Caleres, Inc.

afternoon and welcome to the fourth quarter 2020 calaris earnings conference call my name is erica and i will be your conference coordinator at this time all participants are in the 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 as a reminder this conference is being recorded at this time i will turn the call over to logan bonacorsi Vice President of Investor Relations. Please go ahead, Ms. Good afternoon. I would like to thank you for joining our fourth quarter 2020 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are available at Calaris.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 in 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, Chairman and CEO, Ken Hanna, Senior Vice President and CFO, and Jay Schmidt, President of Polaris. We'll begin the call with brief prepared remarks, and thereafter, we'll be happy to take your questions. I would now like to turn the call over to Diane.

Diane? Yes. Thanks, Logan, and good afternoon, everyone. We appreciate you joining us on today's call as we review our fourth quarter results, provide a little color on what we're seeing in the marketplace, and share how we are planning for 2021. You know, even with the impacts of the virus on the economy, our business, and our personal lives during the last year, the Calaris team remained focused, dedicated, and determined. Over the last year, our associates drew on their creativity and their great optimism to drive the organization through the protracted economic lockdown and to shift towards our recovery and our future. I would like to thank our entire global workforce for rising to this unprecedented challenge in a quick and agile manner. I couldn't be more proud. As a result of these efforts, the organization was able to make tremendous progress on a wide range of strategic objectives on both the operational and the financial fronts. To start, we intensified our focus on driving down costs, streamlining the organization to align with the ongoing needs of the business, and right-sizing our expense base. Through these efforts, we expect to realize $100 million in ongoing annual expense and capital savings beginning in 2021. In addition, we leveraged our previous capital investments in digital to drive an approximately 40% year-over-year increase in e-commerce sales from our own dot-com sites. This pivot enabled the brands to adjust swiftly to changing consumer behavior and priorities in the wake of the pandemic. I'll discuss more specifics on our digital progress in just a few moments. We also continue to generate significant levels of cash, particularly as our e-commerce business accelerated and our stores and the stores of our partners reopened. And we use that cash to restore our overall debt to below pre-pandemic levels by the end of fiscal year 2020. In fact, since the end of the first quarter of 2020, we have proactively paid down approximately $190 million of debt. Even as we paid down significant levels of debt, we simultaneously drove forward with our ongoing shareholder return efforts. In total, we returned approximately $34 million to our shareholders, maintaining our long-running dividends throughout the course of the crisis while employing our opportunistic share repurchase program during a time of significant downward pressure on our share price. Ken will talk more about our capital allocation priorities for 2021 later on. Additionally, we continued the strategic rationalization of our real estate portfolio. ultimately closing 104 doors in our brick and mortar fleet and proactively renegotiating more than 1,100 leases, resulting in approximately 35% reduction in lease expense. More recently, we continue to execute the exit of our naturalizer retail fleet. This effort will result in improved profitability going forward and will more closely align this important brand with the accelerated consumer shift towards digital. During 2020, we have successfully closed 60 Naturalizer stores with 73 more stores slated to close by the end of the first quarter, leaving seven flagship locations in the U.S. and Asia and approximately 150 partner stores around the world. We also move forward with the strengthening of our leadership structure. Most significantly, we announced the alignment of our operating divisions under one President Jay Schmidt, who is with us here today, as well as supplemental enhancements to the leadership team that will ensure continuity going forward, and that will focus our top talent on our highest return growth opportunities. Finally, we continued our work to enhance the Calaris culture, both internally and externally. We implemented new diversity equity inclusion initiatives company-wide including mandatory unconscious bias training and the creation of a DE&I Advisory Council of Representatives across all areas of our business and at all levels. Additionally, we accelerated our ESG efforts, and we will have our inaugural Corporate Social Responsibility Report, which is set for publication next month. This report will detail our ESG strategy, highlight our accomplishments and our progress to date, provide key disclosures, and set our intermediate to long-term goals while providing a really good baseline for future reporting. Now I'd like to turn to our business segments, starting with Famous Footwear. We continued to execute at a very high level at Famous, which rebounded quickly following the extended store closure period. In fact, We capped off 2020 by delivering better than anticipated sales in the fourth quarter and a significant increase in fourth quarter earnings. The segment generated $346.7 million in revenues for the period, which equated to just over a 6% year-over-year decline. Most notably, Famous' fourth quarter operating earnings totaled $14.8 million, and was, on an adjusted basis, 43% greater than last year despite the sales decline. This outstanding performance is a direct result of the strength in our e-commerce business, aggressive expense control, and tight and rigorous inventory management. As we have detailed in the past, our e-commerce business at Famous experienced a significant increase during 2020 and remained strong even as the fleet began to reopen. All in, Famous's e-com business increased 75% in 2020, with its e-commerce penetration rising to 22% of net sales, up from just 10% in fiscal year 2019. Now, looking ahead, we expect Famous Footwear to be an important and strong driver of our improved performance in 21, as we continue to leverage our inherent competitive advantages. Many of them you know. a strong offering of highly demanded brands for the family, a great leadership position in athletic and sport, and a nationwide footprint and omnichannel experience that provides the consumer with the convenience to shop when and where and how they want to shop. Now, as the vaccine rolls out and as consumers return to whatever the more normal shopping and travel behaviors are going to be, we expect to see an acceleration in those high density areas in tourist markets where economic activity has been slower to recover. Beyond the expected uplift due to ongoing market improvements, we're executing on a three-pronged approach. We're focusing on merchandising, marketing, and consumer experience to maximize our momentum here. First, when it comes to our product, we will continue to offer what the consumer wants through that balanced assortment of athletic sport and seasonal styles. We're also going to continue to leverage our sport and athletic leadership position, the part of the business we've always been known for, to capitalize on the ongoing demand for these versatile and active styles. We expect the consumer to continue to gravitate toward well-known brands in these categories, and Famous is situated exceptionally well to benefit on this trend. Further underscoring this fact, is that our top 15 brands represented approximately 77% of our sales during the year. There's a few new things on product that I think I'd like to highlight that really should lead to even broader consumer acquisition and improve retention. First, we witnessed strong momentum in a number of our key non-athletic brands over the last 12 months and expect continued growth here as more consumers recognize us as the destination for these brands. And to further this effort, we will be testing new aspirational brands and elevated offerings that include the outdoor category. Second, we plan on expanding our vertical integration and exploring all of the possibilities within our brand portfolio to drive greater profitability for the organization. We are strategically testing Calaris brands where we see the greatest overlap between the consumers of our portfolio brands and the famous Fort Worth consumer. I think of Dr. Scholl's as just an excellent fit with a millennial family. Finally, we see a significant opportunity in our kids' business, which comped positive in the fourth quarter of 2020. We fully expect to see that momentum to continue this year as we lean into our kids' assortment and leverage our convenience, flexible, and family-friendly experience. Turning to marketing, we're thrilled that our famously new rewards program was recognized in Newsweek's list of America's best loyalty programs. We've certainly seen the benefits of the program and are happy to receive the external recognition. This year, we're going to be even more focused on our consumer database and are increasing our efforts to enhance and grow our rewards members through the acquisition of new consumers, retention of those high-value consumers, and importantly, going back and reactivating some past consumers who have stepped away in recent years. This effort is always looking at optimizing our marketing mix, looking at expanding personalization across our communication channels, and, of course, establishing and building strong emotional connections with the famous brand overall. We are highly aware of the lifetime value these customers bring and believe that this to be a long-term value-generating opportunity for famous. Finally, the third portion of our 21 strategy is maximizing the consumer experience, an area where we're always striving to do better. This will consist of leveraging our new digital platform to drive increased engagement, conversion and retention, evolving our systems to optimize the cross-channel experience, including BOPIS, curbside, and ship from store optionality, and test in-shop concepts and refresh high-traffic and high-potential locations. So there's a lot going on and in summary, we're excited about the opportunities that we see for FAMIS and look forward to driving the full potential of this business as we progress through 2021. Now let's turn to the brand portfolio. Fourth quarter net sales for the portfolio as a whole declined by approximately 32% when compared to the fourth quarter of 2019. Ongoing improvements in brands with a greater penetration in wellness, comfort, and sports styles were offset by outside sales declines from the brands you may expect, specifically Allen Edmonds and Naturalizer, who experienced ongoing pandemic-related effects and dampened store performance. However, even with lower sales, we recorded positive adjusted operating earnings of $1.2 million further underscoring the effectiveness of our rigorous cost control initiatives. Despite the mixed recovery in this segment, we really are very enthusiastic about the brand's portfolio's potential to drive value, and we expect an overall recovery in the footwear market to act as a tailwind for our portfolio. It's important to point out that the global health crisis acted to accelerate certain trends that were already in motion in the footwear market. Trends that were reflected in a lot of the work that we were doing as it relates to the modernization of our distribution centers and the replatforming of our branded websites. As just a couple of examples, Claris was also in the process of its repositioning its brand focus and assortments to really focus on the shift towards digital shopping as well as wellness, comfort, and sport categories. So while the shift in consumer preferences will likely continue in the near term, the successful and ongoing rollout of vaccines should spur a steady return of more social lifestyles, particularly as consumers head back to work and school and once again attend events. This return to more social work-life balance and routines and the resumption of more normal buying patterns should provide a nice supplemental uptick in demand for seasonal occasion and event styles as we move throughout the year. With this backdrop in mind, in aggregate, we believe our brand portfolio is well positioned for a recovering and evolving footwear market, but by design and by definition, our brands are at differing stages of their development at present. So let me share a little color and give you some insight into how we're thinking about a few of our brands. Among the brands with terrific potential for growth in market share, revenue, and margin as we progress through 21 is our Sam Edelman brand. As you know, Sam serves as the cornerstone offering of our portfolio and is grounded by its inherent ability to shift with the consumer. In fact, the brand made significant strides during 2020 to adjust the line and position itself to growth. Looking ahead, and as we all know, customers are reacting to what's new right now, and Sam has ambitious plans that leverages past consumer favorites and new silhouettes, a combination that should restore its well-established market positioning. Beyond the introduction of new, fresh, and compelling product, where his Ford penetration has increased significantly, this plan focused heavily on digital growth, which has seen a nearly 20% increase in conversion since moving to the new platform and expanding its international business. In addition to SAM, there are several of our other brands in the portfolio that, due to their foundation in wellness, comfort, and sport, are exceptionally well aligned as well with the current tenor of the marketplace. And we think they're very well positioned to further their momentum. They include Bionic, Dr. Scholl's, Reigen, Blowfish. Let's look at just a couple of these brands in a little more detail. Dr. Scholz has a strong existing brand identity, fierce customer loyalty, and a sharp focus on healthy living, workplace comfort, and increasingly notable sustainability execution that is really positioning it for improved profitability and success. Furthermore, Dr. Scholz has the potential for accelerated e-commerce growth as well as increased penetration with our famous footwear customers. In addition, Bionics proved really further proved its resiliency and agility during the pandemic and holds great promise for the future. The brand's e-commerce business delivered significant year-over-year increases across key metrics in 2020, underscoring the strong connection consumers have with the brand. In fact, Bionic, which is still quite new, experienced strong digital increases, including a more than 36% increase in web visits, approximately 30% improvement in online conversion rates, more than 50% growth in digital revenue, and a 28% increase in email list size. Bionics plans to target high growth channels and leverage its comfort technology, new product offerings, which are going to reach into new categories, and marketing plan to build on its e-commerce momentum and sales growth in 2021. Now, as excited as we are about those already high performing brands that really have some momentum, we're equally excited about some of our high potential brands that have been underperforming in the wake of the massive changes that have occurred in the footwear market since the advent of the pandemic. These brands offer tremendous upside potential as we work aggressively to restore alignment with consumer preferences. The brand that stands out is offering latent future value creating potential is Allen Edmonds. So as you know, Allen Edmonds has been a powerful and premier brand in the men's category for decades. And even before the onset of the global health crisis, we were shifting to add new sport and casual styles to the assortment to address the shift in consumer preferences that was already underway. However, as you can imagine, the economic lockdown and the changing workplace and travel behavior, has really hit AE in a disproportionate manner. We believe there is still significant unlocked potential with this brand, and we are continuing to adjust our positioning accordingly. In fact, we have leveraged some of our best-selling traditional styles, like the Strand and the Park Avenue, to create casual, customizable products for our consumers, products that we believe will fit quite nicely into their personal AE collections. We expect that about 50% of our assortment will be in the casual and sport this year. And as we move through the first quarter of 21, you'll hear some more exciting news around future collaborations and partnerships. There is no doubt that the rebound in our Allen Edmonds business will take time due to its store base being largely located in high density areas and the ongoing work from home trend. However, We are confident in the brand's ability to leverage its loyal customer base and growth strategy to capitalize on opportunities in the marketplace and return to a stronger contributor in the organization. So all in, as we've discussed many times in the past, we take a very active and continuous approach to managing our portfolio of brands. We will always be working to identify ways to optimize value from this portfolio, driving growth in some, harvesting cash in others, and making adjustments in others in order to stay in step with the consumer. Before I turn it over to Ken, I want to underscore that 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. No new news there. I think everybody's been feeling this. In keeping with these challenges, for our total company, we currently have between 60 million and 70 million of delayed receipts. Even with these macro challenges, there are signs of stabilization in the marketplace. There is no doubt Calaris 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 levels still further, and returning excess cash to shareholders. And with that, I'd like to turn the call over to Ken for a financial review.

Thank you, Diane, and good afternoon, everyone. Before I walk through our fourth quarter and fiscal year financials, I'd like to echo Diane's comments and express how extremely proud I am of what our team was able to achieve during a time of such unprecedented challenge. We remained intensely focused on appropriately managing expenses, and reducing working capital throughout 2020. Through these ongoing efforts, we are confident we have positioned the organization to weather the uncertainties that persist and take full advantage of the opportunities we see in the marketplace. I would like to start by providing a brief update on our liquidity position and capital structure, then discuss our fourth quarter and fiscal year results, and finally provide some color on the outlook for the first quarter of 2021. As we communicated over the last several quarters, we believe deleveraging to be the most value-creating use of cash given the marketplace. To that end, we once again made debt reduction a priority in our capital allocation process. We generated approximately $25 million in cash from operations in the fourth quarter and paid down an additional $50 million in revolver debt, reducing the outstanding balance to $250 million. at the end of the quarter, $25 million below our pre-pandemic debt levels. $126 million in cash generated from operations in 2020 clearly demonstrate the actions taken to manage working capital. All told, we end the year with a solid liquidity position consisting of approximately $88 million in cash and $350 million of capacity on our asset-based revolving credit facility. In addition to our progress on debt reduction during the year, we also returned approximately $34 million to shareholders during the year through our longstanding quarterly dividend and our share repurchase program. Overall, we bought back approximately 7% of our shares outstanding in 2020 at an average price of $8.05. Looking ahead, we expect to reduce our debt levels still further, while at the same time continuing to return cash to our shareholders through investing in our business, our longstanding dividend, and opportunistically buying back shares. Now, moving on to a review of our financials, we had a number of non-recurring and, for the most part, non-cash adjustments in the quarter. I will walk through those adjustments, and you can also find a full presentation of our GAAP results and a reconciliation table to our adjusted results in the earnings release we issued earlier today. Our adjusted earnings per share for the fiscal fourth quarter of 2020 was $0.03 per share, excluding $1.03 of COVID-19 related expenses associated with non-cash impairments of property and lease right of use assets, primarily for Allen Edmonds, and tax valuation allowances associated with our deferred tax assets. 49 cents of non-cast intangible asset impairment charges for Allen Edmonds, 37 cents of expense related to the previously announced exit of a number of our naturalizer retail stores, a fair value adjustment of 18 cents associated with the mandatory purchase obligation for Blowfish Malibu, and a bionic integration-related cost of 7 cents as we completed the ERP integration in the fourth quarter. For fiscal year 2020, our adjusted loss per share was $1.40. This loss per share excludes $10.40 of charges made up of $6.35 of non-cash goodwill and intangible asset impairment charges, $3.10 of COVID-19 related expenses associated with non-cash impairments or markdowns of inventory, property, and leased assets, and tax valuation allowances associated with our deferred tax assets. The total fair value adjustment of 48 cents associated with the mandatory purchase obligation for Blowfish Malibu, 40 cents of expense related to brand exits, and the bionic integration-related cost of 7 cents taken in the fourth quarter. Again, we've provided a complete reconciliation of our GAAP results in the earnings release issued earlier today. And having said that, my remarks will focus on our adjusted results, as we believe this represents our overall operating performance. For the fourth quarter, we delivered consolidated sales of $571 million, down 18.3% from fourth quarter of 2019 levels. Our direct-to-consumer sales reached 75% of our total, while our owned e-commerce sales increased approximately 25% during the period. For the year, we reported $2.1 billion in sales, down 28% from 2019, reflecting the significant effects on our business due to the COVID-19 global health crisis and the associated economic lockdown. Our direct-to-consumer business reached 73% for the full year, up from 68% in 2019. As Diane mentioned earlier, famous footwear total sales were $346.7 million, down 6.2% from the fourth quarter of fiscal 2019. Notably, the predictable sequential seasonal sales decline at famous footwear from the third to the fourth quarter was appreciably less, resulting in a smaller year-over-year sales decline, evidence that famous continued its ongoing momentum driven by still strong athletic sales and ongoing strength in its e-commerce business. Our comparable store sales were down 1.8% during the fourth quarter, with our e-commerce sales up approximately 51%. For the full year, famous footwear sales were $1.3 billion, down 20.4% year over year, driven primarily by the temporary store closures earlier in the year and the nontraditional back-to-school season. Comparable store sales for the year were up 1.6%. with our annual e-commerce sales up 75% over 2019. Our brand portfolio fourth quarter total sales were $234 million, a decrease of 32.4% year over year. Full year brand portfolio sales were down 35.8%, 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. Our consolidated gross margin was 39.9%, down 20 basis points year-over-year. Famous Footwear had a gross profit margin of approximately 41% in the fourth quarter, A 168 basis point decline was driven by growth and increased penetration of e-commerce related business in the quarter. However, notably, e-commerce margins increased more than 400 basis points in the period, reflecting the higher e-commerce productivity due to buy online, pick up in store, curbside, and ship from store initiatives. Our fiscal year gross margin for famous footwear was 39.2%. reflecting a higher mix of e-commerce sales due to temporary retail store closures and increased promotional activity to liquidate seasonal inventory during the year. Our brand portfolio fourth quarter gross margin was 36.5% and was 107 basis points higher than the fourth quarter of last year, reflecting a lower level of promotion and our overall inventory position. The annual gross margin was 36.2%. Our consolidated SG&A expense for the fourth quarter was $226.1 million, representing a decline of approximately $35 million compared to the fourth quarter last year. This year-over-year decline was driven by store selling productivity and actions taken to lower facilities, marketing, and general corporate overhead expenses. Our annual SG&A expense was $889.5 million, a decline of $176.3 million compared to fiscal year 2019. This decline was led by the reduction in variable cost, ongoing savings from the voluntary early retirement plan commenced in the fourth quarter of 2019, and lower lease expense from closing 104 total retail doors during the year. As we have stated, we expect to achieve $100 million or approximately $25 million per quarter of annual expense savings going forward. At Famous Footwear, we posted operating earnings of $14.8 million in the fourth quarter, reflecting a $20 million reduction in expenses and improved e-commerce margin. This represents $4.5 million more in operating earnings on $23 million less sales than the fourth quarter of 2019. Operating margin was 4.3% in the quarter, up 148 basis points year over year. In the brand portfolio, we're pleased to report an operating earnings of $1.2 million for the quarter, reflecting a $20 million reduction in expenses year over year. Our net interest expense for the quarter was $5.6 million, and for the year was $24.4 million, excluding the blowfish adjustment. our full-year consolidated GAAP tax rate was 15.1%. This lower rate reflects the favorable impact related to the utilization of the CARES Act carryback provisions, which allows us to carry back losses in 2020 to years with a higher federal tax rate. The company's fourth quarter net income was $1.3 million, or earnings per diluted share of 3 cents. This compares to net income of $13.9 million or $0.34 per diluted share in the fourth quarter of last year. Our inventory year-end was down 21% and included an approximately 15% decline in famous footwear inventory and a 29% decline in inventory in the brand portfolio segment. Furthermore, we significantly reduced our overall operating working capital position by approximately 50% in 2020. Our capital expenditures totaled approximately $22 million for the year, down from approximately $50 million in 2019. And looking ahead at 2021, given the ongoing disruptions related to the virus, supply chain dislocations, and continued near-term uncertainty in the marketplace, We are not providing fiscal year 2021 guidance at this time. That said, I'm happy to provide you with some high-level perspective regarding our outlook for the first quarter. To reiterate Diane's previous comments, we currently have between $60 million and $70 million of delayed receipts due to supply chain disruptions and the ongoing port congestion. We don't expect that to be resolved in the first quarter. In addition, as a reminder, our sales in the first quarter are seasonably the lowest quarter of the year, and we expect that to continue to be the case in 2021. With that being said, we expect Q1 2021 at the consolidated level to look a lot like Q4 of 2020, both in dollars of sales and dollars of earnings per share. with famous footwear sales expected to be between 5% and 10% lower than the first quarter of 2019, and brand portfolio sales expected to be between 28% and 32% lower than the first quarter of 2019. Furthermore, as previously discussed, we plan to complete the naturalizer restructuring during the first quarter and will take additional non-recurring charges during that period. excluding the impact of naturalizer closings and barring any further delays in the supply supply chain we accept positive adjusted earnings per share in the first quarter and a continued reduction in our overall debt levels in closing in the face of the unprecedented disruption in our business in 2020 the company acted quickly and decisively our nimble business model enabled enabled us to adjust to the environment prioritize cash flow and liquidity while still furthering our long-term strategic objectives, investing for future growth, and creating value for our shareholders. With that, I'd like to turn the call over to the operator for questions. Operator?