Caleres, Inc.

Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience. Music Thank you. Good afternoon, and welcome to the Calaris Second Quarter Earnings Conference Call. My name is Tawanda, and I will be your conference coordinator. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star then 1 on your telephone. As a reminder, this conference is being recorded. I would now like to turn the call over to your speaker for today, Logan Battacorsi, Vice President of Investor Relations. You may begin.

Good afternoon. I would like to thank you for joining our second quarter 2021 earnings call-in webcast. A press release with detailed financial tables, as well as our quarterly slide presentation, are available at Claris.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 on this call at any time. During today's discussion, and unless otherwise noted, Our comparisons will be primarily in relation to the second quarter of 2019. We believe this to be a more comparable time period for most of our key metrics due to the pandemic-related impacts that prevail during the second quarter of 2020. Joining me on the call today is Diane Sullivan, Chairman and CEO, Ken Hanna, Senior Vice President and CFO, and Jay Schmidt, President. 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. Diane?

Yep. Thanks, Logan, and good afternoon, everyone. I'm very excited to report that during the second quarter, market trends that emerged in March continued to gain momentum, with consumers spending and shopping with intent. In fact, the consumers' increasing comfort with in-person interaction improved visibly around the return to work and school. and notably their desire for new and fresh products and styles across categories powered robust demand dynamics. Our company capitalized on this terrific consumer demand and leveraged our strategic foundation, which is, of course, strengthening the power and the reach of our brands, accelerating our digital capabilities, leaning into our capabilities and operations, And then our strong team really delivered exceptional results in the quarter just ended. This builds further on the progress made earlier in the year and puts us on track to deliver record annual adjusted earnings per share of between $3.25 and $3.50. Just a few of the highlights in the second quarter. We achieved all-time record quarterly operating earnings of $62.8 million and adjusted earnings per share of $1.19. We also exceeded first quarter 2021 sales levels by $37 million. We generated significantly stronger gross margins, reaching 47.7%. And we also made noteworthy progress towards our balance sheet goals And, of course, continue to focus and engage with our consumers, driving deeper and stronger connections with all of our brands. Overall, our consolidated revenue for the second quarter was $676 million, representing a nearly 6% improvement from the first quarter of 2021. Our adjusted earnings per share for the period reached $1.19, up 59 cents sequentially and surpassing second quarter 2019 levels by by 57 cents, and most notably making the highest quarter of adjusted earnings per share in the company's history. Our growth margins also improved significantly, rising 705 basis points from the second quarter of 2019 as we drove more full-price selling as a result of tighter inventory levels due to disruptions and delays across the supply chain. In addition, Outstanding trends in our famous footwear business resulted in another quarter of strong cash generation for the enterprise. We once again utilized our free cash to strengthen our balance sheet, reducing our overall debt levels by another 100 million, bringing our total borrowings under our credit facility to 100 million. It's worth noting that we have proactively reduced our total leverage by $340 million in just five quarters. Furthermore, we have recently taken steps to fortify our financial position still further, calling a portion of our long-term debt and renegotiating the terms of our credit facility. Ken's going to provide more details around these strategic financial actions in just a couple of minutes. Notably, the results we delivered in the second quarter were accomplished despite the disruptions in the supply chain that resulted in approximately 28% less inventory across the company when compared to the second quarter of 2019. But before we jump into the segment breakout, I want to highlight the progress we've made and the plans we have to grow our Calaris-wide digital and direct-to-consumer business. During the second quarter, we continued to leverage our previous capital investments, digital capabilities, and our upgraded e-commerce platforms to drive an approximately 58% increase from our own dot-com sites over the second quarter of 19. And that was even as we saw brick and mortar trends accelerate during the period. As you know, our foundation has been built on putting the consumer first, and we are known for curating a diversified suite of powerful brands that connect and reach a growing number of consumer segments. And as a result, our total direct-to-consumer business and sales represented nearly 80% of our total sales. With that in mind, we have sharpened our focus and are driving forward even more with our digital-first strategies to attract new, maintain current, and reactivate previous consumers across our entire portfolio of brands. We view our enterprise-wide customer database and file as a strategic differentiator as well as an asset to drive growth. We are at the early stages of harnessing and exploiting this key strength, but are excited about the potential for value creation. Let's now move to our second quarter segment results, starting with the standout performance at Famous Footwear, where we achieved a number of financial and strategic milestones, including record results across all of our major key financial metrics. We continued to execute at a very high level during the quarter, capitalizing on our competitive advantages, building further on the momentum that began to accelerate in the first quarter of the year, and ultimately closing the period with another record-setting performance. Among the highlights for this segment, famous generated quarterly sales of approximately $454 million and 8% improvement over the second quarter of 2019, and the highest level of second quarter sales in the history of the brand. As consumer demand improved and sales increased, we drove record margins, which reached more than 50%. In fact, margins improved by 671 basis points when compared to the second quarter of 2019, as we drove more full-price selling and reduced promotional activity. Additionally, our return on sales reached nearly 19%, which is 11 full percentage points higher than the comparable period in 2019, and a record for famous. Finally, we delivered operating earnings of $85.5 million, which was $54 million greater than the second quarter of 2019, and quite remarkably, exceeded operating earnings delivered for the entire year in 2019. You know, I should mention that our second quarter success at Famous was broad-based, as we saw sales growth and or gross margin rate improvement across women's and men's and kids' accessories and across style categories, including athletics, casuals, sandals, and boots. In addition, we saw improvement in conversion and AURs when compared to the second quarter of 2019, both in-store and online. In fact, our brick-and-mortar business during the second quarter increased more than 10% over the second quarter of 2019, and our online sales were up more than 50% when compared to the second quarter of 2019, the most comparable period with e-com penetration right now at about 11% of total sales. Notably, conversion on famousfootwear.com was up 61 basis points, and the gross margin rate on e-commerce sales was up more than 1,200 basis points when compared to the second quarter of 2019. It's worth noting that momentum has continued as we have moved into the third quarter of 2021, with brick and mortar traffic up and store-for-store sales up high double digits versus the comparable period of 2020. In addition, our third quarter 2021 basis point improvement for gross margin is tracking to be consistent with the year-over-year basis point improvement that occurred in the second quarter of 21. From a product perspective, of course, trends in our iconic brands are continuing to work in the third quarter. More specifically, seasonal products look good with boots up double digits and kids off to a particularly good start. Let's turn now to our marketing efforts for a minute. We're constantly trying to strive to optimize our marketing mix, expand personalization across the communication channels, and obviously always try to build that strong emotional connection. To that end, we have continued to support all of the touch points in which our consumer encounters famous, including national TV, paid search, our online platform, social media, and beyond. In addition, we're highly focused on our consumer database and leveraging our leading assortment of brands, our great locations that are so convenient, our enhanced online platform, and of course, all of our increasingly popular shopping options to grow our famously rewards members. In fact, when we look at our rewards members, we did experience a 16% increase in new rewards members when compared to the second quarter of 19. bringing the total contactable consumers in our consumer file to nearly 42 million customers. Looking at each channel, we were highly successful through our dot-com site at reactivating previous rewards members, which were up 28% over 19, and retaining rewards members online as well. Meanwhile, the personal interaction of our famous store associates also led to an increase of new members that signed up for the program. So in short, FAMIS is strong, agile, and exceptionally well-positioned to take advantage of this dynamic market environment. While disruptions in the supply chain are creating challenges related to our inventory position in the near term, we're working with our partners to ensure that we have the right product in the right place for our consumers. And I really have to make another special call out to the FAMIS team for just an outstanding second quarter, and in particular, There's so many, but I'm going to mention the planning and allocation team of Nicole and Julie and all of those guys that have done a great job of taking this inventory and getting it to the right stores at the right time. So thanks, everybody. Thanks, Famous, for all your great work. Now let's turn to the brand portfolio. The second quarter marked another solid period of progress in the brand portfolio, which achieved a step-up in gross margin while sales levels were still recovering. In fact, the brand portfolio reported earnings from operations in excess of the comparable period of 2019, marking a significant milestone in recovering ahead of our expectations. Specifically, operating earnings improved 306 basis points over the second quarter of 2019 to reach approximately $16.6 million. This period represented another good example of why a diverse portfolio of brands that reaches a number of different consumer segments and wearing occasions is an advantage. Leading the way in this solid quarterly performance was Sam Edelman, Bionic, Allen Edmonds, and from Blowfish Malibu, one of our emerging brands. While responding quickly to consumer preferences is a hallmark of our entire portfolio, these brands are really setting the pace at the moment and continue to exhibit good momentum. Specifically, both Bionic and Sam Edelman turned in strong sales levels during the period, acquiring new customers in their process. This revenue improvement was driven primarily by their own dot-com sites, which were up 163% and 75%, respectively, when compared to the same period in 2019. Furthermore, Both brands experienced significant gross margin improvement, with Sam Edelman's margins increasing more than 1,300 basis points over the second quarter of 2019, and at the same time, Vionic's gross margins increased more than 1,400 basis points. I would be remiss if I didn't flag in particular the performance of Allen Edmonds here. AE was among our hardest hit brands during the worst of the pandemic, but continues to execute a highly effective shift towards a more balanced assortment, reflecting the way that the consumer is changing. And as we've previously mentioned, we started to see signs of this improvement in April, a trend that accelerated as we progressed through the period. Notably, the brand's e-commerce sales were in line with the second quarter of 2019 levels. AURs increased as we raised prices and pulled back on promotions, and increased traffic in major metropolitan markets have led to improved brick-and-mortar sales. In addition, even as our newer sport and casual styles, which made up nearly 40% of our sales in the quarter, continue to resonate with our consumers, strong demand for our core heritage styles actually accelerated. On an exciting note, Allen Edmonds is the official dress shoe of the U.S. Ryder Cup team for this year's event, which is being held in Cheboygan, Wisconsin, 45 minutes from our Port Washington factory where our shoes are made. The iconic Park Avenue style will be worn by the team during the event's opening ceremonies, and the shoes will be customized with the official Ryder Cup logo embossed on the insole. If our customers want a piece of history, they can buy this limited edition style as well. And finally, Blowfish acted as another strong contributor during the period. In fact, the brand sales and earnings were up from 2019 levels because of its easy and fresh styling, and those things continue to resonate with consumers, and particularly with our famous customers. So a significant part of this performance for the brand portfolio has been in the e-commerce growth. As a whole, the brand portfolio's own .com sites were up 64% when compared to the second quarter of 19, with the number of sites experiencing increases in traffic, conversion, and AURs. In particular, and not surprisingly, brand sites that had access to fresh and new inventory experienced the biggest increases. This improvement highlights and underscores the work that we've been doing to enhance the digital experience, spur direct and personal engagement with our consumers, and foster deeper connection with our brands. With our digital acceleration strategy in place and an energized team pointed in the right direction, we're confident that we can continue to build brand power, inspire our consumers, and drive growth and profitability across the portfolio. We truly do believe that this initiative and see it as a central value-driving component of our long-term strategy going forward. So overall, while we're pleased with the margin performance in the brand portfolio, there is still work to do. The brand portfolio sales revenues were down 33% from the second quarter of 2019 due in large part to ongoing challenges in the supply chain and limited the ability to quickly chase product and fill reorders. As we look out, we do anticipate supply chain and logistics challenges, specifically ongoing long lead times and significant increases in ocean freight, and that will likely put downward pressure on our third quarter sales to the tune of approximately $30 million. That said, we are actively working with our partners to minimize these disruptions and believe we are well-equipped to partially offset some of these cost headwinds. Although the macro environment remains volatile, we see a strong consumer who knows what they want and is ready to engage further with our diversified set of brands. So clearly, we begin the second half of the year very aware of these ongoing dynamics playing out in the marketplace, but are really strengthened by our recent performance. From this point and position, I'm really highly confident in our ability to control the variables within our control, build upon our recent strong results at Famous, continue to improve our sales performance in the brand portfolio, and, of course, enhance long-term value for our shareholders. Overall, I am very enthusiastic about our strategy for ongoing value creation and for the opportunities that lie ahead of us for clearance. And with that, I'll turn the call over to Ken for a financial review. Ken?