Caleres (CAL), a footwear retailer, is trading lower this morning (-3%) after it reported Q3 (Oct) earnings after the close last night. There is a good chance you have never heard of Caleres, but you probably have heard of Famous Footwear. Caleres, which changed its name from Brown Shoe Company in May 2015, operates 1,000+ Famous Footwear stores throughout the US. It also operates around 170 Naturalizer stores in the US and Canada. CAL has also been seeking to expand its presence in China.
Famous Footwear's average retail price is approximately $45 for footwear with retail price points typically ranging from $25 for shoes up to $210 for boots. Famous Footwear stores are located in strip shopping centers as well as outlet and regional malls in all 50 states.
Caleres also has a Brand Portfolio segment, which sells a wide variety of footwear to many different third party retailers for sale in their stores. Some of its larger wholesale customers include retailers like DSW, TJX (including TJ Maxx and Marshalls), Nordstrom Rack and Ross; department stores such as Nordstrom, Macy's, Bloomingdale's and Dillard's; online retailers such as Nordstrom.com, Zappos.com and Amazon; mass merchandisers such as Walmart and Target; and independent retailers such as QVC and Home Shopping Network. CAL also sells product to a variety of international retail customers.
CAL's business is seasonal in nature due to consumer spending patterns, with higher back-to-school and Christmas season sales. Traditionally, Q3 (Oct) accounts for a substantial portion of CAL's earnings for the year. Its product categories are approximately 63% women's footwear, 23% men's footwear, 9% children's footwear and 5% accessories. This composition has remained relatively constant over the past few years. Approximately 66% of footwear sales are retail sales, primarily through its Famous Footwear stores, Famous.com and other e-commerce websites, while the remaining 34% represented wholesale sales.
Of note, Caleres acquired Allen Edmonds in December 2016 for $255 mln, a maker of men's premium handcrafted leather footwear and accessories. The deal allows Caleres to expand its Brand Portfolio and firmly positions the company in men's footwear. Allen Edmonds sales breakdown in 2016 was: retail stores (45% of brand sales), e-commerce (35%) and wholesale (20%). CAL believes it has acquired one of the great gems in men's footwear. As mentioned above, nearly two-thirds of CAL's sales are for women's footwear so this boosts its exposure to men's footwear.
Turning to the Q3 (Oct) results, non-GAAP EPS came in at $0.80, down a penny from a year ago and it was a good bit below market expectations. Revenue rose 5.8% year/year to $774.7 mln, which was also below market expectations. The company guides only on a full year basis, not on a quarterly basis so analysts are usually a bit in the dark in terms of their quarterly models. This can lead to some volatility around earnings. As for the full year FY18, CAL sees non-GAAP EPS of $2.10-2.20 and revenue of $2.70-2.80 bln.
Breaking it down by segment, Famous Footwear segment sales of $473.1 mln were up 1.1%, while back-to-school same-store-sales were up +2.6% and overall same store comps were +0.9%. Brand Portfolio sales of $301.5 mln were up 14.0% including contribution from Allen Edmonds, which was acquired in December 2016. In total, OctQ sales were hurt by approx $35 mln, due to the hurricanes in Texas and Florida and the delayed start to the fall boot season.
On the call, management talked about how after a strong start in August with weekly positive comps at Famous Footwear, September, including back-to-school and Labor Day, was interrupted by hurricanes in Texas and Florida. These events were then followed by an unseasonably warm start to October. However, as more seasonal weather has arrived in November, business has improved, and sales are performing accordingly.
Boot sales are a key category for Caleres and OctQ was a challenging one for boot sales. Women's boot sales were down approximately 20%. As the weather has gotten colder, boot sales have begun to trend positively. While the biggest days for 2017 boot sales are still to come, CAL concedes that there is the potential for margin degradation in the category if the industry becomes increasingly promotional this holiday season.
In sum, this was a tough quarter for CAL. It should not come as a major surprise considering that DSW sold off 13% yesterday on a disappointing OctQ result. Weather/hurricanes were clearly a factor, but the category is also likely being hurt by online footwear retailers as more and more consumers seem more willing to purchase shoes online. It's a tough environment right now for retailers generally and for footwear retailers, in particular.