“We remain committed to taking a disciplinary approach to managing our portfolio and as we continue to respond to the changing patterns of consumer demand, it was the moment to address Naturalizer stores,” Diane Sullivan, CEO, president and chairman at Caleres, said in an earnings call Thursday.
“Make no mistake, we continue to view the Naturalizer brand as a strong and value-driving component of our portfolio and we’ll be focusing on growing the brand’s e-commerce through naturalizer.com and through our retail partner sites,” she continued.
Caleres CFO Ken Hannah said Caleres expects to incur pre-tax charges of between $20 million and $25 million in the fourth quarter. Once complete, it expects the move will lead to an annual pre-tax benefit of between $10 million and $12 million.
Sullivan acknowledged that Naturalizer stores had been “significantly impacted” by this year’s events. “We went from stores that were generating a decent amount of revenue and, obviously, with that reduction, it’s put a lot of pressure on the bottom line, so we went ahead and made the decision to go ahead and exit those doors,” Hannah said.
Hannah said Caleres had carried out a “total revamp” of the Naturalizer brand. “A lot of the stores were tied back to the legacy positioning of the brand and that prior consumer and so we shifted and now was just a good time to go ahead and exit,” he said. Hannah said Caleres would still keep a couple stores that were in markets where its consumers are and have had investment put into them, as well as look to grow the brand globally.
In a Nutshell: Like many within the footwear industry, Caleres felt the effect of the unusual back-to-school season. “Uncertainty around the format of the school year cast a pretty wide shadow over the marketplace and, in fact, this uncertainty led to store-for-store sales for that month to come in well below our historical August sales level,” Sullivan said.
However, when September came around and students started returning to the classroom, Caleres began to see higher sales, “much ahead of our expectations, Sullivan said. September sales ended up exceeding last year’s with-same-store sales up 16.9 percent.
After five weeks of sales levels at or last year’s 2019 levels, Sullivan said momentum began to slow as rising coronavirus cases began dampening consumer demand in certain parts of the country.
A notable bright spot, Sullivan said, Caleres’ conversion rates were up both in store and online. “Boy, do [consumers] know what they want and they are shopping with intent,” she said.
During the quarter, Sullivan said Caleres “continued to lean into” its digital capabilities. Though e-commerce sales moderated from the highs Caleres achieved in the second quarter, she said the company realized a 48 percent year-over-year improvement.
Net Sales: Net sales fell 18.3 percent from the third quarter of fiscal 2019 to $647.5 million, 71.4 percent of which came from direct-to-consumer sales.
While Caleres’ brand portfolio segment saw a 25.6 percent sales decline from 2019, its Famous Footwear segment experienced a shallower 12.3 percent decrease, well ahead of Caleres’ expectations, Sullivan said. Perhaps most notably, she added, Famous Footwear’s third-quarter operating earnings were nearly $200,000 better than last year, despite the sales decline.
Total company-owned e-commerce website sales increased 24.6 percent, with digital penetration rising to 25.4 percent of net sales.
Net Earnings: Caleres returned to profitability in the third quarter with a net income of $14.4 million, or earnings of $0.38 per diluted share. While an improvement from the second quarter’s net loss of $30.7 million, the company’s third quarter net income came in at nearly half of the comparable quarter’s $28.0 million, or $0.68 earnings per diluted share.
Of the quarter’s $0.38 earnings per share, $0.10 related to the fair value adjustment to the Blowfish purchase obligation.
Adjusted net income was $18.2 million, or adjusted earnings of $0.48 per diluted share, compared to adjusted net income of $31.6 million, or $0.78 per diluted share, in the third quarter of fiscal 2019.
Caleres said it saw a gross profit of $257 million in the third quarter, with a gross margin of 39.7 percent, slightly lower than Q3 2019’s 40.4 percent due to an increased penetration of e-commerce sales and continued liquidation of spring inventory. Famous Footwear, Hannah said, had a gross profit margin of 40.9 percent compared to a gross margin of 41 percent during the same period last year. Caleres’ brand portfolio’s gross margin tightened from 37.2 percent to 35 percent, reflecting “aggressive” liquidation of its spring inventory.
CEO’s Take: “So, all in, we’re pleased with our progress and pleased that we were able to deliver a solid performance in the third quarter,” Sullivan said. “We begin the fourth quarter appropriately cautious but confident in our ability to win with the consumer for the balance of the year, and heading into next year.
“While the risk of uncertainty persists—and in fact, in the near term, you know there’s a lot of conversation going on about what’s happening with Covid again—we do believe that with our strong cash generation and leaner inventory that we are very well prepared to manage through this period and take advantage of market conditions as they begin to normalize.”