Caleres Inc (CAL) 2011 Q3 法說會逐字稿

Good afternoon.

My name is Christian and I will be your conference operator today.

At this time I would like to welcome everyone to the third-quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Ms.

Peggy Reilly Tharp.

Ma'am, you may begin your conference.

Thank you.

Good afternoon everyone and thank you for participating in the Brown Shoe Company third-quarter 2011 earnings call, which is being made available to the public via webcast.

I am Peggy Reilly Tharp, Vice President of Investor Relations for Brown Shoe Company.

Earlier today we distributed a press release with detailed financial tables, which is available on our website at BrownShoe.com.

Please be aware that today's discussion contains forward-looking statements which are not historical facts and 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 US Securities and Exchange Commission.

Please refer to today's financial press release and our SEC filing for more information on risk factors and other factors that could impact forward-looking statements.

Copies of this report are available online and from the Investor Relations department.

The Company undertakes no obligation to update any information discussed in this call.

Joining us on the call today are Diane Sullivan, President and Chief Executive Officer; Mark Hood, Chief Financial Officer; and Rick Ausick, President of Famous Footwear.

Today we will begin with the corporate strategies review from Diane, followed by a financial summary from Mark, before turning the call back over to the moderator for Q&A.

And I would now like to turn the call over to Diane Sullivan.

Good afternoon, everyone and thank you for joining us.

Since our last earnings call I have been focused on five key areas where we, Brown Shoe Company, must advance and see success.

The first is centered around delivering quarterly results, and this remains a focus for the entire Company.

While Mark will present a more detailed discussion of our financials during his portion of the call, I want to briefly call out that we reported adjusted EPS of $0.51 for the third quarter, a 13% improvement over last year.

Secondly, I told you we would be working as swiftly as possible to finalize our SAP stabilization, and we made progress with SAP throughout the quarter.

As expected, we are still seeing some residual impact with third-quarter negative EPS impact of approximately $0.07.

However, our October wholesale on-time shipping improved to 93%, and we have eliminated our reliance on external consultants and also implemented new tools in SAP, which are already providing us with a valid new data.

As we discussed during our second-quarter call, we expect to continue to refine and improve SAP in the back half of the year.

And we are seeing each quarter show improvement over the prior one as the stabilization work we completed over the summer is beginning to bear fruit.

Third, I made completing the integration of ASG a priority, and the financial and human resource functions are currently being transitioned to St.

Louis.

Over the past three to six months we have brought on the talent we needed and the team at ASG is making rapid headway in product design and development.

They are also working to become more competitive and nimble in terms of production and improving our speed to market.

And, fourth, and perhaps most significant area for success centered around making progress in our portfolio realignment efforts.

This also includes work related to removing costs as we eliminate underperforming assets not aligned with our strategic focus or delivering on our established financial return criteria.

Briefly, here are a few of the areas that we have made advancements in in the first phase of this portfolio realignment.

As you know, during the quarter we completed the sale of AND 1 for $55 million in cash, allowing us to better focus on our remaining more strategically aligned ASG brand and to pay down our debt levels.

Also, during the third quarter we decided to exit our wholesale children's business and have agreed to multiple licenses with BBC International for Buster Brown, for Avia, and for our Sam Edelman children's brand.

This will be a phased transition which will begin now and continue through the first quarter of 2012.

Additionally, we decided to exit some of our women's specialty businesses and private brands as well.

Specifically, we have elected to not renew some licenses and are completing exiting some brands.

For the remaining women's specialty and private brands in our wholesale portfolio we will continue to evaluate each against our strategically aligned consumer platforms and our established financial return criteria.

We also plan to continue with our real estate management strategy, focusing on improving store productivity, and we have accelerated our aggressive review of marginal stores.

We now expect to close between 70 and 75 Famous Footwear stores, both this year and next, for a total of approximately 145 stores.

In addition, we will be exiting our 20 unprofitable Brown Shoe Closet and F.X.

LaSalle retail locations, which are part of our specialty retail results.

And we should have all of these stores closed in the first half of 2012.

The final part of our phase one plan, the closure of our Sun Prairie retail distribution center, was just announced last week.

In total these steps are expected to reduce annual revenue by approximately $200 million and result in more than $80 million in annual SG&A cost savings.

The related one-time cash and non-cash costs are expected to be approximately $20 million and will be occurred over the next several quarters.

These changes to our asset portfolio will also result in staff realignment in all support divisions, both here as well as in China.

These positions do not impact our topline results and can either be eliminated with manageable results or will be outsourced.

We have already begun to work on all of these areas, including the review of our current support structures.

You should expect to begin seeing results as we achieve success in our multi-year SG&A reduction efforts, which are focused on lowering our fixed cost base.

And, last -- the last area that we have been focused on is our 2012 plans.

These have been developed in conjunction with our portfolio review efforts.

While I expect to share greater details about our strategy for 2012 after the first of the year, you can expect to see incremental improvement in operating profit and better use of our working capital as we continue with our portfolio realignment.

As you know, we still have work ahead of us to reach our long-term targets, and we expect to get there through a combination of both organic growth in our core businesses, as well as this portfolio realignment.

It is important to note that our efforts aren't solely focused around -- just around eliminating underperforming or poorly aligned assets.

We are really determined to expand our portfolio and to become value creators and industry aggregators.

We made strides in this area when we added the Vince footwear license to our portfolio of brands this quarter.

With Vince, the premier destination for women's contemporary sportswear, we are continuing to build and strengthen our Contemporary Fashion portfolio.

Distribution of this brand will begin in fall 2012 and will be aligned with the same strong luxury department and specialty store consumer base as the Vince sportswear line is.

And we really think that the Vince footwear line will expand our presence in this 1.5 billion premiere department store channel currently that is really being served by Via Spiga, Vera Wang and our Sam Edelman brands.

So all in all we believe our efforts will help us reach our long-term goals of achieving a corporate return on invested capital of approximately 15% and an EBIT margin of approximately 8%.

With that I would like to now turn the call over to Mark for a review of our financial results for the quarter.

Thank you, Diane, and good afternoon everyone.

I would like to start our review of quarterly results by pointing out that the portfolio actions Diane mentioned had a significant impact on our reported results.

First, the sale of AND 1, and the size of related gain required us to show this business as a discontinued operation.

The reclassification of AND 1 reduced our sales and operating earnings by $19.1 million and $24.6 million, respectively, in the latter case including the gain on sale.

Second, the businesses we have already begun to exit resulted in $4.5 million of costs in the quarter with $900,000 reported in cost of goods sold and the remaining $3.6 million reported on the restructuring line, along with our ASG integration costs.

With the anticipated changes we have ahead of us, you can expect to see a total of approximately $20 million of cash and non-cash costs over the next several quarters, including the current quarter.

As a result of the reclassification of AND 1 and the impact of our portfolio realignment efforts, consolidated net sales were $713.8 million, down 0.3% versus last year's record topline results.

At Famous Footwear, which is part of our targeted family platform, net sales of $416.2 million were down 1.3%.

Same-store sales at Famous Footwear were down 0.4% versus a record 10.6% improvement in the third quarter of last year.

Comps, excluding toning, would have been 300 basis points better for a 2.6% increase in same-store sales for the third quarter of this year.

In terms of product, we saw strong growth in running during the quarter, up 33.4%.

For boots we saw growth strengthen in each sequential month of the quarter for a total improvement of 3.9%.

Sandal sales remained strong in the quarter and were up nearly 17% year-over-year.

During the quarter we also saw a 55% decline in toning sales.

For back-to-school, while August 2011 was a record-setting month for Famous Footwear, we were also up against our best back-to-school season in 2010.

This year we sat better performance from our later markets, as buying continued to move closer to need and later into the back-to-school season.

While same-store sales from August to mid-September improved by 1.7%, we did experience weakness in the back half of September and October, as did many other retailers.

Overall we found our best consumers have become even better and they're making the most of promotions such as our target coupon and rewards offers.

Turning to our wholesale operations, which include our Healthy Living and Contemporary Fashion brands, we saw net sales growth of 2.9% in the third quarter, with the improvement due to the February ASG acquisition.

In our legacy wholesale business we reported a decline in sales of 11.8% compared to a 33.7% increase in the third quarter of last year.

For our Healthy Living brands, all in Naturalizer sales, which include wholesale and retail results, were $92.5 million, down 7.7% year-over-year versus a strong double-digit increase in the third quarter of last year.

During the quarter performance at Naturalizer was affected by delivery timing of certain products.

Dr.

Scholl's sales were $24.3 million, down 41.4% year-over-year due to strong toning and Pocket Shoe sales in the prior year, which resulted in a 50% increase in the third quarter of 2010.

However, we continue to work on the turnaround of this brand and are starting to see long-term positive signs.

We are testing some initiatives at Walmart where consumers remain price-sensitive during these rough economic times.

In addition, we are looking at sourcing alternatives for our Dr.

Scholl's shoes finding new ways to engage midtier and mass consumers as they face uncertainty around the domestic and global political and financial environment.

Conversely, in our Contemporary Fashion brands, which include Vera Wang, Via Spiga, Franco Sarto and Sam Edelman, net sales were up 8.1% year-over-year on top of a third-quarter 2010 gain of 20.1%.

Contemporary Fashion brands represented approximately one-third of our legacy wholesale revenue in the third quarter.

And we are seeing continued success on the floor at Nordstrom's and other high-end retailers.

Let's move onto specialty retail, which primarily includes our Naturalizer stores and Naturalizer.com, as well as shoes.com.

In the third quarter sales at our Naturalizer retail stores were down 4.1% year-over-year, while same-store sales were down 1.1% versus up 2.3% last year.

While traffic was down at our retail stores this year we did see consumer conversion and pairs per transaction increase.

And at our Naturalizer online business we saw growth of 7% in the third quarter.

In total our direct-to-consumer business improved by more than 10% in the quarter, with FamousFootwear.com up nearly 50% year-over-year, where we saw an increase in both consumer conversion and pairs per order during the quarter.

We also improved our drop ship capabilities and remain focused on expansion of our multichannel business which we expect to drive improved profits as we continue to enhance the consumer shopping experience

I would like to review our financial metrics in a little more detail now, beginning with GAAP earnings per diluted share.

For the third quarter we reported earnings per share of $0.79, which includes a $0.37 benefit from the sale of AND 1, and a $0.07 of costs associated with exiting various wholesale operations brands, and $0.02 of ASG integration-related costs.

Excluding these items, adjusted earnings were $0.51 per diluted share versus $0.45 in the third quarter of last year.

Overall gross margin in the quarter was 38.7%, which was down approximately 70 basis points when compared to the third quarter of 2010.

Several factors impacted gross margins, including lower margins at Famous Footwear, which reduced consolidated gross margins by 90 basis points; a lower mix of retail versus wholesale revenue, which reduced gross margins by 30 basis points.

However, these declines were partially offset by improvement in our wholesale business from the combined impact of our legacy brands and the addition of ASG.

SG&A dollars spend of $239.4 million includes approximately $9 million of ASG expense, was down 3.1% year-over-year thanks to good cost controls and lower incentive costs.

As a share of revenue, SG&A of 33.5% was down 100 basis point year-over-year.

Net interest expense of $6.6 million represents a $1.7 million increase over the third quarter of last year, and was up due to higher borrowing levels related to the ASG acquisition.

The Company's tax rate was 31.7%, down 320 basis point year-over-year.

Depreciation and amortization for the third quarter was $15.1 million, while capital expenditures were $9.2 million, bringing year-to-date CapEx to $31 million.

We ended the quarter with $222 million of borrowings under our revolving credit agreement, which has approximately $300 million of additional availability.

Cash and cash equivalents at the end of the quarter were $42 million.

Inventory at quarter end was $580.2 million, up 7.5% year-over-year.

While wholesale inventory was up, the majority of this increase was related to the ASG acquisition.

At Famous Footwear inventory was down 5.8% at the end of the third quarter, with toning down 62% from last year.

Before wrapping up the call, I would like to review our amended fiscal 2011 guidance.

We expect the changes we have made in our asset portfolio to result in a decline in revenue for the brands we are exiting.

We also now expect full-year SAP-related cost to have an impact on EPS of approximately $0.26.

Finally, we are approaching the holiday shopping season with a generally cautious outlook based on the continued wariness midrange consumers are exhibiting during these uncertain economic times.

As a result, we now expect adjusted EPS of $0.73 to $0.85 for 2011.

For the full year we expect consolidated net sales of $2.60 billion to $2.62 billion; same-store sales at Famous Footwear down 1%, as we expect fourth-quarter sales to be flat to up 2% due to the elimination of the two weeks of expected BOGO.

Excluding ASG, net sales of wholesale Operations are expected to be down 2% for the full year.

Gross profit margin on a consolidated basis is expected down 100 to 140 basis points; net interest expense of $26 million to $27 million, a full-year effective tax rate of 31% to 32%; both GAAP and earnings per diluted share at $0.73 to $0.85; depreciation and amortization of $59 million to $61 million; and capital expenditures of $43 million to $45 million.

I would now like to turn the call back over to the operator for Q&A.

(Operator Instructions).

Scott Krasik, BB&T Capital Markets.

The timing -- or maybe explain a little bit more detail some of the initiatives you're going to take with exiting some of these brands and the exact timing and when we can start to recognize the P&L impact.

It is Mark.

So, again, as Diane indicated in her remarks, we have begun already to transition out of these brands here in the fourth quarter.

We would have some carryover into the first quarter of 2012, but we will move aggressively on the cost reduction associated with these brands -- should have a good share of that out by the end of the fiscal year.

Well, I guess, first, Diane, which brands are we talking about?

Well, you know it was a number of them.

First of all, it was the entire children's business, so that included license brands like Marvel that we are not going forward with, along with other licenses like Barbie and others.

But the key point is we have signed a license agreement with BBC for brands that we really believe are core children's brands to us going forward.

And those would be Buster Brown, Avia, and importantly, Sam Edelman, so that was the whole children's package.

In addition to that, we really looked at our private brand, private-label business.

It was a combination of some intercompany brands that we have, which is -- we are going to continue with, but we are embedding that in other parts of our organization.

And then with some of the other smaller private brand and private label brands that represented probably about 40% of that total business we just decided not to exit.

I would rather not comment on what those are for a bunch of reasons.

So those are the two big chunks.

In addition to that you heard Mark and I talk about the exiting of F.X.

LaSalle and our Brown Shoe Closet stores, along with accelerated closings of some of our Famous Footwear stores.

And then, obviously, the other one being the Sun Prairie distribution center.

So that -- those in a nutshell for the most part were really phase one of our look that I said we were going to do on the assets that we didn't feel lined up with where we are going strategically or, frankly, some excess capacity in our distribution network too that we really wanted to take care of.

So in terms of the reduction in sales, Mark, those will continue through Q4 of next year, is that --?

Yes, when you include the store closings.

There will be closings all the way through fourth quarter next year.

But I think the accelerated closings this year and then the way you would want to think about next year's closings [would] have a half or year of sales impact.

Maybe just changing topics, Rick or Diane, can you talk about what the traffic patterns at Famous looked like after back-to-school?

Are your customers coming in on a regular basis?

Are they shopping when the weather gets colder?

Help us understand the mindset of your customer now.

Sure, I would just kick it off by saying during our core back-to-school time period our business really behaved similarly to the way that it always has.

And we really captured our fair share, and traffic count looked pretty good.

It was later in September and into October when we saw a little bit of a shift.

And maybe, Rick, you might want to comment in more detail for Scott.

Yes, I think -- Diane hit it, I think.

We had some shift of weather patterns first a year ago, and October becomes one of those kinds of months that when those things happen you do get a shift in business.

So early -- end of September, early October weather was warmer and we had less traffic.

The last week of October the weather was worse, particularly in the Northeast, and we have a lot of stores in those marketplaces, and our business was actually very good.

So it feels a little bit like that.

It is hard to separate out the economic issues and things like that, but we did see some differences of pattern of shopping based on the weather.

You had some positive comps in boots, so it is not just that in some categories it seems like women aren't shopping for themselves -- you're not seeing (multiple speakers)?

No, I don't think so.

I think -- again, part of it is -- again, we believe that there is some of the boots that are being sold are in place of casual footwear, because women are wearing that as their fashion versus a casual shoe.

So there is a little bit of that, but, yes, we weren't unhappy with our boot business even with some of the weather shifts.

Okay, thank you very much.

(Operator Instructions).

Steve Marotta, CL King.

A question on the -- again, the realignment -- $200 million reduction in revenue, $80 million in SG&A cost savings.

Can you talk about the delta in EBIT that is expected on an annual basis from these moves?

We will give you a little bit more guidance on that when we do our full-year 2012.

We are still trying to work out some of those timing issues that Scott had mentioned.

Again, in aggregate there will be a pickup in terms of EBIT.

None of the business we are exiting were positive at the operating line.

They were all, for the most part, contribution margin positive, but were negative at [other operating] line.

Mark, can you talk maybe about what is expected to be, not necessarily the timing in 2012, but at the finish line on an annual basis?

So, in other words, I understand your reticence to talk from a timing standpoint as it relates to 2012, but as it relates to if you wave a magic wand they were all done today, what would the EBIT delta be roughly?

And, again, you can talk in ranges if you would like.

Again, a combo platter.

It would probably be someplace in the $10 million to $12 million operating earnings.

Okay, great, that is very helpful.

And when will SAP-related charges go to zero on a quarterly basis?

I expect we will [stop] talking about it in the first quarter of next year.

Okay.

That is great.

You also mentioned, Diane, I believe that you have an 8% EBIT target.

Have you spoken about a timeframe for that?

You know, I haven't yet.

But we certainly plan to as we move into 2012 and we get our plan finalized, I would expect that we give you a sense of timeframe on that.

Okay.

Lastly, your gross margins were down pretty sharp in the fourth quarter of last year at the wholesale division based on supply-chain issues combined with SAP issues.

Can you talk a little bit about gross margin assumptions at wholesale in the fourth quarter of this year -- how much cannot come back?

Oh, and by the way, you also made the acquisition, which I'm assuming carries higher gross margins than what you reported in the fourth quarter last year.

Can you talk a little bit about wholesale gross margins in the fourth quarter this year?

Yes, so, again, legacy wholesale margins were down 800 basis points in the fourth quarter last year.

I think we have been talking throughout the year about that being a recovery opportunity in the 40% to 50% range.

We still think that, however, that is mitigated somewhat by the SAP costs.

So to the extent you've got a couple of cents of SAP costs in the fourth quarter -- I haven't done the math on the rate impact of that.

I can do that for you off-line.

Okay, that would be helpful.

Although those are two different lines -- I mean, the SAP costs are on the SG&A line, correct?

The bulk of them are in the margin.

On margin, okay.

We will take care of that off-line.

Thank you very much for answering the questions.

Jill Caruthers, Johnson Rice.

Can you talk about -- it looks like the SAP impact seems to be $0.06 worse than what you thought last time we spoke a few months back.

If you could talk about maybe where you are seeing additional pressures versus your original thought?

So, again, I think that it was about $0.04 worse.

I think we have talked about $0.22 on the last call, which was the $0.15 in the first half and the $0.07 we expected in the back half.

And what we are seeing is some lingering or some chargeback associated issues associated with billings earlier in the year as some of the errors that occurred in the go live.

And, then, if the legacy core brand performance, it is tough to really dig in to see how it performed this quarter given, I think you started to exit some businesses.

Maybe if you could just talk about the ongoing businesses during third quarter, was it to your projections or did you see additional weakness than what you thought?

I think it was a little bit of a mixed bag in terms of our businesses there.

With respect to our Contemporary Fashion brands like Via Spiga and Sam Edelman and Franco Sarto and Vera Wang those businesses really performs nicely in the quarter.

LifeStride also performed well in the quarter.

Our Naturalizer business, I believe as Mark had mentioned on the call, was impacted by some late deliveries that really didn't get to our stores or to our customers as quickly as we had anticipated or on time.

So their business in the quarter was a little bit impacted.

Then, obviously, our Scholl's business at Walmart was difficult, and we were up against both toning and Pocket Shoe in the midtier last year.

So it was a little bit of a mixed bag.

And it is also, as you said, it is hard to read with the businesses exiting -- that we are exiting along with the SAP and ASF implementation.

But, again, one of when we look at the underlying fundamentals of our core strategic businesses going forward, we feel very positive about what 2012 and beyond is going to look like.

And then just a final question, if you could talk a bit about the DC closing that you announced earlier this week -- or I'm sorry, last week.

Maybe the number of stores that it was currently servicing at Famous, and some -- maybe some metrics you are putting in to reduce the risk as you transition that product to other DCs?

I am going to -- I don't have the exact store count in front of me.

It would be in the neighborhood of probably 250 stores that were still serviced out of Sun Prairie.

As you recall, back in 2009 spring we had opened the West Coast distribution center, and so we have complete redundancy between the three DCs.

And so we are taking this time to take about 250 stores and divide it as between our West Coast, Tejon Ranch and our Lebanon, Tennessee distribution centers.

So I think that will be pretty smooth and clean.

Both are existing facilities and we just need to redirect receipts there and then transfer any residual inventory.

And then also our shoes.com fulfillment is currently done out of Sun Prairie and that will be transitioned to Lebanon.

I appreciate it.

Thank you.

Christopher Svezia, Susquehanna.

This is Christina Cheng for Christopher Svezia.

Could you give us any idea, where do you see inventories by year-end?

Well, with respect to Famous, you want to take this one?

So, again, I think we would expect -- I think Rick has got his sheet handy there.

I will let him answer the Famous piece and I will answer the wholesale piece.

Against last year we should be down about 3% or 4% in that range on inventory at Famous Footwear.

And you'll recall that we had begun already last year to lower our toning inventory at that point.

In wholesale we would expect inventories to rise slightly from the third quarter, so they will still be up a tad bit over the year-end a year ago.

Two factors there.

Obviously, still the ASG acquisition.

And then you've got the early Chinese New Year which will end up with, I will call it, a greater in transit number at the end of this year than last year.

Then could you break out the revenue contribution from ASG this quarter?

If you will bear with me for a second, I will grab that number.

And maybe while Mark is finding the number, do you mind giving any color on your backlog?

It would have been about $36 million, I believe, excluding the AND 1 reclassified sales.

Did you hear that, Christina?

Yes, so it is $36 million.

Yes, ex AND 1, which was re-classed to discontinued.

Okay.

Then any color on your backlog?

Backlog is up about mid-single digits.

And is that excluding AND 1 -- excluding ASG?

That includes ASG.

It includes ASG.

And then excluding ASG would that be --?

It would be down high singles.

Okay, thank you.

There are no further questions at this time.

I will turn the call back to management for any closing remarks.

I just want to say thank you for joining us for our third-quarter call.

And I wish everybody a very happy and healthy Thanksgiving holiday.

Take care, see you soon.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.