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Caleres Downsizes SKU Count 10% in ‘Edit to Win’ Brand Strategy

Caleres saw fourth quarter net sales of $679.3 million, up 19 percent on a year-over-year basis on net income of $33.9 million.

The holiday quarter saw the Famous Footwear retail banner’s sales improve 8.8 percent on a two-year basis.

In a Nutshell: Famous Footwear wasn’t the only winner for the global footwear company. Four key brands owned by Caleres, including Sam Edelman, Allen Edmonds, Vionic and Blowfish, all outpaced quarterly sales expectations and surpassed fourth quarter 2019 earnings levels.

In an earnings call, Caleres CEO Diane Sullivan said the company initiated an “edit to win” strategy across its brand portfolio, which includes labels like Naturalizer, Ryka, Veronica Beard and Franco Sarto. The strategy includes tightening the overall SKU count of these brands to enhance productivity and lower costs, “while building on the successful in-demand products that consumers want,” she said.

The company already has cut back the SKU count of its owned brands by approximately 10 to 15 percent, Sullivan noted, with the potential for 10 percent more.

But as Caleres continues to reduce total SKUs, it is also producing and carrying more of its current product.

Inventory was up 22.3 percent year-over-year to $596.8 million from last year’s $488 million, with in-transit goods nearly twice as high as the fourth quarter of 2020. This reflects the company’s efforts to align inventory with robust consumer demand and ongoing supply chain disruptions.

Excluding in-transit inventory, inventory levels were 20 percent below 2019 levels.

Sullivan doesn’t expect the backlogs will get any better this year.

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“I don’t think there’s any reason right now to believe that we should expect anything different… so we don’t expect it to change significantly,” Sullivan said. What’s more, parts of China and Vietnam are still dealing with covid surges, “like the latest one where there’s a shutdown or lockdown in different cities.”

“I don’t think that we can expect that that’s going to go away completely. So we’re sort of used to it,” she added. “It’s the new normal that we’re operating against in and we’ll just manage our way through it and do what we need to do.”

Gross profit was $294.8 million, while gross margin was 43.4 percent, or a 389-basis point improvement (approximately 3.9 percentage points) over the fourth quarter of 2020. The Famous Footwear segment saw a 48.9 percent gross margin, up from the 40.9 percent margin brought in during last year’s holiday period.

The brand portfolio division had a 34 percent gross margin, down from the year-ago 35.5 percent margin due to a 390-basis-point (3.9-percentage-point) impact from ocean freight, which cost an extra $11 million.

“We don’t see the ocean freight expense going away across the first half,” said Kenneth Hannah, senior vice president and chief financial officer at Caleres. “But the price increases that the team has put through, for the most part, will be able to offset that.”

Caleres already announced 15 percent price increases for the spring, but company president Jay Schmidt confirmed that the hikes will remain in effect through fall 2022 at a minimum.

For 2022, Caleres expects consolidated sales to be flat to up 3 percent, on earnings per diluted share ranging between $3.75 and $4.00, largely accounting for inflationary pressures, continued supply chain disruption and the lack of stimulus spending. The range’s midpoint reflects an approximately 75 percent increase above the company’s pre-pandemic high-water mark of $2.21 per diluted share.

The company expects 50 percent of its earnings to be in the first half of 2022 due to continued momentum from the fourth quarter. This deviates from the 40 percent of earnings that traditionally come in the half, according to Hannah.

Going forward, Sullivan said she expects operating margin rate, return on sales and gross margin rate to exceed historical averages.

During 2021, Caleres generated $168.4 million in cash from operations, ending the year with $290 million of total debt—down from $448.9 million at the end of fiscal 2020. The actions to reduce and reposition the debt should lower the company’s 2022 annual interest expense by approximately $20 million versus 2019 levels.

Net Sales: Net sales were $679.3 million, up 19 percent from $571 million during the fourth quarter of fiscal 2020.

The Famous Footwear segment improved 15.9 percent to $401.9 million in net sales during the quarter, with same-store sales jumping 15.2 percent. The brand portfolio segment saw sales rise 24.4 percent to $291.2 million, with same-store sales soaring 46.4 percent.

Direct-to-consumer sales represented 73.6 percent of total net sales for the quarter.

For all of 2021, Caleres generated consolidated sales of $2.8 billion, up 31.2 percent from 2020’s $2.1 billion. Famous Footwear sales grew 38.4 percent sales to $1.7 billion, while the brand portfolio segment jumped 19.8 percent to $1.1 billion. Direct-to-consumer sales represented 75.1 percent of total net sales for the full year.

Net Earnings: Caleres generated fourth quarter net earnings of $33.9 million, or earnings of 88 cents per diluted share, compared to a net loss of $77 million, or a loss of $2.11 per diluted share, in the 2020 holiday period.

Adjusted net income totaled $34.9 million, or 91 cents per diluted share in the quarter, compared to adjusted net earnings of $1.3 million, or 3 cents per diluted share in last year’s fourth quarter.

Net earnings for 2021 were $137 million, resulting in earnings per diluted share of $3.56.

Adjusted net income for the full-year was $165.2 million, or adjusted earnings of $4.29 per diluted share, compared to 2020’s adjusted net loss of $52 million, or adjusted loss of $1.40 per diluted share.

Earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $272.4 million throughout 2021, while adjusted EBITDA was $285.9 million.

CEO’s Take: Addressing Nike, which has been exiting and scaling back from some retailer as part of its DTC push, Sullivan said Famous Footwear has not seen any slowdown in its athletic and sport business.

“In fact, it’s continued to be as strong as it has been with a few new items coming into being some of the top sellers, which has been nice to see,” Sullivan said. “Our business with Nike continues to be great, and we don’t expect to see anything with any change with respect to our performance there. We’re really feeling very good about the momentum with our Famous business overall.”