Although Caleres was not immune to the same headwinds that have preoccupied the footwear industry this earnings season, primarily caused by late starts for both spring weather and tax return season, the group notified investors in its first-quarter report that Famous Footwear was facing additional issues around under-performing inventory.
In a Nutshell: Caleres executives had their hands full in the first quarter, even without the ever-present threat of additional footwear tariffs. The group completed the purchase of Vionic and Blowfish Malibu in October of last year and this was the first quarter in which both brands were accounted for in its total revenue, improving brand sales by 20.3 percent.
However, Famous Footwear under-performed during the quarter as the company worked to reduce its inventory levels to make way for better-performing product in advance of the back-to-school season. Caleres was able to reduce the shoe chain’s inventory levels by 2 percent during the quarter but said that unplanned sales and promotional activity related to inventory reduction, combined with a high single-digit loss in February, led to sales performance that Caleres chairman, CEO and president, Diane Sullivan described as “frankly, not where we wanted it to be.”
Famous Footwear also introduced its Famously YOU rewards program in the first quarter, adding 1.1 million new members to the loyalty initiative. Caleres said that it reactivated 700,000 existing members from a previous program and that reward sales improved by 1 percent, as a result. Overall, Caleres said that approximately 80 percent of all Famous Footwear sales in the first quarter stemmed from reward members.
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Eventually, Sullivan, addressed the elephant in the room: additional tariffs on footwear produced in China. Sullivan revealed during Caleres’ Q1 conference call that the group still sources about 60 percent of its footwear in the region. However, the company has already begun diversifying away from China, thanks to its “powerful sourcing base” in the footwear space, Sullivan explained.
“While nothing is final yet and we are certainly hopeful for a positive resolution, we are actively working through contingency plans, which include potentially shifting additional production out of China, working with our factory partners to reduce costs and exploring price increases,” Sullivan said. “While we are treating this issue with the same sense of urgency we’re applying across our entire business, we are taking nothing for granted.”
Sales: Caleres began separating sales for Famous Footwear and its brand portfolio in the first quarter to offer a better comparison for each after the acquisition of Vionic and Malibu Blowfish. For example, although total sales were up by 7.2 percent at Caleres for a total of $677.8 million, brand portfolio sales improved by 20.3 percent to $341.1 million while Famous Footwear same-store sales fell by 1 percent to $352.2 million. Total sales for the footwear retailer showed an even steeper decline at 3.1 percent when accounting for the loss of 28 stores since the first quarter of last year.
Caleres expects Famous Footwear’s inventory issues to extend into the second quarter, driving down its revenue outlook in return. The group now expects Famous Footwear to be flat to up in the low-single-digits after predicting a low-to-mid-single-digit increase in Q4 of last year. The group sees the positive performance from its brand portfolio continuing in the next quarter, however, holding to its outlook of low-to-mid-teens growth.
Earnings: Analysts expected Caleres to deliver earnings of about 36 cents per share in the first quarter and that’s exactly what the brand group delivered—when adjusting for the 11 cents EPS lost from acquisitions and the loss of 3 cents EPS stemming from the Carlos brand’s exit from the group’s portfolio. Caleres achieved this while reporting $15 million in net earnings.
However, anticipating challenges in the back half of the year and wishing to approach expectations carefully, Caleres lowered its full-year outlook to a range of $2.35 to $2.45 from a range that was about 10 cents higher.
“Rather than maintaining the mid-point of our adjusted EPS guidance range at a 13 percent growth rate, we are prudently bringing the mid-point for earnings growth down to 9 percent,” Sullivan explained. “While we still expect to see year-over-year gains, we believe this new rate more accurately reflects industry challenges to date and gradual improvement over the balance of the year.”
CEO’s Take: Sullivan did not take the lowering of Caleres’ expectations lightly, further explaining the challenges the group faced and trumpeting its unique position in the market.
“Despite a soft marketplace, brand portfolio performed extremely well and continued to grow—with sales up more than 20 percent year-over-year—and to take share. Once again, we owned six of the top 25 women’s fashion footwear brands and grew sales ahead of market rate while gaining share,” Sullivan said. “At Famous Footwear, while the quarter ended on an encouraging note—with positive same-store-sales for both March and April—the slow start in February was tough to overcome. Going forward, we expect to see softness at Famous Footwear through at least the second quarter, as we continue to prepare for back-to-school by aggressively clearing underperforming inventory. While new additions to our elevated and refreshed product assortment are gaining traction, we expect to see more evidence of this during back-to-school, as we’ve previously discussed.”