By Eric Smith
Asolid showing from Famous Footwear helped drive Caleres to record revenue in the third quarter, but the impact of tariffs took a toll during the period and should persist into Q4, the company said Monday.
The increased tariffs, specifically those on List 4A, resulted in adjusted earnings per share of 78 cents, which missed Wall Street’s target by 5 cents.
“This quarter, the increase in tariffs that were put into place in early September with almost immediate effect created some headwinds in the quarter,” Caleres CEO Diane Sullivan said on the earnings call with analysts. “As a result, our third-quarter earnings results include a 7 cent gross impact associated with the tariffs increase. We were able to offset 4 cents of the tariff headwind by taking disciplined action and maintaining strong price controls but our earnings were still impacted by 3 cents this quarter. We expect another 2 cent net impact in Q4 for a total of 5 cents for the year.”
Because of the havoc that tariffs are wreaking, the company narrowed the top end of full-year adjusted EPS guidance range by 5 cents to $2.35 to $2.40. Still, based on the mitigation efforts Caleres successfully enacted in Q3 to offset some of the impact, Sullivan is “confident that the teams are focusing on what we can control and operating with the necessary discipline to deliver our guidance.”
Also, as Caleres moves into a lighter sales quarter, it expects the tariff impact to slightly ebb, especially since the company can better prepare for what it now knows is coming.
“By the time those tariffs went into effect, most of those orders were booked for the quarter,” said CFO Ken Hannah. “So, when we look, there is a little bit of price that is going to be able to help us in Q4. And then as we move into 2020, we would expect the ability to offset most of the rest of that from a price standpoint. So it’s really consistent with what we had said before over the long term. We don’t expect this to have a negative impact but in the short term, where it went into effect immediately and we had lots of orders that were already booked, we were only able to pull a couple of the levers. As we look forward, we will continue to evaluate different countries where we are producing goods and making sure we can maintain quality and speed, and then we would hope that we could execute a few more of our actions to mitigate more of it.”
Thankfully, Famous Footwear was a bright spot for Caleres in the quarter. The retail chain rode an “excellent back-to-school” season to its eighth consecutive year-over-year growth. Famous Footwear’s 2.5 percent increase in same-store sales beat the consensus expectations of 2 percent growth.
Total sales at Famous Footwear were $446.6 million, which was down 0.5 percent but that was on 47 fewer doors versus the prior year. Famous Footwear ended the third quarter with 960 total doors.
The retailer saw strength in athletic, boots and sandals, which led to EBIT increasing 76 basis points, while also notching sales bumps in all channels and clean inventory levels, Sullivan added. Nike sales also were positive for the first time this year.
“Our kids’ business was particularly strong in the quarter and our decision to elevate our assortment of trend-right premium in-demand brands and styles with key programs delivered what our consumer was looking for,” she said. “We also benefited in the quarter from continued improvements from our key athletic vendor. We are seeing our customers respond to our enhanced offering as they recognize that Famous offers the best brands and styles at a great value.”
Sam Poser of Susquehanna Financial Group LLLP, in a note to investors, said of Famous Footwear: “We continue to be confident that Famous will achieve FY19 SSS [same-store sales] guidance of flat to +LSD [low-single digits]. The beat removes some of the uncertainty that Famous will be able to accelerate SSS to the degree necessary to achieve SSS guidance. Momentum is building as the newly launched Nike product for the mid-tier channel has hit shelves. While our checks indicate that certain styles of the newly launched Nike mid-tier product have underperformed, the new product is a significant upgrade from the glut of Tanjun product that Famous was clearing in 1H19.
“Further, other brands are also performing well, including Vans, Crocs, Birkenstock and Puma. Management expressed confidence in Famous’ performance during the BTS selling season. Also, CAL indicated positive early reads on the boot business, both at Famous and the Brand Portfolio; management called out Dr. Martens, short booties, and sneaker booties as particular standouts.”
The company even heads into the holiday season—“the busiest shopping period of the year,” Sullivan said with some tailwinds thanks to a new Famous Footwear location in New York City.
“This store in Herald Square, which is just down the street from our original 34th Street location will enable us to broaden the reach of the brand featuring world-class and demand brands at a great value,” she said. “This high-impact, brand-enhancing location is going to feature dedicated trend shops that will deepen our emotional connection with the customer and truly make them feel a little famous when they shop with us.”
Though Poser said Caleres’ third-quarter results were “not pretty,” he found a few positives in the company’s earnings report.
“Famous Footwear results and positioning were better than expected and inventory levels are heading in the right direction,” he wrote in a note to investors. “Brand Portfolio results disappointed, but current trends appear to be improving. Simply put, the downside risk is limited, and if anything goes right in 4Q and into next year, upside should rule.”
Shares of Caleres (CAL) were up 49 cents, or 2.2 percent, to $22.72 at market close Tuesday.