Famous Footwear marked its sixth consecutive quarter of double-digit return on sales (ROS) in the second quarter that ended July 30 as the off-price chain continues to limit promotions. However, Diane Sullivan, chairman and CEO of Famous Footwear’s parent, Caleres, Inc., provided a muted outlook for third-quarter sales due to a later-developing back-to-school season and a recent sales slowdown.
“Since March 2021, Famous has benefited significantly from elevated levels of consumer demand, and those conditions continued for most of the second quarter,” said Sullivan. “However, beginning in July, we began seeing demand, traffic and conversion impacted by a more cautious consumer.
Sullivan said Caleres sees “clear evidence of a solid back-to-school season” for Famous Footwear, but Famous Footwear’s third-quarter sales are projected to decline approximately 4 percent, similar to trends seen in the first half of 2022.
In the second quarter, Famous Footwear’s sales slid 3.8 percent to $436.4 million from $453.6 million a year ago. In line with expectations, the decline was driven by a 3.4 percent decrease in store count year-over-year and a later start to back-to-school.
Same-store sales were down 3.1 percent against a 1.1 percent reduction in the year-ago quarter.
“Famous continued to perform at a high level in the second quarter, building on the strong performance in Q1 and then meeting our internal expectations across all key financial metrics,” said Sullivan.
Operating earnings at Famous Footwear were down 26.9 percent to $62.5 million, resulting in a more than 14 percent return on sales.
Famous Footwear delivered a gross profit margin of 48.9 percent, down 118 basis points, due to a more modest level of markdowns and increased freight costs associated with e-commerce sales. Gross margins at Famous Footwear were up more than 550 basis points versus the pre-pandemic Q219.
Inventory at Famous Footwear is up approximately 18 percent compared to 2021 when inventory was low due to supply chain constraints. Compared to the same period in 2019, inventory is down roughly 15 percent.
“We’re working in real-time to make sure that we’re managing our inventory flow by classification and brand to emphasize and amplify what’s working and selling through and what’s not,” said Sullivan.” Going forward, we believe there are certain spots where we can improve our inventory position, particularly in specific categories to more fully capture pockets of strong consumer demand.”
Discussing the growth priorities for Famous Footwear, Sullivan said categories and brands that have been selling continue to resonate with the Famous consumer. The chain’s Top 25 brands represented more than 85 percent of sales during the quarter.
Sullivan also said Famous still has a “significant opportunity” to add brands from Caleres’ Brand Portfolio wholesale segment, which include Sam Edelman, Naturalizer, Allen Edmonds, LifeStride, Dr. Scholl’s Shoes, Rykä, Blowfish, Malibu, Bzees, Circus NY, Franco Sarto, Veronica Beard, Vince, Vionic, and Zodiac.
Sullivan said, “In addition to LifeStride and Dr. Scholl’s, which are already performing well at Famous, we believe we are uniquely positioned to leverage our extensive knowledge and deep consumer insights around fashion footwear to address the customers’ increasing interest in adding seasonal Footwear to her wardrobe. We are working to inject the right styles and brands in the right locations to broaden our reach and drive highly profitable incremental sales on top of our core athletic and sport business. We know that when she buys for her family and herself, she spends more, connecting more and returning more often.”
On marketing, Famous Footwear is accelerating investments in TV, creative production and paid search ahead of back-to-school. A TV commercial featuring John Legend’s “Crowd Go Crazy” launched on July 5 and ran across premier programming and networks.
“In short, Famous had an outstanding first half of the year with double-digit operating margins underscoring the significant power and agility of the Famous brands and providing just a terrific foundation for another strong earnings year in 2022 and beyond,” said Sullivan. “And while yes, consumer demand may moderate somewhat in the second half of the year, Famous remains positioned to win with its national footprint, its strong digital business, its improving inventory position, enhanced consumer experience, and then all of those being very powerful drivers for growth.”
Companywide, sales expanded 9.3 percent to $738.3 million in the quarter.
Sales in the Brand Portfolio segment climbed 35.6 percent to $124.1 million. Among its bigger brands, sales were up 86 percent year-over-year at Sam Edelman and nearly 70 percent at Naturalizer. Allen Edmonds showed “strong signs of improvement,” with sales running ahead of last year, higher average unit retail (AURs) and an approximately 500 basis point increase in gross margin over the second quarter of 2021. LifeStride’s sales jumped 79 percent, with AURs rising significantly.
Net earnings rose 36.9 percent to $51.2 million, or $1.38 per share.
Gross margins companywide reached 45.6 percent, down 209 basis points due to a higher mix of Brand Portfolio sales and increases in freight expense. Gross margins in the Brand Portfolio segment were 38.3 percent, down 139 basis year over year but up 350 basis points over 2019 levels.
SG&A, as a percentage of sales, was 36.4 percent, 206 basis points lower than the second quarter of fiscal 2021. The year-ago second quarter included approximately $10 million of stock and incentive compensation expenses that will occur in the third quarter this year.
Inventory levels companywide were up approximately 36 percent, year-over-year, reflecting efforts to increase inventory levels ahead of the fall buying and back-to-school seasons. Inventory was down 2.7 percent when compared to the second quarter of 2019. At the Brand Portfolio segment, inventories were up 64 percent year over year and ahead 14 percent versus the same time as 2019.
Ken Hannah, SVP and CFO, said, “We believe a central component to drive growth in the Brand Portfolio this year is to ensure we align our inventory with consumer demand. To that end, we will continue to manage the supply chain aggressively, emphasizing building up each brand’s top-selling styles. We believe that having core fall goods behind the right brands and styles could be a competitive advantage heading into fall and expect to capture demand as we progress through the year’s second half.”
Looking ahead, Caleres slightly raised its sales outlook for the year. Sales are projected to climb in the range of 4 percent to 6 percent compared to previous guidance calling for sales to climb 2 percent to 5 percent. EPS is still expected to come in between $4.20 and $4.40.
Sullivan said, “As we look ahead, ’22 is shaping up to be another record or near record year for Caleres. We believe the stage is set for a strong and highly profitable 2023, given the tremendous progress we’ve made across a wide range of strategic and value-driving initiatives in recent quarters.”
Sullivan also touched on the news delivered on July 26 that she plans to retire effective January 15, 2023. Jay Schmidt, president of Caleres, will succeed her as Sullivan moves to the role of executive chairman.
Sullivan said, “Given the strength and the momentum in our business, I just thought this was the perfect time to pass the baton to Jay as part of our long-standing and carefully planned succession process. I’m confident that he is the ideal person to lead Caleres forward at this point in time and to build on the many initiatives that we put in place in recent years to drive growth across the company.”
Schmidt said on the call, “I’m excited to lead Caleres and to continue to build on our recent successes and to continue to identify new opportunities for growth. I’m also extremely confident in our portfolio, in our capabilities, and most importantly, in our talented global team. As many of you might know, I’ve had the good fortune to work alongside some of the best in the industry, especially at Caleres and, above all, with Diane, and I thank everyone for their support and encouragement. Looking forward, I firmly believe in the significant potential of Caleres and our ability to unlock long-term value for our shareholders.”
Photo courtesy Famous Footwear
