Caleres Inc (CAL) 2016 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Caleres' third-quarter 2016 earnings call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Peggy Riley Tharp.

Ma'am, you may begin.

Thank you.

Good afternoon.

I'm Peggy Riley Tharp, Vice President of Investor Relations for Caleres.

I'd like to thank you for joining our third-quarter 2016 earnings call and webcast.

A press release with detailed financial tables and slides are both available at Caleres.com.

Please be aware, today's discussion contains forward-looking statements which are subject to a number of risks and uncertainties.

Actual results may differ materially, due to various risk factors, including but not limited to the factors disclosed in the Company's Form 10-K, and other filings with the 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 which could impact forward-looking statements.

Copies of these reports are available online.

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

Joining us on the call today are Diane Sullivan, CEO, President, and Chairman; Ken Hannah, Chief Financial Officer; and Rick Ausick, President of Famous Footwear.

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

Thanks, Peggy, and good afternoon, everyone.

Thanks very much for joining us for a review of our third quarter.

Our EPS of $0.81 exceeded street expectations, and despite a mixed consumer environment, we delivered growth in sales, margins, earnings, and cash from operations.

Gross margin was up 53 basis points in the quarter, driven by both Contemporary Fashion and Healthy Living.

For SG&A, we maintained our spend in the third quarter, continued our operational investments in future growth, and drove operating margin improvement up 41 basis points.

Once again, in the third quarter our portfolio strategy delivered shareholder value, and we continue to drive consistent, profitable, and sustainable growth.

Our portfolio strategy is more than just Famous Footwear versus our brand portfolio, or Healthy Living versus Contemporary Fashions.

It's really about how we use the lens of consumer trends as we approach our entire business by segment, by channel, by brand, and by our partner.

For our brand portfolio, that means that no one of our brands is more than 30% of our sales, no single channel is more than 20% of our business, and no individual retailer is more than 15% of sales.

For Famous Footwear, we use a portfolio approach to respond to consumer trends and demands.

This is reflected in how we edit and present our assortment of brands, and how we manage our real estate portfolio.

This approach enables us to remain agile, and ensures the experience is the same, no matter how our consumers choose to shop, as they use our national retail footprint, our redesigned mobile site, and Famous.com interchangeably.

Now as Famous Footwear consumers shopped across all of our direct-to-consumer options during the back-to-school season and drove same-store door sales up 2.7%.

While the last two weeks of July and the first two weeks of August got off to a slow start, we saw a much stronger September, with same-store sales up mid-single digits.

For October, comp sales were down low single digits, as record-breaking warm weather spread across the country, which undeniably delayed boot and booty sales.

Because of this type of variability in the market, we continue to look at sales on a seasonal basis, as short-term measurements have become less relevant.

What I can say is that Famous Footwear's top styles and top vendors continued to perform very well, with lifestyle athletic and sport-influenced product maintaining its strong consumer appeal.

Similarly, Famous not only maintained its broad consumer appeal, but expanded on it, as rewards consumers comprised 76% of sales in the third quarter, up nearly 100 basis points year over year.

As we have in the past, we've focused on our rewards consumers this back-to-school season.

However, this year we expanded our efforts to include our targeted high-value customers.

Let me give you a little bit more color on this.

Our existing stores with the higher penetration of high-value consumers out-performed our other doors during both the back-to-school season and in the third quarter, on both a comp sales and a traffic basis.

While it's still early in the execution of this strategy, we have already begun to open new stores where this consumer lives and shops.

For 2016 and beyond, we will continue to integrate our high-value consumer strategy and our digital efforts into our appropriately sized stores.

We will expand our efforts to include new experiences, both in-store and online, to drive cohesive messaging.

A good example of this during our back-to-school season was our online Nike hub, where the teams built a bigger story around one of our largest brands, and highlighted four key styles.

This online experience included video to bring to life the special features of these styles, which we also featured prominently in store.

Visitors to our online Nike shop drove a higher conversion rate, and a significant increase in revenue per visitor.

The online shop also drove visitors to other pages at Famous.com, and created -- and increased the time that our consumers spent online.

Ecommerce sales were up more than 180 basis points in the third quarter, and included our successful ship-from-store program, which was expanded to approximately 900 doors last October.

Consumers keep coming back to Famous Footwear because we offer trend-right and relative projects from trusted brands, and we're confident in our ability to execute against our strategy.

The same can be said for our brand portfolio, where our retail partners and our consumers continue to respond to fresh, new, and innovative product.

Let's turn to our brand portfolio, where both businesses reported outstanding improvement in gross margin, driving overall brand portfolio gross margin to 37.5%, up more than 300 basis points, despite a 3% decline in sales.

Across the portfolio, we delivered in-demand product, resulting in higher sell-through rates at retail and healthier margins.

Operating margins increased for brand portfolio, and at 11.5% of sales, it was also up more than 300 basis points, even as we continued to invest in product design and development and new brands.

Of particular note is that the brand portfolio operating margin continued to trend up, and was at its highest rate in five years.

For our healthy living brands, third-quarter sales of $134.1 million were down 10.4%, reflecting previously discussed declines at Naturalizer and Dr. Scholl's.

However, there was good news in the quarter, as well.

Dr. Scholl's sales were up approximately 3%, excluding the planned reduction in the mass channel.

Sport-influenced styles were up for healthy living, and all Healthy Living brands reported an improvement in gross and operating margin, including Naturalizer.

The brand teams have worked hard to drive significant margin improvement by targeting more profitable businesses, exiting under-performing products and categories, and managing inventory.

For the quarter, Healthy Living inventory declined by low double digits year over year.

Now shifting to contemporary fashion, where third-quarter sales of $130.4 million was up 6.2%, with good growth from key brands such as Sam Edelman and Vince.

Consumers continue to respond to newness from these brands, and others in our contemporary fashion portfolio.

Our exciting designs and fresh product has helped drive better sell-through rates and favorable stock-to-sales ratios.

Even though retailers continue to tighten inventory, reduce initial orders, and chase product in season, we continued to adapt, and delivered a successful third quarter.

Our success to date of both brand portfolio and Famous Footwear is due in great part to solid execution against our strategy.

I'm very happy with the decisions and the investments we have made, as well as the work we've completed, as it has allowed us to remain very agile.

As a result, we've been able to read and react to the atypical seasonal shopping patterns that we see today.

We're able to more rapidly respond to consumers' desire for newness, and we've reduced inventory and delivered good performance in a really ever-changing environment.

We will continue to make solid decisions going forward, as we execute against our strategy to deliver consistent, profitable, and sustainable growth for our shareholders.

With that, I'll turn things over to Ken to give you more of a financial review.

Thank you, Diane, and good afternoon, everyone.

Today we reported a strong third quarter, in which we delivered growth in sales, margin, earnings, and cash.

Our net sales of $732.2 million were up 0.5% versus the third quarter a year ago.

Famous Footwear delivered a solid back-to-school, with same-store sales up 2.7% for the season, and 2.1% for the quarter.

On a two-year trend, same-store sales for back-to-school were up 5.7%, while the quarter was up 6.5%.

Contemporary fashion also contributed to the overall sales growth for the quarter, with sales improving 6.2% year over year.

Consolidated gross margin for the third quarter was $293.8 million, or 40.1% of sales, up 53 basis points year over year, and driven by both Famous Footwear and Brand Portfolio.

As Diane mentioned, Brand Portfolio delivered solid gross margin improvement, as we continued to benefit from the exit of lower margin product, improved product mix, inventory management, and better sell-through rates at retail.

Famous Footwear, while a contributor to the overall margin improvement, was impacted by both higher shipping cost as we continue to grow online sales, and slower booty and boot sales when compared to this period last year.

We essentially maintained SG&A spend in the third quarter at 32.5% of revenue, or $238.3 million.

As we have all year, we continued to invest for long-term growth.

We're currently operating seven more doors at Famous Footwear versus last year, and this includes three new high-volume destination doors for the Famous business.

We also opened seven new Sam Edelman retail stores in FY16.

Depreciation and amortization were $13.9 million for the third quarter, up 8.6% over last year, due to our new retail doors and our continued investment in our consumer fulfillment initiative.

The modernization and expansion of our Lebanon distribution center is on schedule to ramp up in December, and will provide us the flexibility to adapt and meet our consumers' ever-changing needs.

As a result of this work, we'll soon be able to get new product directly into our consumer hands faster than ever before.

Our net interest expense for the third quarter was $3.1 million.

This was down from $3.9 million in 2015, excluding $2 million of debt extinguishment expenses related to the refinancing of our senior notes last year.

For the third quarter, our corporate tax rate was 33.6%.

This was up significantly over last year's rate of 26.7%, which included a discrete tax benefit of approximately $0.03 per share related to the use of tax carry-forwards.

Net earnings in the third quarter for this year were $34.7 million, or $0.81 per share, and included investments in the business discussed earlier, and the opening of additional retail doors.

For the third-quarter of 2015, earnings per share were $0.78 on a GAAP basis, including the debt extinguishment expense, and $0.80 per share on an adjusted basis.

Capital expenditures of $17.5 million for the third quarter and $48.7 million for the first nine months of 2016 reflect the investments in the consumer fulfillment initiative and the new retail doors.

Now turning to our strong balance sheet.

We ended the quarter with cash and equivalents of $173.4 million, up $87.1 million year over year, and had no borrowings against our revolving credit facility.

As always, our priorities for cash center around delivering value to our shareholders.

We're focused on investing in organic growth, and continue to be interested in opportunistic acquisitions.

We plan to continue our long-standing dividend, and to repurchase shares to offset dilution associated with our stock compensation programs.

Our consolidated inventory position at the end of the third quarter was $524.8 million, down 3.6% year over year.

As it has been all year, brand portfolio inventory was down, as we continue to manage inventory and improve our in-season replenishment capabilities.

At Famous Footwear, we ended the quarter with overall inventory down 0.4% per store on a dollar basis, with the mix of inventory down for fashion footwear and up for lifestyle athletic and sport-influenced products.

Before we begin Q&A, I would like to reiterate our FY16 guidance, which calls for consolidated net sales of $2.57 billion to $2.6 billion, with Famous Footwear same-store sales flat to up low single digits, and brand portfolio sales flat to down low single digits.

We continue to expect gross margin to be up 25 to 35 basis points, while we expect SG&A as a percentage of revenue to be down 5 to 15 basis points.

Our effective tax rate will be between 30% and 32%, and our earnings per diluted share will be between $2 and $2.10.

With that, I would like to turn the call back over to the operator for questions.

(Operator Instructions)

Jay Sole, Morgan Stanley.

Great, thank you.

Ken, I just want to start off with the gross margin, because year to date so far gross margin's up about 65 basis points.

You're still guiding to the gross margin being up about 25 to 35 for the year.

That implies a little bit of slow-down in gross margin improvement for the fourth quarter.

Just wondering what the drivers are there?

What explains the implied guidance for 4Q gross margin?

The big piece is we want to make sure we maintain as much flexibility as we can in the fourth quarter.

Clearly, I think we've been trending at a rate higher than that.

So long as we don't see the quarter get highly promotional, we would expect that we could extend that leverage.

I think for the most part, we're wanting to make sure that early here in the quarter, we leave as much flexibility as we can.

Okay, great.

Maybe just to dig into the gross margin in the wholesale business for this quarter.

You called out some of the drivers, talking about better product and maybe more responsiveness.

Can you quantify which ones have been the biggest factors that have driven that really strong improvement in the wholesale business in terms of gross margin?

Yes, it's been across the board.

We've been focused on making sure we're managing our inventory.

As a result, we've been able to continue to see nice initial margin improvement.

I think as we've seen lower initial orders, that's resulted in a reduction in markdowns and discounts and allowances.

I think as we look throughout the entire season, the profitability of our business continues to improve.

We're seeing those improvements across a number of categories.

Jay, it's really not one thing.

It's really all of the pieces that Ken talked about in combination, which is the best piece of it all.

You never want it to be any one thing.

I think that's what we're very encouraged by.

It was across, really across the entire portfolio we saw improvements in gross margin and operating margin.

I think we made some tough decisions earlier in the year around exiting some categories and products.

We are getting the benefit of that.

That was pretty painful earlier in the year, when we were having to report overall revenues that were down.

But I think as you can see, that's resulting in a much more profitable business for us going forward.

Got it, understood.

Then just on SG&A, because this year SG&A dollar growth is pretty flat -- very strong SG&A control, which has been a hallmark for quite a few years now.

Looking ahead into 2017, do you see any inflationary pressures, whether it's rising minimum wages or anything of that nature that could cause that SG&A growth rate to increase as we head into next year?

No, we're not in a position today to give guidance for 2017.

I think on a more general term, we spend a lot of time talking about how do we maintain those expenses.

I think as you impact the top-line growth, obviously the more -- the easier it is to leverage those expenses.

When that growth slows down, then we traditionally have had to monitor and really modulate our investments in the business.

I think that's one of the consistencies this year, as we said from the very beginning.

We were going to invest in some new brands; we were going to invest in the team and product development.

We have continued to do that.

We've had to find offsets in other places of the business to do that.

Great, and then maybe last one for me.

Diane, Ken mentioned some of the new businesses.

Can you talk about DVF and George Brown, and some of the new things you've done this year, and if you're pleased with the progress you've made in those areas?

Yes, I would say we are.

It's particularly, DVF is off to a good start.

The sell-through rates on that classification and category of business has actually been one of the surprises, I would say, in this fall season.

I think you probably heard that it's not just the sport and athletic today, but we're starting to see early signs that the non-seasonal categories of the footwear business is starting to open up a little more.

We're seeing more in the dress and casual side.

We think that's going to bode well for not only our entire Company, but that will help DVF quite a bit.

Our George Brown's very early, and not a whole lot of doors yet.

But so far so good in terms of the read on the kind of products that the consumer is going to want from us in the future.

Okay, great.

Thank you so much.

Scott Krasik, Buckingham Research.

Hi, everyone.

Congrats on the good quarter.

Thanks, Scott.

I might -- I jumped on a little bit late, so I didn't necessarily catch it.

Did you say what the monthly progression of comps for Famous Footwear were?

No, we basically said that August started off slow and finished in the high 2%s.

September was in the mid-single-digit range up, and then October slowed down a little bit in low single digits.

So no -- so positive all three months though?

Oh, yes.

Positive all three months 2.1%, back to school, 2.7%, 2.6%.

Okay.

As we think about next year, not talking about guidance, but it seems like the consumer is shopping more during peak periods, and you can really capture that in back-to-school especially.

Is there anything you can do to try and drive traffic to the stores at a greater rate if that phenomenon continues, and maybe accelerates?

I think we're focused on making sure we're engaging consumers in lots of different ways, Scott.

We really look at trying to drive traffic not just to stores, but really again across all of the different ways that the customer shops.

We are looking at the -- mobile actually is the fastest growing way that she's shopping.

I know that you know that, and you hear that from everybody.

You can see the traffic rates there just growing exponentially.

The desktop and tablets, we're focused on how we managed that, as well.

That's been a little less robust in the last couple of months, as we've seen the growth in the mobile growing much more.

Then the store piece of it continues, I would say on our peak times of the year, to be -- to really come back and do quite a good job.

But again, we don't focus necessarily specifically by channel.

We're really trying to drive interest and engagement and purchasing really across all of those different channels of the way that she shops.

Not any one place.

Okay, thanks.

Ken, you alluded to you want to keep your optionality on the gross margins, but historically, you really haven't played in that at Famous.

I think the sell-in, just based on what you're reporting, hasn't been over the top, so I don't think that retail inventory is that high.

How would you frame the likelihood of needing to be more promotional?

Well, I think I would frame it by the unseasonably warm weather.

Obviously we're selling more sandals today than we are boots and booties.

Just what we've seen in the slight change in weather patterns in last week, that's had a big impact on that business.

We want to make sure Rick has as much flexibility as he needs to navigate the fourth quarter.

We're not anticipating that there is going to have to be anything done from a response standpoint, but we certainly didn't want to close our options.

Okay.

You said Sam was up.

Is that up ex the new store growth?

Are you growing in wholesale still, as well?

Yes.

Okay.

Then is there anything you have learned from the stores that can improve wholesale, or gives you confidence to open more stores?

Just update there.

I think that probably it might be the reverse, actually, a little bit.

I think we want to make sure that we have even more product differentiation in the stores.

There's actually we need a stronger breadth of assortment, and even more freshness and even more newness there.

I would say the pace of how we sell goods is something that we're going to have to pay attention to there.

I would say that's -- almost the reverse there.

We have learned a little bit about how to -- really how to drive the retail side of it better.

Great.

Okay, thanks.

Good luck.

Thanks.

Jeff Stein, Northcoast Research.

Good afternoon, everyone.

At the low end, you're looking for about a 23% improvement in earnings per share in the fourth quarter.

Obviously, that would represent the highest increase of any quarter this year.

Where do you see it coming from, Ken, and how would you size up the risks, the upside, downside?

Where do you see the biggest risks in the quarter?

I think if you look at the business in the third quarter, the operating earnings contribution was a little more 50/50 across the business.

I think traditionally that's been much more heavily weighted towards the Famous contribution.

With the 11%-plus operating margin at the branded business, it's contributing a larger percentage of the overall earnings.

That continues into the fourth quarter.

We don't anticipate any real shifts really in the Famous business, in trend or anything year over year.

I think the biggest change is we're getting more contribution from the branded portfolio.

Then we're also -- we're seeing a little bit of improvement in the corporate other segment, just as we continue to manage our overall expenses.

Got it.

When I look at the SG&A of each of your segments, it was kind of interesting.

For the brand portfolio, your dollars in SG&A were actually down over 5%.

When you combine that obviously with a 300-plus basis point improvement in gross margin, that certainly gets you a lot of leverage, particularly if you can start getting the top line growing again.

I've got two questions here.

One, what's contributing to the drop in SG&A?

Number two, when do -- when would you guesstimate we'll start to see positive revenue growth in the brand portfolio?

Yes, I think a big piece of that is contemporary fashion up 6.2% in the quarter.

I know that Jay has done a great job of really going through and evaluating all of the brands in the portfolio, and making sure that he is reallocating resources appropriately.

We are seeing the improvement there at the expense level.

I think from an overall contribution on the top line, we do believe that you will see that turn in the fourth quarter, and the sales for the brand portfolio segment will be up.

Excellent.

In other words, have you now anniversaried the changing mix at Dr. Scholl's, in terms of the channels?

Yes, in the fourth quarter we have, Jeff, for sure.

If not, then we have other alternatives for how we offset that going into next year.

I wanted to mention one other thing around the brand portfolio is while in terms of our full-year expectations that we really expect that every brand is going to show operating margin improvement by the end of this year, which really demonstrates a significant amount of discipline and traffic execution in this last year.

It's one thing when a couple of them do it.

It's another thing when you really have everybody in the portfolio ending up contributing in that way.

Very good, and final question.

Gross margin dropped at Famous Footwear.

I presume that has everything to do with the product mix shift -- in other words, slow-down in boots and booties during October?

Was there anything else that may have contributed?

Yes, Jeff, it's Rick.

Yes, that's a contributor, as well as the additional freight expense on our dot-com shipping.

Got it.

Okay, thank you very much.

Great quarter.

Thank you.

Laurent Vasilescu, Macquarie.

Thank you very much for taking my question, and congrats on the strong quarter.

I was curious to know, I think in the prepared remarks, you talked a little bit about Nike in the positive.

I'm curious to know how athletic did this quarter at Famous Footwear?

Athletic in total was up mid-single digits.

Then within that, canvas, is there any commentary on that?

Well, canvas business was probably a little bit more diversified by brand.

Some brands did very well, some brands had a little bit of a struggle.

We like to look at it now as more lifestyle driven.

Whether we have -- whether the shoe's an actual canvas shoe or not is secondary to the fact how the customer's wearing it and using the product.

But the lifestyle business as we look at it today was up in the high teens.

Okay, that's great.

Then without getting into specifics on numbers for next year, how are you guys thinking about the athletic category for next spring?

We don't see this trend slowing.

I think we're looking at making sure we have breadth of product, making sure that we have the assortment and the brand that the consumer's looking for in a more meaningful way.

We think it's going to continue through first and second quarter, and we're anticipating even through back to school.

Okay.

With the weather turning and getting a little bit colder -- it always gets colder -- but how is November stacking up so far?

Well, the weather has turned.

As Rick just said, the athletic really not slowing down.

It obviously has gotten better.

Okay.

Then on the SG&A for the fourth quarter, are there any one-time items we should think about from last year as we think about the SG&A dollars for this year for fourth quarter?

No, not really.

Okay.

Then the tax rate, I guess we get to 25% -- is that fair estimate?

Yes, the tax rate last year we had a number of discrete items that allowed us to utilize some of our tax carry-forwards.

Don't really have those this year.

With a higher mix of our business coming through our US subsidiaries, that rate's been at the high end of the 30% to 32% range.

Okay, thank you very much, and best of luck.

Thanks, Laurent.

Steve Marotta, CL King and Associates.

Good evening, everybody.

Diane, I have a couple of questions for you.

Sure.

If you could endeavor to disassemble weather-related acceleration through the month, was there any change in pace of sales after the election?

No, not significantly.

No, definitely not, I would say.

It was -- we didn't see any material change with the election.

As you look into next year -- and without giving specific guidance on 2017, of course, are there -- can you comment on the open-to-buy dollars that are available for the branded portfolio within the wholesale channel?

Are there any shifts to that that are currently going on that you would view either positively or negatively?

I wouldn't say that there's anything that I could give you specifically, other than to tell you there will be the continuation of people wanting to place fewer initial orders and chase goods, and keep inventories tight and lean.

That for sure is what we're seeing.

I think again demonstrating our -- not only the third-quarter performance, but what we also expect in fourth quarter.

Our teams have really done an outstanding job of managing inventory and chasing the great new items that they've been testing, and able to get re-orders and replenishment, and improve their drop-ship capability.

What we're not getting on initial up front, we're really figuring out how to continue to chase the opportunity and chase the consumer demand.

That will help of course when the DC goes live in December?

Sure, yes.

Rick, I have one question for you.

There was a comparable in the industry that recently commented that the acceleration of denim is helping out in other categories besides athletic.

Are you seeing anything like that at Famous?

Actually, Diane, if you want to chime in on the branded portfolio, as well, if you're seeing anything like that in any of the styles that you're selling in either of the divisions?

I think, Rick, we'd say right, really for Famous and for the brand portfolio that there continues to be a trend in athletic and sport-inspired product.

We don't see that really slowing down at all.

What we do see is maybe a little bit of a shift from seasonal to more season-less kind of product.

A little more on the casual and a little bit more on the dress side.

We think that there's -- we think that's actually a good trend, because it really allows the consumer to really diversify her wardrobe a little bit, and we're going to be less reliant on boots and booties, and potentially sandals.

We see more closed shoes -- open, but closed shoes selling, as well.

There's a couple of nice new trends out there that we think we can take advantage of.

That's great.

Thank you so much.

Okay.

Thanks, Steve.

We have no other questions in the queue at this time.

I would like to turn the call back over to our presenters.

Thank you very much for joining us this afternoon.

We wish everyone a happy and healthy Thanksgiving.

Take care.

Thank you for your participation.

This does conclude today's conference call.

You may now disconnect.