Participants

Liz Dunn; Senior Vice President - Corporate Development and Strategic Communications; Caleres Inc

John Schmidt; President, Chief Executive Officer, Director; Caleres Inc

Jack Calandra; Senior Vice President, Chief Financial Officer; Caleres Inc

Chandana Madaka; Analyst; KeyBanc Capital Markets

Laura Champine; Analyst; Loop Capital Markets

Mitch Kummetz; Analyst; Seaport Research Partners

Dana Telsey; Analyst; Telsey Advisory Group

Presentation

Operator

Good morning, and welcome to the Caleres third-quarter 2024 earnings conference call. My name is Darryl, and I will be your conference coordinator. (Operator Instructions)
As a reminder, this conference is being recorded. At this time, I will turn the call over to Liz Dunn, Senior Vice President of Strategic Communications and Corporate Development. Please go ahead.

Liz Dunn

Thank you, Darryl. Good morning, and thank you for joining our third quarter 2024 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are available at caleres.com.
Please be aware today's discussion contains forward-looking statements, which are subject to several risks and uncertainties. Actual results may differ materially due to various risk factors, including those disclosed in the company's Form 10-K and other filings with the US 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 our operating results, we will be providing and referring to certain non-GAAP financial measures. Additional details on these measures as well as others featured in today's earnings release and presentation are available at caleres.com.
The company undertakes no obligation to update any information discussed in this call at any time. Joining me today are Jay Schmidt, President and CEO; and Jack Calandra, Senior Vice President and CFO. Our call will begin with prepared remarks, followed by a Q&A session to address any questions you have. With that, I'll turn the call over to Jay.

John Schmidt

Thank you, and good morning, everyone. As we reported earlier today, our third quarter saw progress toward our strategy, highlighted by the Brand Portfolio reporting growth, Famous Footwear delivering positive comp store sales, and both segments increasing market share. However, our earnings were clearly below our expectations. There were a number of challenges in the quarter that impacted our results. We saw soft boot sales in both segments of our business.
We had discrete issues with late receipts of trending athletic product at Famous Footwear. We had a credit issue associated with one customer in the brand portfolio that resulted in lower shipments. And finally, our China business has softened. While this was not the result we wanted, there were several areas of strength on both sides of our business that leave us cautiously optimistic for the future. Our brands and products are resonating with consumers.
We are gaining market share in both segments of our business, and we remain confident in our growth strategies and long-term vision. In total, for the third quarter, sales declined 2.8% year-over-year, and we reported adjusted earnings per share of $1.23. Now let's turn to our operating segments. Brand Portfolio sales increased approximately 1%. Our lead brands outperformed our portfolio brands with wholesale and owned dot-com both showing modest growth versus last year.
We were encouraged to see a return to growth and pleased to report that the issues that we had last quarter related to our systems implementation did not impact this quarter. Additionally, our Brand Portfolio gained market share according to Circana during the quarter, both in total and in women's fashion footwear.
We continue to see robust demand for new products, with momentum in fashion sneakers. In fact, sneakers and sport represented over 30% of retail selling for the quarter. Slingbacks, Mary Janes, and ballet flats also performed very well.
Wholesale boot shipments, however, declined 5% versus last year. However, at retail, short boots were down 18% and tall shaft boots were up slightly. Wide shaft boots stood out with double-digit growth to last year. In the boot category, much like in the rest of our business, the consumer is prioritizing trend and newness over basics. And more broadly, brands with premium positioning outperformed.
From an inventory perspective, we have more current, less core, and less aged inventory. In addition, our speed initiative drove about 30% of our sourcing in the quarter. Our lead brands, Sam Edelman, Allen Edmonds, Naturalizer, and Vionic represented more than half the Brand Portfolio sales and operating earnings in the quarter.
Three of those four brands saw growth, and collectively, lead brand growth exceeded that of the portfolio brands. The Sam Edelman brand saw strength in the quarter, driven by positive response to fashion newness, particularly in sneakers, flats, and tall shaft boots.
Sales in Sam Edelman retail stores exceeded expectations and retail sell-throughs with our wholesale accounts were up year-over-year. Sam introduced handbags under license in October, and we are encouraged by the positive early reaction.
And finally, we continue to believe Sam Edelman has a significant opportunity internationally. During the quarter, the brand launched in Selfridges and John Lewis in the U.K. and unveiled the first global location for Sam Edelman's new store concept in Shanghai in October.
The Allen Edmonds business was also driven by newness, particularly in new sneakers and dress loafers, while boots underperformed. We successfully launched our new Allen Edmonds Reserve collection across all channels during the quarter, including an exclusive collection with Bergdorf Goodman.
In our retail stores, we continue to see success with our Port Washington studio store concept and now have 11 of these prototypes, with comp stores outperforming the chain by a high-single-digit percentage. Naturalizer returned to growth in Q3, led by its direct-to-consumer business. We saw increases in purchasing by Gen Z, millennials, and higher household income consumers.
Boot sales here were solid, driven by growth in expanded cap widths. Our focus on inclusivity is attracting new loyal consumers to the brand. Additionally, we also opened a new store in Beijing, relaunching the Naturalizer brand in Asia, and are in early innings of international expansion for this brand. Vionic had solid trends at retail, particularly with Nordstrom and saw continued outperformance in both its uptown casual business and the sport lifestyle category. However, the brand faced challenge again with casual short boots.
We continue to evolve and modernize the assortment while maintaining Vionic's wearable well-being positioning. And as we continue to fuel innovation at Vionic, we expect to further expand the brand's reach. Overall, the Brand Portfolio had a mixed quarter. Outperformance by our lead brands is encouraging and strong retail selling trends and market share gains across the portfolio will drive growth in the future. Moving on to Famous Footwear.
Total sales declined 5% during the third quarter, while comp sales increased 2.5%. After a very strong back-to-school season, sales returned to the prior trend. Athletic was strong and positive across men's, women's, and kids. Boots were down over 20% at Famous during the quarter, comprising most of the sales shortfall relative to expectations. At the same time, we saw an extended season for sandal selling with strength from both Birkenstock and REEF.
Once again, our strategically important kids category grew in the quarter, outpacing the total business. Our kids category has now outperformed the rest of the chain for 15 consecutive quarters. Kids penetration of the total Famous business was 25% in the quarter, and we gained 1.3 points of kids market share in shoe chains according to Circana data. Overall, in the third quarter, Famous Footwear's market share gained 0.5 point in shoe chains according to Circana data. We were also pleased with our performance of our own brands at Famous.
Penetration of our Caleres brands was once again up in the quarter, with strong selling for both Naturalizer and Blowfish. Caleres brands continue to provide Famous with greater access to fashion products, while at the enterprise level, vertical sales allow us to capture higher gross margins. Our famous.com business was strong in the quarter, posting an 8.3% year-over-year increase on a comp basis. Finally, we continue to focus on enhancing the consumer experience at Famous. At the end of Q3, we had 32 FLAIR locations in total.
We continue to experience a mid-single-digit sales lift versus the rest of the chain in our fall 2023 and spring 2024 FLAIR stores. FLAIR is successfully attracting more elevated brands and products, and our Famous consumer is responding positively.
We made a tactical decision to delay construction on additional remodels until the first quarter of 2025 to prevent lost holiday sales. However, we will open one new FLAIR store in Boston in the fourth quarter. Famous is well-positioned on inventory heading into the holiday season, particularly in the key trending brands and styles.
The strength of kids, our continued success with FLAIR, and our broad-based improvement in athletic are encouraging. We believe Famous' inherent competitive advantage, namely its leadership position with the millennial family, especially kids, coupled with its clear avenues for growth and support from the Caleres structure, position the business to gain additional market share in shoe chains, generate robust levels of cash, and increase profitability over the long term.
Looking forward, we are now expecting lower sales and earnings than our previous guidance. While Jack will walk you through our updated assumptions in detail, I will provide some color on the factors impacting our revised outlook. We are seeing several trends play out in our business that are negatively impacting our top line performance in the near term.
On the Brand Portfolio side, we expect boots to continue to trend below last year through the fourth quarter. We plan to take aggressive action on poor-performing items to end the year in a clean position. We also expect demand in China to be more muted than previous expectations for the balance of the year.
At Famous Footwear, we are outperforming in our competitive set, but the overall environment in family footwear has been more challenged. Lastly, we incurred necessary investment this year to position our business for the long term.
We have restructured our business and reduced expense, but we do not want to set back long-term growth plans by cutting too deeply. Finally, I would also like to touch on 2 subjects: Tariffs and our long-term plan. First, on tariffs. Our sourcing and supply chain capabilities are well-positioned to adapt and evolve to meet the changing environment. We have been working closely this year with our factory partners to pivot our sourcing outside of China and mitigate the impact of additional tariffs on the business for 2025.
Jack will discuss this with more detail on our sourcing plans shortly. Second, on the subject of our long-term financial targets. In October of 2023, we announced a plan to drive growth in sales, earnings, and total shareholder return. While we still expect to return to more consistent growth in these metrics, we now expect it to take longer to achieve the specific EPS goals we laid out last October. This year has clearly been a setback for us.
Having said that, we believe we are on the right track with the right strategies for the future. We look forward to updating you on our 2025 expectations during our fourth quarter call. And with that, I will now hand it over to Jack for a more detailed view of our financial performance and our outlook. Jack?

Jack Calandra

Thanks, Jay, and good morning, everyone. During today's call, I'll review our third quarter performance and share our revised guidance for the full year. Please note my comparisons to last year will be on an adjusted basis. Starting with Q3 results, sales were $741 million, down 2.8%. On a dollar basis, sales were down $21 million, which included an unfavorable calendar shift of about $29 million at Famous.
As Jay mentioned, weak seasonal demand in the boot category impacted results in both segments. Brand Portfolio sales were up 0.7%, primarily driven by our lead brands. Owned dot-com sites were up 1%, drop-ship improved from Q2 and was about flat versus last year, and total wholesale saw a modest uptick. Famous sales were down 4.8%. Comparable sales, which adjust for the calendar shift, were up 2.5%.
Strong results in athletic and kids offset weak sales in boots. Back-to-school came later in the season, but in total was in line with our expectations. Comparable sales were up 9% in August and down low-single-digits in September and October. Consolidated gross margin was 44.1%, a 55-basis point decrease, and was driven by lower margin in Famous, partially offset by a slightly higher margin in Brand Portfolio. Brand Portfolio gross margin was 43.8%, up 15 basis points, supported by a favorable channel mix and higher initial margins.
Famous gross margin was 42.9%, down 130 basis points. This decrease reflects a shift to more days in BOGO versus Buy More, Save More. However, as previously noted, the shift was gross profit-accretive to what we initially saw from the Buy More, Save More promotion. Softer-than-anticipated performance in boots also impacted clearance margins. SG&A expense was $269 million, or 36.3% of sales, up 30 basis points.
SG&A declined $5 million as a result of our restructuring actions and lower incentive compensation costs, and were somewhat offset by higher rent and investments in marketing, the SAP upgrade, and international. Operating earnings were $58 million and operating margin was 7.9%. Operating margin was 10.9% at Brand Portfolio and 6.9% at Famous. Net interest expense was $2.9 million, down $1.6 million on lower average borrowings and a lower interest rate. Earnings per diluted share were $1.23 versus $1.37 last year.
EBITDA was $73 million and 9.9% of sales. Turning now to the balance sheet. We ended the third quarter with $239 million in borrowings, up about $17 million versus last year. The borrowings balance included the impact of $50 million of share buybacks completed in the quarter, during which we repurchased just over 1.5 million shares at an average price of $32.82 per share. Debt to trailing 12-month EBITDA was 1x.
Inventory at quarter end was $586 million, up 5.4% to last year on a reported basis and up 2.7% when adjusted for the calendar shift. Famous inventory was up 5.1% on a reported basis and up 0.7% on an adjusted basis. Brand Portfolio inventory was up 6%. Both businesses ended the quarter with less aged inventory than last year in both dollars and as a percent to total. Now turning to our outlook.
We are updating our full year 2024 guidance to reflect the shortfall we experienced in Q3 and a more conservative view of Q4. We now expect sales to be down 2.5% to 3% versus last year. This comparison includes the impact of the 53rd week in 2023. Excluding the 53rd week, sales to be down 1.5% to 2%. We expect consolidated operating margin of 6.1% to 6.3% and earnings per diluted share of $3.35 to $3.45, and adjusted earnings per diluted share of $3.45 to $3.55.
We continue to expect an effective tax rate of about 24% and capital expenditures of $50 million to $55 million. We have provided a table in our earnings release and slides that summarizes our previous and revised guidance.
And finally, I wanted to build on Jay's earlier comments on the evolving tariff situation. On the Brand Portfolio side of our business, where we source product directly, more than 50% of our dollar volume is currently manufactured outside of China. We expect to have about 70% sourced outside of China by the back half of 2025, and our lead brands are further along on this migration.
At Famous, currently about 15% of our vendor receipts are made in China. We expect this number to move lower as well. We are working proactively to mitigate the risk of additional tariffs and believe our sourcing capabilities position us well to adapt to any changes.
With that, we can open the line for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Ashley Owens, KeyBanc Capital Markets.

Chandana Madaka

This is Chandana Madaka on for Ashley Owens this morning. So I just wanted to ask just broadly, you're a year into your long-term plan that you outlined at Investor Day. Can you just provide more thoughts around the confidence levels? How should we be thinking about top line growth and scaling to that in next year and beyond? Is there any shift in the makeup there?
And then you spoke to EPS expectations that are now expected to take a bit longer. So from an OpEx perspective, is there anything to call out on what's driving the adjustment? Any bucket that's contributing more?

Jack Calandra

Sure. So thanks for the questions. So as you know, we generated more than $4 of EPS over the last 3 years and continue to believe we have the brands, strategies, capabilities, and people to get back to that earnings power. As Jay said, this year has clearly been a setback, and I really think without making excuses, there have been a confluence of factors that have impacted this year.
One thing I would say is that the fashion segment of footwear, where we obviously play pretty heavily, has been softer than anticipated from the forecast that we were provided in the beginning of the year.
And the seasonal business has been particularly tough. As you know, from our second quarter call, we also had disruption and distraction from our ERP upgrade, and that had a pretty big impact on Q2. As Jay mentioned, that impact is now behind us.
And then we have been making investments, strategic investments to drive future growth that we feel very confident in, and particularly around international and some of our marketing investments. That said, it's going to take us longer to achieve the goals we communicated last October, and we can provide, I think, a further update on our fourth quarter call.
But we feel like we've got, again, all of the capabilities, tools, brands and people to get our earnings back over that $4 level.

Chandana Madaka

Awesome. Just as a follow-up, I wanted to ask if there's anything more specific that you could discuss around the dynamics in China. What do you think is contributing to the softness there? Is it more broadly macro and consumer spend? And just speak to your confidence in the region as you're investing in opening more stores there.

John Schmidt

It's Jay. We still believe that we have a significant growth opportunity in China and the rest of the world. While we're somewhat more cautious on China in the near term, we believe it is an important market for us with significant long-term opportunity.
And we are looking at a more balanced approach with other markets being important as well, such as the Middle East and EU. And even with our JV partner, we're kind of looking at more moderate growth, but still growing there.
And then also that JV partner is expanding into Southeast Asia as well. So we think we have a good plan there, but probably just our original China plan was probably too aggressive coming out of the gate.

Operator

Laura Champine, Loop Capital Markets.

Laura Champine

If I look at the shifts in guidance, it doesn't seem to be top line as much as it is op margin, and it's -- perhaps that's mostly on gross margin. How much of this is just more markdowns to clear inventory in Q4? And how impactful, if it's impactful at all, is the customer (technical difficulty) called out in your press release today?

Jack Calandra

Yes. So this is Jack, Laura. Thanks for the question. So just in terms of -- as we look to Q4, we do expect a gross margin decline for the total company. That will be driven by a gross margin decline at Brand Portfolio where we plan to address the current but slow-moving inventory that we talked about.
And then in terms of the credit issue, just a little background on that, we chose to suspend shipments to a customer given their aged receivables balance and their latest credit rating. We do expect continued challenges in Q4, and we have factored that into our guidance. And just rest assured that the aged receivable balance was appropriately reserved for at the end of the third quarter, again, based on that value and that credit rating.

Laura Champine

So that seems like more of a top line issue, and I wouldn't expect a big markdown of receivables to impact margins in Q4. Is that fair?

Jack Calandra

On the credit issue specifically?

Laura Champine

Right, exactly.

Jack Calandra

Yes. I mean we do -- to the extent that we do any sales there, we have to also put up a pretty significant reserve for potential credit losses. So there is a bit of that offset that goes into the earnings flow-through of that account.

Laura Champine

Okay. And any framing you can give us around how large that customer is as a percentage of your wholesale business?

Jack Calandra

It's pretty small. And I can say as we think about the things that caused us to miss our top line in the third quarter, the first one and the most significant one is the boots issue in both segments that Jay talked about. And then I think after that, in terms of order would be the athletic, the late deliveries of the athletic product that we didn't receive, and then the credit issue would come below that.

Laura Champine

So it sounds like you listed them in the press release in the order of their relative impact, which brings me to my final question. How large is China as a percentage of total sales at this point?

John Schmidt

It's less than -- I mean, the whole international piece is less than 5% of our total, and China is the largest part of that, but there are others there. So it's relatively low. As just said, our plan was more aggressive than what we delivered against. And that's where it did catch us up on third quarter.

Operator

Mitch Kummetz, Seaport Research.

Mitch Kummetz

I just want to start on 4Q. The implied guide there looks like kind of maybe at the midpoint of the range. Sales down, I think, 6%. Jack, can you remind us what the sales impact of the 53rd week was last year, maybe in total and then how that split between Famous and BP? I assume it's mostly, if not all, on the Famous side.
And when you look at that implied sales outlook, what are you assuming in terms of BP growth in the fourth quarter and then also Famous comp?

Jack Calandra

Sure, Mitch. So as a reminder, the impact of the 53rd week last year was $25 million in total for the company. And you rightly point out that most of that was in Famous. It was $18 million for Famous and $7 million for Brand Portfolio. So as we look for -- look at sales going forward into Q4 on a reported basis, so not adjusting for the 53rd week, we expect both segments to be down mid-single-digits.
Adjusting for the 53rd week, we expect Famous to be down slightly, but BP still to be down sort of in that mid-single-digit range, given the impact of the 53rd week wasn't as significant, and the plans that we have to make sure that we get through some of that current but slow-moving inventory, so we finished the year clean from an inventory perspective.

Mitch Kummetz

And on the Famous down slightly adjusted, I could probably try to back into some sort of comp assumption there, but maybe you could save me the trouble and kind of let me know what you're thinking in terms of comp on that business?

Jack Calandra

Yes. So for the Famous business, we're looking at just a marginally positive comp, so about, call it, about a 1% to 1.5% comp for Q4, which is obviously below where we finished in Q3.

Mitch Kummetz

And then, Jack, I think you mentioned in response to one of Laura's questions that gross margin you expect to be down in the fourth quarter. It looks like -- again, if I kind of take the midpoint of your guide, it looks like maybe op margin down around 70 basis points in 4Q. Can you say how much you expect gross margin to be down? I assume maybe you're assuming some SG&A deleverage as well.

Jack Calandra

Yes. So really, in terms of the op margin decline in Q4, more of it is being driven by gross margin. We do -- just in terms of SG&A, we have the $12 million benefit from last year's 53rd week. So obviously, that's coming out of Q4. We do have some additional savings given the work that we've been doing.
But just given what the sales are coming down, we think there is likely some deleverage in SG&A in the fourth quarter. So that reduction in operating margin really coming from both levers, but I would say more so on the gross margin.

Mitch Kummetz

And is your Famous comp, your quarter-to-date -- I don't know, can you say anything about quarter-to-date at Famous? Is that sort of in line with that sort of plus 1% to 1.5%? Or is it below that and you expect that to pick up as the holiday season kicks in some more?

Jack Calandra

Yes. I think it is running a bit below that. But because we have this compressed calendar for holiday, what we're seeing certainly so far in the month of November are some very strong comps with that compressed holiday shopping period. So what we did was we compared sort of how we expect the quarter to build to the last time the calendar was like this, which was in 2018, and that gives us confidence in that forecast.

Mitch Kummetz

And maybe just a last one. On the boots, you said it was the biggest negative impact on the third quarter. Is there any way to quantify that? I would imagine boots are more significant in 4Q. So are you expecting the impact to be more significant in the fourth quarter than the third quarter?

John Schmidt

We're seeing -- hi, Mitch, it's Jay. Boots did -- it was about 2/3 of our drop for the third quarter. We are looking today at seeing the boot sales decline, at least from what we know so far, to be similar to what we've experienced in third quarter. And obviously, it's just starting to turn very cold. So we'll see if that gets improved. But right now, we can only guide on what we know.

Operator

Dana Telsey, Telsey Advisory Group.

Dana Telsey

As you think about the Brand Portfolio, what were the biggest brands where there was a rate of change? What decelerated? Did anything accelerate in Brand Portfolio? And then as you think of the Famous Footwear business, what are you seeing there in terms of the health of that consumer? And it sounds like the FLAIR stores still outperformed the base.
Is it still 43 you're looking for this year? And just lastly, with the promotions in this current fourth quarter, how do you expect them to be different? You mentioned BOGO before. What's adjusting in the promotions in Famous Footwear or in Brand Portfolio as you go forward?

John Schmidt

Okay. So starting off with what in the Brand Portfolio, as was called out, the sneaker business, fashion sneakers were very good and now represent 30% in the quarter. We had significant trends in footwear that were positive, such as flats, Mary Janes, slingbacks.
And then also, we did see a -- although it's a smaller category for us within boots, which got us to that better performance in tall boots, it was really on tall-healed boots, which were very strong in the quarter. And both Sam Edelman and Naturalizer benefited from those trend items.
Fast forward over to Famous Footwear, athletic continues to really dominate right now and these very strong athletic brands that we've reported upon that Famous does have are continuing to trend across the women's, men's, and kids part of the business. And then across the board, it really was boots that just -- this particularly short casual that was the most concerning part and did cause us some pain here.
Moving forward, we still see in the consumers are still wanting the brands that they desire. And that's really -- whether they're value or full price, they're still really looking at the brands and the products that they want and continue to demand. So we're continuing to see that.
And then finally, the FLAIR stores are working. We're very happy with them. We're only going to open one more store. So we have 32 open now. So we'll end with 33. And then right after the -- into the '25 plan, we'll continue to open more. We did delay some of those just so we could keep the stores open and get the most sales through the holiday period.

Dana Telsey

Got it. And then just on that promotional part, Jay, how you're thinking about that, whether it's BOGO or how do you think of that as we go through the holiday season? Does it change at all?

Jack Calandra

Yes. So Dana, it's Jack. So in terms of Famous, we have a promotional calendar, which is very similar to last year, where we did do a lot of BOGO promotion. And so we'll continue that this year. So it should be pretty comparable year over year.
I think where you'll see more markdown activity, promotional activity is on the Brand Portfolio side, again, as we look to exit 2024 with a really good position on inventory. And so that's where I think you'll see some more promotions, and that's where we have factored in some more gross margin dilution in that business in Q4.

John Schmidt

And it will be more clearance-driven in that category, particularly in season.

Jack Calandra

That's right.

Dana Telsey

And just one last thing. How much was the industry down versus yourself? Was there a change in industry trend?

Jack Calandra

So the total footwear industry in total was down about 1%. It was 3% in the quarter?

Dana Telsey

Yes.

Jack Calandra

In the quarter, it was down 3%. And I think what we've seen is that the fashion segment of the industry has been below that. And obviously, that's where we have a decent amount of exposure. So I would say both the overall footwear market and then I think the segments that we really compete in have been pressured.

Operator

That does conclude our question-and-answer session. I would now like to hand the call back to Jay Schmidt, President and CEO, for closing remarks.

John Schmidt

Okay. Thank you. Before we close today, I would like to thank the entire Caleres team for their focus and dedication during this quarter and for the whole year. Our team worked extremely hard during 2024 while laying the groundwork for a stronger 2025. Thank you, all, for joining us this morning, and thank you for your continued interest in Caleres. Have a good day.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.