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Change Is in the Air at Caleres After Q4 Earnings and Revenue Miss

After a busy year of acquisitions and investment, investors punished Caleres for missing sales and earnings targets in the fourth quarter.

In a Nutshell: Caleres stock fell by more than 10 percent in early trading Friday after the company released its Q4 and FY18 financial report following the end of trading on Thursday. Although the year was not without its bright spots, including solid same-store sales at Famous Footwear and record revenue at Sam Edelman, overall revenue failed to meet Wall Street expectations.

In July 2018, Caleres completed the acquisition of Blowfish Malibu, a youth-oriented brand inspired by West Coast styles, and followed that up with the purchase of competing footwear brand, Vionic, in October. These purchases led to a bill of $335 million in outstanding borrowings in revolving credit and an increase in inventory of 20 percent compared to the prior year, with $66.5 million worth of product being added to its cache.

Caleres also completed a transition to an in-house distribution system during the year, which resulted in an increase of $66.9 million in capital expenditures, year-over-year.

Along with its financial report, the group announced that it would be repositioning its Allen Edmonds brand, saying it will reduce its promotional activity in order to strengthen the brand for the long term. Caleres also said it would elevate its marketing efforts at Famous Footwear along with increasing its product assortment.

Sales: For the fourth quarter, Caleres registered total sales of $720.3 million, an increase of 2.5 percent over the comparable time frame. Its portfolio of brands brought in $335.1 million, up 14.8 percent as a result of the Vionic acquisition. Analysts expected sales of $738.12 million in the quarter, a leading cause of the subsequent selloff.

On a slightly more positive note, Famous Footwear recorded same-store sales that were 1.1 percent higher, year-over-year, although its total sales of $365.2 million were down compared to Q4 of FY17 due to an added week impacting comparability for the quarter.

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For the full year, Caleres registered consolidated sales of $2.83 billion, up 1.8 percent over FY17. Analysts expected stronger growth, however, predicting sales of $2.85 billion for the year. Sales for the group’s brand portfolio amounted to $1.23 billion, up 7 percent when including Vionic and Blowfish Malibu. In total, Famous Footwear recorded 1.5 percent growth in same-store sales, totaling $1.6 billion on the year.

Caleres expects consolidated net sales to fall between $3.00 and $3.05 billion in FY19 with brand portfolio sales up in the low-to-mid teens as its acquisitions take root. Famous Footwear same-store sales should be up in the low-to-mid single digits, according to the brand.

Earnings: Fourth-quarter earnings at Caleres also failed to match analyst expectations, with the brand registering a diluted EPS of 38 cents compared to an average guess of 45 cents. Gross profit for the brand was $277.7 million, down from $293.4 in Q4 of FY17, with a gross margin of 38.6 percent. The group lost $75.5 million in the quarter, which resulted in a loss of $1.83 per diluted share, including a $2.31 loss as a result of its new distribution center and the new plan for Allen Edmonds that offset any gains.

The group’s full-year results were somewhat similar, with its overall diluted EPS of $2.21 failing to meet analyst expectations of $2.28. Gross profit for the year was $1.16 billion with a gross margin of 40.8 percent. Despite heavy losses in Q4, Caleres’ net loss for the year was only $5.4 million, including the same expenses mentioned above. Diluted EPS was up 2.1 percent on the year but, following suit with many of its measurables, failed to improve in line with analyst expectations.

Caleres expects adjusted earnings per diluted share of $2.45 to $2.55 in FY19.

CEO’s Take: Diane Sullivan, president and chairman of Caleres, said the brand will continue to build on its plan while also announcing changes to Allen Edmonds and applauding the company’s completed in-house distribution system.

“In 2018, we continued to build on our strategic plan, as we gained market share in Brand Portfolio, delivered our seventh consecutive year of same-store-sales improvement at Famous Footwear, transitioned to an in-house distribution center facility, and acquired two new brands. This work has prepared us for the future and also positioned us for growth,” Sullivan said. “For 2019, we are focused on elevating our product assortment and our marketing at Famous Footwear, while delivering profitable growth. At Brand Portfolio, we plan to continue to expand our market share gains with strong organic growth and contribution from our new brands, Vionic and Blowfish. For Allen Edmonds, we will reduce our level of promotional activity to strengthen brand equity for the long-term.”