EXEC: Caleres shares enhanced insights

Shares of Caleres, Inc. rose nearly 30% on Wednesday after the off-price shoe chain reported first-quarter results well above Wall Street estimates and raised its full-year guidance.

Famous Footwear marked its fifth consecutive quarter of year-over-year margin improvement, while its Branded Portfolio segment continued its strong recovery.

Shares closed the day at $27.19, up $6.26 or 29.9%.

On an analyst call, Diane Sullivan, CEO, said the first quarter marked Caleres’ fourth consecutive quarter of record results and that it came despite inflationary and supply chain pressures.

“We view our first quarter performance as further evidence of the step change we have made in Caleres’ long-term cash generation potential,” Sullivan said. “With smart investments made and strategies deployed across the company, we believe we have effectively doubled our mid-cycle normalized earnings to around $4 per share.”

In the quarter ended April 30, sales rose 15.1% to $735.1 million, beating analyst consensus of $677.28 million.

Gross margin improved by 144 basis points to 44.5%, an improvement of 144 basis points compared to the first quarter of 2021, due to a favorable sales mix and a selling environment in less promotional detail. The price increases helped offset ocean freight costs which began to climb in the second half of last year.

General and administrative expense as a percentage of sales was 35.5%, or 266 basis points higher year-over-year, primarily due to higher variable costs on increased sales, d ‘increased marketing costs and rising wages and labor costs.

Net income rose to $50.5 million, or $1.32 per share, from $6.1 million, or 16 cents, a year ago. EPS was well ahead of analysts’ consensus estimate of 83 cents.

Famous Footwear first quarter margins increase 405 basis points
Among its two segments, Famous sales fell 3.4% to $384.5 million from a record quarter a year ago. The decline reflects slightly lower store counts and the easing of the pandemic that spurred a burst of pent-up demand during the 2020 quarter. Famous operating profit improved 3.8% to a record $49.7 million.

Diane Sullivan, President and Chief Executive Officer, said, “Notably, Famous has maintained its focus on selling at full price, which allows us to maintain our high gross margin level, achieving a gross margin rate of more than 49% over the period.

Gross margins jumped 405 basis points from the first quarter of 2021, marking the fifth consecutive quarter of year-over-year margin improvement. The improvement reflects continued higher full-price sales and another quarter of minimal promotional activity.

“While we continue to face delays in receipts due to supply chain disruptions, we believe that our ability to continue to sell at full price and our disciplined approach to inventory purchases will enable Famous to maintain a margin above our historical averages,” Sullivan said.

Beyond greater full-price selling, Sullivan said Famous has benefited from strong demand for the chain’s differentiated assortment of brands, coupled with a focused marketing approach, planning expertise and allocation, and its localized approach. Said Sullivan, “In summary, the strong financial and operational performance, including return on sales of approximately 13%, demonstrates the power of the Famous brand and sets the stage for another year of strong earnings.”

Famous Shoes Update
Providing an update on Famous’ strategies, Sullivan said that when it comes to products, Famous continues to focus on its reputation for providing “the most sought-after brands”, with top brands representing a “key driver” of financial performance of the quarter for Famous.

She spoke of the continued benefits expected this year from Famous’ focus on active lifestyle footwear. She said: “As we move forward through the year, we will continue to build on our leadership position in athletics and sport and build on our strong relationships with all the brand’s key partners.”

Famous also continues to seek to capitalize on Caleres’ own brands that offer higher margin opportunities for the business as a whole, according to Sullivan. Of the brands owned by Caleres, LifeStride, Scholl’s and Blowfish were all in the top 10 best-selling brands at Famous during the quarter.

Finally, she said Famous has benefited from stronger demand for seasonal and occasional products as consumers socialize more at this stage of the pandemic.

“This presents us with a compelling opportunity to leverage our fashion-focused brands in our portfolio to generate highly profitable incremental sales,” Sullivan said. “We know that when she buys for her family and for herself, she spends more, connects more and comes back more often. So adding the right styles to the right places will expand our business and add value in addition to our core athletics and sports business in the future.

On marketing, Sullivan said Famous has identified opportunities to shift some marketing spend to digital this year to help offset the year-over-year decline in promotional activity, which has a greater impact on Famous’ digital business.

Says Sullivan, “It’s important to remember that the competitive landscape has changed with the expectation that we’ll see another year of limited promotional activity. Therefore, it is critical that we employ a more tactical approach to connecting and engaging with consumers. And to that end, we’re surgical in our marketing tactics, using targeting and personalization to drive repeat purchases and working to move traditional single-channel shoppers to omnichannel consumers.

She said a back-to-school campaign is being planned which paints a “tangible modern image” of Famous based on analytics pulled from the chain’s customer file as well as early readings of its new store prototype and store refreshments.

Sullivan said the Famous store prototype and refreshes are seeing encouraging customer responses. Sullivan said: “Although it is still early days, we are already seeing positive trends from the first prototype and in stores that have completed their refreshes. We are optimistic that these efforts will strengthen our national presence, deepen our differentiation and generate strong returns.

Rise in sales of the brand portfolio segment 46.1%
In the brand portfolio wholesale segment, sales reached $365.7 million in the first quarter, up 46.1% year-over-year. Brands include Allen Edmonds Blowfish Malibu, Bzees, Circus NY, Dr. Scholl’s, Franco Sarto, LifeStride, Naturalizer, Rykä, Sam Edelman, Veronica Beard, Vince, Vionic and Zodiac.

Gross margins improved to 38.1% from 37.6%. Operating profit for the Brand Portfolio segment was $41.3 million on a reported and adjusted basis. In the prior year period, reported earnings were a loss of $2.8 million on a reported basis and a profit of $10.7 million on an adjusted basis.

Sullivan said momentum continued for the brand portfolio segment following the strong rebound seen in the second half of 2021.

“Consumer demand, particularly for wearables and workwear products, accelerated during the period and as major retail partners rebuilt their inventory position,” Sullivan said. . “It is important to note that this post-pandemic restocking among wholesalers has likely moderated as we progress through the year as they return to more normal buying and restocking habits.”

Gains were driven by double-digit improvements from every brand in the portfolio, with a few brands seeing triple-digit increases. Sullivan added that Caleres is also “capitalizing on the continued demand for casual, sports-inspired styles.”

Among brands, sales of Naturalizer “increased significantly in the first quarter of 2021 with a solid increase over 2019 as well,” with more consumers shopping for pre-owned styles. Sam Edelman had “another excellent quarter”, benefiting from strong demand for apparel products. Sam & Libby debuted at Walmart earlier this spring to “overwhelmingly positive reaction.” LifeStride sales more than doubled.

Allen Edmonds saw strong improvements in digital and physical sales, higher average retail selling units (AURs), and an approximately 600 basis point increase in gross margin. Says Sullivan, “Interestingly, demand for dress shoes and sneakers continued into 2022, with the athletic category reaching our second highest ranking.”

Prospects identified
Inventory levels at the end of the quarter were up about 45% year-over-year, reflecting “unusually low” inventory levels a year ago, Ken Hannah, SVP and CFO, said during of the call. Inventories were stable in the first quarter of 2019.

Hannah said: “The increase included a 16% increase at Famous Footwear and a 99% increase for the brand portfolio. Famous Footwear inventory was 13% below 2019 levels, while the brand portfolio was 15% above our 2019 levels, including approximately $100 million of inventory in transit not yet available at the sale. The quarterly level of inventory in transit was down from $177 million at the end of fiscal 2021.”

Given a strong start to the year and healthy demand going forward, Caleres has raised its financial outlook for fiscal 2022. The company now expects:

  • Consolidated sales levels are expected to increase 2-5% from fiscal 2021. Previously, consolidated sales were expected to be flat at 3%.
  • EPS is expected to be in the $4.20-$4.40 range, up from previous guidance in the $3.75-$4.00 range and representing another year of record or near-record earnings. Adjusted earnings hit a record $4.29 in fiscal 2021.

Photo courtesy Caleres

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