Caleres, Inc. (CAL), the parent company of the Famous Footwear retail banner, and a Brand Portfolio business that includes the Naturalizer, Vionic, Allen Edmonds, Stuart Weitzman, Blowfish Malibu, and Sam Edelman brands, missed sales expectations for the fiscal second quarter but beat estimates on the bottom line profit number to seemingly excite investors enough into rewarding the footwear company with a mid-single digit increase in share price on Wednesday, September 9.
All the numbers were pointing up for the quarter until a look at Famous Footwear found a family footwear retailer struggling with a key category, a later back-to-school (BTS) season, and a relentless promotional environment. While Caleres shares managed to post an increase for the day, the importance of the BTS shopping season and trend-right categories in the family footwear trade channel led to a uneven day of trading for competitors Shoe Station and DSW as the market works to assess what this all means heading into earnings reports for others and re-build models for the second half of the year.
Most industry watchers believed the trade channel would see a reinvigorated business based on each receiving new allocations of Nike and Jordan product over the last year. It turns out a downturn in lifestyle athletic may trump a Jordan release.
The weakness at Famous was particularly tough for its parent Caleres Inc. as it erased a nice performance in the company’s Brand Portfolio business when excluding the acquired Stuart Weitzman business.
Total Caleres, Inc. consolidated sales were $695 million for the second quarter, up 5.6 percent year-over-year (y/y). Excluding Stuart Weitzman in the Brand Portfolio business, overall sales decreased 0.8 percent. Brand Portfolio organic sales reportedly increased for the quarter while Famous Footwear sales were said to be down in mid- to high-single digits for the period.
“The strength of our Brand Portfolio helped offset challenges we saw at Famous Footwear in the quarter, where sales were pressured by a back-to-school season that came later than expected, as well as a shift away from lifestyle athletic,” offered Caleres Inc. CEO Jay Schmidt on a conference call with analysts.
Famous Footwear sales were down 6.3 percent in Q2 with comparable sales down 5.9 percent y/y which came on top of a 3.4 percent decline in Q2 last year.
On the shift in the BTS season, Schmidt said that based on third quarter-to-date results, the season came later than expected due to the shift in Labor Day timing and several shifts in tax-free events.
“This resulted in a worse-than-expected second quarter trend and third quarter slightly better than our previous expectations,” he elaborated. “As such, quarter-to-date through Labor Day, our Famous Footwear comp sales are flat.”
During the second quarter, he said Men’s and Women’s performed similarly, and Kids’ was somewhat better. Sales were said to be similar across geography and retail center type.
“We saw weakness in Lifestyle Athletic products during the quarter, while Performance Athletic remained strong,” he noted.
Schmidt said they continued to execute their “Elevate and Edit” strategy during the quarter, driving higher premium product penetration with a 22 percent sales increase compared to last year. He said the Fashion business strengthened in the quarter and was meaningfully better than Athletic, led by strength in Kids’, Fashion and Dress. But the CEO also acknowledged that BTS is heavily driven by Athletic.
Growth brands in the quarter included Jordan, Birkenstock, Skechers, Brooks, and Steve Madden.
Schultz was asked by an analyst if the consumer is now just shopping more for key silhouettes versus key items.
“We are still seeing very strong demand on those big items from what we can see here, and those are those big brands for the family,” Schultz responded. “Birkenstock is a great example of that. That is still trending. As you get into more of the other fashion businesses, you will see the items are still there. They are just not as huge as before.”
He also said “the whole flat business has been very strong” at Famous.
Within Kids’, Schmidt said Famous held share in the total measurable market and gained share in shoe chains with strength across several key brands, according to Circana.
“We also remain focused on improving the in-store experience through Flair [formats] and strengthening digital engagement,” he said. “Flair stores opened in the last year continued to outperform, albeit with margins more pressured compared to previous quarters. We believe the shifting back to school timing may have obscured these results.”
The CEO did point out that premium products outperformed in Flair stores.
The Famous team did not wait to do an autopsy after the second quarter. Schmidt said they began taking action during the quarter to improve inventory positioning, including reducing receipts and increasing clearance events to address excess and aged inventory, while also investing in the categories of the business that were trending.
“These actions pressured gross margin, but meaningfully improved our inventory position exiting the quarter,” he shared.
“We are actively pivoting the assortment to reflect that shift, reducing exposure to softer lifestyle athletic products and increasing our emphasis on performance athletic, fashion, and the higher demand brands and products that are resonating with consumers,” the CEO stated.
“As we move into fall, our Athletic penetration typically drops by over 10 points,” Schmidt noted. “This year, though, in August and quarter-to-date, our Fashion comp was positive and outperformed Athletic by over 10 points. With the stronger trend we are seeing in Fashion, we are expanding our Fashion assortment and increasing our inventory investment to support the demand. We also have two Non-Athletic brands planned for floor takeovers for the back half. Taken together, we believe these strategies will provide sales improvement for the back half relative to the second quarter.”
One analyst had a question on the scale of the performance shift in the business and Schmidt responded that they are looking at a right-sizing of the business as they move into the second half of the year.
“That 10 percent delta we saw between Athletic and Fashion continued from the first week of August through the most recent Labor Day results that we have,” he shared. “So we are seeing that as being a more significant portion of our business and a higher penetration, and that work is currently in play. But for sure, the spike goes way up in for half two back-to-school, but we come down to a more normal balance of our business in Athletic and Non-Athletic in the back half.”
Getting deeper into the mix, he shared that Athletic spikes to over 60 percent of the business during the BTS selling season.
“It has the most pain there, and then it right-sizes to a more normal, what I would say is mid-50s and Non-Athletic being in mid-40s. We are continuing to drive that piece up,” he assured the call participants.
“Again, that work is being done as we speak, but we are making some nice progress on that. I would like to just leave you with the idea that it is a right-sizing. We still have a very big athletic business. Performance Athletic is doing very well, and there are selected pockets of brands and products that continue to trend.”
The CEO suggested that by just getting it right for the BTS period will create a more healthy balance for Famous Footwear for the future.
Famous Footwear Profitability
Famous Footwear gross margin was 42.7 percent of net sales in the second quarter, down 100 basis points year-over-year. The decline was said to be primarily driven by Lifestyle Athletic, reflecting increased promotional and clearance activity across the industry.
Company CFO Dan Karpel said the team has done a nice job going into the second quarter watching trends in Lifestyle Athletic, and did a nice job of managing receipts, but taking decisive action really to meet the market in pricing.
“You will see in our results, we had year-over-year margins of down about 100 basis points,” Karpel explained. “While we are not guiding – we just guide [on a] consolidated [basis]. What we would suggest is that we will continue to be promotional as we did in that second quarter as we think about that back half. You would expect some margin pressure year-over-year, relatively in line with that second quarter.”
Operating margin at Famous Footwear was 1.4 percent of net sales in the second quarter, down 330 basis points from 4.7 percent of sales in the year-ago quarter.
Inventory
Famous Footwear inventory was up 2.8 percent y/y at quarter-end. Schmidt gave the impression they were not going to be cautious in their approach.
“I think in general, we’re still going to be aggressive on keeping our inventories clean on products that are not working,” the CEO committed. “We’ll probably continue to have some Lifestyle Athletic that we’ll continue to keep flowing and we’ll have to keep the markdown pressure on that. The flip side, though, is that our Fashion assortments are really more focused on newness, and I think we’ll probably see less on that. But we’ll watch it carefully through that. That’s what I think is still going to happen.”
Stores
Famous ended the quarter with 814 store locations after opening three stores and closing three stores during the quarter. The retailer expects to open a total of 13 stores and close 26 during the fiscal year.
E-commerce outperformed Stores in the quarter, but both were said to be down versus last year.
Outlook
Looking ahead to the fiscal third quarter, Famous Footwear expects sales and comparable sales to be down in low-single digits y/y. Company CFO Dan Karpel said the Famous business is softer than anticipated at the beginning of the year.
For the full year, Famous Footwear sales and comparable sales are expected to be down in the low- to mid-single digits y/y.
“Our guidance anticipates continuing softness in certain categories of our Famous business and related promotional activity as we adjust our inventories through the balance of the year,” he said. “Additionally, we continue to face an uncertain tariff environment. Our guidance is built on the assumption that new tariffs will be enacted during the third quarter that will largely replace the prior IEEPA tariffs. Given the uncertainty around potential additional tariffs, we believe this to be prudent.”
The CFO said they remain flexible in their overall sourcing strategy and will continue seeking the best country matrix for the company’s quality and price needs.
Image courtesy Famous Footwear/Caleres, Inc.
