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Despite Late Back-to-School Start, Caleres Raises Sales Outlook

Caleres saw second-quarter net sales tick up 9.3 percent to $738.3 million, as net income reached $51.2 million on strong demand for owned brands such as Naturalizer and Sam Edelman.

In a Nutshell: Caleres revised its full-year outlook for consolidated sales, anticipating a 4 percent to 6 percent sales improvement over 2021 instead of the initially projected 2 percent to 5 percent increase. The Famous Footwear owner still expects earnings per diluted share in the range of $4.20 and $4.40.

Holding strong on guidance is a good sign as the Allen Edmonds parent saw increasingly cautious consumers affect demand, traffic and conversion starting in July. Caleres chairman and CEO Diane Sullivan told Wall Street analysts that the back-to-school season helped reversed the negative trend this month.

“There are still three-to-four more weeks that we have where we’re really getting through back-to-school. We did see the build in our back-to-school business coming really a little bit later than we had seen in prior years,” said Sullivan, citing the improvement seen seven to 10 days after what the company initially anticipated.

“I don’t know whether the consumer was really enjoying those great vacations that they couldn’t have in the last two years, or they were not thinking about getting back-to-school as quickly,” she said, noting the potential impact of inflation and gas prices on shoppers’ overall sentiment in “buying much closer to need.”

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For the current third quarter, consolidated sales are expected to remain in-line with the prior-year quarter. Famous Footwear is expected to be down approximately 4 percent to last year’s third quarter, while the Brand Portfolio is estimated to be up 7 percent to 10 percent.

Earnings per diluted share are forecast between $1.05 and $1.15, while consolidated gross margins are anticipated to be flat to the prior year.

Inventory levels were up approximately 36 percent year-over-year to $770.7 million from $565.5 million, reflecting efforts to increase inventory levels ahead of the fall buying and back-to-school seasons. Inventory was down 2.7 percent when compared to the pre-pandemic second quarter of 2019, the company said.

At Famous Footwear, inventory is up 18 percent compared to the prior-year quarter, while inventory at the company’s Brand Portfolio segment is up 64 percent. Even though Famous Footwear’s inventory is up and the retailer is in good standing with Nike, Sullivan believes the company should continue to be aggressive in procuring more inventory in the second half.

“That’s one of the areas of those pockets of consumer demand that’s strong, that we don’t have all the inventory in the places that we’d like,” Sullivan said. “While our kids business and Nike seem to have pretty good inventory availability there—although that’s getting a little tighter given the strength of it—in the next 30 days to 60 days as we receive more receipts, I would expect to see that advantage continue to sort of play out in the late third and fourth quarter and obviously into 2023.”

Gross profit was $336.8 million, while gross margin was 45.6 percent, down 209 basis points (2.09 percentage points) from the 2021 second quarter’s 47.7 percent rate on $322.3 million.

Famous Footwear saw a 48.9 percent gross margin, down from the 50.1 percent margin it took in the year prior. The 118-basis-point (1.18-percentage-point) decline was driven by a more modest level of markdowns and an increase in freight costs associated with the e-commerce sales.

The Brand Portfolio segment saw its margin decline to 38.3 percent from 39.7 percent in the year-ago period.

For now, the footwear company doesn’t envision a big decrease in costs, according to chief financial officer Kenneth Hannah.

“What I would say on our pricing is the demand for our brands…has allowed us to continue to hold our price, and price increases, into the second half,” Hannah said. “Ocean freight is something that we’re starting to see come down a little bit, more so than product cost. But that really won’t show up until those goods come in through inventory and then are sold back through and we realize the profit on those products.”

President John “Jay” Schmidt followed up by reiterating that the company has yet to see material costs coming down.

Cash and cash equivalents totaled $46 million as of July 30, 2022, down from last year’s total of $54.7 million. Caleres ended the second quarter with approximately $349 million in borrowings under its credit facility and no long-term debt.

Net Sales: Net sales were $738.3 million, up 9.3 percent from the second quarter of fiscal 2021 when Caleres reported $675.5 million.

The sales improvement comes amid a 3.8 percent sales decline in the Famous Footwear segment to $436.4 million from the year-ago period’s $453.6 million. Same-store sales at Famous Footwear slid 3.1 percent as the retailer trimmed its store base from 912 to 881 locations.

The Brand Portfolio segment showed strength for the footwear seller at a 35.6 percent sales increase to $324.1 million from $239 million a year ago. Same-store sales for the segment increased 23.5 percent. Sam Edelman sales skyrocketed 86 percent year over year in the quarter, while Naturalizer sales increased 70 percent and LifeStride’s sales soared 79 percent.

Direct-to-consumer sales represented approximately 72 percent of total net sales.

Net Earnings: Caleres generated net earnings of $51.2 million in the second quarter of 2022, or earnings of $1.38 per diluted share. The earnings are an improvement over the 2021 quarter’s $37.4 million, or 97 cents per diluted share.

Operating earnings n the quarter were $68.4 million, up from $62.8 million in the year-ago period. Operating margin came in at 9.3 percent, equaling last year’s margin.

CEO’s Take: Sullivan, who will be retiring as CEO in January, delved into the company’s expected product mix for the latter portion of the year.

“About a third of our business in fall is in boots, but we’re seeing that things are not quite as casual as they had been. We’re dressed up a little bit more on heels,” Sullivan said. “The Brand Portfolio is extremely important for us in the fall season, and we really think we’re in great position to take advantage of that. In the Famous business, it’s really more in the casual side and more in outdoor looks. As we look at the inter-company opportunity there, there are lots of ways that we can really work with Famous to take advantage of not only our expertise in our knowledge of where things are trending, but also help in terms of some of the short-term opportunities that they might have. It bodes well for us in the back half of the year.”