Caleres, Inc.

Good morning and welcome to the Calera second quarter 2023 earnings conference call. My name is Daryl and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. The question and answer session will follow the prepared remarks. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Logan Bonacorsi, Vice President of Investor Relations, Please go ahead.

Good morning. Thank you for joining our second quarter 2023 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 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. In discussing the results of our operations, we will be providing and referring to certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used in today's earnings release and our presentation on the investor section of our website. The company undertakes no obligation to update any information discussed in this call at any time. Joining me on the call today are Jay Schmidt, President and CEO, and Jack Calandra, Senior Vice President and CFO. We will begin this morning's call with our prepared remarks, and thereafter, we will be happy to take your questions. I would now like to turn the call over to Jay. Jay?

Thank you, Logan, and good morning, everyone. Once again, the Calaris team performed at a high level during the second quarter of 2023, delivering strong financial and operational results despite the challenging consumer demand environment. We leveraged our diversified structure, our powerful brands, and our enhanced Omni capabilities to drive earnings per share above the high end of our guidance range. This gain was achieved even with sales modestly below our initial expectations because we prioritized profitability and generated strong consolidated operating margins. Our ability to deliver bottom line results in a choppy consumer market demonstrates the desirability of our brands and the success of our efforts to tighten inventory and reduce promotion across our businesses. We have also reduced expenses across the enterprise. These actions have yielded a fundamentally healthier Calaris. Indeed, we believe our diversified model and operational discipline sets us up to drive value in a variety of market conditions. The structural improvements we've implemented over the last several years, coupled with our focus on cost control and commitment to our strategic initiatives, positions us well for sustainable long-term growth. Now let's turn to some key highlights in the second quarter. We delivered adjusted earnings per share of 98 cents. We grew market share in our lead brands, Sam Edelman, Allen Edmonds, Naturalizer, and Vionic. We increased Famous Footwear's market share in shoe chains. We generated record second quarter growth margins in the brand portfolio. We achieved sequential improvement from the first quarter in the year-over-year sales trend at both famous and brand portfolio. We maximized our inventory levels and managed them well, ending the period approximately 14% below 2022. We invested in consumer experience, analytics, and marketing, areas that are key to accelerate our strategic growth initiatives. We returned approximately $20 million to shareholders via share repurchases and the quarterly dividend. And we utilized our free cash flow to reduce the borrowings under our asset-based revolving credit facility by $48 million from first quarter of 2023. This also represents $105 million year-over-year decline in our borrowings. In recent years, we have prioritized debt reduction after funding our dividend as the top priority for free cash flow. During the second quarter, we reached our leverage ratio target of one times debt to EBITDA. We anticipate strong levels of cash generation, and Jack will cover our capital priorities in more detail in a few moments. Now let's move to our second quarter operating results. Overall, consolidated sales declined 5.8%, falling short of our expectations. Famous footwear sales were about in line with our expectations, while brand portfolio revenues were somewhat below our initial view. Despite this, we generated strong consolidated gross margins of more than 45%. This was driven by continued improvement in the brand portfolio's gross margin as well as rigorous cost management across both segments. Faced with softer demand, we chose to prioritize profitability over promotions. As a result of all of these efforts, we achieved solid second quarter operating earnings. Now let's turn to our operating segments, starting with the brand portfolio, which remains on track to deliver an increased earnings contribution this year in both dollars and rates. During the quarter, we experienced some seasonal weakness in sandals as consumers prioritized casual flats and sneakers. We also saw conservative ordering patterns by our wholesale partners. As you may remember, last year, consumer demand surged as restrictions were lifted and our wholesale partners built their inventories. As we move into the back half of 2023, though, these more difficult year-over-year comparisons ease. and we are ready with strong inventory in loafer, flat, and sneaker styles that our consumers desire. In contrast, our own channels performed well in the second quarter. Our own e-commerce sales were up 8% year over year with standout performances from Lee Brands, Allen Edmonds, and Bionic. In addition, our brick and mortar business climbed more than 16% compared to the prior year. We continue to maximize top selling items and get the consumer what they want and faster by leaning into our edit to win initiative and utilizing our speed program that takes advantage of the fully recovered supply chain network. It's worth noting here that our speed capabilities enable us to pivot quickly in this dynamic market environment and we are closing in on our goal of speed orders representing 20% of our inventory purchases. As a result, the brand portfolio delivered second quarter adjusted operating earnings of $28 million and achieved a 9% operating margin. This performance was driven by a 295 basis point improvement in gross margins due to higher initial margins, lower freight costs, and strong inventory management. We believe our inventory is aligned with our top-line trends due to careful category planning. This benefits our wholesale partners as well, leading to healthier business across all channels, and this sets the stage for a stronger second half for the segment. Now to the performance of our lead brands. As we indicated last quarter, our lead brands have significant growth potential and we are strategically investing in these lead brands to power growth. We expect these brands will represent a higher percent of our total Calaris revenue in 2023, with opportunities to increase that penetration further over the long term via a number of different growth vectors. Starting with Allen Edmonds, the brand delivered its 10th consecutive quarter of growth Improvement was broad-based across all channels with sales of mid-single digits compared to the second quarter last year. We saw strength in our direct channels with brick and mortar of 5% and e-commerce of 13%, driven by increased traffic and conversion. I am pleased to note that we've seen significant increases in the brand's average unit retails compared to pre-pandemic levels. There's a lot to be excited about at Allen Edmonds. Turning now to Vionic. Fresh off its new marketing campaign, emphasizing its Northern California roots, the brand saw a nice improvement in its e-commerce business during the second quarter. Early catalog performance helped deliver a 7-plus percent year-over-year increase in e-commerce with newness, particularly loafers and white sneakers driving the uplift. One of their new styles, the Uptown Mock, sold out during its spring launch and will be a top 10 style for fall. And Sam Edelman and Naturalizer continued to harness their significant brand strength to capture market share. For Sam Edelman, we saw a strong consumer reaction to the brand's new Layla sneaker, as well as an impressive performance at retail with their flats. Naturalizer capitalized on the Calera's speed-to-market capabilities I mentioned earlier to accelerate delivery of the Morrison 2.0 sneaker, a new evolution of its best-selling lace-up sports shoe. Launched in early spring, this sneaker has grown to the number two style in the Naturalizer brand. In addition, Naturalizer had standout gross margin and operating contribution during the quarter. Now, we also had sales growth and profitability improvement from our portfolio brands, especially Lifestride, Franco Sardo, and Dr. Scholl's. As a reminder, these brands are growing assets within the portfolio that serve key consumer segments not currently served by our lead brands and benefit from our one Calaris capabilities. In each of these brands, the consumer responded to style, comfort, and value. And we even had a viral success in the Dr. Scholl's brand with the time off sneaker, which was a TikTok favorite. And I may add sold 75,000 pairs of retail during the second quarter. Overall, the brand portfolio is performing well with the first half of 2023, providing a solid foundation on which to build. As year over year comparison sees, We expect sales trends will improve, and more importantly, the brand portfolio will make a larger and more meaningful contribution to the total company's operating performance this year. Turning now to Famous Footwear. During the second quarter, Famous continued to navigate difficult spending trends among its target consumer and the challenging macroeconomic backdrop overall. Even in this environment, FAMIS outperformed its competitive set and increased market share in shoe chains. We saw strengthening sales trends as we moved through the quarter, and we delivered an expected sequential quarterly improvement in Q2. Our kids business, a key differentiator for FAMIS, was a bright spot again this quarter, increasing 5% over last year. Kids is an essential and growing category for FAMIS and our focus paid off as families continue to prioritize purchases of kids' footwear. This strength is particularly important heading now into the back-to-school season. In total, FAMIS generated nearly $41 million in adjusted operating earnings, a net sales down 5%, resulting in a return of sales of nearly 10%. Famous sustained its gross margin rate of 46% from the first quarter as we continue to be strategic around our promotional approach. About 50% of our business is now excluded from BOGO promotions, up from about 30% pre-pandemic. As we are with the brand portfolio, we are prioritizing the health of our business at Famous Footwear over trying to capture lower quality sales. Looking more closely at Back to School, we executed a number of strategies to capitalize on this important demand opportunity. First, we focused on amplifying newness to drive excitement, interest, and relevance. Second, we approached inventory in a measured and agile manner. While we built up inventory behind key brands, styles, and patterns, we tightly managed our overall inventory position which declined 2% compared to last year, in order to have the capacity to react aggressively to best sellers in season. Finally, we continue to enhance, energize, and modernize the store experience through our new prototype stores. While we don't anticipate comping last year's record back-to-school period, we do believe Famous is uniquely positioned to maintain its leadership status in shoe chains and deliver a solid performance. Looking ahead, the FAMIS team is extremely focused on fueling what's working from a product, marketing, and digital perspective to maximize our earnings potential while managing inventory and expense levels. Overall, we believe in the power and agility of the brand and expect strong earnings in 2023 and beyond. In short, we continue to have great confidence in the long-term outlook for Famous, and we believe we can leverage our competitive advantages to accelerate our growth in this segment. These include our leadership position with kids and the millennial family, our leading assortment of national brands, our nationwide and largely off-mall retail footprint, and our elevated consumer experience in store and online. So, in summary, I'm extremely proud of our strong operational discipline and the financial performance we delivered in second quarter. I believe the most recent quarter underscored yet again the advantages of our diversified structure and the OneColaris model. We remain confident in our ability to achieve our annual sales and earnings guidance for the year. Our brands are strong and enduring, our strategies are clear and actionable, and our teams are dedicated to exceeding the expectations of our consumers in this dynamic marketplace. Moreover, we continue to believe the strong financial foundation we've built will enable us to consistently deliver our annual earnings baseline of more than $4 per share while generating strong levels of free cash flow and creating long-term value for our shareholders. And with that, I'll now hand it over to Jack for a more detailed view of our financials. Jack?