Caleres Inc (CAL) 2002 Q3 法說會逐字稿

Good day and welcome to the Brown Shoe Company’s Third Quarter 2002 Financial Results Conference Call.

This call is being made accessible to the public via web cast in accordance with the SEC’s regulation SD.

At this time, all participants are in a listen-only mode.

Later we will hold a question and answer session and instructions will follow at that time.

For assistance during the call, please press star zero on your touchtone telephone.

Before we begin, I’d like to remind you of the Company’s Safe Harbor language.

During this conference call, the Company will make certain forward-looking statements to help you better understand its financial results and competitive outlook.

Discussion of the Company’s future plans and other statements in this call that are not current or historical facts, are forward-looking statements.

These involve known and unknown risks, uncertainties and other factors that could cause the actual results to materially differ from historical results or from any future results expressed or implied by any forward-looking statement.

Actions that could cause actual results to differ materially include the following; business and economic conditions, and growth in the retail shoe industry, changes in customer order patterns, competitive factors, pricing pressures, excess of obsolete inventory and variations in inventory valuation, shortage of manufacturing capacity and other risk factors listed from time to time in the Company’s SEC reports.

Copies of the Company’s reports are available online and from the Company’s customer relations department.

This call is being recorded and any reproduction of this call, in whole or part, is not permitted without the express written authorization of Brown Shoe Company.

I’ll now turn the call over to Brown Shoe Company’s Chairman of the Board, President and Chief Executive Officer, Mr. Ronald Fromm.

Please go ahead Mr. Fromm.

Thank you.

Good afternoon everyone.

Thanks for joining us today.

With me today are Joe Wood, President of Famous Footwear and Andy Rosen, our Chief Financial Officer.

As you probably know by now, our third quarter was very strong.

We have excellent results to discuss today.

We’re delighted with the results.

Here are a few highlights from the quarter.

Consolidated sales increased 5.2% to $486 million from $462 million in the year-ago quarter.

The increase was driven by gains in our wholesale division and Famous Footwear.

Consolidated inventory turns continued to improve.

Inventories were $381 million.

That’s 14% or $64 million below the year-ago level of 445 million.

Operating margins increased 220 basis points versus the year-ago quarter.

This increase was driven both by better gross margins across all of our businesses as well as by the positive effects of our cost-reduction strategies.

Interest costs were $2.8 million versus $4.8 million a year ago, due to a reduction in inventory in the more efficient debt structure.

Earnings per fully diluted share for the third quarter were $1.18, exceeding our prior guidance of $1.10 as the quarter closed stronger.

I’m pleased to report that while net earnings of more than $21 million fell short of setting a third quarter record at Brown Shoe, we did set a record as measured by EPS of $1.18.

We’re very excited about our gains, gains that we’re making across all of our major business segments, and with each of our initiatives to improve profitability.

The Naturalizer business, which I will detail in a few moments, has never been stronger.

Our wholesale division continues to produce and market great product.

At the end of the quarter, our unshipped order position was up 37% versus last year.

Famous Footwear, which Joe will talk about in a little bit, is stabilized and getting much more productive while carrying far less inventory than in the past.

And our organization continues to coalesce around the project IMPACT goals we’ve previously outlined.

I think we’re positioned for a strong fourth quarter and believe we’ll have a solid year next year, as well.

Looking, specifically, at our third quarter business, our wholesale revenues for the quarter were up 9.2%, or approximately $12 million compared to last year.

Naturalizer, our strongest brand, posted a 25% increase versus the year-ago quarter.

We continue to sell-through very well across all the various points of distribution.

We believe that we are well positioned to continue to capture market share, with this brand, as we go forward.

Naturalizer’s profit improvement was even stronger as very positive sales and margins were achieved.

LifeStride sales were down $1.3 million compared to last year.

However, sustained gross margins improved dramatically, reflecting strong product sell-through’s.

Looking to our other wholesale businesses; our kids division continues it’s momentum, up 23% fueled by good license business, including Barbie, Bob the Builder and, of course, Spider Man, which is even stronger than it was last year.

As I mentioned earlier, the overall tenor of our wholesale business is strong and the best indicator of this is our 37% backlog increase versus year-ago levels.

Naturalizer retail is benefiting in part from our closure of more than 90 under-performing stores.

But more importantly, the productivity of our ongoing stores is improving.

Store-for-store sales gains are building, while margins remain strong.

Clearly, we are merchandising the right product in the stores and the customer is responding.

Comparable store sales for the ongoing U.S. chain were up 10.8% for the quarter, with October up 17.5%.

In Canada, our Naturalizer chain was up against very tough prior-year comparisons and quarterly store-for-store sales were down 3.6%.

On a combined U.S. and Canadian basis, Naturalizer store revenues, for the quarter were $50 million, down from $52 million a year-ago.

But that’s on a base of 15% fewer stores.

The combined U.S. and Canadian Naturalizer retail operations contributed operating earnings of $1.5 million versus a year-ago loss of $1.4 million.

Before we go into detail with regard to our other financials, I’d like to turn the call over to Joe for a few comments about Famous Footwear.

Thanks Ron.

We continue to be very excited about the progress we’re making at Famous.

The 22.6 million operating earnings is up about 60% over last year on a top-line sales increase of 4.8% for the quarter.

Our results reflect improvement across all business metrics.

We drove gross profitability higher by about 240 basis points.

We were much less promotional than this time last year.

And while we’ve had some pick-up in initial markets, better-maintained margins were realized from the fresher inventory on the selling floor, and that’s what’s boosting our profitability.

As you know, we have focused on improving the quality and freshness of our inventory.

While customer counts continue to be about flat, up just about 1%, we have achieved dramatically higher sell-through rates and higher sales conversion rates throughout the back-to-school season.

Obviously, our customers responded well to the assortment that we’re providing, even in a retail environment that continues to be somewhat lackluster.

Since one out of every 10 families shops Famous during the back-to-school period, our goal was to both look exciting and have the right merchandise during this period.

In terms of [walking exciting] [ph], those of you who have shopped our stores saw the Locker Stocker promotion.

We used Net-Connect with our customers needs during this period.

In the larger stores, our visual team wrapped end-caps and other areas of the store to look like school lockers.

This theme also carried into our print and television advertising campaigns.

We believe this type of visual presence was a success in differentiating Famous Footwear from others.

And you’ll continue to see more of this type of in-store theming, in the seasons ahead.

Our inventory current rates continue to be nearly 25% ahead of last year and we’re currently running the business on $56 million less inventory.

With the reduction in our need for working capital, which greatly lowers our interest costs, has meant more current product for customers and, again, better margins for Famous.

It also means much improved availability of product from many of our vendors.

We have experienced broader access to product lines of Clarks, Steve Madden, Nine West, Timberland and more, as a result of our differentiated presentation and our reduced focus on just promotion.

We just concluded a round of positioning meetings with Nike, Adidas, New Balance and Reebok.

With those vendors beginning to open up future product within their assortments that Famous had not previously had access to.

That improved athletic product will hit the selling floor in the second quarter of next year.

We are getting much more competitive from a product standpoint as we look forward.

Let me talk for a minute about the categories that are driving our business.

Famous Footwear today is 46% athletics, 27% women’s, 17% men’s and 6% kids.

Our athletic business continued to show strong results through the quarter, led by the men’s basketball category.

In addition to basketball, it was nice to see that our running business has strengthened.

The good news for us has been performance in our women’s business; dress, junior and casual, realizing double-digit increases while [indiscernible] exceptionally strong margins.

Many of you have been hearing cautionary words about the boot business.

We are pleased to report our unit sales are currently up over last year, mainly because our buyers bought boots that were trend-right and more mainstream.

We’ve also seen impressive sell-through’s on our company-owned brands.

And, given the strength of our sister division, brands like Naturalizer, LifeStride and [Connie] [ph], our margin performance has become very attractive as well.

Looking at our internal processes and systems, I’d like to praise the excellent work being done by our merchandising and allocation teams.

They are not only the driving force behind our freshness and [velocity goals] [ph], but they’re also in the midst of installing new systems that will permit us to perform better as we move into next year.

Just last week, we completed the third and final phase on the implementation of the Arthur Allocation and Planning Process System.

This will be a tremendous benefit to Famous in stocking our stores with the correct styles and quantities as we go into the next fiscal year.

Our logistics team has tightened up their processes making us increasingly efficient in receiving and transporting merchandise to our stores across the country.

Enterprise-wide we’re installing a new transportation management system, a move that will benefit our vendors, our wholesale divisions, as well as the Famous Footwear stores.

Looking forward for just a moment, we continue to see improvements in our business.

While we still have many projects yet to tackle, Famous quickly continues putting right building blocks in place in order to produce future results that we can be proud of.

Thank you for your time and let me turn this call over to Andy.

Thanks Joe.

Good afternoon, everyone.

I’ll begin the overview of the financials with the income statement for the quarter.

Consolidated sales for the quarter were $486 million versus 462 million in the year-ago period, an increase of 5.2%, driven primarily by the wholesale divisions and Famous Footwear.

These sales break down as follows: the Company’s retail revenues were 345.5 million versus 333.4 million in the year-ago period.

Comp store sales performance for the third quarter included Famous comp sales down 0.6%, ongoing Naturalizer U.S. stores up 10.8% and Naturalizer Canada stores up 6.3%.

Wholesale revenues during the quarter increased 9.2% to 140.8 million versus $128.9 million in the year-ago third quarter.

Naturalizer, our flagship brand, was up 25% for the quarter.

The consolidated gross margin rate during the third quarter was 40.8% up 150 basis points versus the year-ago quarter.

Better merchandising margins throughout the wholesale division, and particularly at Famous Footwear, drove this increase.

SG&A expense as a percent of sales during the third quarter of ’02 was 34.1%, down 7/10’s from the year-ago period.

The improvement reflects better expense leverage at Famous Footwear and Naturalizer retail where the store base is now operating much more efficiently.

Operating income for the quarter was $32.7 million, up 57.6% versus $20.8 million in the year-ago quarter.

Retail operations contributed operating income of 23.9 million compared to operating income of 12.4 million last year.

The wholesale business recorded 12.7 million of operating income versus the year-ago level of 12.3 million.

Consolidated operating income, as a percent of sales for the quarter, was 6.7% versus 4.5% last year.

As Ron indicated, interest expense during the quarter amounted to 2.8 million versus 4.8 million in the year-ago period.

The tax rate was 27% in the quarter compared to 22% last year.

The increase reflects a greater mix of earnings from our retail divisions, which carry a higher tax rate than wholesale.

Net income for the third quarter was $21 million versus 11.9 million last year, an increase of 77% and resulted in a record third-quarter earnings per share of $1.18 versus 68 cents in the year-ago quarter.

Looking now at the balance sheet, inventories at the close of the third quarter were $381 million, down 64 million versus last year.

Agings of the inventory also continues to improve.

For example, aged inventory for Famous Footwear are down more than 65% versus third quarter last year.

Total debt was at 160 million or 77 million below third quarter ’01.

And debt to capital improved almost 10 full percentage points to 35.8% versus 45.3%.

On a year-to-date basis, for the first three quarters, net sales were up 3.6% at $1.39 billion.

Operating earnings were up 32% to 62.6 million from 47.3 million last year.

Net earnings were up 49% to $35.8 million from 24.1 million last year.

And year-to-date cash flow from operations was 87.2 million positive versus last year’s usage of 12 million, driven by broad earnings improvement and better working capital efficiencies this year.

Finally, I’d like to provide guidance for the fourth quarter and remainder of this year.

We’re looking for efficiencies gained from the project IMPACT initiatives, the continuing strength in our wholesale businesses and the improved operating platform to Famous Footwear to offset estimated low, negative single-digit same-store sales comps at Famous.

We estimate earnings per share will be in the range of 29 cents to 34 cents for the fourth quarter, compared to 24 cents per share before charge last year.

This will result in an increase in our fiscal year earnings guidance to $2.30 to $2.35 per share versus 2.15 to 2.20.

As we look ahead to fiscal 2003, our project IMPACT initiatives will start to reach their potential.

We also see 2003 as a year of further investment in our business.

We’re currently in the process of identifying the systems and marketing programs that will allow us to further maximize the earnings power of the Company, taking it to the level beyond where project IMPACT can take us.

That said, we do remain comfortable with our estimated EPS guidance of about $2.75 for next year.

This guidance is predicated on positive low, single-digit same-store sales performance at Famous Footwear, continuing gains from project IMPACT and continued strength throughout our wholesale division.

Thanks very much, and now I’ll turn the call back to Ron for closing comments.

Thanks Andy.

Clearly, you can see the momentum building in our business.

It’s easy for us to be excited about what’s going on at retail and wholesale in our business.

Once again, as with – as is always the case, our teams from merchandising, marketing, to sales are doing an excellent job of serving the customer.

We continuously see improvement at the point of contact in our sales effort as Joe pointed out, the increasing conversion cost on the retail business, as we pointed out earlier, increasing sell-through’s and increasing margins in our wholesale business, exemplify the progress we’re making.

We’re solidly on-track toward our goals.

We continue to be dedicated to remaking the way this company does business.

We’re becoming more competitive, more profitable and more relevant to our consumers.

The advances we have been making are creating additional opportunities for us.

I think we’re beginning to be viewed more positively by consumers, vendors and our retail partners.

We have a greater expectation of ourselves.

We have a great expectation that the changes we have made will remain and take hold and that they’ll prove to be incrementally beneficial to our business.

I continue to thank you for your support and attention.

And we’ll open it up to questions.

Operator.

Thank you Mr. Fromm.

If you do have a question or a comment about today’s presentation, you may signal us by pressing star, followed by the digit 1 on your touchtone phone.

Again, that’s star 1 if you do have a question or a comment.

We’ll take your questions in the order that you signal us and take as many questions as time permits.

In addition, if you are on a speakerphone, you will want to release your mute function before you try and signal us.

Your mute function will block the signal from reaching our system.

Again, that’s star 1.

And our first question comes from Jeff Feinberg with JLS Asset Management.

Hi guys.

Just a question in terms of the guidance for next year.

If I heard you correctly, you’re predicating your guidance on positive low, single-digit Famous Footwear comps and it sounds like those are running negative now.

If you could just elaborate on the reason that you would actually expect those to reverse trend, what’s key to that, and have you begun to see any of that yet?

Thank you.

You know, currently, through the end of the third quarter, we are running negative, but very slight negatives if you’re talking – just a little bit over 1% for the current year through the third quarter.

As we have continued to clean up our inventory, we feel that our conversion rates next year will be higher.

Our average retails, because we’re not dealing with inventory that is aged will be higher.

We also feel that the number of people that were coming in our stores with additional investment in marketing dollars will give us a positive gain going into next year.

So, those are only three of the areas that we’re looking at in current time frame, to improve our business from where we currently stand.

So, we’re not that far off from being positive at the end of third quarter this year, much less end of first quarter next year.

Okay, and just a follow up on that, if I may.

Can you hear me okay?

Yes I can.

Thank you kindly.

In terms of the fourth quarter here, your inventories look like they’re in terrific shape, down 14% and obviously, markdown inventory down over 60%.

It looks like all the factors that you’re commenting on are in place already, right now.

So if I may just understand why wouldn’t you be achieving the positive comps right now?

I still think we’re sitting still in a very competitive and promotional atmosphere at the current time frame.

I still think that some of the things we put in place really only started at the beginning of this year.

I don’t think we’ll see the full effect of those until probably first and second quarter of next year.

So, it stays very promotional.

I don’t see this trend changing at the current time frame.

Also, Jeff, you know, if you take a look, as I mentioned in the release, that we had just put in the Arthur Planning and Allocation System, which gives us great ability to get the correct product, both styling and quantity into our stores, that will not be effective fourth quarter.

We’ll probably start seeing the results of that – the positive results of that in first and second quarter of next year.

And, again, the other – the last reason and very positive one, is if you take a look at this company, last year we started a buy-one, get-one-half in the month of October and ran it all the way through the holiday season.

In order to become less promotional we’re only running, I believe, three of those weeks this year versus almost 12 last year, in order to get off the merry-go-round of having to give away product.

So I’d rather take that bite this year and become much more healthy as we go into first and second quarter next year.

I think it’s the right way to position Famous Footwear.

Great.

That’s very helpful.

The one last part of the equation that you mentioned – I apologize, I’m not sure I followed – something about marketing dollars from vendors.

If you could just talk about that, the timing of when that comes in and how it will be used to benefit you?

Well, I’m not sure I mentioned our vendor dollars.

You know, we are re-investing additional dollars in marketing our own company as we go into first and second quarter of next year.

And that’s why I think we feel a little more confident about our business comping positive as we look into ’03 versus ’02.

Okay.

Thank you very much.

Next we’ll hear from John Chanley with Wells Fargo Securities.

Good afternoon.

This is Christopher Stedney [ph] in for John Chanley.

Congratulations on a really great quarter.

Just a couple of quick questions.

First of all, we were on the subject of systems, I was just wondering if you can comment – this probably goes specifically to Joe, but, for Famous Footwear, when do you anticipate seeing the benefits of this new transportation management system that’s currently being installed?

When can we start to see some benefits from that?

You know, I think we’ll see that, really, toward the second and third quarter of next year, probably more so as we get into – our aim was to make sure it was up, running and efficient during the back-to-school timeframe when we started to take June and July deliveries.

As far as Arthur Products allocation process, it is in place now.

You know, you do have to train your people.

We’ll see some of that first quarter, but again more so as we hit the May, June, July timeframes when we hit the bulk of our back-to-school business.

Okay, so, essentially, both systems will really start kicking in towards the second quarter of next year?

Yes, I think that’s when we’ll start receiving the real benefit of that.

That’s going to take us three or four months to continue to train our people.

But the full effect of that we’ll really start to see beginning next summer.

Okay, and just continuing on Famous, I was just wondering if you could just – if you saw any distinct differences in terms of comp performance between your store formats, whether they were mall based or in the strip center, was there any noticeable differences during the quarter?

You know, there wasn’t a lot from the previous quarters.

The only thing that struck us a little strange was, you know, some of our outlet stores performed better than they did the previous year.

But both our mall stores and our strip stores really didn’t see any change in our business from first or second quarter.

Okay.

Do you have anything you can attribute the stronger performance at your outlet stores?

No, I can’t.

It kind of struck us strange, also, because outlet stores as a whole, across the United States, aren’t that strong, but our business was extremely strong.

You know, we didn’t put a lot of different inventory – when I say different inventory, probably better inventory in the stores, better price, little higher retail in the outlets and it probably drove a higher increase in those stores than what we had anticipated.

Is that also merchandised differently than your Famous Footwear stores?

It is priced differently.

It’s an every day low price approach to our business.

Okay, and have you provided any guidance in terms of stores opening for Famous for next year, or any retrofits you might be doing for next year?

Not at the current timeframe.

We’re still in the process of doing, not only three-year plans, but in finalizing our financial plans for next year.

So that’s in the weeks to come.

Okay.

And two more questions, I guess, this could be for Ron and Andy.

Just for, first, Naturalizer retail in the U.S. – actually just Naturalizer retail period, you know, the strong performance you guys saw in terms of operating profits, was that, in part, due to the number of stores that you closed in conjunction with the strong comp performance you guys generated in the quarter?

I mean what, specifically, were the drivers?

I mean do you anticipate, actually, possibly breaking even, at Naturalizer retail this year?

I think we still have a little ways to go to get Naturalizer retail to the levels of profitability that we’ve been talking about over the last couple of quarters here.

However, this quarter, clearly, elevates the trend of business at a greater margin affect that we have experienced and anticipated, you know, to date.

The good news is, it is solid performance across the Company and the performance is solid across categories.

Our fresh product and sell-through’s is what’s driving that business and our average retail price is also driving that business because we’re really driving it on current styles.

Always, when we look at the business today, you have to take into regards that the project IMPACT initiatives were enterprise-wide, so we’re benefiting from the same initiatives on keeping the product fresh, sell-through’s fresh and of course, we are supported by the closing of the stores.

So as we look at that comp trend, that is the comp trend of the ongoing stores.

And that’s very encouraging.

Okay, sounds good.

One last question on your wholesale business, can you give any color, at all, as to what distribution channels exhibited the greatest amount of strength; was it department stores, specialty, discounters?

And do you expect it to continue?

Obviously with the strong backlog orders, I would anticipate that it would.

Clearly the momentum on our wholesale business is broad-based.

Our Naturalizer business, as we’ve talked about, is robust and continues to be very robust.

Our business with the larger mass customers, our Dr. Scholl’s business, our children’s license business, all of those businesses, we’re foreseeing comparable results.

LifeStride, as I think we noted in the press release, was slightly down for the quarter, but on significantly better margins, as we had very strong sell-through’s, and compared to last year, very good margins.

So our wholesale business, broad-based strength and clearly the – I think it’s 37% order backlog is indicative of that business continuing to look strong as we go forward.

Sounds good.

Terrific, guys.

Congratulations.

Thank you.

And our next question comes from Adam [Komoro] [ph] with Entrust Capital.

Hey, guys.

I wanted to echo the congratulations on the quarter.

You guys are doing a great job.

My question is, opportunites for Naturalizer overseas.

Can you talk a little bit about what you guys are thinking is the potential for the brand, not only here but outside the U.S.?

We continue to focus on building our Naturalizer business, domestically and in Canada.

We believe we have significant opportunity here.

We do have a small and healthy Naturalizer business in many markets around the world, but it’s small and insignificant to the chain as a total.

And we’re early in developing a perspective of where we go next.

Okay thanks.

I would like to remind our audience if you do have a question, please press the star key followed by the digit 1.

We’ll hear again from Jeff Feinberg with JLS Asset Management.

Hey, just one quick follow up if I may.

Just trying to understand when you’re talking about a lot of the internal initiatives and wonderful productivity improvements, project IMPACT and the like, if you just sort of think about the earnings power that you touched upon, where do you think we can get the operating margins over a long-term target?

Because if I’m not mistaken, we’re sort of at – based on next year, this guidance, I think we’re at the highest level it’s ever been, and obviously you guys are raising the bar and doing a great job, I’m just trying to get some perspective in terms of where those operating margins could go over time.

Thank you kindly.

That’s an interesting question, Jeff.

We’ve just gone through our – actually in the process of completing our three-year planning and that, clearly, is the question of the day.

And it’s obviously a trade off between investment in the business and, for purposes of growth, and earnings realization.

I think it’s hard to look at our business in a consolidated way.

The model just does not work that way.

But as you look at the different elements of our business, I think we probably set a goal for ourselves, with respect to operating margin at Famous Footwear, to be at the 6% or north of 6% range and similarly on wholesale business, you’re probably looking at something slightly in excess of that.

So that’s kind of how we view it.

But, again, we’re looking at a longer-term perspective, so I don’t want to lead you to believe we’re going to get there next year, but, as we set goals for ourselves, when we look out three to five years, that’s probably the bogie we’re setting for ourselves.

And, forgive me, because I don’t have the numbers in front of me, what does next year’s guidance imply, in terms of operating margin?

Not having anything in front of us, Jeff, we’ll have to get back to you –

Jeff, if you call me tomorrow, we can work specifically on that.

Sure, and I apologize, who should I call?

Andy Rosen.

Okay, Andy.

Thank you.

Sorry for so many questions.

And as a final reminder to our guidance, if you do have a question or comment, please press the star key followed by the digit 1.

We’ll pause for just one moment.

And it appears there are no further questions.

I’ll turn the conference back over to you, Mr. Fromm, for any closing remarks.

I’ve got to say conference calls like this one are certainly fun to do.

Clearly, the momentum in our business, we believe, is real, and we believe that we continue to drive the success that we’re having.

You know, I think it’s interesting for me, as you may recall, I think it was about 18 months ago on this call that we announced that we had completed our analysis and preliminary review on the two initial programs to enhance our earnings.

Those two programs then led, really, into a series of initiatives that we call project IMPACT.

Improved performance and competitive transformation of the business and we really believe that this is the driving force.

Our thought processes, again, whether it’s in retail or wholesale, are driven by the need to be more competitive at the point of IMPACT with our customer.

We think we’re doing that.

We see that in the product, the sell-through’s and the margins.

These truly are still works in progress.

I think as Joe mentioned on some of the systems initiatives, we still continue to work on project IMPACT initiatives.

We continue to see and realize the benefits from those initiatives.

We continue to grow in our appreciation for what they mean to improving our sales and profitability and our competitive position.

They represent enterprise wide work.

And they represent work that, clearly, is building shareholder value, not only for today for but for our future.

We’re just excited with our position.

We wish you a great Thanksgiving and we look forward to the call next quarter.

Thank you very much.

That does conclude today’s conference.

We thank everyone for their participation.

We hope you have a great day.