Q1 2023 Caleres Inc. Earnings Call
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are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. At this time, I will turn the conference over to Logan Bonacorcy.
Vice President of Invest Relations, please go ahead.
Good morning, thank you for joining our first quarter 2023 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are available at www.calaris.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 risks.
and other factors which could impact forward-looking statements. Copies of these reports are available online. In discussing the results of our operations, we will be providing and referring to certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures as well as others used in today's earnings release in our presentation.
on the investor 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 Jay Schmitt, President and CEO , and Jack Calandra, Senior Vice President and CFO . We will begin this morning's call with our prepared remarks and thereafter we will be happy to take your questions. I would now like to turn the call over to Jay. Jay?
Thank you, Logan, and good morning, everyone. During the first quarter, we leveraged our diversified structure to deliver earnings per share at the top end of our guidance range.
Profit contribution from the brand portfolio more than offset the challenging operating environment at Famous Footwear.
As we said last quarter, the structural changes we've implemented over the last several years have resulted in a much more nimble, productive, and profitable organization.
This quarter's performance underscores the value of the Caleras platform.
the strength of our omni-channel capabilities, and the power of our carefully curated portfolio. We believe this structure enables us to be successful in a variety of different operating environments.
Now let's turn to some key highlights from first quarter 2023.
We delivered earnings per share of 97 cents driven by a record profit in our brand portfolio.
We sustained total Caleras market share of more than 6% of the US footwear market.
We grew market share in the brand portfolio with many of our brands improving their rankings.
And we increased famous footwear's market share in shoe chains.
We managed our inventory levels very well, ending the period approximately 13% below the prior year period, and down 3.6% compared to fiscal year end 2022.
We continued to drive investment in strategic areas that are essential for our future growth. We maintained our long-standing quarterly dividend.
And we prioritize debt reduction utilizing our free cash flow to reduce the borrowings under our asset-based revolving credit facility by $16 million from fiscal end 2022.
As we've communicated, after funding our dividend, we believe that continued debt reduction is the top priority for cash flow near term in this uncertain macroeconomic environment. Now let's move to our first quarter operating results. All consolidated sales declined 9.8%
by the outsized margin performance of the brand portfolio.
As a result, we achieved solid first quarter operating earnings and generated strong consolidated gross margins of nearly 46%, which represented a record for the period.
And we delivered 64 million in EBITDA.
In addition, beginning in the first quarter, we initiated cost-cutting and profit improvement initiatives across the organization. In total, we expect these measures to deliver approximately $20 million of SG&A savings this year.
plus an additional $10 million of better than expected freight costs.
We took these actions while still preserving investments in areas of strategic priority, namely consumer experience, analytics, and marketing that will accelerate our long-term growth vectors. Now let's turn to our operating segments.
starting with the brand portfolio, which led our financial performance in the quarter.
We delivered sales modestly ahead of our expectations and second only to the first quarter of 2022, which as you will remember included 50 million of wholesale inventory restock.
Despite this difficult compare, a number of our brands including lead brands Sam Edelman and Allen Edmonds delivered quarterly sales improvements. The consumer was motivated by newness and gravitated toward fashion footwear, especially casual, new dress, and high-resolution Instagram.
casual sandals, and retro-inspired white sneakers. We capitalize on all these trends by leaning into our Edit to Win initiative.
We chased product and utilized our speed programs and supply chain network to react aggressively in season to maximize top selling items. We are pleased that even with the expected sales decline, the brand portfolio delivered record first quarter operating earnings.
costs. We believe these results are a direct reflection of the progress we've made elevating product design, sharpening brand messaging, and maximizing our inventory investment.
Also during the quarter, we capitalized on strong product trends and our capabilities to drive an approximately 8% increase in our D2C business compared to the first quarter of 2022.
This increase includes notable year-over-year improvements from our overall owned e-commerce, dropship and own brick-and-mortar businesses.
Going forward, we will provide color on the performance of our lead brands, Sam Edelman, Naturalizer, Allen Edmonds, and Vionic on each earnings call.
We want the investment community to understand what's driving our business.
We believe each of these brands has significant growth ahead and we are strategically investing to power that growth. These four brands in total represented more than half of the brand portfolio and 27% of our total Caleras revenue in the first quarter. We outperformed in own channels across the entire Caleras area.
and 11% on our own websites respectively.
Allen Edmonds delivered a strong first quarter performance with sales up 11% versus last year.
This improvement was led by robust consumer demand for low first and slip-ons and positive response to its new offerings.
AE's efforts to focus on its consumer.
Also yielded encouraging results from the relaunched loyalty program known as the Collectors.
In fact, we've seen our total collectors grow since the reintroduction of the program last September and the average spend from AE collectors is 20% higher than non-collectors.
And finally, we successfully launched a new brand direction for Vionic, combining a Northern California aesthetic with our unique scientific solutioning.
This new branding, which went live on our website and in catalog during the quarter, spurred an immediate positive reaction on VionicShoes.com with casual sandals and dreads delivering the largest year-over-year growth.
We are encouraged by the early consumer response to its new offerings.
In addition, we saw continued strength in our portfolio brands including LifeStride, Franco Sardo, and Dr. Scholl's. These are important growing assets that serve key consumer segments not currently served by our lead brands.
We are leveraging our OneCalaris capabilities across our portfolio to ensure all our assets are positioned to succeed.
As we progress through the rest of the year, the teams will remain nimble, amplify newness, and react quickly to maintain momentum for the balance of the year.
Longer term, we are laser focused on building upon the momentum we've seen in the recent quarter and have ambitious growth plans for all of our lead brands.
We expect that given the strength of our brands, the diversity of the portfolio, our flexible and agile operating model, and our improved margin performance, that the BP will continue to contribute substantially to the company's operating performance. Turning now to famous footwear.
The launching backdrop was exacerbated by a late-breaking sandal season.
Even in this difficult environment, Famo.us outperformed its competitive set and increased market share in shoe chains.
Our kids business, a key differentiator for famous, was a bright spot in the quarter.
This important and growing category once again outpaced the rest of our business as families prioritize purchases of kids footwear.
In total, famous generated $17 million in operating earnings. And even with the weakness in shoe chains, we expect famous to deliver a significantly stronger earnings contribution in the second quarter as consumer activity accelerates due to typical seasonal drivers.
including warm weather and back to school beginning in mid-July. To that end, we have taken a number of steps to ensure that FAMIS leverages its strength in kids and delivers for back to school.
As you will remember, we delivered our best ever back to school in 2022, despite a less than ideal inventory position.
This year we have a better in-stock position from the beginning on key trending brands and styles that we've reacted to due to our well-managed inventory position. We have named a new kids' merchant to closely maximize all opportunities.
and a new head of stores to drive our strategy at point of sale. We have planned a high-impact marketing campaign across all consumer touchpoints, but especially aimed at the Millennial family. And our investments in technology, specifically launching a CDP during the quarter,
in the long-term outlook for famous.
The same strengths that delivered stellar results in recent years are still very much in place and in fact continue to expand.
As we move forward, we will be taking immediate actions across our product assortment, our team, our marketing approach, our digital strategy in an effort to maximize our earnings potential this year.
In parallel, we will continue to leverage our leadership position with the family.
Our leading assortment of national brands
Our nationwide retail footprint, mostly off mall, and consistent consumer experience in stores and online to accelerate all opportunities for growth at Famous. So overall, as we look forward to the balance of the year,
We are optimistic about the strength of our brand portfolio segment and its ability to deliver a much stronger earnings contribution in 2023 and beyond.
And while we have work to do at FAMIS, we believe that the relative strength in kids, its inherent competitive advantages, and its avenues for growth set us up to improve as the year progresses. Before I hand it over to Jack.
to walk through our financials in more detail, I'd like to highlight and remind you of the power of the Caleras model. We believe the structural changes we've made in recent years, coupled with our diversified structure and strong financial contribution from both operating segments, have been the
will enable us to deliver annual earnings of more than $4 per share on a consistent basis while generating strong levels of free cash flow and creating long-term value for our shareholders.
And with that, I will now hand it over to Jack for a more detailed view of our financials.
hand it over to Jack for a more detailed view of our financials.
Thanks Jay and good morning everyone. In this challenging market environment we achieved better than expected gross margin and profitability in brand portfolio and maintain strong financial discipline across the company.
This resulted in earnings per share at the upper end of our guidance and healthy cash flow which enabled us to reduce debt while still investing in our critical growth initiatives.
In today's call, I'll provide additional details on our first quarter performance.
Discuss actions we are taking on expenses in light of the more difficult operating conditions at FAMIS.
update you on our capital allocation plan and priorities, and share our outlook for the second quarter and full year fiscal 2023.
My comments on our outlook will be on an adjusted basis.
Please see today's press release for a reconciliation of adjusted results.
today's press release for a reconciliation of adjusted results. Starting with Q1. Say I'm not doing a Spanish, but a little I see inside of the
Consolidated sales were at $663 million, a 9.8% decrease versus last year.
Famous sales were down 9.2% as its more moderate income customer continued to grapple with inflation and higher interest rates. Comparable sales were down 8.5%. High portfolio sales were $326 million.
down 11% to last year, and in line with our expectations. You will remember that Brand Portfolio was lapping the restocking at wholesale accounts that was highlighted in last quarter's call and factored into our guidance.
Even with this difficult compare, this sales volume was the second highest first quarter amount in brand portfolios history.
Despite the sales decline, consolidated gross margin increased 120 basis points to 45.7%, reflecting a significant increase in brand portfolio gross margin and a decrease in famous gross margin.
The brand portfolio gross margin was 44.2%, a more than 600 basis point increase versus last year due to higher initial margins and lower ocean and air freight costs.
Famous gross margin was 45.6%, a 360 basis point decline versus last year. This decline reflects the softer consumer demand and a more normalized level of clearance pricing and activity given last year's clean inventory position. SG&A expense for the quarter was $253 million.
or 38.2% of sales.
SG&A expense was 7.7 million below last year as a result of lower variable expenses and incentive compensation costs.
Operating earnings were $50 million and operating margin was 7.5%.
Operating margin was 13.1% at Brand Portfolio and 4.9% at Famous. Net interest expense was 5.6 million or about 3 million above last year given a higher borrowing rate. The weighted average interest rate in Q1 this year was 6.2% versus 2.6% last year.
Deluded earnings per share were 97 cents at the high end of our previous guidance.
EBITDA for the quarter was 64 million or 9.6% of sales.
Turning now to the balance sheet and cash flow, we ended the first quarter with 292 million in borrowings on our revolver and no long-term debt.
Inventory at the end of Q1 was 560 million, down 13.1% versus last year, reflecting reductions in both in-transit and on-hand inventory.
By segment, inventory at Famous was down 1%, primarily a result of supply chain constraints last year, which limited the inventory level. Notably, Famous' inventory was 51 million or 13% below first quarter 2019.
At brand portfolio inventory was down 26% versus last year and up approximately 15% versus the first quarter of 2019.
In general, we feel good about the quantity and quality of inventory in both segments. Regarding cash flow from operations, we generated 38 million during the quarter and deployed cash for strategic investments in the business, paid our quarterly dividend, and reduced outstanding borrowings.
Specifically, we spent $6.5 million on capital expenditures, $2.5 million on our quarterly dividend and $16 million to reduce borrowings.
Given the ongoing macroeconomic uncertainty, we continue to believe that the best use of free cash flow after maintaining the dividend is to reduce our revolver borrowings to below one times on a debt to EBITDA basis and to increase overall liquidity.
On a trailing 12-month basis, we ended the quarter with a debt to EBITDA ratio of 1.1 times and we anticipate getting below 1 times in the third quarter.
That said, we have 6.4 million shares remaining under our current board repurchase authorization and will continue to consider share repurchases based on market conditions.
Now turning to our outlook. Despite a more challenging macro environment, we continue to expect full year earnings per share of $4.10 to $4.30 as we anticipate offsetting top line softness in FAMIS with cost savings in gross margin and SG&A.
Additional full year guidance metrics are as follows. We now expect consolidated sales to be down 3% to 5% versus our original guidance of flat to up 2% including the impact of the 53rd week.
We now expect consolidated operating margin of 7.3% to 7.5% versus our original guidance of 7.1% to 7.3%.
The improved operating margin outlook is being driven by better than expected ocean and domestic transportation costs and specific actions we are taking on overhead expenses.
including eliminating open corporate positions, reducing non merchandise procurement costs, realizing additional brand portfolio synergies, and lowering depreciation expense.
The specific actions we are taking on costs will generate about $20 million of in-year savings and $30 million to $35 million on an annualized basis.
For the in-year savings, 3 million was realized in Q1, 5 million will be realized in Q2, and the remaining 12 million in the second half. We anticipate a one-time cash charge of approximately 4 million in Q2 associated with these actions. We also expect about 10 million of additional freight savings to be completed by the end of the year.
versus our original guidance. 3 million was realized in Q1 and we expect the remaining 7 million in the second half.
We now expect net interest expense of $17 million to $19 million versus our original guidance of $18 million to $20 million.
We continue to expect an effective tax rate of about 25%.
We continue to expect shares outstanding of approximately 34.3 million. This assumes share repurchases to offset dilution of any stock based compensation, but no additional share repurchases. We now expect capital expenditures of 55 million to 65 million versus our original guidance of 60 million to 70 million.
In addition, we are providing the following guidance for the second quarter.
We expect net sales to be down 4% to 5% and earnings per share of 87 cents to 92 cents.
Before we take questions, I will now turn the call back over to Jay.
Thanks, Jack. In closing, we are pleased to have delivered EPS at the upper end of our range for the first quarter.
and maintain EPS guidance for the year.
These results demonstrate the power of our portfolio, the strength of our company, and the dedication of our team. We are committed to disciplined and nimble expense management as we continue to invest in capabilities that drive growth.
I am confident that the commitment of our incredibly talented team, coupled with our strategic approach, will help us deliver strong results for the balance of the year.
And with that, I'd like to turn the call over to the operator for questions. Operator.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 keys.
Our first question is from Abby Ziebenix with Paper Sandler. Please proceed.
for famous footwear in the brand portfolio. I guess specifically on the brand portfolio, do you expect that you will continue to face tough compares with fill-in in the second quarter, or was that mainly just a first quarter dynamic?
I think just in terms of the brand portfolio, we do believe that we will have lapped most of that by the time we get into the second half. And then I'll let Jack fill in on the color by segment. Yeah, Abby, thanks for your question. So we don't give specific guidance by segment, but to be helpful, let me give you a little bit of color. So next week, we're going to be closing off with molecular organ adhesive and
You know, we are certainly expecting Famo.us' sales to improve versus the first quarter. We are tracking to our forecast quarter to date, so we feel good about that. And then I would say in the back half, really our guidance assumes anywhere for Famo.us.
anywhere from a deterioration of what we expect in Q2 to an improvement in what we expect in Q2, but in both cases we still are expecting negative sales, negative sales growth for famous for the year.
In BP and and Jay will give a little bit more color on some of the initiatives that support this We are expecting BP to show some improvement in the back half again part of that is no longer lapping this this Wholesale restock that we talked about as well as some of the initiatives we've got and feel really good about on our lead brands
fashion sneaker part of our business growing exponentially and we're able to get back into position on that in late second quarter and think that that will really help us drive through really further showing this power of our company our sourcing model in our portfolio
And all of those lead brands fit really well and will be maximizing that category as well too. Great. That's really helpful. And then just your inventory management has been really strong, especially compared to peers in the space that have said they'll need to continue to be promotional. So you said you feel good about the quality and quantity of your inventory, but how do you use the peers promotional strategy?
not really managing those brick and mortar inventories really closely driving our digital business. And at famous, we kind of look at it the same way, where we're really maximizing our in-store opportunities and giving them what they need and really watching the quality of that inventory. And I think that's going to be the key thing that helps us manage it as we go forward.
Yeah, and Abby just to add to Jay's comment, I mean, we believe that our consolidated inventories will continue to be down versus last year in Q2 and Q3. So, we will be making sure we continue to manage that tightly and don't have to take any actions to clear our own inventory.
Got it. Thank you.
Thank you.
Our next question is from Laura Champagne with Loop Capital. Please proceed. Thanks for taking my question. I'd like a little more color on what the investments are that you're making in those key brand portfolio brands. Are those marketing investments? Are they infrastructure? What do you need to do there?
Well, they're both marketing and in terms of product more category expansion within those brands that we see will continue to drive. And then they also are feeding off of some growth vectors as we develop different points of distribution and different customers while we continue to develop our own digital business and continue to drive that. So it is a...
research, please proceed. Yes, thanks for taking my questions. I've got a few. Jay, starting with what's famous in the quarter, you mentioned it was worse than planned. Can you speak to why that was, you know, was weather worse than you were planning, tax refunds had maybe a bigger impact than you would thought or was it just that
you know, that moderate-income consumer ended up just being softer than what you thought going in or maybe there was some other reason. Yeah. Actually, a little bit of all the things you mentioned, Mitch, I think that was accurate. First of all, you know, coming into the first early two months, we did see weather as a factor. You know, the cyber Respondent authority is aninces that this year just didn't NaY substitutions
And that, you know, March was our worst month in famous. And we saw a nice improvement on that in April . So I have to believe the weather had something to do with it. But in general, we know that there are some headwinds coming out there and people are actually really focusing their purchases on the key items.
know, really are great for that, but we do think it's a little bit of all of what you described. As usual, we focus on controlling what we can control and then and that's really where we put our efforts.
Okay, and so April was better than March. Has that continued into May? And as you've guided for 2Q, particularly as you're thinking about the famous piece, is the uptick from Q1 based on kind of what trends that you're seeing quarter to date or is it more?
about optimism around back to school or again maybe some combination of the two.
I think it's a little bit of a combination of two. As I said, April was markedly better than March for us. So we think that that's a little closer to where our modeling comes through. And then with the actions that we've taken to really put ourselves in a better place going into back to school, we do think that those two things in combination will do it as the consumer will continue to prioritize. We think that that's a little bit of a combination of two.
think better for both. So how are you thinking about where do you think those could sort of land.
for the year. I mean, I assume you expect famous margins, EBIT margin to be down. Do you still expect it to be up over 19 levels and then, you know, BP as well? Is BP margin going to be up year over year, do you think? Well, we do believe that the BP margin will continue to be up.
based on a lot of things working in our favor there. And it's really about the, those initial margins that we've been able to do, our mix is much better. And obviously with continued savings on the freight side, all three of those things will help us. I think they're too. And then we have some other pieces there. I'll let Jack jump in on the.
We likely will not will not hit that sort of 10 operating margin target this year But we still feel like that's the appropriate target long term and that's why we're making these these changes on the cost structure You know infamous but also in other parts of the business to you know Provide sort of that fuel to get that that margin back at 10%
Okay. All right. Thanks, guys. Good luck. Thank you. Thank you. Our final question is from Dana Telsey with Telsey Advisory Group. Please proceed.
Good morning everyone. As you think about the comp store sales, particularly at Famous Footwear, what were the complexions of the comps? What you saw in ticket or traffic, how did that range? And is the uptick that you see now, are we seeing meaningful improvement? And then on the brand portfolio with the margin improvement.
What are you seeing in terms of wholesale orders and also AUR? Thank you. Okay. As usual, Dana, I'll start with the last part of your question and move my way backwards. But we did see, first of all, AUR was actually up four, so it's up slightly, so that means a really nice fold as we came through.
It's very much in line with what we've seen quarter to quarter. Obviously, there's more reorders coming through, more dropship than everything else versus last year when people were buying quite a bit. But we see our order book because we feel pretty confident that it really meets where our guidance has been.
and does just reflect a lot more of it's going to be more dynamic, I would say, going through there. And, you know, our model really pivots to accomplish that. So then in Q1 overall, we did see, you know, kind of a mix on famous footwear pointing to the quarter.
Our conversion was actually pretty good, but our traffic and brick and mortar was down for the quarter. And and then we had a little bit of a different dynamic in Q1 in on the side. But where that was, you know, conversion was actually down or traffic was roughly flat. So.
I would say overall we just saw a much slower start to the whole season and obviously we're working on things to improve it.
Got it. And then just on unpacking the gross margin for a second and operating margin, freight benefits this year, what are you seeing for that? And is there any other puts and takes as we go through the back half of the year, whether it's on raw materials or any other commodity costs we should be mindful of?
Yeah, Dana, it's Jack, thanks for the question. No, I would say, you know, in terms of the freight benefit, we're actually expecting more freight benefit in the back half. About 60% of the freight benefit is coming in through the back half versus about 40% in the first half. And that includes both what we had planned for and then this incremental, you know, $10 million investment.
Okay, well, thank you everyone for joining us. I just want to close by again, thanking our great team at Caleras couldn't, you know, accomplish any of this without them. And also thinking both our vendor partners at famous and our retail partners out there. We look forward to seeing many of them in market and many of you as well. So thank you again.
This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
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