Caleres Inc (CAL) 2013 Q3 法說會逐字稿

Good morning.

My name is Jennifer, and I will be our conference operator today.

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

(Operator Instructions)

Thank you.

And Ms. Reilly Tharp, you may begin your conference.

Thanks, Jennifer.

Good morning, and thank you for participating in the Brown Shoe Company third-quarter 2013 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.

In addition, slides are available on our website for you to reference during today's call.

Please be aware that 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 US Securities and Exchange Commission.

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

Copies of these reports are available online.

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

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

Today we will begin with a strategy review from Diane, followed by a financial summary from Russ, before turning the call back over for Q&A.

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

Hello, and thanks very much for joining us this morning as we report another good quarter of Brown Shoe Company results.

Third-quarter consolidated sales of $702.8 million were up 1% over last year.

And that excludes sales from discontinued brands.

Earnings per share of $0.63 were up 12.5%, while gross margin of 39.6% declined 50 basis points.

Operating margin of 6.4% was up 50 basis points.

And as you know, we have been working hard to advance our corporate operating margin to reach our long-term goal of 8%.

While this was a really terrific quarter, there is still room to grow this metric.

We have been able to make some outstanding progress against our financial targets the past 18 months.

Our strategy is working.

And through the third quarter of this year, we have already delivered $0.27 more in earnings versus the first nine months of 2012.

Let's get into the details, starting with Famous Footwear, where we saw continued growth in same-store sales, up 4.9% for the quarter.

And this strength was across all geographies, climate zones and genders.

We delivered record quarterly sales at Famous Footwear of $439.6 million, while operating margin of 8.4% was up 30 basis points.

During the quarter, Famous Footwear capped off a great back-to-school season with 5.6% same-store sales growth.

I know we gave you a pretty good update, I think, on our back-to-school strategy and execution during our second-quarter call.

But I would like to just stress that our success is due to the work we have done over the last 18 months, and we are continuing to build on that foundation.

We accelerated our store portfolio review, and are now in a much better position in terms of store profitability and revenue per square foot.

We also invested in our assortment efforts.

We are focused on a smaller number of key styles, but providing greater depth with those products.

And finally, we have developed a relevant and compelling approach to marketing that has really resonated with the consumer.

And the results have followed.

Now, despite our success during back-to-school, like many of our peers, we did experience weak traffic patterns during the quarter, and actually, throughout the year.

However, our conversion rate has remained strong in the third quarter, up 5.3%, while pairs per transaction and AURs were also positive for the quarter.

In terms of product categories and styles, we continued to see good success with canvas, which was up 25%, including boat shoes.

Lightweight running is still also tracking very well, and accounts for nearly two-thirds of all running shoe sales.

And when back-to-school was in full swing during the quarter, we saw strong growth in sports slides, up 32%, and continued strength in sandals, up 16%, as warmer weather remained with us during the quarter.

Not surprisingly, this growth appears to have come at the expense of the boot category, which was up only 2%.

Although we only have a few weeks of the fourth quarter behind us, boot sales have been somewhat sluggish in November.

But we feel confident that we have the right product in-store for when the consumer is ready to buy.

At Famous.com, sales were up 6% in the quarter.

And Russ is going to talk in a little more detail about our online and our omni channel results.

Now, let's turn to our wholesale operations for a minute, where sales of $205.3 million were up 4.5%, excluding sales from discontinued brands.

As we have moved into the fall season, we have seen high-shaft boots, shooties and booties doing well for all of our brands.

We are seeing a lot of buckle and strap details, jewel-toned suedes, distressed leathers, which are somewhat new for a lot of consumers this season.

Healthy Living wholesale sales were down 5.6% in the third quarter, excluding sales from discontinued brands.

But as we talked about last quarter, approximately $7 million of Healthy Living sales, primarily Naturalizer, shifted into the second quarter from the third quarter this year.

So if you look at the Healthy Living portfolio on a year-to-date basis, sales are up 1.2% over 2012, in line with our expectations.

And we expect to be running somewhere around up 2% by year-end.

At Naturalizer, our largest wholesale brand, all-in sales were down 6.1% in the quarter.

However, most telling is that retail sell-throughs are up year over year on lower inventory.

And we have also seen significant improvements in the non-store channel, with retailers like Zappos, Amazon and HSN driven primarily by boots.

And at Naturalizer, retail same-store sales were up nearly 1%, with a slower September turning into a strong October.

And that has continued into November.

At Dr. Scholl's, good growth at the mid-tier was offset by lower sales at the mass channel.

And of course, as we have shifted the balance of this brand to a more profitable customer mix, we have seen a related improvement in gross margin.

LifeStride continued to deliver sales success across the board.

And the brand also grew third-party e-commerce sales by 40% in the quarter.

And for Ryka, although sales were down year over year, they are in line with our expectations.

At our Contemporary Fashion brand, wholesale sales of $98.4 million were up 19.3% in the quarter, excluding sales from discontinued brands.

The improvement we have seen with this platform is due to better product performance from our key brands.

And we should see a continuation of these trends into the fourth quarter.

Sam Edelman continues to be red hot, up mid double-digits in the third quarter.

Early in the fourth quarter, we launched our Sam Edelman e-commerce site to rave reviews, as consumers are thrilled to be finally able to buy Sam's shoes directly from the source.

While it is clearly very early, the site is currently performing well.

And we are also pleased with the performance we are seeing with our licensed partners.

Although very early and a small part of our business, it is an important part of the future expansion plans for this brand and for our wholesale operations.

Franco Sarto had mid double-digit sales in the quarter, as well.

Up 37%, with flats, casual, booties and riding boots doing well.

At Carlos, boots also performed well.

However, sales were down year over year, but up versus expectations.

And for Fergie, casual boots and dress sandals performed well, but weakness at the mid-tier weighed down sales for the quarter.

At Via Spiga, sales are gradually improving, as we have been talking about the last couple of quarters.

And we expect this brand's performance to begin to level out in the fourth quarter.

So far this season, wedges, boots and booties, pointy-toe pumps and flats are doing well.

And we brought on a new designer for the brand, Paul Andrew.

Paul has been singled out by many top-tier retailers for the debut of his own label this past spring.

He is actually going to receive the Launch of the Year honors at Footwear News Achievement Awards this December.

And you will also be able to see his first collection for Via Spiga in December at FNAA, as well.

Finally, our newest brand, Vince, continues to see good consumer interest, with key sellers in all categories: sneakers, flats, heels and booties.

So while Vince is still a small part of our contemporary fashion portfolio, it is growing.

And by 2014, we will have doubled our number of doors.

And for sure, we know this brand is really in demand by consumers, as we could see last Friday when they did their IPO.

This was a good quarter for all of our businesses, and we continued on the path we set out at the beginning of the year.

So to reflect the better clarity we have following the biggest quarter of the year for us, we are raising our adjusted EPS guidance range to $1.36 to $1.40.

You know, when we reported our second-quarter earnings, we received a fair amount of grief for our realistic view of the back half.

While I am pleased we were able to modestly out-perform almost all of our analyst expectations this quarter, I believe we maintained the appropriate amount of realism in terms of our guidance, based on the macro environment.

And I will tell you that we are employing that same realism as we look towards the fourth quarter and beyond.

As our wholesale peers and our retail partners have reported their third quarters, you will have heard a lot of concerns swirling around out there in terms of the promotional environment, consumer sentiment, et cetera, over a lot of things that we don't have control over.

So we are going to continue to operate as we have all year.

And we are going to be focused on executing the things that we have control over, and try to appropriately plan for the external factors that are beyond that scope.

So with that, I would now like to turn the call over to Russ, who is going to review our financials and a little more details around our guidance.

Thank you, Diane.

And thank you, everyone, for joining us on both the call and the webcast.

We certainly appreciate it.

Although Diane briefly reviewed our consolidated sales, I would like to add a little more color.

For the third quarter, we reported net sales of $702.8 million, versus $696 million in the prior year.

And both amounts excluded sales from discontinued operations.

As a reminder, discontinued operations include the Avia, Nevados, Vera Wang, and Aigner brands.

For the third quarter, there were minimal sales from the other brands and businesses we have exited.

Which include our F.X. LaSalle and Brown Shoe Closet stores, and also our children's and women's specialty wholesale brands.

We reported net earnings of $27.3 million in the third quarter or $0.63 per diluted share, up 12.4% compared to $24.3 million in the prior year or $0.56 per diluted share.

Third-quarter 2012 included portfolio realignment costs of $2.6 million on a pretax basis.

I would now like to turn to our individual businesses, beginning with the Famous Footwear, which is part of our targeted family platform.

As Diane discussed, we reported good third-quarter results, with same-store sales up 4.9%.

On a trailing 12-month basis, our revenue per square foot is solidly over $205 and approaching $210.

We remain on track to close or relocate approximately 60 stores, and we expect to open 51 in total this year.

In the third quarter, we closed or relocated 22 stores and opened 11.

Turning to our wholesale operations, sales of $205.3 million were up 4.5%, excluding sales from discontinued brands.

Contemporary Fashion third-quarter wholesale sales of $98.4 million, excluding sales from discontinued brands, were up 19.3%.

As Diane mentioned, our Healthy Living wholesale sales of $106.6 million were down 5.6% in the third quarter, excluding sales from discontinued brands.

But up 1.2% for the first nine months of the year.

Wholesale sales via our external e-commerce partners were up 25%., while our Famous.com site was up 6%.

In total, our owned e-commerce businesses accounted for slightly less than 5% of our third-quarter sales.

As we mentioned last quarter, we are seeing more consumers more rapidly merging their in-store and online shopping into a true omni-channel experience, browsing on their computer, tablet or mobile device, and then heading into the store only when they are ready to buy.

For truly integrated retailers like Famous Footwear, this is good news, as we provide consumers with both fully functional brick-and-mortar stores and a robust online and mobile experience.

Now let's turn to a review of our financial metrics.

Overall gross margin for continuing operations was 39.6% in the third quarter, which was down approximately 50 basis points.

The majority of this weakness was primarily related to Ryka, as the team has begun working to transform this promising brand.

On a year-to-date basis, gross margin for our continuing operations is up 50 basis points.

And as you read in our earnings release, we expect this metric to be up slightly for the full year.

SG&A spend of $233.5 million was down 1.1% in the quarter.

And at 33.2% of revenue, it was down approximately 70 basis points year over year.

Inventory at quarter-end was $544.6 million, up from $512.2 million in 2012.

At Famous Footwear, total inventory was up 4.8%, while wholesale inventory was up 8.5%, driven by our higher growth brands.

Net interest expense of $5.1 million was down 3.8% in the quarter, due to reduction in overall debt.

Our consolidated tax rate was 31.6% for the quarter.

And cash and cash equivalents were $42.4 million, up 3.7%.

We ended the quarter with zero borrowings against our revolving credit agreement.

While this is a great achievement, clearly we will be using our revolver as we take on inventory for spring.

Still, there's no denying the progress we have made in our debt reduction efforts.

Year-to-date depreciation and amortization were $41.1 million for the quarter, while capital expenditures were $41.6 million.

Our debt-to-capital ratio improved to 30.6% from 41.7% in the third quarter of 2012.

Before we begin Q&A, I would like to review our fiscal 2013 guidance.

As Diane mentioned, we are updating our guidance to reflect our performance year to date.

And we now expect consolidated net sales of $2.53 billion to $2.54 billion.

Same-store sales at Famous Footwear up low single-digits.

Net sales at wholesale operations up mid single-digits for continuing operations.

Gross profit margin up approximately 10 basis points for continuing operations.

SG&A of $910 million to $915 million will be flat to down slightly as a percentage of sales.

And net interest expense of $21 million to $22 million.

An effective tax rate on an adjusted basis of 31% to 32%.

Depreciation and amortization of $54 million to $56 million.

And capital expenditures, $54 million to $56 million.

GAAP earnings per diluted share for 2013 are expected to be between $0.82 and $0.86, and this includes $31 million of non recurring costs.

And adjusted earnings per diluted share of $1.36 to $1.40.

Finally, we expect we could see some wholesale sales shift from the fourth quarter of 2013 into the first quarter of 2014, as retailers navigate their fiscal year-end spring product arrivals and an earlier Chinese new year.

With that, operator, we would be happy to answer all questions.

(Operator Instructions)

Scott Krasik with BB&T Capital Markets.

It's actually Kelly for Scott.

Thanks for taking my question, great quarter.

Thanks Kathy.

How are you?

It's Kelly.

Great.

First I just want to talk about now that you are -- obviously see a lot of strength in athletic and casual this year.

As you look to next year, can you just talk about how you are planning to lap these tough comparisons in athletic and casual?

Sure.

I think we will ask Rick to answer that one.

Well, I will tell you, we have just come through our back-to-school pre-lines with all of our major athletic guys, and in the process of finalizing all that.

And frankly, on the athletic side, we see no reason why there isn't still room for growth.

We think the product still looks great, innovations and newness, color, all the things we think customers are looking for.

So we have no problem with that on the canvas side.

Even though it has been a great growth for us, we still have room to expand that assortment into more stores and into more styles.

So we think there's still opportunity in that, as well.

Even with the growth we have had, we see no reason why we can't have continued growth in those two categories for 2014.

Okay, now, just shifting over to wholesale.

The gross margins were down in the quarter.

Can you just talk a little bit more about the outlook there, and dig a little deeper?

Because it is difficult for us to get a grasp on where these are going, considering you have lapped the SAP issues, and your higher-margin businesses are growing at a faster pace.

Yes.

Maybe I will make a couple comments, and then Russ can fill in.

You know, to give you a perspective around the total portfolio and not just the quarter, Kelly, I am going to talk a little bit about the year-to-date performance and what we expect by the end of the year.

Because I think it helps clean it all up.

Sam's, Franco, Vince and LifeStride -- those four brands are really ahead of our expectations.

And in some cases, very much ahead of our expectations.

Naturalizer, Dr. Scholl's, Ryka and Carlos are really trending with what we thought, up 1% or 2% to LY what we think the year is going to look like.

And Via Spiga and Fergie are the ones that are somewhat (technical difficulty).

So we are going to expect to see margins up all-in at the end of the year.

Right.

And I would just add, primarily, as I mentioned earlier, Ryka was the primary reason why the margins were down in the quarter.

And that is what the teams are working on.

The portfolio and making the adjustments with the new portfolio that will be coming out.

So we have some hits in the quarter due to Ryka.

But on a year-to-date basis, all of our margins are up, in all of our brands, across our segments.

So we see an increase reflecting the continued improvement in all of our margins.

We see our strategy is definitely working.

All right, thank you, that is very helpful.

And just lastly, could you just elaborate on your plans for Vince, given the recent IPO there?

You know, stepped up their expectations for store growth.

Yes, it is actually incredibly exciting.

We loved the brand before we learned of the IPO -- we think it just resonates with the consumer really well.

As I said, we are really looking at doubling our door count.

It really feels like there is this white space in this market for this luxury casual look.

So we've really got some terrific iconic shoes already out there that we think we are going to be able to continue to build on.

And then beyond that, who knows what will happen?

But right now, looks very positive.

All right, great.

Thank you, guys.

Thank you.

Steve Marotta with CL King and Associates.

The 5% comp in the third quarter was tremendous.

Congrats on that.

Can you talk a little bit quarter to date?

Have you seen the balance accelerate into November?

I know it is also a difficult comparisons, given Thanksgiving.

But any sort of commentary there would be helpful.

It's a difficult comparison based on Thanksgiving.

(laughter) I think, Steve, we've got probably another week or 10 days before we annualize, at least -- we were up against Cyber Monday yesterday.

We were up against Thanksgiving last week, in the calendar.

So until we get through next week, it's really hard to look at that.

But we are trending close to our plan, so we figure if we planned it correctly, we should come out of this okay.

But again, there is a lot of business to be done between tomorrow and next Tuesday.

So we probably want to hold on talking more about that.

I will call you next week, Rick.

Thank you very much.

(laughter)

Also, can you comment on potential comp drivers for next year, either specific product categories, specific marketing programs, larger emphasis on customer service and conversions.

Can you just talk about what you believe will be the primary drivers of comp next year?

Yes, we still -- again, I know everybody keeps saying -- when is the running business going to stop?

And I don't know, because it keeps getting better.

And so I think we still have a great opportunity there.

One of the things that people, I think, might have missed, Steve, is the number one running shoe in all of athletic selling in the third quarter was a shoe we carried.

That is the first time that has ever happened.

The men's Nike Flex was the number one running shoe in the third quarter.

When that happens, that just gives us the opportunity to participate harder for the customer that is looking for that product.

So as that happens, and they continue to bring us innovation and new styling there, we don't see that business actually slowing down much.

On the other side of that, we are going to try a little spring boot business and see if there's some business there on the casual side.

Because we think the customer -- at least, the back-to-school -- is really receptive to those styles.

Now we just go into lighter colorations and see if there's some opportunity with that.

And then, the canvas business.

The other thing that was pretty surprising, I guess, a pleasant surprise is, we have a huge Converse business.

And when we -- and we impacted our Vans business big time for back-to-school.

Converse had an increase, and we've had a huge increase in Vans.

So those two brands seem to be coexisting very nicely together in our stores.

And we still have opportunity on both of them to grow them into first-half and into back-to-school.

So those are probably the biggest things.

And even on, Steve, I would even add to what Rick said.

He and the team do an incredible job even on building against a lot of the fundamental shifts that he has made in terms of portfolio change, the marketing shift, and all that.

And so you add that -- the upside that he continues to see on the merchandising side built on that foundational shift that we made in the structure of Famous Footwear, as well.

That too.

(laughter)

With fewer stores in the quarter.

Great.

And actually I was just going to ask about store opening opportunities next year.

And now that you have ramped from a productivity standpoint on a per-door basis, can you talk about opportunities to either fill in markets, and what the potential square foot --

I think our plan for next year is to have about 15 to 20 net store gains.

So 45 store openings, 15 to 20 store closings, something on that range -- 20 to 25 store closings, something in that range.

So about 15 to 20 net new stores next year is what our plan is.

But we are looking at it.

We are doing some work around what that opportunity might be, and if there's ways to accelerate.

But that's what we are looking at right now.

Very helpful.

Thank you again.

Thanks, Steve.

Jill Nelson with Johnson Rice.

You touched a bit about it on the wholesale, some questions on whether you get some orders shifted from fourth quarter to first quarter.

And it seems as though -- are you including some of that potential shift into your guidance?

And if there is any way you can quantify what you have in your outlook.

So in our outlook, I think, given the environment out there, we are cautiously optimistic.

So implied in that guidance would be a little bit of that.

Okay.

And then, if you could talk about the boot category.

It seems as though you talked a bit more softer turns at Famous Footwear.

But then when you talked about the wholesale brand, it seems as though you had some stronger boot trends.

Could you talk about that diversion or variance between the two?

Yes.

I guess I would say, Jill, at Famous, certainly back-to-school started off with a real big bang.

The team there did a great job of really assorting shooties and boots -- lace-up boots during that back-to-school season had a significant presence there, and it did extremely well.

Obviously as the weather has stayed relatively warm and there is a lot of other alternatives for the consumer to buy, it softens a little bit.

But again, as I said, I think we are up 2% in total, in boots.

And we expect to be in a great position going forward.

On our wholesale side, much higher percentage of our business there is in the boot category.

And the consumer really is shifting -- blending, I guess, boots and casual and how she is wearing that into a much broader category.

So we had a little more opportunity on the wholesale side to grow that business.

And I think one of the big surprises -- or bigger surprises, has been the tall shaft boots, the riding boots.

I think everyone thought that, that was not going to be as strong a category as it has been.

And it really -- it has been a sell out.

I can tell you in Naturalizer boots, we are already sold out on -- and in virtually any other riding boots in any of our brands are virtually gone at this point in time.

I don't know if that helps.

Yes, it does.

And just last question is on the Naturalizer brand.

I know that you're looking at quarterly revenue performance, it's a bit skewed, given the calendar shift.

Yes, it is.

But it seems as though last quarter that, that brand started to see a recovery from some challenging trends last year.

If you strip out the whole calendar-end shift, are you still confident that, that brand is on a rebound?

Yes, absolutely.

I am.

It was kind of lumpy, for sure, between second and third quarter, just the way it all played out.

But I'm very confident in terms of the performance of that brand.

And I would expect it to continue to show improvement fourth quarter, and then into next year.

No issues on that.

All right, appreciate it.

Thank you.

Yes.

Chris Svezia with Susquehanna Financial.

Nice job on the quarter.

Thanks.

Just when you think about wholesale, how are your partners at this point thinking about the back half, fourth quarter?

Are they being -- just given the promotional cadence -- is it business as usual?

Have they -- are they managing their inventory a little bit better, so there is less mark-down support potential?

I'm just curious if there is anything different you're seeing optically this go-round, versus other periods at all.

Not yet.

I think our expectation, for sure, is that it is going to be more promotional, that there is going to be more couponing and discounts, and you name it.

How much of it is hard to say yet.

But in terms of order flow and that kind of thing, Chris, not a significant shift at all.

Okay.

And then if you -- anything you can add about how they are thinking about spring, if you take out Chinese New Year, things shifting little bit.

Any other color how they are thinking about spring orders at this point in time?

It's a little early for me to comment too much about that.

But again, I think everybody is waiting to see how this holiday season does.

But in general, there is nothing that would be in the cards, I guess I would say, that has us concerned about spring.

They make their final determination about receipts and all of that, really, after the holidays, about things that they might want to tweak or shift or change.

But right now I would say I am not really concerned.

Okay.

That's good to hear.

Mix in wholesale.

I'm just curious.

Yes.

As you start to think about the Contemporary Fashion continuing to grow at strong rates, just say.

I mean, what --

Yes.

(multiple speakers) slow Sam Edelman, if Via Spiga starts to turn around?

And then you think about the lifestyle business.

I am just curious.

How do we think about the margin profile of wholesale suddenly?

Does it really -- do both continue to show improvement, because you are more focused on --

Yes.

-- the sell-through piece?

Yes.

Or does it potentially accelerate just because suddenly your higher-margin businesses continue to grow and surprise, and grow at a faster rate?

I'm curious how we think about that.

Yes.

It's a great question.

And yes, we do expect margin expansion on both our Healthy Living and Contemporary Fashion business.

And we have not changed at all that target that we have out there for an 8% operating margin for the Company all-in.

So yes, while Contemporary Fashions are growing their top line at a faster rate than the other segments, we still have a lot of work to do in terms of ensuring that the margins and operating margins continue to perform well.

And the same with the Healthy Living side, too.

So I would -- the way I guess I would say it is, more top line growth in Contemporary Fashion with comparable improvements in operating margin.

And slower top line growth on the Healthy Living side, with slightly slower growth in operating margins.

Okay.

All right, I got it.

And then just on Famous, real quick.

You mentioned athletic, you mentioned running, you mentioned canvas.

Any thoughts about -- let's throw it out there -- the boat shoe business?

How well that has done for you guys?

Just any thoughts as you think about that for next year?

Does that continue to be a driver for you guys?

Our business is still continuing to be really strong, Chris.

And so I think we are watching it.

The industry keeps talking about how it has softened in some categories or in some channels of distribution.

We are expanding some store counts in a few places.

And right now, we still think it's a positive opportunity.

But we will watch it, and we won't get too far ahead of it.

But we still think there is opportunity to grow that business next year.

Okay, sounds good.

Well, all the best, take care.

Thanks.

Have a nice Thanksgiving, Chris.

You, too.

(Operator Instructions)

And we have no further questions at this time.

I would like to turn the call back over to Diane Sullivan.

Thanks very much.

Appreciate everybody joining us this morning, and we wish everyone a happy Thanksgiving to them and their families.

See you soon.

Take care.

Thank you.

This does conclude today's conference call.

You may now disconnect.