Caleres, Inc. said Famous Footwear’s same-store sales fell 8.5 percent in the first quarter due to a weather-related delay in the sandal season and a pullback in spending from its “more moderate-income customer” due to inflationary pressures. Sequential improvement in sales is expected in coming quarters but Famous Footwear’s comps are expected to be negative for 2023.
Due to a better-than-expected performance by its Branded Portfolio segment, Caleres’ overall earnings in the first quarter came in at the high end of guidance. The company lowered its sales outlook for the year due to the weak trends at Famous but kept its earnings guidance as the softness at Famous is expected to be offset by cost savings and improving gross margins.
Caleres also announced cost-containment efforts to help offset the weakness at Famous.
The 8.5 percent comp decline at Famous follows several healthy quarters for the family footwear chain, especially in improving profitability.
“After several successive quarters of strength, Famous Footwear’s contribution declined markedly as it navigated a challenging macroeconomic backdrop and decelerating spending, particularly in the month of March among its target consumer,” said Jay Schmidt, Caleres’ president and CEO, on an analyst call. “The challenging backdrop was exacerbated by a late-breaking sandal season.”
He said despite the internal shortfall, Famous outperformed its competitive set and increased market share among shoe chains. The kids’ business, seen as a key differentiator versus competitors in the family footwear space, was a bright spot in the quarter, outpacing the rest of Famous’ business “as families prioritize purchases of kids’ footwear,” said Schmidt.
In total, Famous’ sales fell 9.2 percent in the quarter to $349.2 million from $384.5 million. Operating earnings slumped 65.7 percent to $17.1 million from $46.7 million and eroded as a percentage of sales to 4.9 from 12.9.
Gross margins at Famous fell to 45.6 percent from 49.2 percent a year ago. This decline reflects the softer consumer demand and a more normalized level of clearance pricing and activity, given last year’s clean inventory position due to supply chain disruption.
Famous had 866 stores open at the quarter’s end against 887 a year ago.
Looking ahead, Schmidt predicted sequential improvement at Famous in the coming quarters. He said, “Even with the weakness in shoe chains, we expect Famous to deliver a significantly stronger earnings contribution in the second quarter as consumer activity accelerates due to typical seasonal drivers, including warm weather and back to school beginning in mid-July.”
To position the chain for growth, Famous has taken a number of steps to leverage its strength in kids to support back-to-school selling, said Schmidt.
He noted that the year-ago back-to-school period was impacted by lean inventory levels tied to supply chain disruption. Schmidt added, “This year, we have a better in-stock position from the beginning on key trending brands and styles that we’ve reacted to due to our well-managed inventory position. We have named a new kids’ merchant to closely maximize all opportunities and a new head of stores to drive our strategy at point of sale. We have planned a high-impact marketing campaign across all consumer touchpoints, but especially aimed at the millennial family, and our investments in technology specifically launching a CDP during the quarter should better target our messaging and improve our conversion and drive sales. Clearly, there’s a lot to be excited about during back to school at Famous.”
In the Q&A session, Jack Calandra, SVP and CFO, said that while Famous is expected to see better sales performance in the remaining quarters of the year, the chain is still expected to show negative same-store growth overall for the year.
Schmidt concluded on Famous, “In summary, we continue to have great confidence in the long-term outlook for Famous. The same strengths that delivered stellar results in recent years are still very much in place and in fact, continue to expand. As we move forward, we will be taking immediate actions across our product assortment, our team, our marketing approach, our digital strategy in an effort to maximize our earnings potential this year.”
Companywide, Caleres’ first-quarter earnings declined but reached the upper end of guidance due to better-than-expected earnings at its Brand Portfolio segment.
Net sales were $662.7 million, down 9.8 percent from the first quarter of 2021. Sales were below company guidance calling for a decline in the range of 4 percent to 6 percent due to the shortfall at Famous.
Brand Portfolio sales were $326 million, down 11 percent to last year, but in line with expectations. The year-ago period was boosted by the restocking of wholesale accounts following the supply chain disruption. The sales volume was the second-highest first-quarter amount in Brand Portfolio’s history.
The Branded Portfolio wholesale segment includes Allen Edmonds, Blowfish Malibu, Bzees, Circus NY, Dr. Scholl’s Shoes, Famous Footwear, Franco Sarto, LifeStride, Naturalizer, Rykä, Sam Edelman, Veronica Beard, Vince, Vionic and Zodiac.
Net earnings in the quarter for the company declined 31.3 percent to $34.7 million, or 97 cents per share, from $50.5 million, or $1.32, a year ago. Results landed at the higher end of company guidance in the range of 92 cents to 97 cents.
Despite the sales decline, consolidated gross margin increased 120 basis points to 45.7 percent, reflecting a significant increase in Brand Portfolio gross margin, and a decrease in Famous gross margin. Brand Portfolio’s gross margin was 44.2 percent, a more than 600 basis point increase versus last year, due to higher initial margins and lower ocean and air freight costs.
SG&A expense declined 3.0 percent for the quarter was $253 million, albeit increasing to 38.2 percent of sales from 35.5 percent due to sales deleverage.
In light of the more difficult operating conditions at Famous, Caleres at the beginning of the quarter initiated cost-cutting and profit-improvement initiatives across the organization in the quarter. In total, these measures are expected to deliver approximately $20 million of SG&A savings this year, plus an additional $10 million of better-than-expected freight costs. Schmidt said, “We took these actions while still preserving investments in areas of strategic priority, namely consumer experience, analytics and marketing that will accelerate our long-term growth vectors.”
EBITDA for the quarter eroded 22.8 percent to $63.7 million, or 9.6 percent of sales, from $82.5 million, or 11.2 percent, in the same period a year ago.
Inventory at the end of Q1 was $560 million down, 13.1 percent versus last year, reflecting reductions in both in-transit and on-hand inventory. By segment, inventory at Famous was down 1 percent, primarily a result of supply chain constraints last year, which limited the inventory level. Famous’ inventory was $51 million or 13 percent below the pre-pandemic first quarter of 2019. At Brand Portfolio, inventory was down 26 percent versus last year and up approximately 15 percent versus the first quarter of 2019. Calandra said, “In general, we feel good about the quantity and quality of inventory in both segments.”
For 2023, Caleres now expects the consolidated net sales range to be down 3 percent to down 5 percent due to the weakness at Famous. Previously, Caleres expected consolidated net sales to be flat to up 2 percent.
Full-year adjusted EPS is continued to expected to be in the range of $4.10 to $4.30 as cost savings in gross margin and SG&A offset top-line softness at Famous.
Consolidated operating margin is now projected in the range of 7.3 percent to 7.5 percent versus original guidance of 7.1 percent to 7.3 percent. The improved operating margin outlook is being driven by the better-than-expected ocean and domestic transportation costs and specific actions being taken on overhead expenses, including eliminating open corporate positions, reducing non-merchandise procurement costs, realizing additional Brand Portfolio synergies and lowering depreciation expense.
Caleres expects its cost-containment actions to generate about $20 million of in-year savings and $30 million to $35 million on an annualized basis. A one-time cash charge of approximately $4 million associated with these actions is expected in the second quarter. Caleres also expects about $10 million of additional freight savings versus original guidance.
For the second quarter, Caleres expects sales to be down 4 percent to 5 percent and earnings per share of $0.87 to $0.92, down from record second quarter EPS of $1.38 a year ago.
Photo courtesy Famous Footwear
