Caleres, Inc.

Good afternoon, and welcome to the Calaris Third Quarter 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. At this time, I would like to turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Good afternoon. I'd like to thank you for joining our third quarter 2021 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. During today's discussion, unless otherwise noted, our comparisons will primarily be in relation to the third quarter of 2019. We believe this to be a more comparable time period for most of our key metrics due to the pandemic-related pressures that impacted the third 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, our 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?

Thanks, Logan, and good afternoon, everyone, and thank you for joining us on today's call. I'm thrilled to report that the positive consumer demand dynamics that reemerged earlier this year continued during the third quarter. These trends were powered by a return to a more normal back-to-school buying activity, accelerated holiday shopping, and the ongoing momentum from the great economic reopening. In short, the footwear consumer is strong, healthy, and motivated. Kolaris capitalized on this robust consumer demand, achieving another exceptional operating performance during the quarter while navigating the persistent challenges we are all facing in the global supply chain. I'm extremely proud of how our team has continued to deliver through the ongoing volatility, never losing focus on the variables within our control and driving forward with our strategic priorities. As a result of our strong performance during the first nine months of the year and our expectations for ongoing momentum for the remainder of 2021, we are raising our full year earnings outlook. We now expect record adjusted earnings per share of between $3.80 and $3.90 for fiscal year 2021, up from the initial guidance range of $3.25 to $3.50. Among the many highlights for the third quarter, we achieved another record quarterly operating earnings of $81 million and adjusted earnings per share of $1.59. $184 million in revenue, nearly matching our third quarter 2019 performance. We captured a strong consolidated gross margin of approximately 43%, a 241 basis point improvement over the same period two years ago. And we drove forward with our digital-first initiatives to attract new, maintain current, and reactivate previous consumers across our entire portfolio of brands. In addition to our strong execution, we continue to further our strategic priorities, invest in our diversified portfolio to support our long-term growth, and of course, made progress toward our balance sheet objectives. We continue to reduce our debt levels, and given our strong outlook for the remainder of 21 and 22, we fully expect to approach our goal of zero net debt over the course of the next five quarters. We view this as hugely value creating for our shareholders as we effectively convert debt to equity value via these efforts. Furthermore, we took action to bolster our financial foundation still further, finalizing more advantageous terms on our revolving credit facility. This new agreement, coupled with our proactive debt reduction initiatives earlier this year, will lower our 2022 annual interest expense by approximately $12 million. Ken will discuss the specifics of these activities and great accomplishments in more detail in just a few moments. Before we take a closer look at our segment level results, I want to briefly touch on the impacts from the highly discussed supply chain and global logistics challenges that have significantly intensified in recent months. During the quarter, factory closures, increased delivery lead times, and port delays hindered our ability to capitalize fully on the significant uptick in consumer demand. Our teams have worked hard to mitigate the impacts of these ongoing disruptions. And while we're encouraged by factory reopenings, we do expect increased lead times and port delays to continue and will likely affect our ability to capture incremental demand opportunities in the near term. Now let's move to our third quarter segment results, starting with the outsized performance at Famous Footwear. We raised the bar again during this period, leaning into our competitive advantages, taking advantage of the strong consumer demand and achieving a second straight record-setting quarterly performance. Notably, Famous generated quarterly sales of approximately $495 million, a nearly 11% improvement over the third quarter of 2019, and the highest level of quarterly sales in the history of the brand. This outstanding revenue performance was driven by an extremely successful back-to-school period where sales and margins were up from the comparable timeframe in 2019 and marked the most profitable back-to-school period in our history. Even more positively, sales momentum continued even after the conclusion of the back-to-school season despite limited promotional activity. While the robust demand clearly played a role, we also believe this resilient sales activity in the second half of the quarter reflects our inclusion of TV into our marketing mix, the power of our product allocation system, as well as the depth of our inventory as it relates to in-demand brands and styles. It's really worth highlighting, as you would expect, that the third quarter was another period of minimal promotional activity and significantly less promotional days resulting in near record margin levels for the segment. Margins reached nearly 48%, and were 657 basis points higher than 2019. Also helping to support these strong margins was much tighter inventory position at Famous. Inventory levels were down 24% from two years ago. What was really powerful driver was having the right level of inventory behind the key brands and styles. Specifically, our inventory in our top 10 brands was down only 9% from the third quarter of 2019. At the same time, we experienced meaningful improvement in sales, margin, and AURs over the comparable time period from these brands. We've leveraged our allocation expertise to ensure that we are maximizing our inventory with the right product in the right places to meet demand at the local level. Through the work of our merchandising, planning, and allocation teams, we really believe we're reasonably positioned from both a product and inventory standpoint as we enter the heart of the holiday season. Looking ahead, we will maintain our sharp focus on managing the supply chain issues, working closely with our partners to properly align our inventory with consumer demand. Additionally, expenses were well managed in the quarter with a 490 basis point improvement from third quarter of 2019. And as a result, we delivered operating earnings of 87.4 million, which was 59.7 million higher than the same period two years ago. Finally, our return on sales reached approximately 18%, which is more than 11 full percentage points higher than the comparable 2009 period, 19 period, excuse me, and a third quarter record for famous. Now looking at the performance in more detail, we experienced broad-based strength as we saw sales growth and gross margin rate expansion across women's, men's, kids, and accessories. Not surprisingly, our kids' business was particularly strong in the period, increasing 26% over 2019, highlighting the widespread return to in-classroom learning, a strong inventory position, and demonstrating the work we've done to amplify our kids' offerings to the consumer. Shifting to style categories, athletics, casual, and sandals all recorded increases over the same period in 2019, while boot styles were down modestly. In addition, we saw strong improvement across the omni-channel. From an e-commerce perspective, we achieved our two-year growth plan put in place prior to the pandemic during the period. Our online sales were up approximately 44%, contributing an incremental $20 million of sales when compared to the third quarter of 2019. However, what wasn't envisioned at the time two years ago was the growth we experienced in our brick-and-mortar business during the period. Brick-and-mortar sales increased 7% over the third quarter of 2019, even with 55 fewer stores. Notably, we saw increased conversion despite much lower inventory levels and improved AURs across both channels. On an exciting note, early next week, Famous is testing its first-ever catalog. We've experienced great traction from recent catalogs with Sam and Allen Edmonds and Bionic, and we're using these learnings to support our customer acquisition objectives for our largest brand. Famous is a convenient stop for holiday style, and this is the perfect time to connect consumers with the great brand offerings and gift opportunities, including shoes, accessories, and gift cards, as we head into the holidays. There's just a lot to be proud of at Famous, and while this is record performance is notable, our focus is on how we can maintain and build on this momentum to drive profitable growth going forward. Now let's talk a little bit about the brand portfolio segment. During the third quarter, sales volumes in the brand portfolio expanded approximately 26% sequentially, supported by strong consumer demand fundamentals and underscoring the ongoing rebound for certain brands and trending styles. While the sequential sales improvement was encouraging, supply chain disruptions, including the factory closures and the port delays, tempered our ability to utilize our speed programs, deliver goods on time, and to capitalize on incremental demand. Most significantly, though, exceptionally high ocean freight costs compressed margin rates by approximately 400 basis points from the third quarter of 2019. As the timing of product price increases on ship goods lag the current higher cost to ship. The brand portfolio experienced an incremental 11.5 million of oceans freight cost during the quarter. We believe that focusing on the items within our control will pay off as we navigate these ongoing disruptions. While there just isn't a one size fits all solution, our teams are working to pull every lever. And this includes taking price increases, working with our factories to manage input costs, obviously placing future buys earlier, renegotiating container contracts, evaluating freight options, and looking at everything we can do to fix the ocean, to help the ocean transit times, and minimizing our country exposure risk through dual sourcing wherever we can. So it's really a basket full of a lot of different things that we're going to be doing to ensure that we continue to improve our position. Looking ahead, while ocean freight will likely remain elevated above historical rates, through the combination of efforts that I talked about, we would expect to be able to somewhat offset the higher cost of ocean shipping in future quarters with the larger offsets to occur as spring 2022 goods are sold through. All of that withstanding, we continue to make really great progress on a number of our key brands as they continued their upward progress registering sales and or margin and earnings improvements along with increases on key strategic objectives, including our direct consumer presence where we saw a 20% increase in sales from our own e-commerce sites. In fact, we're seeing favorable consumer response to and strong sell-throughs from many of our brand product offerings. So let me share a couple of the standout performances in our brand portfolio. In this period, it was, again, Bionic, Sam Edelman, and Allen Edmonds. These leadership brands had a more advantaged inventory position during the quarter and overall have a high degree of brand equity and authority in the segment they compete in. Starting with Bionic, which continued on its strong growth track, and strengthened its place as one of the leading brands in our portfolio. During the quarter, Vionic grew its sales 12% over the third quarter of 2019 and experienced significant improvement in e-commerce sales, which were up nearly 90% over the same time period. Furthermore, continued full price selling during the quarter led to stronger gross margins and an improved levels of earnings. I'll also mention that Bionic Beach, which we launched in the fall of 2020, has quickly become one of our best-selling styles. Now, turning to Sam Edelman, a central part of an important part of our portfolio. The brand built on its first-half performance, delivering positive operating earnings growth over 2019. During the period, SamEdelman.com delivered significant improvement in demand, with online sales up 77% over the two-year period. In addition, I have to say I just continue to be encouraged by the progress that we're making at Allen Edmonds. Sport and casual continues to be a growing part of our assortment. Dress has returned as more and more people return to work, and boots are performing well. While sales have yet to reach pre-pandemic levels, we're pleased with the operating earnings that came in ahead of our third quarter of 2019 as we have seen positive consumer reaction to new products and loyalty to our heritage styles continue to accelerate. Given the strong demand in the marketplace and our difficulty and our inability to circumvent the global supply chain issues with our domestic and nearshore production facilities, we expect the recovery of this brand to continue into 2022. I'd also like to highlight Rika, which continues to deliver a strong sales performance as its casual and sports styles and its focus on health and wellness resonates with the active consumer. More recently, the brand's expansion into outdoor and trail has opened up another category for the brand portfolio, with these products already showing positive trends in the marketplace and is expected to grow into next year. Finally, we're happy to officially welcome Blowfish Malibu to the Polaris portfolio of brands. As you will remember, we purchased a majority stake in the company back in 2018, and after the third quarter, we completed the acquisition and now have 100% ownership of the brand. I want to thank all the associates who worked so closely together to bring this transaction to completion. Going forward, we expect the challenges in the macro supply chain to be part of the operating environment for the foreseeable future. However, we're highly confident that as supply chain issues moderate and inventory positions improved, that we will continue to see tremendous upside in this business over the long term. Our unique balance of brands and styles in the trending casual and sport categories and our strong, longstanding presence in the improving dress and event categories positions Calaris well to capitalize on the robust consumer demand trends playing out in the marketplace. Before I hand it over to Ken, I want to recognize our global workforce and their outstanding performance. No one would have predicted this level of recovery, and it's through their outstanding efforts that we expect to deliver a record year for our company in 2021 and what also makes us highly optimistic for our prospects for another terrific year in 2022. With that, I will now hand it over to Ken for a review of our financials. Ken?