was accompanied by a nearly 12% adjusted return on sales. Of particular note, the segment led the financial performance of the company for the first time in nearly two decades. Looking more closely at the quarter, strong demand for our Lead Brands and largest portfolio brands drove the company’s performance. Notably, sales in this segment were 4.5% higher than fourth quarter of 2022 and segment gross margin increased significantly. And while we invested in key capabilities like our marketing network and international expansion, most of the margin strength flowed through to the bottom-line, leading to a 570 basis point improvement in adjusted quarterly operating margin.

This strong upward momentum was broad-based, with increases across both our wholesale and direct channels, primarily our owned e-commerce, which increased 5% year-over-year. As the consumer continued to prioritize newness, including loafers, ballets, Mary Janes, slingbacks and, of course, fashion sneakers, our brands were well positioned to meet the diversified needs and preferences of our consumers. We saw particular strength across our Lead Brands during the last quarter of the year with positive trends in year-over-year sales, operating earnings and market share. In total, these four brands, which include Sam Edelman, Allen Edmonds, Naturalizer and Vionic, represented about 55% of the Brand Portfolio sales and more than half the segment’s operating earnings during the fourth quarter.

Diving into the performance of our Lead Brands, Sam Edelman had a solid quarter with improving financial metrics. We announced some big news last week. In case you missed it, Sam unveiled Kylie Jenner as the face of its spring marketing campaign. This is an exciting time for the Sam Edelman brand and team, which is celebrating its 20th anniversary this year. The brand also continued to expand internationally, opening 10 new stores in 2023, with plans to grow that number significantly in 2024. We expect the 20th anniversary marketing plans and events, international expansion with our joint venture partner in Asia and the relaunch of the Sam and Libby brand will be significant sales drivers in 2024 and beyond. Next, at Allen Edmonds, they turned in their 12th positive quarter of growth.

Casual and sports styles continue to lead the way during the period, with the consumer responding to newness and colorways of our iconic shoes and introductions of new styles. During the quarter, we opened a new Port Washington Studio concept store in Birmingham, Alabama. We now have eight Port Washington Studio stores and continue to see the sales performance outpace the rest of the chain. We already have plans to introduce the Port Washington Studio into four stores during 2024 and continue to look for more opportunities to add this concept to new and existing locations. Our Naturalizer brand had a standout quarter from both a sales and margin perspective. Sales were up double digits and operating margin improved substantially. The brand gained 1 point of market share during the quarter with a significant increase in new consumers.

We are pleased with the rollout of the Naturalizer loyalty program, named Naturalizer Insider, and are seeing positive spending trends with loyalty members. We are also seeing an increase in younger consumers, driven by strong relevant fashion offerings and targeted marketing efforts, including new collaborations and partnerships. As you know, we’ve done a lot of work in recent years to transform and ready Naturalizer for even greater growth. We believe there is tremendous opportunity for the brand moving forward. Finally, Vionic’s profitability improved significantly in the quarter despite a modest decline in sales, with both our wholesale and e-commerce businesses making significant contributions. Loafers, flats and sneakers drove the brand’s fourth quarter business and the Uptown Moc remains Vionic’s number one item.

In addition, our Rejuvenate Recovery slide sold very well as did new styles in the walking category, with more to come in 2024. As I mentioned, our largest portfolio brands also delivered outsized performances in the quarter, namely Dr. Scholl’s, Franco Sarto and LifeStride achieved year-over-year improvements in sales and earnings. As we’ve noted, these brands play an important role in our overall portfolio, reaching different customer segments, while generating meaningful profit and cash flow. This year, Dr. Scholl’s celebrates its 100th year anniversary with sales driving collaborations and partnerships. The first will be a collaboration with apparel brand Free People, which is set to drop in early April. Overall, the Brand Portfolio performed at a high level during 2023, delivering its best performance in portfolio history.

As we outlined at our Investor Day last October, we continue to expect the Brand Portfolio to contribute about half of total sales and 60% of operating profit within the three-year period. We are confident the Brand Portfolio, powered by its Lead Brands, is positioned to lead the financial performance of Caleres over the long term. Moving on to Famous Footwear. Total sales declined 1.5% and comp sales declined 5.9%, representing a sequential improvement in trend from the prior-quarter period, both in-store and online. Traffic was down and seasonal products, namely boots, represented much of the sales decline. Famous, once again though, outperformed its competitive set, gaining market share in Shoe Chains. During the holiday season, the consumer was motivated by highly demanded trend items instead of promotions.

Robust selling on key athletic brands and styles and cozy products like slippers drove a modestly better sales trend during the seven-week holiday period. In addition, we were particularly pleased with the performance of our Kids business, where sales increased 2% year-over-year and we gained 1.4 points of market share in Shoe Chains. As you know, we view Kids as our key differentiator and the entry point for the millennial family. Our Kids business has outpaced the rest of the chain for 12 consecutive quarters, and 2023 marked our highest level of annual Kids sales ever. We were also pleased with the relative outperformance of women’s fashion and sales of key vertical brands, Naturalizer and Dr. Scholl’s, were up year-over-year at Famous. Over the last year, we’ve worked to drive a more balanced athletic versus fashion assortment, and we are making progress on that front.

Our vertical integration provides Famous with greater access to fashion products, a key growth driver for the business, as well as a greater ability to flex with trends and differentiate versus competitors. And vertical integration allows our own brands to reach new audiences. Our newest vertical brand, Sam and Libby, launched in Famous for spring with solid early reads. I will remind you, at an enterprise level, Caleres captures a higher gross margin on brands sold vertically. Finally, our efforts to enhance the consumer experience at Famous Footwear continues. We had 21 FLAIR stores open at the end of the quarter. The second wave of FLAIR stores have proven highly successful and are outperforming the chain and delivered positive year-over-year comps in the fourth quarter.

We plan to continue to refine our approach to improving consumer experience to ensure we are realizing the highest return on this investment. We will transform an additional 23 stores to the FLAIR concept in 2024 and will have 44 FLAIR stores by year-end. All-in, Famous performed well in 2023. The structural changes we’ve made across the business have enabled the Famous segment to maintain operating earnings and operating margin well above pre-pandemic levels, and we expect this to continue. Looking ahead, we believe Famous Footwear is exceptionally well-positioned to compete and solidify its leadership position in the family channel. So, before I hand it over to Jack to walk through our financials in more detail, I would like to highlight a few key focus areas that will enable us to achieve our long-term strategic operating initiatives and financial targets.

First, we are focused on expanding our direct-to-consumer business and expect our own e-commerce business to continue to outperform. We have launched loyalty programs across several of our Lead Brands that will allow us to engage more directly with our consumers and capture more share of wallet. We are utilizing our marketing and analytics capabilities to engage consumers efficiently and profitably. Second, we will continue to focus on our enhanced SPEED programs to read and react in real time. During 2023, 20% of our Brand Portfolio receipts came through SPEED. And we expect that penetration to grow well above 20% moving forward. Now more than ever, our brands are positioned to capitalize on trend, whether the trend is casual, dress or sneaker driven.

Our SPEED programs create a virtuous circle, aligning inventory with consumer demand to drive sales productivity and expand gross margin. Third, we believe Famous is well positioned to return to growth and drive greater market share in the Family Channel. This year, we will build on our leadership position in Kids, continue to focus on evolving our FLAIR store format, offer an elevated and curated assortment of key in-demand brands for the entire family, ensuring a more advantageous mix of athletic and fashion, and leverage the Consumer Data Platform, or CDP, to connect with and drive an even greater level of engagement with consumers through personalized communication and localized assortments. Fourth, as we outlined at our Investor Day, international is a significant growth area for Caleres.

In the fourth quarter, we hired Erica Mackoul as Senior Vice President of International to focus more intensely on that effort. In 2024, we will continue to build the Sam Edelman business in China with 45 new stores. Naturalizer will re-enter China with its newly-created global flagship store design with 10 new stores in the fall of 2024 as well as a digital relaunch. This is just the beginning. International is a big growth opportunity for Caleres. And finally, we are investing to fuel growth. In 2024, we will make outsized investments in international expansion, consumer experience, both in-store and online and across our marketing platform. These investments are an accelerant to unlock additional growth opportunities for the future. At the same time, we will remain disciplined and rigorous in managing our expense level to drive strong financial performance and shareholder value.

And with that, I will now hand it over to Jack for a more detailed view of our financial performance and outlook. Jack?

Jack Calandra: Thanks, Jay, and good morning, everyone. During today’s call, I’ll provide additional details on our fourth quarter and full year 2023 performance, update you on our capital allocation activities and plans, and share our outlook for 2024. Today’s comparisons will include the 14th week for Q4 and the 53rd week for the full year, unless otherwise indicated. We’ve included a table in the release outlining the sales impact of the extra week for each segment and for total company. As a reminder, my comments will be on an adjusted basis. Please see today’s press release for a reconciliation of adjusted results. Before I turn to the adjusted results, I wanted to give you some detail on the factors leading to the large one-time item included in our GAAP results.

Our GAAP results include a release of deferred tax valuation allowances of $0.76 in the fourth quarter and $0.75 for the year, which had primarily been established in 2020 after incurring a significant pre-tax loss associated with the pandemic impact to the business. As a result of our strong earnings performance in 2021, 2022, and 2023, we are no longer in a cumulative three-year loss position and we’re able to release most of these valuation allowances. Additionally, the adjusted results include a benefit of $0.05 in Q4 and $0.13 for the full year from our cost reduction initiatives. Now, turning to sales. Fourth quarter sales were $697 million, up slightly to last year. As Jay mentioned, this performance was driven by a 4.5% increase in Brand Portfolio.

Famous Footwear sales were down 1.5%, slightly better than our initial expectations. Comparable sales were down 5.9%. Consolidated annual sales were $2.82 billion, in line with our expectations, and down 5.1% versus fiscal 2022. Fourth quarter consolidated gross margin was 43.9%, a 348 basis point increase versus last year, and a record for the third — for the fourth quarter. Brand Portfolio’s fourth quarter gross margin was 42.6%, a 660 basis point increase versus last year. Due to lower freight costs, higher initial margins, and fewer markdowns and allowances. Famous Footwear’s fourth quarter gross margin was 42.9%, a 54 basis point improvement versus last year. For fiscal 2023, consolidated gross margin was 44.8%, 154 basis points above last year, reflecting a 537 basis point increase at Brand Portfolio and a 156 basis point decline at Famous.

SG&A expense for the fourth quarter was $273 million, or 39.1% of sales. Annual SG&A expense as a percent of sales was 37.7%. Annual SG&A expense was $5 million lower than 2022 despite absorbing an extra week, reflecting our expense management initiatives and lower incentive compensation costs. Fourth quarter operating earnings were $33 million and operating margin was 4.7%. Operating margin was 11.9% at Brand Portfolio and 4.9% at Famous. Annual operating earnings were $201 million, or 7.1% of sales. It’s worth noting that this consolidated annual operating margin is 270 basis points higher than pre-pandemic levels and was achieved while navigating consumer demand headwinds at Famous. Brand Portfolio achieved a record annual operating margin of 11.7%, a 316 basis point improvement versus last year.

Famous delivered a 7.8% operating margin, maintaining a margin level above pre-pandemic averages. Fourth quarter net interest expense was $4 million, down about $1 million from last year. And annual net interest expense was $19 million. Fourth quarter earnings per diluted share were $0.86, a 32% improvement versus last year. And annual earnings per diluted share were $4.18, marking our third consecutive year of EPS above our $4 baseline. EBITDA for the trailing 12 months was $260 million, or 9.2% of sales. Inventory at year-end was $541 million, down 6.8% versus last year, primarily in Brand Portfolio, reflecting a more normalized supply chain and disciplined inventory management across the business. By segment, inventory at Famous was up 2.5% versus last year, but down 4% when adjusted for the 53rd week.

At Brand Portfolio, inventory was down 13.6% versus last year. We feel good about the amount and composition of inventory with aged inventory down in both businesses in dollars and as a percent of total. Regarding cash flow from operations, we generated $200 million during the year and deployed cash for strategic investments in the business, paid our quarterly dividend, repurchased shares to offset dilution, and lowered borrowings on our revolver. Specifically, during the year, we spent $50 million on capital expenditures, $10 million on our quarterly dividend, and $17 million on share repurchases. And with a $40 million paydown in Q4, borrowings are more than $125 million below fiscal year-end 2022. Debt-to-trailing-12-month-EBITDA was 0.7 times.

Looking ahead, our capital allocation priorities remain consistent with what we’ve communicated previously. First, invest for organic growth, focusing on our Lead Brands and key capabilities. Second, maintain the dividend. Third, given still elevated interest rates, we will continue to focus on reducing debt in the near term. As we said in Investor Day, by 2026, we expect borrowings to be less than $100 million and less than 0.5 turn of EBITDA. Fourth, share repurchases. Given our debt reduction progress and expectation for free cash flow in 2024, we have the opportunity to both reduce leverage and buy back shares. We will evaluate these alternatives in light of business performance and market conditions as we proceed through the year. We had 5.6 million shares remaining under our current Board authorization at year-end.

Now, turning to our outlook. As we mentioned when we outlined our three-year plan last October, we don’t expect our growth to be linear, and embedded in that outlook was more modest growth in year one. In addition, our plan assumed that the overall footwear market would grow at 1% in 2024. Circana now expects a decline of 1%. Including this adjustment, as well as balancing the strong momentum in our Brand Portfolio against anticipated headwinds, like inflationary pressures and higher freight costs, for 2024, we expect sales to be flat to up 2%, which includes the impact of the 53rd week in 2023. Excluding the 53rd week, we expect sales to be up 1% to 3%, and earnings per diluted share of $4.30 to $4.60. We anticipate earnings to be up more in the first half than in the second half.

However, due to the timing of expenditures, including marketing for the Sam Edelman campaign and expense for the common platform implementation, we expect EPS down in Q1 and up in Q2. Additionally, we are providing guidance on the following metrics for the full year. Consolidated operating margin of 7.3% to 7.5%, an effective tax rate of about 24%, and capital expenditures of $60 million to $70 million. We are also providing the following guidance for Q1. We expect consolidated net sales to be flat to up 1%, and earnings per diluted share in line with Q4 2023 on an adjusted basis. With that, I’d like to turn the call over to the operator for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Laura Champine with Loop Capital Markets. Please proceed.

Laura Champine: Thanks for taking my question. I wanted a little bit more about what’s behind your expectation that the footwear industry will decline this year. And maybe if we could start with where you think last year likely fell out as an industry knowing that it’s fragmented and then what’s behind the expectation that we’ll have another rough year this year?

Jack Calandra: Yeah, Laura, this is Jack. Thank you for your question. So, we get, as part of our planning process each year, the expectations from Circana. And what they’re projecting is the market to be down about 1%, with units down a little bit more than that and some favorability on the AUR side. And then, when we look at it by segment, it looks like fashion is expected to be the weakest with sport, leisure and performance stronger than that. And so, we look at that and we apply those categories and those growth rates to our portfolio to come up with what we think it would look like for us to basically hold market share in 2024. And as you know, we’ve been very successful in growing market share, and this plan assumes that we will grow the market share in both Famous and in Brand Portfolio.

Laura Champine: Got it, Thank you.

Operator: Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Dana Telsey: Hi. Good morning, everyone. As you think about the cadence of the year, first quarter, second quarter, how are you thinking about Brand Portfolio and Famous? And did you notice any deterioration or stabilization through the core Famous Footwear consumer in the fourth quarter? And what are you seeing in order trends for Brand Portfolio from the wholesale channel? Thank you.

Jay Schmidt: Hi, Dana. It’s Jay. I think, overall, in just thinking about the consumer, we are seeing, I think, the demand environment remains mixed, as I would say, as we leave fourth quarter and into first quarter. We see our Brand Portfolio consumer continually trend-driven and responding very well to newness right now, which is driving demand. And at our Famous, consumer during fourth quarter and into early first, we did see the market environment remains choppy. Our target consumer, the millennial family, continues to prioritize kids. And — however, I will say that we’re seeing some very strong reaction from both segments on really these highly demanded items. So that’s really our goal is to continue to get in front of them and go there.

We are seeing a slightly better trend as we move from February into March. And that gives us some sign for optimism, but obviously very early on in the quarter. And then finally, in terms of order trends, they’re very consistent to where they’ve been in previous quarters right now. As you know, our business is highly demand driven and dynamic on our Brand Portfolio and we continue to react in real time with our SPEED program, our dropship program and also our replenishment program to continue to meet that consumer demand.

Jack Calandra: And then, Dana, I’ll just add a couple things on the cadence for Famous. So, just in terms of our overall guidance, we are assuming that Famous will be sort of a modest negative to modest positive comp in our guidance range, low and high. We are anticipating the first half to be stronger than the second half. And a lot of that is just due to the calendar shifts. So, as you know, with the calendar shift, the first week of August, which is a critical back-to-school week for Famous is now falling into fiscal Q2 versus fiscal Q3 last year. And then, obviously, we have the impact of the 53rd week on Q4 this year. So, there’s just some shifts with those — with the calendar that’s moving numbers between the quarters. And then, I would just say, look, we expect the promotional activity in Famous to be broadly in line with 2023. And with that would come sort of a flattish gross margin.

Dana Telsey: Got it. And then, if you unpack SG&A, Jack, anything that we should be thinking about as we go through the year, any quarterly ups or downs in terms of the SG&A impact? And then, Jay, as you think about your own brands in the Famous Footwear store, where are you along that path, and what could that add to the margin opportunity there? Thank you.

Jack Calandra: Sure, Dana. I’ll start with the SG&A. So, part of the reason we’re guiding to earnings down in Q1 is there are some investments we’re making in SG&A in Q1, particularly the Sam Edelman marketing campaign, and then expenses related to our common platform implementation, the first phase of which goes live at the end of May. And so, there are some expenses associated with that. And then, as we go through the year, obviously Q4, we don’t have that 53rd week of expense in Q4. But what I will say is that we talked about last year taking some actions on cost, and I’m pleased to say that we delivered those cost reductions both in 2023 and those are built into our 2024 plan.

Jay Schmidt: Okay. And then, as far as our own brands, we’re seeing some really nice results coming out of fourth quarter and then moving into first quarter, particularly with our Dr. Scholl’s brand at Famous, our Naturalizer brand, and we’re pleased with the early launch of Sam and Libby. And so, we feel that we are well on our track of how we led to our three-year goal there. And we are planning those brands up significantly. And obviously, Jack, the profit on vertical brands is significantly higher than where we go as a company, right?

Jack Calandra: That’s correct.

Jay Schmidt: So, we’re very excited for what we’re seeing there. And again, that was a concerted effort and we look like we’re well on track.

Dana Telsey: Thank you.

Operator: Our next question is from Mitch Kummetz with Seaport Research. Please proceed.