Caleres Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 1, 2023

There are 8 speakers on the call.

Operator

Good morning. Welcome to Caleres First Quarter 2023 Earnings Conference Call. My name is Sherry, and I will be your conference coordinator. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

As a reminder, this conference is being recorded. At this time, I will turn the conference over to Logan Bonacorsi, Vice President, Investor Relations. Please go ahead.

Speaker 1

Good morning. Thank you for joining our Q1 2023 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation 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 ks and other filings with the U. S.

Speaker 1

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 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 and our presentation on the Investors section of our website.

Speaker 1

The company undertakes no obligation to update any information discussed in this call at any time. Joining me on the call today are Jay Schmitt, President and CEO and Jack Calandra, Senior Vice President and CFO. 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?

Speaker 2

Thank you, Logan, and good morning, everyone. During the Q1, we leveraged our diversified structure to deliver earnings per share at the top end of our guidance range. Profit contribution from the brand portfolio more than offset the Challenging operating environment at Famous Footwear. As we said last quarter, the structural Changes we've implemented over the last several years have resulted in a much more nimble, productive and profitable organization. This quarter's performance underscores the value of the Caleres platform, the strength of our omni channel capabilities And the power of our carefully curated portfolio.

Speaker 2

We believe this structure enables us to be successful in a variety of different operating environments. Now let's turn to Key highlights from Q1 2023. We delivered earnings per share of $0.97 driven by a record profit in our brand portfolio. We sustained total Caleres market share of more than 6 We grew market share in the brand portfolio with many of our brands improving their rankings And we increased Famous Footwear's market share in shoe chains. We managed our inventory levels very well, Ending the period approximately 13% below the prior year period and down 3.6% compared to fiscal year end 2022.

Speaker 2

We continue to drive investment in strategic areas that are We maintained our long standing quarterly dividend And we prioritize debt reduction utilizing our free cash flow to reduce the borrowings under our asset base revolving credit facility by $16,000,000 from fiscal end 2022. As we've communicated, After funding our dividend, we believe that continued debt reduction is the top priority for cash flow near term in this uncertain macroeconomic environment. Now let's move to our Q1 operating results. Overall, consolidated sales declined 9.8%, falling short of our initial expectations. While some of this decline was expected, Famous Footwear was particularly hard hit by the softer consumer demand within the shoe chain channel.

Speaker 2

Fortunately, the weaker performance by Famous was offset by the outsized margin performance of the brand portfolio. As a result, we achieved solid first quarter operating earnings and generated strong Consolidated gross margins of nearly 46%, which represented a record for the period. And we delivered $64,000,000 in EBITDA. In addition, beginning in the Q1, We initiated cost cutting and profit improvement initiatives across the organization. In total, we expect these measures to deliver approximately $20,000,000 of SG and A savings this year, plus an additional $10,000,000 of better than expected freight costs.

Speaker 2

We took these actions While still preserving investments in areas of strategic priority, namely consumer experience, analytics And marketing that will accelerate our long term growth vectors. Now let's turn to our operating segments, Starting with the brand portfolio, which led our financial performance in the quarter. We delivered sales modestly ahead of our expectations and second only to the Q1 of 2022, Which as you will remember included $50,000,000 of wholesale inventory restock. Despite this difficult compare, a number of our brands, including lead brands Sam Edelman and Allen Edmonds Delivered quarterly sales improvements. The consumer was motivated by newness and gravitated toward fashion footwear, Especially casual, new dress, casual sandals and retro inspired white sneakers.

Speaker 2

We capitalize on all these trends by leaning into our edit to win initiative. We chase product and utilized our speed programs And supply chain network to react aggressively in season to maximize top selling items. We are pleased that even with the expected sales decline, the brand portfolio delivered record first quarter operating earnings of nearly $43,000,000 and achieved a 13% operating margin. This performance was driven by a 6 11 basis point improvement in gross margins due to higher Initial margins and lower freight costs. We believe these results are a direct reflection Of the progress we've made elevating product design, sharpening brand messaging and maximizing our inventory investment.

Speaker 2

Also during the quarter, we capitalized on strong product trends and our capabilities to drive an approximately 8% Increase in our D2C business compared to the Q1 of 2022. This increase includes year over year improvements from our overall owned e commerce, drop ship and owned brick and mortar businesses. Going forward, we will provide color on the performance of our lead brands Sam Edelman, Naturalizer, Allen Edmonds and Vionic on each earnings call. We want the investment community to understand what's driving our business. We believe each of these brands has significant growth ahead and we are strategically investing to power that growth.

Speaker 2

These 4 brands in total represented more than half of the brand portfolio and 27% of our total Caleres revenue in the Q1. We outperformed in own channels across all lead brands in the quarter With strong positive comps driven by increased traffic. Trends in flats, loafers, new dress shoes and fashion sneakers Drove business at both Sam Edelman and Naturalizer, where we delivered an improvement of 25% And 11% on our own websites, respectively. Allen Edmonds delivered a strong first Quarter performance with sales up 11% versus last year. This improvement was led by robust Consumer demand for loafers and slip ons and positive response to its new offerings.

Speaker 2

AE's efforts to focus on its consumer Also yielded encouraging results from the relaunched loyalty program known as the Collectors. In fact, We've seen our total collectors grow since the reintroduction of the program last September and the average spend from AE Collectors is 20% higher than non collectors. And finally, we successfully launched a new brand direction for Vionic, Combining a Northern California aesthetic with our unique scientific solutioning. This new branding, Which went live on our website and in catalog during the quarter spurred an immediate positive reaction on vionixshoes.com With casual sandals and dress delivering the largest year over year growth. We are encouraged by the early consumer response to its new offerings.

Speaker 2

In addition, we saw continued strength in our portfolio brands, including LifeStride, Frank Osarto and Doctor. Scholes. These are important growing assets that serve key consumer segments not currently served by our lead brands. We are leveraging our OneCelaris capabilities across our portfolio to ensure All our assets are positioned to succeed. As we progress through the rest of the year, The teams will remain nimble, amplify newness and react quickly to maintain momentum for the balance of the year.

Speaker 2

Longer term, we are laser focused on building upon the momentum we've seen in the recent quarter And have ambitious growth plans for all of our lead brands. We expect that given the strength of our brands, The diversity of the portfolio, our flexible and agile operating model and our improved margin performance That the BP will continue to contribute substantially to the company's operating performance. Turning now to Famous Footwear. After several successive quarters of strength, Famous Footwear's contribution declined markedly as it navigated a challenging macroeconomic backdrop and decelerating spending, particularly in the month of March among its target consumer. The challenging backdrop was exacerbated by a late breaking sandal season.

Speaker 2

Even in this difficult environment, Famous outperformed its competitive set and increased market share in shoe chains. Our kids business, a key differentiator for Famous, was a bright spot in the quarter. This important and growing category Once again outpaced the rest of our business as families prioritize purchases of kids footwear. In total, Famous generated $17,000,000 in operating earnings. And even with the weakness in shoe chains, we expect Famous To deliver a significantly stronger earnings contribution in the Q2 as consumer activity accelerates due to typical seasonal drivers, including warm weather and back to school beginning in mid July.

Speaker 2

To that end, we have taken a number of As you will remember, we delivered our best ever back to school in 2022 despite a less than ideal inventory position. This year, we have a better in stock position from the beginning on key trending brands and styles That we've reacted to due to our well managed inventory position. We have named a new kids' merchant to closely maximize all opportunities and a new Head of Stores to drive our strategy at point of sale. We have planned a high impact marketing campaign across all consumer touch points, but especially aimed at the millennial family. And our investments in technology, specifically launching a CDP during the quarter, should better target our messaging and improve our conversion Clearly, there's a lot to be excited about during back to school at Famous.

Speaker 2

In summary, we continue to have great confidence in the long term outlook for Famous. The same strength That delivered stellar results in recent years are still very much in place and in fact continue to expand. As we move forward, we will be taking immediate actions across our product assortment, our team, our marketing approach, Our digital strategy in an effort to maximize our earnings potential this year. In parallel, we will continue to leverage Our leadership position with the family, our leading assortments of national brands, Our nationwide retail footprint mostly off mall and consistent consumer experience in stores and online to accelerate all opportunities for growth at Famous. So overall, as we look forward to the balance of the year, we are optimistic about the strength of our brand portfolio segment and its ability to deliver a much stronger earnings contribution in 2023 and beyond.

Speaker 2

And while we have work to do at Famous, We believe that the relative strength in kids, its inherent competitive advantages and its avenues for growth Set us up to improve as the year progresses. Before I hand it over to Jack To walk through our financials in more detail, I'd like to highlight and remind you of the power of the Caleres model. We believe the structural changes we've made in recent years coupled with our diversified structure and Strong financial contribution from both operating segments will enable us to deliver annual earnings of more than $4 per share on a consistent basis, while generating strong levels of free cash flow and creating long term value for our shareholders. And with that, I will now hand it over to Jack for a more detailed view of our financials.

Speaker 3

Jack? Thanks, Jay, and good morning, everyone. In this challenging market environment, we achieved better than expected gross margin and profitability and brand portfolio and maintain strong financial discipline across the company. This resulted in earnings per share at the upper end of our guidance and healthy cash flow, which enabled us to reduce debt while still investing in our critical growth initiatives. In today's call, I'll provide additional details on our 1st quarter performance, discuss actions we are taking on expenses in light of the more difficult operating conditions at Famous, Update you on our capital allocation plan and priorities and share our outlook for the Q2 and full year fiscal 2023.

Speaker 3

My comments on our outlook will be on an adjusted basis. Please see today's press release for a reconciliation of adjusted results. Starting with Q1, consolidated sales were $663,000,000 a 9.8% decrease versus last year. Famous sales were down 9.2% as its more moderate income customer continue to grapple with inflation and higher interest rates. Comparable sales were down 8.5%.

Speaker 3

Brand portfolio sales were 326,000,000 Down 11% to last year and in line with our expectations. You will remember that brand portfolio was lapping the restocking at wholesale accounts That was highlighted in last quarter's call and factored into our guidance. Even with this difficult compare, This sales volume was the 2nd highest first quarter amount in Brand Portfolio's history. Despite the sales decline, consolidated gross margin increased 120 basis points to 45.7%, Reflecting a significant increase in brand portfolio gross margin and a decrease in Famous gross margin. Brand portfolio gross margin was 44.2%, a more than 600 basis point increase versus last year Due to higher initial margins and lower ocean and air freight costs.

Speaker 3

Famous gross margin was 45.6%, A 360 basis point decline versus last year. This decline reflects the softer consumer demand And a more normalized level of clearance pricing and activity given last year's clean inventory position. SG and A expense for the quarter was $253,000,000 or 38.2 percent of sales. SG and A expense was $7,700,000 below last year as a result of lower variable expenses and incentive compensation costs. Operating earnings were $50,000,000 and operating margin was 7.5%.

Speaker 3

Operating margin was 13.1 percent at Brand Portfolio and 4.9 percent at Famous. Net interest expense was $5,600,000 We're about $3,000,000 above last year given a higher borrowing rate. The weighted average interest rate in Q1 this year was 6.2% Versus 2.6% last year. Diluted earnings per share were $0.97 at the high end of our previous guidance. EBITDA for the quarter was $64,000,000 or 9.6 percent of sales.

Speaker 3

Turning now to the balance sheet and cash flow. We ended the Q1 with $292,000,000 in borrowings on our revolver and no long term debt. Inventory at the end of Q1 was $560,000,000 down 13.1% versus last year, Reflecting reductions in both in transit and on hand inventory. By segment, inventory at Famous was down 1%, Primarily a result of supply chain constraints last year, which limited the inventory level. Notably, Famous' inventory was $51,000,000 or 13% below Q1 2019.

Speaker 3

At Brand Portfolio, inventory was down 26% versus last year and up approximately 15% versus the Q1 of In general, we feel good about the quantity and quality of inventory in both segments. Regarding cash flow from operations, we generated $38,000,000 during the quarter and deployed cash for strategic investments in the business, Paid our quarterly dividend and reduced outstanding borrowings. Specifically, we spent $6,500,000 on capital expenditures, $2,500,000 on our quarterly dividend $16,000,000 to reduce borrowings. Given the ongoing macroeconomic uncertainty, We continue to believe that the best use of free cash flow after maintaining the dividend is to reduce our revolver borrowings to below 1 times on a debt EBITDA basis and to increase overall liquidity. On a trailing 12 month basis, we ended the quarter with a debt to EBITDA ratio of 1.1 times and we anticipate getting below 1 times in the 3rd quarter.

Speaker 3

That said, we have 6,400,000 shares remaining under our current Board repurchase authorization and we'll continue to Now turning to our outlook. Despite a more challenging macro environment, we continue to expect full year earnings per share of $4.10 to $4.30 As we anticipate offsetting top line softness in Famous with cost savings and gross margin and SG and A. Additional full year guidance metrics are as follows. We now expect consolidated sales to be down 3% to 5% Versus our original guidance of flat to up 2%, including the impact of the 53rd week. We now expect consolidated operating margin of 7.3% to 7.5% versus our original guidance of 7.1% to 7.3%.

Speaker 3

The improved operating margin outlook is being driven by better than expected ocean and domestic transportation costs And specific actions we are taking on overhead expenses, including eliminating open corporate positions, Reducing non merchandise procurement costs, realizing additional brand portfolio synergies And lowering depreciation expense. The specific actions we are taking on cost will generate about $20,000,000 of in year savings And $30,000,000 to $35,000,000 on an annualized basis. For the in year savings, dollars 3,000,000 was realized in Q1, $5,000,000 will be realized in Q2 and the remaining $12,000,000 in the second half. We anticipate a one time cash charge About $10,000,000 of additional freight savings versus our original guidance. Dollars 3,000,000 was realized in Q1 And we expect the remaining $7,000,000 in the second half.

Speaker 3

We now expect net interest expense of $17,000,000 to 19,000,000 Versus our original guidance of $18,000,000 to $20,000,000 We continue to expect an effective tax rate of about 25%. We continue to expect shares outstanding of approximately 34,300,000. This assumes share repurchases to offset dilution of any stock based Compensation, but no additional share repurchases. And we now expect capital expenditures of $55,000,000 to $65,000,000 Versus our original guidance of $60,000,000 to $70,000,000 In addition, we are providing the following guidance for the 2nd quarter. We expect net sales to be down 4% to 5% and earnings per share of $0.87 to $0.92 Before we take questions, I will now turn the call back over to Jay.

Speaker 2

Thanks, Jack. In closing, we are pleased to have delivered EPS at the upper end of our range for the Q1 and maintain EPS guidance for the year. These results demonstrate the power of our portfolio, The strength of our company and the dedication of our team. We are committed to disciplined and nimble management as we continue to invest in capabilities that drive growth. I am confident that the commitment of our incredibly talented team Coupled with our strategic approach will help us deliver strong results for the balance of the year.

Speaker 2

And with that, I'd like to turn the call over to the operator for questions. Operator?

Operator

Thank you. Our first question is from Abi Zviennik with Piper Sandler. Please proceed.

Speaker 4

Great. Thanks so much for taking my question. I have 2. So first, is there any color you can give on the guidance for both the Q2 and fiscal year between your I guess, specific on the brand portfolio, do you expect that you will continue to face How compares with Phil in the second quarter or was that mainly just the first quarter dynamic?

Speaker 2

I think Just in terms of the brand portfolio, we do believe that we will have lapped most of that by the time we get into the second half. And then I'll let Jack fill in on the color by segment.

Speaker 3

Yes, Abby, thanks for your questions. So we don't give specific guidance by segment, but to be Let me give you a little bit of color. So, we are certainly expecting Famous' sales to improve versus The Q1, we are tracking to our forecast quarter to date. So we feel good about that. And then I would say in the back half, Really our guidance assumes anywhere for Famous, anywhere from a deterioration of what we expect in Q2 to an improvement in what we expect in Q2.

Speaker 3

But in both cases, we still are expecting negative sales growth for Famous for the year. In BP and Jay will give a little bit more color on some of the initiatives that support this. We are expecting BP to show some improvement in the back half. Again, part of that is no longer lapping this Wholesale restock that we talked about as well as some of the initiatives we've got and feel really good about on our lead brands.

Speaker 2

And I would say, Abby, that includes obviously the investments of the lead brands we talked about, Sam Edelman, Naturalizer, Allen Edmonds and Vionic. And then specifically as we really are modeling the market right now and product opportunities, we see the whole fashion sneaker Part of our business growing exponentially and we're able to get back into position on that in late second quarter and think that that will really help us drive through Really further showing this power of our company, our sourcing model and our portfolio And all of those lead brands fit really well and will be maximizing that category as well too.

Speaker 5

Great.

Speaker 4

That's really helpful. And then just your inventory management has been really strong, I mean, especially compared to peers in the space that have said they'll need to continue to be promotional. So You said you feel good about the quality and quantity of your inventory, but how do the peers promotional strategy impact your promotional strategy through the remainder of the year? Thanks.

Speaker 2

Well, I think we believe that obviously we're going to model it very closely and keeping control of that and we'll be watching the competitive Landscape all the way through, but continually our model on the brand side is not really managing those Brick and mortar inventory is really closely driving our digital business. And it's famous we kind of look at it the same way where we're really maximizing our in store opportunities and giving them And really watching the quality of that inventory and I think that's going to be the key thing that helps us manage it as we go forward.

Speaker 3

Yes. Navi, just to add to Jay's comment, I mean, we believe that our consolidated inventories will continue to be down versus last year In Q2 and Q3. So we will be making sure we continue to manage that tightly and don't have to take any actions to clear our own inventory.

Speaker 4

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question is from Laura Champine with Loop Capital. Please proceed.

Speaker 6

Thanks for taking my question. I'd just like a little more color on what the investments are that you're making in those key Brand Portfolio Brands, are those marketing investments? Are they infrastructure? What do you need to do there?

Speaker 2

Well, they're both marketing and in terms of product more category expansion within those brands that we see will continue to drive. And then they also are feeding off of some growth vectors as we develop different points of distribution and different customers. Well, we continue to develop our own digital business and continue to drive that. So it is a combination of things. It's not just one thing, but we do feel that We'll continue to get us there and maximize through.

Speaker 6

Got it. Thank you.

Operator

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

Speaker 5

Yes. Thanks for taking my questions. I've got a few. Jay, starting with Famous in the quarter, you mentioned it was worse than Can you speak to why that was? Was weather worse than you were planning?

Speaker 5

Tax refunds had maybe a bigger impact And you thought or was it just that moderate income consumer ended up just being softer than what you thought going in or maybe there Some other reason.

Speaker 2

Yes. Actually a little bit of all the things you mentioned, Mitch, I think that was accurate. First of all, coming into the 1st early 2 months, we did see weather as a factor. And that March was our worst month in Famous and we saw a nice improvement on that in April. So I have I believe the weather had something to do with it.

Speaker 2

But in general, we know that there are some headwinds coming out there and People are actually really focusing their purchases on the key items they want. And so that's what we've done is Really come back on Famous and really improved our inventory position and continue to fuel the things that we can control, which is mostly The items that they want in all the colors and sizes that they need. So that would be really Our strength for that, but we do think it's a little bit of all of what you described. As usual, we focus on Rolling what we can control and then, and that's really where we put our efforts.

Speaker 5

Okay. And so April was better than March. Has that continued into May? And as you've guided for 2Q, particularly as you're thinking about the Famous Is the uptick from Q1 based on kind of what your trends that you're seeing quarter to date? Or is it more About optimism around back to school or again maybe some combination of the 2?

Speaker 2

I think it's a little bit of combination of 2. As I said, April was Better than March for us. So we think that that's a little closer to where, our modeling comes through. And then with the actions that we've taken To really put ourselves in a better place going into back to school, we do think that those two things in combination will do it. As the consumer, we'll continue to prioritize, we believe purchases for the family, particularly their kids.

Speaker 5

Okay. And then on the profitability, so Famous Was in Q1 was down year over year, but better than 2019 and BP was I think better for So how are you thinking about where do you think those could sort of land for the year? I mean, I assume you expect Famous margins EBIT margin to be down. Do you still expect it to be up over 19 levels? And then BP as well.

Speaker 5

Is BP margin going to be up year over year do you think?

Speaker 2

Well, we do Believe that the BP margin will continue to be up based on a lot of things working in our favor there. And it's really about the initial margins that we've been able to do. Our mix is much better. And obviously, with continued Savings on the freight side, all three of those things will help us, I think there too. And then we had some other pieces there.

Speaker 2

I'll let Jack jump in on the Famous piece.

Speaker 3

Yes. Mitch, on the Famous piece, we posted 11.5% operating margin last year in that business. We had signaled that that was going Come down this year. I think just given the softer expectations for sales, we likely will not hit That sort of 10% operating margin target this year, but we still feel like that's the appropriate target long term. And that's why we're making these changes on the cost Structure in Famous, but also in other parts of the business to provide sort of that fuel to get that margin back at 10%.

Speaker 3

Okay.

Speaker 5

All right. Thanks guys. Good luck.

Speaker 2

Thank you. Thank you.

Operator

Our final question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Speaker 7

Good morning, everyone. As you think about the comp store sales, particularly at Famous Footwear, what were the complexion to the comps? What you saw in ticket or traffic? How did that range and is the uptick that you've seen now, are we seeing a meaningful improvement? And then on the brand portfolio with the margin improvement, What are you seeing in terms of wholesale orders and also AUR?

Speaker 7

Thank you.

Speaker 2

Okay. As usual, Dana, I'll start with the last part of your question and move my way backwards. But we did see, 1st of all, AUR was actually up 4. So it is it's up So that means a really nice hold as we came through and really came through that 22 space where we really do feel Our strategy there has worked really nicely. In terms of our wholesale inventory Or wholesale order book, I should say.

Speaker 2

It's very much in line with what we've seen quarter to quarter. Obviously, there's more reorders coming through, more Drop ship and everything else versus last year when people were buying quite a bit, but we see our order book as we feel pretty confident that it really meets where our Guidance has been and does just reflect a lot more of it's going to be more dynamic, I would say, going through there. And you know our model really pivots to accomplish that. So then in Q1 overall, we did The kind of a mix on Famous Footwear pointing to the quarter. Our conversion was Pretty good, but our traffic in brick and mortar was down for the quarter.

Speaker 2

And then we had A little bit of a different dynamic in Q1 on the e comm side, but where that was conversion was actually down, Our traffic was roughly flat. So I would say overall, we just saw a much slower start to the whole season and obviously we're working on things to improve it.

Speaker 7

Got it. And then just unpacking the gross margin for a second and operating margin. Freight benefits this year, What are you seeing for that? And is there any other puts and takes as we go through the back half of the year whether it's on raw materials or any other commodity costs we should be

Speaker 3

Yes, Dana, it's Jack. Thanks for the question. No, I would say, in terms of the freight benefit, We're actually expecting more freight benefit in the back half, about 60% of the freight benefit is coming in through the back half Versus about 40% in the first half. And that includes both what we had planned for and then this incremental $10,000,000 that we talked about. So that's obviously a nice tailwind in terms of the gross margin there.

Speaker 7

Thank you.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Okay. Well, thank you everyone for joining us. I just want to close by again thanking our great team at Caleres, couldn't I can't push any of this without them. And also thanking both our vendor partners at Famous and our retail partners out there. We look forward to seeing many of them in market and many of you as well.

Speaker 2

So thank you again.

Operator

This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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