Caleres Inc Q2 FY2021 Earnings Call

Good afternoon. And welcome to the Caleres Second Quarter Earnings Conference Call. My name is Tawanda and I will be your conference coordinator. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the call over to your speaker for today, Logan Bonacorsi, Vice President of Investor Relations. You may begin.

Good afternoon. I would like to thank you for joining our second quarter 2021 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 that 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. The company undertakes no obligation to update any information discussed on this call at any time. During today's session, unless otherwise noted, our comparisons will be primarily in relation to the second quarter of 2019. We believe this to be a more comparable time period for most of our key metrics due to the pandemic-related impacts that prevailed during the second quarter of 2020. Joining me on the call today is Diane Sullivan, Chairman and CEO; Ken Hannah, Senior Vice President and CFO; and Jay Schmidt, President. We will begin the call with brief prepared remarks and thereafter we will be happy to take your questions. I would now like to turn the call over to Diane.

Thanks, Logan. And good afternoon, everyone. I'm very excited to report that, during the second quarter, market trends that emerged in March continued to gain momentum, with consumer spending and shopping with intent. In fact, consumers' increasing comfort with in-person interaction improved visibly around the return to work and school, and notably, their desire for new and fresh products and styles across categories powered robust demand dynamics. Our company capitalized on this terrific consumer demand and leveraged our strategic foundation, which is, of course, strengthening the power and the reach of our brands, accelerating our digital capabilities, leaning into our capabilities and operations, and then our strong team really delivered exceptional results in the quarter just ended. This builds further on the progress made earlier in the year and puts us on track to deliver record annual adjusted earnings per share of between $3.25 and $3.50. Just a few of the highlights in the second quarter. We achieved all-time record quarterly operating earnings of $62.8 million and adjusted earnings per share of $1.19. We also exceeded first quarter 2021 sales levels by $37 million. We generated significantly stronger gross margins, reaching 47.7%. And we also made noteworthy progress towards our balance sheet goals and, of course, continue to focus and engage with our consumers, driving deeper and stronger connections with all of our brands. Overall, our consolidated revenue for the second quarter was $676 million, representing a nearly 6% improvement from the first quarter of 2021. Our adjusted earnings per share for the period reached $1.19, up $0.59 sequentially and surpassing second quarter 2019 levels by $0.57 and, most notably, making the highest quarter of adjusted earnings per share in the company's history. Our gross margins also improved significantly, rising 705 basis points from the second quarter of 2019 as we drove more full price selling as a result of tighter inventory levels due to disruptions and delays across the supply chain. In addition, outstanding trends in our Famous Footwear business resulted in another quarter of strong cash generation for the enterprise. We once again utilized our free cash to strengthen our balance sheet, reducing our overall debt levels by another $100 million, bringing our total borrowings under our credit facility to $100 million. It's worth noting that we have proactively reduced our total leverage by $340 million in just five quarters. Furthermore, we have recently taken steps to fortify our financial position still further, calling a portion of our long-term debt and renegotiating the terms of our credit facility. Ken is going to provide more details around these strategic financial actions in just a couple of minutes. Notably, the results we delivered in the second quarter were accomplished despite the disruptions in the supply chain that resulted in approximately 28% less inventory across the company when compared to the second quarter of 2019. But before we jump into the segment breakout, I want to highlight the progress we've made and the plans we have to grow our Caleres-wide digital and direct-to-consumer business. During the second quarter, we continued to leverage our previous capital investments, digital capabilities and our upgraded e-commerce platforms to drive an approximately 58% increase from our own dot-com sites over the second quarter of 2019. And that was even as we saw brick and mortar trends accelerate during the period. As you know, our foundation has been built on putting the consumer first and we are known for curating a diversified suite of powerful brands that connect and reach a growing number of consumer segments. And as a result, our total direct-to-consumer business and sales represented nearly 80% of our total sales. With that in mind, we have sharpened our focus and are driving forward even more with our digital-first strategies to attract new, maintain current and reactivate previous consumers across our entire portfolio of brands. We view our enterprise-wide customer database and file as a strategic differentiator as well as an asset to drive growth. We are at the early stages of harnessing and exploiting this key strength, but are excited about the potential for value creation. Let's now move to our second quarter segment results, starting with the standout performance at Famous Footwear where we achieved a number of financial and strategic milestones, including record results across all of our major key financial metrics. We continue to execute at a very high level during the quarter, capitalizing on our competitive advantages, building further on the momentum that began to accelerate in the first quarter of the year and, ultimately, closing the period with another record-setting performance. Among the highlights for this segment, Famous generated quarterly sales of approximately $454 million, an 8% improvement over the second quarter of 2019 and the highest level of second quarter sales in the history of the brand. As consumer demand improved and sales increased, we drove record margins, which reached more than 50%. In fact, margins improved by 671 basis points when compared to the second quarter of 2019 as we drove more full price selling and reduced promotional activity. Additionally, our return on sales reached nearly 19%, which is 11 full percentage points higher than the comparable period in 2019 and a record for Famous. Finally, we delivered operating earnings of $85.5 million, which was $54 million greater than the second quarter of 2019 and, quite remarkably, exceeded operating earnings delivered for the entire year in 2019. I should mention that our second quarter success at Famous was broad-based as we saw sales growth and our gross margin rate improvement across women's and men's and kids and accessories and across style categories including athletics, casual, sandals and boots. In addition, we saw improvement in conversion in average unit retails when compared to the second quarter of 2019, both in-store and online. In fact, our brick and mortar business during the second quarter increased more than 10% over the second quarter of 2019 and our online sales were up more than 50% when compared to the second quarter of 2019, the most comparable period with e-commerce penetration right now at about 11% of total sales. Notably, conversion on FamousFootwear.com was up 61 basis points and the gross margin rate on e-commerce sales was up more than 1,200 basis points when compared to the second quarter of 2019. It's worth noting that momentum has continued as we have moved into the third quarter of 2021, with brick and mortar traffic up and store-for-store sales up high double-digits versus the comparable period of 2020. In addition, our third quarter 2021 basis point improvement for gross margin is tracking to be consistent with the year-over-year basis point improvement that occurred in the second quarter of 2021. From a product perspective, of course, trends in our iconic brands are continuing to work in the third quarter. And more specifically, seasonal products look good, with boots up double-digits and kids off to a particularly good start. Let's turn now to our marketing efforts for a minute. We're constantly trying to strive to optimize our marketing mix, expand personalization across the communication channels, and, obviously, always try to build that strong emotional connection. To that end, we have continued to support all of the touch points in which our consumer encounters Famous, including national TV, paid search, our online platform, social media and beyond. In addition, we're highly focused on our consumer database and leveraging our leading assortment of brands, our great locations that are so convenient, our enhanced online platform and, of course, all of our increasingly popular shopping options to grow our Famously YOU Rewards members. In fact, when we look at our rewards members, we did experience a 16% increase in new rewards members when compared to the second quarter of 2019, bringing the total contractable consumers in our consumer file to nearly 42 million customers. Looking at each channel, we were highly successful through our dot-com site at reactivating previous rewards members, which were up 28% over 2019 and retaining rewards members online as well. Meanwhile, the personal interaction of our Famous store associates also led to an increase of new members that signed up for the program. So, in short, Famous is strong, agile and exceptionally well-positioned to take advantage of this dynamic market environment. So, while disruptions in the supply chain are creating challenges related to our inventory position in the near term, we're working with our partners to ensure that we have the right product in the right place for our consumers. And I really have to make another special call-out to the Famous team for just an outstanding second quarter and, in particular, there are so many, but I'm going to mention the planning and allocation team of Nicole and Julie and all of those that have done a great job of taking this inventory and getting it to the right stores at the right time. So, thanks, everybody. Thanks, Famous, for all your great work. Now, let's turn to the Brand Portfolio. The second quarter marked another solid period of progress in the Brand Portfolio, which achieved a step-up in gross margin, while sales levels were still recovering. In fact, the Brand Portfolio reported earnings from operations in excess of the comparable period of 2019, marking a significant milestone and recovering ahead of our expectations. Specifically, operating earnings improved 306 basis points over the second quarter of 2019 to reach approximately $16.6 million. This period represented another good example of why a diverse portfolio of brands that reaches a number of different consumer segments and wearing occasions is an advantage. Leading the way in the solid quarterly performance was Sam Edelman, Vionic, Allen Edmonds and, from Blowfish Malibu, one of our emerging brands. While responding quickly to consumer preferences is a hallmark of our entire portfolio, these brands are really setting the pace at the moment and continue to exhibit good momentum. Specifically, both Vionic and Sam Edelman turned in strong sales levels during the period, acquiring new customers in their process. This revenue improvement was driven primarily by their own dot-com sites, which were up 163% and 75%, respectively, when compared to the same period in 2019. Furthermore, both brands experienced significant gross margin improvement, with Sam Edelman's margins increasing more than 1,300 basis points over the second quarter of 2019 and, at the same time, Vionic's gross margins increased more than 1,400 basis points. I would be remiss if I didn't flag, in particular, the performance of our Allen Edmonds here. AE was among our hardest-hit brands during the worst of the pandemic but continues to execute a highly effective shift towards a more balanced assortment, reflecting the way that the consumer is changing. And as we've previously mentioned, we started to see signs of this improvement in April, a trend that accelerated as we progressed through the period. Notably, the brand's e-commerce sales were in line with the second quarter of 2019 levels. Average unit retails increased as we raised prices and pulled back on promotions and increased traffic in major metropolitan markets have led to improved brick and mortar sales. In addition, even as our newer sport and casual styles, which made up nearly 40% of our sales in the quarter, continue to resonate with our consumers, strong demand for our core heritage styles actually accelerated. On an exciting note, Allen Edmonds is the official dress shoe of the US Ryder Cup team for this year's event, which is being held in Sheboygan, Wisconsin – 45 minutes from our Port Washington factory where our shoes are made. The iconic Park Avenue style will be worn by the team during the events opening ceremonies and the shoes will be customized with the official Ryder Cup logo embossed on the insole. If our customers want a piece of history, they can buy this limited edition style as well. And finally, Blowfish acted as another strong contributor during the period. In fact, the brand sales and earnings were up from 2019 levels because of its easy and fresh styling, and those things continued to resonate with consumers, particularly with our Famous customer. So, a significant part of this performance for the Brand Portfolio has been in the e-commerce growth. As a whole, the Brand Portfolio's own dot-com sites were up 64% when compared to the second quarter of 2019, with the number of sites experiencing increases in traffic, conversion and average unit retails. In particular, and not surprisingly, brand sites that had access to fresh and new inventory experienced the biggest increases. This improvement highlights and underscores the work that we've been doing to enhance the digital experience, spur direct and personal engagement with our consumers and foster deeper connection with our brands. With our digital acceleration strategy in place and an energized team pointed in the right direction, we're confident that we can continue to build brand power, inspire our consumers and drive growth and profitability across the portfolio. We truly do believe that this initiative is – and see it as a central value-driving component of our long-term strategy going forward. So, overall, while we are pleased with the margin performance in the Brand Portfolio, there is still work to do. The Brand Portfolio sales revenues were down 33% from the second quarter of 2019, due in large part to ongoing challenges in the supply chain and limited ability to quickly chase the product and fill the orders. As we look out, we do anticipate supply chain and logistics challenges, specifically ongoing long lead times and significant increases in ocean freight, and that would likely put downward pressure on our third quarter sales to the tune of approximately $30 million. That said, we are actively working with our partners to minimize these disruptions and believe we are well equipped to partially offset some of these cost headwinds. Although the macro environment remains volatile, we see a strong consumer who knows what they want and is ready to engage further with our diversified set of brands. So, clearly, we began the second half of the year very aware of these ongoing dynamics playing out in the marketplace, but are really strengthened by our recent performance. From this point and position, I'm really highly confident in our ability to control the variables within our control, build upon our recent strong results at Famous, continue to improve our sales performance in the Brand Portfolio and, of course, enhance long-term value for our shareholders. Overall, I am very enthusiastic about our strategy for ongoing value creation and for the opportunities that lie ahead of us for Caleres. And with that, I'll turn the call over to Ken for a financial review.

Thanks, Diane. And good afternoon, everyone. I would like to start by echoing Diane's comments. We delivered an outstanding second quarter, which reflects the power of our portfolio, the strength of our strategy and the dedication of our Caleres team. I'm pleased to report that in addition to another strong operating performance in the quarter just ended, we also continue to advance our efforts to reinforce our financial foundation and drive forward with the strategies intended to enhance shareholder value. As we previously discussed, our top priority for cash flow remains debt reduction and we made tremendous progress toward that objective, once again in the second quarter. In total, we paid down an additional $100 million in revolver debt during the period, another step toward our goal of zero net debt. During the course of the past five quarters, we've managed our working capital and utilized our strong cash generation to lower our overall indebtedness by $340 million, creating significant long-term value for our equity holders in the process. In addition to our revolver debt reduction, we elected to call $100 million or half of our outstanding senior secured notes on August 16. We've shifted this long-term debt to our revolving credit facility. You will see this reflected on our balance sheet at quarter-end as the current portion of long-term debt with only $100 million of long-term debt remaining. Furthermore, we've recently entered into discussions to renegotiate and renew the terms of our revolving credit facility. We expect, through these negotiations, we will extend the credit facility's maturity date by five years and restore it to pre-COVID terms. This shift and renewal, coupled with the additional revolver debt reduction, will reduce our annual interest expense by approximately $9 million. Looking ahead, we expect to close 2021 with an even stronger balance sheet, likely ending the fiscal year with total debt around $200 million, which is on par with the debt levels that prevailed pre our Vionic acquisition. At the same time, during the second quarter, we continued to invest in our business and return capital to shareholders through our recurring dividend, which, as you all will recall, we maintained throughout the pandemic. We view this as a strong symbol of our firm commitment to rewarding our shareholders for their ongoing support of our business and their confidence in our long-term prospects for value creation and growth. Last week, we announced that our Board of Directors approved our 394th uninterrupted quarterly dividend which will be paid on October 1, 2021 to shareholders of record as of September 10. Now, let's look at a few of our financial metrics in a bit more detail. As Diane highlighted, for the second quarter, we delivered $675.5 million in sales, driven by record second quarter sales of Famous Footwear. Our consolidated gross margin was 47.7%, up 705 basis points from the second quarter of 2019. Famous Footwear delivered a gross profit margin of approximately 50.1% in the second quarter. The 671 basis point improvement from 2019 was primarily driven by more full price selling and a lower promotional environment. Our Brand Portfolio second quarter gross margin of 39.7% was 498 basis points higher than the second quarter of 2019 as brands pulled back on promotional activity in the wake of the ongoing supply chain disruptions. Our second quarter SG&A expense was $259.5 million during the period, or 38.4% of net sales. As expected, this included incremental expense related to the additional performance-based and share-based compensation expense associated with our improved operating performance. The company generated approximately $65 million of cash from operations in the second quarter and, as discussed, used that cash to reduce our debt levels further. All-in, we ended the quarter with a solid balance sheet consisting of approximately $55 million in cash, lower levels of debt and improved working capital position. Our inventory at quarter-end was down approximately 28% when compared to 2019 second quarter and included an approximately 28% decline at Famous Footwear and a 30% decline for the Brand Portfolio, including a much higher percentage of our inventory in transit and not yet available to sell. As we look to the rest of the year and as we continue to work to align our inventory levels with consumer demand, we expect constraints in the supply chain to persist. To that end, we will be hyper-focused on minimizing these challenges to the best of our ability, optimizing and maximizing our current inventory, emphasizing trending brands and brands with trending styles, and taking calculated risks in order to drive our ongoing improvements. Now, turning to the outlook for the third quarter and full-year fiscal 2021. As Diane highlighted earlier, we are encouraged by the momentum we are seeing at Famous Footwear so far this quarter and the potential for ongoing sales improvement in the Brand Portfolio. And although uncertainties remain, we're taking aggressive actions to protect that momentum and mitigate macro challenges and are confident in our ability to control the variables within our control. With that said, for the third quarter of 2021, we expect to deliver adjusted earnings per share of between $1.10 and $1.25 per share. For the full year, we expect to deliver record adjusted earnings per share of approximately $3.25 to $3.50 per share. Our Famous Footwear sales in the back half of 2021 are expected to be at or slightly above 2019 levels and our Brand Portfolio sales are expected to improve to be down approximately 20% to the same period. In closing, the progress we've made during 2021 is significant. In the near term, we believe our skilled and dedicated team can leverage this strong foundation and our powerful portfolio as well as quickly adjust and capitalize on this rapidly evolving marketplace. At the same time, we will prioritize our cash flow and liquidity, place a high degree of focus on our long-term strategic objectives, invest for future growth, and create long-term and sustainable value for our shareholders.

I would now like to turn the call over to the operator for questions.

Very, very well done in the second quarter and guidance. Highest congratulations. A couple of quick questions. As it relates, Diane, to back-to-school, can you talk a little bit about, a few puts and takes aside, how normal is this season on a weekly basis? Is it still skewed significantly because of the pandemic? Or is it tracking somewhat more normal in its beginning peak and tail?

Steve, I would say it's fairly normal and we've looked at it compared to 2019 and 2020 and looked at even the five-year average. It's peaking a little bit later, maybe by a week, but not much. And we are seeing a little more of a peak this season, this year, I should say, than we saw last year. Last year was a little bit more of a flat line. This year, we saw a peak in really week 28, something like that. So yes, I would say it's returned to somewhat more normal and a little bit later.

There's been very little air freight in the first half. As we mentioned, there have been delays. Most of the delays have really been in terms of the time early in transit. And we mentioned with the Brand Portfolio inventory at the end of the second quarter, it's down 30%. We have over $100 million of that inventory that was sitting in transit. So, it was on the water, on its way. And therefore, as I tried to characterize it was not available to sell. And so, to this point, we've not had a lot of air freight. We have a little bit baked in the back half where we need to make sure we have goods available for our digital business and we're working with our suppliers to keep inventory flowing, but lead times have continued to be extended for sure. There are two pieces to that. I'll let Jay, if he wants to give you some specifics, kind of jump in here. But there's two pieces. There are the delays on the water and that went from 14 days to 21 days to as high as an incremental 30 days. And then, there are the delays where there are factories that have shut down for periods of time with COVID and had delayed receipts and are at capacity. So that's on a case-by-case basis. So I don't know, Jay, if there's anything in addition to that you want to add?

No, I think it's by case-by-case.

As it pertains to your ordering for spring and summer deliveries next year, are you trying to pull forward goods and maybe anticipate deliveries, say, 30 or 60 or 90 days earlier? And if so, maybe you can quantify that in order to beat the rush, if you will?

That's a great question, Steve. We began several months ago to incorporate lead times into everything we’re working on, both for the Brand Portfolio and the Famous side, ensuring clarity in their purchases. On the Brand Portfolio side, Jay has effectively collaborated with the teams to narrow our assortments and focus on key items, as we cannot build the business on a broader range. We need to concentrate on fewer items but go deeper. We've done significant work in that regard. Additionally, we are actively diversifying our supplier base without rapidly shifting in one direction, ensuring we have a variety of producers for our shoes and container resources, while also focusing on consumer insights to guide our decisions. There’s a lot involved, but as I assess potential focus challenges, I see Q1 possibly presenting issues due to Vietnam and the various problems occurring there. However, we are taking steps to mitigate those challenges as much as possible.

As it pertains to spring and summer deliveries, can you give us a little bit of look into what the order book is like right now, say, compared to 2019 at this time?

Congratulations on the terrific results. As you saw the environment through the second quarter, any specific categories that you would call out, differing one from another? And pricing, how are you thinking your pricing going forward? Are there raw material increases that you're taking price on?

First of all, in terms of the trends and what we saw throughout the quarter, any of the iconic brands that had been performing really throughout the spring season continued to do so and the trends that you'd seen, whether it's in athletic and sport, whether it's foot bed sandals and Crocs. All of those things continue to be terrific. But what we did see at the consumer was much more comfortable and ready to go out and go to social occasions. That opened up dress and sandals and heels. Definitely, were something that the consumer demanded. And actually, I can tell you from our Sam Edelman business, we're completely out of stock in core sizes and things like the Hazel and the Yaro. So, that says to me that there is definitely some pent-up demand there. So that would be a little bit of a sense of what we see and early reads on boots, while it's extraordinarily early, it seems to be good as well. As it relates to price increases and input costs and really all of the costs that are going up right now, yes, we have definitely taken a look at all of that and are raising prices going into the latter part of the fourth quarter and for spring of 2022.

First of all, average unit retails for even the brand side were up about 8% in the second quarter, which was good. If we're going to see that, I think, build as we get into fall, really going into the 10% moat. So, that's where we're going on the average unit retail front and we have seen material costs go up as well. So, that's really aided toward that.

Congratulations.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Ms. Diane Sullivan for closing remarks.

All right. Thank you... Thanks again for joining us on today's call and for your interest and your ongoing support. In summary, I think you can tell, for all of our comments, we really believe we're well positioned to capitalize on improving consumer sentiments and all these great new purchasing habits to finish the year in a record-breaking manner. We also believe we are poised to maintain this momentum into 2022 and beyond, given the powerful one-two punch that we have of our expenses, direct-to-consumer network, anchored by Famous Footwear, and our exceptional portfolio of value-driving brands. In our view, our multifaceted platform for engaging consumers is a significant and differentiating strength, one that greatly enhances our overall value proposition. Thank you again and look forward to seeing you and on the next call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.