Caleres, Inc. (NYSE:CAL) Q4 2022 Earnings Call Transcript

Caleres, Inc. (NYSE:CAL) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Good morning, and welcome to the Caleres Fourth Quarter Earnings Conference Call. My name is Robert and I’ll 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. As a reminder, this conference is being recorded. At this time, I’ll turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Logan Bonacorsi: Good morning. I’d like to thank you for joining our fourth quarter and full year 2022 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 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 US 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 operation, 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 other views in today’s earnings release and our presentation on the Investors section of our website. The company undertakes no obligation to update any information discussed on this call at any time. Joining me on the call today are Jay Schmidt, President and CEO; and Jack Calandra, Vice President and CFO. We will begin this morning’s call with our prepared remarks, and thereafter, we’ll be happy to take your questions. I would now like to turn the call over to Jay. Jay?

Jay Schmidt: Thank you, Logan, and good morning everyone. I’m pleased to report that Caleres delivered strong results and exceeded expectations during the fourth quarter of 2022, capping off our best year ever. In short, 2022 was a year of significant operational and financial accomplishments at Caleres. In total, we delivered a 6.9% year-over-year increase in sales and achieved adjusted operating earnings of $217 million. Our adjusted earnings per share of $4.52 was $0.23 better than the high watermark set in fiscal 2021. Perhaps even more notable, this EPS level more than doubled our pre pandemic record and we generated approximately $281 million in adjusted EBITDA. In addition, during 2022, we grew total Caleres market share to more than 6% of the U.S. footwear market, outpacing market growth for the second year in a row with our lead brands gaining share.

We improved brand perception metrics with our new customer file in the brand portfolio increasing 28% year-over-year. We managed our inventory levels well ultimately ending the year approximately 3% below fiscal 2021. We intensified our focus on strategic priorities including edit to win, where we reduced SKU count and amplified key product trends and items to drive sales. We continue to prioritize investment areas namely consumer marketing and experience that are essential for future growth. We made significant progress toward our long term ESG goals and we returned more than $73 million to our shareholders through share repurchases and dividends. These exceptional annual results underscore the power of our brands, the strength of our platform and the successful execution of our strategic initiatives.

Now let’s move to some performance highlights from the fourth quarter. During the period, we achieved record quarterly sales of $696 million, which was 2.5% higher than the fourth quarter of 2021. We generated strong margin levels despite a more challenging competitive landscape at Famous. And we achieved solid fourth quarter operating earnings and earnings per share. In addition, we prioritized debt reduction utilizing our free cash flow to reduce the borrowings under our asset based revolving credit facility by $57 million. Jack will talk more about our capital allocation priorities for 2023, but we believe that near term continued debt reduction is the top priority for cash flow due to rising interest rates and an uncertain macro environment.

In our brand portfolio, strong demand for our lead brands drove this outstanding quarterly performance and translated into year-over-year improvements across all key financial metrics for the segment. Of note, sales in the segment were 6.4% higher than fourth quarter of 2021 as the consumer prioritize fashion footwear, especially dress and casual shoes, as well as boots. In fact, for the year, our lead brands, which include Sam Edelman, Naturalizer and Allen Edmonds delivered positive sales trends grew market share and increased earnings. It’s also worth highlighting that for the full year, the brand portfolio delivered over 20% growth in its overall annual earnings. Segment operating earnings climbed to a record $112 million, eclipsing the previous record of $80 million set in 2017.

Again, this performance was driven by strong consumer reaction to our fashion products and reflects the progress we’ve made against key strategic initiatives to elevate product design, sharpen brand messaging and maximize our inventory investment. The bar is now higher, yet we believe there is significant runway to build on this momentum and further increase the contribution of the brand portfolio. We also saw outsized growth in our direct to consumer and owned e-commerce businesses in line with our objectives. In the brand portfolio, we capitalized on strong product trends, advanced drop ship capabilities and enhanced consumer analytics to drive an approximately 23% increase in our D2C business compared to fourth quarter of 2021. Similarly, our owned e-commerce business grew 18% over the same period with double digit sales increases from nearly every one of our owned websites.

Further, we expanded the number of new consumers to the brand portfolio by 25% over the same time period. Going forward, we believe we can unlock even more value from our customer file as we continue to build expertise in this area. Now moving on to Famous Footwear where we also turned in an impressive performance despite the challenging competitive landscape at the beginning of the quarter. Fourth quarter sales got off to a slow start down high single digits in November before rebounding sharply in mid-December. Sales exceeded our expectations in the last six weeks of the period, resulting in record fourth quarter sales and a positive sales comp. This late quarter performance was driven by robust demand for key athletic brands, which the famous team was able to capitalize on due to a stronger in stock position compared to last year.

In addition, our kids business, a key differentiator and one we view as a future growth opportunity delivered another outsized performance. Kids sales increased by 9% over the fourth quarter of 2021 and by 23% in the last six weeks of the year. This performance was a continuation of the strong results we achieved during the back to school period and further solidifies Famous’ position at the footwear destination for kids and the millennial family. During the quarter, Famous did experience gross margin declines due to more normalized inventory levels, especially in seasonal product. Going forward, we do expect to maintain gross margins above pre pandemic levels due to the structural changes we’ve made to our promotional strategies. All in, famous performed again at a high level during 2022.

And while results didn’t quite reach the record setting number achieved in 2021, this segment contributed $196 million of operating earnings and an 11.5% operating margin. In other words, the second best performance in Famous history. And while we understand that consumers are still navigating an uncertain macro environment, we continue to believe Famous is exceptionally well positioned to compete and excel due to its leadership position with the family, its leading assortment of national brands, its retail locations across the country in key markets and its enhanced consumer experience, both in store and online. Before I hand it over to Jack to walk through our financials in more detail, I would like to highlight the key focus areas that will enable us to win in 2023 and beyond.

First, we will sharpen our focus on the millennial family at Famous Footwear. Our objective is to align our product assortment, store experience, digital presence and marketing approach with the millennial families footwear needs. As discussed, we rolled out a new prototype Famous store in early 2022 and we’ve now opened an additional 10 stores using the same format. This new format has proven highly successful in highlighting our top national brands creating a localized assortment and facilitating direct engagement with the family in a convenient manner. So far on average, these stores have significantly outpaced their market areas in both sales and traffic. Second, we will continue to enhance our famous footwear assortment to a more balanced athletic and fashion mix.

As outlined last quarter, we are seeing meaningful progress on the fashion side of the business. We know that when she buys for her family and for herself, she is spending more, connecting more and returning more often. In fact, we continue to see growth in our top fashion brands from the market, as well as a 9% improvement in sales in our own Caleres brands. We believe we can take our extensive consumer knowledge to deliver the right brands and styles in the right quantities and locations to deliver highly profitable incremental sales at Famous. Third, we intend to capitalize on the strength and relevance of our lead brands in our brand portfolio. We have continued to see outsized performance and robust demand from Sam Edelman, Vionic, Alan Edmonds and Naturalizer brands in recent years.

At the same time, we are leveraging that strength and success, as well as our brand building and operational expertise to expand the profitability of the entire portfolio. Fourth, we are focused on maximizing Caleres’ platform capabilities that span the entire enterprise. This includes leveraging our shared centers of knowledge around design and innovation, edit to win, digital, marketing, analytics, as well as sourcing and logistics to unlock growth opportunities and to increase operating margin. Finally, we are committed to delivering exceptional sales and earnings going forward. As we’ve stated previously, we believe the structural changes we’ve made in recent years have transformed Caleres into a more agile, efficient and profitable organization.

We are confident in our ability to deliver annual earnings in excess of $4 per share on a consistent basis as we generate strong levels of free cash flow and create long term value for our shareholders. We look forward to providing more detail on each of these strategic priorities at our Investor Day on Wednesday, June 14 in New York City. And with that, I will now hand it over to Jack for a more detailed view of our financials. Jack?

Jack Calandra: Thanks, Jay, and good morning, everyone. Today I’ll provide additional details on our strong fourth quarter and record annual results, discuss our capital allocation progress and plans and share our outlook for fiscal 2023. As a reminder, my comments will be on an adjusted basis and will focus on the comparable period in 2021 with some supplemental comparisons to 2019 where helpful. Please see today’s press release for a reconciliation of adjusted results. Starting with the fourth quarter. Fourth quarter sales were $696 million, a record for the fourth quarter and an increase of 2.5% versus last year. As Jay mentioned, this performance was driven by a 6.4% increase in brand portfolio. Famous Footwear sales were up slightly the last year and better than our initial expectations due to a strong second half of the quarter.

Comparable sales were up 0.7%. Consolidated full year sales increased 6.9% to reach $2.97 billion, marking our best ever annual sales performance. Fourth quarter gross margin was 40.4%, a 300 basis point decline reflecting an increase in brand portfolio gross margin and a decrease in Famous gross margin. Brand portfolio gross margin was 36%, a nearly 200 basis point increase versus last year due to a favorable sales mix toward higher margin businesses, including drop ship and owned e-commerce, as well as a reduction in ocean and air freight costs. Famous fourth quarter gross margin was 42.4% a 650 basis point decline versus last year. This expected decline reflects a more normalized level of promotional activity and pricing. We continue to prioritize the optimization of gross margin with our ongoing goal of achieving annual gross margin in the low to mid-40s for Famous.

For the full year, consolidated gross margin was 43.3%, 90 basis points below last year reflecting a 180 basis point increase in the brand portfolio and a 170 basis point decline in Famous. SG&A expense for the fourth quarter was $255 million or 36.7% of sales. Full year SG&A expense as a percent of sales was 36%, the lowest since 2015 and 30 basis points favorable to 2021. This expense leverage was enabled by the nearly 7% top line growth as we do continue to see inflationary pressures in wages and rent. Fourth quarter operating earnings were $26 million and operating margin was 3.7%. Operating margin was 6.1% at Famous and 6.2% at brand portfolio. Full year operating earnings were $217 million or 7.3% of sales a 60 basis point decline from 2021.

It’s worth noting that this consolidated full year operating margin is 370 basis points higher than 2019. Famous maintained its double digit operating margin, delivering 11.5% for the year. Brand portfolio achieved an 8.5% full year operating margin, a 390 basis point improvement versus last year. Fourth quarter net interest expense was $5 million or about $3 million above last year given higher average borrowings on our revolving credit facility and a higher borrowing rate. The weighted average interest rate in Q4 was 5.7%. Full year net interest expense was $14 million and the weighted average interest rate was 3.8% Fourth quarter diluted earnings per share were $0.65 and full year diluted earnings per share were $4.52, another full year record for Caleres.

EBITDA for the trailing 12 months was $281 million or 9.5% of sales. Turning now to the balance sheet and cash flow. We ended the fourth quarter with $308 million in borrowings on our revolving credit facility, a $57 million reduction during the fourth quarter and no long term debt. Inventory at year end was $580 million down 2.8% versus last year. On hand and available to sell inventory was up and goods in transit were down materially. Inventory was down 6.2% compared to year end 2019. By segment, inventory at Famous was up 5% versus last year, primarily a reflection of supply chain constraints, which limited last year’s inventory availability. Notably, Famous’ inventory was $59 million or 18% lower than year end 2019. At brand portfolio, inventory was down 8.2% versus last year and up 6.1% versus 2019.

We feel good about the composition and level of inventory in both businesses as we begin the year. Regarding cash flow from operations, we generated $80 million during the quarter and deployed cash for strategic investments in the business, paid our quarterly dividend, and as previously mentioned, reduced the borrowings on our revolver. Turning to capital allocation, we continue to implement strategies that we believe will create and enhance shareholder value. In addition to investing in value driving growth opportunities, in fiscal 2022, we purchased 2.6 million shares or approximately 7% of shares outstanding for a total cost of $63 million. Including the dividend, we returned $73 million in cash to shareholders during the year. We believe at this time, the best use of free cash flow after maintaining the dividend is to continue to reduce our revolver borrowings to below 1 times on a debt to EBITDA basis and to increase overall liquidity.

That said, we have 6.4 million shares remaining under our current board repurchase authorization and will continue to consider share repurchases based on market conditions. Now turning to our outlook. As we’ve mentioned, we’ve made a number of operating and financial structural changes to the business over the past several years that we believe allow us to maintain earnings in excess of $4 per share even in the face of the current inflationary pressures, higher interest rates and an uncertain macro environment. As such for 2023, we expect sales to be flat to up 2% when compared to fiscal 2022. This includes the impact of the 53rd week of this year, which we estimate provides about $22 million of sales and diluted earnings per share of $4.10 to $4.30.

Additionally, we are providing guidance on several other key metrics for fiscal 2023. Specifically, consolidated operating margin of 7.1% to 7.3%, reflecting improvement in brand portfolio and a decline in Famous. That said, we still expect Famous operating margin above 10%. We expect interest expense of $18 million to $20 million due to higher interest rates. We expect capital expenditures of $60 million to $70 million, a level more in line with our prepandemic spending and inclusive of our strategic investments. We expect an effective tax rate of about 25%. And finally, we expect share count of approximately 34.3 million. This assumes share repurchases to offset dilution of any stock based compensation. Given the extraordinary $50 million retailer inventory build we are lapping, in the Brand Portfolio segment in Q1 this year, we are also providing the following guidance for Q1.

We expect net sales to be down 4% to 6% and earnings per share of $0.92 to $0.97. With that and before we take questions, I will turn the call back to Jay.

Jay Schmidt: Thanks Jack. This was a great year for Caleres where we more than doubled our pre pandemic earnings level. We are confident that the structural and strategic changes we have implemented, coupled with our talented team and unique infrastructure have set us up to deliver on our 2023 objectives and drive long term value for our shareholders. We look forward to sharing more about our brands and our strategy at our Investor Day on June 14. And 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. At this time, we’ll be conducting a question-and-answer session. Our first question comes from Abbie Zvejnieks with Piper Sandler. Please proceed with your question.

Abbie Zvejnieks: Great. Thanks so much for taking my question and congratulations on the strong end to the year. So you mentioned outperformance at Famous Footwear in those last six weeks. Have you seen that same outperformance continue into the first quarter? And then I have one follow-up after that.

Jay Schmidt: I would say, as we opened up first quarter, starting out a little softer than what we saw in the last six weeks in Famous, although we did see some of the key styles and trends going. We’re — at Famous, we always think that our consumers is very aware now and we’re still seeing new casuals and retro joggers and kind of the fashion sneakers that they were selling continue on there. And we expect we’ll see a lot of spring sandals and other things that are currently selling in the brand portfolio open up as we get later into the quarter.

Jack Calandra: Yes. And Abbie, thanks for question. This is Jack. So just to add to that, as you know, in the first quarter, the major part of the quarter is still ahead of us with, obviously, Easter and some of the events around that. So as Jay mentioned, things have slowed a bit from where we saw the last six weeks of the fourth quarter, but still feel really good about the next six weeks ahead of us, because that is really the prime selling season for Famous.

Abbie Zvejnieks: Got it. And then maybe switching to the brand portfolio, how should we think about that cadence of sell into the wholesale channel? I know you said 1Q will be tougher as we lap that selling from last year, but how does the order books look going forward through 2023? And how should we just model that?

Jay Schmidt: Our order books actually, in terms of fill rate, look consistent to where we’ve been in the past quarters as we’ve been in 2022 when modeling that. So we feel good about where we budgeted. If you take out Q1, we’re really looking at 5% in the other quarter. So that’s really — we feel like that the moment of that lap and then we’ll be back to it in the brand portfolio, but all signs look very good, Abbie.

Abbie Zvejnieks: Got it. Thanks so much.

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

Mitch Kummetz: Thank you. And thanks for taking my questions. I’ve got a few. Let me start with Famous Footwear gross margin, you guys mentioned normal promotions and pricing in the quarter. But help me understand why it was actually down 10 bps on a three year? And what gives you the confidence that it will be above pre-COVID going forward? And I know that for Famous, you mentioned that op margin should be greater than 10% for the year. I don’t know if you can comment on gross margin for the year?

Jack Calandra: Yes, Mitch, thanks for the question. This is Jack. So I would say, in terms of the fourth quarter for Famous, we did put in place a (ph) in mid-December, as we mentioned, the first six-ish weeks of the quarter in Famous were a bit soft. We amped the promotional cadence, got nice response to the BOGO, but that was a little bit of a margin decline. We also saw some increases in the cost of goods. And so, there was some LIFO reserve calculations that also affected the gross margin for Q4. I would say, we expect — with inventories getting to a more normalized level, and I think some of those inflationary pressures on cost of goods starting to subside, we wouldn’t expect to see that going forward.