Q3 2022 Caleres Inc Earnings Call
Good morning, and welcome to the Claris third quarter earnings Conference call. My name is Melissa and I'll be your conference coordinator at this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
Under this conference is being recorded at this time I'd like to turn the call over to Logan Bona Kashi Vice President of Investor Relations. Please go ahead Miss.
Good morning, I would like to thank you for joining our third quarter 2022 earnings call and webcast a press release with detailed financial tables as well as our quarterly slide presentation are available at Clarus Dot com. Please be aware today's discussion contains forward looking statements, which are subject to a number of risks and uncertainties actual orders.
<unk> 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 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 and.
In discussing the results of our operations will be providing a referring to certain non-GAAP financial measures you can find additional information regarding these non-GAAP financial measures as well as others used in todays earnings release and our presentation on the investors section of our website. The company undertakes no obligation to update any information discussed in this call.
At any time.
Joining me on the call today are Diane Sullivan, Chairman and CEO , J Smith, President and Jack Calandra, Senior Vice President and CFO 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 Dan Dan.
Thank you Logan and good morning, everyone. It's an exciting time at Clarus with our teams' energy running high as our momentum continues today I'm very happy to report that Claris continued its strong performance in the third quarter of 2022.
We built on our excellent first half results, which were driven by another period of outstanding operational and financial execution.
These results are further proof of the strength of our brands.
Our compelling product and product creation power of our disciplined inventory management and of course, the agility and resiliency of our operating model that is showing strength.
For the third quarter, and even with that as the consumer navigate this challenging macroeconomic environment.
We achieved record quarterly sales of 798 million nearly 2% higher than the third quarter of 2021.
With improvement once again, driven by a seven 6% year over year increase from the brand portfolio segment.
And we delivered another strong return on sales, reaching more than 7% as the brand portfolio recorded robust third quarter earnings and famous held its operating margin into the double digits, achieving 12, 3%.
And all in this generated operating earnings of 57 million and earnings per share of $1 15.
I will note that at $1.15. We've ended the first nine months of 2022 with $3.86 of earnings per share.
Or $1.66 above our pre pandemic record.
In addition, during the period, we also grew total clarus market share.
We continue to manage our inventory well and ultimately ended the period nearly 16% lower than the second quarter of 2022.
And we returned 24 million to our shareholders through share repurchases and dividends.
Al and excellent results with a team that is determined to continue to drive this momentum.
Now as you know this will be the last time that I speak with all of you as CEO and I will transition to executive Chairman in mid January .
I cannot express how much of an honor serving as CEO of Polaris has been for me I'm proud of what we've accomplished and proud of the diversified portfolio, the consumer and product driven organization and they inclusive culture that we've felt during that time.
You can absolutely count on the fact that the strategic focus areas of delighting consumers.
<unk> product that fits in as relevant creating inspiring experiencing in games chains are well embedded into the fabric of who we are that will never change.
I want to thank my leadership team for their collaboration creativity and drive for results and of course their commitment to all of our colleagues consumers and our partners.
And I want to thank all of you in the investment community for your interest and support of me and our organization.
To say that I'm excited about the future of claris would be an understatement I see tremendous potential for the earnings power of the company in fact with our record earnings performance in 'twenty, one and our expectations for another record this year I am confident our pre pandemic earnings level is firmly in there.
Their view.
Furthermore, I believe in the resiliency and the portfolio and I'm completely confident in our ability to create long term value for our many stakeholders.
I believe our expertise and capabilities in brand building and product creation marketing digital commerce, and our supply chain management provide a unique foundation.
From which to continue to build.
And I'm also confident that this will be a successful executive transition.
As you well know Jan I've been working side by side for many years and I can say that without reservation. He has an unending commitment to excellence. He knows the footwear category of our business and our consumers very well and he is ideally suited to lead the organization through its next chapter.
And his leadership roles numerous ones at Clarus and his distinctive merchant mind has prepared him well to steer the company into the future.
And although many of you may have met him by now I would like to take a moment to introduce Jack as well who joined US in September as CFO and his joining his first claris quarterly earnings call today.
As you get to know Jack in this role I'm confident that you'll be impressed by his strong financial background and his consumer goods expertise.
As you can imagine the snack next step in my personal careers as exciting as it is bittersweet.
That said I'm thrilled to most of my new role as executive Chairman I look forward to supporting J, Jack and the rest of the Polaris leadership team.
I'd say based on what we've.
We've accomplished together.
And I also look forward to focusing on continuing to Hans the Claris culture drive strategic initiatives to unlock growth and assist in ensuring we have a value enhancing pipeline of growth opportunities ready for when the timing is right.
Now I'll turn the call over to Jay to share more detail about our third quarter results Jay.
Thank you Diane for your kind words, your confidence and your support.
We've worked together for a long time and I feel so fortunate for that opportunity.
In the past 12 years as our CEO you have led the transformation of our financial performance our portfolio of brands, our digital business and our employee culture.
I want to thank you for your leadership and Mentorship and I look forward to your ongoing counsel as executive Chairman.
Yeah.
Now, let's talk about our third quarter performance Choleri did deliver another period of strong results, we leaned into our diversified brand portfolio and our advantage inventory position to meet the robust demand in key trending segments of the footwear market.
At the same time, we continued to prioritize investment areas, namely consumer marketing and experience that is value driving an essential for future growth.
I'll begin with our famous footwear segment.
Payments continued to perform at a high level during the third quarter.
Up against the blockbuster period last year famous beat our expectation delivering a modest year over year sales decline. However.
Limiting promotional activity the business generated margins higher than pre pandemic levels, which were also in line with our plan.
Okay.
GAAP will walk through the specific key financial metrics of each segment in more detail in just a few minutes, but I would like to call out a few highlights that drove our quarterly performance at famous namely Kids brand curation fashion acceleration and consumer experience.
Okay.
First our back to school Kids business was a highlight outpacing last year's robust performance.
In fact, our kids business increased 3% in the 10 week back to school period versus 2021.
The results for the first full quarter, where even better up 6% as we position the right inventory behind the right brands and styles.
Clearly the kids category is a strategic differentiator and our long term growth driver for famous.
And this recent performance further solidifies our position as the destination for back to school footwear.
Second the curated assortment of national brands and styles continued to resonate with the famous consumer target the millennial family.
Famous the top 25 brands represented 89% of sales during the period.
And we saw acceleration of those key brands as inventory strengthen later in the quarter.
Payments also experienced strength in its non athletic business aligning with the demand we saw with the rest of our Polaris brands.
Third we are seeing meaningful progress in our effort to meet the consumer and to build our competency 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.
This was accelerated by growth in top key market brands as well as by the vertical integration with our Claris France.
Our own Polaris brands performed very well at famous during the period with sales increasing 19% versus last year.
Life stride in particular was a standout breaking into the top 10 of all selling brands at famous for the quarter.
Our Doctor Shoals footwear experienced similar results posting a double digit increase across both mens and womens segments.
I will also call out natural either which had an impressive year over year sales performance, increasing our fashion component for the famous consumer while offering a strong comfort proposition.
All of these improvements demonstrate our ability to take our extensive understanding of our consumer and deliver the right brands and styles in the right quantities and locations to drive highly profitable incremental sales.
This is all in addition to the core athletic and sport business that famous is known for.
Okay.
Lastly, clarus have continued to invest in the consumer experience at famous amplifying a tangible brand image across our omnichannel.
In recent quarters, we have re platform famous footwear dot com.
Updated high potential and high performing stores.
Initiated a new store concept that brings the best footwear brands and trends to life and showcases all of the enhanced visual assets and communication focused on the family that we display on our website.
So far the results seem very promising.
Our digital performance improved 2% in the quarter.
And our early read from a new store concept show a significant uplift in financial performance.
We are encouraged by these developments and look forward to providing more updates at year end.
Overall famous has delivered a strong performance during the first nine months holding its powerful double digit operating margin well underscoring the strength of the famous brand.
And while we recognize that there is uncertainty for consumers given the threat of mounting inflationary pressures. They missed is well positioned to compete and win even in a challenging market due to its leadership position with the family.
Its advantaged assortment of national brands.
Retail locations in key markets across the country with exceptional service by our team.
And enhanced consumer experience in stores and online supported by customer insights.
Yeah.
Next I'd like to move to the brand portfolio.
Brand portfolio turned in an outstanding performance in the third quarter of 2020 to achieving another period of year over year improvements across all key financial metrics and putting us well on our way to delivering a significant step up in the segments overall annual.
<unk> earnings contribution in 2022.
Okay.
This performance was driven by robust demand and strong consumer reaction to our fashion products with most of our lead brands delivering positive sales trends during the quarter.
These results reflect the progress the team has made against specific key initiatives.
Including elevating our product design fit and relevance.
Sharpening our brand positions and messaging.
And aligning inventory with demand with our edit to win strategy playing nicely for more of the right styles and skus quantities and sizes to meet the consumers' needs.
And while you've heard from our peers that retailers are being more conservative with inventory our capabilities have allowed us to minimize the impact to claris.
For example, our drop ship partnerships continued to support meaningful sales outcomes.
We expect this trend to continue through 2023 and it serves as another example of how we can continue to connect with consumers maximize our inventory investment and provide our retail partners flexibility in periods of uncertainty.
Okay.
Also during the quarter the brand portfolio achieved an outstanding performance in our brand's website sales.
Lighting, the power of our brands and our improved digital capabilities.
This included a nearly 22% growth from our owned e-commerce sites with solid year over year increases from nearly every brand with the largest gains coming from Sam Edelman and naturalize her.
In total the brand portfolio side saw an increase of 24% in new customers versus 2021.
Clearly these results demonstrate how we can leverage our powerful brands, our customer analytics and our growing expertise in this area to unlock more value from the total choleric customer file going forward.
Yeah.
I'd now like to highlight some brand level detail focusing primarily on the portfolios lead brands.
Beginning with natural either which is delivered an outsized performance all year long gaining market share and driving sales earnings and average unit retail improvements.
During the third quarter naturalize, our sales increased nearly 60% over 2021 with gains in dress casual and boots, especially tall shaft boots.
Average unit retails increased by 20% over last year, driven by newness and style and innovation.
The brand's focus on inclusive sizing has resonated with consumers not only through offer any extended sizes and with but also by offering wide shaft proportions, and it's tall Buddha assortments.
The brand also launched an elevated look with improved functionality on naturalize their dot com.
The new site emphasizes the strength of elegance and utility along with comfort and fit and it connects with consumers through authentic product concepts and stories.
The result.
Sales of naturalize their dot com grew more than 50% in the third quarter and new customers to the site grew by 19%.
With over half of this increase in younger consumer demographics.
Okay.
Naturalizes performance serves as another example of the power of our brands combined with the power of our capabilities and our talented team members.
The ongoing evolution here has placed the brand in the top 12 evolved fashion brands and sales performance for third quarter. According to NPD.
Next our Sam Edelman brand delivered continued strong results with sales increasing 26% year over year.
While the brand wholesale performance showed strength across all footwear categories via trend right styling at Sam Edelman Dot com business more than doubled in the quarter.
Key to driving this performance with a heightened focus on the aspirational luxury consumer including fall direct mail and a global marketing campaign, featuring supermodel Naomi Campbell.
These initiatives translate into a 75% increase in web traffic, a 55% increase in new consumers and a new record in digital sales for the month of September .
Clearly there is a lot of momentum with fail.
Next to Allen, Edmonds, where newness and it's well known brand icons as well as sneaker and food offerings showed continued improvement versus last year with higher average unit retails and margins.
Yeah.
Product collaborations and limited drop events continue to delight consumers and drive full price selling.
Our court and trunk show with our most successful ever and our collaboration with the brand Barber an exclusive styles became immediate best sellers.
Both of these events highlight the brand's commitment to authenticity and Kraft, which is at the heart of the Allen Edmonds brand.
Also new this quarter is a relaunch of our collectors loyalty program, allowing us to enhance our relationship with our best customers.
There are many other brand examples I could give but to summarize the consumer continues to respond to newness and fashion aligned with our brand's clear DNA.
Our brand portfolio is more diversified and relevant and focused than ever and our teams and processes are flexible and able to pivot to meet changing consumer demand.
Looking ahead across the entire portfolio the brand teams will lean into their strong product creation ability.
Build on consumer insights and build on our own E Commerce business.
Manage inventories using speed to market as a catalyst.
And further our edit to win initiative all to unlock opportunities for future growth.
Overall 2022 is progressing in line with our expectations.
In light of the more challenging macroeconomic environment.
Entire team at <unk> will be focused on controlling what we can.
Managing expenses and reducing our overall debt levels.
However, our strong execution through the first nine months allows us to say with confidence that despite the uncertainty in consumer spending and the broader economy. We are confident in our ability to deliver record earnings per share this year.
In closing I am energized to be taking on the CEO role at this moment in <unk> evolution.
Our team has established a great foundation from which to build and I am optimistic about our prospects for long term profitability.
Further I am highly confident in our ability to generate strong levels of cash and drive additional shareholder value.
With that I will now hand, it over to Jack for a more detailed view of our financials Jack.
Thanks, Jay and good morning, everyone I am thrilled to be speaking with you on my first <unk> earnings call today I will provide.
Provide additional details on our strong third quarter results discuss our capital allocation progress and plans and share our improved outlook for full year 2022 financial performance.
As a reminder, my comments will be on an adjusted basis and will focus on the comparable period in 2021.
Some supplemental comparisons to the third quarter of 2019 were helpful.
Please see today's press release for a reconciliation of adjusted results.
Sales were $798 million, an increase of one 8% versus last year.
As Diane mentioned this performance was driven by a seven 6% increase in brand portfolio sales.
Famous footwear sales declined two 6% slightly better than expectation and comparable sales were down 8%.
Gross margin was 42, 6% effectively in line with last year, reflecting a decrease in famous gross margin and increase in brand portfolio gross margin and a higher contribution of brand portfolio sales to total company.
Famous gross margin was 44, 7% down 290 basis points versus last year.
The decline reflects more normalized pricing and increased promotional activity versus last year when inventories were exceptionally low due to supply chain constraints.
Notably gross margin was up 370 basis points versus the third quarter of 2019.
Brand portfolio gross margin was 37, 9%, a 490 basis point increase versus last year due to higher wholesale prices, which were up 16% on average.
Growth in higher margin sales from the direct to consumer channel and a favorable brand mix.
Gross margin in brand portfolio increased 70 basis points versus the third quarter of 2019.
SG&A expense was $283 million or 35, 5% of sales as.
As communicated on our second quarter call. This includes approximately $9 million of higher stock and incentive compensation expense most of which is a timing shift from Q2.
Operating earnings were $57 million and operating margin was seven 1%.
Operating margin was 12, 3% at famous and six 9% at brand portfolio.
Net interest expense was $4 million.
$900000 higher than last year, given higher borrowings on our revolving credit facility and a higher borrowing rates given the increase in LIBOR.
Diluted earnings per share were $1 15 at the high end of our previous guidance.
EBITDA for the trailing 12 months was 299 million or 10, 1% of sales.
Turning now to the balance sheet and cash flow. We ended the third quarter with approximately $365 million in borrowings on our revolving credit facility and no long term debt.
Inventory at quarter end was 649 million up 19, 5% versus last year and up slightly compared to the third quarter of 2019.
On hand, and available to sell inventory was up and goods in transit were down materially.
Notably inventory was down 15, 8% sequentially.
By segment inventory at famous was up 17, 5% versus last year and down 11, 5% versus 2019.
At brand portfolio inventory was up 22, 6% versus last year and up 14, 1% versus 2019.
We.
Ignite is the importance of maintaining a healthy relationship of inventory to sales and expect continued improvement in inventory levels in Q4.
Regarding cash flow from operations, we generated $19 million during the quarter and deploy cash for strategic investments in the business paying our dividend and buying back shares.
In the third quarter, we repurchased 838000 shares at an average price of $25 72 per share for a total cost of $21 6 million.
Including the dividend, we returned $24 million in cash to shareholders in the quarter.
Looking ahead, we expect to generate a significant amount of cash flow from operations in the fourth quarter.
While we have six 4 million shares remaining under our current board authorization and we will continue to consider share repurchases based on market conditions. We believe at this time the best use of free cash flow after maintaining the dividend is to reduce our revolver borrowings and increase.
<unk> overall liquidity.
As such our guidance does not assume additional share repurchases this year.
Given our.
<unk> performance year to date and our current expectation for Q4, we are tightening our fiscal year 2022 earnings outlook to the upper end of our previous guidance range as such we now expect full year 2022 diluted earnings per share to be between $4 30.
And $4 40.
We are reaffirming our previous guidance for full year 2022 sales to be up between 4% and 6% versus 2021.
And we are providing guidance on several additional metrics as follows.
We are planning continued improvement in inventory levels, and expect Q4, ending inventory to be up mid single digit percent versus last year.
Given the recent increases in interest rates and the likelihood of an additional increase from the fed in December we expect our interest expense to be about $14 million for the year.
And finally, we expect full year capital expenditures of about $55 million.
With that I'll turn the call back to Diane for some closing remarks, thanks, Jack and as you can see we are extremely encouraged by our results year to date and even with the uncertainty in the macroeconomic environment. We're very confident will close a year and a record setting manner.
Going forward our portfolio is strong our teams are aligned and we still have plenty of runway for growth. So we're poised to generate significant value for all of our stakeholders with that I'd like to turn the call over to the operator for some questions and answers operator.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key our first question comes from the line of Steve.
Marotta with C. L. King <unk> Associates. Please proceed with your question.
Good morning, Jane J, Jack and Logan Diana Congratulations again on a just incredible career and an incredible run at Choleri youre going to be very minute I'm sure on the calls.
Thank you Steve I really appreciate that great thing and Jay of course welcome again.
Thank you.
Yes.
Can you talk a little bit about November to date and if it differed at all from the rate of sales in the third quarter at both branded portfolio in famous.
Yeah sure let me, let me start and then I'll kick I'll kick the ball around a little bit this morning with that both Jay and Jack but on this one as it relates to our brand portfolio of business quite honestly, our trends going into the fourth quarter have continued to be as good if not better than what we saw in the third quarter. So.
We're feeling very good about.
How that is looking at.
And.
For the fourth quarter as it relates to the famous side of the business and as you've heard from many folks.
That certainly the customers have been under stress there was some weather related issues out there and.
Sentimental has been a little off so we were stayed where tragedies super thoughtful in our guidance given both the strength that BP and a little softer on the famous side, how do we put those pieces together to really guide very smartly for.
The fourth quarter. So Jack maybe you could just talk a little bit about what the assumptions are around that I think thats, probably the most helpful way to share our thinking sure. Thanks, Diana Hi, Steve So really at the low end of our guidance at 430.
We would assume that that's famous.
Comparable sales could be down as much as low double digits and then at the high end famous would be down sort of mid single digits on comparable sales and what I would say is kind of where we are quarter to date is kind of in between those two numbers.
So feel really comfortable with the range we've given.
Both to protect on the downside and then to give us some upside opportunity as well.
And then reiterating that on brand portfolio feel very good about the current trends on that and they seem to be continuing that's right yes.
That's very very helpful, absolutely, 100% and I think I asked this on the last call as well and I know you don't specifically provide order book information, but as we look out through the first half of 'twenty three can you talk a little bit about.
What you're seeing.
Maybe how much drop ship.
Has increased as a percent of sales during the quarter so that.
Actual order book does not completely reflective of what is ultimately sold during the quarter.
Maybe a.
A little bit of it.
It might be a tale of two half next year.
Great question and I'll, let Jay talk a little bit about the order book and drop ship, because that's really actually the drop ship businesses has been we were early adopters I think in that in the end that's continued to be a real advantage for us, particularly on the I would say the last six months Jay with you yes.
Really provides a lot of flexibility and really a way to maximize our inventory going directly to the consumers.
And I would say two things number one the drop ship business has continued to grow high double digits during the quarter and.
We're seeing that be around that 20% of our business. So again its supplemental to the total but still very very important significant to the brand portfolios business. The other thing is is that our order book is actually really in line with where we've been going into the quarters as we go through with so much of it being dynamic now with our drug.
<unk> ship and our replenishment business that.
Where we're really seeing more of that come through that way, but so we feel pretty confident in our order book as we go into.
Spring right now.
Jim when you say in line I just wanted to understand that is that roughly flat with last year.
Where it is is we actually it's been the same percentage of where we've gone into each quarter. So it allows us to really capture the rest of it into there. So yes, it's been in line with I.
I would say historical new normal quarters, I think 'twenty two is a funny year and it was a little lopsided as we went quarter to quarter, but thats really reflects where we've been in this third and fourth quarter. So we feel quite confident and it has evolved right.
We used to look at order book only we've yet to look at the drop ship capabilities. When you look at our own direct to consumer businesses. So it's a mix.
And all of that is very much in line with what our outlook looks like so feeling pretty positive about that and I think Steve you know the other thing on that point as you know.
We really did have the inventory on the brand portfolio. This fall, which really helped accelerate our business and when you have a good business going into the next season that is very helpful as well.
So you know how that all works.
Sure sure sure excellent.
One more question as it pertains to cost and pricing can you talk a little bit about what is going on in the first half of 'twenty three and is there the potential actually for sourcing deflation in the second half of 'twenty three compared to the second half of 'twenty two.
Yeah.
Well I think I'll start and Jay can add some color to it.
We're thrilled with the price elasticity that our brands showed really all through 2022.
That price increase of 16%.
That really stuck on the brand portfolio was I think a fantastic.
Our priority for sure there may be some deflation and.
The input costs.
But there is also really going to be additional ocean freight savings and other opportunities.
No.
And Steve I think you know.
Both Jay and Jack.
Certainly support this point that our focus is absolutely on continuing to hold and maintain these margins going forward. So while we're going to do everything there will be some there will be tailwind there'll be some headwinds in all in our goal is to continue to deliver higher gross margin levels I would say absolutely.
And then the other thing is we'll continue to attack that would speed all the way through the reorder system and I think that will help us pick up additional scale and savings as we go forward.
The supply chain really returns back to what we've seen is more normal lead time levels.
That's terrific. Thank you very much.
Thanks, Dave appreciate it.
Thank you. Our next question comes from the line of Abbvie Zanex with Piper Sandler. Please proceed with your question.
Good morning. Thanks, so much for taking my question I just wanted to ask about the inventory I mean, I'm moving very telling me being up around mid single digits, but ended the year.
It's certainly impressive so can you just talk about your strategy on how you're going to move that inventory both at famous.
And the brand portfolio and then I guess, how are you thinking about promotions at the brand portfolio and are you concentrating now it's more in your DTC channels versus putting them.
To sum of the wholesale partners.
And then I guess on just balancing newness in this product creation that you're talking about to drive demand.
That excess inventory thank you.
Yeah. So I'll start Abbvie do you have a lot of questions on <unk>.
If I, if I don't unpack them and they're in the right way, let us know and well and will.
Certainly add some more color to it I think.
Our inventory position, we feel of this talk about the famous footwear side I think we're in terrific position.
At famous we as we got some of those.
New goods and during the course of the quarter, we actually did see some acceleration in those pockets in demand kind of style set that famous had we are got plenty of room and within our guidance to make sure we maintain our competitive position.
In the in the marketplace and in the fourth quarter of this year, so feel like again through all of our our guidance and what we've what we planned that that we don't really see any issue and we want to make sure that we go into the first quarter next year and a really clean position and in fact I think Jay.
We saw that almost 60% of our inventory is is really new quarter. So we're really hoping that that newness is going to really motivate the consumer to buy so we believe we have it pretty well covered there on the brand portfolio side.
We all know that in the second quarter, our inventories increased as all of the endemic issues go lives and some things came firstly there came a lot early but you know as we've gone through the back half of this year, we have really not been focused on promotional promotion or liquidation.
At all it's been fundamentally full price selling because we frankly did not have the inventory last year, we were down I think at retail somewhere on average about 30% and our inventory levels and brand portfolio last year. So the fact that we have some inventory is terrific and we're planning on ending the year.
Are you now as Jack mentioned and in a good spot.
While it was lumpy through the year here and there but of course.
Where it wasn't it.
As we end this year going into next year and believe we have tons of opportunity to chase and to manage the business and whatever the new normal kind of looks like.
And I would just add is that in brand portfolio, we really saw it come in early and so this was really we really ended third quarter exactly where we thought we would with inventory and we see fourth quarter coming in to that same place and also that we don't have to frontload anymore because of the supply chain normalizing.
So we're going to see it return to a much more manageable type of business with better turns throughout the.
As we go forward so anyway, but the fall is really it's exactly what we said it came in early and it's really being driven down and Fortunately, it's in the right styles that the consumers demand it.
Great Super helpful. Thanks, So much.
Thanks Savi.
Thank you. Our next question comes from the line of Laura Champine with loop capital markets. Please proceed with your question.
Thanks for taking my question and congratulations Diane and welcome again, Jay and Jack I really just have one question and it's about one famous footwear can be expected to turn that comp positive again, and I guess embedded in that question is what's going on.
I'm, an AUR perspective.
Whether you know for better for worse right now and in the in this current period.
Well I'll take I'll start with the end.
Right now for the third quarter. Our AUR is were actually slightly up in famous footwear for the quarter. So that actually reflects I would say good solid.
Demand and help to it we.
Really saw athletic come down in the.
Third quarter, and we saw a non athletic increased at the same time, so as we look to move that more to an even balance I think where we're going forward for that for 2023 I think we are still.
Going through in the fourth quarter and really trained.
I think really I think our forecast really reflects any risks that's out there but.
I think we'll see that moving into 2023, so Laura I'd add maybe Apple things Jay as well on this topic. If you look at the quarter right. We were down just 1% on a comparable store basis, which really wasn't.
Not bad in this overall environment, particularly as you think about the athletic business, which is 60% of our business in the quarter as a category in the total market.
It was down in the.
High single digits. So.
We think as the consumer continues to move and better balance now they when they start buying hazelett again in a little more robust way and as Jay and the team continue to build out that not the other non athletic and fashion side. So we're balancing sort of the.
Categories within the store and famous we think that actually is going to truly help and left that that comp from down one two.
What what we expect in 'twenty three to be in a more positive place. So a lot of it is this category category driven.
And as we drive the fashion side of it a little bit stronger assignments that will that will really help I think that's a big strategic shift for everybody and kids, that's going to allow us to change the momentum and get more inventory this year and get more inventory in those categories yet.
So.
Does that help.
It does thank you guys.
Alright, Thank you Laura.
Thank you. Our next question comes from the line of Mitch <unk> with Seaport Research Partners. Please proceed with your question.
Yes, thanks for taking my questions.
And best of luck to you in your new role.
So I want to start I've got a few questions I want to start on the on the famous side.
So the quick.
The range of guidance in the fourth quarter, obviously, that's below what you've delivered in Q3 and I'm just trying to better understand that how much of that is just that the macro seems worse than what it was in the third quarter versus maybe you know.
The kids business is maybe a little worse, just given that we're post.
Back to school and I'm wondering maybe how boots are influencing kind of the trend that youre seeing right now just maybe given kind of a warm start to the season, although better weather in the last week.
Some of that in terms of kind of how youre looking at the current trend in that business. Some good guide for the quarter.
Yeah, maybe maybe I'll just start Mitch and give you a little perspective.
Recently, obviously because of the seasonality of everything and with the weather being is a little more challenging late October into early November .
<unk> changed those categories that are more seasonally influenced not only at famous but everywhere has shown really really good rebound.
So as you would expect that that is very much kind of what our performance.
Looks like I think the other thing is that there is tremendous.
Tremendous amount of shifting going on in <unk> and in the macro environment that we wanted to make sure that we really had.
The right kind of room in the fourth quarter to make sure.
You don't deliver that the earnings per share that we had laid out there and gave famous plenty of room and the company to make sure that we could do that and go into 'twenty three in a way that we felt was really kicking up.
And continuing to support the momentum so Jay and Jack and I'm happy to have you add any other comment ill. Just said, we did see boots off to a strong start in September at famous and then Thats. It got warmer it cooled off a little bit the trend and then going into November it started to pick up again, so we're feeling good about.
That piece of it with the fashion part of the boot business being the strongest right now.
Yeah, I would just add that I think the results we've seen quarter to date on famous are pretty consistent with what we've seen in the industry and just a reminder, which is probably different from a lot of others is that Q4 is our smallest quarter. So less material on the full year, then I think some of our other players in the industry.
And then just a follow up on boots can you just remind me.
If I recall correctly last year, you know December was particularly warm I don't know if that was a negative on your beef business last year, plus I think there are a lot of late deliveries. So just as you look at that comparison as you kind of see the quarter playing out how much of an opportunity is there on the <unk>.
For the quarter and even on the on the brand on the BP side, just in terms of baby replenishment can you kind of walk you through that.
Yes.
And our BP side I'll start at that pace.
Our boots are really a significant portion of our business up to 30% across the portfolio and we do see more opportunity.
Our inventories really were very out of line last year and so we really didn't have the boot inventory. We're in good place. There now so we do see some nice delta is coming through as we go into fourth quarter.
And that piece of it and even with famous.
Boots in Q3, we're actually up a little bit for the.
<unk> quarter, and we do feel like we have more opportunity there as we go in particularly on the on the fashion part of the boot business, which seems to be the best part right now.
And then Chuck just on the on the again on Q4.
Maybe I haven't had the chance to sort of back into the margins for the quarter, but.
Can you just kind of maybe.
Hi, well, we'll talk about some of the puts and takes that you're thinking about Q4, maybe especially on kind of the merch margin side kind of how youre anticipating promotions.
Yeah, well I think we're expecting an increased level of promotional activity.
Currently versus last year, and Mitch I think Theres a couple of factors. There. One is we know that inventories in the industry are higher.
We know that the consumer is the consumer wallet is a bit more stretched than it was last year and so I think those two factors are.
Inclining us to think that this is going to be a more promotional.
Period, we also have.
Versus last year, our inventories, we had very little inventory last year because of some of the supply chain constraints. So for those reasons, we're expecting I think to get to a more normalized level of pricing and promotional activity in the quarter and that's factored into our guidance.
And I guess final question just on the on the famous <unk>.
Margins, you mentioned that the gross margin there it's up 370 bps from Q3 19.
So just maybe kind of remind us you know some of the structural changes to the business that has allowed you to deliver that level of profitability.
And how sustainable you feel like those changes are.
Well, let me start on that on that Mitch on on that some of the structural changes that I can really actually speak to it from a total company perspective.
And there's a couple of probably most the biggest significant areas would be really in the margin rate assumptions across the company both in for famous and for our brand portfolio. We really believe that we are going to be able not to maintain things at the high level at famous in 'twenty, one but somewhere.
There between historical and those 21 levels, which is you are even seeing is still a little bit better than that today. So that's that's one element the brand portfolio.
The margin improvement that we're seeing now getting much higher highs.
Thirties.
Let's hold 40 at some point in time, but that that structural change that's happened. So the whole margin profile of the company because of how we've been able to price. The edits we've done a whole lot of by the host of other things have really changed that the second thing was we exited.
Brands, and we exited stores and that structural cost came out of our P&L as well interest expense was a bit different share buyback.
Depreciation and amortization, it's been a big factor of it as well and then even corporate payroll. So when we look at all those pieces and add them up and we take a certain percentage we don't assume it's all going to be better. It's very very clear to see that the materiality of that is going to be significant for us going.
Forward with the most important.
We look at this management of SG&A and expense on a day to day basis. We we took $100 million out a couple of years ago. We continuously look at that to make sure that we're reallocating that spend in the right way, but the real one is gonna be those margin rates and and that's going to be.
Critical and that's where I would say 80% of our focus is on making sure that that continues to be where it is today or better as we go forward.
I think that's what you know what I would say with respect to the you know the.
The structure for the entire enterprise is that helpful for you.
It is thanks and good luck for holiday.
Thanks, Thank you.
Thank you ladies and gentlemen, our final question comes from the line of Dana Telsey with Telsey Advisor Group. Please proceed with your question.
Good morning, everyone, and congratulations Diane and Hello, J, Jack and Logan.
Thank you Dana.
Are you.
So.
Current trends we've been hearing about end of October into November can you frame, how it's looking for you guys with famous in the brand portfolio and next up is the <unk>.
Half of the brand portfolio is very impressive both in terms of margin sales increases and how it combines and interacts with famous footwear would that path of operating margins of the of the brand portfolio improving what do you see as the long term opportunity in terms of that margin and the stickiness.
The famous footwear operating margin now in that double digit range with the promotional environment.
In terms of how you are.
Managing pricing and promotion that that maintains that stickiness or as the benefits from supply chain reduction can it offset some of the promotional headwinds that may arise. Thank you.
Well, let me start gain on a couple of those things I think is the short answer answer on that is the sustainability of this on the operating margin side. It is yes, we absolutely believe there's enough stickiness with is the structural changes that we've made the way that we approach.
<unk> the business.
Creation capabilities, we have and our focus on margin as I just said is absolutely.
And it will allow us to continue to make progress against that and I know Jay and Jack as we move into 'twenty three.
We'll certainly be sharing more with you about that and are really planning to do an investor day sometime in the first half of 'twenty, three where we share a little bit more where they all share a little bit more about.
Their their outlook for the next couple of years, So I think more to come on that but the short the short answer is yes, we absolutely believe that we can and then secondly, Jay a little bit I spoke about earlier, but maybe on the trends that we're seeing and then maybe Jack can close it out on reiterating kind of what are some of our assumptions were.
Well, we're certainly seeing them on the I would say the non athletic side of the business, we're seeing multiple categories open up.
In terms of low firsthand flats are very very good right now and again anything that feels comfortable really trending nicely as consumers continue to select new things to add to their wardrobes, our boot business on the brand portfolio side is good. It was also good on famous and and we see that.
Starting to tick up as the weather gets.
Colder at did say more of the fashion side of that is really where.
The dynamics are and obviously our brand portfolio fits in perfectly there.
You picked up on it it also works very nicely in our on our vertical integration there with several of our brands like stride Shoals.
Even some Franco sarto are naturalize are coming in nicely as we really open up that whole famous opportunity there as.
As we look to integrate that.
And it's coming off really nicely back to the margin question. We don't see any return on that we feel like we've made enough structural changes and also the way that we're running the business. Both on the famous side that has really more of the brands. They want at higher retails and then also we really did change.
The mix of where we're really focusing on the brand portfolio side and that gives us reason to believe that that will continue.
Dana has that is that yet to the core of your question works great. Thank you very much.
Alrighty, Thanks, Dana Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to MS. Sullivan for any final comments.
I just wanted to say thank you for joining us this morning, and wishing everybody a happy Thanksgiving, we'll see many of you next week and looking forward to that thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Yeah.