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Demand for Going-Out Shoes on the Rise: Caleres CEO

Sport, wellness and comfort continued to lead the way at Caleres in the fourth quarter.

The company’s Famous Footwear segment saw particular success in the period, with sales decreasing 6.2 percent year-on-year and comparable sales down just 1.8 percent. This compared to an 18.3 percent decline at the company overall and a 32.4 percent drop within Caleres’ brand portfolio.

CEO and chairman Diane Sullivan spoke with Wall Street Tuesday, highlighting the retail chain’s strong position in athletic, particularly with well-known brands. Famous Footwear’s top 15 brands, she noted, drove approximately 77 percent of sales last year.

At the same time, Caleres also witnessed strong momentum in a number of non-athletic brands in the past year and expects continued growth here, Sullivan said. To further this effort, the company plans to test new aspirational brands and offerings, including in the outdoor category.

Additionally, Sullivan indicated Caleres is looking to further integrate its owned brands where it sees the greatest overlap with Famous Footwear customers. “I think that Dr. Scholl’s is just an excellent fit with the millennial family,” she said.

Sullivan said “there is no doubt” that strength in sport, active and wellness will continue throughout 2021. “We don’t think that that’s going to change significantly at all,” she added.

Outside of those categories, Caleres has seen early signs of opened-up footwear selling “outstanding well,” Sullivan said. “And it’s not only flat kinds of sandals and that sort of thing, but wedges and heels, as well, seem to be working. And there is that early distant light right now that we can see opened-up footwear for going-out occasions—what we might have traditionally called a little more dress type of sandals—we’re seeing that become a little bit more in demand.”

While Sullivan expressed optimism for occasion footwear returning in the future, she showed significantly less hope for “career-oriented” footwear. “That’s what’s not coming back,” she said.

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In a Nutshell: Caleres continued what Sullivan called “the strategic rationalization of our real estate portfolio” in 2020. Ultimately, she said, it closed 104 doors of its brick-and-mortar fleet and renegotiated more than 1,100 leases, resulting in an approximately 35 percent reduction in lease expense.

More recently, this has included the exit of much of the Caleres Naturalizer retail fleet. In its last quarterly earnings call, Sullivan announced plans to close 133 legacy Naturalizer stores. During 2020, she said, the company successfully closed 60 locations, with 73 to follow by the end of the first quarter. This will reduce the brand’s physical presence to seven flagship locations in the United States and Asia and approximately 150 partner stores around the world.

“This effort will result in improved profitability going forward and we will more closely align this important brand with the accelerated consumer shift toward digital,” Sullivan said.

Caleres generated $126.4 million in cash from operations—including $24.6 million in the fourth quarter—in fiscal 2020, ending the period with $88.3 million in cash on hand. Using these “significant levels of cash,” Sullivan said, it paid down much of its debt, including $50 million of its credit facility borrowings in the fourth quarter, and restored overall debt to pre-Covid levels. Since the beginning of the first quarter of 2020, it proactively paid down approximately $190 million of debt, she noted. At the same time, it returned $34.1 million to shareholders through dividend payouts and share repurchases.

Like others, Caleres has been affected by ongoing port congestion troubles. According to Sullivan, the company currently has between $60 million and $70 million in delayed receipts, including $50 million for Famous Footwear and $10 million to $20 million on the company’s brand portfolio side. When exactly Caleres will fully catch up with all those receipts remains hard to tell, Sullivan said.

The company ended the quarter with inventory levels 21 percent lower year-over-year, a reflection of ongoing actions taken to align with consumer demand and the ongoing liquidation of Naturalizer store inventory.

Net Sales: Caleres reported fourth-quarter net sales of $571 million, an 18.3 percent decline from the same period last year. Direct-to-consumer sales accounted for 75 percent of this total, with company-owned e-commerce penetration—up 25 percent year-on-year—rising to approximately 30 percent of net sales.

Amid strong athletic sales and ongoing e-commerce strength, the company’s Famous Footwear division saw sequential improvement from the third quarter as sales dropped just 6.2 percent compared to the prior-year period to $346.7 million.

Total sales within Caleres’ brand portfolio dropped 32.4 percent in the fourth quarter to $234 million as sales declines at Allen Edmonds and Naturalizer brands offset improvements among brands offering more wellness, comfort and sport styles, Sullivan said.

Caleres recorded a gross profit of $225.6 million and gross margin of 39.5 percent in the fourth quarter.

Looking at the full fiscal year ended Jan. 30, net sales came in down 27.5 percent year-on-year at $2.12 billion. Direct-to-consumer sales represented 73 percent of this total. Owned e-commerce website sales alone accounted for approximately 30 percent of net sales following approximately 40 percent growth compared to the prior year.

Sales in Caleres’ famous Footwear segment fell 20.4 percent year-over-year to $1.3 billion, “driven primarily by the temporary store closures early in the year and the non-traditional back-to-school season,” Hannah said. Comparable store sales rose 1.6 percent compared to fiscal 2019, with annual e-commerce sales up 75 percent.

Full-year brand portfolio sales dropped 35.8 percent, “reflecting steep declines in women’s fashion footwear, temporary closure of our owned retail and wholesale partner stores and weak consumer demand for certain footwear categories as markets closed and consumers became accustomed to a work-from-home lifestyle,” Hannah said.

Gross profit for fiscal 2020 totaled $787 million, with a gross margin of 37.2 percent.

Earnings: Caleres experienced a net loss of $77 million, or $2.11 per diluted share, in the fourth quarter, compared to net earnings of $0.4 million, or $0.01 per diluted share, a year earlier. The company’s $2.11 loss per share included $1.03 from Covid-related impairments and other expenses, intangible asset impairment charges of $0.49, an expense of $0.37 related to the Naturalizer brand retail exits, fair value adjustment of $0.18 associated with the mandatory purchase obligation for Blowfish Malibu and Vionic integration-related costs of $0.07.

Accounting for those items, Caleres reported an adjusted net income of $1.3 million, or $0.03 per diluted share, compared to $13.9 million, or $0.34 per diluted share, in the fourth quarter of fiscal 2019.

The company recorded a net loss of $439.1 million, or $11.80 per diluted share, in fiscal 2020. This included goodwill and intangible asset impairment charges of $6.35, Covid-related impairments and other expenses of $3.10, fair value adjustment of $0.48 associated with the mandatory purchase obligation for Blowfish Malibu, brand portfolio expense of $0.40 related to brand exits and Vionic integration-related costs of $0.07.

With those items factored it, Caleres posted an adjusted net loss of $52 million, or $1.40 per diluted share. This compared to an adjusted net income of $86.4 million, or $2.10 per diluted share, in fiscal 2019.

CEO’s Take: “While the future feels brighter, the first half of the year will continue to be constrained by ongoing pandemic-related impacts, supply chain disruptions and port congestion,” Sullivan said.

“Even with these macro challenges there are signs of stabilization in the marketplace. There is no doubt Caleres is a more agile and focused organization than it was at the start of 2020 and we believe we are well positioned to capitalize as the market rebounds, more likely in the second half of the year as the world returns to a greater degree of normalcy. As we plan for future success, we will focus on maintaining our strong momentum at Famous, driving enhanced consumer alignment and improved performance in the brand portfolio, continuing to take a careful and disciplined approach to cost control and capital spending, absolutely reducing debt level still further and returning excess cash to shareholders.”