Caleres (CAL +1%), a footwear retailer, which operates the Famous Footwear and Naturalizer brands, is trading modestly higher this morning although it was up significantly soon after the open. CAL reported Q1 (Apr) earnings after the close last night.
Non-GAAP EPS fell 16% yr/yr to $0.36 but that was a penny better than expected. Revenue rose 7.2% yr/yr to $677.8 mln, which was slightly better than expected. Breaking it down by segment, Famous Footwear segment sales declined 3% yr/yr to $352.2 mln, while same-store-sales were down -1.0%.
Caleres also has a Brand Portfolio segment, which is quite large and sells a variety of footwear to many different third-party retailers for sale in their stores. BP customers include DSW, TJX, Ross Stores, Macy's, and Target. BP sales in the quarter were up 20.3% yr/yr to $341.1 mln. Part of this growth was from CAL's recent acquisition of Vionic and Blowfish Malibu. As you can see, this BP segment is now nearly as large as its Famous Footwear segment. In terms of FY20 Guidance, CAL lowered its adjusted EPS guidance to $2.35-2.45 from $2.45-2.55.
Caleres echoes what we have heard from other retailers about February being a rough month due to bad weather. As such, Famous Footwear reported negative same-store comps in the high single digits in February. The company explained on the call that the slow start to spring delayed or eliminated sales and drove higher promotion selling across the industry. However, the good news is that, as the weather improved, FF comps turned positive in March and April.
Looking ahead, it sounds like Q2 (Jul) could be a difficult quarter for Famous Footwear as CAL expects softness in the quarter as it "prepares for back-to-school by aggressively clearing underperforming inventory," according to CEO Diane Sullivan. Traditionally, back-to-school season in Q3 (Oct) accounts for a substantial portion of CAL's earnings for the year.
We follow the retail footwear space pretty closely. Our sense is that it's really tough these days as online competitors keep gaining share. Footwear is the type of product that is very suitable for online purchases and online price comparison shopping. This is leading to increased discounting. CAL is feeling the effect of this. A good example of this pressure is Payless ShoeSource going out of business.
The Brand Portfolio side is performing much better than the Famous Footwear side. Granted, part of the growth is coming from acquisitions (Vionic and Blowfish Malibu), but it's also because CAL has been investing to improve this side of the business. The goal has been to improve designs and, just as importantly, to improve its speed to market so it can get new styles out to its third-party retail customers on a much faster basis. That investment seems to be paying off.
Overall, we are a bit surprised the stock gapped up at the open despite a pretty lackluster performance from its Famous Footwear segment. That's especially the case considering that CAL is signaling that JulQ results could be rough as it expects to clear inventory to prepare for back-to-school season.
We think a few things are boosting the stock today. First, the Brand Portfolio side is really doing quite well, and CAL sounds bullish about its near-term prospects. Second, CAL reported a big EPS miss last quarter so investors are happy with a slight beat since it could have been worse. Third, the stock has been a multi-month downtrend and has accelerated over the past six weeks (down 30%), so expectations were quite low heading into this report. CAL exceeded those low expectations.
Finally, and maybe this is a bit out there, we wonder if CAL may start to consider separating the two segments into separate businesses by spinning off its Brand Portfolio unit. Famous Footwear seems to be weighing down the BP segment, which might benefit from being a separate company. It may be just the thing to get its stock moving higher again.