Caleres, Inc.
Q3 2020 Earnings Call Transcript

Published: 19 Nov 2020

[Operator:]

Good afternoon, and welcome to the Caleres Third Quarter 2020 Earnings Conference Call. My name is Erica, and I will be your conference coordinator. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. At this time, I’ll turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead, miss.

[Logan Bonacorsi:]

Good afternoon. I’d like to thank you for joining our third quarter 2020 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.

[Diane Sullivan:]

Thanks, Logan, and good afternoon, everyone. We appreciate you joining us on today’s call. I want to first begin by thanking the Caleres team for their outstanding performance in recent months, under which are quite obviously extremely difficult circumstances. As you can see from our results, our people have risen to the challenge in an impressive way, responding quickly and effectively to the rapidly changing footwear market, driving our performance forward while at the same time, negotiating the increasingly complex personal lives that I think everybody finds themselves grappling with. We are truly fortunate to have such a resilient, dedicated, and talented team. Because of their efforts, there is lots of good news to discuss on the operation and financial front. During the third quarter, we maintained our progress and continued our recovery, delivering solid and improving sequential results across most key financial metrics. Most notably, we reported sharply higher net income with adjusted earnings of $0.48 per share. We also achieved a 30% sequential increase in revenues as the top line benefited from the return to full operation of our store network, the full reopening of our partners’ stores, solid digital demand as well as an extended back-to-school purchasing season. At the same time, we maintained our intense focus on driving down costs, achieving a $38 million reduction in overall expenses during the quarter. Through these efforts, we again generated a significant amount of free cash flow, achieving the highest level of third quarter cash generation in 10 years and put that cash to use further strengthening the balance sheet and reducing overall indebtedness. In total, we paid down $50 million of debt during the quarter, bringing overall debt reduction to nearly $140 million since the beginning of the second quarter. Now let’s turn to our business segments where we will start with a review of our Famous Footwear results. Famous continued to benefit from our inherent competitive advantages, which included a strong offering of in-demand brands and advantages assortment of sport performance and casual oriented styles and a convenient and safe store locations that are cited largely off-mall.

[Ken Hannah:]

Thank you, Diane. Good afternoon, everyone. Despite facing ongoing pressure from the lingering health crisis, I’m very pleased with the progress we’ve made to improve our competitive position during this period. We remained laser-focused on appropriately managing expenses and working capital. And through these ongoing efforts, we are confident in our ability to weather the uncertainty that still persists today in the marketplace. I’d like to start by providing an update on our liquidity position and capital structure and discuss our third quarter results. And finally, we’ll provide a little additional color on the outlook for the remainder of the year.

[Operator:]

Your first question is from Laura Champine with Loop Capital.

[Laura Champine:]

Thanks for taking my questions. Diane, could you talk a little bit more about the changing management at Famous Footwear, I think that was sort of snuck in there as a surprise to me anyway, at the end?

[Diane Sullivan:]

Yes. No surprise. We – Molly Adams who had been here for a couple of years did a terrific job and decided to leave the company and has another opportunity. Fortunately, Laura, we have a great team and a good bench strength there. And Mike Edwards has been with the company for about 12 years in a number of different capacities across Famous, including planning and allocation. And he’s our Chief Customer Officer for a while. He’s been running our stores. He’s basically has a great sense of that brand its customer and actually, his head and his heart is really in the game to win at Famous. So he along with a terrific other group of people there will continue to drive that business very well into the future.

[Laura Champine:]

Got it. Thank you.

[Diane Sullivan:]

Yes.

[Operator:]

Your next question is from Steve Marotta with CL King.

[Steve Marotta:]

Good evening, Diane, Ken, and Logan. Congratulations on a stellar quarter, really very, very nicely done in the teeth of what was a difficult time undoubtedly. You’ve given very nice shipping. You’ve given some great color around the fourth quarter. Just wondering if the November to date timeframe has varied significantly from what you expect from the balance of the quarter.

[Ken Hannah:]

No, I wouldn’t. I would say kind of as we’re running quarter to date, we’re kind of right in line with what we had kind of laid out. And again, we hesitated to as to what kind of color that we would provide, but we didn’t want to leave everybody out there trying to figure it out themselves. So obviously, as we mentioned, we’ve got some stores in some areas that have been closed. And so we’ve tried to take that into consideration, but if we move towards a much larger shutdown obviously the numbers that we’ve kind of laid out will be off the table.

[Steve Marotta:]

And that also assumes what travel patterns will be for the holiday season, which I assume is going to be reduced. Just the general trajectory of what’s happening right now. Correct?

[Ken Hannah:]

Exactly.

[Steve Marotta:]

Okay. Two other more long-term questions, the first is, to the extent that you can talk about the first half buying patterns across your wholesale customer universe, including what they expect from a digital component as well. Can you talk a little bit about what you’re seeing there where open to buy dollars are usually obviously this has done well in advance of November? But I think that this is a relatively unique year. Any thoughts that you can give us on how the wholesale businesses is currently planning and trending would be really helpful.

[Diane Sullivan:]

Okay. Hey Steve, it’s Diane. Here’s what I would say. It’s again a little early to talk to too much about 2021, but clearly consumer behavior has shifted dramatically to consumers being very comfortable to purchase online. We do not see that changing. We see that penetration of our business continuing to grow at a pretty rapid rate. That’s true both at our Famous business, as well as with our own e-commerce business and as well as our partners businesses. And I think if you talk to people that where sort of forecast where what 2021 is going to look like, they’ll tell you that it’s most likely that e-commerce related businesses are going to be somewhere between 40% to 50% of someone’s business. So I think that’s the biggest thing that, that we see in terms of going forward. And then obviously, the sport and athletic and casual side of life doesn’t look like that changing anytime soon, but – good part of the population would have access to it that, I think there’s going to certainly be an opportunity for other types of footwear to come in back into play again too. So that’s what I tell you right now. We’re keeping our eye on both the short-term and managing our business, as well as the medium-term to make sure we take advantage of every opportunity that we can. So and staying innovative on all of our products, because we think that’s really where what’s the consumer is going to be interested in.

[Steve Marotta:]

And Diane, you really just touched right on to my very last question, which is how are you thinking and planning for a post the vaccine world. And there is more than a likely chance that the consumer is going to experience a jailbreak. And that given social distancing reductions that they’re going to be going to clubs and movies and restaurants and when that comfort level resumes people being social animals, I think that could happen. How do you plan for that? You certainly don’t want to be less short, but obviously you can’t an inventory farm on, if you could just share your thoughts there to be helpful.

[Diane Sullivan:]

Sure. I mean, I think in the short-term, Steve, we like having our wholesale inventory down 36. We like having our famous inventory about where it is. We’d like it to be a little bit more in some of our – we’re a little light on some of our top 10 brands, but in general, we’re going to continue to play it close to the vest on inventory and make sure that we can really begin to see some driving of full price business again, because obviously this year has been one where that we’ve had to clear an awful lot of goods everywhere. So I think we’re going to keep inventory tight and watch it very carefully. We’re going to make sure that we’re doing all the right work around our speed to consumer program. So making sure that with materials have planned on good for products that we think are going to be important going forward. So making sure that we have the agility there to respond during the market and during the season. And I think, lastly, as we get closer, I think that’s one of the benefits that Caleres does have – we have, again, visibility across so many different parts of the marketplace and landscape. We can see what’s happening and we’ll be able to pivot quickly to where we think the consumer is moving. So I think we’re in good position, I’d said that, there’s still a lot of work to do. We don’t – we like what we accomplished this quarter, but we’re not satisfied. And we’re going to keep pushing it. We think we can come out a winner in the end of – after everything is behind us. So I hope you’re right. I hope people definitely will want to go out and socialize and go places. So keep your fingers crossed, right.

[Steve Marotta:]

And they are. Thank you for the color. That’s very helpful.

[Diane Sullivan:]

All right. Thanks.

[Ken Hannah:]

Thanks, Steve.

[Operator:]

Your next question is from Chris Svezia with Wedbush.

[Chris Svezia:]

Good afternoon, everyone. Nice job on tough environment.

[Diane Sullivan:]

Thank you.

[Ken Hannah:]

Thanks, Chris.

[Chris Svezia:]

Couple things. One, just want to go to Naturalizer, I guess more specifically when you think about the 20% reduction in revenues for the quarter, what impact is the Naturalizer liquidation? I guess, having on that, if at all. Number two, just on Naturalizer, what’s the Naturalizer retail, just in terms of sales, how big is that? And then lastly, is our Naturalizer retail stores profitable. And what do you intend to do with the savings? You just tend to reinvest that $10 million to $12 million or is that potentially flow through?

[Ken Hannah:]

Yes, I think so, if you step back – your first question, when you were talking about liquidation, obviously, we laid out a timeline to go ahead and close those stores by the end of the fourth quarter. So we began doing some of that liquidation through our own retail sites and our website in the third quarter. But don’t believe given the inventory levels that we’ll have a problem liquidating the rest of the inventory in those stores between now and the end of the fiscal year. When it comes to the natural retail – Naturalizer retail stores, I mean, obviously, they’ve been significantly impacted by what’s happened this year. So we went from stores that were generating decent amount of revenue. And obviously with that reduction is put a lot of pressure on the bottom line. So we went ahead and made the decision to go ahead and exit those stores. If you recall, and Diane can jump in here and provide color, but we did a total revamp of that brand. And one of the things we did is we kind of move forward and repositioned that consumer and that brand, and a lot of the stores were tied back to the legacy positioning of the brand and that prior consumer. And so we’ve shifted and now it’s just a good time to go ahead and exit, we are going to keep a couple of stores that we have that are end markets where those consumers are that have had investment put into them. And obviously, we’re still looking to grow that brand globally as it has a nice meaning across the world. So I don’t know, if you want to share anything.

[Diane Sullivan:]

Yes. I think, Chris, I’d maybe just add this, when I said it was the moment, it really was when we looked at the size of that business and the impact that COVID had had on it. And as we looked at the other opportunities about where we could move that customer to in the future, we felt it was much more aligned with where the consumer was going. So we think that we will continue to drive our business to our own website, we think that will continue to be an important part and we’re going to allocate some resources and we have plans in place for how we’re going to capture those consumers. We’re also going to be looking at our retail partners, our strategic partners. There’s a lot of opportunity. We already have a very strong, powerful about, I think it’s probably close to little bit over half of our business with our strategic partners is already digitally driven. So we think there’s even more opportunity to do that. And there’s also opportunities in Canada and other places for us to look at new ways to capture that customer. So we have a full-on plan for how we’re going to do that. And so I think our, that $10 million to $12 million, some of it will certainly be allocated to ensuring that we capture, the maximum that we can in terms of customer acquisition of that brand and working with our teams to do so. So it’s a combination of lots of different things, but really the right moment, because they were legacy retail kind of stores, where we hadn’t invested a lot in the last number of years. So the time was right.

[Chris Svezia:]

So just from a numbers perspective, am I thinking about the $50 million maybe run rate given where the revenue trajectory was, and these were losing money obviously. Is that a fair ballpark range or just trying to think about how we start to think about this for next year?

[Ken Hannah:]

No, the – I mean, the revenue impact was a little bit less than that just with the clients. We had seen close to 50% declines this year with the shutdown. So it was well above that. And now it is below that. So the production in top-line, obviously, was putting pressure and putting a number of those stores into a loss position. So we felt like it was about a two year payback to go ahead and exit. And certainly in the $10 million to $12 million, we tried to take into consideration what we had identified as opportunities to reinvest. And so we felt like it was the time to make that decision.

[Chris Svezia:]

How do you think about stores for Allen Edmonds, even maybe Sam Edelman potentially at this point in the same sort of context? Is there opportunities there or now you’re comfortable with what you have?

[Diane Sullivan:]

Well, I think there’s – I’ll take this one Ken, and you can add to it. I think there’s a couple things on that. Chris, I think first of all, we always and we’ll continuously look at our entire fleet, whether it’s famous or Allen Edmonds or Sam Edelman, and make sure that we’re looking at the real estate and making sure it’s profitable. The Naturalizer – a lot of the Naturalizer outlets business was in outlet stores as well. So it was very little sort of a mall full price and much more outlet, which wasn’t really a consistent part of our strategy. And as we look at Allen Edmonds, that is a very critical part of their overall direct-to-consumer effort. We’ll have to continue to monitor that, because it is in more urban kind of location. So we’ll have to make sure that we monitor that and continue to see whether or not that makes sense. And on Sam Edelman, again, the same thing more mall-based places are more challenging. And we expect that we’re going to continue to look at it and we have, if we need to make a decision on that, we will. So Ken, I don’t know if you wanted to make another comment on that.

[Ken Hannah:]

Yes, I guess the thing I would add is, when you look at the Naturalizer stores and the split, obviously, as Diane mentioned, there were a ton of them that were outlets. I think the most important thing is they just – they didn’t represent what the brand stands for. That’s not the case in our Allen Edmonds and Sam Edelman. So totally different conversations, obviously we’re – all three of those brands from a retail perspective are down. And so, we’re having conversations with all of those landlords about restructuring leases and trying to do things. And so, where we can get some movement, obviously it will significantly change the financial profile. But the brands are aligned with how we represent in store and so, two totally different scenarios between kind of where we had found ourselves at Naturalizer versus Allen Edmonds and Sam Edelman.

[Chris Svezia:]

Got it. Okay. Just a couple last things for me. Just on the October trend for Famous footwear coping down single-digits. How much of that do you attribute to either weather factors, maybe some softness of the boot business versus specifically COVID related shoppers, not shopping with the same level of frequency, et cetera? I’m just trying to peel that back a bit.

[Diane Sullivan:]

Yes. I think it’s hard to say exactly Chris, but I would say generally speaking, it’s tied much more with consumer sentiment overall, and the rise in the cases of the virus across the country. So I think generally speaking, it was overall consumer sentiment would be the reason as we would see that. And we were very careful around our promotional activity as well. And because our – we were selling through goods at Famous at really good margin, so we didn’t want to promote too much either. So we stayed pretty careful threading that needle about making sure we were delivering good margin too.

[Ken Hannah:]

I think that’s fair. I think when we look more consumer sentiment and really you could see it in the traffic and as we go back and look at market share data, I mean, from an October standpoint, we were able to maintain and in some cases grow our market share. So I don’t think it’s anything other than just consumer sentiment.

[Chris Svezia:]

Last thing for me, just on the SG&A, as I think about Q4, and I know you’re not providing a lot of color here, but to kind of get to profitability ex-some of the one-time charges, it makes some assumptions that SG&A is still down pretty materially, maybe similar levels to Q3. Am I thinking about that right? And how do we think about what’s structural in the business versus what’s going to come back pretty materially into next year?

[Ken Hannah:]

Yes. We had indicated – we’re down $38 million in Q3 in our second quarter call, we had kind of talked about exiting the year being down at least $25 million. So if we just hold to the $235 million or so that we had an expense in Q2 and – in Q3 and Q4, then that’ll be at that level. So obviously, if we’re closer to the higher end of some of those sales reductions, we have the ability to flex that SG&A down a little bit more, but you know, it won’t be any higher in gross dollars than it was in Q3 just to help you out on your modeling.

[Chris Svezia:]

Okay. All right. That’s all I got for now. Thank you, and all the best around holiday.

[Diane Sullivan:]

Thanks. You too, Chris.

[Ken Hannah:]

Thank you, Chris.

[Operator:]

Your final question is from Sam Poser with Susquehanna.

[Sam Poser:]

Good afternoon. Thanks for taking my questions. I’m going to start with Famous. Can you – could you be more – you said mid-teens up down mid-teens for the first – for August and September. Could you give us some more color on where exactly actual October was? Was it mid-singles, high-singles, low-singles?

[Diane Sullivan:]

It was down mid-singles.

[Sam Poser:]

And then can you – you had a lot of help in the back-to-school, clearly helped for August and help September. Do you have like a combined, comp number of combined sales number for August, September to sort of offset, because there is nothing incremental that’s probably going to happen in the fourth quarter, the way that shift happened in Q3?

[Diane Sullivan:]

Yes, it was really starting, I would say second week September was when we started to see our performance really left relative to our last year’s business. So there was about five weeks there, where we were higher than or close to last year’s levels. And so that’s kind of where it all came, Sam was really in those weeks. And I don’t think we have, I don’t know, Ken, if we have an August September number, but we can certainly follow-up with you and get you that, if that would be helpful.

[Sam Poser:]

That would be. And then how should we think with Famous on store openings and closings in the fourth quarter? And then sort of just how are you thinking about next year as far as same-stores?

[Ken Hannah:]

Yes, I mean, we’ve got a few opening and then obviously we’re closing some additional stores, I mean we had talked about for the year being down 45 to 50, and so, year-to-date we were down 29 through the third quarter. So we’ve got, I think there is one store for sure opening and one that we may push to next year. So as we look into next year, obviously, we’ve continued to close around 45 to 50 stores each year. And we’ve been continuing to reduce the number of new stores that we’re opening. So we’re planning on opening a few, I think somewhere in the 10 range would be my best guess if we were sitting here today. But obviously, lots of discussions going on with landlords and as they get a little bit more realistic about rents, then obviously that gives us an opportunity to open more stores.

[Sam Poser:]

Thanks. And then on the – can you give more color onto what the SG&A cuts were at Famous to bring – to really have your EBIT in line with last year’s EBIT there?

[Diane Sullivan:]

Yes, I mean, a lot of it was productivity in the stores with just getting better productivity out of the labor. We did reduce some marketing, we had obviously, originally planned to spend a lot of TV and radio at back to school. And then obviously when it started shifting, we did not end up spending that money, some of that was transitioned over to digital spend, but a lot of that was not. And then the rest was really in facilities expense with we did have stores close, I think year-over-year, we’re down 35 stores, so that was contributing to that as well.

[Sam Poser:]

And when you say productivity, you’re really saying your headcount went down in the stores.

[Ken Hannah:]

No. We’re saying our labor productivity as a percent of sales, so the hours that we were expanding to generate the sales that we did. So in lot of cases, there was hours that were adjusted during the quarter to be more productive.

[Sam Poser:]

Okay. thanks. And then when you think about the Brand Portfolio business here, and again, looking forward – especially since Q4 is supposed to be slightly worse than Q3, how much of Q3 – you sort of hinted that there was some pull forward from Q4 on some wholesale orders from brand portfolio? Is that – did I hear that correctly?

[Diane Sullivan:]

Yes, we basically said there was a little more demand in Q3, than we had anticipated, because we’re trying to make sales up, because some retailers find themselves really needing inventory on some of the key items. So there was a little bit of demand higher than what we anticipated. I think we had talked about being down 30 in the third quarter, and we came in down 26. So there was a little shift there, little better than we anticipated. And really, I think we’re thinking about the fourth quarter in that same kind of range. Ken, I think you said right, 25 to 30 down for brand portfolio in the fourth quarter. So pretty much in line with right where we were at this year. And again, I mentioned our inventory levels as well being down in that 36 range going into the fourth quarter too.

[Sam Poser:]

And then lastly, you said that back to Famous again, that the Famous sales are going to be from a year-over-year perspective a little weaker than they were in Q3. And that’s primarily due to not having that. You’re just not going to have that spike…

[Diane Sullivan:]

Yes. I think we said – yes, we were down 12 and in the third quarter and we’re forecasting 10% to 15%, so we’ll see how it all shakes out, but, roughly in line also.

[Sam Poser:]

Okay, great. Thank you very much and happy holidays.

[Diane Sullivan:]

Thanks, Sam.

[Ken Hannah:]

Thanks, Sam.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating, you may now disconnect.