Caleres (CAL) Q3 2024 earnings call transcript

Caleres Inc. Third Quarter 2024 Earnings Call December 5, 2024 ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 C O R P O R A T E P A R T I C I P A N T S Jay Schmidt, President, Chief Executive Officer Jack Calandra, Senior Vice President, Chief Financial Officer Liz Dunn, Senior Vice President, Strategic Communications and Corporate Development C O N F E R E N C E C A L L P A R T I C I P A N T S Chandana Madaka, Keybanc Capital Markets Laura Champine, Loop Capital Mitch Kummetz, Seaport Research Dana Telsey, Telsey Advisory Group P R E S E N T A T I O N Operator Good morning and welcome to the Caleres Third Quarter 2024 Earnings Conf erence Call.

At this time, I will turn the call over to Liz Dunn, Senior Vice President of Strategic Communications and Corporate Development. Please go ahead. Liz Dunn Thank you, Darryl. Good morning and thank you f or joining our third quarter 2024 earnings call and webcast. A press release with detailed f inancial tables as well as our quarterly slide presentation are available at caleres. com. Please be aware today’s discussion contains forward -looking statements which are subject to several risks and uncertainties. Actual results may dif f er materially due to various risk f actors, including those disclosed in the Company’s Form 10-K and other f ilings with the U. S. Securities and Exchange Commission. Please ref er to today’s press release and our SEC f ilings f or more inf ormation on risk f actors and other f actors which could impact f orward-looking statements.

Copies of these reports are available online. ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 In discussing our operating results, we will be providing and ref erring to certain non-GAAP f inancial measures. Additional details on these measures, as well as others f eatured in today’s earnings release and presentation, are available at caleres. com. The Company undertakes no obligation to update any inf ormation discussed in this call at any time. Joining me today are Jay Schmidt, President and CEO, and Jack Calandra, Senior Vice President and CFO.

Our call will begin with prepared remarks f ollowed by a Q&A session to address any questions you have. With that, I will turn the call over to Jay.

Jay Schmidt Thank you and good morning, everyone. As we reported earlier today, our third quarter saw progress toward our strategy, highlighted by the brand portf olio reporting growth, Famous Footwear delivering positive comp store sales, and both segments increasing market share. However, our earnings were clearly below our expectations . There were a number of challenges in the quarter that impacted our results . We saw sof t boot sales in both segments of our business, we had discrete issues with late receipts of trending athletic product at Famous Footwear, we had a credit issue associated with one customer in the brand portf olio that resulted in lower shipments, and f inally our China business has sof tened .

While this was not the result we wanted, there were several areas of strength on both sides of our business that leave us cautiously op timistic f or the f uture. Our brands and products are resonating with consumers . We are gaining market share in both segments of our business, and we remain conf ident in our growth strategies and long term vision. In total f or the third quarter, sales declined 2.8% year-over-year, and we reported adjusted earnings per share of $1.23. Now let’s turn to our operating segments. Brand portf olio sales increased approximately 1%. Our lead brands outperf ormed our portf olio brands with wholesale and owned dot-com both showing modest growth versus last year. We were encouraged to see a return to growth and pleased to report that the issues that we had last quarter related to our systems implementation did not impact this quarter.

Additionally, our brand portf olio gained market share according to Circana during the quarter, both in total and in women’s f ashion f ootwear. We continue to see robust demand f or new products with momentum in f ashion sneakers . In f act, sneakers and sport represented over 30% of retail selling f or the quarter. Slingbacks, Mary Janes and ballet f lats also perf ormed very well. Wholesale boot shipments, however, declined 5% versus last year, however at retail short boots were down 18% and tall shaf t boots were up slightly . Wide shaf t boots stood out with double- digit growth to last year. In the boot category, much like in the rest of our business, the consumer is prioritizing trend and newness over basics, and more broadly, brands with premium positioning outperf ormed.

From an inventory perspective, we had more current, less core and less aged inventory . In addition, our speed initiative drove about 30% of our sourcing in the quarter. Our lead brands, Sam Edelman, Allen Edmonds, Naturalizer and Vionic, represented more than half the brand portf olio sales and operating earnings in the quarter. Three of those f our brands saw growth and collectively lead brand growth exceeded that of the portf olio brands. The Sam Edelman brand saw strength in the quarter driven by positive response to f ashion newness, particularly in sneakers, f lats and tall shaf t boots . Sales in Sam Edelman retail stores exceeded ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call.

This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 expectations and retail sell-throughs with our wholesale accounts were up year-over-year. Sam introduced handbags under license in October, and we are encouraged by the positive early reaction.

Finally, we continue to believe Sam Edelman has a signif icant opportunity internationally . During the quarter, the brand launched in (inaudible) and John Lewis in the U. K. and unveiled the f irst global location f or Sam Edelman’s new store concept in Shanghai in October. The Allen Edmonds business was also driven by newness, particularly in new sneakers and dress loaf ers, while boots underperf ormed. We successf ully launched our new Allen Edmonds Reserve collection across all channels during the quarter, including an exclusive collection with Bergdorf Goodman. In our retail stores, we continue to see success with our Port Washington studio store concept and now have 11 of these prototypes with comp stores outperf orming the chain by a high single digit percentage .

Naturalizer returned to growth in Q3, led by its direct-to-consumer business. We saw increases in purchasing by Gen Z, millennials and higher household income consumers . Boot sales here were solid, driven by growth in expanded calf widths. Our f ocus on inclusivity is attracting new loyal consumers to the brand. Additionally, we also opened a new store in Beijing, re-launching the Naturalizer brand in Asia, and are in early innings of international expansion f or this brand . Vionic had solid trends at retail, particularly with Nordstrom, and saw continued outperf ormance in both its uptown casual business and the sport lif estyle category . However, the brand f aced challenges again with casual short boots. We continue to evolve and modernize the assortment while maintaining Vionic’s wearable wellbeing positioning.

As we continue to f uel innovation at Vionic, we expect to f urther expand the brand’s reach. Overall, the brand portf olio had a mixed quarter. Outperf ormance by our lead brands is encouraging and strong retail selling trends and market share gains across the portf olio will drive growth in the f uture.

Moving on to Famous Footwear, total sales declined 5% during the third quarter while comp sales increased 2.5%. Af ter a very strong back-to-school season, sales returned to the prior trend . Athletic was strong and positive across men’s, women’s and kids. Boots were down over 20% at Famous during the quarter, comprising most of the sales shortf all relative to expectations . At the same time, we saw an extended season f or sandal selling with strength f rom both Birkenstock and Reef . Once again, our strategically important kids category grew in the quarter, outpacing the total business . Our kids category has now outperf ormed the rest of the chain f or 15 consecutive quarters . Kids penetration of the total Famous business was 25% in the quarter, and we gained 1.3 points of kids market share in shoe chains, according to Circana data.

Overall, in the third quarter, Famous Footwear’s market share gained half a point in shoe chains, according to Circana data. We were also pleased with our perf ormance of our own brands at Famous . Penetration of our Caleres brands was once again up in the quarter with strong selling f or both Naturalizer and Blowf ish. Caleres brands continue to provide Famous with greater access to f ashion products, while at the enterprise level, vertical sales allowed us to capture higher gross margins . Our Famous dot-com business was strong in the quarter, posting an 8.3% year-over-year increase on a comp basis.

Finally, we continue to f ocus on enhancing the consumer experience at Famous . At the end of Q3, we had 32 Flare locations in total. We continue to experience a mid single-digit sales lif t versus the rest of the chain in our f all 2023 and spring 2024 Flare stores. Flare is successf ully attracting more elevated brands and products, and our Famous consumer is responding positively . We made a tactical decision to delay construction on additional remodels until the f irst quarter of 2025 to prevent lost holiday s ales. However, we will open one new Flare store in Boston in the f ourth quarter. ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call.

This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 Famous is well positioned on inventory heading into the holiday season, particularly in the key trending brands and styles. The strength of kids, our continued success with Flare, and our broad -based improvement in athletics are encouraging . We believe Famous’ inherent competitive advantage, namely its leadership position with the millennial f amily, especially kids, coupled with its clear avenues f or growth and support f rom the Caleres structure, positions the business to gain additional market share in shoe chains, generate robust levels of cash, and increase prof itability over the long term.

Looking f orward, we are now expecting lower sales and earnings than our previous guidance. While Jack will walk you through our updated assumptions in detail, I will provide some color on the f actors impacting our revised outlook. We are seeing several trends play out in our business that are negatively impacting our top line perf ormance in the near term. On the brand portf olio side, we expect boots to continue to trend below last year through the f ourth quarter. We plan to take aggressive action on core perf orming items to end the year in a clean position. We also expect demand in China to be more muted than previous expectations f or the balance of the year.

At Famous Footwear, we are outperf orming in our competitive set, but the ov erall environment in f amily f ootwear has been more challenged . Lastly, we incurred necessary investment this year to position our business f or the long term. We have restructured and reduced expense, but we do not want to set back long term growth plans by cutting too deeply.

Finally, I would also like to touch on two subjects, tarif fs and our long term plan. First on tarif f s, our sourcing and supply chain capabilities are well positioned to adapt and evolve to meet the changing environment . We have been working closely this year with our f actory partners to pivot our (audio interf erence) with additional tarif f s on (audio interf erence). Jack will discuss this with more detail on our sourcing plans shortly.

Second, on the subject of our long term f inancial targets, in October of 2023 we announced a plan to drive growth in sales, earnings and total shareholder return. While we still expect to return to more consistent growth in these metrics, we now expect it to take longer to achieve the specif ic EPS goals we laid out last October. This year has clearly been a setback f or us. Having said that, we believe we are on the right track with the right strategies f or the f uture. We look f orward to updating you on our 2025 expectations during our f ourth quarter call.

With that, I will now hand it over to Jack f or a more detailed view of our f inancial perf ormance and our outlook. Jack?

Jack Calandra Thanks Jay, and good morning, everyone. During today’s call, I’ll review our third quarter perf ormance and share our revised guidance f or the f ull year. Please note my comparisons to last year will be on an adjusted basis . Starting with Q3 results, sales were $741 million, down 2.8% . On a dollar basis, sales were down $21 million, which included an unf avorable calendar shif t of about $29 million at Famous. As Jay mentioned, weak seasonal demand in the boot category impacted results in both segments . Brand portf olio sales were up 0.7%, primarily driven by our lead brands. Owned dot-com sites were up 1%, drop ship improved f rom Q2 and was about f lat versus last year, and total wholesale saw a modest uptick .

Famous sales were down 4.8%. Comparable sales, which adjust f or the calendar shif t were up 2.5% . Strong results in athletic and kids of f set weak sales in boots . Back-to-school came later in the season but in total ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 was in line with our expectations. Comparable sales were up 9% in August and down low single digits in September and October. Consolidated gross margin was 44.1%, a 55 basis point decrease, and was driven by lower margin in Famous partially of f set by a slightly higher margin in brand portf olio.

Brand portf olio gross margin was 43.8%, up 15 basis points supported by a f avorable channel mix and higher initial margins . Famous gross margin was 42.9%, down 130 basis points. This decrease ref lects a shif t to more days in BOGO versus Buy More, Save More. However, as previously noted, the shif t was gross profit accretive to what we initially saw f rom the Buy More, Save More promotion. Sof ter than anticipated perf ormance in boots also impacted clearance margins. SG&A expense was $269 million or 36.3% of sales, up 30 basis points . SG&A declined $5 million as a result of our restructuring actions and lower incentive compensation costs and were somewhat of f set by higher rent and investments in marketing, the SAP upgrade, and international.

Operating earnings were $58 million and operating margin was 7.9% . Operating margin was 10.9% at brand portf olio and 6.9% at Famous. Net interest expense was $2.9 million, down $1.6 million on lower average borrowings and a lower interest rate. Earnings per diluted share were $1.23 versus $1.37 last year. EBITDA was $73 million and 9.9% of sales. Turning now to the balance sheet, we ended the third quarter with $239 million in borrowings, up about $17 million versus last year. The borrowings balance included the impact of $50 million of share buybacks completed in the quarter, during which we repurchased just over 1.5 million shares at an average price of $32.82 per share. Debt to trailing 12-month EBITDA was one times.

Inventory at quarter end was $586 million, up 5.4% to last year on a reported basis and up 2.7% when adjusted f or the calendar shif t. Famous inventory was up 5.1% on a reported basis and up 0.7% on an adjusted basis. Brand portf olio inventory was up 6%. Both businesses ended the quarter with less aged inventory than last year in both dollars and as a percent to total.

Now turning to our outlook, we are updating our f ull-year 2024 guidance to ref lect the shortf all we experienced in Q3 and a more conservative view of Q4. We now expect sales to be down 2.5% to 3% versus last year. This comparison includes the impact of the f if ty-third week in 2023. Excluding the f if ty- third week, sales to be down 1.5% to 2%. We expect consolidated operating margin of 6.1% to 6.3% and earnings per diluted share of $3.35 to $3.45 and adjusted earnings per diluted share of $3.45 to $3.55. We continue to expect an ef f ective tax rate of about 24% and capital expenditures of $50 million to $55 million.

We have provided a table in our earnings release and slides that summarizes our previous and revised guidance. Finally, I wanted to build on Jay’s earlier comments on the evolving tarif f situation. On the brand portf olio side of our business, where we source product directly, more than 50% of our dollar volume is currently manuf actured outside of China. We expect to have about 70% sourced outside of China by the back half of 2025 and our lead brands are f urther along on this migration. At Famous, currently about 15% of our vendor receipts are made in China. We expect this number to move lower as well. We are working proactively to mitigate the risks of additional tarif f s and believe our sourcing capabilities position us well to adapt to any changes.

ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 With that, we can open the line f or questions. Operator?

Jack Calandra Sure, thanks f or the question. As you know, we generated more than $4 of EPS over the last three years and continue to believe we have the brands, strategies, capabilities and people to get back to that earnings power. As Jay said, this year has clearly been a setback, and I really think, without making excuses, there has been a conf luence of f actors that have impacted this year. One thing I would say is that the f ashion segment of f ootwear, where we obviously play pretty heavily, has been sof ter than anticipated f rom the f orecasts that we provided in the beginning of the year, and the seasonal business has been particularly tough.

As you know f rom our second quarter call, we also had disruption and distraction f rom our ERP upgrade, and that had a pretty big impact on Q2. As Jay mentioned that impact is now behind us. Then we have been making investments, strategic investments to drive f uture growth that we f eel very conf ident in, and particularly around international and some of our marketing investments . That said, it’s going to take us longer to achieve the goals we communicated last October, and we can provide, I think, a f urther update on our f ourth quarter call. But we f eel like we’ve got, again, all of the capabilities, tools, brands and people to get our earnings back over that $4 level.

Jay Schmidt Hi, it’s Jay. We still believe that we have a signif icant growth opportunity in China and the rest of world. While we’re somewhat more cautious on China in the near term, we believe it is an important market f or us ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 with signif icant long term opportunity and we are looking at a more balanced approach with other markets being important as well, such as the Middle East and EU.

Even with our JV partner, we’re looking at more moderate growth but still growing there, and then also that JV partner is expanding into Southeast Asia as well. We think we have a good plan there, but probably just our original China plan was probably too aggressive coming out of the gate.

Jay Schmidt Thank you.

Jack Calandra Yes, this is Jack, Laura. Thanks f or the question. Just in terms of as we look to Q4, we do expect a gross margin decline f or the total Company, and that will be driven by a gross margin decline at brand portf olio, where we plan to address the current but slow-moving inventory that we talked about. Then in terms of the credit issue, just a little background on that, we chose to suspend shipments to a customer given their aged receivables balance and their latest credit rating. We do expect continued challenges in Q4, and we have f actored that into our guidance. Just rest assured that the aged receivable balance was appropriately reserved f or at the end of the third quarter, again based on that value and that credit rating.

Laura Champine That seems like more of a top line issue, and I wouldn’t expect a big markdown of receivables to impact margins in Q4. Is that f air?

Laura Champine Right, exactly. Jack Calandra ViaVid has made considerable efforts to provide an accurate transcription.

This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.

com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 Yes, we do—you know, to the extent that we do any sales there, we have to also put up a pretty signif icant reserve f or potential threat losses, so there is a bit of that of fset that goes into the earnings f low-through of that account.

Jack Calandra It’s pretty small, and I can say as we think about the things that caused us to miss our top line in the third quarter, the f irst one and the most signif icant one is the boots issue in both segments that Jay talked about. Then I think af ter that in terms of order would be the athletic—delayed deliveries of the athletic product that we didn’t receive, and then the credit issue would come below that. Laura Champine It sounds like you listed them in the press release in the order of their relative impact, which brings me to my f inal question.

Jack Calandra It’s less than—the whole international piece is less than 5% of our total, and China is the largest part of that, but there are others there. It’s relatively low. As just said, our plan was more aggressive than what we delivered against, and that’s where it did catch us up on third quarter.

Jack Calandra Thank you.

Jay Schmidt Thank you.

com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 Jack Calandra Sure Mitch. As a reminder, the impact of the f if ty-third week last year was $25 million in total f or the Company, and you rightly point out that most of that was in Famous , it was $18 million f or Famous and $7 million f or brand portf olio. As we look f or—look at sales going f orward into Q4 on a reported basis, so not adjusting f or the f if ty-third week, we expect both segments to be down mid single digits . Adjusting f or the f if ty-third week, we expect Famous to be down slightly but BP still to be down sort of in that mid single digit range, given the impact of the f ifty-third week wasn’t as signif icant and the plans that we have to make sure that we get through some of that current but slow-moving inventory, so we f inish the year clean f rom an inventory perspective.

Jack Calandra Yes, f or the Famous business, we’re looking at just a marginally positive comp, call it about a one to one and a half comp f or Q4, which is obviously below where we f inished in Q3.

Jack Calandra Yes, so really in terms of the op margin decline in Q4, more of it is being driven by gross margin. We do— you know, just in terms of SG&A, we have the $12 million benef it f rom last year’s f if ty-third week, obviously that’s coming out Q4. We do have some additional savings given the work that we’ve been doing, but just given what the sales are coming down, we think there is likely some deleverage in SG&A in the f ourth quarter. That reduction in operating margin really coming f rom both levers, but I would say more so on the gross margin.

Jack Calandra Yes, I think it is running a bit below that, but because we have this compressed calendar f or holiday, what we are seeing certainly so f ar in the month of November is some very strong comps with that compressed holiday shopping period. What we did was we compared how we expect the quarter to build to the last time the calendar was like this, which was in 2018, and that gives us conf idence in that f orecast.

Jay Schmidt We’re seeing—hi Mitch, it’s Jay. Boots did, it was about two-thirds of our drop f or the third quarter. We are looking today at seeing the boot sales decline, at least f rom what we know so f ar, to be similar to what we’ve experienced in third quarter. Obviously, it’s just starting to turn very cold, so we’ll see if that gets improved, but right now we can only guide on what we know.

Jay Schmidt Thank you.

Jay Schmidt Starting of f with what’s in the brand portf olio, as was called out, the sneaker business, f ashion sneakers were very good and now represent 30% in the quarter. We had signif icant trends in f ootwear that were positive, such as f lats, Mary Janes, slingbacks . Then also we did see a—although it’s a smaller category f or us within boots which got us to that better perf ormance in tall boots, it was really on tall -heeled boots, which were very strong in the quarter, and both Sam Edelman and Naturalizer benef ited f rom those trend items. Fast f orward over to Famous Footwear, athletic continues to really dominate right now, and these very strong athletic brands that we reported upon that Famous does have are continuing to trend across the women’s, men’s and kids part of the business.

Then across the board, it really was boots that just —you know, this particularly short casual that was the most concerning part and did cause us some pain here. Moving f orward, we still see in—the consumers are still wanting the brands that they desire, and that’s really whether they’re value or f ull price, they’re still really looking at the brands and the products that they ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www. viavid. com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 want and continue to demand, so we’re continuing to see that.

Then f inally, the Flare stores are working, we’re very happy with them . We’re only going to open one more store, so we have 32 open now, so we’ll end with 33. Then right af ter the—you know, the ’25 plan, we’ll continue to open more. We did delay some of those just so we could keep the stores open and get the most sales through the holiday period.

Jack Calandra Yes, Dana, it’s Jack. In terms of the—in terms of Famous, we have a promotional calendar which is very similar to last year, where we did do a lot of BOGO promotion. We’ll continue that this year, so it should be pretty comparable year-over-year. I think where you’ll see more markdown activity and promotional activity is on the brand portf olio side, again as we look to exit 2024 with a really good position on inventory . That’s where I think you’ll see some more promotions, and that’s where we have f actored in some more gross margin—some more gross margin dilution in that business in Q4.

Jay Schmidt It will be more clearance-driven in that category, particularly in season.

Jack Calandra That’s right.

Was there a change in industry trend? Jack Calandra The total f ootwear industry in total was down about 1% (inaudible) in the quarter?

Jack Calandra In the quarter, it was down 3%, and I think what we’ve seen is that the f ashion segment of the industry has been below that, and obviously that’s where we have a decent amount of exposure. I would say both the overall f ootwear market and then I think the segments that we really compete in have been pressured.

com Caleres Inc. – Third Quarter 2024 Earnings Call, December 5, 2024 Jack Calandra Thank you.

Jay Schmidt Thank you.

I would now like to hand the call back to Jay Schmidt, President and CEO, f or closing remarks. Jay Schmidt Okay, thank you. Bef ore we close today, I would like to thank the entire Caleres team f or their f ocus and dedication during this quarter and f or the whole year. Our team worked extremely hard during 2024 while laying the groundwork f or a stronger 2025.

Thank you all f or joining us this morning and thank you f or your continued interest in Caleres. Have a good day.