Caleres Inc Q1 FY2022 Earnings Call

Good afternoon, and welcome to the Caleres First Quarter 2022 Earnings Call. My name is Jeff, and I'll be your conference coordinator. At this time all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. And as a reminder, this conference is being recorded. At this time, I will turn the call over to Ms. Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Good afternoon. I'd like to thank you for joining our first quarter 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 U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors that could impact forward-looking statements. Copies of these reports are available online. The company undertakes no obligation to update any information discussed in this call at any time. 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 our prepared remarks and thereafter, we'll be happy to take your questions. I would now like to turn the call over to Diane. Diane?

Thank you, Logan, and good afternoon, everyone. I'm pleased to share that Caleres maintained its strong momentum as we moved into 2022, achieving record first quarter results across all key financial metrics despite challenges like inflation and supply chain issues. This marks our fourth consecutive quarter of record performance and positions us for another year of record or near-record earnings. With today's earnings report, we are raising our earnings per diluted share guidance to between $4.20 and $4.40. Our performance in the first quarter underscores the significant improvement we've made in Caleres’ long-term cash generation capabilities. Thanks to our strategic investments and initiatives, we believe we've effectively doubled our normalized mid-cycle earnings to around $4 a share. Examining the quarter further, we executed well and made significant strides in our strategic initiatives, building on our strong foundation. Highlights include record sales of $735 million, a consolidated gross profit margin of nearly 45%, and consolidated operating earnings of approximately $66 million. Additionally, we released our second ESG report in mid-April and are proud of our progress toward our long-term goals, which we expect to meet by 2025, if not sooner. Before discussing segment performance, I want to update you on our capital return program. In March, the Board of Directors increased our buyback authorization by 7 million shares, reflecting confidence in the business's strength and long-term outlook. During the first quarter, we returned about $15 million to shareholders through the repurchase of approximately 701,000 shares, or roughly 2% of our outstanding shares. We consider the buyback a prudent use of discretionary cash, and we believe our early progress on this front is already providing value to our shareholders. Given the inherent value in the Caleres structure, we feel well-positioned to maintain this momentum this year and beyond, supported by our dynamic and expanding brand portfolio along with our extensive direct-to-consumer network, which allows us to effectively reach consumers when and how they prefer to shop. We believe our multifaceted approach to engaging consumers is a key competitive advantage that enhances our overall value proposition. Now, turning to segment performance, let's start with our largest brand, Famous Footwear. Famous continued its strong performance, achieving another record first quarter surpassing last year's results for the same period. Notably, Famous remained focused on full-price selling, allowing us to uphold a strong gross margin level of over 49%, a 405 basis point improvement from the first quarter of 2021 and marking five consecutive quarters of year-over-year margin improvement. Despite ongoing supply chain disruptions causing delays, we are confident that our commitment to full-price selling and disciplined inventory management will enable Famous to maintain higher margin levels than historical averages. Alongside this strong margin rate, vigorous demand for our unique selection of brands, along with targeted marketing, planning expertise, and our strong local presence led to nearly $50 million in operating earnings for the segment, representing a nearly 4% year-over-year improvement even with a modest 3% decline in sales. Overall, our financial and operational strength, highlighted by an approximately 13% return on sales, showcases the potential of the Famous brand and sets us up for another successful earnings year. Before transitioning to the Brand Portfolio, I want to briefly discuss progress in key focus areas for Famous. With our 887 locations, we remain the preferred local footwear destination for millennial families. We continue to meet consumer demand through our top brands, which have proven to be strong contributors to Famous' financial performance. As we proceed through the year, we will leverage our leadership in athletics and strengthen our relationships with key brand partners. Moreover, we will focus on maximizing vertical opportunities between Famous and our portfolio brands, which could lead to higher margins for the overall enterprise. Notably, brands like LifeStride, Scholl's, and Blowfish all ranked among the top 10 best-selling brands at Famous last quarter. Additionally, we have noticed an increasing consumer interest in seasonal and occasion-based products, offering us the opportunity to use our fashion-driven brands to enhance sales. We find that when consumers shop for themselves and their families, they spend more and return frequently, making it essential to provide the right products in the right locations to expand our business beyond our core athletic and sports offerings. Regarding marketing, as mentioned previously, we completed a marketing attribution study for Famous last year and have used its findings to shape our 2022 strategies. We are now focused on expanding our contactable consumer file through new customer acquisition, retention, and reactivation. Consequently, we have identified opportunities to shift a portion of our marketing budget towards digital channels, offsetting the decline in year-over-year promotional activities that have more heavily impacted our digital business. The competitive landscape has changed, and we expect limited promotional activities this year. Therefore, it’s crucial to take a tactical approach to engage consumers. We are implementing targeted and personalized marketing strategies to encourage repeat purchases and transition traditional one-channel shoppers into omnichannel consumers. In April, we noticed a more comparable promotional environment to the previous year, resulting in year-over-year customer growth and an increase in spend per customer. As we prepare for the important back-to-school season, we aim to optimize our media investments for maximum impact. Although it's too early for specifics, I am encouraged by the early creative work from the team. The campaign reflects a contemporary image of Famous Footwear, informed by consumer analytics and initial feedback from our new store prototypes and refreshes. Speaking of our new store, we are focused on enhancing the consumer experience and have made significant strides. We recently tested a prototype store designed to elevate the shopping experience, showcasing our in-demand brands in an engaging way. We are also refreshing existing stores. Together, these efforts should enhance customer experiences, drive excitement, and unlock additional value from these already successful locations. Early trends from our prototype store and refreshed locations are encouraging, and we believe these efforts will strengthen our national presence and further differentiate us in the marketplace while generating solid returns. Famous is off to a promising start, with increasing brand awareness, improved inventory management, and support from key brand partners, positioning us well to capitalize on the current market landscape. Now, let’s discuss the Brand Portfolio. Following a strong rebound in the latter half of 2021, the Brand Portfolio delivered exceptional results, surpassing both the first quarter of 2021 and our metrics from the first quarter of 2019, setting us up for improved earnings contributions in 2022. We noted a 46% year-over-year increase in sales, driven by heightened consumer demand for dress and work-related products and replenished inventory levels among key retail partners. However, it is important to recognize that this wholesale partner restocking will likely stabilize as we progress through the year. Additionally, gross profit margin reached 38%, representing a 53-basis point improvement from the first quarter of 2021 due to favorable sales mix and a less promotional retail environment. Although ocean freight costs have been rising since last year, we successfully mitigated their impact in the first quarter through price increases that began to take effect. We will continue to strive to offset increased freight costs as the year unfolds. Overall, the Brand Portfolio generated $41 million in earnings, a $44 million increase over 2021 and approximately $28 million growth compared to the first quarter of 2019. These favorable results were fueled by double-digit growth from each brand, with several achieving triple-digit increases. This widespread performance illustrates the depth of our portfolio and shows that while we are benefiting from growth in occasion dressing, demand for casual and sport-inspired styles remains strong. Moreover, our strategic management of inventory is yielding positive results, ensuring the right inventory is available for our key brands and products. The brand teams have also aligned the organization more closely with consumer interests, allowing for a 23% increase in the portfolio’s direct-to-consumer business. This includes nearly a 19% growth from our owned e-commerce sites, reflecting strong year-over-year upticks across nearly all brand websites. We saw a 26% increase in new customers who appreciate our innovative designs and diverse offerings. We are cultivating a consumer-centric culture at Caleres and plan to leverage our strong brands and consumer insights to grow and maximize the value of our customer base over time. Looking more closely at some of our brand successes, it’s evident that consumers are actively working, traveling, socializing, and celebrating, with a significant focus on footwear for various life experiences. A major success story this quarter is Naturalizer, which is recovering from pandemic lows. Naturalizer's sales saw substantial growth compared to both the first quarter of 2021 and 2019, bolstered by good inventory levels and the strategic use of airfreight to ensure availability of high-demand products, particularly for special occasions. The online wedding shop and party-ready styles specifically contributed to this sales surge. Additionally, reduced promotional activity led to improved margins for the first time since the pandemic began. Sam Edelman also had a strong quarter, benefiting from heightened demand for dress products, particularly in the category where the brand excels. The digital business saw nearly 60% growth compared to the same quarter last year, and the introduction of the Sam & Libby brand at Walmart earlier this spring has been met with a positive reception. We are enthusiastic about the growth potential for Sam Edelman and its contributions to earnings. Progress at Allen Edmonds is also promising, with noted improvements in both digital and physical sales, higher average unit retail prices, and a 600 basis point increase in gross margin. Notably, demand for dress shoes and sneakers has continued into 2022, contributing to the sport category's growth as our second-largest segment. Lastly, LifeStride deserves mention, as its sales more than doubled compared to last year, delivering great designs at remarkable value across all categories, achieving higher margins and the best return on sales ever. As we shift focus to inventory, a core driver for growth in the Brand Portfolio this year will be better alignment with consumer demand. Therefore, we are actively managing our supply chain, expediting receipts where feasible, and emphasizing the importance of building inventories of top-selling styles to fuel sales through our Edit to Win initiative. We believe that effectively aligning inventory provided a competitive edge during the quarter, and we anticipate further opportunities to tap into demand as we continue throughout the year. In summary, the rebound in the Brand Portfolio is unfolding as we expected, with strong contributions anticipated in the year ahead. Going forward, we plan to leverage our excellent product design while adhering to our Edit to Win initiative to take advantage of robust consumer demand and unlock growth opportunities across our portfolio. We see a structural uplift in earnings expectations for the enterprise and are excited about the future potential for our brands and long-term value creation. Our established strategies and capital investments have significantly bolstered our earnings potential so far and position us for even greater achievements as we navigate through the year. With that, I will now hand over to Ken for a more in-depth review of our financials, capital return strategies, and revised outlook for 2022.

Thanks, Diane, and good afternoon, everyone. I'm excited about the structural changes we've made across the business and the momentum we drove during the first quarter. I'm even more excited about the potential for future value creation as we progress throughout the year. I'd like to start my discussion by sharing some additional details around our record-breaking results, our capital allocation plans and our outlook for 2022. It's important to note that most of my commentary will focus on the comparable period in 2021, with some supplemental comparison to the first quarter of 2019, where relevant and useful. We delivered consolidated first quarter sales of $735.1 million, which was 15% above the first quarter of 2021. As Diane mentioned, this performance was driven by the Brand Portfolio's outstanding 46.1% increase over the first quarter of 2021. In addition to great sell-through at our retail partners and a significant uplift in the direct sales across all brand divisions, this sales improvement in the Brand Portfolio includes $50 million of shipments to refill our partners' inventory pipeline. As planned, Famous Footwear sales declined a modest 3%, reflecting a lower store count and the easing of the pandemic in the prior period and that has spurred a burst in pent-up consumer demand. Our consolidated gross margin was 44.5%, up 144 basis points from the first quarter of 2021, reflecting another quarter of strong margin performance at Famous and improving margins at the Brand Portfolio. In fact, Famous Footwear delivered a gross profit margin of 49.2% in the quarter. This 405 basis point improvement over 2021 was driven primarily by the robust consumer demand for leading brands and style assortment, the continuation of more full-price selling, and another quarter of minimal promotional activity. The Brand Portfolio recorded first quarter gross margin of 38.1%, a 53-basis point improvement over the first quarter of 2021, due to favorable sales mix and a much less promotional retail environment. As Diane noted, we were able to offset the impact of higher freight and input costs during the period with higher average prices, as both cost and average price was up close to 13%. First quarter SG&A expense was $260.8 million during the period or 35.5% of net sales, a $17.3 million increase from the same period a year ago due to higher variable costs on our increased sales, additional investments in marketing, and higher wages and labor costs. Our operating earnings for the quarter were $66.2 million or 9% of sales, generating diluted earnings per share for the quarter of $1.32. This is up from $0.36 in the first quarter of 2019 and $0.60 in the first quarter of 2021. Our EBITDA for the trailing 12 months was in excess of $300 million and over 11% of sales. Turning now to the balance sheet and our cash flow. The company generated $19.7 million in cash from operations during the quarter and used that cash to fund our dividend, buy back shares, and continue to invest in our business. We ended the first quarter of 2022 with $305 million in borrowings under our revolving credit facility and no long-term debt. Our first quarter interest expense was $2.3 million, down $5 million from the first quarter of 2019. We expect our interest expense to approximate $10 million for fiscal 2022. I now think it would be helpful to spend a minute unpacking our inventory position. Our inventory at quarter end was up approximately 45% compared to the first quarter of 2021, which was unusually low. It was flat to the first quarter of 2019. 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% higher than our 2019 levels, including approximately $100 million of in-transit inventory not yet available to sell. The quarterly in-transit inventory level was down from $177 million at fiscal year-end 2021. Now let's turn to capital allocation. As you know, we carefully and constantly evaluate the most value-enhancing avenues for our free cash flow. At the start of the fiscal year, we put in place a flexible capital return program, inclusive of dividends, share buybacks and investing and growing our business. We executed on that plan during the quarter, repurchasing nearly 2% of our shares outstanding for $15 million, utilizing the cash generated during the period. In addition, since the start of the fiscal second quarter, we repurchased an additional 800,000 shares of Caleres common stock for approximately $19 million. When you include the purchases made during the second quarter, this brings our total share repurchase to date to 1.5 million shares or 4% of our shares outstanding. Our updated fiscal year guidance takes our share repurchase activity to date into consideration. We continue to view our stock as an attractive investment option and expect to make ongoing purchases under the existing authorization throughout the remainder of 2022. Finally, given the strong start to the year, and inclusive of the company's current expectations for its underlying business, along with what we know now about anticipated macro challenges that include geopolitical concerns, inflationary pressures and ongoing supply chain disruptions, Caleres now expects annual consolidated sales to be up between 2% and 5% when compared to 2021 and earnings per share to be between $4.20 and $4.40 per share. Additionally, we expect the second quarter of 2022 to be in line with the first quarter of 2022. It's important to note that our revised guidance range does include the impact of the share repurchase activity to date. With that, I'd like to turn the call over to the operator for questions.

Your first question comes from Laura Champine from Loop Capital. Your line is open.

Thank you for taking my question and congratulations on a strong quarter. I wanted to share my understanding of your comments that Q2 should be similar to Q1, and please correct me if I'm mistaken. I assume this means that sales and earnings totals will be alike, but considering the typical seasonality we experience, I would anticipate revenues to be higher at Famous and somewhat lower seasonally at Brand Portfolio. Does that sound right?

Yes, Laura, thanks for the question and an opportunity to clarify. On a consolidated basis, we expect sales and earnings to be very similar to what we just reported in 2022's first quarter. When you look, one of the reasons that we called out the $50 million of pipeline fill at our partners was that's really the difference between Q1 and Q2 for kind of the Brand Portfolio segment and then that delta to keep those sales relatively consistent would be the increase that you would see at Famous Footwear.

Got it. Thank you for that.

Your next question comes from the line of Dana Telsey. Your line is open.

Thank you. Good afternoon everyone and congratulations on the nice progress. In light of the current environment, how would you frame the health of the consumer, what you're seeing in pricing, what you're doing on pricing in Famous and in the branded portfolio? And any updates on the supply chain? And then I have a follow-up.

Okay. Great. This is Diane. I would say that consumer demand fundamentals appear to remain very strong. We are fortunate to have a diverse portfolio of brands that cater to various consumer segments and price points, including Famous, which resonates with many consumers and features the national brands they desire. Frankly, Dana, we have not observed any significant changes in consumer demand over the past few weeks. It continues to be as strong as it was in April, and we do not expect any major shifts as we progress through the second quarter and the rest of the year. While it's all to be seen, we feel very confident in the indicators we are seeing regarding our business. Regarding price elasticity and price increases, the promotional environment is quieter than it has been, and we implemented our price increases at the beginning of spring this year. Currently, it appears that our pricing strategy is effective. Additionally, we always strive to provide exceptional value in the products we offer to consumers. Lastly, concerning supply chain costs and lead times, I would say that we haven't seen any signals suggesting a decrease in input and transportation costs until 2023. We have planned for this as we refine our guidance for the remainder of the year. We'll see how negotiations at the ports unfold in July. Nevertheless, we are diligently working to ensure we have the right products and inventory available to meet consumer demand moving forward. Overall, not much has changed in that regard, but we believe we have a good inventory balance to support our needs.

Got it. And just a quick follow-up, the strength of Nike and Famous and how that's doing for you and then also the order book on the branded portfolio, how is that looking and anything we should be watching for?

Okay. Thanks, Dana. With respect to Nike, again, continues to be very good for us, and we're not seeing any slowdown in the demand for the Nike products nor our opportunity to be able to have those products in our stores. So our teams are doing a terrific job there. We're continuing to see the sell-through there be very, very good, along with, frankly, really a broad range of brands within the Famous experience. So it's been really very good all the way around. And in terms of the order book, I'll let Jay make a comment, but we'd say that we like what we're seeing, and it certainly supports the guidance that we have shared with you for the rest of the year, so Jay, maybe a little color on the order book for Q3?

Yes. I would say, Dana that the Q3 order book is shaping up nicely versus '21 position, and we are encouraged by our fill rate to date. We have adjusted our buying to account for higher transportation lead times, so that is resulting in a little of a higher fill rate. And while there are still a lot of uncertainties with port delays and COVID shutdowns, so far, we haven't experienced any significant cancellations and do not anticipate that being the case going forward.

Thank you.

Your next question comes from the line of Steve Marotta.

Good evening everybody. Diane and Ken and Logan, congratulations again on a terrific quarter. Diane, you touched on this already, I'm hoping maybe you could just put a finer point on it. Obviously, the guidance was very good for the balance of the year. What gives you confidence that gross margins will hold across the portfolio and that promotions just competitively won't tick up for the balance of the year?

Yes. Well, a couple of things. You never know for sure, but I think we have taken a very realistic view on our guidance for the rest of the year. We have very good visibility, obviously, into what our expectations are right now for the second quarter. Ken commented a little bit on that already. We also have really managed our promotions in our own stores to make sure that I think we had 70 fewer days, frankly, in the first quarter of promotional activity than we had last year. So we are really dialing it back. We're keeping our inventories as tight as we possibly can and managing the push and the pull of all of that in the way that we believe that we need to. And again, I think the teams have done a great job in focusing on the brands really and the styles that the consumer wants. So we've really made sure we have those right brands and those right styles to make sure that our margins continue to reflect the kind of improvement that we have seen for the last number of quarters. So again, feeling very positive, Steve, about what that looks like and again, it's all tied to, I think, really managing our inventory in the best way that we possibly can. And we have just outstanding capabilities in terms of how we plan and how we allocate inventory. And we have outstanding operational excellence on the execution of all of that.

Great. That's very helpful. And Ken, besides the pipeline fill that you referred to from the branded portfolio standpoint in the first quarter, were there any other puts and takes to shifting, say, earlier deliveries? Or was there any other significant call-outs for the branded portfolio side on shipments in the first quarter?

No, I think Diane mentioned we experienced double-digit growth across the brands, and several of them saw triple-digit increases. This reflects not only the variety of our products but also the consumers we are serving. We anticipate that the momentum we saw in Q1 will carry into Q2, but I wanted to highlight the pipeline fill, as that won't be replicated in Q2. Overall, all brands and categories are showing strong performance.

Very helpful. Thanks. I'll take the balance offline. Thank you.

There are no more questions at this time. Turning the call back over to Ms. Diane Sullivan for closing remarks.

Thank you very much. Appreciate you all joining us this afternoon, and we'll see you along the way. Some of you next week. So we look forward to that. Take care.

This concludes today's conference call. Thank you for your participation. You may now disconnect.