Caleres, Inc.

Good afternoon, and welcome to the Calaris Third Quarter 2020 Earnings Conference Call. My name is Erica, and I will be your conference coordinator. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. At this time, I will turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead, Miss.

Good afternoon. I would like to thank you for joining our third quarter 2020 earnings call-in webcast. A press release with detailed financial tables as well as our quarterly side presentation are available at colaris.com. Please be aware today's discussion contains forward-looking statements which are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors, including but not limited to the factors disclosed in the company's Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors which could impact forward-looking statements. Copies of these reports are available online. The company undertakes no obligation to update any information discussed in this call at any time. Joining me on the call today is Diane Sullivan, CEO, President and Chairman, and Ken Hanna, Senior Vice President and CFO. We will begin the call with brief prepared remarks, and thereafter we will be happy to take your questions. I would now like to turn the call over to Diane.

Thanks, Logan, and good afternoon, everyone. We appreciate you joining us on today's call. I want to first begin by thanking the Calaris team for their outstanding performance in recent months, under which are quite obviously extremely difficult circumstances. As you can see from our results, our people have risen to the challenge in an impressive way. responding quickly and effectively to the rapidly changing footwear market, driving our performance forward while at the same time negotiating the increasingly complex personal lives that I think everybody finds themselves grappling with. We are truly fortunate to have such a resilient, dedicated, and talented team. Because of their efforts, there is lots of good news to discuss on the operation and financial fronts. During the third quarter, we maintained our progress and continued our recovery, delivering solid and improving sequential results across most key financial metrics. Most notably, we reported sharply higher net income with adjusted earnings of 48 cents per share. We also achieved a 30 percent sequential increase in revenues as the top line benefited from the return to full operation of our store network, the full reopening of our partner stores, solid digital demand, as well as an extended back-to-school purchasing season. At the same time, we maintained our intense focus on driving down costs, achieving a $38 million reduction in overall expenses during the quarter. Through these efforts, we again generated a significant amount of free cash flow, achieving the highest level of third-quarter cash generation in 10 years, and put that cash to use, further strengthening the balance sheet and reducing overall indebtedness. In total, we paid down $50 million of debt during the quarter, bringing overall debt reduction to nearly $140 million since the beginning of the second quarter. Now let's turn to our business segments, where we will start with a review of our famous footwear results. Famous continued to benefit from our inherent competitive advantages, which included a strong offering of in-demand brands, an advantageous assortment of sport, performance, and casual-oriented styles, and a convenient and safe store locations that are cited largely off-mall. In fact, the segment turned in $391.7 million in revenues for the third quarter, representing a roughly 12% increase year-over-year decline, but coming in well ahead of our expectations for the period and increasing 17% from the second quarter of this year. This was even with the loss of an equivalent of 1,700 business days in the period due to store closures related to illness, weather, fires, civil unrest, which restricted our sales by approximately 6 million. Perhaps most notably, is that Famous' third quarter operating earnings were nearly $200,000 better than last year despite the sales decline due to our ongoing conservative approach to expenses as well as very prudent inventory management. During the quarter, we continued to lean into our digital capabilities, and while our e-commerce sales moderated from the high levels achieved while the store network was closed, We realized a 48% year-over-year improvement at Famous. In addition, e-commerce penetration reached 17% of net sales, up from just 10% in the third quarter of last year. Looking at the quarter in more detail, as with most things this year, the back-to-school season was absolutely far from normal. And as we alluded to in our second quarter call, back-to-school purchasing got off to an extremely slow start in August, and 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. However, as we progressed through September, higher sales started to materialize, much ahead of our expectations. as children headed back to classrooms and as consumers felt more comfortable venturing out into the world. Notably, September sales exceeded last year's levels by approximately $15 million, with store-for-store sales up 16.9%, providing a partial offset to the declines that we saw in August. After five straight weeks of sales better or equal to last year, sales momentum in the last month of the quarter started to slow. as traffic in stores declined and rising virus cases in certain parts of the country started to dampen consumer demand. All that said, the cadence of the quarter was sales in August were down double digits, sales in September were up double digits, and sales in October declined single digits. In the quarter, as it relates to brand trends, as we know, during times of uncertainty, we continue to see consumers seek out quality brands that they know and love, and Famous is perfectly positioned to fulfill those ongoing needs. In fact, our top 10 brands represented 70% of our total sales. And just as in the second quarter, consumers were still gravitating towards athletic, sport, and casual styles. And boy, do they sure know what they want. And they are shopping with intent. In fact, year-over-year conversion rates were up both in-store and online. A notable bright spot also during the period was the increase in our kids' penetration, rising to nearly 19%, and further heightening the extended nature of our back-to-school season. Now, looking ahead, we understand fully that uncertainty remains and renewed local restrictions in areas where the virus has had surges, they're starting to be reinstated. And as has been our position, From the start, the health and well-being of our associates, customers, and communities is our top priority, and we are continuing to take appropriate precautions as it relates to safety. We are closely watching the numbers in the regions where our stores are located and will follow local government guidelines when it comes to the operations of our stores. We currently have 11 stores that have reclosed due to local mandates. While store closures may increase as we approach the holidays, we are confident that with our recent experience, disciplined cost approach, and customer service options, we'll weather whatever may happen in the coming weeks or months. Now before moving to our results in the brand portfolio, I'd like to just take a quick moment to say how excited we are that Mike Edwards is going to be leading FAMIS going forward. He certainly is the popular choice here at Calaris internally, and I think so also with our partners. And his tremendous experience and knowledge about our business from so many different angles is going to be essential to building Samus' futures growth and success. Now turning to the brand portfolio's performance. For the quarter, we delivered better than expected results, with net sales declining approximately 26%, compared to the third quarter of last year, but improving 45% sequentially. We turned in positive operating earnings of $7.3 million, further highlighting the progress in our wholesale business and our ongoing focus on cost control initiatives. The stronger-than-anticipated results were driven by positive consumer reaction to our athletic sport and casual products, as well as improving performances from Vionic, Sam Edelman, Riker Blowfish, and Vence, among others, and increased shipments to strategic retail partners that were working to increase and align their inventory levels with consumer demand. Moreover, we continue to manage our portfolio inventory levels in a very strategic manner, ending the quarter down 36% from last year's levels. We feel confident we can continue to weather the ongoing imbalance in the supply chain throughout the rest of the year. In addition, I'd also like to highlight that during the quarter, our wellness and comfort brands continue to perform well as the consumer demands these products. In fact, our wellness and comfort brands represented about 55% of our portfolio versus 47% last year. And more specifically, it was really terrific to see Bionic recording more than a 50% improvement and its e-commerce sales. Next, consumers are reacting to what's new right now, and our new product offerings are certainly resonating with them. For example, Allen Edmonds recently launched its Park Avenue sneaker, which is currently sold out and on back order. In addition, our Rika athletic brand has been outstanding and has furthered its progress with the launch of a trail sneaker that's also doing very well. And as you would expect, The Vince brand's cozy, fuzzy styles that everybody is looking for right now, and lots of different brands, particularly our Sheerling slipper, are experiencing strong sell-through since coming to market. And finally, a little bit about our boot business, which now represents 37% of the total brand portfolio sales, down from about 47% last year. And that was delayed at the start of the quarter by some late deliveries. However, since that time, we've seen some strong selling trends so far this fall. Not surprisingly, Luxold boots have been driving the strength with casual booties as well as cold weather styles really leading the way. I think it's worth mentioning that Sam Edelman experienced marked sequential improvement, highlighting the heightened demand for its fall products, particularly boot styles, In fact, SAM's new combat boot, the Garrett, was the number one new item released in October, according to NPD. And Garrett was in good company with three other Calaris boots from Franco and Naturalizer also taking top spots in the top ten new items during the month. So now let's transition to the realignment of our Naturalizer brand. We remain committed to taking a disciplined and strategic 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's store footprint. As a result, we recently made the decision to wind down most of our legacy Naturalizer retail brand stores in the U.S. and Canada. But 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. In fact, Naturalizer continues to inspire great brand loyalty. It has a great track record of anticipating and adjusting to consumer preferences and needs. And we expect the store closures to be complete by the end of fiscal year 2020 and anticipate savings of 10 to 12 million per year. As we move into 2021, we expect to reallocate capital and resources to amplify our digital presence, capturing the consumers where they want to shop, intensifying our e-commerce focus, and then making sure we're leveraging those capabilities across the brand portfolio. So all in, we're pleased with our progress and pleased that we were able to deliver solid performance in the third quarter. And 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. And just as a reminder, the fourth quarter is 10% smaller on average, and we expect sales will be lower sequentially, declining approximately 20%. There is still plenty of work to do for sure as we close out 2020, but we're excited about the potential for strong ongoing gains as we head into 2021. As you would expect, of course, we will continue to maintain the discipline with regard to the management of expenses while appropriately investing in the areas that we expect to give us a strong return on our investments, particularly to grow our digital business. 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. So in short, we're taking a cautious approach to the near term, but very optimistic about the intermediate term. We have the right portfolio of brands, great operating platform, the talent, and we believe the work we've done over the last several months has positioned us well to capitalize on our opportunities and drive our growth and make sure we create value for all of our stakeholders. And with that, I'd like to turn the call over to Ken for a financial review.